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Operator: Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies Third Quarter 2025 Earnings Conference Call. My name is Daniel, and I will be your coordinator for today's call. [Operator Instructions] This conference call is being recorded for replay purposes and will be available on the company's website. I will now turn the conference over to Rob Kukla, Director of Investor Relations. Please proceed, sir. Rob Kukla: Thank you, Daniel. Good morning, everyone, and welcome to FET's Third Quarter 2025 Earnings Conference Call. With me today are Neal Lux, our President and Chief Executive Officer; and Lyle Williams, our Chief Financial Officer. Yesterday, we issued our earnings release, and it is available on our website. We are relying on federal safe harbor protections for forward-looking statements. Listeners are cautioned that our remarks today will contain information other than historical information. These remarks should be considered in the context of all factors that affect our business, including those disclosed in FET's Form 10-K and other SEC filings. Finally, management's statements may include non-GAAP financial measures. For a reconciliation of these measures, please refer to our earnings release and website. During today's call, all statements related to EBITDA refer to adjusted EBITDA. And unless otherwise noted, all comparisons are third quarter 2025 to second quarter 2025. I will now turn the call over to Neal. Neal Lux: Thank you, Rob, and good morning, everyone. Our team executed another solid quarter, demonstrating why FET is a great company and even better investment. We extended our track record of outperformance, delivered significant capital returns, and we believe FET remains an incredible value while poised for long-term growth. Over the past 3 years, we have outpaced the Russell 2000, our small-cap Index, in revenue and free cash flow growth. And with our third quarter results, we continued this trend. Our Beat the Market strategy, which centers on new product development and targeted commercial efforts, drove strong bookings and meaningful backlog growth. During the quarter, we captured several offshore and international awards. This success increased our backlog by 21%, its highest level since 2015. Our commercial teams are generating market share gains. They successfully pushed third quarter revenue to the top end of our guidance. In addition, our operating teams are driving increased efficiency, higher utilization and structural cost reductions. This combination allowed us to exceed the top end of our EBITDA guidance. FET's free cash flow performance is another area of strength. Year-to-date, we are up 21% and have achieved our ninth consecutive quarter of positive free cash flow. Over that period, our operations have generated almost $200 million in cash. Looking ahead to the fourth quarter, we anticipate another good quarter of free cash flow. Therefore, we are once again raising our full year guidance to between $70 million and $80 million. This free cash flow performance allows us to execute our capital returns framework through further net debt reductions and share repurchases. Last quarter, we discussed reducing net leverage to 1.3x by year-end. I am pleased to report we are now at that level, 1 quarter ahead of schedule. Also, in the third quarter, we repurchased 5% of our shares outstanding, bringing the total for this year to 8% through September. We have seen a strong run in FET's stock performance. However, even after this remarkable gain, our free cash flow yield is around 20%, and share buybacks remain a compelling use of capital. In addition, we believe that FET's share outlook remains incredibly attractive, given our long-term forecast. The key driver there is our Beat the Market strategy. By competing in targeted markets, utilizing our competitive advantages, developing differentiated technologies and leveraging our global footprint, we continue to grow profitable market share. For the first 9 months of 2025, our annualized revenue per rig is up 3% despite subdued market activity. And since the strategy's implementation in 2022, we have increased this metric by 20%. Last quarter, we outlined a refinement to the strategy by aggregating our addressable markets into 2 broad categories: leadership markets and growth markets. For our new investors, let me quickly summarize our discussion from last quarter's call. Our leadership markets are where FET solutions are fully adopted by the industry, where we have meaningful share, strong competitive positions and broad geographic reach. We estimate the size of our leadership markets to be $1.5 billion, with FET maintaining a 36% share. A few examples from our portfolio include Global Tubing, Quality Wireline, Variperm and Perry ROVs. FET derives about 2/3 of its revenue from the leadership markets, and we will continue to invest in product development to maintain and expand our position. The growth markets are about twice the size of our leadership markets, or roughly $3 billion. Here, our products and solutions are differentiated, proven and have fewer competitors. However, they may be in the early stages of industry adoption. They may have a narrower customer base, or they may be more geographically limited. As a result, our aggregate market share here is relatively low, around 8%. This creates an exciting opportunity to increase revenue rapidly through wider industry adoption, new customer acquisition and expanded global utilization. Let me provide a couple of examples and share some insights. One example is coiled line pipe, a product that saves operators' time and money. The market opportunity is immense and has very few direct competitors. However, broad customer adoption has been limited by our industry's conservative approach to new technology. Recently, our team's relentless commercial efforts have added a number of key accounts. Demand is expanding in the U.S., the Middle East and offshore. Sequentially, coiled line pipe revenue grew 28%. We expect this product to be a meaningful contributor to our long-term growth. The second example I want to highlight is from our artificial lift product family, where demand is generally more stable because it is tied to existing production. Our technically differentiated products extend the life of downhole pumps, allowing more production at significantly lower cost. Execution of this value proposition has made us the market leader in the United States. The exciting part for FET is that the international market is more than 4x larger than our home market. We are making headway there as our revenue has grown 12% since last year. By leveraging our global footprint to address these markets efficiently, we have a significant opportunity to grow revenue. These are 2 of many products that compete in the growth markets. Our goal over time is to double our share from 8% to 16%, which would increase FET's revenue by $250 million in a flat market. However, our base case is not a flat market. We see the possibility of our addressable markets expanding by 50% or more over the next 5 years. Here's how we get there. The 2 main drivers of energy demand are economic activity and demographics. By 2030, world GDP is forecasted to increase by nearly $30 trillion and the global population is expected to increase by 400 million. With this growth, it is reasonable to forecast an oil demand increase of at least 5 million barrels per day in that period. In addition, our industry will need to replace 30 million barrels of daily supply that will be lost to natural production declines. Finally, on top of that, demand for natural gas is forecasted to grow rapidly to power AI data centers and supply LNG exports. With this outlook, today's supply will not come close to meeting this level of demand. We believe that means significant investment is required. To meet these challenges, our customers need to be significantly more efficient, while adding a modest amount of new capacity. Under this scenario, FET's addressable markets would expand by more than 50%. This expansion, combined with our targeted market share gains, would organically double revenue in 5 years. And with our strong operating leverage and capital-light business model, our free cash flow would grow significantly. By 2030, this would give us meaningful firepower to execute strategic investments, including accretive acquisitions and additional shareholder returns. We call this Plan FET 2030, and its execution is our North Star. Now, while we are excited about our long-term vision, we also remain focused on executing today. So to provide an update on our quarterly results and outlook, I am now going to turn the call over to Lyle. David Williams: Thank you, Neal. Good morning, everyone. FET delivered revenue of $196 million, approaching the top end of our guidance range as offshore and international revenue grew in the quarter. Revenue increases for our drilling and subsea product line drove offshore revenue to 22% of our total. And as Middle East and Canadian revenue each increased by over 10%, international revenue surpassed U.S. sales. U.S. rig count declined by 5% in the quarter, and revenue from most of our product lines averaged a 5% decrease as well. One product line, however, was more impacted as their customers took a conservative position and pushed deliveries into the fourth quarter. Overall, this led U.S. revenue to decline 10%. As Neal highlighted, we had another great quarter of bookings. Our book-to-bill was 122%, showing the benefits of FET's diverse product offering. Both segments achieved greater than 100% book-to-bills at 129% and 112%, respectively. Booking strength for the Drilling and Completions segment was again led by subsea. The strong quoting activity we highlighted last quarter led to new orders for ROVs and pushed the book-to-bill ratio over 200%. In addition, drilling bookings increased by 45% as the team secured capital equipment orders for new-build land drilling rigs in the Middle East. Also, orders grew 24% in our stimulation and intervention product line with strong demand for many of our products. In the Artificial Lift and Downhole segment, a large Canadian customer ordered sand control products in support of an extended drilling program. Valves had its largest bookings in almost 2 years, and our process technologies product family achieved its second highest bookings quarter over the same time frame. Our large backlog and higher revenue, combined with healthy incremental margins, helped us exceed our EBITDA expectations. Consolidated EBITDA was $23 million, up 13% and above the top end of our guidance. Margins improved by 150 basis points to nearly 12% due to favorable product mix, ongoing cost reductions and tariff mitigation efforts. Now, let me provide a bit more color on our segment results. Drilling and Completions segment revenue was flat for the quarter. Momentum continued for coiled line pipe as sales increased 28% with market share gains and revenue recognition on a Middle East project. The subsea product line was up 5% with revenue recognized for ROV projects. And strong sales of wireline products and heat transfer units drove an increase in our stimulation and intervention product line. Offsetting these increases were lower sales for consumable items tied to softer market activity. Despite flat segment revenue, EBITDA was up 3%, driven by product mix and benefits from cost savings initiatives. Our Artificial Lift and Downhole segment revenue decreased 4%. Lower downhole casing hardware and processing equipment technology revenue was partially offset by increased sales volumes for valve and sand control products. Similar to the Drilling and Completions segment, EBITDA increased 2% despite lower revenue. Favorable product mix and cost savings drove the increase with margins improving 130 basis points. In the third quarter, increased tariffs on steel imports and targeted tariffs on imports from India surprised the markets. Our teams evaluated pricing adjustments to counteract these policies. In addition to our strategy of passing along tariffs through pricing, we continue to leverage our global footprint to avoid tariffs altogether. For example, early in the fourth quarter, we leveraged our Saudi Arabia manufacturing facility to assemble and ship heat transfer units to a Latin American customer. This successful supply chain adjustment protects the competitiveness of these products in the global market. While our teams effectively mitigated negative tariff impacts this quarter, tariff rate volatility continues to be a challenge for our operations. To further counter tariff costs and in support of our solid operating results, we accelerated progress toward our $10 million structural cost reduction goal. As of the end of the third quarter, we are close to achieving that original goal. Additionally, in the third quarter, we made the strategic decision to consolidate 4 of our manufacturing plants into 2. Combining facilities allows us to reduce overhead costs, improve direct labor and asset utilization, and enhance the efficiency of our operations. To achieve these consolidation benefits, we are discontinuing a few low-volume, low-margin products. Our results include $21 million of noncash inventory and other asset impairments and $1 million of cash charges for severance and relocation costs. By the second quarter of 2026, we expect these facility consolidations to contribute over $5 million of additional annualized cost savings, taking our total structural savings to approximately $15 million, 50% more than our original goal. These efforts have supported our EBITDA this year and will provide additional tailwind going into 2026. Shifting to cash flow and shareholder returns. I am pleased to report that our $28 million of free cash flow, a 23% increase, enabled meaningful shareholder returns. Consolidated free cash flow benefited from increased EBITDA, reductions in net working capital and the sale-leaseback transaction. Our success in these areas enables us to confidently raise our full year 2025 guidance to between $70 million and $80 million. Also, with this continued free cash flow strength, we accelerated our share buyback program. In the third quarter, we repurchased 635,000 shares for $15 million, bringing the full year total to 966,000 shares, or 8% of the shares outstanding. Our expected fourth quarter free cash flow supports continued execution of our capital returns framework, and we have already begun additional buybacks. While executing our third quarter repurchases, we reduced net debt by $12 million, or nearly 10%, to $114 million, resulting in a net leverage ratio of 1.3x. Our liquidity position remains solid. We ended the quarter with $32 million of cash on hand and $86 million of availability under our revolving credit facility with total liquidity of $118 million. Before turning to our financial guidance, let me provide a little more detail on our income tax expense and corporate items for modeling purposes. In the quarter, we increased the valuation allowance reserves we hold for the U.K. and recorded $5 million of additional income tax expense. Net of this charge, income tax in the quarter was roughly $5 million, slightly below the second quarter. As our sourcing strategies shift income across jurisdictions, we expect our effective tax rate to shift as well. For example, for the fourth quarter, we expect income tax expense of $2 million to $3 million. For the fourth quarter, we estimate corporate costs and depreciation and amortization expense of around $8 million each and interest expense of $5 million. Now, turning to the market and our financial guidance for the remainder of the year. We are forecasting a gradual decline in activity through the fourth quarter. However, at current commodity prices, our elevated backlog, continued market share gains and further cost savings should help keep our results relatively steady with the third quarter. Therefore, for the fourth quarter, we forecast revenue of $180 million to $200 million and EBITDA of $19 million to $23 million; and for the full year, revenue of $770 million to $790 million and EBITDA of $83 million to $87 million. Let me turn the call back to Neal for closing remarks. Neal? Neal Lux: Thank you, Lyle. To conclude, I want to first reiterate how proud I am of the team's execution. They delivered strong safety results, bookings, revenue, EBITDA and free cash flow. Their efforts and performance are also positioning FET to finish the year with momentum. Looking ahead to 2026, we've begun initial discussions with our customers about their plans for the year. It is too early to call a bottom in activity. However, with our strong backlog, planned market share gains and structural cost-saving efforts, we are well positioned for 2026. More importantly, we must continue to focus on the long-term vision. With our Beat the Market strategy, we are striving to double revenue. The next 5 years have the potential to be truly special for FET and its investors. That is FET 2030. Thank you for joining us today. Daniel, please take the first question. Operator: [Operator Instructions] Our first question comes from Joshua Jayne with Daniel Energy Partners. Our next question comes from Daniel Pickering with Pickering Energy Partners. Daniel Pickering: Can you hear me? Neal Lux: Yes. Thanks, Dan. Daniel Pickering: Great. Just checking to make sure the system is working here. A couple of questions. I mean, bookings is obviously quite strong. Neal or Lyle, can you talk a little bit about -- I'm just wondering, have you changed your incentive system for your sales guys? Are you tackling things in a different way? I mean, bookings have obviously accelerated, and the world looks a little bit worse. And so you're doing something right. I'm just wondering if there's a redesign of the way you're attacking things or if it's just all the efforts finally resulted in a bunch of orders. Neal Lux: Yes. We -- Dan, we've looked at our markets, our sales process. This has been an ongoing -- something we've been working on for many years. And I think we're starting to really see the fruits of that. It goes back to our Beat the Market strategy, looking at the markets we're playing in and really having the right products and then having the teams go after it. So I do want to say the subsea bookings, which have been really strong, that is part of a -- a structural part of the cycle that we're a part of. And so, that's been good. But our teams really are aligned with that Beat the Market strategy and are focused on generating sales. Daniel Pickering: Okay. And as we look at that backlog, you're showing strong margins because of the reasons you talked about, Lyle. But how do we think about margins in the backlog, better than what we print in 2025, the same? Are you seeing any improvement in margins on the new orders? David Williams: Great question, Dan, there. I think one of the biggest factors that we need to look ahead to is going to be mix in our bookings. So, as Neal mentioned, subsea has been a big driver of those backlogs. And traditionally for us, contribution margin from subsea is a little bit lower than our average on the basis of the volume of pass-through items that we have in that business. So technology is good, but there's more pass-through there. So, that would put a little bit of downward pressure of mix with subsea being a higher piece of our revenue next year. That being said, we -- the team has done a great job this year with these cost savings initiatives that we've seen a lot of that cost this year, but there's more to come that will benefit us going into 2026. Daniel Pickering: Okay. Second question would be the discussion around the facility consolidation. Kind of a big picture question. You're obviously talking about targeting substantial revenue growth. If we're going to fewer facilities, I mean, how do you think about the revenue-generating potential of your manufacturing base? So if we're going to run $800 million in revenues this year, what can your manufacturing capacity do? Is it $1 billion? Is it $1.2 billion? Is it $900 million? How much utilization are we really looking at now versus the future? Neal Lux: Yes. So I think we still have a substantial roofline and footprint, Dan, that we can add people and material to grow revenue. I think over the last few years, we've talked about having the capacity to increase our revenue 50%. That still remains in place today. So with the -- even with the consolidation, we still have plenty of space to expand and pull product through. So I'm not worried about that growth with these consolidations. I think it's going to make us much more efficient in the near term. And I think there's benefits on the cost side, but also benefits for the customer, right? We're going to have better deliveries, be on time and just having that right structure in place. So we're looking forward to it. I think it's the right decision to make, and the timing here allowed us to do it and position for 2026. Daniel Pickering: Final question. Lyle, given the constraints that you have on share repurchase and leverage levels, et cetera, what's our capacity to repurchase shares over the next couple of quarters, given where the balance sheet is today? David Williams: Great question there, Dan. And maybe just to remind everyone of the context there, our share purchase capability is really limited by 2 factors, one of them being our net leverage of 1.5x, and we're below that level now. So we're in good shape. The other being the amount of free cash flow we generated in the last fiscal year. So that's really our cap. That puts about $36 million worth of total buyback capacity. And if we look at what we've repurchased through the end of the third quarter, it's about $21 million worth of repurchases. That would leave us another $15 million or so of capacity that we could use here in the third quarter -- I'm sorry, in the fourth quarter. And as mentioned on the call, we've done some of that already here in the month of October. So we've got quite a bit of dry powder left in the ability to buy back shares. Daniel Pickering: And Lyle, what does -- how does that look in '26 then? Does that reset? Or is it $15 million until we get to the end of '26? David Williams: Great. Thanks, Dan. It does reset every year. So the 2026 number will be roughly, call it, half of our 2025 free cash flow number. As we just said, we've raised that volume again. So we'll have a lot of dry power going into 2026. Daniel Pickering: So call it kind of $40 million-ish or something like that? David Williams: Yes. Operator: Our next question comes from Joshua Jayne with Daniel Energy Partners. Joshua Jayne: Okay. I don't know what happened. Sorry about that. So first question for me, just given the diversified nature of your business, could you speak to where you think we are in the cycle in each geography? And I'll sort of break them down into U.S. land, international and offshore. And based on where you think we are in each of those geographies, sort of how does that [indiscernible] about the spending moving forward in the next 12 to 24 months, allocating resources and capital? Maybe just as the first question. Neal Lux: Yes. I think we're always looking for -- at our markets individually, rather. I hate to categorize it by geography necessarily. So going back to our Beat the Market strategy, we have our leadership markets and our growth markets. I think there's opportunities in each regardless of the geography. I think we mentioned a few examples on the call where we do see ability to grow quickly is to take successful products that we've had in the United States and export those around the world. The example we mentioned was artificial lift. We've also seen that in our stimulation and intervention product line, where we've shipped our products to shale development in Argentina, in the Middle East. Again, we're well positioned in each region. So I think we closed with some comments that I think it's still too early to call a bottom. We're talking with our customers. But looking ahead to next year, we feel pretty good with the backlog we have, with the plans we have in place to have some -- to have a good year and really set ourselves up for the longer term. Again, the 5-year vision for us is to double our revenue organically. Joshua Jayne: And when -- I think you mentioned coiled line pipe on the call. So that was a product, for example, I think, grew 28% quarter-over-quarter. When I hear about growth like that, is that a business that you think heading into 2026 could roughly double as an example? Neal Lux: I think, over time, for sure. In 2026, I think that would be a pretty good -- a pretty big leap. It goes back to awards and timing. But our goal for our growth products, the growth markets that we have, yes, in 5 years, we do want it to double. If we can do it sooner, great. And I think coiled line pipe has had some great wins. The team has done well. But I hate to tell them they got to double within 1 year. But I think they have the opportunity to have some nice growth for sure. Joshua Jayne: And then, last question, maybe just to [ give you ] the floor on. As you're constantly introducing new products to the market, I mean, is there anything else just when we think about on the new product side heading into '26 that you're especially excited about that ultimately help E&Ps become more efficient? What are the things that you're thinking about introducing in '26 that could really drive some of this growth you're seeing sort of even if the market doesn't improve much going forward? Maybe talk about some of those products. Neal Lux: Yes. We have a really good pipeline now of new product development we're pushing through. Exciting area for us is, again, in the artificial lift to take the success we've had with protecting downhole ESP pumps and expand that to other artificial lift applications like rod lift. So we've got good progress there. Another one is our -- for subsea is our Unity operating system for ROVs. We've introduced that in 2025. We're expanding delivery. Again, with a lot of the new bookings we've had with ROVs and subsea, we have the Unity system on there. So that's exciting. And then, on the power side, we provide a key heat transfer unit for many of the mobile power units that are being deployed, both in the U.S. and hopefully internationally here shortly. Operator: Our next question comes from Jeff Robertson with Water Tower Research. Jeffrey Robertson: Neal, if we think about the growth markets, you talked about coiled line pipe and some of the downhole pump products that FET supplies. Does a period of lower oil prices increase adoption of some of those technologies by customers? Or is it more just industry trends as people -- as companies or countries around the world move toward more unconventional resource development? Neal Lux: Yes. I think the -- in a tighter market with, let's call it, more challenging oil price, products like that, where we can save operators' time and money, you get a very solid look. So I think that's open door. And then, by having that door open, it's allowed us to really show off really the technical capability. I think a good expectation, again, with lower oil prices is, service companies are going to have to be more efficient as well and do more with less and increase the service intensity. And again, that's where we see our consumable products -- while rigs may not be going up a lot, they're going to be working harder and longer, same with frac crews. And I think we're going to see more consumable usage that way. Jeffrey Robertson: Do you have -- can you just remind me what the capacity at your Dayton pipe facility is? And when you talk about growing share in coiled tubing and coiled line pipe, how much you can accommodate before you would have to consider any kind of capital investment? Neal Lux: We've never really had that capacity outlined. But I can tell you from having been there since the building was constructed, we could put a lot more pipe through that facility. Again, it's going to extra shifts, utilizing mills -- both mills more efficiently. So I see the bottleneck for growth there is our commercial teams and getting the bookings. So once we get the bookings, I think we have a good runway to push more revenue through that facility. Jeffrey Robertson: And then, as you think about the 2030 goals, does the growth in -- or does the goal to double revenue in growth markets, does that just -- is that just traditional oil and gas? Or do you see opportunities for any of your product lines or the flexibility to make any acquisitions that could expose FET to any kind of adjacent markets? Neal Lux: Yes. I think oil and gas will be a big part of that. The other adjacent market would be defense. We talked about our rescue submarine booking. We see a good, let's call it, opportunity pipeline there to add on. We're also selling our remote-operated vehicles to defense contractors and really to the navies around the world. So I think that's another opportunity. So I think oil and gas, organic, as well as defense. And our teams are always looking for new markets that we can expand our addressable ones. So part of our goal, right, is to double our revenue in the markets we participate. If we can identify new ones that are adjacent, where we have a differentiated offering, where customers value the products and solutions that we deliver, that would be another way to expand our addressable markets, and we are constantly looking for that. Operator: [Operator Instructions] Our next question comes from Steve Ferazani with Sidoti. Steve Ferazani: Appreciate all the detail on the call. You introduced sort of how you're thinking about 2026. I think it's fair to ask, given the sort of consensus developing around the potential for sub-$50 WTI in the first part of the year, how well you're positioned for that and how you can offset what that could do on pressure at least on U.S. consumables? Neal Lux: Yes. Again, in the call, we said it was probably a little too early to talk about 2026. If we do get a low oil price, one of the things that we're looking at is, does production in the U.S. roll over? And as we -- as I'm sure you've read and you kind of look around the industry, it appears that most operators are trying to hold production at least flat year-over-year. And so, I think that would be a higher level of production than maybe we're modeling going into that. But overall, I think it's -- we're going to stay close to our customers. We think even in a sub -- prices go below where they are today, those get into the 50s, there's going to have to be more efficiency. And so, we're going to put ourselves as we're going to be the enabler of that efficiency. And so, we're well positioned for that, and that's part of our strategy. Steve Ferazani: Okay. And when we think about this multiyear high on backlog, timing of conversion, I know a lot of this is percentage of completion. How much of that backlog is multiyear? And how much of that do you think you work through over the next 5 quarters? David Williams: Yes, Steve, that's a really good question. And typically, when we think about our backlog over time, that backlog is going to typically run out in 2 or 3 quarters. I think now, with a bigger backlog build that we have in subsea, that's where we're going to see that run all the way into 2027. So the rescue submarine we announced last quarter, for example, we will recognize a decent amount of revenue on that in 2026, but we won't deliver that until late 2027. So we'll have revenue running all the way through there. But the bulk of our backlog probably bleeds out in 2026 with some subsea lasting all the way into '27. Steve Ferazani: Perfect. That's helpful. The uptick on both valves and sand control products, the sequential improvement, I know there's 2 different dynamics going in there. Can you walk through what you're seeing on the valve side? I know there was some destocking going on related to tariffs. Are we seeing that easing now? Are we getting through the destocking? And then, on the sand control products, what you're seeing in Canada? David Williams: Steve, the valves, I think you hit the nail on the head. We talked for the last 2 quarters about what we call the buyers' strike as buyers, with the uncertainty in what tariffs were going to do, basically pulled the pin on ordering patterns. So we have seen some needed increases there for our distribution customers who needed to restock some shelves. My comments about tariff rate volatility continue to be there. And despite the recent news about maybe lowering tariffs on Chinese imports, where that would most affect valves, we definitely see that volatility continue. So we're keeping our eyes close on the valves business, but it was nice to see the increase there. Neal Lux: Yes. And Steve, I think in Canada, I believe it was maybe our first or second quarter call, we thought the back half would be stronger based on some of the customer discussions we've had. So I think that's really been part of the activity or the growth in Canada as we've had that. And our team has been really successful on maintaining and getting key bookings up there as well. Steve Ferazani: And if I could get one more in because I heard you mention maybe once or even twice the potential in the -- serving the rod lift market. Have you served that market before? Would that be a new addressable market? Neal Lux: That's a really new market. We've had, let's call it, some sales into that market, Steve. So it's not completely from scratch. So we're already into it. But we're doubling down our efforts and expanding with our products. We've talked about in the earlier calls, we have a really neat piece of -- really neat product called Pump Saver Plus. It helps really in a very similar way that we have for ESPs. It prevents rod pumps from getting destroyed through -- breaking down, excuse me, through sand and gas management. So we think the product has a lot of legs. We've refined it, and we're working really closely with both operators and rod lift pump companies to really get that product out in the market. Operator: I'm showing no further questions at this time. I would now like to turn it back to Neal Lux for closing remarks. Neal Lux: Thank you, Daniel, and thank you for your support and participation on today's call. We look forward to our next call in February to discuss FET's fourth quarter and full year 2025 results. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning, and thank you for joining us today for Select Medical Holdings Corporation's Earnings Conference Call to discuss the third quarter 2025 results and the company's business outlook. Presenting today are the company's Executive Chairman and Co-Founder, Robert Ortenzio; the company's Chief Executive Officer, Thomas Mullin; and the company's Executive Vice President and Chief Financial Officer, Michael Malatesta. Also on the conference line is the company's Senior Executive Vice President of Strategic Finance and Operations, Martin Jackson. Management will give you an overview of the quarter and then open the call for questions. Before we get started, we would like to remind you that this conference call may contain forward-looking statements regarding future events or the future financial performance of the company, including, without limitation, statements regarding operating results, growth opportunities and other statements that refer to Select Medical's plans, expectations, strategies, intentions and beliefs. These forward-looking statements are based on the information available to management of Select Medical today, and the company assumes no obligation to update these statements as circumstances change. At this time, I will turn the conference over to Mr. Robert Ortenzio. Please go ahead. Robert Ortenzio: Thanks. thank you, operator. Good morning, everyone. Welcome to Select Medical's Third Quarter 2025 Earnings Call. As our custom, I'll provide some overview of the quarter and comment on our development efforts, and then I'll turn the call over to our CEO, Tom Mullin. Let me begin with the regulatory update that affects our critical illness recovery hospital segment. On September 22, CMS announced the deferment of its expanded Medicare outlier reconciliation criteria, what we commonly refer to -- have referred to as the 20% transmittal rule. It was originally slated to apply to cost reporting periods beginning on or after October 1, 2024. This rule will now be effective for periods beginning on or after October 1, 2025. The rules deferral resulted in a favorable revenue adjustment recorded this quarter. We are pleased with the delay of the transmittal and expect the rule to have much less of an impact as labor costs are more stabilized in the cost years now affected by the change. This should result in fewer of our hospitals subjected to an outlier payment reconciliation. While we are pleased with CMS' decision to delay the implementation of the 20% transmittal rule, we believe further reform is needed to ensure Medicare policy supports treatment of high-acuity patients in our long-term acute care hospitals. We will continue to actively advocate for policies that enable us to provide critical care for these patients. I would now like to turn to an update on development. During the third quarter, we acquired a 30-bed critical illness recovery hospital in Memphis, Tennessee and grew our outpatient portfolio by 3 clinics. Future development efforts remain focused on our inpatient rehabilitation segment. Between now and the first half of 2027, we expect to add 395 inpatient rehabilitation beds through a combination of new openings and strategic bed additions. This month, we opened our fourth rehab hospital with our joint venture partners, the Cleveland Clinic that operates 32 new beds. By year-end, we expect to open a 45-bed rehabilitation hospital in Temple, Texas and a 32-bed acute rehab unit in Orlando, Florida. We also anticipate adding 10 beds to an existing rehab hospital with our joint venture partner, Riverside in Virginia. Moving to 2026, we expect to open 3 new inpatient rehab hospitals, including a 58-bed facility in Tucson, Arizona in partnership with Banner Health, a 63-bed hospital in Ozark, Missouri with Cox Health and a 60-bed hospital with AtlantiCare in New Jersey. Additionally, we plan to add 2 acute rehab units and 2 neuro transitional units to further enhance our continuum of care rehabilitation. Looking ahead to 2027, we are preparing to launch a 76-bed rehab hospital in Jersey City, New Jersey under the Kessler brand. Beyond these projects, our pipeline remains active and promising with additional opportunities under various stages of development. As we advance these initiatives, we will remain focused on strategic investments that drive sustainable growth and long-term value for our shareholders. In addition to development, we continue to evaluate opportunities to increase the return on capital to our shareholders through share repurchase and cash dividends. This quarter, the Board of Directors approved a cash dividend of $0.0625 per share, which is payable on November 25, 2025 to stockholders of record as of November 12, 2025. These actions reflect our ongoing commitment to enhancing shareholder value and positioning the company for continued success. This concludes my remarks, and I'll now turn the call over to Tom Mullin for additional remarks regarding financial performance for the quarter of each of our segments. Thomas Mullin: Thank you, Bob, and good morning, everyone. On a consolidated basis, revenue grew over 7% to $1.36 billion compared to $1.27 billion in the prior year. Adjusted EBITDA also increased over 7% to $111.7 million, up from $103.9 million. Earnings per common share from continuing operations rose over 21% to $0.23 compared to $0.19 per share in the same quarter last year. Moving into our segment results. We will start with the inpatient rehab hospital division, where we delivered another strong quarter. Revenue increased 16% year-over-year to $328.6 million and adjusted EBITDA was up 13% to $68 million. Our revenue per patient day increased nearly 5% and our average daily census rose 11%. Occupancy improved to 83% from 82% with same-store occupancy rising to 86% from 85%. Our adjusted EBITDA margin declined slightly to 20.7% from 21.3%. In our outpatient rehab division, revenue increased 4% to $325.4 million, which was driven by over 5% growth in our patient visits. Net revenue per visit decreased to $100 from $101 in the same quarter last year. The decrease in net revenue per visit was driven by a reduction in our Medicare reimbursement and an unfavorable shift in payer mix. Adjusted EBITDA decreased over 14% to $24.2 million, with margin declining from 9.1% to 7.4%. In our critical illness recovery hospital division, our revenue increased over 4% to $609.9 million, while adjusted EBITDA rose over 10% to $56.1 million, up from $50.8 million in the same quarter of last year. Our adjusted EBITDA margin increased to 9.2% from 8.7%. Occupancy remained steady at 65% with our admissions up 2.1%. That concludes my remarks, and I will turn the call over to Mike Malatesta for additional financial details before we open the call up for questions. Michael Malatesta: Thank you, Tom, and good morning, everyone. At the end of the quarter, we had $1.8 billion of debt outstanding and $60.1 million of cash on the balance sheet. Our debt at quarter end includes $1.04 billion in term loans, $150 million in revolving loans, $550 million in 6.25% senior notes due 2032 and $47.1 million of other miscellaneous debt. We ended the quarter with net leverage of 3.4x under our senior secured credit agreement and have $419.1 million of availability on our revolving loans. Our term loan carries an interest rate of SOFR plus 200 basis points and matures on December 3, 2031. Interest expense was $30 million compared to $31.4 million in the same quarter last year. For the quarter, cash flow from operating activities was $175.3 million. Our days sales outstanding or DSO from continuing operations was 56 days at September 30, 2025, compared to 60 days at September 30, 2024, and 58 days at December 31, 2024. Investing activities used $32.6 million, which includes $53.1 million used for purchases of property and equipment, offset by $22.1 million of proceeds from the sale of interest in one of our hospitals. Financing activities used $135 million, including $100 million in net repayments on our revolving line of credit, $7.7 million in dividends, $17 million in net distributions to noncontrolling interest and $2.6 million in term loan repayments. We are reaffirming our business outlook for both revenue and adjusted EBITDA for 2025. We expect revenue to be in the range of $5.3 billion to $5.5 billion and adjusted EBITDA to be in the range of $510 million to $530 million. We are increasing our estimate for earnings per common share to be in the range of $1.14 to $1.24. Excluding capital expenditures subsequently contributed to nonconsolidating joint ventures, we still expect capital expenditures to be in the range of $180 million to $200 million. This concludes our prepared remarks. At this time, we'd like to turn the call back to the operator to open the line for questions. Operator: The first question for today will be coming from the line of Ben Hendrix of RBC Capital Markets. Benjamin Hendrix: I appreciate the opening commentary about the 20% transmittal delay. I wanted to see if you could focus a little bit on the ongoing impact of the high-cost outlier. What it's doing to the admission volume, occupancy and kind of what types of mitigation tactics you guys can employ to help offset that? And then just close with any development conversations in Washington. Thomas Mullin: Ben, this is Tom Mullin. I'll start with your question. To your point about the high-cost outlier and the fixed loss threshold continuing to increase at a pretty dramatic rate over the last 4 years and now sitting at just under 79,000. It does have a negative impact on our LTAC business because whenever you think of how our LTACs are positioned across the country, many of our LTACs are with some of the largest academic medical centers that carry the highest case mix index and most acute patients across the country. So as we see that fixed loss threshold continue to go up, we are unable to accommodate as many of those very acutely ill patients just because there's so much more loss to get to any outlier reimbursement. So it has had an effect on our ADC and some of the mitigation efforts that we have, we're fortunate that we have inpatient rehab hospitals in those shared markets in most of our shared markets with the large academic medical centers that we partner with. And we're able to use those as downstream opportunities to get some of the patients moved from the LTAC to the inpatient rehab as they're able to take more acutely ill patients, and we get our rehabs able to do that. So we've seen year-over-year, our patient days or our length of stay on some of these -- on those patients has decreased by 1.5 days on our patients. As a result of that, our ADC is down slightly, but our admissions are up. So obviously, we're going to continue to focus on that high-cost outlier threshold. And I'll let Bob comment on what we're doing in D.C. to try and combat some of those efforts. Robert Ortenzio: The environment in D.C. is one that I think I characterize it as better than it's been historically. We -- I think we have more open channels with both CMS and the committees of jurisdiction in the House and Senate. Our energy most recently has been to try to get the deferment of the 20% transmittal so that it would be applied a bit more fairly because of the nature of our cost reports and the high labor costs coming out of the pandemic. So as I mentioned in my earlier comments, we are pleased with that. However, it does not solve really more of the long-term challenges that we have. Just to point out that, that fixed loss threshold in the last 4 years has gone from $38,000 to $59,000 then to $77,000. And then we did get, I think, a bit of a break with it being at $79,000, still quite an increase, but a bit more modest when you consider that the proposed rule had the fixed loss threshold of being $91,000, which would have been extremely punitive had that been implemented in the last proposed rule. So as always in this industry, we are holding our breath for the proposed rules to come out, and then that is an avenue for us to comment. But it is true that while the regulatory environment is difficult because the outlier pool is supposed to stay at a little bit below 8% and the mechanism that CMS has is to continue to push up the fixed loss threshold to try to come within that legislative mandate of the 8%. But on the other hand, it works against the policy for LTACs, the overreaching policy for LTACs, which is to have them take the higher acuity patient. So there is a push and pull there that I think is difficult to reconcile. And the only thing that we can do is continue to advocate on behalf of the sickest of the sick patients that go into the -- particularly to our LTACs. I hope that answers your question. But if you have a follow-up, please ask. Benjamin Hendrix: No, I think that covers it. Operator: Our next question will be coming from the line of Justin Bowers of DB. Justin Bowers: So I'll just stick with 2 quick ones on LTAC. So number one, Bob and Tom, is there -- has there been any discussion with CMS or in D.C. about raising the targeted amount of payments or that 8% threshold to something higher in terms of like percentage of outlier patients? And then two, there's a lot of moving parts with reimbursement, but you did get an increase for 2026 and a modest increase for the HCO. Are the trends that we're seeing now as it relates to like length of stay in ADC, is it just -- is that a good way to think about sort of like how the business should trend on the go forward, absent any other big changes? Robert Ortenzio: It's a great question. And I think the best way for me to respond is to say this, there are lots of levers in a very complicated reimbursement system. As I've said before on this call, the LTAC reimbursement has become mind-numbingly complicated. And I think we see -- we hear that from our shareholders and from the analyst community because there are -- if you go with the fixed loss threshold, you go with site neutral, you look at the compliance requirement of 20-day length -- 25-day length of stay, you look at an 8% outlier pool. These are all levers that can be pulled for us, for Select. And I think for most of the industry, we'd be happy for relief to come from any of those levers. And for me, just from a -- strategically, I'd like to propose to policymakers ranges of options that they could do to help the industry that is no secret over the last 4, 5 years has struggled as an industry. And so we're putting all options on the table for relief. And it's hard oftentimes for us to know either from a legislative or regulatory standpoint, what are the paths of least resistance for regulators. So sometimes we don't always know from a transparency standpoint of what they feel they can do more easily. Sometimes the regulatory CMS feels that they're restricted by some legislative constraints. And the legislative branch doesn't want to oftentimes impose too much on what they view as a regulatory playing field and encroach upon that. So we're -- we try to work with the rest of the industry to put as many options on the table. Obviously, you hear about the ones that are most difficult for us. I mean it is trying when the fixed loss threshold has been going up as dramatically as it has over the last couple of years. So that's obviously an easy one, but that may not be the easiest one for CMS to solve for. So we obviously put other options on the table. Justin Bowers: Appreciate that. And then just pivoting, there's a lot of development activity, especially on the IRF side over the next couple of years. Can you help us understand how much of the CapEx this year is maintenance versus growth? Michael Malatesta: I'll take that question on maintenance. Maintenance for this year, we're projecting overall $180 million to $200 million. Maintenance is going to range in that $100 million to $105 million range. The remainder is related to... Operator: And our next question will be coming from the line of Ann Hynes of Mizuho Securities. Ann Hynes: I know you said in the prepared remarks that you had a revenue benefit from the delay of the 20% transmittal rule. What was the impact in the quarter from a revenue and EBITDA perspective? Michael Malatesta: So Ann, the net impact when we take into account the revenue and some expense reversals was in the $12 million to $15 million range. Ann Hynes: For EBITDA? Michael Malatesta: EBITDA for the quarter. Ann Hynes: Okay. And then what about for the year? Because you didn't raise -- like I would assume this would have been a benefit to guidance. Is there something else going on that you didn't raise guidance for the positive change? Michael Malatesta: Well, as you saw, we had some softness in our outpatient segment this quarter. So while we're comfortable raising EPS guidance, we thought it was prudent just to maintain EBITDA guidance. Ann Hynes: Okay. And then -- and just from a year impact, like what was the delay? I know that was the quarter, the 12% to 15%, but what impact did it have on your guidance for the total year? Michael Malatesta: So for the year, we really did not -- we had just a negligible, not a de minimis impact for Q4 because I think as we -- as Bob alluded to earlier, that as the time line progressed, it had less of a significant impact to 20% transmittal rule because we had more labor periods to compare against. Ann Hynes: And maybe you mentioned outpatient. Maybe can you give us some more detail on what type of softness you're seeing and the impact? And what you think driving it? Michael Malatesta: We did have a nice increase in volume of approximately 5%, but we did have pressure on rate. And Medicare has been a headwind that we've had to deal with for all of 2025 and actually the last few years significantly. But we also did see a deterioration in our mix for this quarter. We look to get that back on track, but just not the mix within categories, but sometimes the mix within the mix of certain geographic areas and certain managed care commercial payers. Ann Hynes: Okay. And then maybe focusing on 2026. I know you're not giving guidance today, but are there any high-level headwinds and tailwinds that you want to call out? Michael Malatesta: What -- I think the one thing with outpatient that we have not experienced in the last 5 years is, even though it's modest, there will be an increase for Medicare -- and our Medicare Advantage payers. So that is -- I consider that some type of a slight tailwind. And also, I think Tom can speak to this too, the significant development that we've communicated going into next year. Thomas Mullin: Yes. I think starting just with LTAC briefly, we'll have the 20% transmittal back in place starting this October 1 and rolling in by cost year. So that will be a bit of a headwind, but far less because of the point Mike just made about the labor markets and being further from the pandemic labor costs. So we will be able to mitigate that far more than what we would have experienced in the past year. And as it relates to inpatient rehab, there is a fair amount of development that to get started in 2026 with new hospitals. And there's also consideration for converting more of our LTAC beds in markets where there's rehab demand to add an ARU within our LTACs. So you'll see a fair amount of rehab growth in the next year. Ann Hynes: All right. Maybe one more question, just on rehab. Can you remind us like when you build a development hospital, how long to break even and how long do you get to your like peak margin profile? Michael Malatesta: It's -- Ann, it's Mike Malatesta again. It's approximately 6 months until we get to about breakeven. For full maturity, it's around 3-year -- hospital that we're at that 85% occupancy that we have for our core hospitals. Operator: Our next question will come from the line of Joanna Gajuk Of Bank of America. Joanna Gajuk: A couple of follow-ups. So on the 20% transmittal goal delay in implementation. So because of the more recent cost reports will be used, should we think about the, I guess, the headwind much smaller than that $12 million to $15 million you saw in first half of '25? Michael Malatesta: Joanna, I think your question is that is for next year, we project the impact to be much less in '26 than it would have been if it was implemented for '25. Yes. And we think the impact will maybe approximately a 1/3 of what we would have anticipated if it was put in place for this year and not rescinded. Joanna Gajuk: Okay. That's super helpful. And I guess, to Bob's commentary around D.C. environment, maybe a little bit warming up or at least open channel, so that's positive. And I guess as we think about heading into next year and the proposal for fiscal '27, so any indication whether the CMS would propose again to increase the outlier threshold to $90,000? Or you think that's kind of off the table? How should we think about that? Robert Ortenzio: Well, the short answer is no idea. There is -- these proposals are just absolutely blacked out. I mean this is why they become such a big event for us every year because there is literally no discussion ever that comes out of CMS on the proposed rules for reasons which you can appreciate. Those things are locked down. They get drafted, they circulate around the administration before then they're released under, I think, the most extreme confidentiality. Joanna Gajuk: Okay. So I guess we'll just have to wait and see. All right. That's fine. I was just checking. And if I may, a couple of more follow-ups. On the outpatient rehab, so you said that the weakness in that segment was because of the -- it sounds like a payer mix. So what exactly is happening? Is it just -- like you said, there's something with different markets growing differently or there's some sort of like managed care denying care or not paying or anything else that's going on there? Michael Malatesta: Well, the first part is with Medicare, there's over a 3% [increase] this year. So that's the challenge that our operation had to face the entire year. For this particular quarter, though, we did see a slight shift in mix to Medicare, Medicare Advantage. And also, it depends with -- which -- geographically, which areas have comprised a little more of your volume. And also within managed care commercial, that's a wide basket. Certain payers pay different rates higher and lower than others. So this quarter, we did have, as we say, a shift in our mix, but along with our sustained Medicare cut that we've had to endure all year. And again, that is going away next year where we'll have a modest increase. Joanna Gajuk: Right. Because that was my other follow-up. But before I ask that, on this payer mix. So should we think this is something that could persist in terms of these margins all the way down to 7%? And is there something you can do to kind of mitigate that headwind? Michael Malatesta: Well, we don't think this is something that's going to persist. Again, with Medicare, that's going to help with Medicare and Medicare Advantage with an increase. But on our -- we've also talked about in the past, putting investments into our systems. And this is where going into next year, with our investment in our scheduling module, that should facilitate it. Plus there is a focus to kind of rectify the deterioration of mix. Joanna Gajuk: And then my follow-up on the outpatient rehab Medicare rate next year. So we don't have the final -- why I guess, might be delayed. But based on the proposal it says, the proposal is finalized as proposed without any changes, but what will be the rate update for your rehab therapy codes? I mean we were estimating, it's got to be 2.6% to 2.8%, but any estimate that you can share for us? Michael Malatesta: Actually, with the mix of codes, and there's just a few codes that predominantly make up the base of revenue over 95% of your revenue mix for therapy codes. We're a little more modest. We're around that 1.8%, 1.75% increase for next year when you take all factors into account for Medicare. Joanna Gajuk: But it's still better than the cost, so I guess. Michael Malatesta: [We're happy]. Yes. Joanna Gajuk: Yes. And if I may, just very last question. Just talking about how the segment did versus your internal expectations. So you said the outpatient was a little worse. And then the LTAC business or the critical illness hospitals, it sounds like were better because of this reversal. But outside of the reversal, how were the trends in the critical illness hospitals? And also, how did the IRF segment did versus your internal? Michael Malatesta: Well, I think -- and Tom can maybe elaborate on critical illness, but I think we're all in agreement for inpatient rehab, it just continues to exceed our expectations this year. Thomas Mullin: And in critical illness, we did see occupancy increase compared to prior year. But as everyone on this call knows, in the critical illness business, there's a fair amount of seasonality, and we're always going to see a decrease in the third quarter. And then we start to really pick back up as we enter October and the fourth quarter as the season start to change and we start to see respiratory volumes start to pick up. So we saw the normal trend that we see every year in critical illness. But compared to the prior year same period, occupancy was ahead, admissions were ahead and revenue was ahead. But obviously, the 20% transmittal deferment played into the rate increase. Operator: And our next question will be coming from the line of A.J. Rice of UBS. Albert Rice: First, maybe just to ask you on the rehab IRF development pipeline. Do you have a sense of what the relative start-up costs that you experienced this year and how that might compare to next year? Is that number going to be a tailwind -- headwind for you? And your biggest peer in that segment is talking about potentially changing the footprint model a little bit, smaller facilities, et cetera, to go into a new market. Are you -- anything going on in your approach to the sizing of these development locations that's worth calling out? Michael Malatesta: A.J., it's Mike. In regards to losses, we've had a pretty consistent cadence from last year and projecting into next year, we're projecting approximately $15 million to $20 million of start-up losses per annum. So that's going to be fairly consistent. Tom is going to speak to our strategy on the size of the hospitals. Thomas Mullin: Our focus will remain partnership focused and looking to expand partnerships with the larger health systems across the country. So you'll see more new partners added in the coming year or 2 across the country. You'll also see us in our markets where we're running at or near capacity with existing partners, we'll be adding new hospitals, like Bob spoke to in his opening remarks where we added a fourth rehab hospital with Cleveland Clinic that just opened earlier this week. So there will be additions in our existing markets, but we'll be looking to add large new academic medical centers with inpatient rehab as well. We typically build 60-bed rehab hospitals, but we're considering 80 to 100 bed rehab hospitals in future markets where the demand deems it necessary. Albert Rice: Okay. Interesting. Any thoughts on labor? I think you've sort of tangentially commented on a couple of times across different business lines. But what are you seeing there as you think about '26? It sounds like it's probably a more stable labor environment than you've seen in a number of years, but I just don't want to put words in your mouth. What's sort of the cost trend on labor that you're seeing this year and for the different business lines? And do you see it being pretty stable going into next year? Michael Malatesta: So A.J., I mean, if we're going to go back to what we call the agency crisis or challenges we had in '22 and the first half of '23. Agency within our critical illness division has -- utilization has been consistently around 15%. So that's been very stable. Our agency rates, again, are back to pre-COVID levels. And full time, I think with full-time increases for full-time equivalents across all 3 business lines, it's been fairly consistent and actually a little under 3%. So it's a much more stable environment than we encountered a couple of years ago. Albert Rice: Okay. Interesting. The last question on leverage, you're down to 3.4x now at this point. Is -- how should we think about that going forward from here? Is that sort of a stable area roughly that's comfortable? And as you sort of debt pay down maybe is less of a priority, does it change your thinking about capital allocation in any way? Robert Ortenzio: No, A.J., this is Bob. The 3.4 is a stable, comfortable leverage. We can take it down. But as you've heard Marty and I in the past talk about it, it's opportunistic. I mean, divided by the CapEx for development is obviously our #1 priority. And then you've got dividends, you've got stock buybacks and you've got debt reduction is then on the list, and we'll take advantage of the one that is the most advantageous to us, and we'll take the one the market gives us. Operator: And we now have a follow-up question from Justin Bowers of DB. Justin Bowers: I just wanted to follow up on PT. So Mike, what percentage of your MA rates are pegged to the Medicare fee schedule? And then the follow-up to that would be, do you have a sense of -- I mean, Medicare has been a headwind for quite a few years now. Any sense of what kind of drag that's been on EBITDA in the division over the last few years? And then what can you do to get this back to double-digit margins? Michael Malatesta: Okay. So let me take -- I think there's 3 questions there, Justin. So the first question is approximately 80% of our Medicare Advantage is linked directly to the Part B fee schedule. So -- and then I think your next question, I remember, was -- what -- I'm sorry, Justin, can you repeat your 2 questions again, your last 2? Justin Bowers: Yes. So it was just -- there's been -- I think there's been -- what a decrease in the -- there's been headwinds for, what, 4 or 5 years now... Michael Malatesta: 4, 5 years -- the decrease in the last 4 or 5 years, and the metric we look at is if we just had a 2% increase, a modest increase over the last 5 years versus the cuts that we had, we calculate as almost $65 million directly to our bottom line. Justin Bowers: And then is this -- the rate increase is going to help. Any other levers that you can pull to sort of like to get this thing back to double-digit margins? Michael Malatesta: Well, the focus and the focus going into '26 is going to be on productivity. So that's where we've invested in our systems and the scheduling module. But just minor increases in productivity will have a large impact on our bottom line. So that productivity and enhancements of our systems -- our front-end system is going to be a focus for outpatient in the year to come. Operator: And this does conclude today's Q&A session. I would like to go ahead and turn the call back over to Mr. Ortenzio for closing remarks. Please go ahead, sir. Robert Ortenzio: Thank you, operator. There are no closing remarks. We look forward to updating you next quarter. Operator: This concludes today's program. You may all disconnect.
Leandra Clark: Good morning, and welcome to MAPFRE's activity update for the third quarter of 2025. This is Leandra Clark, Head of Investor Relations and Capital Markets. Thank you for joining us today. We are pleased to have here with us José Manuel Inchausti, Vice President of MAPFRE, who will provide some opening remarks and an overview of recent business trends. Following that, José Luis Jiménez, our Group CFO, will discuss the main financials; and Felipe Navarro, Deputy General Manager of the Finance area, will walk us through the balance sheet. As a reminder, we report IFRS financial information on a half year basis. The information in this activity update is prepared under the accounting policies applicable in each country, which generally do not apply IFRS 17 and 9. [Operator Instructions] and we will open up the Q&A session at the end of the presentation. I will now hand the floor over to José Manuel Inchausti. José Manuel Inchausti Perez: Thank you, Leandra. Hello, everyone, and thank you for your time today. Let me share some highlights of the quarter before José Luis and Felipe walk you through the details. Results have been excellent with higher profitability in all regions and in our main business units. We are outperforming almost all updated targets announced at the AGM. However, if we look at the macroeconomic context, the world economy has continued to slow down with fiscal tensions, trade wars and higher geopolitical risk. This is creating exchange rate volatility that is affecting our top line, especially the U.S. dollar and Latin American currencies. Premiums have grown 3.5%, reaching over EUR 22 billion, and at constant exchange rates, this would more than double, reaching nearly 8%. Non-life, which is more than 75% of our business, continues to benefit from improved technical management. Premiums in this segment are growing over 6% at constant exchange rates, almost 2% in euros, reaching over EUR 17 billion. The Life business is up around 10% in euros, nearly 40% at constant exchange rates, reaching over EUR 5 billion. The Non-life combined ratio is now 92.6%, down more than 2 points with a strong reduction in the claims ratio to 65%, and an excellent expense ratio at 27.5%. The net result is up nearly 27%, reaching EUR 829 million with a return on equity of 12.4%. These results includes extraordinary impacts of EUR 79 million from the partial goodwill write-down in Mexico and the derecognition of tax credits in Italy and Germany. This is the result of an ongoing review of our balance sheet with a prudent approach to valuation. The adjustments have had no impact on our cash flow positions nor our capacity to pay dividends. Without these one-offs, the result would stand at an excellent EUR 908 million and the return on equity over 13%. Our capital base remains strong despite market volatility with shareholders' equity up 5% during the year, reaching EUR 8.9 billion, and the solvency ratio close to 209% at the end of June, in line with our target range. These robust results have allowed us to increase the interim dividend to EUR 0.07 per share, up nearly 8% compared to last year. Core businesses are performing extremely well, supported by the progress in the implementation of our Strategic Plan. Overall, Iberia has an excellent contribution to results with almost EUR 350 million up over 22%, thanks to its diversified business mix with the Motor result up more than EUR 80 million, consolidating its recovery. There were also strong contributions from General Property & Casualty and Accident & Health. We continue to see the positive effects of our technical management with the Motor combined ratio improving by 6 points to 98.5% and Accident & Health improving 4.5 points to 95%. In Lat Am, performance has been outstanding with a combined ratio of 83% and almost all countries below 100%. The largest challenge we are facing in the region right now is currency volatility. We have been operating in this market for many years and are confident that our diversified business model will continue to prove resilient. While currencies are affecting the top line, results are strong across the region. Brazil has had an excellent quarter with a net result of almost EUR 200 million, up 6% with very strong margins. In addition, Mexico, Peru and Colombia together contribute over EUR 100 million to the results. But both the Non-Life and Life businesses remain highly profitable with improvements in the combined ratio across most lines, and financial income continues to be an important tailwind. The region reported a total result of EUR 340 million, up 11%. North America is delivering an excellent result of nearly EUR 100 million, up 40%. Technical measures continue to pay off with relevant improvements in Motor and General Property & Casualty. Finally, in MAPFRE RE, prudent underwriting, diversification and adequate retrocession are delivering solid results. We continued increasing prudence during the quarter with reserves still in the upper end of our confidence interval. Hurricane season has been very quiet. However, we prefer to maintain a conservative approach. Performance was standing with a net result of EUR 256 million and a combined ratio under 94%. In conclusion, we are extremely satisfied with this year's results. The Board of Directors approved an interim dividend of EUR 0.07, an almost 8% increase to be paid on November 28. It was the fourth consecutive increase, bringing total dividends paid in 2025 to EUR 0.165, EUR 508 million fully in cash. This is the highest dividend ever paid in a year. During the last 5 years, MAPFRE has paid out EUR 2.3 billion to shareholders. The average dividend yield for this year is over 5% and more than 7% for the last 5 years. I will now hand the floor over to José Luis to walk us through the details of the quarter. José Jiménez Guajardo-Fajardo: Good morning to everyone. I will now discuss the key trends by region, complementing the figures already provided by José Manuel. In Iberia, total premiums are growing over 9% with solid growth in most lines of business. Non-life is up nearly 5% and Life premiums are up 20%. The combined ratio has improved 2.5 points to 95.9%. Our investment portfolio continued to boost profit. The return on equity is now up almost 2 points to 13%. Profitability in Lat Am has been excellent. Brazil continues to see excellent results, posting return on equity of over 27%, with improved technical ratios and high investment returns. The Non-life combined ratio is around 72%. In local currency, business volumes were down slightly with linked segment still affected by high interest rates and the macro and geopolitical context. Premiums in euros are down 11.5% with a 9-point exchange rate impact. Other Lat Am continues to deliver strong profitability, contributing over EUR 140 million, up 19% with technical improvements across all lines, leading to a 3-point reduction in the combined ratio to 96%. Premiums have been very affected by exchange rates, with strong local currency growth in key markets like Mexico, Colombia and Peru. In North America, premiums are down 4% in euros with a 3-point drag from the U.S. dollar. The combined ratio is well under 96%, improving around 3 points. In EMEA, losses in Germany and Italy are going down significantly. The region is reporting a second consecutive quarter of positive numbers with a EUR 7 million profit, compared to almost EUR 19 million in losses last year, with a 6.5 point reduction in the combined ratio. Regarding MAPFRE RE, José Manuel has already commented on the reserving strategy and the bottom line. In terms of growth, premiums are growing around 1%. The U.S. dollar is relevant for this business and premiums will be up over 6% at constant exchange rates. Additionally, reserve reinforcements has been around EUR 165 million year-to-date with a 5-point impact on the combined ratio, which means the ratio will have been below 90% without this one-off. MAWDY continues to contribute positively with a net result of EUR 3 million. Lastly, I would like to address a few specific items. First, hyperinflation adjustment has improved from around EUR 47 million last year to EUR 24 million this year, mainly due to Argentina and Turkey. And second, the extraordinary impact of EUR 79 million were recorded in the holding expense line, of which EUR 38 million correspond to the partial goodwill write-down in Mexico, and the rest to derecognition of deferred taxes in Italy and Germany, with EUR 31 million and EUR 9 million, respectively. As a reminder, in September 2024, there was the partial goodwill write-down in Verti Germany for EUR 90 million as well as extraordinary income of EUR 35 million from various tax adjustments. General P&C lines continue benefiting from technical discipline, strong market positions and diversification. Premiums are slightly down, affected by currencies. The combined ratio remained excellent below 81%. In Iberia, premiums increased by 7% with improvements in key segments, especially Commercial lines. The combined ratio stands at an excellent 94%, thanks to diversification and a prudent underwriting approach as well as comprehensive reinsurance protection. In Brazil, premiums declined 10% in euros, while the drop in local currency was just 1%. Agro insurance is still affected by high interest rates as well as the geopolitical and macroeconomic situation, while other retail and industrial lines are experienced notable growth. The combined ratio has improved to 63%, supported by Agro, which remains in the low 50s with a lack of relevant events as well as a strong performance in other retail lines. North America, premiums are impacted by the dollar depreciation, while the combined ratio has improved 2 points to 83% during a traditionally quiet quarter weather-wise. Regarding Motor, the third quarter confirmed previous trends with significant advance in most market. The combined ratio is now below 100% with around a 5-point improvement year-on-year. The net result is almost EUR 96 million compared to EUR 70 million in losses last year. In Iberia, the combined ratio has improved over 6 points, reaching 98.5%, and we expect to see further improvements. Premiums are growing 3% and reflect average premium growth of over 7%, almost a point higher than the market. The result has grown by over EUR 80 million, reaching EUR 52 million compared to losses last year. In Brazil, premiums are down mainly due to the currency depreciation. The combined ratio remained stable, in line with higher interest rates. Performance has been a standing in North America with a EUR 52 million profit, almost double compared to last year, with the combined ratio down more than 3 points. Regarding the regions, in other Lat Am, almost all units are now reporting combined ratios below 100%. In EMEA, the combined ratio is also down 8 points from around 120% to 112%. In conclusion, technical management remains solid and the measures implemented continue paying off. Regarding the Life business, premiums are up almost 10% with strong trends in Iberia and other Lat Am, especially Mexico. Furthermore, the Life business is very profitable, adding EUR 180 million to the result. In Iberia, total premiums are growing 20% due to strong performance in savings products. Excluding special transactions, growth in Iberia will be around 17%. This very strong underlying performance is supported by our extraordinary distribution capacity, adapting to the individual needs of our clients. The protection business is growing in line with previous trends. The net result was EUR 92 million, down year-on-year. About half of the decrease is explained by lower financial gains. In Brazil, premiums are 14% lower, impacted by the currency as well the high interest rate environment, which affect lending and related Life Protection product demand. Profitability remains strong with a combined ratio of 82%, down 2 points year-on-year. Regarding the rest of the countries, volumes were up almost 16%, led by over Lat Am, in particular, Mexico. Performance in both Mexico and Malta has been noteworthy, growing more than 40% and 10%, respectively. Now I will hand over to Felipe to discuss the main balance sheet items. Felipe Navarro de Chicheri: Thank you, José Luis. Shareholders' equity stands strong at over EUR 8.9 billion, up 5% during the year on the back of the excellent results we are reporting. The improved valuation of the available-for-sale portfolio offsets the negative currency conversion differences, mainly from the U.S. dollar, which is down 12% year-to-date. Leverage is at 21%, reflecting our disciplined approach to capital and debt management. Regarding our capital structure, we don't expect any major changes in the near future. The upcoming maturity of our senior bond in May 2026 will most likely be refinanced by senior debt. We hope to go to market sometime early 2026. Total assets under management stand at more than EUR 63 billion. Third-party assets, which are now over EUR 15 billion are up more than 14% with outstanding performance in Brazil. We maintain our position as one of the leading non-bank players in the asset management business. Our own investment portfolio amounts to EUR 47.5 billion with asset allocation stable. We remain convinced that our portfolio's defensive nature, focus on quality and diversification and high liquidity is well prepared to face market volatility. On the top left, you can see our main fixed income portfolios. Regarding the euro area, duration is down year-to-date, but relatively stable on the quarter and portfolio yields overall are slightly higher. In other markets, portfolio yields in Brazil substantially increased nearly 240 basis points year-to-date, reaching 12.7%. In other Lat Am, yields are stable, while they are moving up in North America. On the bottom left, you can see Non-Life net financial income is up around 9%. Other Lat Am continues to be affected by Argentina, where investment returns are lower than prior years, which is offsetting the hyperinflation adjustments, which are also lower. On the right, you can see net financial gains at around EUR 29 million. Iberia remains the largest contributor, the majority coming from Non-Life. Now I will hand the floor over to José Manuel to make a few closing remarks. José Manuel Inchausti Perez: Before moving on to the Q&A, I would like to reiterate that we continue consolidating significant improvements across all regions and business lines, especially in the Motor business. This is thanks to one of our strongest assets, our high level of diversification, both by geography and by product, which not only mitigates risks but allow us to leverage opportunities. We continue executing our strategic initiatives with focus on profitable growth and continuous technical improvements as we move forward in our internal transformation. Financial income is still a relevant tailwind, and our balance sheet remains resilient. Despite the geopolitical and macroeconomic uncertainty, we have a very positive outlook. We are prepared to face the headwinds from currency depreciation, inflation and economic slowdown, and we are confident in the direction we are heading in. The increased interim dividend we announced this morning is proof of that. In conclusion, these solid results are proof of the strength of MAPFRE's business model, our ability to adapt in a constantly changing environment and our ongoing commitment to profitability, solvency and a client focus. These achievements allow us to be optimistic about the coming years, continue with the prudent approach that define us. I will now hand the floor over to Leandra to begin the Q&A. Leandra Clark: Thank you, José Manuel. Although most of you are already familiar with the process [Operator Instructions] And now let's start with the first question. We've received several questions surrounding the reinsurance business. Juan Pablo Lopez from Banco Santander would like to ask if there's been any impact from the recent hurricanes in the Caribbean. José Jiménez Guajardo-Fajardo: Okay. And thanks for your question, Juan Pablo. To be honest to you, I mean, the impact so far is negligible. And we have to say that MAPFRE has no exposure to Cuba and Jamaica. And in the case of Global, it's a minimum exposure that probably it wouldn't affect the result. Leandra Clark: We've also received several questions regarding the reserve strengthening at MAPFRE RE during the quarter. Maks Mishyn would like to know what was behind these reserves? And Alessia would like us to quantify the impact, both at 9 months and on the third quarter stand-alone and what businesses they affected, if they affected any particular line of business? José Jiménez Guajardo-Fajardo: Okay. I would say that probably following our prudent approach to reserving, I mean, we have reserve reinforcements has been around EUR 165 million year-to-date, which means more or less a 5-point impact on the combined ratio. Otherwise, it would have been below 90% without this one-off. In terms of the quarter, last quarter, we did a reserve around EUR 60 million. Leandra Clark: Thank you. Paz Ojeda also would like to know if we've finished with this reserve strengthening or will this continue in the coming quarters? José Jiménez Guajardo-Fajardo: Probably, I think it's too soon to say. I mean we are just in the middle of the hurricane season. Apart we have all the kind of NatCat events that could happen at any time around the world. So I would say that until the 1st of January is quite difficult to comment. But of course, I mean, we are prudent by nature. And if we think that there is secondary price increase or whatever it could happen, we are more on the prudent side. Leandra Clark: Thank you, José Luis. Maks also had a question regarding our outlook for the fourth quarter. As we've seen that the hurricane season remains mild. If that continues into the fourth quarter, what could we expect from an underlying combined ratio? José Jiménez Guajardo-Fajardo: Once again, I would say it's too difficult to say. Hopefully, the quarter could end as it has started. But during the last few weeks, we have Melissa and everything was a little bit concerned. Finally, it's not a big issue. But still, we have to deal with the end of October and November. Leandra Clark: Thank you. Moving on to another topic, still MAPFRE RE. Juan Pablo from Banco Santander asked about the loss ratio, which he said was very low in the quarter. Was there any release or extraordinary impact? And he also asked for the expense ratio, which has increased quarter-on-quarter. And is wondering if there's been any other extraordinary impacts in either of these lines. José Jiménez Guajardo-Fajardo: Well, as we have mentioned before, there is no release at all. It's the other way around. We have reserve reinforcements as we have pointed out. Maybe the good figures come from low NatCat events during the quarter. And regarding the expenses, it's just the profit sharing adjustment that we have in some policies that explains the difference. Leandra Clark: Thank you. We have one last question from Maks Mishyn regarding the reinsurance business. In particular, he's asking about the profitability of the Life business. I believe there may have been some volatility on the quarter, although this is a business that tends to have high volatility. Felipe Navarro de Chicheri: There is as well -- I mean, the reserves as well in the Life business has been reinforced during the year. And we can mention that the Life business, which is an area that we want to grow in the future, has been observed and developed in a very prudent way. So this is what we may expect on the year. I mean we are looking at this business very closely. And I think that year-on-year, it evolves quite swiftly. Leandra Clark: Great. Thank you. We're going to move on to the next block of questions. Moving on to Iberia. Juan Pablo from Banco Santander has some questions regarding the Motor gross written premiums that are growing 3% versus the sector, which is growing around 9% and that we've seen some loss of policyholders during the quarter. How do you see the competitive environment? Are you expecting an inflection point in terms of market share in the short term? José Manuel Inchausti Perez: Okay. The first thing is that MAPFRE Iberia has dropped 6 points, its combined ratio in Motor insurance, which was the main objective. And now it's in a good 98.5%. That was the first objective, and we were very focused on profitability. Once -- and in spite of that, the growth is 3%. It's true that it's less than the market. It is still a positive growth of 3%. In the next quarters, once we have improved, I would say, radically the combined ratio, we will be a little bit more focused on growth, not only in premiums, but in insured units. Regarding the market, what we could say is that the market has entered in a very soft market in the motor insurance in Spain, but we will be more dependent on our technical results than these movements in the market. Leandra Clark: We've also received some questions that affect more the General P&C line. The first one is from Paz Ojeda, Bank Sabadell. She mentions that it's been a quite benign year in general for weather -- from a weather event point of view. And that it seems -- or she'd like to know what part of the improvement in the combined ratio in General P&C is due to this very benign weather environment. Felipe Navarro de Chicheri: I mean there's definitely some kind of impact of this benign weather. I mean this is something that we are experiencing lately. It is true that General P&C has as well other exposures that are affecting the situation. And once again, we want to mention that there is a very prudent approach on the reserving of this line of business. So even though this prudent approach that we are taking, we are still posting excellent combined ratios, and we should continue if nothing happens otherwise. Leandra Clark: Thank you, Felipe. Moving on also into General P&C. Maks Mishyn from JB Capital would like to know what has been the impact of the wildfires in Spain on your claims during the quarter? José Jiménez Guajardo-Fajardo: I will say that despite the tragedy of these wildfires, we all have in mind those images about the countryside, small village and the fire and so on. We have to say that many of these properties were not insured and probably the impact will be negligible on the accounts. Leandra Clark: Great. Thank you. Moving back to Motor. We've received several questions, which I'm actually going to summarize, I think, from a few analysts. I think in general, the question is, number one, what can we expect for the combined ratio in Motor in the coming quarters? And number two, what -- how do we feel about this slowdown in premium growth? And do we think this can also improve in the coming quarters? José Manuel Inchausti Perez: What I would say is that the combined ratio in MAPFRE is -- Motor insurance is 99.6%, which is a good improvement over 5 points over the last year, and it will continue improving in the next quarters. Growth has been 2.3%, affected by exchange rates, and it should be better in the next quarter as well. Leandra Clark: And Maks Mishyn has a follow-up question on that, and he'd like to know what type of tariff increases are you implementing in Motor? And when do you expect to normalize churn and start growing the client portfolio? José Jiménez Guajardo-Fajardo: Well, in this case, I mean, we -- as we have said in different presentations, the premium, I mean, the increase in target is more related to inflation to cover the cost slightly above inflation. But it's true that during the last quarters, I mean, year-to-date, we prefer to come back to profit and to resolve the crisis on the Auto business. Right now, I think we are in a very good position to try to put the focus on growing in terms of customers, and that's where we are focused for the coming quarters. Leandra Clark: Thank you. We're moving on to the Iberia Life business. Barclays -- Alessia, Barclays commented that Life gross written premiums came down by 17% in the third quarter. Can you please give us some details of the drivers of why the business volumes in Life came down between the third and the second quarter? José Jiménez Guajardo-Fajardo: Linear growth in Life Savings, I mean, it's not regular. I mean we cannot share the same amount every quarter. So it is true that during the first and the second quarter, we have a real extraordinary growth. Probably the third quarter has been more flat. But as well, we have plans. You all know, we try to become a leader on financial planning in the Spanish market. We have more than 3,000 branches, more than 10,000 people specialized in Life Savings, and we are really focused in continue growing on the coming quarters. Leandra Clark: Thank you. We have two more questions or one more, I believe, for Iberia. Juan Pablo from Banco Santander. He asks why financial income was down and would like to know if we can expect a stabilization at the current levels. José Jiménez Guajardo-Fajardo: At the group level, I mean, financial income has grown around 9%, if I'm not wrong, with the figure. In the case of Iberia, it is true that we have to come back to last year because last year, we sold a real estate property, and we did an important capital gain. But we have to say that we expect a stabilization even maybe why not increasing a bit the financial income. I think that the book yield is something that probably can continue growing slightly. And it is true as well that this year, we have less capital gains compared to last year despite the incredible performance on the financial markets. But we are not -- we have no concern about that. And probably we believe it could be a tailwind in the coming quarters. Leandra Clark: Thank you. We have one additional question in Iberia, General P&C. The combined ratio performed very well, down again during this quarter. And Juan Pablo from Banco Santander would like to know, has there been anything extraordinary or a release of provisions? Felipe Navarro de Chicheri: As I said before, I mean, General P&C is performing extremely well. There was no release during the quarter. There was -- in fact, it was otherwise. I mean, we were preparing for having a very benign quarter to have some reinforcement of reserves in this line of business as well. So things are performing well, and this is nothing extraordinary that we should mention. Leandra Clark: Thank you. Well, we finished with Iberia. And in case -- unless there's any follow-up questions, we're moving on to Brazil. Our first question is from Juan Pablo at Banco Santander, and he's asking about growth. He comments that we're seeing a fall in gross written premiums. What is our outlook for this business? And what is the impact from the struggling Agro business in Brazil? José Jiménez Guajardo-Fajardo: Well, in the case of Brazil, we have to say, I would say, several things. The first one is that the business is performing extremely well and results are growing another quarter. It is true that we have an important headwind there, which is the high interest rates. The Selic right now is around 50%. And where you are selling insurance product linked to credit, it's quite difficult to grow in such market conditions. I would say, the good news is that probably next year, we have elections in Brazil. Inflation is coming down, very close to the target of the Central Bank. And we believe it could be reasonable to think that probably interest rates could come down in Brazil significantly. In the short term, we have the advantage, we have the pros of high interest rates for our investment portfolio. In fact, the book yield of the investment portfolio has increased almost 3 percentage points, which is not bad. But on the other hand, it's suffering a bit in terms of premium growth. Next year, we could see a reverse on this function. So probably we have lower interest rates. We expect to see more premiums coming for the business. So we are optimistic about the future of the business in Brazil. Leandra Clark: Thank you. Following up on the Agro business, well, I would say the combined ratio in general, Non-Life, which is very much supported by Agro. Juan Pablo from Santander asks, your combined ratio increased quarter-on-quarter after a very strong second quarter. In the past, you mentioned you expected a lower structural combined ratio in Brazil. Could you update us on the structural level around mid-70s combined ratio? José Jiménez Guajardo-Fajardo: I think 70s is a wonderful combined ratio, and we would like to see that ratio in many of the business. And it doesn't matter from one quarter to another, it moved slightly up. I mean, if I remember properly, second quarter was around 68%. Right now, it's 71%. I'll be more than happy to see 71% for the coming future. But this is an extraordinary business for us. I think we think we have a quite competitive advantage in the marketplace. And it doesn't matter if the combined ratio moves around the 70s up or down. So we are very happy with that. Leandra Clark: Thank you. Regarding the Life business in Brazil, is there any -- there's been a fall year-on-year in the premiums. Is there any reason different to ForEx? And how do you see the trend of the Life Protection business going forward? Felipe Navarro de Chicheri: I mean as José Luis has mentioned already, I mean, this is very much related with interest rates. Selic at 15% is a deterrent on the increasing of the credit in the market. We should expect that if -- as José Luis mentioned, we are going to have lower Selic during the next year. There will be an increase of lending in Brazil that will help us to increase the level of premiums on the market. I mean there is as well the FX that has been affecting us. But I mean, I think that all in all, I think that there is a solid position on the Life Protection business that will continue during the next year. Leandra Clark: Moving on to the rest of Latin America. On a similar note, Life business is actually doing quite well and growing year-on-year, but the P&C business seems to be a little weaker. Is there any other reason, again, different from foreign exchange? What are the trends you're seeing in Non-Life in the rest of Latin America outside of Brazil? José Jiménez Guajardo-Fajardo: As we have pointed out before, I mean, high interest rates is really a driver of this, in the sense, it's quite difficult to sell insurance linked to credit. And it is the same trend in Mexico, it could be in Colombia and Peru. As we have a more positive view regarding interest rates in the future, we have seen this week as the Fed has reduced by 25 basis points and probably this could continue in the coming months. So this could help as well that Latin American central banks could review as well rates. So this is a very good trend for the business. Apart from that, I mean, we have the FX effect. But once again, we tend to believe this has stabilized so far. And in the last, I would say, 2 months, we have seen how some Latin American currencies has strength rather than deteriorate compared to previous quarters. And so far, year-to-date, we see a slight appreciation on the real, a slight appreciation on the Mexican peso. So I don't know, I think probably this mean reversion probably could affect us positively from now till next year. Leandra Clark: Thank you. We're going to move on to North America. We've received so far, two -- one question. Juan Pablo from Santander would like to know why is the combined ratio so low in P&C? Were there any release provisions? Or was it weather-related? José Jiménez Guajardo-Fajardo: No. I mean not release provision at all. It's just probably this part of the year is probably the best in the U.S. in terms of weather-related events, but also all the hard work that our colleagues has done there in terms of efficiency, in terms of operational effectiveness and so on. But the weather has helped a bit, but we continue with the good trends of previous quarters. Leandra Clark: Thank you. We're going to move on to a few questions we received regarding the balance sheet strengthening that took place with some extraordinary impacts this quarter. We received a question from Antoine at AlphaValue. He would like us to give some background information regarding the goodwill write-down in Mexico. How is this business performing? And what would have been the combined ratio in Lat Am, excluding Mexico? Felipe Navarro de Chicheri: I don't have a figure about Lat Am, excluding Mexico. I mean we can send it the answer to you after. I mean it's going to be very detailed. Regarding the write-down in Mexico, I think that we need to be aware on what kind of transaction we were looking for in this area. We wanted to have -- to increase the network that we had in order to distribute better and reaching more the client in the Life business. In this case, I think that the acquisition of a network of more than 4,000 agents and related distributors of Life business is an extremely good acquisition. The thing is that the business that was on back of it, this was -- there was something that we need to revise, review and to challenge in order to provide with sound information on this business. This is the reason about this partial write-down that we did in the goodwill in Mexico. That is part of it that has been preserved, because we think -- that we continue thinking that the business should be profitable. There will be a lot of cross-selling that is not included in this goodwill that is going to be captured from Mexico. And once again, this is part of the very prudent approach that we have from the balance sheet, and this is going to be the same approach that we have on the reinforcement of reserves and looking at a very strong balance sheet for the future of MAPFRE. Leandra Clark: And just to follow up, we're looking at the combined ratios for the region and Mexico's combined ratio is very much in line with the total of other Lat Am. So there's no large difference in the profitability across the region versus Mexico. Thank you. We received another question coming from Paz Ojeda, Bank Sabadell. And she'd like to know what risks do we have remaining for additional write-downs in intangibles, including goodwill, deferred tax assets or value of business acquired across the different subsidiaries that the group has? Felipe Navarro de Chicheri: I think that we look always as a very conservative -- with a very conservative eye all those intangibles assets that we have. When we are looking at them, we have a very strong and very strict approach on how we analyze it. It is true that the goodwill that we have in the market are right now associated mainly to very strong operations. And I think that, that is something that has been seen in the past. I mean, they're related with very strong businesses. But we are going to continue looking at the opportunity of approaching this with the most prudent way in a manner that things are going to be on the reinforcement of the balance sheet. There is nothing in the short term that let us know -- let us think that we should continue with this -- with any kind of write-down. But I mean, in any case, we are going to continue looking at each of every -- and every line of the balance sheet in order to take the most prudent approach that has been taken in the last years. Leandra Clark: Thank you, Felipe. Moving on, we have a question surrounding the dividend. Juan Pablo from Santander asks, we've seen your solvency ratio improved to 209% compared to 206% last quarter. This is the figure we have at the end of June. This is quite comfortable above the midpoint of your target range of 200% with a 25-point leeway. Could we expect any increase of dividend payment -- payout -- excuse me, of dividend payout? José Manuel Inchausti Perez: What I have to say just -- and then I will let José Luis speak about the solvency ratio. Any decision about dividend payout is taken by the Board and they must be approved by the AGM. So that will be the procedure. José Jiménez Guajardo-Fajardo: Well, regarding the solvency ratio, I mean, we are really happy with the level that we have achieved, 209%, which is in line with the margin that has been set out by the AGM, by the Board of Directors. And nothing to comment. I mean, probably if the trends continue, we could keep within that range on the high end. And probably, we are looking forward to continue with such a strong balance sheet. Leandra Clark: Thank you, José Luis. We're going to move on. We have 2 more questions. The next one is regarding M&A coming again from -- sorry, from Banco Santander. He'd just like an update on what are our M&A plans and our strategy going forward. Felipe Navarro de Chicheri: Mean there's no change in the strategy. We already mentioned that we have capacity to display more capital, but I think that we are not in a hurry right now. We are looking at any opportunity. There is nothing on the desk that we should look for a very immediate closing or in the next months. The opportunities that we are looking at or that we are looking with a very close attention are related with, of course, with Spain that we want to increase our distribution power on the country, mainly for the -- trying to rebuild the bancassurance agreements that we had in the past and try to distribute better on the Life business. On the -- we should be keen on displaying more capital in the euro area, and we need to bear in mind that the only country mainly that we could do it would be Germany. Italy could be an opportunity, but I mean, it's mainly Germany on this side. If we look at Lat Am, I think that there are two economies that are the focus of our M&A strategy. First, Brazil. And we are looking for any opportunity that could help us to increase our importance there. It is important to mention that we don't need -- we don't want to jeopardize in any case our very good agreement with Banco do Brasil. So we will be very careful in this area And of course, Mexico, which is a country that is in the long term, very linked to the U.S. economy and is the second biggest economy in Lat Am. Looking at the U.S., I mean, we could think about some company that will present some business that will make a complement to the one that we are distributing already in Massachusetts, which is mainly Homeowners and Motor, and try to look for an opportunity in a single state company that could help us to try to put a foot on another state that could help us to start developing mainly this new line of business in the area that we are already present or the Motor and Health -- or Motor and Home that we are already doing very well in Massachusetts in this other state. I mean those are the main points that we want to increase. I mean, the areas where we want to deploy more capital will be, I mean, on top of, of course, Motor agreements, distribution agreements, Life business, which is one of our priorities. I mean, I think that there is nothing that changed from the past. So the same kind of strategy and nothing on the short term for the moment. Leandra Clark: Thank you, Felipe. And moving on to our final question. Juan Pablo from Banco Santander has commented that our latest guidance in terms of ROE and combined ratio looks a little out of date. And do we plan to update these targets anytime soon? José Manuel Inchausti Perez: As I said before, our current guidance was adopted in coherence with the Strategic Plan that ends in the next year. Fortunately, things seems to be better than expected. But we have to bear in mind that we are not in the end of the year, we are just in the third quarter on one side. And on the other side, any change in any guidance of the company must be adopted by the Board previously. Leandra Clark: So we have no further questions. We did receive some to the platform that we think would be better answered after the call due to a very technical nature. We'll reach out to you between now and Monday. And just as a reminder, all the documents are available at our website. And now I'm going to hand the floor back to José Manuel for some closing remarks and after José Luis Jiménez. José Manuel Inchausti Perez: Yes. If I make some closing remarks, I would say that we are very satisfied with the company figures that we have presented. They are excellent results, and the results are the consequence of 3, 4 very hard years of work, especially to decrease the combined ratio and to grow up the ROE. Combined ratio is improving 2.2% -- 2.2 points over the last year. That has been compatible with a very prudent approach, which has led us to make some strongest provisions in some units, especially in Reinsurance unit and to make the write-offs and the recognition of fiscal assets that we have presented to the market. So overall, every country -- almost every country, almost every business line is improving its technical results. So we feel the whole team feels very rewarded for the for the work that has been done in the last year. Growth is 80% in a constant exchange ratio and having this improvement on the balance and on the results, we will be focusing in profitable growth over the next quarter, not only in premiums. This is something that we already have, but in insured units and in terms of customers. Another thing is that MAPFRE is having a very good years, and we have good expectations for the end of the year if nothing extraordinary happens. Just to remind that the dividends will surpass for the first time in our history, EUR 500 million, which is a very remarkable figures. And just to put an end, talk just a second on the prudent deployment of AI and digitalization that is going on in the company. The company is improving a lot. And I must say with a prudent and humanistic approach to the AI, we are expanding it over the company. And the last part is to talk about system plans, very important system plans that are going on in Spain, Latin America and U.S.A. And so far, they are giving results and they are on track as well. So that is my final conclusion, and thank you very much for the attention and the questions. Leandra Clark: Thank you. José Jiménez Guajardo-Fajardo: I think José has said it all. We have had a wonderful quarter, and we are looking forward to a really good year for MAPFRE. Thank you so much for your analysis, for your questions. And if you have any further questions that we are able to give you a proper answer, we are at your disposal in the coming hours or days. Thank you so much. Leandra Clark: Thank you. José Jiménez Guajardo-Fajardo: Thank you. José Manuel Inchausti Perez: Thank you.
Christopher David O'Reilly: [Interpreted] Thank you very much for taking time out of your very busy schedule to join Takeda's FY '25 Q2 earnings announcement. I'm the MC today, Head of IR. My name is O'Reilly. Thank you for this opportunity. [Operator Instructions] Before starting, I'd like to remind everyone that we'll be discussing forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those discussed today. The factors that could cause our actual results to differ materially are discussed in our most recent Form 20-F and in our other SEC filings. Please also refer to the important notice on Page 2 of the presentation regarding forward-looking statements on our non-IFRS financial measures, which will also be discussed during this call. Definitions of our non-IFRS measures and reconciliations with the comparable IFRS financial measures are included in the appendix to the presentation. Now we would like to start with the presentation of the day. We have Christophe Weber, President and CEO; Milano Furuta, Chief Financial Officer; Andy Plump, President, R&D; Teresa Bitetti, President, Global Oncology Business Unit; P.K. Morrow, Head of Oncology Therapeutic Area Unit, will provide you with presentation, which will be followed by a Q&A session. We will get started now. Christophe Weber: Thank you, Chris, and thank you, everyone, for joining us today. Our fiscal year 2025 first half results confirm our expected business dynamic for fiscal year 2025 with business fundamentals tracking as planned. This is the last year of very significant VYVANSE generic impact, which peaked in H1 and which will be much less of a headwind to our growth from now on. Growth on launch product grew 5.3% at constant exchange rate, and we expect this growth to accelerate in H2. ENTYVIO is growing, albeit at a slower pace as the pen is growing 20% quarter-to-quarter in the U.S., but still represent only 9% of ENTYVIO volume in the U.S. Our PDT business is expected to grow at mid-single digit this year with immunoglobulin and albumin growing high single digit. We will continue to maintain very tight OpEx control through efficiency improvement supporting profit. Our decision to update full year management guidance for core operating profit and core EPS was driven by a headwind from transactional foreign exchange, mostly generated by the euro appreciation, which has most notably affected QDENGA. Our updated reported forecast, including our EPS forecast reflect a nontax deductible impairment loss booked in the first half. From fiscal year 2026 onwards, Takeda will be in a new business cycle with VYVANSE generic impact mainly behind us, potentially three new product launch for rusfertide, oveporexton and zasocitinib and an evolving late-stage pipeline now enriched by our strategic partnership with Innovent Biologics. Our leadership in leveraging technology and AI will further transform the company, which will be led by Julie. Milano will discuss our financial results and expected results in more detail in a moment, and then Andy will present our pipeline advancement with exciting data on zasocitinib. Later on this call, Teresa Bitetti and P.K. Morrow will discuss our partnership with Innovent Biologics and we'll focus on two new late-stage molecules. With that, I'll hand it over to Milano to walk us through the financials. Milano? Milano Furuta: Thank you, Christophe, and hello, everyone. This is Milano Furuta speaking. Slide 7 summarizes our first half financial results. Overall, our business performance is tracking as we planned. As anticipated, this period was significantly impacted by LOE, as we lost approximately JPY 100 billion of VYVANSE revenue. Meanwhile, we have been focused on driving OpEx savings, which has partially offset the impact to corporate profit. We expect H1 to be the peak of VYVANSE generic impact, and we expect a better growth outlook for the full year. Revenue in H1 was just over JPY 2.2 trillion, a decrease of 6.9% or minus 3.9% at constant exchange rates or CER. Core operating profit, core OP, was JPY 639.2 billion, a year-on-year decrease of 11.2% at actual FX or 8.8% at CER. Reported operating profit was JPY 253.6 billion, a decline of 27.7% due to larger impairment losses this fiscal year. Core EPS was JPY 279 and reported EPS was JPY 72. The 40% decline in the reported net profit and EPS reflects the impairment of cell therapy, which is nondeductible from taxable income. Cash flow was very strong this period with adjusted free cash flow of JPY 525.4 billion, including improvements in working capital. Slide 8 shows our growth and launch products, which represent over 50% of revenue. In H1, this portfolio grew 5.3% at CER. This modest growth includes the impact of phasing of certain products, and we anticipate a higher growth rate in the second half. In GI, ENTYVIO growth was 5.1% at CER. We are encouraged to see increasing numbers of active ENTYVIO Pen patients in the U.S., and we are also making progress with expanding formulary access. That said, revenue growth has been slightly below our expectation, and we are revising our full year forecast for ENTYVIO to 6% at CER. In rare disease, TAKHZYRO continues to grow steadily as a market leader in HAE prophylaxis with 5.9% growth at CER. Our PDT portfolio growth reflects several factors, which were built into our guidance and fully in line with expectation. IG growth was 3.1%. While Medicare Part D redesign is impacting several products in the U.S. this year, one of the most impacted product is GAMMAGARD LIQUID, and we expect this to normalize in Q4. Our SCIG portfolio is growing at double digits, and we expect this to continue. Albumin declined slightly in H1 due to timing of shipments to China and the foreseen cost containment measures. Meanwhile, we have also secured additional sustainable tender markets outside of China, and we expect albumin performance to accelerate in H2. Therefore, we confirm the growth outlook of high single digit for both IG and albumin. In oncology, FRUZAQLA continues to expand as we roll out global launches. Finally, in vaccines, we have reallocated supply of QDENGA based on market needs, which has pushed some shipments timing into later this fiscal year. However, we expect annual demand to remain in line with our original estimate. Another factor impacting the growth rate of QDENGA is transactional FX, mainly due to the strength of the euro versus the Brazilian real. On Slide 9, you can see how the growth on launch products and the VYVANSE loss of exclusivity contributed to total revenue performance. FX was also a headwind this quarter due to appreciation of the Japanese yen against major currencies. As we expect growth and launch products to deliver higher growth in H2 and VYVANSE year-on-year decline to moderate, we project more favorable year-on-year growth dynamics in H2. Next, an update on efficiency program that we initiated in April 2024. We continue to make progress with initiatives in H1 this year, including additional organizational changes impacting 600 positions, further optimization of real estate and the growth initiatives to capture efficiencies across the R&D value chain. Restructuring costs in H1 were JPY 27.4 billion, and we are focused on further driving additional OpEx savings. As we show on Slide 11, these operational efficiencies are contributing to a reduction in R&D and SG&A expenses. In this bridge for core operating profit, you can see that LOE of high-margin VYVANSE was the main reason for the year-on-year decline of 8.8% at CER. Within this decline at CER, we had a negative impact from transactional FX, which accounts for about 1/3 of the decline. Let me take a moment to explain how this is impacting our P&L. Revenue can be impacted when there is an FX fluctuation between the currency paid for product and the currency of the entity where revenue is booked. This is exactly what is impacting QDENGA sales today, for example, because our European entity books revenue in Europe for its sales to Brazil in Brazilian real. Cost of goods can be impacted, too, when products are imported from other countries. For example, when the euro appreciates, commercial entities outside Europe have to recognize higher COGS when importing products to sell locally. As you know, Takeda has a large manufacturing footprint in Europe, so we are particularly sensitive to euro currency volatility. Next, reported operating profit on Slide 12. This decreased by 27.7% versus prior year, mainly due to the decline in core operating profit and higher impairment of intangible assets. The main item was a JPY 58.2 billion expense related to our recent decision to discontinue cell therapy efforts. Next, our updated full year outlook on Slide 13. Starting with management guidance, although we have reduced our forecast for ENTYVIO and VYVANSE, we expect total revenue to stay in the range of the broadly flat versus prior year. For profit guidance, we expect higher OpEx savings to fully mitigate the impact from unfavorable change in product mix. However, the transactional FX dynamic that I just described is having a larger impact on profits. Therefore, we are slightly lowering our guidance for core operating profit and core EPS from broadly flat to low single-digit percentage decline. The bottom part of the slide shows our reported and core forecast. This reflects our latest FX assumptions, including transactional FX and items booked in H1 that will impact the full year results. We have also revised our adjusted free cash flow forecast to include a USD 1.2 billion payment to Innovent Biologics for our recently announced in-licensing deal. This payment will be funded by cash on hand. Our dividend outlook remains JPY 200 per share for the full year. On Slide 14, we show more details about the updated operating profit forecast. You can see the relative magnitude of transactional FX impact, while OpEx savings compensate for unfavorable product mix. The net impact of all these moving parts, including transactional FX, is a JPY 10 billion reduction in our operating profit forecast to JPY 1.13 trillion. In summary, our business fundamentals are tracking as planned. While H1 growth was largely impacted by LOE, we expect better growth rates for the full year fiscal year. Meanwhile, we remain focused on cost discipline to deliver our guidance, while investing for future growth. Thank you for your attention. I will now hand over to Andy for more details on the pipeline updates. Andrew Plump: Thank you very much, Milano, and hello to everyone on today's call. Next slide, please. Fiscal year 2025, as you just heard from Christophe, is a pivotal year as we advance and accelerate our exciting high-value late-stage pipeline to launch. Today, I am pleased to provide pipeline updates reflecting our growing late-stage portfolio of promising programs powered by our increasingly productive and efficient development engine. We are 2 for 2 with positive Phase III studies for both rusfertide and oveporexton with zasocitinib Phase III data in psoriasis expected by the end of this calendar year. In a few minutes, Teresa Bitetti and P.K. Morrow will walk you through the details of our recently announced partnership with Innovent Biologics, which upon closing, will expand our oncology pipeline. With 2 highly differentiated late-stage oncology assets in development for multiple solid tumors, this deal has the potential to transform our oncology pipeline. But first, I'm going to highlight some recently presented Phase III data for oveporexton and long-term IgA nephropathy data for mezagitamab that we are particularly excited about. The results of these studies truly represent Takeda's high bar for innovation and the breakthrough benefits we seek to provide patients. Let's start with oveporexton on the next slide. Oveporexton is on track to be the first-in-class and potentially best-in-class orexin 2 receptor agonist that treats the underlying orexin deficiency in patients with narcolepsy type 1. We believe that the data presented at the World Sleep Congress last month establishes a new standard of care for NT1. In one of the largest, most comprehensive Phase III development programs for NT1 to date, we demonstrated statistically significant and clinically meaningful improvement across all 14 primary and secondary endpoints with most participants within normative ranges. It is clear that oveporexton has a profound effect on daytime symptoms like excessive daytime sleepiness and cataplexy, nighttime symptoms and cognitive symptoms. In addition, it significantly impacts how patients with NT1 feel and function. We believe we have created a new standard of care to treat NT1 by treating the entire range of symptoms with a safe, well-tolerated pill. Oveporexton sets a high bar with the new standard of care, which will be hard to beat. Feel and function were assessed using multiple objective and subjective measures. Based on these strong Phase III data, we plan to file for U.S. approval in NT1 as quickly as possible later this year with regional filings to occur simultaneously or shortly thereafter. Our orexin franchise is making rapid progress beyond oveporexton. The next-generation orexin 2 receptor agonist, TAK-360, is rapidly enrolling Phase II studies for narcolepsy type 2 and idiopathic hypersomnia. Results for these trials are expected to be read out by early fiscal year 2026. Next slide, please. We previously presented compelling 48-week proof-of-concept data for our anti-CD38 antibody, mezagitamab, in IgA nephropathy. This includes consistent and supportive trends in decreased IgA, IgG and galactose-deficient IgA1 levels, reflecting the selective targeting of CD38 on plasma cells, which produce pathological antibodies. I'll now preview the exceptional 96-week results from the proof-of-concept trial that continue to support this promising approach to modifying this disease. Mezagitamab-treated patients show persistent reductions in proteinuria or UPCR, nearly 18 months after the last dose, suggesting sustained efficacy beyond the treatment period. Importantly, the estimated glomerular filtration rate, or eGFR, that is the regulatory gold standard for measuring renal function remains stable at 96 weeks. Mezagitamab is the first IgA nephropathy therapy to demonstrate stable renal function 18 months after dosing. We look forward to presenting the full data at ASN Kidney Week next month. Our Phase III IgA nephropathy study is open and has been enrolling well. Next slide, please. The Phase III VERIFY study of rusfertide, a potential first-in-class synthetic hepcidin mimetic in development to treat polycythemia vera was presented at the American Society of Clinical Oncology in a plenary session in June. Updated 52-week data will be available at an upcoming medical congress. This quarter, we received breakthrough therapy designation, which speaks to the exceptional practice-changing data presented at ASCO 2025 and increases the probability of priority review for rusfertide, which we intend to file this fiscal year. Looking ahead to our next major pipeline milestone, we expect zasocitinib Phase III psoriasis data later this calendar year. Based on the data seen in Phase II, we believe zasocitinib will provide an important and very attractive oral option for patients. I'm also excited to report that the head-to-head study of zasocitinib versus deucravacitinib in psoriasis is expected to complete enrollment in the next few weeks. As you can see here, psoriasis is the first of many diseases where zasocitinib can benefit patients. With that, I will now turn it over to Teresa and P.K. to provide more details on the Innovent partnership, which has the potential to catapult Takeda into an industry-leading oncology company. Thank you. Teresa Bitetti: Thank you, Andy. Good morning, good afternoon, and good evening. We are pleased to be here today to share more detail about our recently announced partnership with Innovent Biologics and why it's critically important for patients and for Takeda. Next slide. Our collaboration with Innovent involves 3 differentiated assets, each with unique mechanisms. 363 is a potentially first-in-class PD-1/IL-2 alpha bias bispecific. 343 is a next-generation Claudin 18.2 ADC, and we're also receiving the exclusive option to license 3001, which is another ADC targeting EGFR and B7H3. This deal is strategically important because it adds cutting-edge anchor assets to our pipeline. First, a bispecific with the potential to be an IO backbone therapy across a broad range of indications, lung included. Second, a next-generation ADC with potential to address difficult-to-treat cancers, including gastric and pancreatic. And finally, an option to license a potential best-in-class bispecific ADC. These unique programs, each with differentiated mechanisms further demonstrate our commitment to science, our commitment to patients and have the potential to be significant growth drivers for the Takeda enterprise post 2030. So next slide. Let me spend a little time sharing how we've structured this deal and what it brings to the Takeda portfolio. So for 363, which is the PD-1/IL-2 alpha bias bispecific, Takeda will lead the co-development of this asset globally using a 60-40 Takeda-Innovent cost split. Takeda will also lead U.S. co-commercialization of 363 with a 60-40 Takeda-Innovent profit or loss split. And Takeda will have the exclusive right to commercialize and manufacture outside of Greater China. For 343, the Claudin 18.2 ADC, Takeda will have the right to develop, manufacture and commercialize worldwide outside of Greater China. And finally, we will have the option for 3001, which is the EGFR/B7H3 ADC currently in Phase I. If we choose to exercise the option, we will have global rights to develop, manufacture and commercialize outside of Greater China. Next slide. This collaboration further enhances and augments our oncology portfolio and is consistent with our clearly articulated oncology strategy. As a reminder, you can see here on this slide, our strategy is focused on 3 disease areas and 3 modalities. And as we have highlighted here in the red box, the programs included in this partnership fits squarely within our strategy. So now I'm going to turn it over to P.K. to explain more about the science behind these programs. Phuong Morrow: Thank you, Teresa. I'm now going to share more about the 3 programs in this collaboration and why we are so excited to bring them into our pipeline at Takeda. I will start with IBI363. IBI363, as you can see here, is a bispecific with a unique mechanism that has the potential to become an immuno-oncology or IO backbone. Specifically, IBI363 is what I would call an IO-IO molecule, meaning that it is designed to block the PD-1/PD-L1 pathway and selectively activate IL-2 alpha signaling while attenuating IL-2 beta gamma signaling. As you can see on the left-hand side of this slide, this differentiated IL-2 alpha biased approach has been shown to activate tumor-specific T cells that express both PD-1 and IL-2 alpha receptor within the tumor microenvironment, thereby unleashing a more effective antitumor immune response. IBI363, thereby supercharges tumor-specific T cells, resulting in apoptosis of the cancer cell. And by blocking the PD-1 pathway, IBI363 ensures that these T cells continue to stay activated and it reduces the risk of T cell exhaustion. IBI363 has now dosed more than 1,200 patients and has demonstrated very encouraging results. Next slide. We have seen clinically impactful results in trials involving patients with IO refractory squamous and non-squamous non-small cell lung cancer as well as in third-line microsatellite-stable colorectal cancer. And while median overall survival is immature at the higher doses, it already shows a positive trend even at these lower doses. The results you see on the screen were just shared as oral presentations at this year's ASCO. They are encouraging data, especially when indirectly compared to results from standard of care chemotherapy on the right. The safety profile of IBI363 is considered tolerable with the most common adverse events related to IBI363 being rash and arthralgia. Discontinuations due to these events have occurred in a small percentage of patients and a priming dose has been added to the dosing schedule to reduce the risk of immune-related events that may occur with bispecific dosing. The high caliber of these data is reinforced by the FDA's granting of a Fast Track designation in non-small cell lung cancer. Thus, while this is a competitive environment, we are very encouraged by the data we have seen to date and the potential of this differentiated mechanism. Next slide. To maximize the potential of IBI363, we have 3 very clear objectives, which are built on the efficacy that we've seen thus far. First is to establish foundational efficacy in tumors that have progressed as IO therapies. Second is to penetrate into earlier lines as either monotherapy or in combination. And third is to build on our known data to establish efficacy in immune desert tumors such as microsatellite-stable colorectal cancer in which other IO therapies have not worked. So that's why, as shown on this slide, we're initially establishing the 5 Phase III trials, including 2 trials in IO refractory squamous and non-squamous non-small cell lung cancer, 2 in frontline non-small cell lung cancer and 1 in microsatellite-stable colorectal cancer. We also have a series of life cycle management trials that we're discussing with Innovent, which will help to build upon proof-of-concept data as it evolves. Next slide. Now I'll walk you through IBI343. This Claudin 18.2 targeted ADC is seamlessly harmonized with our oncology strategy due to, first, its novel ADC platform; and second, its demonstrated efficacy in GI cancers. When examining the image on the left, I will walk you through the platform from left to right. First, on the very left, IBI343 has a humanized IgG1 with Fc silencing. This Fc silencing is important because it reduces the risk of off-target toxicity and increases the tolerability of this Claudin targeting molecule. This differentiates 343 from other Claudin-targeting agents, which are known to have increased gastrointestinal adverse events. In addition to that, in the middle, the glycan-specific conjugation and sulfamide spacer increases the stability, solubility and potential bystander effect, allowing the ADC to result in a more efficient apoptosis of the cancer cell. And it also supports a homogeneous drug-to-antibody ratio of approximately 4, which many of us believe is a favorable ratio for ADCs. And finally, this potent exatecan payload inhibits topoisomerase 1, so it fits seamlessly into many standard of care regimens. Next slide. 343 has been dosed in more than 340 patients. And as shown during oral presentations at this year's ASCO, IBI343 has demonstrated encouraging activity in pancreatic and gastric cancers. Compared to the standard of care, 343 has more than doubled the response rate and more than doubled the overall survival as compared to standard of care chemotherapy thus far. This, coupled with a favorable and consistent safety profile with manageable GI and hematologic adverse events supports its ability to fit seamlessly into the standard of care. All of this makes us very excited to continue advancing this asset in GI cancers with critical unmet need. And as with 363, these results were also reinforced by a Fast Track designation by the FDA for pancreatic ductal adenocarcinoma. Next slide. We also have an ambitious development plan for 343 in Claudin 18.2 expressing GI cancers as its topoisomerase inhibition enables us to fit seamlessly into the frontline treatment of pancreatic cancer. In the second line of the chart, you can see that Innovent has an ongoing study, which is well underway in China and Japan in the third-line setting in gastric cancer. We will leverage this data from this study and add a single-arm study in the U.S. and the EU to move forward towards global registration in the third-line setting. And in the bottom row, you can see that the plans are underway for a frontline study in gastric cancer to address the needs of more gastric cancer patients across lines of therapy. Next slide. And finally, I will review with you IBI3001, for which we have the exclusive option to license at a potential future date. IBI3001 is truly a novel molecule, which is both a bispecific and an ADC. It targets EGFR and B7H3, 2 targets that are highly expressed in many solid tumors, including lung cancer, colorectal cancer and head and neck cancer, and it is linked to the same potent exatecan payload as 343. Innovent has rapidly progressed this asset into the clinic, already producing data, as you can see on the right-hand side, that shows encouraging efficacy even in highly refractory solid tumors. We look forward to following the progress of this trial, which is moving at speed. And with that, I'm delighted to turn it back to Teresa to talk about the immense promise of this collaboration for patients. Teresa Bitetti: Thank you, P.K. So looking at this from a patient perspective against the backdrop of the top tumor types by overall prevalence worldwide, we have the opportunity to make a difference in areas of extremely high unmet need. So as you can see highlighted in red, the tumors in our initial development plan are not only prevalent but difficult to treat. In our initial plans, we can address 4 of these cancers and make a meaningful difference for patients. Next slide. As I mentioned at the start, this partnership will serve as a significant potential growth driver for Takeda. When we look at the market opportunity for our initial development plans for 363, we're looking at lung and CRC. In lung, we will be focusing on the IO refractory second-line setting, where the majority of patients will have already been treated with a PD-1 or PD-L1 and then move rapidly into the frontline setting as a monotherapy or part of a combination regimen. And in colorectal cancer, we'll focus on the frontline patients with MSS CRC. So in aggregate, the initial plan focuses on a potential combined addressable market of over $40 billion. Next slide. Now let's look at the market potential for 343. Globally, gastric cancer affects around 1 million people with 35% to 55% expressing the Claudin 18 biomarker. In pancreatic, the global incidence is approximately 500,000 with 30% to 60% of patients expressing Claudin 18. The current standard of care in these tumor types centers on chemotherapy and the 5-year survival rates are very low, highlighting the urgent need for innovative treatments. Altogether, 343 offers a potential combined addressable market of approximately $8 billion, although we expect this market to grow as we and other novel agents enter. So as you can see, across both assets, there's an enormous potential to make a significant impact for patients. So next slide. So in closing, we are incredibly energized by this extraordinary strategic partnership that brings great value for both patients and for Takeda. This agreement with Innovent will enable us to address critical treatment gaps in some of the most prevalent and difficult-to-treat cancers. It brings forward unique and truly differentiated programs that will overcome many of the challenges of currently available therapies, and it adds anchor assets to our solid tumor pipeline with the potential to be future growth drivers for Takeda. So in short, this collaboration is incredibly meaningful, both for us and for patients. So thank you for your attention. I'm going to hand back to Chris to open the Q&A. Christopher David O'Reilly: [Interpreted] Now I would like to take questions from participants. We have Christophe, Milano, Andy, Teresa, P.K. and Julie Kim, CEO Elect Interim Head, Global Portfolio Division and Giles Platford President, Plasma-Derived Therapies Business Unit are joining in the Q&A. [Operator Instructions] The first question is from Yamaguchi-san. Hidemaru Yamaguchi: This is Yamaguchi from Citi. The first question regarding to Innovent deal. I understand the potential of this product is pretty big. But at the same time, Takeda sales has not really involved in the solid tumor for a while after [indiscernible]. And investors have a lot of question on this one, how much you need to spend on R&D for the next few years where you have to balance the operating margin. So R&D investment, even though you're going to split, but solid tumor first line seems to be very costly. So can you give me some elaboration on how you're going to run this clinical trial to compete with the global guys on the R&D and trying to, I would say, finance your R&D and the impact -- potential impact to the margins? That's the first question. The second question regarding to the earnings change. Even though there's only a slight change on a CL basis on the ENTYVIO and VYVANSE, seem to have a big change on the currency things. And this year might be a unique year, but is there any way in the future trying to avoid those changes or through some other transactions trying to prevent or this year, it's hard to escape from this currency related to earnings divisions. That's the second question. Christopher David O'Reilly: Thank you, Yamaguchi-san. So the first question was around how we're going to run the trials for the Innovent assets and what that means for R&D expenses. So perhaps P.K. can just comment briefly on -- again, on the development plans we have in place for these programs. And then Milano can add a comment on how that will fit within our R&D budget. And then for the second question on this transactional FX impact, I'd also like to ask Milano to comment on that, please. Phuong Morrow: Yes. Thank you. So we are very committed to investment both within our oncology portfolio as well as overall in order to support our long-term growth, while continuing to support profitability. In terms of the financial implications of this deal, these have actually been reflected in our revised forecast and guidance. It's a little premature for us right now to comment on outlook for R&D spend and margins for fiscal year 2026. But I can assure you, we are very committed to achieving the margins in the mid- to long-term, which are driven by top line growth and optimizing our cost structure. Milano Furuta: Thank you, P.K. Yamaguchi-san, not much things to add to what P.K. said already. But I think you can see that we have been managing quite effectively or in some areas, we are even reducing R&D expenses beyond our initial expectations by the efficiency program, also the continuous -- with continuous cost discipline. That's one. And then the second one is we are very mindful about this -- the incremental R&D investment as well. So that's why you see this cost split of the 60-40 for this 363 compound. At the same time, as you might be aware that we have been arranging some cost sharing program, the partnership with Blackstone for mezagitamab. So that's kind of through those kind of arrangements. We are very consciously managing incremental investment. But in the end, we want to invest for growth, while optimizing OpEx. Eventually, that's going to be top line growth, should be the main driver to the long-term corporate margin improvement. Second question about transactional FX. This is very hard to answer, as it is very difficult to predict the currency fluctuation. But this transactional FX in Takeda's case, as I commented during the presentation, the euro volatility is quite -- have a big impact in this year. This is because of -- relatively, we have a large footprint in the manufacturing operation in Europe. So we have to see how currencies goes. But in the long -- if we want to mitigate, then we have to -- maybe in the long run, somehow we have to rebalance the manufacturing footprint, but that's kind of, of course, a long-term strategic plan. It's not -- we've taken actions depending on a 1-year currency volatility. We have to take a bit to long-term stance on that. Christopher David O'Reilly: [Interpreted] Next question from Mr. Matsubara from Nomura. Matsubara: [Interpreted] Matsubara from Nomura. I have 2 questions. First is about ENTYVIO. As you explained, ENTYVIO Pen penetration is advancing, but the insurance coverage as of now and to enhance penetration of pen furthermore, what actions are you taking now? The second question is Nabla Bio that you have partnership with now, and this is nonclinical as of now, and it's not fully disclosed, but by utilizing this R&D acceleration, how does it go? And for mid- to long-term pipeline enhancement and acceleration, how do you see that? Christopher David O'Reilly: Okay. So thank you for your questions, Matsubara-san. So the first on ENTYVIO, what is the state of insurance coverage? What are we doing to expand access to pen? I'd like to ask Julie to comment on that. And then the second question was on our recently announced collaboration with Nabla Bio. Perhaps Andy can add some comments on what we're doing in terms of utilizing AI in drug discovery. Julie? Julie Kim: Yes. Thank you for the question. And in regards to ENTYVIO Pen access, as you heard from Christophe in his opening comments, we are continuing to improve our overall position along the access continuum, and we're encouraged by the 20% growth that we're seeing quarter-over-quarter in terms of ENTYVIO Pen. Now that being said, we continue to work on access at various different levels. One, in terms of the -- I would say, the highest level of coverage. I think you are all aware that we have 2 out of the 3 big contracts signed for quite some time now, and we continue to work on the CVS piece. For the other levels of access, when you look at the way that the U.S. market is structured, it's actually -- there's a lot of localization even with the way that we have the big 3 PBMs. So while we continue to improve at the local level as well, we are putting in place very specific tactical actions to address the localized challenges in addition to what we're doing at the overall coverage level. So hopefully, that gives you a sense that we're working across multiple different levels on the access continuum in the U.S. Andrew Plump: And thank you, Julie, Matsubara-san, and thanks for the question. We're quite excited by the partnership with Nabla Biosciences. But maybe I can just dial up for a second and give you some sense of the work that we've been managing in our research laboratories for the last couple of years. We see discovery in the biopharmaceutical industry changing quite rapidly, and we're positioning Takeda to be at the leading edge of application of advanced technologies in research. And in fact, we're in the process of completing a new laboratory in Cambridge, Massachusetts in Kendall Square that we call the lab of the future. And the intent of this lab is to enable a workflow in discovery that can both improve our probabilities of success and also greatly accelerate the time that it takes to move molecules through discovery. Today, 1 in 5 -- 1 in 4 of our research programs are enabled by in silico technology. By next year, we expect that over 90% of our programs will be enabled by in silico technology. The partnership with Nabla Biosciences is one example of how we're embracing AI in drug discovery. This is a company that was started by George Church that uses algorithms to optimize sequences of large molecules. We've worked with them for over 2 years now, and we have 3 pilot experiments that each were successful, 2 accelerated programs and a third one actually took us to a novel space that we wouldn't have gotten to with traditional approaches. So we were quite excited about that, and that's what led to then the collaboration that you see at hand. Christopher David O'Reilly: [Interpreted] JPMorgan, Wakao-san. Seiji Wakao: This is Wakao from JPMorgan. I have 2 questions. Firstly, regarding gross margin trend and revised guidance. When comparing the initial guidance with the revised full year guidance, the gross margin has deteriorated 66% to 64.7%. Should we understand this is -- this primarily as an FX impact from the euro? If there are other contributing factors, could you elaborate on this point? And also, if FX is indeed affecting the gross margin, the second quarter gross margin looks relatively solid compared to the FX levels. I'd like to know this point? And why do you expect it to deteriorate in the second half? And second question about IV -- Innovent partnerships. When is the next data update for IBI363 expected, so Page 27. Regarding ongoing first-line and second-line NSCLC studies, we will be able to see data in 2026. In addition, when is the global Phase III trial expected to start? That's it. Christopher David O'Reilly: Thank you, Wakao-san. So the first question on gross margin trend and the revised gross margin outlook for the full fiscal year. I'd like to ask Milano to comment on that. And the second question on the next data point to come for IBI363 and whether we can give an indication of starting Phase III studies. I'd like to ask P.K. to comment on that, please. Milano Furuta: Wakao-san, thank you for the question. You asked about the bridge from initial forecast updated forecast. At the same time, how the H2 second half gross margin will be lower. Actually, the answer would be basically same. If you compare -- if we compare the May forecast and revised the forecast, as you said, gross margin is expected to be lower by about 1.4 percentage points. About half is coming from the transactional FX. And the other half is also coming from kind of product mix change. So we are reducing the VYVANSE, the revenue and the ENTYVIO revenue. And then these 2 revision has a negative impact on the gross margin. So that's the contributing this gross margin update in the forecast. And actually, this explains -- these dynamics explains in the second half because this is more about the second half sales. Also, we are updating the currency forecast for H2. So those 2 impacts were contributing lower gross margin in H2. Phuong Morrow: Thank you, Milano. And perhaps to address the other 2 questions that were asked related to the Innovent collaboration. The first is to say that we, like you, are very enthusiastically monitoring the data with both 363 and 343. We are not yet releasing when we will disclose further data in the coming year, but we will be following this closely, as we determine when the appropriate data inflection will be in order to release more data in a public forum. The second question you had was related to the start of the Phase III studies. And we have noted that the Phase III study in second-line squamous non-small cell lung cancer, we expect to begin in the coming months. And as you saw from the slides, we will also be looking towards moving and initiating additional studies at speed. Christopher David O'Reilly: [Interpreted] Next question is Stephen Barker, Jefferies. Stephen Barker: Steve Barker from Jefferies. The first question is about ENTYVIO and the second question is about your collaboration with Innovent. Starting with ENTYVIO. So you've cut your estimated current growth rate at constant exchange rates from 9% to 6% due to competitive pressures. I was wondering if you could give us more details of those competitive pressures and the implications for growth going forward as in next year and beyond? And secondly, regarding your deal with Innovent, certainly, the China data published to date on 363 is impressive. But there have been several cases where impressive data in China has not been replicated in international studies. So I was wondering if you could share your view on if that apparent trend or phenomenon is real or not? And more specifically, how confident are you that you can replicate the impressive China data in international trials? Christopher David O'Reilly: Thank you, Steve. So I think the first question on ENTYVIO and the reasons for the reduction in the full year forecast. I'd like to call on Julie to answer that. And the second question on data replicability of the China studies in a more global population. I'd like to ask P.K. to comment on that, please. Julie Kim: Thanks for the question, Stephen, on ENTYVIO. So let me start by saying that ENTYVIO has been on the market for 12 years now, and it is still the overall market share leader in IBD when you look at it from a patient demand perspective, and we are holding market share. But as you've noted, there are a few things that are impacting our top line. One is in terms of the intensified competitive activity, and we're seeing that particularly on the CD side, but it is also starting to impact UC. But as I said, overall, because ENTYVIO is still the only gut-selective medicine out there for IBD, we've been able to hold share. The other things that are impacting the top line, there are a few things. One, as Milano mentioned in his talks, it is about the channel mix. We've particularly had an increase in 340B population as well as an increase in Medicare Part D redesign impact. Beyond that, the pen conversion, as we've mentioned, is moving a bit slower than we anticipated. And while we are resolving those access hurdles, it has impacted the top line thus far. But we do expect as those hurdles are resolved, we will see an acceleration of growth, which is why we do expect to end the year higher than where we are year-to-date. Phuong Morrow: Thank you, Julie. And to answer the second question, I'll say 2 points. One is, as you alluded to, initially, Innovent has accrued more patients in China, but over the past few months has now begun to increase the enrollment ex-China, including in U.S. and Australia, and we are continuing to monitor that data as well as its applicability. The second element is the fact that we actually endeavored on very significant due diligence during the evaluation for this collaboration. And that included bringing our own Takeda radiologists in order to evaluate the -- many of the images that we were seeing of the patients as well as determining the correlation with our response criteria, i.e., RECIST. And we saw a very strong correlation there. Christopher David O'Reilly: [Interpreted] Next question, SMBC Nikko Securities, Wada-san. Hiroshi Wada: Wada from SMBC Nikko Securities. About Innovent pipeline, I have a question. 363, regarding mechanism of action, I want to know IL-2 alpha bias, what's the significance of this? Roche has -- well, IL-2 itself is approved for the melanoma and other cancers, but not expanded very much to other cancers. If you activate alpha, Treg may be activated as well. And because of that immune response is suppressed, I think that's what was the rationale. So alpha activated mechanism for 363, what's the meaning of that, including the clinical data you have obtained so far. Can you explain that, please? Christopher David O'Reilly: Yes, P.K., would you like to take that question? Phuong Morrow: Yes, absolutely. So it's a great question. And we also asked the same question and interrogated that data with Innovent and discussed this in depth. And I can tell you that what is actually unique about this particular pathway is the fact that, first, we did learn from the experiences of others within the industry as it relates to IL-2. And that's why our focus has been on this IL-2 alpha bias with attenuation of the beta-gamma pathway. And with that in mind, we have seen that the IL-2 alpha biased approach has been able to target specifically tumor-specific T cells that are addressing both -- or express both PD-1 and IL-2 alpha. So it's been a very precise and effective activation within the tumor microenvironment. The other question that you had was related to whether this would actually cause and trigger activation of Tregs, which we also had that question related to. And we have not actually seen activation of Treg cells, which would have resulted, of course, in a decrease in the immune response. Thirdly, I would say that because of this, we think that the clinical data are very consistent with the mechanism of action with findings of very encouraging data in both IO refractory as well as in earlier lines. Thank you. Hiroshi Wada: [Interpreted] May I continue? Christopher David O'Reilly: [Interpreted] Yes, go ahead. Hiroshi Wada: [Interpreted] And for development policy, so refractory cold tumor is the strategy that you want to take. I understand that additional IL-2 NSCLC first line and head-to-head with PD-1 for Phase III. Is that the plan going forward? Phuong Morrow: Yes. Chris, would you like to be to take this? Christopher David O'Reilly: Yes, please P.K. Phuong Morrow: Yes, of course. So I think your question was around the development plan related to IBI363 and where we see the experience with this and the promise of this and agree with you that we actually want to leverage the strong clinical data. So beyond the 2 second-line studies in IO refractory squamous and non-squamous non-small cell lung cancer, we will plan to go head-to-head against IO therapy, both likely in an all-comers population as well as in a TPS-high population. Christopher David O'Reilly: Next question, I'd like to call upon Tony Ren from Macquarie. Tony Ren: Tony Ren from Macquarie. A couple of questions again on the Innovent transaction. For the IL-2 PD-1 bispecific IBI363, I understand -- I actually cover Innovent myself. I understand they have a global Phase II study. The primary completion -- estimated primary completion of this study is March 2026. So really only 4 months away. Did you guys get a chance to look at the data from that Phase II study, which I believe primarily is conducted in the U.S. and looking to recruit about 178 patients? And if so, were the data better or worse than what you've seen in China? So that's my first question. Christopher David O'Reilly: P.K., would you like to answer that one as well, please? Phuong Morrow: Yes, absolutely. So yes, first, I would like to say that, yes, we have been in constant communication with Innovent related to the evolving data. And as you allude to, that data in the global Phase II is progressing or the trial itself is progressing very nicely and at speed. I can't disclose what obviously, the data shows thus far, but we can see that I would like to just say that the data thus far is fairly encouraging, but I think too early to comment further. Tony Ren: Okay. Thank you for addressing that. Also, Innovent is starting the Phase III global study. I think it's called MarsLight-11 trial in immunotherapy-resistant non-squamous non-small cell lung cancer, right? So that trial according to clinicaltrial.gov is literally starting today. But also -- Dr. Morrow, you said that you're looking to start in the next few months. So are you -- as Takeda is leading the clinical development, right, are you looking to change the trial design and the conduct of this MarsLight-11 study? Phuong Morrow: What I will say is that we -- as I noted, we have had great conversations and discussions with Innovent weekly, if not every few days. And related to the MarsLight study as well as these beginning studies, we've also had discussions about whether we would need -- we would desire to change or tweak any of the elements of the protocol itself. I would say right now, we have not required any or asked for any significant changes as of today, but we are continuing to have those discussions. Tony Ren: If you do decide to change the trial design or protocol or conduct, would that require a new FDA clearance? Phuong Morrow: I don't think so. Christopher David O'Reilly: [Interpreted] Next question is Ms. Ueda, Goldman Sachs. Akinori Ueda: I am Ueda, Goldman Sachs. My first question is regarding [indiscernible] therapy business. I think in the United States, now CSL has been closing some of its plasma centers recently. So it also appears that Takeda is currently focusing on moving -- improving efficiency such as optimizing utilization rates and implementing the digital transformation initiatives rather than expanding the number of centers. So are there any changes in the business environment in the U.S. such as like the demand outlook or the cost structure that are driving the shift? And furthermore, I think some other companies seems to be actively investing in the collection centers outside in the U.S. So could you also let us know whether you are also considering similar types of investments? [Interpreted] I'd like to ask a second question to Milano regarding your dividend increase. Given this -- the downward revision of the guidance, I believe that EPS is going to be also lowered. And you also are able to transfer from the accumulated fund to your hand. However, what is about the potential risk of the impairment loss and how you are confident to continue increasing the dividend payment? I'd like to ask the second question to Milano-san. Christopher David O'Reilly: So the first on the PDT business and specifically on our collection initiatives in the U.S., I think I'd like to ask Giles to comment on that. And then the second question on the sustainability of the dividend. Milano, if you could kindly answer on that one, please. Giles Platford: Yes. Thank you, Chris, and thank you, Ueda-san, for the question. We have been investing extensively to improve efficiency and productivity across our BioLife collections network, and that has positioned us very strongly to be able to meet the growing demand for plasma-derived therapies and to continue to grow our collection volumes without opening to the same extent, new centers. In particular, we have benefited this year from the accelerated rollout of the personalized nomogram for both our FK and Haemonetics devices, and that has enabled us to improve volume collection by approximately 10% to 11% on a per donation basis. And as a result, we won't be opening as many new centers, and we are also benefiting from the ramp-up of the centers that we have opened in the past years. To the second part of your question, we do continuously evaluate opportunities to open up new countries to contribute to global supply of plasma. We don't have anything to communicate at this point in time, but it is a big part of our advocacy work worldwide to ensure that we are having more countries contributing to sustainable supply of plasma. Thank you. Milano Furuta: [Interpreted] Thank you very much for your question. Basically, regarding our dividend policy, as we explained in the past, it is a progressive policy, meaning we will sustain or increase the dividend. And in order for us to make a decision, we will look at core EPS and reported EPS and mid- and long-term reduction of interest-bearing liabilities or borrowings. And looking at these 3 parameters, we make a proposal what to do with the dividend in the next year and going forward. Therefore, at this point in time, I cannot say anything definitely, but these are the 3 points, we will base our decisions. And for the next fiscal year, around May time frame, we would like to announce what is the policy of dividend. Christopher David O'Reilly: [Interpreted] Next question from UBS Sakai-san. Fumiyoshi Sakai: Fumiyoshi Sakai from UBS, two questions. One is the same plasma business. CSL issued profit warning. There are reasons very vague, but one of the factors that you mentioned is weakening demand of China albumin sales or revenues. And your page -- Slide 40, you have slight decline in China. However, you haven't really changed the guidance for FY '25. Do you think -- do you still think that this guidance is achievable? If it's so, can you just give us the -- what's really going on in China market right now? So that's the first question. The second question is U.S. Biosecure Act when you make a deal with Innovent, anything going on in the U.S. these days is a mystery, but this act is still pending? And have you considered what are the political consequences having China Biotech as a partner? Probably not? But if you could update with this Biosecure Act and your business tie-up, I would really appreciate that. That's the second question. Christopher David O'Reilly: Thank you, Sakai-san. So the first question on albumin demand in China and our confidence in the full year outlook, I'd like to ask Giles to comment on that. And then the second question on U.S. US Biosecure vis-a-vis the Innovent deal. I'd like to ask Christophe to answer that question, please. Giles Platford: Sure, Chris, and thank you, Sakai-san, for your question. It's true, our albumin portfolio did decline marginally by 2% for the first half. This was a result of the impact of shipment phasing to China, but also related to the continued government-imposed cost controls in the country, both of which were anticipated as well as some effect of tender timing globally. And I'd like to point out that with a somewhat slower near-term growth outlook for China linked to those government-imposed cost controls, we have been actively working to build sustainable market opportunities for albumin outside of China, and we do see continued growing demand for albumin worldwide. And we have successfully secured a number of tenders in markets ex-China, which will be delivered in the second half, hence, accelerating our growth for the balance of the year. So yes, we remain confident to deliver on our guidance of high single-digit growth for the year for albumin and for our IG portfolio. Thank you. Christophe Weber: Thank you, Sakai-san. This is Christophe here. Obviously, we take into consideration the geopolitical environment when we discuss a deal like our partnership with Innovent Biologics. So I will mention 2 points. One is that we will do -- we'll drive the global development of this asset, guaranteeing that it is meeting all the criteria required by regulatory agencies across the world. So that's very important. And the second point I will mention is that we will manufacture these molecules in the U.S. So we will do a full tech transfer and we manufacture -- we'll organize the manufacturing of this molecule in the U.S. And therefore, we think that this is also a way to mitigate the potential geopolitical risk. Thank you. Fumiyoshi Sakai: [Interpreted] Can you just -- Giles-san, can you give a margin update in PDT business? Giles Platford: Yes, absolutely. I can do that. So we continue to see our margin recovery year after year, and we expect to deliver continued margin improvement in fiscal '25. And that's part of the reason why we gave a slightly more modest guidance in terms of growth for this year. We are seeing more supply on the market. If you remember, Takeda was the first to recover post pandemic. So we benefited from strong growth the past couple of years in meeting unmet demand globally. We see that situation now normalizing. So we're being a little more selective in terms of tender participation ex-U.S., very much expected, anticipated and consistent with the guidance that we gave, and that's partly because we're trying to calibrate both the need to grow, but also the need to grow profitably and to ensure we're getting value recognition in the process. We see continued improvement in product mix. So our innovative subcutaneous IG portfolio has delivered 15% growth for the first half. So that product mix helps in improving margins. The BioLife productivity and efficiency efforts driven by data digital and technology transformation that I referenced earlier are also helping us to improve margin. And we have seen gradual improvement in yield in fractionation and process improvement across our manufacturing network. So all of that is contributing to an improvement in margin over time. Thank you, Sakai-san. Christopher David O'Reilly: For the next question, I'd like to call on Mike Nedelcovych from TD Cowen. Michael Nedelcovych: I have 2. My first is just a broad question on your celiac disease programs. I'm just curious what the breadth of your ambitions are here? How important could those programs become ultimately should they make it to the marketplace? And then my second question is on mezagitamab for IgAN. When we think about the target product profile for that agent, is it sufficient to have efficacy similar to competitor agents across mechanisms, but with potential treatment holidays? Or should we be looking for better efficacy? Christopher David O'Reilly: Thank you, Mike. I think both of those questions on our celiac ambitions and aspirations for mezagitamab, Andy you can answer those. Andrew Plump: Thanks, Chris. Mike, it's Andy. So firstly, on the celiac programs, we had 3 programs that were in proof-of-concept studies, one that we've discontinued, which was TAK-062, which was an orally administered glutinase, which failed to show benefits. And two, TAK-227, which is a transglutaminase 2 inhibitor that's got restricted and then TAK-101, which is a tolerizing vaccine. Both of those are still in Phase II studies right now. Of course, this is a huge unmet medical need with no established standards of care. The bar is quite high for moving forward and the science is quite tough. But we're excited to see data in the coming months and over the next year for both of those programs. So I think we can talk more about what the potential long term could look like after we've seen those data. In terms of mezagitamab, obviously, and you're referencing this, it's an incredibly competitive landscape. With mezagitamab, though, we've got a fairly unique opportunity here. I would say that in terms of efficacy, we wouldn't -- based on the data that we've seen, especially from the APO/BAF agents, I don't think that we expect to see more efficacy. I think the real opportunity with mezagitamab is at least similar efficacy. The 96-week data that I referenced that you'll see in the coming weeks at the upcoming ASN Week meeting is quite extraordinary. I think the real opportunity here is the potential for sustained benefit after relatively short-term dosing. And then secondly, the potential benefits on safety. Christopher David O'Reilly: [Interpreted] In interest of time, I would like to make the next question as final, Sogi-san, Bernstein. Miki Sogi: I have 2 questions. First question is about ENTYVIO. So this is to Julie. So you have mentioned that the evolving competition in the U.S. as well as the increasing -- the change in channel mix. I can imagine that those -- the dynamics are -- it's not really easily reversible. So should we assume that the slowing down the growth rate as you have included in the revision from 9% to 6%. Is this the kind of trend we should expect for the 2026 and beyond? And if that's the case, will you be revisiting the peak year sale of ENTYVIO at some point? That's first question. The second question is about the Innovent deal. I have a question about this IBI3001, very interesting product, the ADC -- bispecific ADC. For this molecule, should we think that this is kind of going to work as 2 ADCs in 1 molecule, meaning that it's just kind of working as EGFR ADC and the B7H3 ADC? Or if there's any synergy by putting these -- the functions in molecule? Those are 2 questions. Christopher David O'Reilly: Okay. Thank you, Miki. So the first question on ENTYVIO to Julie and the second on 3001 to P.K., please. Julie Kim: Thanks for the questions, Miki. In terms of the growth, what I would say is this, as I mentioned earlier, ENTYVIO has been able to hold share -- patient demand share in overall IBD. And what I would expect without giving any predictions about growth and whatnot that we'll provide for FY '26 in May. I would say that our growth is in line with market at this point in terms of patient demand, and we expect to be able to hold our share given the fact that we're still the only gut-selective molecule in IBD and the strong track record that we have, particularly in UC. And as I mentioned, where we see the significant competitive challenges is in CD thus far. In terms of the peak at this point, we are not changing our overall peak revenue guidance. Phuong Morrow: Thank you. And to add on related to IBI3001, happy to bring this forward. So we agreed and when discussing the data and the potential for this molecule with Innovent, it was based upon a few elements. The first is the fact that these targets are very well harmonized with our current disease area strategy in solid tumors, particularly in GI and thoracic cancers. These target specifically. And the second element is that we believe that, as they should target 2 elements and then use the same novel exatecan payload as well as platform that they would be able to very specifically harness a payload and result in more encouraging efficacy. We've seen some elements of that thus far in the earlier doses, as I noted, and we will continue to monitor as we progress up the dose levels. Christopher David O'Reilly: [Interpreted] Thank you very much. With this, we'd like to conclude today's webinar. Thank you very much for your participation today. We'd like to ask for your kind continued support. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Operator: Good day, and welcome to the AGCO Third Quarter 2025 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Greg Peterson, AGCO Head of Investor Relations. Please go ahead. Greg Peterson: Thanks, Gary, and good morning. Welcome to those of you joining us for AGCO's Third Quarter 2025 Earnings Call. We will refer to a slide presentation this morning that's posted on our website. at www.agcocorp.com. The non-GAAP measures used in the slide presentation are reconciled to GAAP metrics in the appendix of the presentation. We will make forward-looking statements this morning, including statements about our strategic plans and initiatives as well as our financial impacts, demand, product development and capital expenditure plans and timing of those plans and our expectations concerning the cost and benefits of those plans and timing of those benefits. We'll also cover future revenue, crop production, farm income, production levels, price levels, margins, earnings, operating income, cash flow, engineering expense, tax rates and other financial metrics. All of these forward-looking statements are subject to risks that could cause actual results to differ materially from those suggested by the statements. These risks are further described in the safe harbor included on Slide 2 in the accompanying presentation. Actual results could differ materially from those suggested in these statements. Further information concerning these and other risks is included in AGCO's filings with the SEC, including its Form 10-K for the year ended December 31, 2024, and subsequent Form 10-Q filings. AGCO disclaims any obligation to update any forward-looking statements, except as required by law. We'll make a replay of this call available on our corporate website later today. On the call with me this morning is Eric Hansotia, our Chairman, President and Chief Executive Officer; and Damon Audia, our Senior Vice President and Chief Financial Officer. With that, Eric, please go ahead. Eric Hansotia: Thanks, Greg, and good morning to everyone joining the call today. We delivered a strong third quarter performance, underscoring the effectiveness of our strategic execution and the resilience of our global team. While macro conditions continue to be volatile, we benefited from a more favorable regional mix and stayed laser-focused on what we can control. Our disciplined approach to production and cost management continues to position us well in this environment. Thank you to the entire AGCO team for their continued focus in these 2 areas, where we remain agile in the face of a complex and evolving landscape, and our people have been instrumental in helping us navigate this uncertainty, maintaining our momentum and continuing to put farmers first. Net sales were $2.5 billion, down approximately 5% year-over-year or up nearly 6% when excluding Grain & Protein business divested last year. Strong growth in EME led the quarter, which continues to be our largest, most stable and most profitable region. Near record global crop production in 2025 is leading to an elevated grain inventories and putting pressure on commodity prices. While farm income is being supported by increased government assistance in the U.S., crop margins are still tight and farmers around the globe remain cautious on capital spend. During this industry downturn, we are staying focused on executing our strategy, supporting our dealers and customers and investing in technologies that will drive long-term growth. We also continue to look for every opportunity to limit the impact of tariffs on our farmers. We are closely monitoring evolving tariff policies and government support programs around the world while continuing to engage with suppliers and adjust our supply chain. We continue to assess and implement price increases where appropriate and feasible. For the quarter, consolidated operating margins were 6.1% on a reported basis and 7.5% on an adjusted basis. Our results reflect strong execution by our teams. We maintained solid margins through disciplined operational performance, favorable regional mix and continued progress on our restructuring initiatives. This consistency underscores the effectiveness of our strategy and our commitment to delivering long-term value. Notably, we achieved these margins despite another quarter of significant production cuts in North America as part of our ongoing efforts to destock the dealer channel. When comparing third quarter of 2025 to the same period last year, production was down nearly 50% in North America. Production levels are actually down nearly 70% from 2023. In addition to making further progress on reducing dealer inventories, we've also decreased company inventories. This continued discipline is reflected in our working capital improvements and free cash flow generation during the 9 months of the year, which was approximately $453 million up compared to the same period in 2024. Slide 4 provides an overview of industry unit retail sales by region for the first 9 months of 2025. The global farm equipment market continues to face significant headwinds. Brazil remains slightly up compared to the third quarter of 2024, driven primarily by demand for smaller and midsized tractors, coupled with favorable trade dynamics. Despite record soybean harvest and potential trade benefits, demand for larger equipment has yet to show meaningful improvement. High financing costs and political uncertainty are expected to continue, constraining demand in 2025, but the early signs of recovery point to a modest increase in 2026. In North America, tractor sales declined 10% in the first 9 months of 2025 compared to the same period in 2024, with the steepest drops occurring in the high horsepower categories. Driving this behavior is the significantly lower grain export demand, global trade uncertainty and continued high input costs. We expect these pressures to persist, particularly with the demand for larger equipment. Recent announcements of government support are expected to support net farm income, which may help unlock future equipment investments. There are also potential upsides if further progress can be made on top of the trade agreement that was announced earlier this week between the U.S. and China. For Western Europe, tractor sales were down 8% during the first 9 months of 2025 compared to the same period 1 year ago. The industry experienced double-digit percentage decreases across most markets. Demand and mix are expected to remain soft through the remainder of the year as lower income levels weigh on arable farmers and correspondingly large tractors. As AGCO's largest and most strategically important region, Europe continues to deliver stable demand that is less cyclical than other markets with strong and consistent operating margins. This performance provides valuable balance to our global portfolio, helping us to offset fluctuations in other markets, including those influenced by evolving U.S. trade dynamics. We remain confident in the region's ability to support our long-term growth, especially as Precision Ag grows there. Combined sales continue to decline across all 3 regions with North America experiencing the largest year-over-year drop at 29%. Amid industry-wide pressures, AGCO is performing more resiliently than in previous downturns and remains well positioned for the long-term growth. Looking ahead to 2026, current commodity prices and fundamental uncertainties continue to impact the global ag industry outlook. Positive market factors, including livestock and dairy prices, the replacement cycle and government payments are being offset by geopolitical tension, tariff impacts and difficult farm economics, which include elevated borrowing costs and rising input costs. Given the combination of all of these factors, there is increasing likelihood of markets being relatively flat in 2026 with North American large ag down and Europe and South America modestly up. This view confirms our assessment that the global industry is at the trough. Slide 5 outlines AGCO's factory production hours. To ensure year-over-year comparability, we've excluded Grain & Protein production hours from the 2024 baseline. Third quarter production hours were up approximately 6% year-over-year, driven by a favorable comparison in Europe, where quarter 3 2024 was impacted by the prolonged factory shutdowns as well as increased output in South America. In contrast, North America production was down over 50% again this quarter, reflecting our continued focus on reducing dealer inventories in response to soft market demand. And as I mentioned, production levels are actually down nearly 70% from 2023. Looking ahead, we now expect full year 2025 production to be down approximately 15% versus 2024, a slight revision from our prior estimate of down 15% to 20%, primarily due to stronger quarter 3 output in EME. Rightsizing inventory in North America remains a top priority, while Europe and South America will continue to see production effectively aligned with retail demand. Looking at regional inventory breakdown. In Europe, dealer inventory is now just over 3 months, slightly below our target. Fendt is below this average, while Massey Ferguson and Valtra are just above. Europe's near target inventory levels are encouraging, particularly given our strong exposure to the region. In South America, dealer inventory ticked up to around 4 months, slightly above our 3-month target and quarter 2 levels, given the decline in demand for low and medium horsepower tractors. The increase in inventory reflects mainly a more cautious industry outlook given the demand changes in quarter 3, which led us to adjust our forward sales expectations. In North America, we continue to make meaningful progress, reducing dealer inventory from 9 to 8 months, while still above our target, the reduction reflects the success of our disciplined production cuts with units being reduced almost 13% in the quarter. Our 3 high-margin growth drivers, globalizing and expanding our Fendt product line, growing Precision Ag and increasing our parts business remains central to our strategy. To unlock the full potential of these growth levers and transform AGCO into a higher-performing company throughout the cycles, there are 5 major strategic shifts we've just made in the past 2 years that position us for significant earnings growth. Let's start with a significant update regarding our resolution with TAFE. We recently announced the sale of our ownership interest in TAFE, generating approximately $230 million in after-tax proceeds. For the first time under my leadership, we now plan to move forward with a $1 billion share repurchase program, reflecting our confidence in the business and our commitment to shareholder returns. We plan to begin purchasing $300 million of shares in the fourth quarter. Turning to other key elements that are meaningfully reshaping our company. The creation of our PTx business is the most critical to helping us achieve our vision to be the trusted partner for industry-leading smart farming solutions. By combining Precision Planting, the ag assets of Trimble and 6 additional tech acquisitions over the last 5 years, plus doubling our engineering budget, we've built a $900 million platform with a path to $2 billion in Precision Ag revenues as synergies and scale take hold. As we strengthened our high-margin, high-growth portfolio, we exited the lower growth, lower-margin business of Grain & Protein, which lacked alignment with our core machine and technology products as well as our distribution strategy. Project Reimagine is a company-wide restructuring effort focused on automating, standardizing, simplifying, centralizing and in some cases, outsourcing work. With over 700 active projects, we are driving efficiency, lower costs and most importantly, improving the outcomes for our dealers, farmers and employees enabled by AI. This initiative is expected to reduce our cost base by $175 million to $200 million. Finally, FarmerCore is unique in our industry and is transforming our go-to-market strategy. We're taking service and support right to the farmers, online and on the farm by investing in digital tools and enabling dealers to shift from brick-and-mortar to mobile service models. This is about servicing the farmer, not just the product. We're making meaningful progress in North and South America with expansion to other markets planned in the future. Together, these 5 strategic shifts are shaping the AGCO we've envisioned, more focused, more agile and better positioned to deliver sustainable high-margin growth. The results include margins at this trough that are comparable to the company's margins at the previous cycle's peak. AGCO is delivering higher margins through the business cycle, driven by these structural changes to the company's portfolio and value proposition. Going deeper into Precision Ag, Slide 7 showcases 2 major innovation milestones that reflect AGCO as a leader in smart farming solutions. We've launched Phase 1 of FarmENGAGE, our new mixed fleet digital platform designed to deploy work plans, track fieldwork and collect task data from all machines on the farm regardless of brand. This retrofit-first solution enables AGCO equipment to seamlessly integrate with existing Trimble technology while also supporting interoperability with non-AGCO fleets. Looking ahead, Phase 2 will consolidate features into a unified platform experience and Phase 3 will complete the full farm operation cycle, delivering an end-to-end solution for planning, execution and optimization. Together, these phases position FarmENGAGE as an absolute cornerstone of our smart farming strategy. As you know, our goal is to be autonomous across the crop cycle by 2030. We are accelerating this journey and at a recent Tech Day in Germany, we unveiled the latest OutRun autonomous solution for tillage and fertilization. Tillage is now in beta testing and fertilization is in alpha. These build on the success of our OutRun autonomous grain card solution, which is already in production. These innovations offer autonomous capabilities for Fendt and competitive machines in 3 of the 5 major stages of the crop cycle, making us one of the industry leaders in this transformational technology. This progress reflects our commitment to delivering practical, scalable technologies for the mixed fleet that reduce labor dependency, improve efficiency and help farmers operate more profitably. On that exciting note, I'll hand it over to Damon for a deeper dive into the financials. Damon Audia: Thank you, Eric, and good morning. Slide 8 summarizes our regional net sales performance for the third quarter and year-to-date. Net sales for the quarter increased approximately 1% year-over-year, excluding the positive impact of currency translation. For comparability, we've also excluded the $251 million of sales associated with the divested Grain & Protein business in Q3 of 2024. Breaking net sales down by region. Europe, Middle East posted a 20% increase compared to the same period in 2024, excluding the impact of favorable currency effects. This reflects a recovery in the production levels and corresponding sales following extended plant downtime last year. Growth was strongest in the high horsepower and mid-range tractors. South America declined close to 10%, excluding favorable currency impact. Weaker industry demand drove most of the decrease with lower sales across most product categories. North America was down 32%, excluding unfavorable currency effects. The decline was driven by continued market softness and our focused underproduction to reduce dealer inventories. The largest decreases occurred in high horsepower tractors, sprayers and combines. Asia Pacific/Africa declined 5%, excluding unfavorable currency translation impacts. Lower demand across the Asian markets were partially offset by stronger performance in Australia and Africa. Finally, consolidated replacement parts were $498 million in the third quarter, up 2% year-over-year on a reported basis and down approximately 2% when excluding the favorable currency translation. Turning to Slide 9. Third quarter adjusted operating margin was 7.5%, 200 basis points higher than the prior year. The industry backdrop remains challenging with continued pressure from factory underabsorption and elevated discounting. The margin improvement was primarily driven by strong performance in our Europe/Middle East segment, where higher sales and production volumes supported improved operating leverage. By region, Europe/Middle East income from operations increased around $163 million, with operating margins approaching 16%. The improvement reflects the significantly higher volumes and sales compared to Q3 of 2024, which was impacted by the extended plant shutdowns. North American operating income declined approximately $56 million year-over-year with margins remaining negative again this quarter. Lower sales and significantly reduced production hours were the key drivers, coupled with a significantly weaker industry. South America operating income declined $23 million with margins down to around 6%, primarily due to lower volumes. Asia Pacific Africa posted a slight increase in operating income of $1 million, driven by lower manufacturing costs, partially offset by lower sales volume. Slide 10 shows our year-to-date free cash flow performance. As a reminder, free cash flow is defined as cash provided by or used in operating activities less capital expenditures. Free cash flow conversion is calculated as free cash flow divided by adjusted net income. Through September, we generated $65 million of free cash flow, an improvement of around $450 million versus last year's net outflow of $387 million for the same period. This was driven by stronger working capital performance and roughly $120 million in lower capital expenditures year-over-year. We continue to expect full year free cash flow to be within our targeted range of 75% to 100% of adjusted net income. Our capital allocation priorities remain unchanged. Reinvest in the business, potential bolt-on acquisitions, maintain investment-grade credit ratings and return capital to shareholders. As Eric mentioned, following the TAPI resolution and the Board approval of our new $1 billion share repurchase program, we expect to begin repurchasing $300 million of shares in the fourth quarter. We also recently declared our regular quarterly dividend of $0.29 per share. We remain focused on deploying capital effectively to drive long-term shareholder value, and we're encouraged by the increased flexibility to return capital through the preferred investor method of share repurchases. Slide 11 highlights our current 2025 market outlook across our 3 major regions. Our outlooks remain relatively unchanged since the second quarter call other than a modest adjustment to our North American large ag forecast. In North America, we continue to expect significantly lower industry demand in 2025. While net farm income has improved, supported by government programs and record high cattle prices, sentiment remains challenged by weak corn and soybean prices. Investment confidence is declining and interest rate cuts haven't yet provided meaningful relief. We're maintaining our outlook for the small tractor segment to be down approximately 5% and now expect large ag to be down around 30% versus our prior range of down 25% to 30%. In Western Europe, we continue to expect the industry demand to decline 5% to 10%. The market remains soft but relatively stable. Wheat prices are below historical averages and geopolitical uncertainty continues to weigh on sentiment. In South America, record soybean exports, partly driven by U.S. tariff barriers have supported trade flows. However, margins are under pressure from higher input costs and elevated interest rates in Brazil are dampening demand, especially for large ag. Under these conditions, we still expect Brazil to be flat to up 5% for the year. Slide 12 outlines the key assumptions supporting our full year 2025 outlook. We continue to expect global industry demand to be around 85% of mid-cycle levels. Our sales outlook remain unchanged despite a slightly softer pricing outlook now in the 0% to 1% range, which is down from approximately 1% in Q2, given the increase in competitive pricing in certain regions. We continue to anticipate a favorable currency impact of roughly 2%. Our guidance reflects current tariffs across our global footprint, along with mitigation efforts through cost actions and pricing. That said, the potential for additional U.S. tariffs or retaliatory measures fostered continued uncertainty. We're monitoring developments closely and we'll adjust our outlook if needed. Engineering expense is expected to remain effectively flat year-over-year. We still expect our adjusted operating margin to be approximately 7.5%, reflecting structural improvements in cost initiatives, positioning us roughly 350 basis points above our last trough in 2016. Lastly, we revised our effective tax rate to 33% to 35%, modestly better than our prior estimate of approximately 35%. Turning to Slide 13 for our current 2025 outlook. We continue to expect full year net sales of approximately $9.8 billion, consistent with our prior outlook. This reflects the modest changes in demand trends across key markets. We refined our earnings per share forecast to approximately $5, reflecting strong execution across our global operations. This assumes no material changes to existing trade measures. Capital expenditures are now expected to be around $300 million. While this represents a decrease from the prior estimate of $350 million, we remain focused on supporting strategic initiatives and maintaining flexibility in response to shifting demand trends. We continue to target free cash flow conversion of 75% to 100% of adjusted net income, supported by disciplined working capital management and improved inventory efficiency. As Eric noted, we're pleased with our performance for the third quarter in what remains a challenging and evolving year. Our teams have executed well, grown share and continued to reduce dealer inventories while supporting farmers' needs. With this updated outlook, we believe our results further demonstrate the structural improvements in AGCO's profitability. Even in a down cycle, we're delivering stronger margins and more consistent earnings, a reflection of our transformed business model. With that, I'll turn the call over to the operator to begin the Q&A. Operator: [Operator Instructions] Our first question today is from Kristen Owen with Oppenheimer & Company. Kristen Owen: Wondering if we can start here with the strong Europe results. And maybe just ask a simple question, how Europe performed relative to your expectations? I'm just trying to parse through some of the onetime items versus the underlying trends there and what's supporting the outlook for a little bit more constructive growth in 2026? And I'll start there. Damon Audia: Yes. Sure, Kristen. So I think Europe, I would say, performed modestly better than what we had expected more on the top line. So volumes were a little bit stronger than what we had originally anticipated. The production, what you saw with the margins heavily influenced by the production schedule, I would say, was relatively in line with what we had expected. So overall, we feel good. I think the key point for us as we look at Europe right now, the dealer inventory levels are sitting below the optimal level for us. So we feel very good as we go into the fourth quarter and into '26 here that we're sitting in a relatively strong position from producing in line with retail or hopefully, if the markets were to pick up. And again, we haven't given a full outlook for '26 yet, but the dealer inventory levels are positioned well there for '26. Kristen Owen: And then my follow-up, understanding it's very early days to digest, but any initial thoughts on the China trade agreement that was announced yesterday and how that might complement some of the government support that's been floated out there. Just early thoughts on what that could do for your North American outlook next year. Eric Hansotia: Yes. We see this as clearly net positive. There's a combination of the soybean purchases that are more clear now for this year and the next few years. So farmers can -- that's really the core of what farmers look to is market stability and predictability. But then there's also the government support that's been strengthened. And so it's a dual positive outlook. Having said that, we think this is going to be a little bit of a show-me situation where the farmers are going to need to have this -- have the trades actually happen, the deal actually finalized, the beans actually being purchased, which will then drive real pricing in the market. So our phones weren't ringing off the hook yesterday with all kinds of purchasing orders coming in. But it's net positive. That will just take some time to play out in the market. It's probably more of a 2026 effect. Operator: The next question comes from Jamie Cook with Truist Securities. Jamie Cook: I guess just my first question, just on the North America dealer inventory. It's nice that it came down to 8 months, I guess, versus 8 to 9 or 9 months last quarter. I mean this sounds like this is obviously going to go into -- the excess inventory is going to go into 2026. So just any color there on at what point in 2026 do you think we could get rightsized? And if we continue this way and given what you're saying about North America, is there greater risk in 2026, North America would be at a loss again for 2026? I guess that's my first question. And then I'll ask the next one after you answer this. Damon Audia: Yes, Jamie. So I think overall, North America, the team did a really good job in reducing the units on hand, as I think Eric said around 13% down sequentially. Given the change in our industry outlook for this year with large ag being down now around 30%. And as Eric alluded in his opening comments here, we do see North America down -- large ag down in North America -- next year as well. That is putting pressure on us to get to that 6-month target. I don't -- we won't get there by the end of the year. I think we'll make improvement from the 8 months down, but we won't get to the 6 months now. Again, that's based on our current outlook. I think as Eric just said on the prior question here, a lot of new information has come out over the last couple of days with the China trade agreement, with more conversations about subsidies for the farmers. And just to put it in perspective, again, our industry -- our inventory levels are based on the 12-month forward look. So again, if hypothetically, if large ag in North America was flat next year instead of what we're assuming is down, that would have changed my current 8 months, would have reduced it by around half a month. And so it's fairly sensitive to what looks -- what '26 will look like. So again, if we see that market turn here based on farmer sentiment, based on increased purchasing in '26, we're going to be in line with our target fairly quickly. So a little bit hard to answer right now because I think there's a little bit of flux in the system based on some of the most recent news. Jamie Cook: Okay. And then I guess just my second question, tariffs and the lower price. I think last quarter, the guidance assumed $0.45 in net tariff impact to EPS. Any update sort of with Section 232, how that impacts you? And just curious how we're managing the higher cost, but then obviously, you lowered your pricing assumption. So where are you seeing the discounting? And how do you think about pricing into 2026, given what some of your peers have communicated? Damon Audia: Yes. No, we're definitely -- I think the incremental Section 232 items had a relatively modest impact to our overall tariff cost. Again, as we've sort of quoted a net tariff number for 2025, I would say we are marginally worse relative to the $0.45 more due to the incremental lost volume that we're estimating here versus the industry. And so I think that's sort of a little bit of the challenge for us here. As we think about the pricing comment for this year, we have seen some increased competitive pricing tension more in South America and Europe, and that's what's forced us to change our outlook from what was up around 1% to somewhere in the range of 0% to 1%. We will still be net neutral to positive on price versus material cost, and that does include tariffs on a global basis. So we're still going to be able to cover it, but maybe not as much as we had hoped given the current environment. As we look into 2026, we're going to see how the industry dynamics play out. As we've said from the beginning, our goal is to limit the cost of the tariffs to us and to the farmers, where we can't do that, we know that those costs will be centralized likely here in North America, and we're going to look to try to spread pricing as broadly as possible. And as I, again, early look into '26, again, I think we'll -- as a total company, we should be able to cover the material costs and the pricing, but we want to get through the year-end before we give more official outlooks for '26. Operator: The next question is from Kyle Menges with Citigroup. Kyle Menges: Maybe just jumping off from the last question. It'd be helpful to just hear you guys elaborate a bit more on the pricing competition you're seeing, particularly, it sounds like in Brazil and Europe, just maybe what's going on there. Damon Audia: Yes. I think, Kyle, what we've seen is the South American market, especially Brazil, as we said the last quarter, has started to recover. It was the first of our 3 major markets into the downturn. It started to recover, mainly in the medium and low horsepower segments of the market, again, influenced a lot by the specialty crop farmers, coffee, citrus, -- and what we've seen is a little bit of a slowdown in those markets here. And so the market is still growing. I would say we were 0% to 5% last quarter. We were probably closer to the high end of that. And as we look at some of the competitive nature down there with some discounting, especially in that segment, it's reduced our outlook now closer to the lower end of that segment. Again, I think the markets are still doing well. But just given the push to try to drive volume there, we're seeing that segment of the market be a little bit more competitive in nature. Kyle Menges: Got it. And then just on your earlier comments on global retail sales, looking like they could be flattish year-over-year next year, assuming that's more so just talking about unit sales. I'm curious if that includes Precision at all. And would be helpful just to hear you discuss a little bit the trends you're seeing in demand for your precision solutions into 2026 and how you feel like you're positioned in that retrofit market going into next year? Damon Audia: Yes. So maybe I'll touch on the industry comments, and then I'll let Eric elaborate on the PTx business. So our outlook for next year is really based on retail unit sales. It's not really including parts or our PTx business. Think of that more as whole goods sales. Eric Hansotia: Yes. And then PTx , we're hitting all our forecast this year. It's going as we would plan it to be at this stage of the cycle. We're at the trough. So the margins are lower than where we ultimately want them to be. But we're signing up dealers. We've got 90 -- over 90% of our AGCO machines now going out of the factories with Trimble technology. Essentially, if you look at the 2 channels that we inherited, the Precision Planting and the PTx Trimble channels, we've got over 90% of the market covered in everywhere except for Brazil, and that's in the low 80s with that dealer network, and we're working on melting those together. The effort to end up with combined dealers that have the full portfolio is well underway. We've got 50 of those done. Target is to have 78 of them by the end of the year. That will cover about 70% of the U.S. market, which is the fastest-growing Precision Ag business. So just trying to give you a few data points on both channel as well as technology and our product. And then new technology, we had our Field Tech Days and PTx launched 11 new innovations this year, well ahead of what we had anticipated when we were putting the business together. So the innovation engine is probably running ahead of schedule. Financials are on track. Channel development is on track. We've got a new leader in charge of PTx. He's hitting the ground running really well, has visited many of our global operations in terms of sites and dealers. And so I'm very pleased with how that's going. Just as a reminder, retrofit doesn't go down as much as the rest of the business. It only declines about 1/3 as much as the overall decline of the whole goods. And so we're seeing -- although it's down, it's not down nearly as much. And as it recovers, we expect that, that will recover as well. Operator: The next question is from Tami Zakaria with JPMorgan. Tami Zakaria: I wanted to get a little more clarification on the pricing outlook being changed. Can you help us with which regions or region is driving that reduction in outlook? And I just wanted to make sure, is fourth quarter pricing still positive? Or are we talking about negative pricing? Damon Audia: Yes. So Tami, fourth quarter, it will still be positive. If you look at our year-to-date, I think we're up around 50 basis points, give or take. And so pricing will be up around 1% in the fourth quarter total company-wise. Again, if I think about the change in the pricing, again, based on the prior -- one of the prior questions, the change really was driven more in South America and Europe is sort of where we saw the reductions relative to our Q2 outlook for you guys. Tami Zakaria: Understood. And my next question is, I think I heard you say North America large ag, you now expect to be down next year. Can you help us frame what that down means as of right now? Are we talking about flat to down or down to some degree, but less than this year's 30s? Any way to frame that? Eric Hansotia: Yes. Prior to the news of the last 2 days, we would have said down, like, say, single digits, nowhere near as much as this year. But then since then, we've had a couple of pretty significant positive indicators in terms of farm support for farmers from the government and pricing stability of China buying soybeans. So where that will actually end up is unknown, but it won't be anywhere near what we saw this year. We believe we're at the bottom of a global industry. We believe pricing is probably at about its worst. We think pricing power will be stronger next year. And so I think that '25 is probably, in many cases, the worst of the cycle. Operator: The next question is from Stephen Volkmann with Jefferies. Stephen Volkmann: Damon, can you just give us a little bit of a walk into the fourth quarter? There's a pretty big margin expansion kind of implied in your guidance. And I'm just curious what are the buckets that kind of deliver that? Damon Audia: Yes. I think, Steve, for us, the margins in the fourth quarter should finish up at around 9% or a little bit over 9% to deliver the 7.5% full year. And as we look at some of the improvements, I think Europe, again, fourth quarter is generally a fairly strong quarter for Europe. And so with from a volume standpoint, so we should see the margins tick up there. Asia Pacific is one of the early -- was in the down market early, and we see that improving. So I think we see a little bit of the margin coming out of there. And then South America would be the other one. North America continues to be the challenge. And if I think about the margins in North America relative to the third quarter, given the increased level of underproduction. Again, we said on the scripted remarks that we were down around 50% and Q4 will be down we'll be cutting production over 50% as we continue to try to focus on that dealer inventory. So I think sequentially, those margins will be even lower here in the fourth quarter for North America. Stephen Volkmann: Okay Helpful. And then maybe just to focus on the restructuring program. So the $175 million to $200 million, is there a benefit of that in the fourth quarter? And then what would the benefit of that be in '26? Damon Audia: Yes. Again, year-over-year, we're picking up steam as we move through the restructuring actions. So there will be some benefit in the fourth quarter relative to last year. That's embedded in the outlook already. As I look at next year, you're going to get the carryover from the original $100 million to $125 million and you'll get some of the early parts of the incremental $75 million. So next year, as we look at the restructuring benefits today, I'd say it's probably in the range of $40 million to $60 million of incremental improvement relative to 2025. Operator: The next question is from Mig Dobre with R.W. Baird. Mircea Dobre: I want to go back to the tariff discussion, if we can. And what I'm confused about, frankly, is this interplay between Section 232 and just the normal reciprocal tariffs. And I guess the way I would ask the question, when we're sort of thinking about your guidance for 2025, there was a sort of cadence in the way these tariffs kind of came into play, not much impact in the first half, maybe more impact in the second. You also have FIFO accounting. So I'm wondering, is it fair to think that the impact from these tariffs is actually greater in 2026 than what's embedded in the 2025 guidance? And if so, is there a way to maybe quantify it for us? Damon Audia: Yes. Sure, Mig. So yes, in answer to your question, if we look at the -- there's a couple of variables to your point, we still have some costs that we have costs that have flown through our P&L related to the tariff payments we're making. Some of it is still tied up in inventory. And then we will have the full year run rate of those tariffs, assuming there are no changes. So again, when we think about that, we've also announced that we put price actions in effect in many of our businesses, PTx parts, whole goods for model year '26. And so we have only seen a portion of that, and that's why we're sort of giving you that net effect this year. But if I just try to quantify in absolute terms what the tariff costs are, again, not mitigating with price or other actions. For next year, again, assuming no changes to what's in effect today. I would tell you that the total tariff costs are less than 1% of my total company sales. So this year, we're guiding to $9.8 billion. I'd tell you the total tariff cost on an annualized basis would be less than 1% of that. Now that would be concentrated here in North America. So the percent would be more. But as we've talked about in the past, our philosophy is to try to price in the region where we can. But to the extent we're not able to pass all of that given competitive dynamics in that region, we look for opportunities to be strategic and increase prices in other parts of the world to offset that total cost here for the total company. Mircea Dobre: Okay. That's really helpful. And then maybe a quick follow-up on South America. And I don't know if this is the right way to think about it. But when I'm sort of looking at margin here, your revenue has gradually recovered sequentially through the year. We've seen a sequential step down in margin from the second to the third quarter despite revenue being higher. And I'm kind of wondering if this is a function of pricing, as you talked about earlier or if there's something else going on that we need to be aware of as we think about the fourth quarter? Damon Audia: Yes. So I think, Mig, there's been a couple of things. The mix, if you think about year-over-year and you're thinking more -- the mix is as we talked about the high horsepower segment, despite all of the geopolitical stuff that we're hearing about Brazil being a beneficiary, we're not seeing the large ag part of that market pick up yet. And so what we have been seeing is, again that medium, low horsepower specialty crops. So what you're seeing year-over-year there is really more of a mix challenge. In the quarter, we had a little bit of a warranty spike year-over-year, nothing significant, but just on a quarter year-over-year basis, warranty was a little bit higher. When I think about the fourth quarter, again, you're going to see that mix headwind come in, in South America as again, we're not seeing the large horsepower pick up. And if you look at the fourth quarter for South America specifically, last year, we called out a special tax benefit for R&D. It was about 1% to 1.5% of a margin lift. That's not repeating this year. And so those are the 2 drivers as I think about the fourth quarter is really the continued mix decline year-over-year and then that one tax benefit that I had in the fourth quarter of 2024. Operator: The next question is from Chad Dillard with Bernstein. Charles Albert Dillard: A question for you guys on North America. So can you walk through the path to margin recovery? Is there further restructuring that you can do? And then also, I guess, like how much of that headwind is just coming from tariffs? Damon Audia: Yes. So Chad, the part of the overall restructuring programs that we're talking about, some -- a portion of that is in North America. So we will see some marginal benefits of that as we move into next year. When I look at the margins right now or the negative margins it's heavily influenced by the level of underproduction. Again, I think as Eric mentioned, when you look at where we were producing in 2023, the number of hours versus what we're producing right now in the back half of '25, we're down around 70-plus percent in hours in North America. So when you just think about the cost of those factories running at that lower level of utilization, that is a significant drag on the margins. On top of that, as I said, the tariff costs are centralized here. The team is doing a nice job in trying to offset that I'd say, on a dollar basis, we're not offsetting it on a margin basis. So obviously, that's going to be margin dilutive. So the key for us is to get the volume, right? We look at this industry. And I think last year, when you exclude Grain & Protein, we were $2.3 billion or so, give or take. We need to get that volume back up. And whether that's the industry recovering, whether that's the continued focus on gaining share, all of those things are going to be critical. I'd say parts is doing quite well. But in North America, parts is a little bit weaker year-over-year. So again, that's a high-margin part of the business. So we need -- the volume has to start flowing back in North America, and it's not necessarily a reflection of what we're doing. It's more a reflection of the industry because when we look at Fendt, we're actually gaining share here in North America. You're just gaining share on a much smaller pie and you're not seeing that drop to the bottom line just given the overall industry decline. Charles Albert Dillard: Got it. That's super helpful. And then just secondly, you were talking about your pricing strategy to mitigate tariffs and talking about spreading it, I guess, more globally. I'd love to get a little bit more color on that. I guess what I'm trying to understand is how successful are you seeing pricing stick if you're looking to expand more globally than merely focusing on pricing in North America? Eric Hansotia: Maybe I'll take that one. Our strongest -- our biggest market is Europe, and we continue to grow share there even though we put pricing into that market. South America is probably the opposite. It's like Damon said, it's the most price competitive right now. And so it's been the one that's the most difficult for us to have pricing power at the moment. But big picture, South America is going to come back as the industry comes back. But we've had the most success in Europe, put the price in and gain share at the same time. So our disconnect between where we incur the tariffs and where we offset it has been working. Remember, there's a 3-pronged strategy there. Number one is work with our supply chain to minimize the cost impact and moving products around from -- within our supply base or within our manufacturing operations is item #1. Item #2 is Project Reimagine. We're going to take about $200 million out of our cost structure on a little over $1 billion base. So that's a self-help area. And then only third is the pricing action. And we've been really clear all the way along is we're going to put price around the globe wherever we can, where the market will bear, and that focuses on North America. Operator: The next question is from Joel Jackson with BMO Capital Markets. Joel Jackson: On your outlook that you expect next year, global sales flat, Europe up, the rest of the markets is down a bit. Can you speak to knowing what your inventory levels will be at the end of this year, what that might mean for underproduction in the various regions we might expect next year? Damon Audia: Yes, Joel, obviously, I think if we look around the world, Europe, we continue to be in a really good position. You didn't see much underproduction in Europe this year. And again, given the dealer inventories right now are sitting below our optimal level, I would say, sort of consider that relatively flat year-over-year, again, producing closer to retail or in line with retail, excuse me. South America, again, the industry is picking up year-over-year. If you remember, we had a lot of underproduction here in the first half of 2025. And so as I think about South America, you probably see some incremental positive from absorption on the full year. It will be first half weighted, and then we'll start to lap the comps that we're seeing here in the third and fourth quarter, where we're producing closer to retail. North America, again, is a little bit of a wildcard. Again, if you look at what we've said with North America large ag potentially being down, our dealer inventories at 8 months right now, hoping to get that closer to our target. That would likely result in some underproduction here in the early part of 2026. But as Eric said, given the recent news with the trade deal with potential incremental subsidies in my comment that if that changes the industry outlook for large ag, that may help us accelerate or not have to underproduce. But again, North America is still a little bit of a TBD next year. Joel Jackson: And then finally, can you maybe talk about what sort of subsea package states to package in the states of magnitude might move the needle for your end customers, $5 billion, $10 billion, $15 billion programs, whether that's $50 an acre, $100 an acre, have you thought about sort of what's needed to move the needle to get farmers to look at capital purchases and not just deleveraging or working capital? Eric Hansotia: Yes. I think it needs to be over $10 billion. $10 billion to $20 billion, anything in there will get farmers' attention. Granted, that money is not seen as the same as market-driven profitability. They're more likely with subsea money to pay down debt and other things because they're not sure if it's going to be sustainable into next year and year after. So if the trade deal really sticks and there's a 3-year commitment to purchase 25 million metric tons type purchasing or more, that's going to drive confidence way more in farmers than will the subsidy. Operator: The next question is from Angel Castillo with Morgan Stanley. Angel Castillo Malpica: I just wanted to go back to maybe one of the earlier discussions on North America margins and tariffs. I just wanted to check, I guess, am I doing the math right based on what you talked about with the 1% of sales impact next year that, that kind of implies something approaching or kind of roughly $1 of tariff headwind. So if you could just comment on that? And then just related to that, I guess, based on what you're estimating today for kind of the North America outlook, fully accepting that there's a lot of moving pieces still, which quarter would you kind of expect to see the kind of peak pressure in? Damon Audia: So Angel, can you give peak pressure in what regard? Angel Castillo Malpica: In terms of how you kind of spread that tariff headwind, which I'm assuming there's a little bit of a ramp-up as you kind of work through inventories and the flow-through of that tariff impact on your kind of P&L. So just curious which quarter would kind of see the peak of it before it starts to comp the year numbers? Damon Audia: Yes. Well, I think the first question, again, is if our sales right now are $9.8 billion, I said less than 1%. So you're probably looking at sort of less than $1, call it, closer to $0.80, give or take, depending on how things finalize again, some of these tariffs, as you know, are still changing, and those will influence some of the small horsepower tractors that we buy from others -- that are imported from other countries. So I don't want to be too precise, but directionally, less than that. And again, that doesn't take into consideration the pricing actions that I mentioned as well. So again, when I gave Mig that number, that was the absolute tariff cost. That's not my net effect to P&L next year because I already have pricing actions in effect in parts in PTx for model year '26 equipment. And so the net number will be less than that. Again, we haven't given a specific outlook. We want to see how the fourth quarter unfolds, but it will be a lot less than that absolute number that I'm quoting you for the tariff costs themselves. as I think about the cadence, we're starting to already see that flow through our P&L in North America, depending on the product. Again, as you know, we buy a lot of these medium and low horsepower tractors from other companies, depending on the level of inventory that we had in stock and that our dealers had in stock, that's flowing through over a period of time, coupled with the cost that we're incurring for some of the raw materials that we're purchasing for our assembly operations here in the U.S. So again, I think it's going to phase itself in. As we get into the second quarter, I would think we'd work through most of the inventory that we've had, and we start to see more of the full effect, I'd say, directionally around Q2. Angel Castillo Malpica: That's very helpful. And then maybe earlier, I think you had indicated that flat volumes next year would actually reduce your inventory levels by about half a month. And I think your current assumptions was down single digits. I guess, first, can you put a finer point on kind of what that assumption was for North America? Is that closer to mid-single digits or high single digits type of decline? And then if for some reason, I guess, volumes in North America, large ag wind up being closer to down kind of mid-teens, which I think some investors kind of channel checks suggest that might be a realistic risk. I guess what's the sensitivity or math or impact on your inventory levels if it were to be closer to the mid-teens? And how much -- what does that mean for production next year? Damon Audia: Yes. So I mean, we haven't given a specific number related to what we were thinking for '26. Again, it's more -- as we look at the data, as we look at the analytical models running, we're starting to see it down. I think, as Eric said, sort of in that mid-single-digit range is what we were directionally looking at. I'd rather not speculate right now with all of the recent news that's come out this week. Again, I think as Eric said, those are both net positive data points for farmers in North America. And we're hopeful that, that has more of a positive catalyst as we go into '26. But obviously, to the extent it was down, you're using your mid-teens numbers, we would be forced to keep the underproduction probably longer to continue to reduce the dealer inventories. We want to make sure that we're not -- that we're getting that down to that 6 months as quickly as possible. And again, given the numbers you hear us quoting with production down over 50% again in the fourth quarter, we're being as aggressive as we can in trying to minimize the -- putting incremental inventory into the dealer channel here. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Eric Hansotia for any closing remarks. Eric Hansotia: Yes. Thank you for joining us today and all these thoughtful questions. AGCO continues to make meaningful progress on our transformation journey. We delivered a strong third quarter performance with strong margins, disciplined inventory management, accelerated cost reduction and healthy free cash flow generation year-to-date. I'm really proud of the team for achieving this amidst macro volatility by focusing on what we can control in a dynamic environment that always -- and always keeping our eyes on putting the farmer at the center. In fact, the feedback we're getting from our farmers is real strong. Our Net Promoter Score is at our all-time highest level in the company's history. They like the net impact of our products and what we're doing with our dealers to serve them better. In the quarter, Europe is our biggest market, continued to provide stability. We know farmers around the world are under pressure. Our priority is supporting them with efficient machines and technology that keep them productive and profitable. We continue to execute our strategic shifts that sharpen our focus and unlock long-term potential, including the TAFE exit, the PTx creation and Project Reimagine. Our innovation flywheel is spinning faster than ever with new autonomous solutions and the launch of FarmENGAGE, reinforcing us as one of the most progressive leaders in smart farming. And I think you'll see that on display big time at AGRITECHNICA the world's largest ag show coming up here in a week or so. That will be a great way to engage with all the exciting things that AGCO's got going on. Our 2025 financial outlook reflects our confidence in the strategy and the strength of our global team. Even in this challenging environment, we are investing in the future, gaining share, executing with agility and always putting the farmer first. Thank you for your participation today. We really appreciate it. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the VICI Properties' Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this conference call is being recorded today, October 31, 2025. I will now turn the call over to Samantha Gallagher, General Counsel with VICI Properties. Samantha Gallagher: Thank you, operator, and good morning. Everyone should have access to the company's third quarter 2025 earnings release and supplemental information. The release and supplemental information can be found in the Investors section of the VICI Properties website at www.viciproperties.com. Some of our comments today will be forward-looking statements within the meaning of the federal securities laws. Forward-looking statements, which are usually identified by the use of words such as will, believe, expect, should, guidance, intends, outlook, projects or other similar phrases are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Therefore, you should exercise caution in interpreting and relying on them. We refer you to the company's SEC filings for a more detailed discussion of the risks that could impact future operating results and financial condition. During the call, we will discuss certain non-GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available on our website in our third quarter 2025 earnings release, our supplemental information and our filings with the SEC. For additional information with respect to non-GAAP measures of certain tenants and/or counter-parties discussed on this call, please refer to the respective company's public filings with the SEC. Hosting the call today, we have Ed Pitoniak, Chief Executive Officer; John Payne, President and Chief Operating Officer; David Kieske, Chief Financial Officer; Gabe Wasserman, Chief Accounting Officer; and Moira McCloskey, Senior Vice President of Capital Markets. Ed and team will provide some opening remarks, and then we will open the call to questions. With that, I'll turn the call over to Ed. Edward Pitoniak: Thank you, Samantha, and good morning, everyone. I want to start by talking about something we probably won't get asked about much during the upcoming Q&A, and that's our Q3 earnings growth. For Q3 2025, we grew our AFFO per share earnings by 5.3% versus Q3 2024. I want to emphasize our Q3 2025 earnings growth rate, because I want to emphasize the earnings growth that our model is capable of producing even in periods of continuing uncertainty. With our Q3 2025 results, the VICI team continues to demonstrate its resourcefulness and resilience in growing relationships that grow our revenues and profits without, in the case of 2025, significantly growing our capital base. You will hear more in a moment from John Payne about what the VICI team is doing to continue to grow our portfolio and our income. You will hear from David on our financial results, balance sheet and updated 2025 earnings guidance. Before we turn to John and David, I want to talk about the wider strategic context in which we are producing our results. And by context, I do not mean the state of the market this week is very weak, which has obviously been a rough week for REITs and for gaming operators. If you wish, we can share our thoughts on this week's market reactions and ructions during the Q&A. By strategic context, I mean the larger context of the world we are living and moreover, we'll be investing in, in the years, not weeks to come. As I've told you before, I do a lot of reading. Some days, I do wonder if I do too much reading. Two weeks ago, I read a guest post in one of my favorite daily newsletters, Odd Lots. That particular day, the Odd Lots Pop-In was given order to Viktor Shvets, Head of Global Desk Strategy at Macquarie Capital. Viktor starts by quoting Nobel Prize winner Neils Bohr, who is often quoted as having said, "Prediction is very difficult, especially if it is about the future." Viktor does acknowledge that Yogi Berra evidently said something similar. After summarizing the current weird state of our world, Viktor states, "In line with many other prognosticators, I do believe that the next decade will be the most critical period in the transition from yesterday's capitalism toward a yet to be defined alternative system. Everything is up for grabs in what is likely to be one of the most profound changes since the invention of agriculture with far deeper consequences than even the industrial revolutions had." Viktor goes on to ask, "Then what are rational investment strategies in response to an irrational world caught in violent transition?" Viktor's preferred answer is, "To have strong views rather than no views. This involves joining the revolution and backing instead of fighting secular themes, basing investment strategy on a new world and avoiding the waging of old battles." He states that for the last 10 years, his firm has valued building portfolios around sectors and companies that are, "Supported by long-term structural forces rather than investing based on a heavily degraded reading of economic and capital market cycles." With portfolio construction based in part on rising returns on digital capital he then continues, "Included are several disruptive themes, such as the replacement and augmentation of humans, the flow on impact to social, political and geopolitical arenas and the corresponding need for balm, both metaphysical and real." Okay, did you get all that? These days, it's hard, at least for me, to determine if Viktor's view is on the outer or inner spectrum of potential outcomes. But a lot of what he says rings true to me and in any case, I believe that in this period, real estate investors should be developing and executing return and risk management strategies that account for the possibility that Viktor will be proven right, that we are in a prolonged period of significant change and that those changes could impact people's desire and need for what Viktor calls balm, both metaphysical and real. And just in case I'm not pronouncing it as clearly as I should, he is saying B-A-L-M, balm and not bomb, B-O-M-B. And I take balm to mean what people do to seek connection, entertainment, play-based excitement, both psychological and physical wellness and healing. These are the experiential dimensions, the various dimensions of balm. We at VICI have been, are and will continue to be examining, evaluating and potentially investing in through our insight-driven approach, depending, of course, on our determination that these experiences have the investment attributes we rely on. We are mindful, very mindful that at a time like this, it's more important than ever to identify as best we can the risks of oversupply, obsolescence and the other factors that can lead to real estate capital destruction. And through that identification process to determine what we will and will not invest in. It's an approach that has driven what we've done at VICI in the last few years, an approach that has led to investments made and investments avoided. And as you can see from our Q3 2025 results, it's an approach that is delivering growth where it most counts growth in AFFO per share. With that, I'll turn the call over to John. John? John W. Payne: Thanks, Ed. Good morning to everyone who's on the call. As Ed laid out, we face a market environment defies easy explanation. But at VICI, we have already faced multiple unprecedented events in our 8-year history. And through disciplined capital allocation, we have been able to strike the balance between investment, quality and growth. Subsequent to quarter end, we announced that we'll be adding our 14th tenant, Clairvest, in connection with MGM resource agreement to sell the operations of MGM Northfield Park. Upon closing of the transaction, VICI will enter into a new triple-net lease with an affiliate of Clairvest as well as an amendment to the master lease between VICI and MGM Resorts. The Northfield Park lease will have an initial annual base rent of $53 million or $54 million if the transaction closes on or after May 1, 2026. And rent under the MGM Master Lease will decrease by the same amount. Simply put, this transaction will not change the total amount of rent collected by VICI. Clairvest is a top performing private equity firm out of Toronto, and they are a recognized leader in the gaming sector. Clairvest is a sought-after partner with gaming experience across regional casinos, racetracks, suppliers, technology providers and online gaming globally, having made 17 investments in 37 gaming assets over the last 2 decades. VICI looks forward to further diversifying our tenant roster with a well-respected counterpart in the sector. Now casino gaming remains the top focus for VICI. We continue to believe in the durability of the sector despite recent noise around Las Vegas. John DeCree at CBRE put it well in his research note earlier this week. Las Vegas has experienced a confluence of idiosyncratic headwinds. The slowdown in visitation this summer influenced by decreased Canadian travel and reduced capacity from Spirit Airlines is definitely something to monitor. But Las Vegas has endured cycles before, and operators are expecting trends to improve through quarter 4 and into 2026. Headlines emphasize short-term trends, but at VICI, we take the long view. We are still big believers in Las Vegas as one of the world's best destinations with operators who are willing and able to adapt their business to meet consumer demand. With that said, some operators have experienced recent strength in Las Vegas. The Venetian, one of our tenants, for example, continues to perform remarkably well with record hotel revenues and gaming volumes this summer. Additionally, according to Venetian management, 2026 is on track to be a great year for the Venetians group business, convention cycles in and out of cities each year. But Las Vegas continues to draw solid group demand that supports the segment as other conferences rotate locations. For example, CONEXPO-CON/AGG, America's largest construction trade show that draws nearly 140,000 attendees takes place every 3 years is set to happen in Las Vegas in March of 2026. We believe the convention business in Las Vegas is an underappreciated mitigant to the cyclical nature of leisure-oriented business. In 2024, convention visitors spent $1,681 per trip. That is 33% higher than the average leisure visitor. And the strength of Las Vegas as a convention city has continued to gain momentum post-pandemic. VICI owns nearly 6 million square feet of convention of conference convention and trade show space on the Las Vegas Strip, and representatives from several blue-chip large cap companies like Amazon, Google, Microsoft, attend conferences in Las Vegas every year. VICI continues to believe in the strength and resiliency of Las Vegas. Over the last 8 years, VICI has been deliberate with its portfolio construction, and we believe we've made the company better each time we grew bigger. Our multidimensional investment evaluation bolsters the quality of our decisions as real estate owners, and we conduct rigorous analysis with each opportunity that comes across our desk. At any given time, we consistently have multiple ongoing dialogues with gaming and other experiential operators, and what we want to continue to do, which is what has earned its credibility thus far, is maintain a disciplined capital allocation strategy that facilitates quality growth. We do not aim to grow for growth sakes. We do not seek to compromise creditworthiness to reach for return. We instead engage in selective sustainable capital allocation that can provide long-term growth and withstand potential near-term macro shocks. We are long-term stewards of capital, and VICI aims to make decisions that support sustained and sustainable growth that delivers value to our shareholders. Now I will turn the call over to David, who will discuss our financial results and guidance. David? David Kieske: Thanks, John. Touching on our financial results, AFFO per share was $0.60 for the quarter, an increase of 5.3% compared to $0.57 for the quarter ended September 30, 2024. These results once again highlight our highly efficient triple net model given the increase in adjusted EBITDA as a proportion of the corresponding increase in revenue. Our margins run in the high 90% range when eliminating non-cash items. Our G&A was $16.3 million for the quarter and as a percentage of total revenues, was only 1.6%, which continues to be one of the lowest ratios in not only the triple net sector but across all REITs. On September 4, we declared a dividend of $0.45 per share, representing a 4% increase from the prior dividend amount and our eighth consecutive annual dividend increase since VICI's inception. We are very proud to deliver this consistent increase to our owners. Touching on liquidity and the balance sheet. During the quarter, we settled a total 12.1 million shares under our forward sale agreements and received approximately $376 million in net proceeds with a portion of these proceeds being used to repay $175 million of the outstanding balance on our credit facility. Our total debt is $17.1 billion, and our net debt to annualized third quarter adjusted EBITDA is approximately 5x at the low end of our target leverage range of 5x to 5.5x. We have a weighted average interest rate of 4.47% as adjusted to account for our hedge activity and a weighted average 6.2 years to maturity. Turning to guidance. We are updating our AFFO guidance for 2025 on a per share basis. AFFO for the year ending December 31, 2025, is now expected to be between $2.51 billion and $2.52 billion or between $2.36 and $2.37 per diluted common share. Compared to our prior AFFO per share guidance of $2.35 to $2.37 per share, the raise represents an increase of the lower end by $0.01. Based on the midpoint of our updated 2025 guidance, VICI now expects to deliver year-over-year AFFO per share growth of 4.6%. As a reminder, our guidance does not include the impact on operating results from any transactions that have not closed interest income from any loans that do not yet have final draw structures, possible future acquisitions or dispositions, capital markets activity, or other non-recurring transactions or items. With that, operator, please open the line for questions. Operator: [Operator Instructions] Our first question comes from Anthony Paolone from JPMorgan. Anthony Paolone: John, I think you mentioned you're at 14 tenants now. And so VICI's kind of unique compared to net lease peers, and that you got a pretty narrow set, and you talk to them all the time. So, can you talk about maybe like how often lease amendments come up? And if they do, how you approach those conversations? Edward Pitoniak: Yes. It's Ed. I'll start off and turn this over to John in just a moment. But where I want to start this morning is by reminding everyone of where we came from, and how we started. At VICI, we were born with challenges. And what we proved right out of the gate, and I believe, improved ever since is that when we face challenges, we get after them. We focus on making sure we understand the full dimensions of the challenge. And then we work as productively and expeditiously as possible to find the right solutions that deliver the right outcomes for us and our partners. And we've got obviously a track record of doing that through what we've done in selling assets that our partners wanted to get out of, and we wanted to get out of as well. We have obviously helped tenants get out of assets that they for strategic reasons, wanted to get out of Northfield Park being the most recent example. But I'll turn it over to John because he can further elaborate on the approach we take with our partners and the degree to which we are always focused on making sure that any challenges that exist for them or for us get dealt with, and we can all move on. John W. Payne: Yes, just a little bit to add to what Ed talked about. I mean, we are very fortunate or blessed to now have 14 tenants that allowed us to get into greater detail of strategic growth, or if there tends to be a problem in the business, we can discuss about how we can be beneficial, which is very different than many other REITs that you know Tony, that have 100 or 500 or 1,000 tenants that I'm not that smart to be able to help with 1,000 different tenants to understand how we can be beneficial to them. So, we are very fortunate to have a few, and we can get into greater detailed discussion with them about how to grow again or how to handle a certain situation. Anthony Paolone: I mean, if I could ask more directly on Caesars, given the comments from them around the regional assets, like how much you approach a situation like that? Or would you use a similar framework to what you've used in the past? Or just any context there? Edward Pitoniak: Yes. I think the framework we've used in the past, Tony, would be the same frameworks we would apply here. We would look across the portfolio on our own and with them determine where do they want to be, where they want to continue to be, where do we want to continue to be, what are the various levers that we can work on our side, on their side to make sure that we end up with an outcome that is a genuine win-win for both parties. We've obviously got time to deal with this, but we also don't want to let this continue to be a distraction. We've got a business to grow. They have a business to run. And we will work in the way we have worked in the past from our very beginnings to make sure that we find the solutions that work for everybody as quickly as we can. And again, I just want to reiterate our experience in our 8 years of getting after it when a situation needs to be dealt with. Operator: The next question comes from Greg McGinniss from Scotiabank. Greg McGinniss: John, I was hoping you could talk about some of the more non-gaming conversations you're having these days, and your feelings on potential likelihood of getting deals done. And I'm especially interested if you could touch on collegiate or university level athletic facilities. John W. Payne: Everyone is smiling around the room, because I spent quite a bit of time with experiential operators and have been spending quite a bit of time, as you mentioned, in university sports. I'll touch on that one because it's very interesting. What I would describe, university sports today is going through radical change. And I say that in -- when we talk to athletic directors or CFOs or chancellors, and they tend to nod their head saying, "Yes, John, it's good to know that we are going through radical change." But we've been talking a lot with them about sports infrastructure. There's a lot of different investment companies getting involved in professional and youth in collegiate sports. But VICI is a little bit different in our pitch to them about how we can accelerate their growth in infrastructure and building, whether it's arenas, stadiums, practice facilities, ice rinks, all of those things. So, it's been a really good educational process for the universities and for VICI as well about how our capital can work in that environment. On the other side, as I -- in my remarks, gaming is still top of the pyramid for us. We're spending a lot of time with our current tenants and new tenants. And then, there's other experiential operators in mixed use, in attractions, certain resort properties as well that our team has been out kicking the tires a little bit. But university sports is definitely a big opportunity. There isn't a university that we've met with that doesn't have projects that they need to get done, and they are figuring out in this new environment, how they're going to pay for it. Greg McGinniss: Great. And I think maybe just touching on the gaming side a bit. Is there any potential catalyst or some event that needs to occur to make some inroads into the downtown or local Vegas market? John W. Payne: Yes. This is a market we would love to be in, as you're seeing the results come out every year. I think, I saw a stat the other day that the Nevada locals market or the Las Vegas locals market is now the second biggest market in the United States, which is a market that we sure would like to be in. And we love the regulations and the support from the State of Nevada and making investments in the bricks and mortars. So, this is an area that we continue to look at. There are obviously some great operators in that space, Red Rock Resorts, Golden, there are some individual owners that own real estate there that we would love to be partners with over time. Operator: The next question comes from Barry Jonas from Truist Securities. Barry Jonas: A competitor just noted their expectations for more broadly marketed competitive bidding type gaming M&A processes. Is that your expectation as well? And if yes, do you see VICI participating? David Kieske: Barry, good to talk to you. Well, we see a lot in gaming. And if there's things out in the market, I think there's a good chance that we're also getting a look. And to answer your question, do we expect to participate? Look, it depends on a lot of factors. Gaming M&A is complicated. And even though it's a single asset, it's kind of simply M&A given there's three parties, there's a seller, there's a propco and opco buyer and they're complex long-term leases that take a lot of diligence and a lot of work to get things done. So, we would hope to continue to be active and continue to grow. John just talked about, there's always things we're looking at and pursuing. Edward Pitoniak: And Barry, this is Ed. I'll just add that a week like this for gaming operators, there are the occasional public gaming operators who go, how much more of this do I want to put up with. And so, I think there are a number of factors in play that could, could. I want to emphasize could not necessarily lead to heightened activity. Barry Jonas: Got it. Got it. And then, just for a follow-up. Coverage on Northfield Park in the Clairvest transaction looked pretty good. Can you talk maybe how that compared to what 4-wall was in the MGM lease? I guess, what I'm trying to get at is how do you think about the difference in value for a new lease with a smaller tenant versus the pre transaction with a much larger lease and tenant? Edward Pitoniak: Yes. It's a very good question, Barry. And I would generally say that for a single asset, with a single tenant, yes, I think to your implicit point, you generally are going to look for higher coverage than you might have had within a master lease with a much bigger tenant. I think that's pretty much the simple logic of it. Operator: The next question comes from Smedes Rose from Citi. Bennett Rose: I guess just on that with Clairvest and as you mentioned, they have a history of some gaming assets in the U.S. and in Canada. Do you -- would you expect to do more deals with them? Do you think that they're actively looking to expand their footprint in the U.S., or is this more of a one-off opportunity for them? John W. Payne: I hope so. I mean, we really enjoyed getting to know them in this process. They're very creative. They've hired a lot of very seasoned operators to work with them in the properties that they've owned not only now, but in the past. So, we're excited to have them as one of our tenants, and we hope to continue to grow that portfolio with them over the coming years for sure. Bennett Rose: Okay. And then, I wanted to ask you on the loan book, is there any other -- are there any of the borrowers having any short-term difficulties that you can speak to? Or is everyone current on the payments just given some of the softness we're seeing in a broader economy, particularly across, yes, certain kinds of venues? Gabriel Wasserman: Yes. It's Gabe here. I can answer that. Yes, everyone is current on all their obligations under their loans, and we continue to have active asset management and monitor all of our investments. And work with our partners to understand that they're meeting their milestones and their business plans. Operator: The next question comes from Haendel St. Juste from Mizuho. Haendel St. Juste: My question, I guess, it's on the MGM decision to withdraw from the New York City license bidding process. It seemed to surprise a lot of people, including us. Was it a surprise to you? And what do you see as the implications for your Yonkers asset? And then, I guess as part of that, given their decision to withdraw MGM, does that free you up to perhaps partner with some of the other bids? Edward Pitoniak: Yes, Haendel, good to talk to you. Well, certainly, it didn't take us by surprise, because we've obviously been in conversations with them for a while. And what MGM did was look at the situation, the ever-evolving situation in the New York landscape, and make what we agree is a very sound capital allocation decision or capital non-allocation decision based on, again, the changing circumstances. I think, one of the key factors, Haendel, that really became clear in the last few months is that without a Manhattan-based Casino, it was not clear that the remaining bidders would be able to create a casino experience that would become a truly national and international destination. And thus, if it was going to mainly be a competitive marketplace of three regional gaming assets, competing geographically very close to each other for the same regional marketplace. It wasn't necessarily clear that the resulting economics of that very competitive marketplace would support the kind of capital required to enter the market with the tax regimes that are likely to be in place. And so again, I think MGM took care and took a lot of thought and obviously consulted very closely with us in making that decision. In terms of the aftermath of decision and what it means for us within this marketplace, yes, we have been in dialogue with various contestants in this process over the last couple of years and certainly could be of service to them with capital if we believe that their opportunity was an opportunity that had very good capital fundamentals that it had a legitimate shot to become what it would have to become, which is the most profitable regional casino in America. And I just want to emphasize that point end, Haendel. The way this is evolving, whatever does get built in New York is going to have to be meaningfully, measurably more profitable than any other regional casino in America, and that includes the finest regional casinos in America, whether we're talking about MGM National Harbor, Encore Boston MGM Detroit or the others, each of which I should emphasize tends to have market dominance and at a lack of competitive supply that will not necessarily exist here in New York. Haendel St. Juste: Appreciate those comments. And if I could ask a follow-up or a question on the -- I guess, there was announcement earlier this week, Cordish is developing a new project down to Virginia, about an hour south of your D.C. National project. I guess, I'm curious on the competitive dynamics there? I think Richmond is about an hour away with mild traffic. So curious if you think the location, maybe the demographics relative to what your asset offers -- offer you some maybe some insulation. John W. Payne: Yes, it's a good question. The distance may seem like an hour, but if you've been in D.C., welcome to a little bit more traffic. And again, it's a pretty undersupplied market there. And they probably will target very different consumers. We'll have to see how the new asset that's built by Cordish. I'm sure it will be a wonderful asset as they do a good job in building their assets. But National Harbor is, as Ed just mentioned, if you're going to mention the best or one of the best regional casinos in the United States, MGM has done a fabulous job there. It continues to do a fabulous job. The numbers continue to be quite successful, and we think they're going to continue to grow there. So, we'll have to watch how that happens. But I do think they're probably a little bit -- the customer base is going to be a little bit different. Operator: The next question comes from David Katz of Jefferies. David Katz: I appreciate all the candor, as usual. I wanted to just go back on the sports facilities commentary, John. Not have you negotiate something in this kind of forum. But just out of curiosity, are there any historical cap rate or any kinds of comps or anything like that? Just out of curiosity, how we would think about the opportunity if someone -- if people like us wanted to sit down and try and develop the TAM and think about what it all means for you? Edward Pitoniak: Yes. I'll start out, David. And I would say that, if you're going to look for a historical precedent for the possible infusion of private capital into real estate, on university land, the corollary would be the development of on-campus student housing by private capital, which has certainly taken place in the past and the American Campus Communities is obviously an example of private capital, a REIT in fact, at the time that they did exactly that. And obviously, we had to make sure they were creating a positive spread between their weighted average cost of capital at the time and whatever cap rate they went on to campus with. And so, I do think that this landscape of sport infrastructure and college campuses is obviously rapidly evolving in an overall marketplace that is wildly volatile and everybody is trying to get smart as fast as they can. But I think what John and the team are finding, and John, you can elaborate on this, is that the idea of conventional private equity coming on to campus with a 5- to 7-year investment horizon, just doesn't -- John, I mean, it's not that appealing. John W. Payne: Yes, David, good to hear from you. I know you've asked about this sector before. And it is important to understand that this is what I think our company feels great about is finding a space that we think there's a lot of opportunity to deploy capital and we've been spending time getting educated on the space, who are the decision-makers are, what is the magnitude of opportunity where at the same time, hearing from the universities about how they could take our type of capital. And that -- what we're talking about today is we're right in the middle of those processes. And obviously, state schools run schools are different than private schools, right? And so, we are continuing to refine the way we think about the opportunity. We continue to talk about pricing. And as Ed said, there's other forms of outside capital that are also spending time with the universities. And so, it's -- like I opened up by saying there's a lot of change going on in collegiate sports right now, and it's just an opportunity we are spending some time because we think there is a magnitude of capital to be deployed. Operator: The next question comes from Rich Hightower at Barclays. Richard Hightower: As always, I appreciate the candor on various topics. But Ed, maybe just to ask you a metaphysical question to use this word from earlier in the comments. Obviously, we don't want to focus on short-term movements in the stock price or cost of capital. But in your conversations with investors, what do you think are the major overhangs at this point? And does most of it revolve around some of the Caesars stuff you mentioned before? Is it other things? Edward Pitoniak: Yes. I mean, I think it's a combination, Rich. I think there's the idiosyncratic factor of that noise, combined, obviously, with what's been a fairly tough period for the RMZ over the course of the year. And I think you put out a good note last night pointing out that, yes, in recent weeks, we have declined more than the RMZ. But more, I don't know if you want to jump in here about the degree to which we may also somewhat idiosyncratically be seeing a dynamic of first half winners. Well, you can explain better than I can. Moira McCloskey: Yes. No, thanks, Rich. So, as I was saying, we do think it's a confluence of factors between, yes, this Caesars focus, but also at the same time, when there's been a positioning rotation out of some winners, out of some long positions as the market has rotated into the end of the year. So, the timing has been unfortunate, but we do think it's a combination of factors, not just the one particular overhang. Operator: The next question comes from Chris Darling at Green Street. Chris Darling: So with Six Flags in the news recently, I thought that presents a good opportunity to ask about your broad level of interest in theme park real estate ownership. The pros and cons that might come with those types of assets. And related to that, I'm curious if you've explored the theme park landscape internationally as well as domestically in the U.S. Edward Pitoniak: Yes. John, you want to take that? John W. Payne: Yes, Chris, good to hear from you. To be blunt, yes, it's an area of attractions in the United States are, an area that we have spent a lot of time with. We've not done a transaction, but we have spent quite a bit studying the landscape there, the opportunities there, the accounting treatment there and obviously have followed what is going on in the news with Six Flags. And I think that's the way I can put it. Edward Pitoniak: Yes. And I'm going to ask Gabe to chime in here in a moment. Chris, but one of the things we always do when we look at any particular experiential category, is work to determine the degree to which there's a meaningful amount of real property within the business that is readable. And Gabe, you can opine if you wish, on theme parks and other categories we looked at, ski resorts and other things. Gabriel Wasserman: Yes. So, in regards to that, Chris, obviously, there's a lot of real property at these theme parks and a lot of personal property, including the roller coasters and some of the attractions, and we would just make sure any potential investments that we're owning real property and put it in a REIT-friendly structure, but we're confident we could work with our partners to make it work. Chris Darling: Okay. I appreciate those thoughts. And then just maybe a point of clarification on the Northfield lease with Clairvest and maybe a little nuanced here. But as it relates to allocating rents between the new stand-alone lease and then the remaining master lease with MGM, the resulting coverage ratios that you talked about, I guess, I'm interested to understand what are your contractual rights in that regard versus this perhaps being more so just a good faith discussion between all the parties involved. Edward Pitoniak: Yes. I don't know if -- I mean, there are obviously contractual considerations and I'm looking at Samantha to bail me out in case we need to explain any of those. But I think the most fundamental starting point, Chris, is obviously, the economic throw weight of the assay. What rent could it support at a coverage level we're all comfortable with? That's the starting point. What is the EBITDA before rent of the asset? And what thus would be a level of rent coverage both we and they would be comfortable with. Samantha Gallagher: Yes. And just from a contractual perspective, in any event, however we come to the determination of what rent might come out, we're always protected that we would never find ourselves in an economically disadvantaged position. So, we're always going to have the same amount of rent. When that transaction is completed between the, what we call, severance leases, the new lease with the stand-alone tenant and then our MGM Master Lease and that's contractually provided. Operator: The next question comes from Chad Beynon from Macquarie. Chad Beynon: And, Ed, thanks for the comment on Viktor's piece. His reports are absolutely a must read in. He's another person that probably reads multiples of most of us on the call here. So, maybe just wanted to start with the call right on the Caesars Forum Convention Center. We've kind of eclipse that time period where that begins. It seems like all the commentary from Vegas operators is that conventions, the group pace, the outlook, you talked about some of the citywides is extremely positive. It's obviously some of the leisure concerns that have hurt some of the near-term results. So, with that opportunity, for that call right, how are you guys thinking about timing on that versus other deals? John W. Payne: It's a very good question, and I like your comments about Las Vegas. Because I think you said near-term concerns about leisure customers. And in my opening remarks, I do think we're -- the world is so short term ADD focused that there's times that we don't think step back and think about what a great destination Las Vegas is and will continue to be. We obviously have a variety of things that we evaluate. You are correct that the opportunity to buy the Caesars Forum Convention Center is live right now. And we're fitting it into all the other things that we look at when is the right time. Is there the right time? And Las Vegas, as I said in my opening remarks, we are big believers in, and we'll continue to make investments over time. So... Edward Pitoniak: Yes. I just want to jump in and emphasize, Chad, along the same line. The degree to which Vegas is competitive dominance across the American convention trade show and conference space has only increased in the last 5 to 10 years. If you look across the competitive landscape of the big American convention centers in the gateway cities, it's actually kind of a sad story. First of all, most of the full-service urban hotel product has seen tremendous underinvestment. And a lot of the convention facilities themselves are in need of substantial capital and/or infrastructure. It would have been, for example, here in New York, it would've been a very positive thing for the Javits Center, if the related wind project has gone ahead and created hotel inventory adjacent to Javits. But as we all know, that project didn't happen. And as a result, Javits is still this conference center, the convention center near pretty much nothing in terms of hospitality infrastructure. And that's just one example among many across the U.S. where Vegas, again, just shines because of the amount of capital put into both the conference convention and trade show facilities, $100 million in the Mandalay Bay. Again, I can't remember exactly how much Venetians put in to the Expo Center. But at any rate, this competitive dominance is only going to grow in the years ahead. Chad Beynon: That's great. And then... Edward Pitoniak: Samantha is looking at me with anger, because I used the word, ain't in that way. Go ahead, Chad. Chad Beynon: And then moving over to the tribal lending landscape. I know we talked about before the North Fork loan is very different than a traditional loan to a tribe. But how has that evolved? And how is your comfort level working with other drives evolved here? David Kieske: Yes, Chad, it's David. Good to hear from you. Just to clarify that North Fork is, it's a loan to a tribe. It's a typical lending structure into a tribe. That's unique about it. There's no security in the real estate, and that goes with anything around tribal gaming. So, we have a lot of relationships with tribes on commercial land. We obviously have a great relationship with Red Rock and the development of what will be a phenomenal asset at Madera, California opening in, kind of, Q3 2026. We do have dialogue with other tribes. I mean, anything we would do around tribal has to be with a great team, a great asset, but ultimately, it will be a credit investment, right? There's not a way to own gaming real estate that sits on tribal land and actually have security in that asset. And so, we have a very active credit book led by Gabe whose -- you've heard from on this call, and we will continue to look for ways to deploy smart capital with good tribes in the future as the opportunities arise. Operator: The next question comes from John DeCree at CBRE. Unknown Analyst: It's Colin on for John. Maybe going back to Northfield transaction, I think a lot of us has been relatively excited to see some recent pick-up in M&A. So, curious maybe how those negotiations went considering this became into a single lease, an OpCo asset trading hands, do you guys expect or think we could start seeing some more OpCo trade hands going forward? John W. Payne: Well, your opening question was how did the negotiations go. And we're -- again, in my opening remarks, we're excited to have Clairvest as one of our tenants, and we surely hope that we continue to grow with them. They operate assets, that we own. If you're asking, has there been a pickup in opportunities that we're seeing, for us because we're looking at so many sectors across the gaming and experiential landscapes, there are a lot of different deals that we're looking at. Do I think there'll be more deals in gaming? I hope so. And I think we'll be there and talking to operators and talking to potential sellers. Colin, I am disappointed that John's not on. I gave him some love with a quote with the opening. So, it's disappointing to hear that love. So you'll have to pass that along. Unknown Analyst: He's going to be very disappointed. I didn't hear that, but definitely... John W. Payne: You're not going to get a repeat next quarter. So he's one and done. Edward Pitoniak: Yes. If you're going to be here, turn next time, Colin. Unknown Analyst: And I guess, maybe the other question, I wanted to double click on is, how comfortable are you guys sort of letting leverage maybe creep below, sort of, the low end of the range that you guys have 5x to 5.5x. I think you have you guys about 5x right now. And obviously, leverage you guys had taken a pretty low going into the MGP acquisition, saving a lot of dry powder for what was quite a material transaction. So, I'm just kind of curious how you're seeing leverage trend from here. Obviously, you have the escalators. But how are you thinking about it potentially creeping below your low end? Edward Pitoniak: I would say, as a Spanish like to say with tranquility, if it goes lower, that is just fine. If it goes a little higher, it's just fine. But as you remember, Colin, from that dinner we had together in Boston, as important for us as leverage is laddering. And what we like about the 5x debt-to-EBITDA benchmark is that, it means by definition, you have $1 of debt for every $0.20 of EBITDA. And I'm not going to go through the whole English, major math thing I did at that dinner. But as you and your clients gathered, we like the way in which -- laddering in which roughly no more than 10% of debt comes due in any given year, matches up with 5x debt-to-EBITDA, such as the metrics are such that in the worst case scenario where the credit market window is closed, you could, if necessary, pay off expiring debt with available cash flow after debt service. So, in and around 5x, plus or minus 1/10 here, 1/10 there, again, we don't tend to get highly precise about that. It's more about building a ladder for the future. And with that, making the best use of the amount of retained cash flow we generate, which as we've spoken about in the past, is now in the $600 million range and gives us firepower that enables the kind of year we're having this year, where we're growing, once again, AFFO per share in this quarter by 5.3% while growing our share count by barely more than 1%. Unknown Analyst: Great. And yes, Ed, I still think that was one of the best articulated explanations of formulation of a leverage target that you gave when we had that dinner. So, I appreciate it. Operator: The next question comes from Daniel Guglielmo from Capital One. Daniel Guglielmo: You all own a lot of properties on the Las Vegas Strip, but not all of them. Based on your experience, what kind of macro or Las Vegas demand environment do properties typically come to market there? And if the opportunity rose, would you expand your ownership on the Strip? John W. Payne: I'll answer the last part of the question. I think for the right property and right operator, absolutely, we would continue to expand our presence not only on the Las Vegas Strip and not only in the locals market that I talked about, but I think all over Nevada. We're big fans of that as well. But as it pertains to when do they come to market, that's very hard to predict. And it depends on the company and how they're thinking about use of proceeds from the monetization of their real estate. But what I would tell you, to Ed's comments, we will be prepared should there -- should there be an opportunity of an asset in Las Vegas on the Strip that comes to market. But I can't tell you when they're going to come. Daniel Guglielmo: Yes. I appreciate that. And then just a follow-up. In the opening remarks, the 3Q earnings growth was mentioned. I think part of that is the competitive annual rent escalators that you all have. On the flip side, tenants do bear increased rent line. So, can you just talk about some of the risks that you all think through on the tenant side in with those kind of rent lines increased for them? Edward Pitoniak: Yes. First of all, Daniel, Q3 2025 wouldn't within itself have had any rent escalations quarter-over-quarter sequentially. And when we think about escalation, what we think about is, again, the supportability of the rent. And so yes, we do not want rent escalation that goes beyond what the tenant can afford to pay over the long term. And so again, I think we're in an environment right now where things are -- have more or less reached the equilibrium, in terms of rates of inflation, rent escalation and revenue and profit growth. But obviously, we monitor it closely. And again, it doesn't benefit landlords when rent gets beyond what the tenant can pay. Operator: The next question comes from Jim Kammert from Evercore ISI. James Kammert: Team, if I were thinking about your competitive advantage, let's say, as an example on the university sports, what elements really would differentiate VICI structuring wise or other attributes? Because if I'm being snarky, I would say it's really just the cost of capital, right? I mean university is going to want to take the best deal for them. So, how would VICI differentiate itself from other potential providers of the capital? Gabriel Wasserman: Yes. Jim, it's Gabe Wasserman, I can take that one. So, I don't think we're just competing along cost of capital. It's not the only dimension. It's also on structure. So, as a permanent capital vehicle that wants to own our real estate forever. I think our investment time horizon is very well aligned with our potential university and collegiate partners. And as we compare and contrast our capital and opportunity with private equity folks, we just think that our long-term permanent horizon is just a really good match for potential universities and colleges, and that's really resonated well in the conversations that we've been having. Edward Pitoniak: Yes. I would just add too, Jim, that while, obviously, universities, both public and private can often tap the tax-free bond market. Most universities, we're finding out run in the way that Harvard famously speaks of, which is every tub on its own bottom. And athletic departments in particular, and John and Gabe, elaborate this, athletic departments, especially at this point, are being told you need to be self-funding and self-sustaining. And no, you're not necessarily going to get to use up whatever envelope we have in the tax-free bond market. Do you want to add to that, John? John W. Payne: No, it's a very good point. James Kammert: That's great. And then just one quick related question. With most of those opportunities, I know it's very premature, but would they be leasehold interest because you presume the university continue to own the underlying land, or is that not necessarily? Edward Pitoniak: Yes. I think it depends on the university. We're open to both structurally and can make both of them work. John W. Payne: Jim, it's a very good question, and you open by saying, I know, it's premature as we've talked about the university space, and I've been very open that when you're the first kind of week into this space, educating athletic directors and CFOs and chancellors and presidents on our type of capital, the structure then, as Gabe mentioned, is a big factor in the discussions. Can we own the real estate? Can't we own the real estate? What is the duration of the lease? How much capital of a project can you put in versus a donor? Does your name go on it, does it or don't? I mean, there is a wide variety of things that we are feeling out. And as Sam mentioned, every university, it's different. And state universities are different than private, and that's why we're taking the time in meeting and really crafting how our capital can work. Obviously, we have not gotten over the finish line with the university sports deal yet. But you can hear that we've been spending some time because we think there is a big opportunity in sports infrastructure and the amount of capital that needs to be put to work. Operator: Our final question today will come from Alec Feygin from Baird. Alec Feygin: Kind of wanting to synthesize what we've talked about all the call from the MGM capital allocation decision or the Caesar convention and also how you think about the balance sheet. With VICI taking the long view about capital deployment, kind of what's the philosophy about how VICI weighs deploying money in uncertain times for good opportunities versus waiting and preserving the balance sheet for a potential great opportunity that may or may not come? Edward Pitoniak: Yes. No, it is a wonderful question, and I wish we had more time to do it full justice. Because it is something that our investment committee is always, always deliberating. And I would tell you, Alec, there's no perfect answers, but I would say that because we invest what we believe to be perpetual capital. We really want to have confidence that 10, 15 and 20 years from now, we or our successors are going to be glad we've made this investment that we invest in the right geography, the right category, the right marketplace, and most importantly, the most -- the best operating partner we could find for that opportunity so that we can always be comfortable, the credit is secure. Operator: We will now hand the call back to Ed for any closing comments. Edward Pitoniak: Thank you, Adam, and I'll just thank everybody for their time today and look forward to continuing the conversation in the weeks and months to come and see you again in February. Operator: This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.
Operator: Hello, and thank you for standing by. Welcome to MasTec's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Chris Mecray. You may begin. Chris Mecray: Good morning, and thank you for joining us for MasTec's Third Quarter 2025 Financial Results Conference Call. Joining me today are Jose Mas, Chief Executive Officer; and Paul Dimarco, Chief Financial Officer. We have prepared slides to supplement our remarks, which are posted on MasTec's website under the Investors tab and through the webcast link. There's also a companion document with information and analytics on the quarter and a guidance summary to assist in financial modeling. Please read the forward-looking statement disclaimer contained in the slides accompanying this call. During this call, we'll make forward-looking statements regarding our plans and expectations about the future as of the date of this call. Because these statements are based on current assumptions and factors that involve risks and uncertainties, our actual performance and results may differ materially from our forward-looking statements. Our Form 10-K, as updated by current and periodic reports, includes a detailed discussion of risks and uncertainties that may cause such differences. In today's remarks, we'll be discussing adjusted financial metrics reconciled in yesterday's press release and supporting schedules. We may also use certain non-GAAP financial measures in this conference call. A reconciliation of any non-GAAP financial measures not reconciled in these comments to the most comparable GAAP financial measures can be found in our earnings press release, slides or companion documents. I'll now turn the call over to Jose. Jose Mas: Thanks, Chris. Good morning, and welcome to MasTec's 2025 Third Quarter Call. First, some third quarter highlights. Revenue for the quarter was just shy of $4 billion, a 22% year-over-year increase. Adjusted EBITDA was $374 million, a 20% year-over-year increase, and this growth performance was the highest level since the first quarter of 2024. Adjusted earnings per share was $2.48, ahead of consensus by nearly $0.20. And despite a revenue record quarter, backlog at quarter end was $16.8 billion, a roughly $325 million sequential increase with every segment delivering backlog growth. In summary, we exceeded guidance across each of our revenue, EBITDA and EPS metrics, representing a strong period of execution for MasTec. This strong result is, in part, a testament to the scale and diversification we have achieved for MasTec over time, and we are excited about our outlook for the balance of the year and beyond, given clearly positive market conditions across all end markets we serve. I'd like to point out some further highlights about our quarter. Our Communications segment grew revenues 33% year-over-year. And EBITDA increased 38%, all organic. And EBITDA margins for the segment improved 40 basis points compared to last year's third quarter. Our Clean Energy and Infrastructure segment grew revenue by 20% year-over-year, and EBITDA improved 36%, virtually all organic. EBITDA margins for the segment improved 100 basis points compared to last year. Our Power Delivery segment grew revenue 17% year-over-year, and EBITDA increased 21%, all organic. EBITDA margins for the segment improved 30 basis points compared to last year despite a difficult year-over-year storm emergency response comparison that tends to be very profitable. These 3 segments make up our non-pipeline segments, which grew revenues by 22% for the third quarter compared to last year, EBITDA by 31% and achieved a 60 basis point improvement in EBITDA margins, again, virtually all organic. We highlight this because of the significant investments we've made to diversify our business and position us to participate and benefit from the changing landscape of both power generation and delivery. Our solid execution across these segments, coupled with the expectations of significantly improved pipeline market as natural gas plays a much larger role in future energy generation, position MasTec for continued growth and strong financial performance. MasTec's total backlog remained very healthy in the third quarter, reaching another record level despite significantly increased volumes burn experienced during the period. Third quarter backlog increased 21% year-over-year and was up slightly sequentially with a book-to-bill ratio of 1.1x. While the sequential backlog included a solid 8% increase from our Pipeline segment, our visibility in that segment is considerably better than backlog suggests. We continue to expect further backlog growth in the current quarter and to end the year at another record level. Turning to some segment highlights. In our Communications segment, the telecom infrastructure market remains dynamic. Our customers are making significant and growing capital investments to support broadband delivery across the country to replace older cable delivery systems, and more recently, to enable enhanced artificial intelligence applications. Third quarter revenue easily exceeded our planned contribution from nearly all of our top 10 customers, with higher capital spend seen in multiple regions across wireless and wireline construction, resulting in an impressive 33% growth rate versus prior year in the quarter. As expected, margins reached double digits and increased 140 basis points sequentially as well as 40 basis points versus the prior year. Still, the 11.3% EBITDA margin leaves room for improvement as investment requirements for growth moderate. We believe we continue to have significant margin opportunities looking forward. MasTec's wireless business continues to see solid growth from both geographic expansion and providing new and broader services to existing customers. On the wireline side, demand strength continues to be supported by substantial broadband infrastructure build-out by legacy telecom players, cable operators, as well as newer entrant fiber overbuilders. This race to connect consumers to broadband fiber continues, and we are well positioned to execute deployment nationally. Further, middle-mile broadband build-outs have emerged as an additional growth driver for years to come, and hyperscaler CapEx associated with the data center build-out is contributing to this additional growth for fiber deployment. Our contract with Lumen, which has begun to ramp up in recent months, is anticipated to drive solid and visible growth for our business in 2026. Turning to Power Delivery. While third quarter financials were solid, profit and margin year-over-year comparisons were impacted in the period by a lack of storm-related restoration services against a more normal comparison in the prior year as well as lower than planned volume from our Greenlink project due to permitting related delays as has been reported in the press in recent weeks. We have factored both changes into our full year outlook as well. Despite these challenges, we expect our Power Delivery segment to achieve double-digit growth in both revenues and EBITDA for full year 2025. Further, our bullish stance on overall grid investment demand remains undiminished, and feedback around load growth and capital spend projections by our power delivery customer remains very positive. Implied requirements for grid investments in the coming years are substantial. We see ongoing growth of anticipated power demand set against an aging infrastructure that does not meet either the capacity or the physical location of the sources of incremental supply and demand. We continue to expect large CapEx commitments across transmission, substation, distribution as well as new generation capacity. Third quarter backlog for Power Delivery increased 11% versus the prior year quarter and increased slightly from second quarter despite an increased burn rate. Post quarter end, I'm pleased to announce that our transmission and substation group within our Power Delivery segment was awarded its second largest project ever, trailing only Greenlink project in size. We expect the project to start in mid-2026 and to be added to backlog by year-end. We will discuss this project in more detail on our year-end call. Turning to our Clean Energy and Infrastructure segment. While adjusted EBITDA increased 36% year-over-year, I'd also like to highlight that we have more than doubled our EBITDA from the segment versus the first quarter, demonstrating the considerable progress we've made during 2025. Renewables demand remained very healthy in the period, and we were pleased with execution for the business, which saw significant growth both year-over-year and sequentially, while meeting our margin target of high single-digit, consistent with the prior quarter and improved from the prior year as we continue to benefit from enhanced focus on execution and working closely with our trusted partners. Our Industrial and Infrastructure business continue to show collective growth with execution on key projects showing results and reflected in strong margin outcomes. We are excited about future growth here from both ongoing transportation and other infrastructure opportunities and from substantial growth potential related to data center build-outs, including both civil work as well as behind-the-meter power infrastructure. Overall, backlog for Clean Energy and Infrastructure of $5 billion increased 21% from the prior year and 2% sequentially with a book-to-bill of 1.1x. This included a 9 straight sequential increase in renewables backlog. It's important to note that reported backlog is only estimated 18-month backlog. A number of our recent wins have been for projects with late 2026 starts, where only a portion of the estimated revenue is included in backlog. While our renewable growth will be driven mostly by solar, we've been very successful in securing wind projects for 2026 and beyond. We believe we are well positioned at current backlog levels for strong continued growth in this segment. Turning to our Pipeline Infrastructure segment. We saw revenues increase 20% year-over-year as we returned to growth after lapping the challenging comparisons of the wind down of the MVP project. The third quarter represented the best margin performance for the year for our Pipeline segment. While still down from the previous year, we expect continued margin improvements and expect our fourth quarter to be the highest margin quarter of the year in this segment, setting us up very well as we enter 2026. This margin improvement, coupled with expected revenue growth, creates significant opportunities for earnings growth in 2026 and beyond. Total Pipeline backlog increased 8% sequentially to $1.6 billion and more than doubled from the same period a year ago. We added more than $600 million of new bookings in the period and saw a book-to-bill ratio of 1.2x despite the higher level of burn. Third quarter backlog saw the inclusion of our activity on the Hugh Brinson project, which actually started in the third quarter. We don't normally call out specific projects on our calls, but this project is a good example of how pipeline work is being awarded today. While rumors of our involvement in this project started in the first quarter, we received final signed contract documents just this quarter and physically started work shortly thereafter. I say all this to highlight that while backlog is an important metric in this segment, our visibility into future work is far greater than just backlog. There are a number of projects that we will build starting in 2026 where final contract documents may not be completed and thus not reported in our backlog until close to project kickoff as all variables get included in final contractual documents. We remain optimistic and confident in both the short- and long-term growth outlook for our Pipeline segment. Gas-fired generation will be a critical source of incremental baseload power generation for decades to come. And our customers are getting ahead of the process to supply this important demand source while also meeting the needs of near-term LNG export demand growth and continued demand at the consumer level to replace fuel oil and other sources. In summary, we are pleased with our third quarter results and maintain strong confidence in expected growth based on drivers and powerful demand drivers across each of our businesses. In addition, we are continuously looking for ways to optimize our operating model to generate the best possible margin outcome, and we see multiple levers to achieve better margins as we look ahead. We remain very excited about the opportunity for MasTec and our investors over the coming years. As always, our enthusiasm for the outlook is grounded in execution and in the hard work of every person on the MasTec team. I'd like to thank all of our people for their continued commitment to our corporate values of safety, environmental stewardship, integrity and honesty, all while serving our customers diligently and ensuring the delivery of a great work product. Thank you, all. I will now turn the call over to Paul for our financial review. Paul? Paul Dimarco: Thank you, Jose, and good morning. As Jose mentioned, we are pleased with our strong third quarter results, driven by continued sequential volume improvement and solid execution across our operating segments. Looking ahead, our customers continue to highlight a growing need for MasTec's broad service offerings to meet their infrastructure development goals, giving us high confidence in the growth trajectory of our business across all 4 operating segments. Infrastructure investment needs across communications, energy and power sectors as well as civil and commercial infrastructure remain in the strongest position we can recall and reinforces our positive outlook for years to come. Now looking at our third quarter segment performance. Our Communications segment continues to produce substantial and robust growth with revenue of $915 million, topping our forecast notably in the third quarter, generating 33% year-over-year growth. The business remains well positioned to leverage strong demand for both our wireless and wireline service offerings, including an increasingly diverse customer set seeking to deliver broadband telecom infrastructure to both residential and commercial end users. Third quarter EBITDA margin was 11.3%, an increase of 40 basis points versus 10.9% in the prior year and a notable 140 basis point increase from the second quarter. We've reduced our full year margin guidance slightly to reflect the investments made to support our strong organic growth rates. The overall telecommunications end market and our visibility remains strong with third quarter backlog totaling $5.1 billion, a small increase sequentially despite the record quarterly revenue in the period. MasTec's Power Delivery segment also continues to post significant growth with a 70% increase in third quarter following a similar year-on-year growth rate in Q2. We continue to see strong growth opportunities across the country through our diverse service offerings that enable our customers to invest in upgrades and new capacity across the U.S. power grid. Our updated guidance does reflect a lower level of activity than previously expected on Greenlink in the fourth quarter as our customer works through isolated delays due to permitting. We are actively constructing other components of the project, and we expect that to continue. EBITDA margin of 9.4% for the third quarter increased 30 basis points from the prior year and 70 basis points sequentially, but fell below our low double-digit forecast for the period. While an encouraging result in most respects, the outcome was impacted by project mix versus our forecast. We continue to expect improvement in the margin performance of our base business over time through continued strong execution, operating leverage and project mix. In our Clean Energy and Infrastructure segment, total revenue for Q3 of $1.4 billion represented a strong 20% increase from the prior year and a similar 21% increase sequentially as our renewables business ramp continued as planned. Overall, segment revenue was about in line with our third quarter target with renewables meeting forecast while growing almost 50% year-over-year on record demand for new renewable power installations. Third quarter CE&I EBITDA increased 36% year-over-year, significantly outpacing the revenue increase as margins in this segment increased 100 basis points to 8.5% as well as 110 basis points sequentially. Renewables margin was stable sequentially as expected at solid single-digit levels -- high single-digit levels, while we captured anticipated operating leverage across Industrial and Infrastructure from higher volume and strong operating execution. CE&I backlog, which totaled just over $5 billion, benefited from solid new bookings across all business verticals, contributing to 21% increase from the prior year third quarter and a 2% sequential increase. We have substantial renewables backlog in place now to support a strong 2026 outlook, which we expect to show solid growth versus 2025. Our Industrial and Infrastructure business are also well positioned to continue to win work in the balance of the year to support a higher backlog at year-end and ongoing volume growth into 2026. Turning to Pipeline Infrastructure. Third quarter revenue of $598 million was an impressive growth rate of 20% from prior year and an 11% increase sequentially as the business ramps from volume lows seen in the first quarter. The pickup is inclusive of a broad-based increase in gas pipeline work nationally, though the beat versus plan of over $20 million was led by New York ramping -- new work ramping in the Southern regions. EBITDA for the quarter of $92 million with a 15.4% margin met guidance of mid-teens for the segment. The comparison to the prior year on a margin basis remains challenged by the current ramp of new work versus the prior year outcome, positively impacted by project closeouts. Pipeline backlog of approximately $1.6 billion increased 8% sequentially and 124% from the prior year, with new awards totaling over $600 million in the quarter, offset in part by increased burn rates. We again saw diverse project awards, including the large job Jose I mentioned as well as a number of smaller midstream project wins in the period. As Jose noted, we're pleased with the overall strong demand set and opportunity pipeline and other -- sorry, in Pipeline and have received significant verbal awards that we expect to convert to backlog in the coming periods as we get closer to construction start dates, usually within 30 days of mobilization. As a result, the impact of new awards to our Pipeline backlog may be less pronounced than in other segments. Our excitement for this oncoming investment cycle continues to accelerate, and we foresee solid growth in our Pipeline segment for 2026 and beyond. Regarding our overall progress on margin expansion, we are pleased with the consolidated result of 9.4% in the third quarter, which was a really strong 160 basis point improvement from 7.8% in the second quarter and a fairly dramatic lift from the starting point of 5.7% in Q1. The margin progression we have now recorded comes from our continued focus on operating productivity and cost management as well as solid operating leverage as our volume has increased. We have noted an expectation of full year double-digit margin as our midterm objective, so we still have some work to get there. Our third quarter results, while improved, were generated by project mix and productivity that is, as of yet, still not fully optimized. The bottom line is we continue to expect annual positive margin progression, which will continue to be a primary focus for MasTec. Regarding our updated consolidated guidance, our supplemental guidance document for segment and other financial guidance details is now posted to the IR website. We are increasing 2025 full year revenue guidance to $14.075 billion with adjusted EBITDA of $1.135 billion, slightly above the low end of our previous guidance. Our revised outlook reflects higher than previously anticipated levels of Communications and Pipeline activity, offset by lower Power Delivery revenue than previously expected due in part to timing of activity on Greenlink in Q4 as our customer works through the isolated permit delays. Adjusted EPS is forecasted to be $6.40, up 62% versus 2024. We generated cash flow from operations of $89 million in the third quarter and free cash flow of $36 million, slightly below our expectations. Our strong sequential revenue growth and associated higher working capital investment as well as higher capital expenditures to accelerate growth impacted these results. We continue to expect $700 million to $750 million of cash flow from operations for 2025, assuming DSOs average around the mid-60s for the year. We ended the quarter with total liquidity of approximately $2 billion and net leverage of 1.95x, and we expect further leverage improvement by year-end given earnings and cash flow expectations. As I noted last quarter, our strong balance sheet provides us significant financial flexibility to pursue a disciplined return-focused capital allocation strategy. Our top priority remains supporting our robust organic growth opportunities through investments in equipment and capacity expansion where we see compelling returns. We will also continue to evaluate opportunistic accretive acquisitions that complement our existing service lines, consistent with our long-standing approach. In addition, we maintain a share repurchase authorization and will deploy capital to buybacks opportunistically. This concludes our prepared remarks. I'll now turn the call over to the operator for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Ati Modak with Goldman Sachs. Ati Modak: I guess, Jose, on the Pipeline backlog, thank you for all the color. Curious if you're able to directionally guide to the level of revenue that these projects and ongoing conversations could lead to for '26? And maybe you can give us a sense of what that backlog growth looks like in the near term given all these conversations. Jose Mas: One of the reasons we really tried to highlight a specific project on today's call was to kind of talk about the change that we're seeing in how pipeline work is being awarded. I remember years ago, when we would have these calls, we would talk a lot about book and burn. And the reality is that the business the way it is today, it's almost returning to that level. We've got commitments from customers on specific jobs. They want to leave the books open to kind of get all the details of the project done by the time they sign a contract. We're, quite frankly, ready to start construction, which is very favorable from a risk profile perspective, where it doesn't work because it doesn't give the Street great visibility into our backlog. But conversely, we do have that visibility, right? So when we talked about the strength of our pipeline market, we're more optimistic today than we've been. On our last call, we talked about reaching or exceeding historical high levels of revenue. I can tell you today, we're more confident about our ability to achieve that now than we were then. It's not for '26. This is not a '26 story. I think we'll grow the business double digits in '26, but really the growth is going to be substantial in '27 and beyond from what we're seeing from the projects that have been committed to us, and it's extremely exciting. Again, from a margin perspective, it's a business that we struggled with on a year-over-year comparison this year because of the closeout of MVP and the lower revenue levels. We're going to see that business get back to a strong margin profile in Q4. It obviously had significant improvements in Q3 at 15.4%. We expect to do a lot better than that in the fourth quarter. And that bodes really well entering '26 and beyond. So we're excited about our margin potential in the business, and we're more excited about the revenue opportunities for beyond '26 and into '26. So exciting times. Ati Modak: And then I know you gave the color on the capital allocation strategy. So I guess on the organic growth side, can you remind us what the CapEx level should be on a run rate basis as we consider the opportunities out there? And then also on M&A, I mean, I know you've spoken about a third transmission line capability down the road and need for M&A around that. But curious if given what's going on in the market, you would look at something on gas power generation as well. Paul Dimarco: This is Paul. I'll start with the CapEx question. So in the near term, with the outlook we have for Pipeline, which is our most capital-intensive end market, you can expect CapEx to run in front of depreciation a little bit, right? So depreciation is running about $300 million right now. You should expect it to be north of that, probably around $350 million going into '26, but it depends where the growth comes from. Obviously, we have other segments that are much less capital intensive. So that's kind of a near-term, maybe '26, '27 view. Jose Mas: On M&A strategy, I'd say a couple of things. I'd say our focus hasn't changed. We will be more active in the M&A space going forward. As it relates to power generation, I think we've historically had an Industrial business that we've done some projects. We haven't really done combined cycle. I don't know that that's an area that we would get into. At the same time, one of the fascinating things about our business today is I think everybody is being asked by customers to really look at different things and different opportunities, which creates new opportunity revenue streams for all of us in the space. And I think you'll see MasTec pick up its share of that as well. Operator: Our next question comes from the line of Jamie Cook with Truist Securities. Jamie Cook: Congrats on a nice quarter. I guess my first question, Jose, can you just talk about the permitting issues with Greenlink and how that impacted your guidance? Should I just assume that's a change in your Power Delivery revenues and then like the potential risk that you see on Greenlink in 2026 and the potential to offset that? So that's my first question. My second question, obviously, a lot of large work out there across multiple segments. You're on Greenlink, Hugh Brinson, you won another pipeline job. Just wondering, I guess, across each segment or across the company, given your -- the number of employees you have today and the size of your company, how many large projects do you feel comfortable taking? Do you [ know you mean at one time ], just given the risk profile of larger projects just from an operational execution standpoint, just how you're thinking about that? Jose Mas: Jamie, I think you got a lot of questions into that one question, but let me try to start from the top. Jamie Cook: Okay. Jose Mas: Look, our fourth quarter change is primarily Greenlink. That's what it is, right? We're at the lower end of the range that we had originally put out for Q4. The difference between the low end of our range and the high end of our range for Q4 was about $30 million of EBITDA. That's all coming out of our Power Delivery business for the most part, and that's the big change. As it relates to Greenlink, we've said a lot historically. We've -- it was an incredible win for our company. We're really excited to be working with the customer. Obviously, they're facing some challenges on permits, quite frankly, that were originally issued and are now being reviewed. We've said that we expected the run rate on that project to be $300 million to $500 million a year over a number of years. We gave more clear guidance over time on '25 of $375 million to $425 million. The truth is that for '25, we're going to end up -- it's more like somewhere in the $250 million range. So it's a significant difference from what our expectations were of ramp in the second half of the year. With all that said, that project will be built. It's an exciting project. We will build it. We're hoping that the time schedule doesn't really change from a completion perspective, which is just going to increase the load on that project over the coming years. We announced today another transmission substation job within that business, which is the second largest award we've ever gotten within that group. That will help, obviously, in 2026. We're hoping that that's additive to what we would have done with Greenlink, but at a minimum, it will significantly help offset it if that becomes the case. We expect Greenlink activity to increase in '26 versus '25 from current levels. So the story in our mind is really solid. It's intact. When you talk about large projects, I think it's almost important to really -- I'm switching subjects now to the large project part of your question. I think it's important to kind of think about different businesses, right? We don't really have large projects in Communications. In Pipeline, for the most part, it's a project-oriented business. We don't have projects like MVP anymore. The projects will be smaller in scale, which were a lot more like the projects we've historically built. So I think we have an enormous amount of comfort as should our investors relative to that. When you think about our Clean Energy and Infrastructure business, it's -- we've got a nice maintenance business there, our Infrastructure business. But at the same time, there are more projects there. You should feel comfortable with the level of performance in that business. Again, we've doubled profitability since the first quarter. So I think people should have comfort around that. When we talk about Power Delivery, it's a $4 billion segment. Of that business, 80% to 90% of that business is maintenance driven. It's MSAs. It's working for utilities every day. It's working on distribution lines. It's working on substations. So it's a very recurring predictable business. We've highlighted the project end of that business because it's where we were the smallest, right? Greenlink was really the first of many projects that we felt could grow our project orientation around that market. So let's take a step back. 17% revenue growth in the quarter from a revenue perspective in Power Delivery, 21% EBITDA growth. For the year, we're expecting 13% growth in Power Delivery, 13% EBITDA growth. That's important because that's despite Greenlink not having the activity that we expected. Had Greenlink had the activity, obviously, those numbers would be a lot bigger. The project portion of our Power Delivery business is one of the biggest growth potentials that MasTec has. It's one that we need to cultivate and build. Again, it doesn't risk the portfolio because it's such a small percentage of MasTec's overall business, but it is important to the growth of our Power Delivery business. So I'd say all this to say, we're very excited about Greenlink. We're very excited about what the opportunity means. We're very comfortable with our ability to execute on that project at a high level. We're super excited about our next win that we'll talk about more on our next call and what that means to MasTec and quite frankly, potentially future wins that exist. So I think our investors should have tremendous comfort around how we've grown the business, how we've thought about the projects, how we thought about the risk profiles and the opportunities that they bring to MasTec. Operator: Our next question comes from the line of Philip Shen with ROTH Capital Partners. Philip Shen: Just wanted to check in with you guys on next year. Is -- do you think $8 of EPS is still on the table for next year? Or can we assume that this has potentially moved higher after your recent wins? Jose Mas: Philip, thanks for the question. A couple of things, right? When you look at consensus out there, we haven't given guidance. Consensus today is 10% revenue growth on a year-over-year basis, 20% EBITDA growth on a year-over-year basis. We've said that consensus relates to north of $8 a share, which is 25% EPS growth from '25 to '26. I'd tell you today, we're really comfortable with where consensus sits. We're working really hard to obviously continue to grow and build our business. But I think just where consensus stands, right, 10% revenue growth, more than 20% EBITDA growth, those are fantastic statistics, right. And a company that's done most of its growth on an organic level, that's nothing to sneeze at. We're proud of that. We hope to do better. But yes, we're comfortable with where the numbers sit today. Philip Shen: Great. That's very helpful color. And then shifting to margins. It sounds like next year, the margin expansion narrative is very much on the table. I just wanted to touch on Q4 specifically. Can you help us understand the basis point impact from OpEx investments versus gross margins -- gross margin percentage? Is the gross margin percentage holding up in Q4? Jose Mas: Yes. The way we think about it, right, is, again, we've had really high levels of growth. And unfortunately, with really high levels of growth, you have certain investments that are made to execute on that growth. And not all of our growth is same-store sales, and we've kind of used that example historically where -- same stores is a lot easier to grow with because you already have an office, you have people and you're just incrementally growing revenues, which is what you want to do to increase margins over time. But we've expanded in a lot of new geographies. We've opened a lot of new offices. We're working for new customers. And those require more investments. And I think that when you look at the margin profiles that we've laid out from the beginning of the year, we've got some puts and takes. Some businesses are doing better, some are doing slightly worse. I think it's all driven by that, right? So we've made significant investments to the growth profile. Those investments will pay off. I can tell you that as a company, one of our major focuses is definitely our margin improvement. We think we've got room, quite frankly, across all of our businesses. Again, when we think about fourth quarter, we think the major change is really what's happening in Power Delivery. If you look at -- we've had some questions overnight around Communications and their margins. The reality is if you look at EBITDA dollars on where we guided versus where consensus was, it's no different. We just have a little higher revenue. And again, that talks to the impacts of investment in growth. So we're really comfortable where we're at. We know we can do better, which I think is a positive. We've got to execute on that. But we feel really good about where our business stands and the opportunities ahead of us. Operator: Our next question comes from the line of Steven Fisher with UBS. Steven Fisher: Congrats. Just a follow-up on that last question, but maybe more specifically to the Communications segment. I mean it seems like there really is a broadening set of opportunities there, and you did call out some of the investments that you're making. Can you just talk about the shape of those investments? Kind of is there a lot more that you need to go? Or are you sort of at the peak point of that? And just how the margins can evolve there over the next year or 2? Jose Mas: Thank you, Steve. I'd highlight a couple of things. First, margins improved 40 basis points year-over-year to 11.3%, which is one of the highest levels that we've had in a long time. When we think about fourth quarter, we're showing almost 100 basis point improvement on a year-over-year basis for the quarter. Also, we think, really solid. So I think we're headed in the right direction. We've -- at the end of the day, that business is going to grow almost 30% on a year-over-year basis, which is just a staggering number, again, organically. And a lot of that has to do with investments in new geographies. And those investments are harder because you're opening new offices, you're either moving people or hiring new people, and it takes longer for those investments to translate into earnings, right? So I think we've been doing that for a long time. We're seeing the results of those earlier investments already in our numbers or we wouldn't be able to hit these, right? So it's a lot of the stuff that has been done more recently that's having the negative impacts or really the drag. And again, we're working our way through that. We have opportunities for further growth in 2026. The market is really hot. I think that with all of the changes that we've seen in the government, and I know we've talked about BEADs for a really long time, but I actually now believe that BEADs is going to have a pretty significant impact on our business and our customers because of how it's changed in the profile of customers it's going after it. So I feel really comfortable that that's going to be a further growth driver as we think in '26. But everything that's happening with data centers and AI and the need for fiber and the middle-mile fiber growth that we're seeing is just providing tremendous opportunity for us across the country. As we obviously increase in size, the growth requirements moderate because we're in a lot more places, a lot more geographies. So again, we feel really good about the progress that we made this year in the growth of that business and really what it's going to translate over time. Steven Fisher: And if I could ask a follow-up on the Power Delivery side. I know you talked about not having as much revenue on Greenlink this year, and that's taking some of the profits down. But I guess on the bigger picture about the project itself, does this delay impact the overall expected profitability for the whole project? Or is it just a pushout in timing? And then the bigger picture question is, as this translates to sort of a thought on risk for overall transmission projects that you're going to be taking on over the next couple of years, how should we think about the risk approach that you're taking there? Is this sort of like a reminder that you should be kind of very prudent in the risks you're taking on in these transmission projects? Jose Mas: Steve, I think we've got to be prudent in all risk that we take in all jobs in all of our businesses. And I think that's where I think we've been great stewards of MasTec in really understanding the risk profiles that we're committing to and contractually protecting ourselves against those. As it relates to Greenlink, again, we're working with our customer. We have a high level of confidence in both our and our customers' ability to get that project done and to get it done safely and timely. We do not expect any impact to profitability whatsoever on that project over the period other than obviously it being in different periods than what we originally expected. So our -- again, our confidence and our excitement around Greenlink is unchanged. We expect it to be a very successful project for both our customer and MasTec. And again, we'll provide more updates as they come. But we don't expect any negative impacts in '26 other than from a revenue perspective, what it could be to what it ultimately is, and it's just going to compress the time line. Operator: Our next question comes from the line of Andy Kaplowitz with Citi. Andrew Kaplowitz: Jose, Quanta yesterday talked about a total solutions opportunity for hyperscalers. We know you don't have the same exact portfolio as them, and you talked about not being particularly excited to combine cycle, but you do have significant capability to help data center customers. So what's the probability that we'll see something like that, like a total solution set of projects for MasTec starting in '26? And could you update us on the journey to $1 billion that you originally discussed you could do with data center customers? Jose Mas: So I'd answer the first part of your question just by saying very high, and I'd answer the second part of your question by saying I think that, obviously, data centers offer an incredible opportunity to companies like MasTec in our industry. We're involved in a number of different things already when you think about what's happening on power, when you think on what's happening on fiber directly for data center builders, right? We're looking at -- we've been working on the civil side for a long time. We've talked about it. We're working on the infrastructure side. But I think our ability to take a larger role and a more important role as we think about those projects on a future basis and really capture a higher percentage of that revenue, again, is extremely high. Andrew Kaplowitz: Great. And then could you give a little more color into what's going on in Clean Energy? I think 8.5% EBITDA margin is a high watermark for MasTec. I understand Q3 is a seasonally good time of the year, but do you think margin on an annual basis can continue to push higher in that segment? And you did lower your revenue outlook slightly in the segment, though you're still going to do double-digit growth. So how are you thinking about growth across Clean Energy going into '26? Jose Mas: Again, great quarter, 20% revenue growth. More importantly, 36% EBITDA growth for the quarter. We pretty much beat our margins every quarter there relative to what we've guided. I think we're somewhat conservatively guided for Q4. Hopefully, we can do that again. Business is doing really well. Again, our Clean Energy and Infrastructure business is a combination of renewables and infrastructure. I think if you think about the Infrastructure business, it's obviously a slower grower. That's a business that if we're growing at 10% a year is really solid. So our renewable business is obviously growing much faster than that. We're sitting on the highest level of backlog we've ever had in the business. We expect backlog to again increase in Q4, incredible opportunities in front of us. A lot of backlog post the 18-month period where we don't even report. So we're feeling really comfortable about where that business is headed. I think it's going to continue to help drive significant growth in our Clean Energy business, and our margins have improved. We're hopeful we can sustain that and over time, improve on that. So all around, we're feeling really comfortable where we stand there and the opportunities for '26 and beyond. Operator: Our next question comes from the line of Justin with Baird. Justin Hauke: Great. I guess I've got 2. One is just a really quick one. I just wanted to confirm just on that Hugh Brinson project. Is the full value of that project in backlog? It looks like, I guess, supposed to complete at the end of '26. So I just wanted to ask that. And then my second question is just on the cash flow. Obviously, last year was a huge cash flow year. You've got pretty big guidance here for the fourth quarter ramp. And just curious what are the contributors to that moving pieces that drive the 4Q cash flow number? Jose Mas: So I'll cover the first part of the answer. The answer is -- on the mainline, the answer is yes. There's pieces of that project that are potentially not in backlog yet. Paul Dimarco: And then cash flow is just a function of the revenue cadence, right? So we're forecasting revenue to contract sequentially in the fourth quarter. I think expect a little bit of DSO improvement, we've got a little bit of degradation up to 69 days in Q3 that we expect to come back down to the mid-60s. So the combination of those 2 is really what drives the release of the working capital investment in Q4. Operator: Our next question comes from the line of Julien Dumoulin-Smith with Jefferies. Julien Dumoulin-Smith: Just wanted to follow up on my friend, Steve Fisher's question here a moment ago. Can we go back to the comms business? Can we talk about the bifurcation, what's the growth in the wireline versus wireless? And what's being implied for 4Q '25 here? Just, what's the cadence? Should we expect that to continue here when you think about that 33%? Or how are you thinking about that persisting? I hear a little bit of mixed commentary. I would love to hear how you break it out, especially in light of this Lumen contract. Jose Mas: Sure. I mean there's no question that today, our wireline business is bigger than our wireless business. It's been the case for some time. Our wireline business is growing faster than our wireless business. Our wireless business is predominantly -- our biggest account there is AT&T. So obviously, their project to their Nokia-Ericsson swap-out was a big driver of that. That project started for all intents and purposes in the fourth quarter of 2024. So that has been a driver -- a helpful driver in our [indiscernible] growth. Comparisons there get a little bit harder in Q4. So we've moderated our revenue growth in Q4 versus what we've been achieving for the first 3 quarters. With that said, our wireline business is growing very rapidly. So I think -- I don't have the exact number, but I believe our revenue growth in the third quarter is estimated to be in the mid-single digits. And again, something that we're hoping to beat. But again, feel really good about where the business is and where it's headed. Julien Dumoulin-Smith: Got it. All right. So fingers crossed on beating that number there, perhaps handily. And then maybe just on backlog real quickly, just to talk about this real quickly. I mean it almost seems like there's a shadow backlog emerging here, if you want to call it that for Pipeline. Can you speak to a little bit of like how to size that up? I mean, relative to the $1.5 billion-ish of backlog you have in the Pipeline business? Any kind of order of magnitude? Any way to think about it? Obviously, [ ET ] got other projects like DSW coming up here. I mean, anything that you can kind of point to that you'd flag. And maybe in a similar fashion, transmission project awards seem to be heating up here as well. Do you have -- you kind of alluded to sort of shadow backlog or opportunities there as well, if you can speak to it. Jose Mas: So I think the best way we've been able to do that, right, is to talk about future revenue potential in Pipeline. And what we've said is, which is something that we would never have said a year ago or even probably 6 months ago is we now see the ability to exceed historical high revenue levels in that business. To kind of remind everybody, historically, our high years in that business were about $3.5 billion in revenue. We're guiding at [ $2.2 billion ] this year, and we now have a path to meet or exceed historical levels. I think that's the best way to kind of frame where we see the opportunity, again, not for '26, but for beyond. So I think -- and I feel better about the opportunity to do that today than I did last quarter. As it relates to transmission, to be clear, today, we announced another win within that segment of our business, which will be substantial, which is important and it's something that will kick off in the middle of '26. We'll give more details on that project on our next call, but we think a really important fact, we said a long time ago, we expected to win something else in late '25, early '26. I think it's something else that we're now able to deliver on. And again, we'll talk about that more on our next call. Operator: Our next question comes from the line of Marc Bianchi with TD Cowen. Marc Bianchi: I wanted to ask about the backlog and maybe similar to -- or along the lines of what Julien's first question was there. But if we look at -- maybe rewind 18 months and look at where kind of backlog was at that time, the ultimate revenue that you delivered, you had sort of like 64% coverage of that revenue over the following 18 months here. And as I look forward from today and you look at the composition of backlog, is there any reason that we shouldn't think about that ratio of conversion or backlog coverage being a whole lot different? You mentioned the Pipeline where maybe that's turning to a bit more of a book and burn type of aspect. So just curious if there's any comments around that comparison? Jose Mas: Marc, it's a good analysis. I mean I think as we think about it, obviously -- I think historically -- in our history, there's been a few periods where we've continually beat backlog quarter-over-quarter-over-quarter. Backlog at times, tends to be lumpy as you win awards. The fact that we've been able to deliver continued growth in backlog to me is as meaningful as any of the percentage statistics you can come up with. I think it definitely shows where the business is headed. So again, we feel really good about where we stand. We think that with all that said, I think there's a lot of opportunity to further increase backlog and further help that. So I do think that backlog is a reflection over time of where your business is headed. And I think over time, we've delivered great backlog results, which will translate into further revenue growth. So whether I can pin down the specifics on whether the historical percentages are going to play out exactly the way they did, to be honest, I haven't done that math. It might be interesting to do offline, but I haven't done it. But I can just generally tell you that we see momentum in our business. It's supported by our backlog growth and more importantly, supported by the opportunities that we see coming. Marc Bianchi: Okay. Great. And I guess just the other one back on Communications. So the '24 was a down year, '25 was a recovery year. What do you think as a placeholder for '26 growth? Do you think this business could do double-digit growth, top line growth in '26? Jose Mas: Yes. Operator: Our next question comes from the line of Brian Brophy with Stifel. Brian Brophy: Just following up on some prior discussion. In the past, you've talked about having the capacity for 2 large transmission projects at once. Obviously, it sounds like we're going to hit that here next year. But you've also made a lot of investments on the headcount side. Curious if you're still thinking 2 projects is kind of the limit? Or how you're thinking about potentially adding capacity on the transmission side to take on more? Jose Mas: There's no question in our minds that we're going to continue to build that business to take on more projects and to have the ability to take on more projects simultaneously. So you start with 1, you build the 2, you eventually get to 3, right? So you can't put -- you can't get ahead of yourself. Again, we're excited about where we stand and the potential that we have in that business. There are other opportunities out there that we're also interested and we're evaluating. So we expect over time to definitely win more. Brian Brophy: Okay. And then also following up on some of the prior discussion. It sounds like combined cycle is a little bit less interesting. But how do you guys think about potential opportunities on the single cycle side in gas? Jose Mas: Brian, it's a huge opportunity. Obviously, there's a lot going on. We do play in that space today, albeit at a smaller level. It's a question that we've constantly got to answer, how much are we willing to invest, how much -- it's -- look, it's a very different business than what we've historically done. Risk mitigation in that business is the entire business because there is -- there are risks associated with that business that we don't typically see in other parts of our business. So understanding that and really managing towards that in my mind is the difference between a great project and a bad project. So we're looking at opportunities, definitely an area that we will engage in, but we will be cautious in our engagement around that. Operator: Our next question comes from the line of Brent Thielman with D.A. Davidson. Brent Thielman: Great. Just one more for me, really, just on the Pipeline side. Jose, you mentioned this change in how some of these things are being awarded. Can you just talk a little bit about maybe relative to past cycles, the competitive environment, is it different? Are the potential economics on these projects different than past cycles, especially as you seem to pretty close to the customers talking about these long-term engagements? Jose Mas: So Brent, I think that there is no difference in the earnings opportunity historically, right? I think we've really performed at a really high level historically. I don't think we're sitting here saying that we've got tremendous opportunity to improve on that, but we definitely have opportunities to get to that. And that's a significant difference from where we've been over the course of the last really 2 years. So -- again, not just because of the revenue opportunities, but because of our ability to execute at a higher margin level in those businesses probably what excites us the most. And there's no reason that we shouldn't be able to deliver at historical levels. I also think we're working with our customers. We've got a lot of long-term relationships. We're not here to take advantage of our customers and try to make all our money on one job. We're going to work with our customers to hopefully get a significant size of their plans and their capital that they spend. And in that, we want to make a fair margin. We want to make a historical margin, but I don't know that we're necessarily looking at elevated margins. Operator: Our next question comes from the line of Liam Burke with B. Riley Securities. Liam Burke: Jose, you're talking about specifically telecom, but I guess it can go across your businesses that you're moving into new geographies and opening new offices. Is that your existing customer pulling you into that market saying, "Hey, we need you?" Or are you just identifying the market, and that's where you decide to invest? Jose Mas: I think it's both new and existing customers, right? Obviously, I think we've done a good job at increasing our share of business with existing customers, especially as we look at a holistic approach across all of the businesses that we offer. The truth is that in today's world, a lot of our customers can use a lot of different MasTec services. I think we've done a good job at cross-selling those services and putting us in a position to build for those customers differently than we have in the past. On top of that, again, I think we are -- especially as you think about Power Delivery, we are newer in the space as we've really made a huge push in that business post 2021. So I think our brand recognition has significantly increased in that business, and we're getting a lot more opportunities from new customers because of it, and we will help deliver for those new customers. So I think it's a combination of both. Whether it's for an existing or a new customer, if you're opening a total new geography, it's really not that much different in terms of the investment in the payback. But the decisions that we've had to make, right, or do we do this organically or do we do this through M&A. And I think that for the time being, we've decided to do most of that organically, which I think over time has higher return profile, and I think we've executed to that. And I think going forward, you'll see a mix of that. Liam Burke: Great. And just quickly on renewables. You said that it was heavily weighted towards solar this year, but your order flow is looking towards wind in 2026. Is that new build? Or is it just upgrades and maintenance? Jose Mas: Yes. So Liam, to be exact, what we said was we expect our renewable growth to be driven by solar because that's what's growing faster. So the bulk of our business today and in the future will continue to be solar. I think we highlighted wind because there's been a lot of questions about how the wind business is doing and where the future of the wind business is. And I can tell you that it's an important part of our portfolio. Between what we put in backlog and what we expect to put in backlog here for the fourth quarter, we're going to end up with 3 of the 4 largest jobs in MasTec's history on the wind side, which is just -- in today's world, somewhat of a staggering statistic. I think it bodes really well to the longevity and really the strength of the wind business in addition to what we're doing on the solar side. So we just wanted to highlight it because I think so much gets talked about solar, but I actually think there's a pretty healthy wind business out there that we've done a good job at cultivating and growing, and that was really the only purpose for the comments. Operator: Due to the interest of time, we have time for our final question. That question will come from Maheep with Mizuho. Maheep Mandloi: This is Maheep from Mizuho. Just a follow-up on the previous question. Could you talk about like the battery storage business, talked about wind and solar, but any thoughts on the growth in that segment for you? And separately, just on the Pipeline side, any thoughts on labor constraints, if any, in any part of the business for you? Jose Mas: Yes. So the first part of the question, I mean battery storage is becoming a much larger part of our entire portfolio. The majority of our projects today have some sort of battery opportunity related to them. And I think that business has grown really nicely for us in 2025 and definitely been a growth driver for the business this year and one that we expect for next year. I think the second part of the question, I missed the end, but I think it was around pipeline constraints. I think -- when we think about the business, it's obviously been a very radical change on what the expectation of the pipeline market was going to be in '25 versus at this point last year. And I think that our customers obviously have decided to make significant investments. Those investments take a little bit of time. So one of the reasons that I think that we talked so heavily about back into '26 is because I think it's taken that amount of time to get engineering, permitting and materials in line to be able to execute on those projects. So while I think that there were some constraints early on in this year to get that cycle going at the level that it wants to be as an industry, I think we're getting through that, and we'll see that activity start to really pop second half of '26. Operator: Thank you. I would now like to turn the call back over to Chris for closing remarks. Chris Mecray: Thank you. That concludes today's call. Thank you for participating. And as a reminder, please visit our website for a replay and transcript of the call, which will be posted when available. Thank you. Operator: Thank you for your participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Cooper-Standard Third Quarter 2025 Earnings Conference Call. As a reminder, this conference call is being recorded, and the webcast will be available on the Cooper-Standard website for replay later today. I would now like to turn the call over to Roger Hendriksen, Director of Investor Relations. Roger Hendriksen: Thanks, Danny, and good morning, everyone. We appreciate you spending some time with us this morning. The members of our leadership team who will be speaking with you on the call this morning are Jeff Edwards, Chairman and Chief Executive Officer; and Jon Banas, Executive Vice President and Chief Financial Officer. Before we begin, I need to remind you that this presentation contains forward-looking statements. While they are made based on current factual information and certain assumptions and plans that management currently believes to be reasonable, these statements do involve risks and uncertainties. For more information on forward-looking statements, we ask that you refer to Slide 3 of this presentation and the company's statements included in periodic filings with the Securities and Exchange Commission. This presentation also contains non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to their most directly comparable GAAP measures are included in the appendix to the presentation. With those formalities out of the way, I'll turn the call over to Jeff Edwards. Jeffrey Edwards: Thanks, Roger, and good morning, everyone. We certainly appreciate the opportunity to review our third quarter results and provide an update on our business and the outlook going forward. To begin on Slide 5, I'll highlight some of the key third quarter data points that we believe are reflective of our continuing outstanding operational performance and our ongoing commitment to our core company values. In terms of operations and customer service, we're on track to have possibly one of the best years in our company's 65-year history. We ended the third quarter with 99% of our customer scorecards for quality and service being green. For new program launches, we also continue to deliver strong performance with 97% of those scorecards green. Our plant managers and our plant employees continue to deliver outstanding performance and value for our customers through their dedication and commitment to excellence. We're extremely proud of that. Also in our plant operations, safety performance continues to be excellent. In fact, during the third quarter, we had a total incident rate of just 0.28 recordable incidents per 200,000 hours worked. That's well below the world-class benchmark of 0.47. Importantly, 36 of our plants have maintained a perfect safety record with a total incident rate of 0 for the first 3 quarters of the year. That's 60% of all of our production facilities achieving a perfect safety score and demonstrating that our ultimate goal of 0 safety incidents is achievable. We're proud of our entire global team for their focus and achievement in this most important operating measure. In terms of cost optimization, we had another solid quarter with our manufacturing and purchasing teams delivering $18 million of savings through lean initiatives and other cost-saving programs. These cost reductions and operating efficiencies, combined with revenue growth in the quarter, allowed us to achieve a solid 140 basis point improvement in gross margin versus the third quarter of last year. Despite some of the market headwinds that we've been seeing, we continue to drive profitable growth and margin expansion through the execution of our plans and strategies. Finally, we're continuing to leverage world-class service, technical capabilities and our award-winning innovations to win new business. During the third quarter of 2025, we received $96 million in net new business awards, which are expected to drive profitable growth as they launch over the next few years. That brings our total net new business awards for the first 9 months to nearly $229 million. I will provide some additional detail on this in a few minutes. First, let me turn the call over to John to discuss the financial details of the quarter. Jonathan Banas: Thanks, Jeff, and good morning, everyone. In the next few slides, I'll provide some details on our financial results for the quarter and discuss our cash flows, liquidity and aspects of our balance sheet and capital structure. On Slide 7, we show a summary of our results for the third quarter and first 9 months of 2025 with comparisons to the same period last year. Third quarter 2025 sales were $695.5 million, an increase of 1.5% compared to the third quarter of 2024. The slight increase was driven primarily by positive foreign exchange and favorable volume and mix, partially offset by certain customer price adjustments. As Jeff mentioned, our third quarter 2025 gross margin improved 140 basis points compared to the prior year to 12.5% of sales. Adjusted EBITDA in the quarter was $53.3 million, an increase of more than 15.6% when compared to the $46 million we reported in the third quarter of last year. Importantly, we were able to drive further margin expansion of 100 basis points versus the same period a year ago despite the modest revenue growth and market headwinds. On a U.S. GAAP basis, we reported a net loss of $7.6 million in the third quarter compared to a net loss of $11.1 million in the third quarter of 2024. Adjusting for restructuring and other items from both periods as well as the related tax impacts, adjusted net loss for the third quarter of 2025 was $4.4 million or $0.24 per share compared to an adjusted net loss of $12 million or $0.68 per share in the third quarter of 2024. Our capital expenditures in the third quarter of 2025 totaled $11.2 million or 1.6% of sales, similar to the prior year period. We continue to exercise discipline around capital investments, which are primarily focused on program launch readiness in order to maximize our returns on invested capital. Moving on to the 9 months. For the first 9 months of 2025, our sales were essentially flat compared to the first 9 months of 2024. Significantly, and despite flat revenue over the first 3 quarters, our gross profit margin increased by 170 basis points and our adjusted EBITDA margin improved by 230 basis points compared to the first 9 months of last year. Moving to Slide 8. The charts on Slide 8 provide additional insights and quantification of the key factors impacting our results for the third quarter. For sales, favorable volume and mix, net of customer price adjustments, increased sales by approximately $2 million compared to the third quarter of 2024. The impact of favorable foreign exchange was approximately $8 million. For adjusted EBITDA, lean initiatives in purchasing and manufacturing positively contributed $18 million year-over-year. In addition, we continue to realize benefits from our restructuring initiatives implemented in prior periods, amounting to $5 million in incremental savings in the third quarter compared to last year. Favorable foreign exchange was a tailwind of approximately $4 million in the quarter. Partially offsetting these improvements were $5 million of unfavorable volume and mix, including customer price adjustments and the impact of certain short-term production disruptions, $6 million in increased costs and wages and general inflation and $6 million in higher SGA&E expense. The increase in SGA&E expense was primarily related to stock price appreciation adjustments for certain equity-based incentive awards as our share price increased by approximately 72% during the third quarter. With most of the price gain occurring later in the quarter, this increase and the related incremental expense were not contemplated in early August when we last reported earnings and updated our guidance. Moving to Slide 9. On Slide 9, we present the same type of year-over-year bridge analysis for the first 9 months of the year. As mentioned, sales were essentially flat for the first 9 months with slight positive volume and mix being offset by unfavorable foreign exchange. Adjusted EBITDA in the first 9 months increased by more than $48 million or more than 38% compared to the first 9 months of 2024. The improvement was driven primarily by $63 million of manufacturing and purchasing efficiencies, $17 million of restructuring savings and $9 million of favorable foreign exchange. These positive drivers were partially offset by $20 million of unfavorable volume, mix and price adjustments, approximately $19 million of higher wages and general inflation and $5 million in higher SGA&E expense, again, mainly due to the stock price appreciation discussed earlier. Overall, our SGA&E continues to benefit from previous restructuring and cost reduction initiatives and a disciplined management focus on controlling costs. We are pleased with our improving results in the first 3 quarters of 2025 as our focus on controlling costs, delivering exceptional operational performance and launch of new, more profitable programs are having the positive impacts we had planned despite some of the market headwinds we began to see late in the third quarter. Moving to Slide 10. Looking at cash flow and liquidity. Net cash provided by operating activities was approximately $39 million in the third quarter of 2025 compared to $28 million in the third quarter of 2024. Capital spending, as mentioned earlier, was approximately $11 million in the third quarter of 2025, resulting in net free cash flow of approximately $27 million for the quarter, more than $11 million higher than the same period last year. We ended the third quarter with a cash balance of approximately $148 million. Coupled with $166 million of availability on our ABL facility, which remained undrawn, we had solid total liquidity of approximately $314 million as of September 30. We believe that is more than sufficient to support the continuing execution of our business plans and profitable growth objectives in today's environment. Following the solid results of the first 3 quarters and even considering our revised outlook for production volume headwinds in the fourth quarter, we believe we remain on track to achieve positive free cash flow for the full-year this year. With respect to our capital structure, we are continuing to evaluate various options to strengthen our balance sheet and further improve our cash flow and are carefully monitoring market conditions and developments in the credit markets. We are optimistic that as we continue to deliver improving results, we will be able to favorably refinance our first and third lien notes in the next several months. With that, let me turn it back over to Jeff. Jeffrey Edwards: Okay. Thanks, Jon. And this last portion of our call, I'd like to again comment on our high-level strategic imperatives and how these are positioning us for continuing profitable growth over the next several years. Then I'll wrap up with a few comments on our near-term outlook and our revised guidance for 2025, so please turn to Slide 12. Our strategies and operating plans are built around the 4 key strategic imperatives that you see outlined on Slide 12. By aligning the company around these common objectives, we've been able to drive significant improvements in virtually every aspect of our business. By the continuing execution of our plans and strategies, we're positioning the company to deliver continued profitable growth, further improvements in margins and significantly improved returns on invested capital as we discussed in last quarter's call. Moving to Slide 13, as I name it, my favorite slide in today's presentation. One of the key improvements in our business has been the increase in our profit margins all financial strength and overall financial strength of the business. Through our successful strategic execution, we've been able to increase our gross profit margins by more than 100 basis points each year over the past 3 years, and that's despite reduced or flat production volumes in our 2 largest operating regions. Because of our focus on sustainable efficiency and fixed cost reductions, we will continue this trend of expanding margins into the future even if production volumes remain flat. We would obviously expect to leverage any increase in production volume to drive further profitability and returns. In addition to our cost optimizations, we're benefiting from continuing launches of new programs and products with enhanced variable contribution margins. As the new programs ramp up, they'll be replacing the older programs that have lower margins on average. Our book business, launch cadence and the timing of runout business give us a high degree of confidence in our expanding margin outlook. Turning to Slide 14. Our strategic execution is also enabling business wins that we believe will drive further profitable growth in coming years. I mentioned at the beginning of the call that in the first 9 months of the year, we've received nearly $229 million in net new business awards. Of the total awards, 87% were related to the value-add innovations in product and technology that we've introduced into the market. We continue to believe that our strategy and capabilities around technology and innovation are a clear source of competitive advantage for us. Similarly, 83% of the new awards were related to battery electric or hybrid vehicle platforms, which is an indication of how closely our product offerings and innovations are strategically aligned with the fastest-growing segments of the market. Finally, as we shared last quarter, our growth strategy includes expanding our relationships with the fast-growing Chinese OEMs that are beginning to expand their business globally. This opens up significant opportunity for us to expand both in terms of our customer base as well as geographically where we believe the greatest growth will be occurring over the next several years. We are proud to be the supplier that our customers turn to for quality components, consistency of delivery and collaboration on critical design and development of new technologies. Now, we're also the supplier they're returning to, to support their global expansion needs. With these awards in hand and bright outlook for new business wins ahead, we are increasingly confident that we will be able to execute our plans and achieve our longer-term strategic financial targets for growth, margins and return on capital. Turning to Slide 15. To conclude our prepared remarks this morning, let me focus in the nearer term and our outlook for the rest of 2025. Following a somewhat choppy third quarter in which certain of our customers around the world experienced short-term production disruptions from things like cyber attacks, lightning strikes, labor disruptions, just to name a few, we're now expecting a much more significant impact, unfortunately, in the fourth quarter due to the aluminum supply chain disruption that has hit our largest customer. While we're encouraged by public commentary about plans to make up the lost production in future periods, there is no way we can mitigate the impact this will have on our fourth quarter. From a more positive perspective, the statements about making up lost production early next year support our view that the underlying demand for new light vehicles remains strong, it's consistent with our plans for strong profitable growth over time as markets normalize. We expect any reduction in production volumes related to this latest supply disruption to be temporary and will not have any lasting impact on our opportunities to achieve our longer-term strategic targets. As a company, we're maintaining our relentless focus on the aspects of our business that we can control, operational excellence, delivering world-class quality, service and innovation to our customers and continued near flawless launches of new programs with enhanced contribution margins. As we do this, we're confident that we will position the company to achieve our strategic financial targets going forward as production volumes normalize. Turning to Slide 16. Despite our strong results in the first 3 quarters of the year, which exceeded our original plans, we are reducing our full-year guidance ranges for sales and adjusted EBITDA to reflect the expected impact of various temporary reductions in customer production volume, including on some of our most important platforms. The waterfall chart on the right breaks out the various drivers of our revised outlook for 2025 full-year adjusted EBITDA versus 2024 actuals. Our success in delivering manufacturing efficiencies and other cost savings are still the biggest drivers to the positive, but unfavorable volume and mix is now a significantly greater factor to the downside. Importantly, even with challenging overall outlook in the fourth quarter, we still expect to deliver significantly higher adjusted EBITDA and positive free cash flow for the full-year on sales that are flat to slightly lower than they were in 2024. We want to thank our customers, our suppliers and all of our stakeholders for your continued confidence and support. We remain committed to working together and finishing the year as strongly as possible. This concludes our prepared remarks, so let's move into Q&A. Operator: [Operator Instructions]. Your first question comes from Mike Ward of Citigroup. Michael Ward: Jeff, if we look out in 4Q, it's unfortunate the fourth thing happened, but it sounds like they're trying to get it accelerated as fast as they can. Then it sounds like they're going to try to make it up pretty early in the first half. It also sounds like they're going to add a third shift to Dearborn and LineSpeed, so when you kind of balance it out, it's really just postponing it into first half '26. Is that how you're looking at it? Can we look at first half of '26 where some of the things actually start to accelerate for you? Is that the way you're thinking about it? Jeffrey Edwards: That's exactly how I'm thinking about it. I think while the end of '25 isn't quite what we had forecasted because of the event, we're preparing our business plans for '26, '27 and '28. Certainly, there's an impact positively to what's going on in '26. Yes, it's a short-term issue, as I said in my prepared remarks, and I have no doubt that the first half of '26 will reflect improved results beyond what we originally had planned. Michael Ward: When we look across the different vehicles you supply components to, if you had to pick one where they're increasing the line rate, would the F-150 be the one that your highest content vehicle? Jeffrey Edwards: Yes. My short answer would be yes. Michael Ward: Jon, I wonder if you can walk through the gives and takes on the cash flow because that's a pretty strong cash flow statement you made for 4Q. You have to pay the interest, right, that was accrued in 3Q, so you have the 6-month interest payment. Is that correct? Jonathan Banas: That's correct. Mid-December is the next coupon due on the first and third lien notes. Michael Ward: That's about $30 million? Jonathan Banas: Actually, closer to $55 million. $55 million combined. Michael Ward: Then you have working capital. It sounds like working capital should be a strong positive. Jeffrey Edwards: It needs to be Mike. Jonathan Banas: Right. To get to positive, we need to generate about $30 million-plus of free cash flow in Q4. You're right, the big benefit that we see as we do every Q4 is improvements in working capital, unwinding that from an accounts receivable perspective and reducing inventory levels as production winds down towards the end of the year. Both of those obviously have a positive cash benefit. We're spending less, obviously, in the lighter months of November and into December as well. That preserves some cash on the balance sheet as well. All that combined will benefit and more than outweigh the $55 million in coupon payment that's due in mid-December. Michael Ward: The F-150 delays doesn't disrupt the working capital that much? Jonathan Banas: The timing will matter about when the production comes out because if you think about the timing of average days receivable, things that don't get produced in October would impact the total quarterly cash flows. If it's later in November, December, that's not being produced, then that impacts the subsequent quarter's cash flow timing. Operator: Your next question comes from Nathan Jones of Stifel. Nathan Jones: I guess I'll start with some of the net new business wins and probably as, I guess, the year-to-date ones more than just focusing on the 3Q ones and how that impacts the path to the 2030 targets that you laid out last quarter? What I'm looking for is some more commentary on the linearity of the path from 2025 to 2030, should we expect the growth and margin expansion to be fairly linear between 2025 and 2030? Is it more backloaded? I mean, I think some of these Chinese OEM contracts will ramp up faster than maybe some of the Western ones. Just any commentary you can give us on the linearity you're looking at for that, please? Jeffrey Edwards: Yes, Nathan, this is Jeff. I will tell you that we've been at this booking new business at these higher margins now for a couple of years plus probably. Yes, if you're going to take the line from today to 2030, I think it's pretty linear. Certainly, you're also correct that the Chinese launches are coming to market faster than most. Even with that taken into consideration, I would tell you we're very happy with what we're seeing in margin growth. We showed you a little bit of that today, the historical trend line there and even a glimpse into what we already know with 2026. If you drew the line from '26 to '30, you keep going on a similar trajectory. Nathan Jones: I guess to follow-up to that, obviously, these platforms don't ramp up -- start ramping up out in 2030. There are net new business wins that you need to get over the next couple of years at least to get to those 2030 targets. What kind of net new business wins should we be looking for, say, in '26, '27 and '28 to check that the company is still on target to get to those 2030 goals? Jeffrey Edwards: I think similar to what we track this year. That's kind of how we have to do it, right? You got to replace what's building out and you got to win the new stuff that's coming. Then if there's new programs or conquest opportunities on top of that. Historically, it's been in that same range that you see happening this year. We've had some years that were a little better, some years maybe a little bit under it, but I think that's a pretty good number going forward as well. Nathan Jones: Then maybe a follow-up on the balance sheet. You're still at about 4.2, a little over 4 turns of leverage today. I think you guys have targeted getting that down closer to 2x by the end of 2027. Do you think you're still on target to get to there? Does any of this disruption change that at all? Or I still think that you're on target to get to that kind of leverage by then? Jeffrey Edwards: This is Jeff. We're still on target to get there. As we just talked, I think '26 is actually going to be better than we originally had planned, not only because of what we discussed a few minutes ago with the volumes being made up from some of the fourth quarter disruption. I also tend to believe that we're going to see increases in overall volumes in some of our key regions. We don't have that yet in our forecast, but based on the leading indicators and certainly based on the amount of new models that are being invested in and coming through the system related to hybrid and electric vehicles, we're pretty excited about the businesses that we've been winning and the overall impact we think that will have on the next several years related to volume. Operator: The next question comes from Kirk Ludtke of Imperial Capital. Kirk Ludtke: On Slide 15, did any of these items impact the third quarter? Jonathan Banas: Kirk, it's Jon. When you think about some of the non-aluminum issues, the answer would be yes. Obviously, the thing is about the cybersecurity incident at one of our customers as well as some of the natural disaster weather-induced things, they did impact September and did put a little bit of a drain otherwise on Q3. Kirk Ludtke: Was it meaningful? Can you quantify it? Or kind of? Jonathan Banas: You see it impacted in the lower volume and mix that we would have had otherwise. Certainly not anywhere near as significant as the Q4 impact of the $25 million that you see on the bridge slide. We were able to essentially manage through that, but you think of the lost revenue, it's a big portion of the lower contribution at $53 million of EBITDA. Otherwise, we would have been a couple of million higher than that. Kirk Ludtke: I know we've talked about #1, but are #2 and 3, do you expect the production lost from #2 and #3 to be recovered in the first half of '26? Jonathan Banas: We haven't heard directly on that from those #1 and #2 -- or sorry, #2 and #3 customers, but if it's any indication, I think that they'll be competing for share and should do well as far as their production ramps. Kirk Ludtke: Then on Slide 14, the net new business slide, that's very helpful to break that out. Can you apportion that 83% between just battery and hybrid? Jonathan Banas: We do have that breakdown, Kirk. I'm going to have to get back to you on what that -- the current business wins are. broken out by hybrid and the true battery electric, but as we indicated, the majority of the total is, in fact, electrified, one of those platforms or another compared to the ICE platforms, but we'll get you that in short order. Operator: [Operator Instructions]. It appears there are no more questions. I would now like to turn the call back over to Roger Hendriksen. Roger Hendriksen: Okay. Everybody, thanks for your engagement this morning. We appreciate your questions. If you do have additional questions that weren't addressed on the call this morning, please feel free to reach out to me, and if necessary, we can arrange for future discussions with the management team. Thanks again for joining the call. This will conclude today's session. Thank you. Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning. Welcome to today's Colgate-Palmolive Third Quarter 2025 Earnings Conference Call. This call is being recorded and is being simulcast live at www.colgatepalmolive.com. Now for opening remarks, I'd like to turn this call over to Chief Investor Relations Officer and Executive Vice President, M&A, John Faucher. John Faucher: Thanks, Drew. Good morning, and welcome to our third quarter 2025 earnings conference call. Today's conference call will include forward-looking statements. Actual results could differ materially from these statements. Please refer to our third quarter 2025 earnings press release and related prepared materials and our most recent filings with the SEC, including our 2024 annual report on Form 10-K and subsequent SEC filings, all available on Colgate-Palmolive's website for a discussion of the factors that could cause actual results to differ materially from these statements. Our remarks will also include a discussion of non-GAAP financial measures, which exclude certain items from reported results, including those identified in tables 4, 6, 7, 8 and 9 of the earnings press release. A full reconciliation to the corresponding GAAP financial measures is included in the third quarter 2025 earnings press release and is available on Colgate-Palmolive's website. Joining me on the call this morning are Noel Wallace, Chairman, President and Chief Executive Officer; and Stan Sutula, Chief Financial Officer. Noel will provide you with some thoughts on our Q3 results and our future plans, and then we will open up for Q&A. Noel? Noel Wallace: Thanks, John, and good morning, everyone. Thanks for joining us today as we discuss our Q3 results and more importantly, the steps we are taking to accelerate our performance in this volatile operating environment. Importantly, focused on the priorities and actions set out in our 2030 Strategy. As you will hear today, consumer uncertainty, tariffs, geopolitics, high cost inflation and other factors are all pressuring sales and profit growth across the consumer sector. Despite these headwinds, we are operating with determination and focus. We have healthy brands in growing categories with strong market shares and a diverse global footprint with nearly 50% exposure to faster growth emerging markets and a best-in-class global supply chain to service that demand. We remain committed to our goals of delivering organic sales growth, net sales growth and dollar-based EPS growth and to our capital allocation priorities to drive total shareholder return towards the top end of our peer group. We have done that over the past 5 years and have confidence in our ability to continue to do that. What drives this confidence is our ability to execute on our 2030 strategy to accelerate change as we adapt to this complex and changing environment. Coming off our 2025 strategic plan, we have improved our innovation, built and scaled our capabilities, improved our organic sales and market share performance and delivered consistent annual dollar-based EPS growth. This is the perfect time for our strategic transition as we're coming off our 2025 plan, which built the organizational muscle necessary to execute our strategy and focus on global alignment. This is not wholesale change but rather we are working to accelerate the rate of change as we embark on our 2030 Strategy. We have made and are continuing to make the changes that are required to drive outperformance. And over the strategic time horizon of our 2030 strategy, we will emerge a stronger and more effective company. As I outlined in September, we are taking concrete intentional steps to accelerate our growth going forward, steps that will drive performance in any market environment, but particularly important now. These include a new innovation model with additional resources focused on delivering more impactful science-based innovation across all price tiers. This new model includes investment in people, process improvement and resources and tools, including AI to make us faster and better able to prioritize the innovative products and packaging that matter most to our customers and consumers. We are focused on omnichannel demand generation, including upskilling our commercial organization to be more consumer-centric by adopting how we deliver the right products at the -- with the right content, with the right message to the right people at the moments that matter. This will help continue to build the strength of our brands and drive brand penetration. Having scaled new capabilities we prioritized as part of our 2025 Strategy, including digital, data, analytics and AI, we will drive more dynamic change by accelerating our investments and efforts in areas like RGM and agentic AI, working to drive efficiency, disrupt our own processes and integrate new ways of working across the company. And using predictive analytics and automation more and more across our supply chain to deliver personalization at scale, drive optimal asset utilization, minimize downtime, improve our service levels and enhance our quality systems. Underpinning many of these initiatives is our strategic growth and productivity program. While this program will enable us to fund incremental investments and deliver savings to drive dollar-based earnings growth, it is even more vital as a strategic enabler to facilitate the changes in behaviors and processes needed to accelerate organizational change, making us more flexible and simplifying our processes to increase speed and efficiency. Because of these actions and the fundamentals of our business, we believe we are well positioned to outperform in the context of the current global category slowdown for several reasons. The strength of our business in emerging markets gives us the ability to drive faster category growth as developed markets remain sluggish. Hill's underlying performance remains very good in a softer category given our robust innovation and our ability to gain market share in low development segments like cat, wet and small paws. The health of our brands across categories following years of investment provides us with opportunities to drive pricing to offset raw material inflation. Across our business units, we continue to have well-funded advertising and innovation plans. And we're operating with an even greater focus on revenue growth management, particularly with prescriptive analytics and AI. And we continue to generate strong cash flow to invest in the business and help drive TSR. The timing for us to be kicking off our 2030 Strategy could not be better. We are seizing this moment as the 34,000 Colgate-Palmolive people around the world work to deliver on the change needed to reaccelerate growth and outperform. And with that, I'll take your questions. Operator: [Operator Instructions] The first question comes from Dara Mohsenian with Morgan Stanley. Dara Mohsenian: So clearly, a difficult operating environment here in terms of category growth in household products, as you mentioned, Noel, with all the consumer pressure points. Can you just give us some perspective on if you expect the category softness to linger as we look out to 2026. You also highlighted a number of focus areas for your own business in 2026 within that landscape. So just how impactful and quickly do you think those levers might be in improving your own organic sales growth performance, again, as we look beyond this year? And if I can just slip a Part B, can you just review Hill's specifically, volume mix dropped off in the quarter. I know there's some factors exaggerating that, but it did look like the underlying performance was perhaps weaker. So just an update on pet category trends and Hill's market share performance. specifically would also be helpful. Noel Wallace: Great. Thanks, Dara. So clearly, a lot of volatility in the market, particularly in the quarter, we're seeing month-to-month swings that are, quite frankly, pretty surprising through the quarter. August was very difficult, but September shipments did get better but just not enough to make up for the August softness we saw. So if I look back at my upfront comments, which I think clearly lay out exactly how we're thinking about the business, both short term and long term. As we switch to our 2030 strategy, we feel we're in a position of strength here. We're executing against the changes that we implemented through 2025 and the new changes that we believe contemplate the current environment, which we expect to continue in the short term, certainly to be sluggish. The SGPP will provide the right organizational structure and the capabilities while funding importantly, increased investment in helping us drive that dollar-based earnings per share growth we talked about. So if I go around the world perhaps in terms of the operating environment, on an underlying basis, we think North America was actually a little better for us this quarter and particularly ex skin, but we're still not where we need to be there. And I'm pleased to see how Shane and John Coyman are truly tackling the opportunities that we see on the business. Categories were slightly weaker in Q3 in North America but our performance improved sequentially, and we expect that to continue sequentially, particularly excluding skin health. Consumer still remains relatively weak across North America, as you point out. We're seeing higher levels of couponing. Hispanic traffic is still down. And as you've heard from others, category takeaway in the U.S., particularly in September, was a little softer than most of us anticipated and a little softer than the preceding months. So -- and if I move on, again, we expect that to continue. But this SGPP plan, Dara, what I'm really trying to get across here is we're anticipating a continued sluggishness but we're making the changes necessary to stimulate growth not only for our business but for the categories. And that's going to be consistent all over the world. As expected, let me get into Europe. We're seeing a little less pricing than before. Volume was in line, maybe slightly lower than we were expecting. Western Europe was strong, better than we expected, some incremental weakness in Eastern Europe, particularly in Poland. Latin America is mixed, although Mexico and Brazil, better for us than for some others. Organic was up mid-single digits in both Mexico and Brazil. Conversely, Colombia and Central America were a little softer as they're dealing with more economic weaknesses in those markets and more political volatility that's impacting consumption across those regions. So if I move on now to perhaps China, China is a mixed bag for us. Colgate continues to do well as e-commerce and innovation are key drivers for us in that market and doing exceptionally well. We were up mid-single digits on the Colgate side. However, Darlie continued to see some weakness, particularly in premium e-commerce. We are taking aggressive steps to address our innovation and our e-commerce business there but it's taken a little longer than we anticipated to see the changes. As you saw in the announcement, India was a little softer but we expect that to improve moving forward. The GST came through in the quarter, medium and long-term positive, we think, for the benefit, it created some additional headwinds as we went into the quarter -- as we exited the quarter. But importantly, we are really focused on getting some big core innovations executed across that country and pushing our premium innovation, particularly in the urban class of trade where we've seen some sluggishness. And so let me move on to Hill's quickly to balance out your question at the end. Hill's from a category remains a bit soft but we particularly saw dog dry down but cat way up. U.S. growth slowed a bit but that included some headwinds from lower e-commerce inventory that got pulled out at the end of the quarter, a little softness in Canada due to the Canadian sentiment. But overall, we're pleased with Hill's. If you take ex private label up some good growth there, and we're gaining share there across almost every strategic growth segment there is. And that, again, is, I think, a testament to the strategy we put in place the last couple of years, the increased capacity we have in areas like wet. And we obviously are expecting the category to remain a little bit sluggish in the short term but the opportunities for growth remain real and particularly in those faster-growing segments like cat and wet, and we believe we've got the plans in place to do that. So despite a positive growth in our categories but slower than we anticipated in the quarter, raw material inflation, tariffs, obviously, some trade destocking, we're still delivering dollar-based earnings per share and strong cash flow. And overall, that's exactly how we expect the business to continue to trend. Operator: The next question comes from Peter Grom with UBS. Peter Grom: I wanted to ask on Latin America. So I just wanted to ask on Latin America. So first, just the prepared remarks, there was a comment regarding a decline in oral care due to the replacement of trade inventories in connection with the formula change. So can you just give more color on what happened there? And is there a way to quantify the impact that had on the quarter? And then second and related, growth in the region has been more in this low single-digit range this year as pricing has moderated. And Noel, your commentary to Dara's question was helpful. But just as we look ahead, would you expect more of the same? Or do you see an opportunity for growth to improve from here? Noel Wallace: Sure. Thanks, Peter. So yes, Latin America organic was 1.7%. But if you include -- which includes 150 basis points negative from the volume impact from the Colgate Total replacement, which I'll talk to perhaps in a second here. As I mentioned just a second ago, we were pleased with Mexico and Brazil, both up around 4%. so overall, those markets continue to perform well. Pricing is improving but a little bit at the expense of volume, and we saw volume a little bit sluggish in our categories, not to be expected given some of the prolonged pricing we've taken there. So let me explain a little bit more on Colgate Total. Globally, through the third quarter, Colgate Total continues to do well, driving organic sales growth and premiumization as we've been able to take pricing on this pretty significant innovation. We've rolled it out around the world with new regimen claims and on toothpaste, mouthwash and toothbrush and seeing some good share growth in general around the world. So we're pleased with that. If I go back to Latin America, we noticed an increase in consumer complaints, including some temporary mouth irritations in Latin America early in the year, with the majority coming from consumers who had used the clean Mint variant. This was mostly people who brush their teeth 3, 4, sometimes even 5 times a day. We determined this was primarily due to the new flavor. So we adjusted the formula and in collaboration with the Brazilian health authorities, we voluntarily replaced the impacted variants in Brazil with the reformulated product, and we've seen Colgate total market shares begin to improve subsequent to that change. We are currently also replacing the impacted variants in other markets in Latin America. This was the gross margin impact that we discussed in the prepared commentary, 40 to 50 basis points. While we did not see the same level of complaints in other markets, we are proactively adjusting the formula for the impacted variants around the world. There may be some further costs going forward. But at this point, we believe the majority of costs have already been incurred. Coming back to some of the categories in Latin America, still growing but have slowed a little bit in the recent periods, driven by particularly volume while we're still getting pricing in the categories. And this, as I mentioned just a moment ago, is more acute in Andina and Central America, where we're seeing a little bit more price competition in those markets. We're making the necessary changes to adjust to that, and we're working on sharpening our price points to improve our volume shares. Overall, Latin America, volume shares for our total Oral Care business were flat, slightly down in value, as I mentioned, due to perhaps the total replacement. We're starting to see those shares come back nicely. Operator: The next question comes from Kamil Gajrawala with Jefferies. We'll go to the next question. The next question comes from Filippo Falorni with Citi. Filippo Falorni: On the Asia Pacific business, Noel, you mentioned the GST tax change, obviously, impact on India. Any sense of quantifying that impact also? And you mentioned an improvement going forward. Is that the main driver? Are you expecting also an improvement in the macro conditions there? And any comments on the local competition in that market would be helpful. Noel Wallace: Yes. So let me -- Filippo, let me address India first. Thank you. As you saw from the Indian company results, organic was down mid-singles. Underlying demand in India, mostly in the urban part tends to be a bit sluggish. Rural seems to be holding up okay. We had very difficult comparisons, as you well know. Pleasingly, comps get easier, and we feel we've got really good plans moving forward, and we expect better performance in the fourth quarter and returning obviously to growth in 2026. The GST tax in our categories, particularly oral care and toothpaste went from 18% to 5%. As you can imagine, this led to some price reductions and disruptions in trade inventories. I think our team did a really good job to manage that and get ahead of it and get it cleaned up as we move into the fourth quarter. Longer term, we would expect the GST reduction to benefit consumption in the category, which has been challenged by the inflationary pressures there. So overall, we think this will be a net positive for us. Moving forward, we're obviously very focused on addressing some of the sluggishness we're seeing in the rural areas. We've got a strong premiumization strategy to continue to grow share in the modern trade and particularly in urban areas. And we'll be reviewing that business in detail with the teams next week but we're excited about some of the strategic areas that we're going after and the long-term growth potential of that market. Operator: The next question comes from Robert Ottenstein with Evercore ISI. Robert Ottenstein: First, a quick follow-up just on Latin America. If you can give us just a sense of where the market shares ended up with the relaunch and your thought of the impact of the formula change on that? And do you -- what is the outlook for 2026? And then my main question is on the drugstore channel in the U.S. very weak, not a great channel to shop in, products under locking key. How are you dealing with that -- the challenges of that channel? And then perhaps related to that, elmex has been a huge success in Europe. Drugstore channel in the U.S., not the greatest venue for that. How are you thinking about that dynamic, the weakness of the drugstore channel as well as the potential of elmex in the U.S.? Noel Wallace: Yes. Thanks, Rob. So let me try to take those in turn. First, on Colgate Total, we got out of the gates really, really strong with that relaunch, saw market shares grow incrementally for the business. As you can imagine, we stay very close with our consumers. And as I outlined, made an adjustment to the flavor in order to address some consumer complaints and irritation associated with select variants. The good news is that product is -- new product is rolling in, particularly in Brazil and Mexico and across the region as we speak. And the early indication is we're starting to see the shares come back quite nicely. We have a really strong marketing plan for the year -- for the quarter to go, the quarter we're in right now. So we're quite confident that we will see the business rebound nicely. As I mentioned, it was about 150 basis points of negative organic in the quarter for Latin America, about 40 to 50 basis points of total gross margin hit. So the good news is we're moving forward and confident in what we're seeing with Colgate Total. If I move to Asia, particularly where we're seeing some very strong results on Colgate Total, we're very encouraged by the progress we're seeing in that region. As I refer to your question around the drug class of trade, it is challenged. The good news is we have reengaged them in conversations in the middle store about how to drive more traffic back into those stores. I mean, obviously, CVS announced more improved results this week, as you may have seen. So we're hopeful they're committed to getting the middle of the store addressed and certainly, in the therapeutic end of the business, our whitening business continues to do quite well there. But they are -- it's challenged right now, and we're working very closely with them to improve the category dynamics through some of the revenue growth management initiatives and more importantly, some of the high-end therapeutic premium innovation we're bringing to it. Elmex, wonderful business. I won't get into the discussion on Europe at this stage but driving record shares for us in Europe. We have taken that bundle, to your point, Rob, into other key strong pharmacy markets around the world. It requires a strong professional underpinning in order to launch that. Clearly, we have opportunities to take that into other markets. And as we decide to roll that into new markets around the world, we'll be sure to let you and other investors know because it's a wonderful bundle with great upside potential. Operator: The next question comes from Robert Moskow with TD Cowen. Robert Moskow: I noticed in the script that in the U.S., you mentioned some increased competitive activity, getting more promotional. You described it as fairly rational. Can you be more specific as to the degree to which it's intensifying and what you expect going forward? Noel Wallace: Yes. Thanks, Rob. Yes, we've seen a slight uptick in promotional weights, more couponing, a little bit more volume on deal but nothing that would suggest that we're back to pre-COVID levels and higher. It's still, in my view, quite constructive. But you can imagine, as we've seen some volume slowdown in the categories in which we compete, I think all of the retailers and all the competitors are looking for solutions in order to drive more turn and more velocity in store. And ultimately, that turns to volume. What's interesting is when you look at the volume characteristics in the U.S., we still see the premium and the super-premium growing very, very nicely. It's the value-oriented brands or SKUs or segment as well as the mid-price segment that seems to be suffering. And importantly, as I outlined in our 2030 strategy, we are very deliberately looking at more core innovation across our franchises to stimulate more demand, particularly at the lower end, while we continue to focus on the significant growth opportunity we have in the premium segment around the world. So the strategy is much more intentional in getting more innovation out to stimulate demand, not only here in North America but around the world. Operator: The next question comes from Lauren Lieberman with Barclays. Lauren Lieberman: Just wanted to ask about the pricing environment in Europe. We've had a few years, obviously, post-COVID where there's pretty constructive pricing. This quarter is still positive. But just curious about kind of the longer-term outlook and ability to keep driving positive price in Europe. Noel Wallace: Yes. Thanks, Lauren. So clearly, as we've said, we're really pleased with continued pricing in Europe. And I think we've learned a lot in the last couple of years on how to manage price effectively, notwithstanding the fact that it will continue to be a challenge in the longer term getting positive pricing every quarter but we have certainly built a much stronger muscle on the importance of ramping up our innovation. And again, I come back to the SGPP and the focus we have on putting more resources into innovation, and that's going to allow us to take price-based innovation, particularly at the premium side of the business, and that will be our focus. Overall, the retailers have to be pleased with the category growth they're seeing on dollars and our ability to get pricing in the category but it's going to be a balance. We need to bring real science-based innovation to drive the premiumization and take more pricing. I would expect that pricing, our anticipation is that we can keep getting positive pricing as we move forward but it will certainly be a little bit more challenged given the prolonged inflation that we've seen in the categories and our need to balance both pricing and volume growth moving forward. Operator: The next question comes from Bonnie Herzog with Goldman Sachs. Bonnie Herzog: I had a question on your implied Q4 organic sales growth. I guess for the full year, guidance assumes a step-up in Q4 at the midpoint. So I guess, just hoping you could talk through the puts and takes for Q4 to get there. I guess I'm asking in the context of the still subdued end market backdrop and certainly the greater headwinds from private label pet food exit. Stanley Sutula: Bonnie, it's Stan. So yes, let's talk a little bit about Q4. So we said in our guidance that Q4 organic or that full year organic will be roughly in line with the year-to-date. So if you look at the year-to-date, we're roughly 1.2%. So getting to the full year would indicate that we'd improve over the performance in Q3. If you think about the drivers that would help there, we had an impact that Noel articulated earlier around total to the total company. That's going to improve here as we go. And you also heard in both our prepared commentary and some of the questions thus far that there was some destocking in certain markets and certain products. And so as that levels out, that also becomes a benefit here heading into Q4. In addition, on private label, the impact that you saw in Q3 year-on-year will roughly be about the same impact that you'll see in Q4 as we have completely exited the private label business but we still have that year-on-year impact. So right now, as we look at Q4 and coming off of Q3 and the momentum that we see, we feel pretty good about that in line for our guidance of roughly in line with the Q3 year-to-date, which is around 1.2%. Operator: The next question comes from Kevin Grundy with BNP Paribas. Kevin Grundy: Noel, a question for you. I wanted to kind of take a step back and get your thoughts on the top line challenges. How much of this you believe is cyclical versus how much you believe maybe are Colgate-specific challenges, 1% organic sales growth in the quarter. I'm sure you're not pleased with it. It's levels that investors are less accustomed to seeing from Colgate. So number one, at a global level, where do you see industry growth at the moment, kind of rolling up everything and looking across your business relative to the 3% to 5% longer term? And then two, how much of this do you see as cyclical versus how much is company-specific and you think you can address with the strategy that you've outlined so far on the call? Noel Wallace: Yes. Thanks, Kevin. So let me just tackle the categories first. They obviously slowed, as I mentioned, in Q3 on a global basis, particularly for developed markets. The initial slowdown was driven by lower pricing across many of the categories but that inflationary pressure -- the inflationary pressure abated, we didn't see it necessarily coming back in volumes. And clearly, underpinning all of this is just the continuous consumer uncertainty. As we talk to consumers and evaluate consumers around the world, it's not a question of them being confident. It's just the uncertainty with all the moving parts that are going on and all the noise and rhetoric. So ultimately, on a global basis, categories are now for us growing roughly 2% on a global basis, probably more like 3% in the first half. So obviously, it's a bit slower. And that's versus the 4% to 5% exit run we had in 2024. So volumes today basically flat with pricing more or less 2%. So if you go back, Kevin, historically, over the last 10 years, I mean, clearly, these are low levels of market growth. So whether you want to call it cyclical or not, I mean, it's clearly way below the historical averages. And so our anticipation is, yes, things will get better. But I want to reiterate, if things don't get better, we are preparing our plans and our strategy to address what we need to do to grow faster in this current environment. That's not only faster top line but faster margin growth and faster EPS to ensure that we're putting steps in place if this is to linger on for another couple of quarters. I do think it's somewhat cyclical versus historical numbers. But we're not waiting to see if it turns. We're taking steps now to ensure that we accelerate organic growth moving forward. Operator: The next question comes from Peter Galbo with Bank of America. Peter Galbo: I wanted to ask a little bit on the gross margin performance in the quarter. I know you called out maybe the acceleration in palm oil costs. And I just wanted to understand, a, how much of that is just base period effect? I mean the raw material pressure in the margin build clearly stepped up versus the second quarter. So I just want to understand, is that base period effects? Or is that something else? And then b, Noel, I know there's a lot of kind of geopolitical noise around it but obviously, we have some Southeast Asia trade deals. We have political unrest in Indonesia, a lot of places where you source from. So maybe just the latest and greatest on what you're seeing kind of in the live market from a palm oil perspective. Stanley Sutula: Let me start with the gross profit. First, gross profit margin was down year-over-year in the quarter versus Q3. But I would point out Q3 of last year was the highest gross profit margin we've had since 2020. So the year-on-year impact is primarily driven through greater-than-anticipated raw materials inflation, and that is fats and oils is the biggest driver there. The impact of lower volumes on our fixed cost leverage from our production facilities, tariffs and the transactional FX. We also saw an impact that we talked about earlier from a formula change in Colgate Total in Latin America, as we mentioned in the prepared commentary. For our guidance, what we've laid out is that our year-to-date margin is 60.1%. We expect the full year gross margin to be roughly in line with that, which would put Q4 at 60% plus or minus. The sequential improvement for Q4 versus Q3, we're confident in because we expect that there'll be less material inflation on a year-on-year basis, transactional and Colgate Total impact will be partially offset by a slightly greater tariff impact. So we're confident on the gross profit improvement as we go quarter-to-quarter, which would deliver us a gross profit margin for the year that's roughly in line with the year-to-date. Operator: The next question comes from Chris Carey with Wells Fargo Securities. Christopher Carey: Just to clarify that, was there -- were there anomalies in Q3 gross profit that should be easing from here over and above just the rising commodity backdrop. So I just wanted to clarify that quickly. But really, the question is around advertising spending. Colgate has increased ad spending over the years. Obviously, this is allowing for a very full and rich source of investments to support your brands. I'm also conscious that you have peers that are looking at AI and automation to drive savings in advertising. Clearly, you talked about AI quite a bit in the prepared remarks. And I just wonder with sales and categories doing what they're doing, is there any, I guess, desire or thought to think a bit more strategically about advertising spending going forward and maybe less concentrating on percentage of sales? And how can the organization be more efficient with this spending so as to get the right return profile. So thoughts there. Stanley Sutula: Yes, Chris, let me start with the gross profit. So just again, the kind of quarter-to-quarter anomalies as we think about what will drive that. From the total impact that we talked about in Latin America, that was roughly 50 basis points or so margin. And we believe that most of that is behind us. So that would be a benefit. And then we do see materials, gross materials easing a year-on-year basis. So that will also be a help. And now we're completely out of private label. So that does not going to impact the current period GP. Obviously, it's still in the prior year. So we're confident in the GP improvement here as we go quarter-to-quarter. Noel Wallace: Yes, Chris, let me talk about the advertising question because I -- this is one I'm spending a significant amount of time on. And as we laid out our 2030 Strategy, and we've talked about in previous meetings, AI and ultimately, the application of AI across various vectors in our company is strategically very, very important. And we've been investing not only over the last 3 years in that space but we'll continue to accelerate our investment there. So if I look at the year-to-date spending on advertising, roughly in line with last year's record full year number, and we expect the fourth quarter to be roughly in line with the year-to-date. So advertising dollars and percent down slightly year-on-year as we lap, obviously, the strong level of spending that we had in the year ago quarter in 2024. But we are still spending very robustly against our brands, although we pulled back a little bit in some markets where we saw the consumer is much more challenged, and we delayed some of the innovative launches that we had to a later point. So we adjusted spending accordingly. But we're still spending against what we call return on investments. So very much looking at leveraging our media efficiencies, as you point out, to get a much better return on the overall investment. We still expect advertising to be roughly flat this year on a percent of sales basis as we move forward. And as I talked about, we will look to the savings from our SGPP to continue to fund advertising and accelerate how we're thinking about building our brands moving forward. So let me talk a little bit about AI, and this is one that certainly I hope that our investors have seen that we've been really out in front of this, as I talked about at CAGNY. It's a very important focus for us and a key strategic enabler for both growth and productivity as we move into the 2030 plan. And we're very, very excited about that. We've spent a significant amount of money in the last 2 years training and upskilling our teams on horizontal AI and the ability to apply that to drive more productivity. Our independent surveys that we see would indicate that we're making strong progress versus our peer growth in terms of using AI and its implementation across the company. We've launched AI hubs using the world's leading generative AI models to ensure our people have secure access to the most advanced AI capabilities. And as I think I may have mentioned at CAGNY, this is, to me, a huge unlock to drive productivity across the organization. We'll move it into the next phase, certainly as we go into 2030 more on a vertical basis to really reengineer our processes and drive a lot more efficiency. But I thought I could talk about a couple of the areas that we're very focused on with regards to advancing AI and particularly as we move into agentic AI, which is the next big frontier for us that we're quite excited about. So marketing and content, we will be using generative AI will be pivotal to transforming all of our marketing and digital strategies. We're going to significantly enhance consumer engagement through optimized real-time and compelling visual storytelling through AI-developed content. That's going to be exciting for us. We have some pilots in some pretty significant markets that are showing very early -- great early success. The second big focus area, as I mentioned in my upfront comments, is around innovation and how we're going to truly step up the quality and quantity of our innovation using AI and our ability to much more efficiently generate more consumer-centric concepts and get those tested and validated much quicker and incubated across core markets. So that's exciting for us. As we look at some of the collaboration, as we think about Agentic commerce moving forward, an area that we're really thinking about collaborating closely with some of our big retailers, whether it's Walmart and OpenAI, whether it's Amazon, all of these will afford us the opportunity to unlock the potential that Agentic commerce will bring, and we're certainly thinking about strategically how to make sure our brands play at the forefront of that and that exciting change that we're going to see from shopper behavior. So rest assured, AI is right at central in terms of our strategic growth enablers for the 2030 strategy and the investments that we put in place over the last couple of years, we think, position us very well to continue to maximize on the trends that we're seeing with that exciting technology. Operator: The next question comes from Michael Lavery with Piper Sandler. Michael Lavery: [ Mostly ] you covered already. There's been good stuff already. Just maybe a couple of quick ones on pet. Cats are gaining share of the U.S. pet population. You pointed out some innovation in the EU. Is there a similar shift there in terms of the market dynamics favoring cats? And you also pointed to the 20,000 distribution point gain in the U.S. Can you give a sense of maybe some of the timing and how much of that wraps into 2026? And maybe just on inventories as well, you cited a little pressure there. Are those at the right levels now? Or should we expect any more retailer reductions still to come? Noel Wallace: Yes. Thanks, Michael, for the question. So let me more broadly cover Hill's again, and I'll address in turn some of your specific questions. Overall, given the category slowdown and impressive quarter for Hill's in what I would characterize as pretty tough circumstances. Overall, we delivered 2.5% organic ex private label, and that came with some e-commerce inventory reductions we saw at the end of the end of the quarter from some of our retailers. Therapeutic, which I didn't talk about in my upfront comments, continues to be a real growth driver for us. The Prescription Diet business is doing exceptionally well with market share growth, which is obviously helping our mix and gross margin and operating margins on that business moving forward. We saw a greater impact, as we've mentioned in the upfront comment on private label this quarter to the tune of about 300 basis points. Clearly, strategically, we're not in the business for producing private label. So this is going to get cleaned out as we move through the fourth and into the first half of 2026, which will be terrific for the business, allow us to really focus on the short-term growth opportunities and longer-term strategic growth opportunities that we've talked about. So if I go back to the year-to-date and importantly, the third quarter, we grew organic sales in almost every combination of wet, dry, treats, cat, dog, prescription diet and science diet. So it was very broad-based strength despite the slowing category. So we're really pleased with the underlying structure of the business. Continued strong margin performance on the business, that's driven by the fundamentals, aided to be sure, by a little bit lower private label but we're obviously getting more leverage through the P&L as we continue to optimize the supply chain, and we're able to do that despite obviously softer volumes in general. And as the category remains sluggish and ultimately should come back medium and longer term, we'll get obviously more leverage moving through our facilities. We're gaining share across channels as well, which is terrific. The science-based innovation that we're bringing behind the increased brand investment is clearly working. Active biomes, multipacks, a series of price pack architecture moves, getting better assortment in store, particularly on the growing segments like cat and wet are generating real benefit for us. And my compliments, obviously, to the supply chain that with all the changes that we've executed over the last couple of years, our supply chain now really seems to be executing well. Our ramp-up of Tonganoxi, obviously unlocking a lot of opportunities for growth in the West segment and driving more efficiency. So overall, a pretty strong performance despite the slowdown in the market. And I think longer term, as we've always said, the dynamics of this category continue to be excellent. Even though we're seeing some slowdown, the strategic growth segments are growing fast, and we have an opportunity to get our fair share in those segments. And lastly, I would say is the Prime acquisition that we made in Australia continues to perform really, really well ahead of expectations. We're learning a lot about fresh in that market, and we will continue, obviously, to fuel that growth in Australia and learn from that important segment. Operator: The next question comes from Andrea Teixeira with JPMorgan. Andrea Teixeira: Are you planning any selective pricing to offset the additional commodity headwinds? And then a second part of that is that with FX coming in better than anticipated, isn't it positive, sorry, for especially Lat Am transactional FX into 2026 and even in the fourth quarter as you phase out the total impact? Stanley Sutula: Yes. So Andrea, why don't I take the first one. So on the pricing, as you go through, Noel's covered pricing here and what we would look at. The pricing actions we have in place try to address in balance with competition as well as the commodities that we see. And FX clearly did come in favor here over the past quarter. And if it stays in the current place, should be a tailwind for us heading forward. At the current spot rate, we still see it as a flat to low single-digit negative impact for the year but Q4 would be more favorable than Q3. Europe has the biggest marginal benefit but most currencies in general have moved favorable. And in fact, you mentioned Latin America currencies. Those have also moved recently, which is a benefit to the business. So FX becomes a bit of a tailwind here at the current spot rates. Noel Wallace: Yes. And other thing, Andrea, I mentioned is that we were positive pricing in every single division in the third quarter, which, again, I think is a clear indication that our brands are strong. The investment we put behind them over the years is allowing us to offset some of the commodity inflation and some of the foreign exchange inflation that we've had in the first half. But overall, we're encouraged with that, and we will continue to look for pricing opportunities as we move forward, certainly as we look to balance the volume component of the business in the medium and longer term. Operator: The next question comes from Olivia Tong with Raymond James. Olivia Tong Cheang: Can you talk a little bit about offset EPS unchanged. Gross margin guide obviously came in 50 basis points but you're maintaining the low single-digit EPS. Are you expecting to be on the lower end of the range? Or is there some kind of offset that we should be mindful of? And then as we think about this more challenged environment, is there more that should be done with respect to restructuring given the current backdrop? Stanley Sutula: So let's talk a little bit about the guidance on EPS. So if you kind of go back and look at the overall guidance, we said that we still expect net sales to be up low single digits, and that's including a flat to low single-digit negative impact from foreign exchange, though that improves as we get to the back half of the year. We updated our organic sales growth to be roughly in line with the year-to-date, which would indicate to be around 1.2% for the year. And that includes a 70 basis point impact from the exit of private label. So as you're thinking about run rate going out, it's important to keep that in mind. And then on gross profit margin, we said we'd be roughly in line with the year-to-date gross profit margin of 60.1% and including advertising roughly in line with the full year of last year. And we've held our EPS guidance. And I think if you step back in our commentary the last few years, we've made significant changes to the business model. The strength of that business model enables us to weather the challenges that we had here in Q3 and still deliver bottom line dollar-based EPS growth, and we expect to be able to continue that here for this year. On the restructuring question, for our sales growth and productivity program, this is designed for 2 facets. First, we're doing this, we believe, from a position of strength to enable us to fund incremental investments as well as the second piece is delivering savings to continue to deliver dollar-based earnings growth. It facilitates the changes that help us make us more flexible, simplify our processes, increase our speed and efficiency. Now the program is consistent with what we announced last quarter with estimated charges of $200 million to $300 million and concluding by the end of 2028. And we anticipate those kind of first charges to start to roll through in the fourth quarter. So we're doing a lot of planning. We're going to execute this carefully because we're changing the way we work, not just slashing cost. So it's important that we're looking to design and allow the future fit for our organization, which aligns with our 2030 Strategy. That's going to include investments in things like omni demand gen, increased innovation, scaling our capabilities and Noel just covered AI and agentic AI, deep investments in those areas and educating our teams at the same time to be able to go execute that. This also will help us continue to drive flexibility and personalization in the supply chain. We talked about those investments that we made, and we think that will continue to benefit us going forward. Noel Wallace: Olivia, if I can just add one thing to what Stan said. We spent a lot of time over the last 12 months talking about building flexibility into the P&L. And I think that is the key thing from that standpoint, which is we worked all through '24 to build that. We used some of that. We're still building flexibility in the P&L. So again, when we think about achieving our targets, we're still continuing to think about that. And I think if you look at the '25 results, we've had incremental tariffs. Year-over-year, we have foreign exchange. We've had higher raw materials, the category slowdown, what have you. It's that focus on the flexibility that allows us to get to that. And yes, we're going to use that up as we go through the year to deal with headwinds, but that's really the focus of building that up in the first place. Operator: The next question comes from Steve Powers with Deutsche Bank. Stephen Robert Powers: And I guess picking up on some of that. So Noel, when you step back and you think about the initiatives that you opened with and that Stan just walked through in support of SGPP, new innovation model, omnichannel diversification, RGM, et cetera, all underpinned by AI and predictive analytics. Those all seem like the right points of emphasis. But I guess a couple of questions around that. How do you think about the upfront costs of all those things in the aggregate, number one. Number two, to what extent are they really points of category acceleration or points of Colgate-specific differentiation versus more just the cost of doing business these days? Because if I was going to be devil's advocate, I'd say that thematically, that's what a lot of companies are doing. And I guess all of that in terms of how that plays into your '26 planning, if you could? Noel Wallace: Yes. Thanks, Steve. So listen, I think we clearly want to look at these as a way to gain a competitive advantage in the market but more importantly, utilize the capabilities to drive incremental category growth for our retailers and for us. So let me start with innovation. And we're learning a lot about how to use technology to innovate faster and to get better premium innovation in the market that's validated expeditiously in terms of how we've looked at it before. So all of that is intended on giving us a way to go to our retailers, partner with our retailers with better innovation faster and in more quantity than we've done before. So it's going to allow us to hopefully accelerate that if we gain a competitive advantage on that. Getting a clear understanding of how to use, let's take agentic AI and how to make sure that we're participating in, once again, drives premiumization, drives more purchase intent, the 3 more, more money, more households, more volume, allows us to really get much more personalized with our messaging, which will drive incremental consumption in the category. So all of that, if we believe we're doing it right and partnering with our retailers in an effective way, should drive more category growth. Now getting the -- taking AI aside from the top line aspect of the company and the growth aspect, it's using it to really effectively be more productive internally within the organization. So let me take demand planning as an example. Clearly, we have -- we see real opportunities in the demand planning space to use AI to more automate demand planning and demand replenishment, which allows us to generate more cash for the business and lower working capital. So clearly, opportunities for us to gain an advantage there. So not dissimilar to how we embarked on the whole SAP journey 20 years ago, we feel technology can be a real competitive advantage for us as a company, and we're making sure we're putting the training and the investments in place. And we've been doing that for the last 3 years, given some of the flex that John mentioned in the P&L. So it's not like we're starting from square one here. Our teams are well equipped to understand the applications of technology, and we're investing in the right capital given the strong cash flow that we have to ensure that we're positioning ourselves for success moving forward. Stanley Sutula: Yes. And I'd just pick up on your question on the upfront cost. We're not starting. We're well underway and have been for some time. And in fact, as we look at our 2030 strategy, one of the things that's changed over the last few years is while the total number of investment you see may look relatively static, under the covers, we're practicing good resource allocation. So we are driving productivity, getting more efficiency, using AI to help us drive that and then making strategic investments, which we've been doing over the last several years on data, digital, AI, those investments on educating our people all help enable this going on. So it's not like we're going to come and say we have to make this big, large incremental investment. We're reallocating resource, making strategic investments and have been for some time, and we'll continue to do so as part of our 2030 strategy. Operator: The last question will come from Edward Lewis with Rothschild & Company, Redburn. Edward Lewis: Yes. Noel, I wanted to return to China. I guess it's another quarter of familiar trends with growth at Colgate China and then challenges at the H&H subsidiary. Can you talk about what's going on at the latter and how you're looking to turn around performance? I mean, is it as simple as a bricks-and-mortar business essentially losing share to online? Noel Wallace: Yes. Thanks, Ed. So clearly, we're not pleased with the overall performance in China. We see real opportunities for longer-term growth. Clearly, that market is challenged from obviously a little bit slower growth and a more intense competitive environment/ And a pretty transformational transition into e-commerce, which our Colgate business has managed exceptionally well. And our Holly & Hazel business now is putting the right investment in place to get the premium side of their business, which is what's driving that marketplace right now. So we spent some time, as I alluded to in previous calls, as you well point out, getting the go-to-market fixed on Holly & Hazel. And I think the go-to-market, particularly in brick-and-mortar, is quite advanced now, and we'll start to see benefits of that in the next couple of quarters. Where we're really doubling down now is on building the brand more effectively through our online communication and how we do that and move from both from basically a more transactional business today with some of these strong online platforms to a more strategic basis on how we advertise top of the funnel, what we talk about to build the brand and ultimately drive ultimately persuasion and conversion. And that's going to require a more deliberate focus on how we spend our money online, with intentionality in my view, and a better understanding of how Colgate has done it successfully, which we're sharing those learnings. And then more importantly, getting the premium side of the Holly and Hazel business stepped up and excited that we've got a pretty significant premium innovation coming in the fourth quarter, which they will introduce, and they're really ramping up the 26 grids to ensure that we have much more online e-commerce-ready products to launch to that segment of the market, which seems to be growing quite nicely. Operator: This concludes the Q&A portion of our call. I will now return the call to Noel Wallace, Colgate-Palmolive's Chairman, President and CEO, for any closing remarks. Noel Wallace: So thanks, everyone, for your questions. Not a lot more to add. But obviously, while the external environment provides challenges, I hope you feel we are very confident in our ability to continue to execute against our strategy. We're particularly excited about the changes we're making to adapt to the current environment to ensure that we accelerate growth both for Colgate-Palmolive and for our retailers. And let me make sure I thank again the incredible tireless effort by Colgate people all around the world to continue to drive our results, and we look forward to talking to you again in the first quarter. Thanks, everyone. Operator: The conference has now concluded. Thank you for attending today's call. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. My name is Colby, and I'll be your conference operator today. At this time, I'd like to welcome you to the CubeSmart Third Quarter 2025 Earnings Call. [Operator Instructions] I will now turn the call over to Josh Schutzer, Vice President of Finance. Joshua Schutzer: Thank you, Colby. Good morning, everyone. Welcome to CubeSmart's Third Quarter 2025 Earnings Call. Participants on today's call include Chris Marr, President and Chief Executive Officer; and Tim Martin, Chief Financial Officer. Our prepared remarks will be followed by a Q&A session. In addition to our earnings release, which was issued yesterday evening, supplemental and financial data is available under the Investor Relations section of the company's website at www.cubesmart.com. The company's remarks will include certain forward-looking statements regarding earnings and strategy that involve risks, uncertainties and other factors that may cause the actual results to differ materially from these forward-looking statements. The risks and factors that could cause our actual results to differ materially from forward-looking statements are provided in documents the company furnishes to or files with the Securities and Exchange Commission, specifically the Form 8-K we filed this morning, together with our earnings release filed with the Form 8-K and the Risk Factors section in the company's annual report on Form 10-K. In addition, the company's remarks include reference to non-GAAP measures. A reconciliation between GAAP and non-GAAP measures can be found in the third quarter financial supplement posted on the company's website at www.cubesmart.com. I will now turn the call over to Chris. Christopher Marr: Thank you, Josh. Happy Halloween, and welcome, everyone, to our third quarter call. It was a very solid third quarter for Cube, which resulted in guidance increases across our key same-store and earnings metrics. Across all markets, our existing customer KPIs remain strong with key credit and attrition metrics remaining consistent within historical normal ranges. We are continuing to feel diminishing headwinds from new supply as the stores placed in service over the last 3 years lease up and the forward pipeline continues shrinking. As evident by 2 consecutive quarters of improved guidance expectations, the year has played out a bit better than we expected, which we attribute to the lessening impact of new supply, a more constructive pricing environment during our busy rental season and the continued health of the consumer. We foresee continued gradual improvement in operational metrics. We are not anticipating a catalyst for a sharp reacceleration. We are prepared and operating under the expectation that the stabilizing trends as well as deliveries of new stores will vary by market. Market level performance was similar to what we have been discussing for the last couple of quarters. Top performers continue to be the more urban, Mid-Atlantic and Northeast markets. The East Coast of Florida is experiencing stabilizing trends and some of the sunbelt markets are still finding their footing. In summary, it's a slow, steady stabilization without a catalyst for rapid acceleration, just like we laid out when we entered the year. We've seen some better pricing power that started earlier in the year for the reasons I've previously shared, while overall demand levels are mostly stable, but not growing significantly. It takes time for improving fundamentals to flow through to revenue with only 4% to 5% monthly customer churn, and this was the first quarter since Q1 2022, where move-in rates in the same-store portfolio were positive year-over-year. Assuming these stabilizing trends continue through the end of the year, we should be on improved footing heading into 2026. Now I'd like to turn the call over to our Chief Financial Officer, Tim Martin, for his commentary. Timothy Martin: Thanks, Chris. Good morning, and thank you to everyone for taking the time to join us today. For the quarter, we performed in line with our expectations, reporting FFO per share as adjusted of $0.65. Same-store revenues declined 1% compared to last year with average occupancy for our same-store portfolio down 80 basis points to 89.9%. Same-store operating expenses grew just 0.3% over last year, again, reflecting our keen focus on expense control. We saw favorable year-over-year variances in utilities expenses and in property insurance following our successful renewal back in May, which we discussed last quarter. So negative 1% revenue growth combined with 0.3% expense growth yielded negative 1.5% same-store NOI growth for the quarter. From an external growth perspective, we're starting to see a little momentum here late in the year as we're under contract to acquire three stores in the fourth quarter. We also completed and opened our joint venture development in Port Chester, New York during the quarter and are scheduled to open our project in New Rochelle, New York during the fourth quarter. On the third-party management front, we had another productive quarter, adding 46 stores to our platform, bringing us to 863 stores under management at quarter end. On the balance sheet, we successfully completed our issuance of $450 million of 10-year senior unsecured notes on August 20. The offering has a yield to maturity of 5.29% and was our first time back to the market in 4 years. We were delighted with the execution and delighted with the support we received from our fixed income investor base. Our 2025 notes mature later this month, and we intend to satisfy those initially through borrowings under our unsecured credit facility and then ultimately term that out by accessing the bond market again in the coming months. Our leverage levels remain quite conservative with net debt to EBITDA at 4.7x at quarter end. From a guidance perspective, we updated our full year expectations and underlying assumptions in our press release last evening. Highlights of the guidance changes include a $0.01 raise at the midpoint of our FFO per share as adjusted. On same-store revenue growth, we improved the midpoint of our guidance range. Our expense growth guidance range improved as well with a revised midpoint of 1.5% for the year. All of that translates into improved same-store NOI expectations for the year with a revised midpoint of negative 1.25%. Picking up on Chris' comments, we expect trends to continue to stabilize through the remainder of the year, putting us on better footing heading into 2026 than where we entered this year. Our guidance implies negative revenue growth in Q4, although acceleration from Q3 at the midpoint. While we're still not anticipating things snapping all the way back to normalized levels of growth quickly, we're seeing encouraging signs that are starting to flow through the portfolio. Thanks again for joining us on the call this morning. Happy Halloween. And at this time, Colby, let's open up the call for some questions. Operator: [Operator Instructions] Your first question comes from the line of Samir Khanal with Bank of America. Samir Khanal: Chris, I guess just how are you thinking about the balance between rate and occupancy right now in an environment where demand seems to be stable as you try to get that new customer in the door? Christopher Marr: So ultimately, the systems are focusing in on maximizing the revenue from each customer and so trying to find that balance, and it varies by market. So when you think about those two levers, rate and occupancy, you have the elasticity of demand that one has to deal with. And so when we look at those markets that we would describe as having been solid for a while, kind of the rock stars in this part of the cycle where you're getting both rate and occupancy, I'd call out New York City, Washington, D.C. MSA, Chicago, then you have those markets that are stabilizing. So their rate and occupancy are moving in a good direction, albeit still perhaps down year-over-year. And those examples would be Miami and L.A., Los Angeles. And then those markets that are still trying to find their footing where, again, the systems every day are trying to navigate through that dynamic of new move-in customer rate versus occupancy and testing is the demand there at any price. And those would be the same markets we've talked about all year, Atlanta, Phoenix, Cape Coral, Charlotte, the sunbelt market. So really varies quite a lot by market as the systems try to find that balance. Samir Khanal: And maybe as a follow-up here, I know you talked about move-in rates that were positive in the quarter, kind of the 2.5% better on rate versus occupancy. I mean can you provide some color around October as well, what were you seeing kind of trends in October? Christopher Marr: Yes. So the occupancy gap to last year has contracted from the end of the third quarter as of yesterday, we're down 100 basis points from where we were at this point last year. And the average rent on rentals, that 2.5% that you quoted for the quarter in October is kind of in that 1.92% kind of range. Operator: Your next question comes from the line of Nicholas Yulico from Scotiabank. Viktor Fediv: This is Viktor Fediv on for Nick Yulico. On your last call, you said that most demand still comes from traditional search and you're working with your partners for Gemini integration. So what percentage of leads and bookings are now AI influenced today? And how does overall the cost per AI leads compared to traditional search engine leads so far? Christopher Marr: Yes. The leads coming through the LLMs, which is primarily ChatGPT at this point for us are about less than 1%. Viktor Fediv: Got it. And then you also mentioned last call that merchant builder exit [ waves ] is kind of coming to the market. And just trying to understand whether it has intensified recently? And what does it mean for you and kind of for your potential acquisition pool? Christopher Marr: I'm sorry, I think we got a little bit more clarity on the question, if we could, merchant builder sellers? Viktor Fediv: Yes, yes, sellers, yes, whether you can see now more of them or not really versus, for example, Q2? Christopher Marr: Yes. No, I haven't really seen a change. Again, there's no and there typically isn't like significant duress in our sector. And so I think what you have is folks who may have opened a store in 2022, where they were underwriting cash flows based on the spectacular storage performance during COVID are clearly not meeting their pro formas. But I think what we're finding is everyone is just looking for ways to extend out and anticipate stabilizing trends and better times ahead and financial institutions for the most part, are cooperating. Operator: Your next question comes from Todd Thomas with KeyBanc. Todd Thomas: Chris, Tim, your comments about the improving trends and third quarter being the first period of higher move-in rents and it seems like that continued in October. Your guidance assumes an improving revenue growth trend in 4Q, albeit still negative. You mentioned that. But just your comments overall suggesting that, that trend of improving revenue growth, early sort of read into '26, is it fair to assume that you would expect, all else equal, that trend to continue from here, just given the 4% to 5% churn and the time it takes for that to translate to revenue growth? Is that how you're thinking about it at this point in the cycle? Christopher Marr: Yes. As you think -- I mean, as you think about '26 macro, again, assuming the consumer health remains where it is, the economy continues to do okay, we would anticipate that the trend from Q3 to Q4 -- and again, we talked about in Q2 that Q3 had a little bit of an anomaly and that was going to create that decel from the prior quarter. But yes, that trend should continue. Again, do we inflect positive in same-store revenue growth? As we sit here today, yes. When might that occur? Again, as we sit here today, I would conservatively expect that's probably the back half of 2026. Todd Thomas: Okay. And then some of your peers, I think, ran promotions are implemented, newer discounting strategies during the quarter. I was just wondering if you can speak to whether Cube participated or what discounting strategies might have been implemented during the peak season and how you're thinking about pricing, promotions and discounting in the off-peak season as occupancy typically pulls back a bit here. Christopher Marr: Yes. So I guess there was some new vernacular introduced recently with this gross net kind of concept. The 2.5% gross move-in rate year-over-year growth that we saw is -- for us, it is also the net. We have not had any change in our discounting. Todd Thomas: Okay. Are you changing your promotional offerings, though or changing your discount strategies at all? Christopher Marr: No. Operator: Your next question comes from the line of Juan Sanabria with BMO Capital Markets. Juan Sanabria: Just on the acquisition side, a couple of your peers have become more aggressive, talking more -- about more opportunities or deal flow. Just curious what you're seeing and/or willingness or appetite to increase the external investments. Timothy Martin: Thanks, Juan. I appreciate the question. I guess we have three stores under contract, so that's movement in the right direction. I think what we have seen and we've talked about here for the past several quarters is pretty consistent view from the buying side of the table as to what return thresholds look like. I don't think that's changed much at all. It hasn't for us. I don't think it's changed much for others either. I think the change is that the seller side of the equation has gotten a little bit more constructive from the buyer's perspective, and you're starting to see things move a little bit. I think you saw that from some of our peers. I think you see that from us with the three stores that we have under contract. So nothing -- I wouldn't say there's any earth-shattering move other than the market becomes a little bit more constructive as the gap between buyer and seller has shrunk to the point where you're starting to see some things get done. Juan Sanabria: And then just as a follow-up, your rent per occupied square foot was strong in the quarter, up 2.4% quarter-over-quarter, flat year-over-year, better than peers. What do you think allowed you to push that in-place rate relative to the industry a bit stronger? Christopher Marr: Yes. I think, again, you're just -- everybody's system, I assume, is trying to do the same thing, which is find that balance between the levels of demand that are out there for storage and then pricing to capture that customer as well as the marketing tools to capture that customer. I think some of it is portfolio construct. Again, where we are at this part of the cycle, our strategy and our quality focus, I think, is very helpful to our results. And then part of it actually is just sort of the normal seasonality that one would expect to see from Q2 into Q3. Operator: Your next question comes from the line of Eric Wolfe with Citi. Eric Wolfe: I think you said a moment ago that -- conservatively that same-store revenue might not turn positive until the back half of 2026. But I mean if you're already at 2% to 3% move-in rate growth, is there some reason to believe that, that stays there that you wouldn't just go to like 2% to 3% same-store revenue growth? Is there some kind of offset on the ECRI? I'm just trying to understand why if you're already at, call it, positive move-in rents today that it's going to take until the back half of 2026 to be positive on same-store revenue. Christopher Marr: Yes. I mean not sarcastically, it's math. So we are in a business where 4% to 5% of our existing customers churn on a monthly basis. And so barring again some sort of change to the good on the demand side, again, which we don't foresee a catalyst for that. It just takes time. So you will just gradually see that slightly negative same-store revenue growth begin to move in a positive direction. And exactly when that crossover occurs, we're not providing guidance at this point, and we don't do quarterly guidance from a same-store perspective. But again, I think to be fair at this point in October 31, what I shared is kind of the conservative outlook at the moment. Eric Wolfe: Got it. And then I guess to the move-in rents that you provide in [indiscernible] I mean does that include promotions? I'm probably asking because I'm just thinking through like if we continue to see just positive move-in rent growth, like, I don't know, say, 2% to 3% or 2% to 4%, does that eventually translate into, call it, 2% to 4% same-store revenue growth. I know occupancy obviously plays a factor to your point. But I guess I'm just wondering about the -- if you can really just kind of take these move-in rent growth and then assume you're going to get a similar ECRI component to it, then take that as a leading indicator of where same-store revenue growth is going? Or we're mistakenly not including promotions or not including something else into that calculation? Timothy Martin: I'll jump in. If you think about the -- if you think about your premise there of 2% to 3%, 2% to 4% type year-over-year improvement in pricing, then -- and you held everything else constant, then ultimately, after, call it, 12 months when you've churned 5% of your portfolio each month at that type of churn, then eventually that's where you would get to. And then it would probably be helped a little bit then by some of those other factors. You probably get a little bit more out of your ECRIs, you probably get a little bit of occupancy if you're in that environment when you have -- if you have that type of pricing power, normal pricing power over a prolonged period of time. So back to Chris' point earlier here is it just takes time to flow through because it's 4% to 5% a month and it builds and builds and builds. So if you had that for a prolonged period of time, I think that's ultimately where you get to from a revenue growth perspective, plus or minus. Eric Wolfe: And then does the move-in rents include promotions or is that like a separate calculation we should make, meaning that up -- I think it was up like mid-2s this quarter. Is that flat with promotion? Christopher Marr: Yes. So that 2.5% is gross. And it for us is the same as the net because our promotions have not changed, the amount or the magnitude. Operator: Your next question comes from the line of Michael Griffin with Evercore ISI. Michael Griffin: Chris, maybe you can expand a bit on whether or not you've seen any changes in new customer behavior? I mean it seems like if you're able to raise these new customer rents, maybe there's less price sensitivity or customers shopping around. And I know it's always a topical point with storage, but any incremental homebuyer customers coming back? Or is it still -- they haven't really materialized yet? Christopher Marr: Yes. I think what you're finding is you're just able to get rate in these markets that are not typically the homebuyer and seller movement market. So you're leading year-over-year improvement in rate to new customers, Manhattan, Queens, Brooklyn, Chicago, Washington, D.C. and then the laggards where you're just still trying to find your footing in terms of where is that balance and at what rate can you get that customer to convert continue to be Atlanta, Phoenix, Charlotte, some in Texas, some of the major Texas markets are moving in that direction as well. So it really is just market from our perspective, which then sort of ties into your question, which is its customer use case. Michael Griffin: Appreciate the context... Christopher Marr: Yes, I'm sorry, one last piece. And then ultimately, it's still -- when we talk about supply and those headwinds are diminishing across the portfolio, but that also varies pretty significantly by market. So not surprising, those sunbelt markets that, a, tended to rely historically on a little bit more of that homebuyer and seller are also the markets that continue to get deliveries. While deliveries overall are down, they are still occurring all too frequently in Atlanta, in Phoenix, in the West Coast of Florida. Michael Griffin: So it's kind of a double whammy for those sunbelt markets, so to say? Christopher Marr: Yes. Michael Griffin: Great. And then maybe next, just on sort of the ECRIs and outlook there. I mean I realize that the rent roll downs, the move-in, move out is still pretty wide. But has your strategy changed there at all? Have customers become more sensitive to rate increases? Or are they typically still willing to accept them and you're able to push strategically where you can? Christopher Marr: Yes. The customer health, which we continue to really focus in on, and again, varies by economic strata and parts of the country, generally across the portfolio continues to be very good, and we have not seen any change in customer behavior as it relates to ECRIs and our overall approach has been consistent throughout 2025. Operator: Your next question comes from the line of Ravi Vaidya with Mizuho. Ravi Vaidya: I wanted to ask for the third-party management business. I saw a couple of stores came off on a net basis. Is there something that looking ahead, should we expect this to increase again? Or maybe who are some of the new private operators that you're partnering with? And how can that be used as a hedge for higher supply? Timothy Martin: Yes, I appreciate the question. So on our third-party management program, we talk about the stores that we add to the platform because that's ultimately what we control. That's our new business, the development team is looking for opportunities to add owners, to add stores to the platform. This year, we have exceeded adding 130 stores for the eighth consecutive -- at least 130 stores a year for the eighth consecutive year. So that part of the business remains healthy. The part that is very difficult to predict is when stores are going to leave the platform. And part of this year, when you have that churn, part of this year's churn was self-inflicted earlier in the year when we bought 28 stores that were in that third-party managed bucket. You just have a lot of stores that are -- leave the platform most often. That is because they have transacted, they have sold to somebody that either self-manages or has a different relationship. And so trying to predict the net growth in the store count on the 3PM platform is an impossible task. So we control what we can control. And we look -- when stores leave the platform, we've talked about in the past, we feel like it's job well done. We've helped that owner create the value. We've stabilized and improved performance. And in most cases, we set them up to achieve their desired results as they transact and sell the asset to someone else. Operator: Your next question comes from the line of Spenser Glimcher from Green Street. Spenser Allaway: Maybe just going back to the acquisition front. Are there certain markets or geographies that you guys are more comfortable underwriting just due to greater stabilization of fundamentals? And then on the flip side, are there any markets that are sort of redlined right now just because there's still too much operational uncertainty maybe outside of the obvious supply-heavy markets? Timothy Martin: Yes. I mean just the nuance response is we're comfortable underwriting everywhere. I think embedded in our underwriting are obviously going to be different risk hurdles based on some of those characteristics that you would refer to. Perhaps the best deal that we can find right now would be in a market that's more challenged because others don't see maybe what we see. And so we don't have a bias necessarily to blacklist a particular market because of supply as an example or some other criteria. But what we would do in that standpoint is to make sure that from a risk-adjusted standpoint, we're getting paid to take on that uncertainty. So those markets create more challenge from an underwriting standpoint to try to look at where rates are today, perhaps and where rates might be in a year or 2. It is a challenging but not impossible underwrite when you have a store in particular because it's such a micro market business, when you have a store that's competing against new supply to be able to have confidence in your ability to project where rates in that small market are going to stabilize once that new supply leases up is a challenge. It's the fun part of the investment team and what they do because those deals that have a little bit of hair on them are the most challenging, but also very interesting and perhaps the place that you can make a really nice risk-adjusted return. So we haven't -- we're not avoiding markets, but certainly considering all of those risk factors. Spenser Allaway: Okay, yes, that's very helpful. And then can you just share what stabilized cap rates you guys are underwriting on the three assets that you're acquiring in 4Q? Timothy Martin: Those three assets are a little bit of a mixed bag between stable and not stable. Going in, when you look across the three, we're going in, in the low 5s and stabilizing across the board fairly early on in year 2 or 3 at right around a 6% across the board for those three opportunities. Operator: Your next question comes from Brendan Lynch from Barclays. Brendan Lynch: New York City continues to perform quite well, and it continues to outperform other large markets in the Northeast. Maybe you can just kind of compare and contrast what is leading to that outperformance. Obviously, there's a lot of supply issues in the sunbelt, maybe it's the same in the Northeast. But just kind of any color that you can provide on New York relative to some of these other markets in the region? Christopher Marr: Yes. So it's going to be partly what you just said. So again, the boroughs really nonexistent new supply impact. So you're really stable from that perspective. You have a more need-based customer. And then obviously, we have a very significant position there and one in which the asset quality is extremely high. So we just have everything in our favor in a market that in this part of the cycle is just doing very well. Other Northeast, Philadelphia, Boston, a little bit of a mixture there. You've got supply as opposed to the boroughs. And you have a little bit of more of a mix in the customer base. It's not quite sunbelt like, but you do have a little bit more of that mover, so to speak, than you might have in, say, the Bronx. So I think it's kind of a combination of those two things. And you see that similarly in urban Chicago, you see it in a few of the other urban markets. Brendan Lynch: Great. And then maybe just sticking with New York City, you've got new development coming there. It's a relatively small investment. I think the $19 million. Maybe just talk about what would allow you to get more assertive or aggressive on development in the New York City area. Timothy Martin: It's really looking for opportunities that have a -- that are located in a spot that would be complementary to our existing portfolio and frankly, would have a need from a demand standpoint for there to be new product. Obviously, it's not as easy to pencil out deals in the boroughs as it used to be because the tax incentives aren't there any longer. So surely, there are opportunities somewhere, but the fruit is pretty high up in the tree. And for us to find an opportunity, it's going to be something that we're pretty excited about. Operator: Your next question comes from the line of Eric Luebchow from Wells Fargo. Eric Luebchow: Can you comment a little bit on any trends you're seeing on your average length of stay? It seems like vacates have been kind of muted across the industry this year, obviously helps from a roll-down perspective, but perhaps takes a little bit longer for some of these better move-in rates to flow through the portfolio. So any commentary on that would be helpful. Christopher Marr: Sure. When you think about those trends, I would macro say they're consistent, still elevated. So our customers who have been with us greater than a year, that's up 50 basis points year-over-year. And again, if you kind of compare it to pre-COVID, so third quarter of 2019, it's plus 260 basis points. And then those customers who have been with us greater than 2 years, which is about 40% of our customers, that's actually down year-over-year about 140 basis points, but again, up 50 basis points what we saw in 3Q '19. So continue to be pretty consistent, have come down a bit off of peak, but still elevated relative to historical metrics. Eric Luebchow: I appreciate that. And I know you provided a little bit of directional commentary on '26, but just trying to take maybe more of the bull case. Obviously, if we get a housing catalyst, if we see a pickup in customer mobility, move-in rates continue to find stability, start growing. Do you think it's reasonable we could get back to more historical levels of growth by maybe the second half of next year, certainly into 2027 and then potentially even higher beyond that, especially given some of the supply delivery commentary. Just wanted to get your temperature on what you see over the next few years and not just into '26? Christopher Marr: Yes. I do see that bull case as playing out the way you described. Again, it's sort of finding that catalyst for demand. And if that occurs, housing being the easiest thing to point at, we continue to have a healthy consumer. I think you then start to see consistent performance from those solid markets that we've experienced here over the last couple of quarters, those steady eddies continue. And then you're overall helped by the fact that the Charlottes and the Nashvilles, et cetera, of the world should rebound quite nicely. And I think we're well positioned from -- obviously, to get the rate. We've shown that we can do that through this cycle, increasingly more so over the last couple of months. And then on the occupancy side, then you get the pickup there as well. And to your point, you could see, and I would expect if those conditions were to occur, you would see more elevated performance. Operator: Your next question comes from the line of Michael Mueller with JPMorgan. Michael Mueller: I just go back to like development supply. I mean what's your gut feeling tell you about how quickly supply may come back in some of the markets as they improve over the next couple of years? I mean do you see a lot of competitive projects in -- near you where people are just kind of waiting for the right time to kick off? Or do you think you're going to have a little bit longer of a runway without meaningful supply? Christopher Marr: Yes. I think that crystal ball is complicated and maybe a little fuzzy. So I think it will be slower. I think that you have a couple of factors. Again, we still have elevated cost, I think it will, to our point be a more gradual recovery in move-in rates. So you'll still have to see some progress there. And I think the developers, again, who have opened in '22 and are sort of trying to figure out how to hang on at this point, may not be likely to want to get back into it again until they deal with exiting the store that they have. And then ultimately, the primary lenders to the space for the developers, those local and regional banks have to be -- they continue to be constructive in terms of how they think about underwriting and how they think about providing that leverage. I think that should constrain things as well. So again, at least you look out through next year, probably at least the first half of '27, I think we'll continue to see some restraint. Again, there are -- the markets I've called out that appear to have no guardrails but I think we'll continue to see some constraint. And then if you just think practically, if it picks back up again, it takes 6 months to sort of get everything going and then another 12 months to build. So you're 18 months out from whenever that happens. Operator: Your next question comes from the line of Michael Goldsmith with UBS. Michael Goldsmith: Move-in rate was up 2.5% during the quarter, apparently, both on a gross and a net basis, but came down in October. So how did the move-in trend during the quarter? Did it peak in October? Or did it peak kind of earlier during the period? And is that how it normally plays out? Christopher Marr: Yes. Move-in trend was historically normal. You see kind of that peak in July and then trends tend to sequentially start to slow down. But again, I think the message here is that the road is a bit windy. We've got markets that are continuing to move in a fairly straight line in an upward trajectory. And then there are markets, again, pick on the sunbelt where the road is a little bit more windy. So overall, I would say, kind of consistent with the last couple of years is what we've seen. Michael Goldsmith: Got it. And you said on the call maybe a couple of times just really stabilizing trends and encouraging signs. By stabilizing trends, are you referring to same-store revenue growth and by encouraging signs, you're suggesting the move-in rate. Is that kind of what you're pointing to? Christopher Marr: Yes. So again, the top line metric, same-store revenue growth will just kind of beat the drum again. It takes time for that to move given the relatively low churn in the customer base. So when we talk about stabilizing trends, we're talking about move-in rates and demand levels, which again, have been weaker than historical, but fairly consistent and occupancy. So it's more of the KPIs that are happening every day, which will then gradually bleed into the same-store revenue result, which will then gradually move that in a positive direction. Michael Goldsmith: Port Chester looks great. Good luck in the fourth quarter. Christopher Marr: Super excited about it. Timothy Martin: We have units available if you'd like to get. Operator: And with no further questions in queue, I'd like to turn the conference back over to Chris Marr for closing remarks. Christopher Marr: Okay. Thank you, everybody, for participating. Again, stabilizing trends, encouraged by the direction overall that the portfolio is moving. Assuming these continue, we expect to be on improved footing heading into 2026. We look forward to seeing some of you at upcoming conferences. And next time we're on a quarterly call, we'll share our specific expectations for 2026. So thank you all. Happy Halloween. Operator: This concludes today's conference call. You may now disconnect.
Operator: Good morning, ladies and gentlemen. Welcome to the Compania de Minas Buenaventura Third Quarter 2025 Earnings Results Conference Call. [Operator Instructions]. And please note that this call is being recorded. I would now like to introduce you to your host for today's call, Mr. Sebastian Valencia, Head of Investor Relations. Mr. Valencia, you may begin. Sebastian Valencia Carrasco: Good morning, everyone, and thank you for joining us today to discuss our third quarter 2025 results. Today's discussion will be led by Mr. Leandro Garcia, Chief Executive Officer. Also joining our call today and available for your questions are Mr. Daniel Dominguez, Chief Financial Officer; Mr. Juan Carlos Ortiz, Vice President of Operations; Aldo Massa, Vice President of Business Development and Commercial; Mr. Alejandro Hermoza, Vice President of Sustainability; Mr. Renzo Macher, Vice President of Projects, Mr. Juan Carlos Salazar, Vice President of Geology and Explorations; Mr. Roque Benavides, Chairman; and Mr. Raul Benavides, Director. Before I hand the call over, let me first touch on a few items. On Buenaventura's website, you will find our press release that was posted yesterday after the market close. Please note that today's remarks include forward-looking statements that are based on management's current views and assumptions. While management believes that these assumptions, expectations and projections are reasonable in view of the current available information, you are cautioned not to place undue reliance on these forward-looking statements. I encourage you to read the full disclosure concerning forward-looking statements within the earnings results press release issued on October 30, 2025. Let me now turn the call to Mr. Leandro Garcia. Leandro Raggio: Thank you, Sebastian. Good morning, and thank you for joining us today to discuss the quarterly results of the company. On Slide 2, this is our cautionary statement, important information that I encourage you to read. Today, we will discuss our third quarter of 2025 performance, highlighting key achievements on our strategic priorities going forward. After the presentation, we will be available for our Q&A session, where our team will be happy to answer your questions. Next slide. I would like to highlight a few key areas that contributed to our strong third quarter results. Copper production in the third quarter of 2025 reached 12,800 tonnes, down 24% year-on-year. This is mainly explained because in the third quarter of the last year, all the ore stockpile during the El Brocal's voluntary temporary suspension in the second quarter of 2024 was processed. Silver production reached 4.3 million ounces, 3% lower compared to 4.4 million ounces produced during the same period last year. The decrease was mainly due to lower production at Uchucchacua and Yumpag in line with expectations, partially offset by increased production at El Brocal and Julcani. Gold production was 30,894 ounces, down 21% year-on-year, mainly due to lower output at Orcompapa and Tambomayo, consistent with the 2025 planned mining sequence. EBITDA from direct operations in the third quarter of 2025 was $202.1 million, which represents a 48% increase compared to the $136.5 million in the same quarter last year. Net income for the quarter was $167.1 million compared to $236.9 million in the third quarter of 2024, which include $157.3 million from the sale of Chaupiloma. The third quarter ended with a cash position of $486 million and a total debt of USD 711 , resulting in a leverage ratio of 0.41x. Moving on to San Gabriel. CapEx for the project in the third quarter of 2025 was $92 million allocated to completing the construction of the processing plant to enable the start of commercial production in the fourth quarter of 2025. As of now, San Gabriel has reached 96% overall progress. Construction is 95% complete. On September 5, 2025, Coimolache received a new operating permit, allowing fresh ore placement on a new level of Tantahuatay leach platform and adjacent surface areas. This milestone enables full capacity production at both the mine and the leach pad. Finally, Buenaventura Board of Directors has approved a dividend payment of $0.1446 per share ADS. Moving on to cost applicable to sales trend. Copper cash decreased in the third quarter of 2025, mainly due to the positive contribution of byproducts at El Brocal. Silver cash increased driven by higher commercial deductions related to tailings sales at Uchucchacua and lower ore grades at Yumpag. Gold cash has decreased due to higher volumes sold. On the next slide, we will present free cash flow generation. The third quarter 2025 cash position decreased during the quarter mainly driven by the net cash outflows from investing activities and financing activities. In terms of financing activities, Buenaventura redeemed the remaining $149 million of its 2026 notes at par, including a great interest. Moving on to Slide 6. Third quarter 2025 CapEx related to San Gabriel was $92 million, allocated to completing the construction of the processing plant. As of September 2025, San Gabriel's total CapEx has reached $681 million. We are moving forward steadily and remain on track to begin production in the fourth quarter of 2025, subject to timely approval of the necessary permits. As part of this progress, the Ministry of Energy and Mines granted San Gabriel, a power transmission concession. Mine development has been completed and mining preparation activities are underway using Buenaventura's owned fleet. The commissioning plan is now being implemented with the C1 and C2 commissioning already completed. San Gabriel's cumulative progress has reached 96% overall completion by third quarter 2025, primarily driven by finishing the engineering and procurement as well as the construction at 95% of advance. On the next slide, we are showing the processing plans progress. The primary crusher mechanical works are at 100%. The SAG and Ball mills mechanical works are at 100%. And finally, the CIL tanks mechanical works are at 100%. Moving on, we can see the progress of the main components of the plant. Moving on to Slide 9. We are showing the progress at the Filtered Tailings plant that currently is at 96% overall progress. To conclude this presentation, I would like to share a few final thoughts. First, a stable and continuous production at our flagships. We are making progress in our efforts to increase throughput while prioritizing cost efficiency. Second, solid performance from our affiliate companies, Coimolache's new operating permit will enable production at full capacity. We are expecting to produce over 8,000 ounces of gold next year which will lead to higher cash flow in the coming quarters. Third, strong cash flow generation and a solid balance sheet driven by the outstanding performance of Buenaventura's flagship operations enabled us to return value to shareholders and resume our dividend policy. Finally, the San Gabriel project has achieved 96% overall progress. The new power line concession will allow us to complete commissioning in the coming weeks on track as we aim for our first gold bar by fourth quarter of 2025. Thank you for your attention. I will hand the call back to the operator to open the line for questions. Operator, please go ahead. Operator: [Operator Instructions]. Our first question comes from Carlos De Alba from Morgan Stanley. Carlos de Alba: So I wanted to maybe go back a little bit and make sure that we get a little maybe more color, Leandro, on what is still pending for San Gabriel. And when do you expect to get maybe those permits that are pending? And if there is anything else from a government approval perspective. How confident are you that with the recent changes in government that we have seen in the country, you're going to get them relatively on time? And to the extent that there might not be on time, if that possible delay will be weeks, days, weeks or months. And then related to that is, you did mention you expect to -- the total production for the year in San Gabriel, but what is the sequence that we should be contemplated in the model. And given the benefit that you have in ramping up this project, I mean, very amid, very high gold prices. When can we see -- when do you expect San Gabriel to be EBITDA neutral or at least where you start to breakeven? Leandro Raggio: Thank you, Carlos. Well, we are coordinating previously since weeks ago, the final permits for San Gabriel. We are confident that we will be granted of all, and we will end this year with the production of 2 bars. Maybe Renzo can give us more detail and then Juan Carlos Ortiz can help us for the sequence of the production. Please, Renzo. Renzo Macher: Sure. Yes, all the permits are aligned there to be able to produce the first cover towards the end of the year, it is a matter of when the authorities go up. We don't foresee any problems on that. And regarding what is pending in San Gabriel, the power should be arriving this Sunday and then it's somehow testing the C3 and C4, and that is going to take us a couple of months to complete. Leandro Raggio: For the production sequence, Juan Carlos can help us. Carlos? Carlos de Alba: Yes, maybe before Juan Carlos -- sorry, I may have lost my connection for a second there. So can you repeat what is happening with power. So you're getting access power this week or today or tomorrow, is that what you said? And then why won't take 2 months or to ramp up? Renzo Macher: Sure. So power line construction is complete. All the arrangement with the other users is complete. The permit from the authority is complete. The energy station will happen on Sunday, and then we can start the commissioning process. The commissioning process will take around a couple of months because we need to stabilize power first, then we're going to start filling the mills, filling all the plant with water. And then as soon as we can start crushing and milling, we're going to be filling all the circuits up to the Tailings storage facility. And then we're going to start adding ore to that to start the crop of gold, and we expect that to be finishing towards mid-December. Juan Ortiz Zevallos: Thank you, Carlos. And regarding your question about production, as Renzo mentioned, this year is going to be the initial gold bars by the end of the year. And in January, we will start doing the operational ramp-up. We start the operational ramp-up in January. And as we mentioned before, we need to pay attention to the construction process, the normal construction might be filtration, dissipation and compaction of the Tailings -- in the Tailings Dam because the shape of the Tailings reservoir is a V-shaped valley. We need to start from the bottom where the area is limited. And as long as we are compacting the Tailings and raining elevation, we will extend and gain more available area for compaction. Due to that, the production this year on a global basis is going to be in the order of 70,000 to 90,000 ounces of gold next year, and we are working in -- along with the project team with the commissioning and monitoring all the process, trying to do our best to be on the upper range of this guidance. Carlos de Alba: Thank you, Juan Carlos. And maybe just, I don't know, Daniel, or when do you expect to start breaking even at current gold prices? Juan Ortiz Zevallos: We're going to start with the high grade at the beginning. So it's going to be pretty soon, I would say, the first or the second quarter, we will probably be reaching breakeven. Even if we are not working at full capacity, we will be over breakeven, I would say, by the second quarter next year. Carlos de Alba: Thank you very much. Good luck. Operator: [Operator Instructions]. Ladies and gentlemen, with that, we will be concluding today's audio question-and-answer session. I would like to turn the floor back over to Sebastian Valencia, Head of Investor Relations, for any webcast questions. Sebastian Valencia Carrasco: Thank you, operator. At this time, there are no further questions. I would like to turn the call over to Leandro Garcia. Leandro Raggio: Thank you, Sebastian. I would like to thank you for the time and effort today to join us today. your participation and input are very appreciated. Thank you again, and have a wonderful day. Operator: Thank you very much. Ladies and gentlemen, that concludes Buenaventura's Third Quarter 2025 Earnings Results Conference Call. We would like to thank you again for your participation. You may now disconnect.
Operator: Thank you for standing by. My name is Carly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Emerald Holding Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Erica Bartsch, EVP of Strategy and Communications at Emerald. Please go ahead. Erica Bartsch: Thank you. Good morning, everyone, and welcome. Before we begin, let me remind everyone that this call will include certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This includes remarks about future expectations, beliefs, estimates, plans and prospects. In particular, the company's statements about projected results for 2025 are forward-looking statements. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. For a discussion of these risks, uncertainties and other factors, please refer to the company's SEC filings, including its most recently filed periodic reports on Form 10-K and Form 10-Q as well as the company's earnings release, all of which can be found on the company's Investor Relations website. The company does not undertake any duty to update such forward-looking statements. Additionally, during today's call, management will discuss non-GAAP measures, which it believes can be useful in evaluating the company's performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP. The reconciliation of these non-GAAP measures to their most comparable GAAP measures can be found in the company's earnings release, which is available on the company's Investor Relations site. As a reminder, this conference is being recorded, and a replay of this call will be available on the company's Investor Relations website through 11:59 p.m. Eastern Time on November 7, 2025. I would now like to turn the call over to Mr. Herve Sedky, President and Chief Executive Officer. Please go ahead. Herve Sedky: Thank you, Erica, and good morning, everyone. I'll begin our call today with a review of our third quarter performance, followed by a discussion of our strategic initiatives. I'll then turn things over to David Doft, our CFO, to run through our financials. Throughout the year, we've executed with discipline and consistency across the portfolio, advancing the strategic priorities we set at the start of 2025. Through the first 9 months of the year, we delivered solid growth in revenue and adjusted EBITDA, along with solid organic growth, underscoring the strength and resilience of our increasingly diversified model and the progress we're making toward our long-term objectives. The third quarter, historically both our smallest and softest period, unfolded largely as expected. During the quarter, we strengthened our portfolio with the acquisition of Generis, a leader in peer-to-peer executive events and advanced innovation initiatives to enhance the customer experience and drive scalable efficiencies across our operations. With Generis, Emerald's portfolio now spans an even broader mix of high-growth sectors, strengthening our resilience across market cycles and reducing exposure to slower growth verticals. Combined, these actions reflect our commitment to building dynamic, high-impact platforms that help businesses connect and grow in an increasingly complex marketplace. Based on our progress to date, we are increasing our full year 2025 guidance to reflect the Generis acquisition and narrowing our guidance range given our increased visibility as we approach year-end. David will provide more details on this in a moment. Stepping back from our results, what continues to define our business is focus, consistency and the power of live engagement to drive growth. Live events remain one of the most reliable ROI channels for B2B decision-makers. In fact, Harvard Business Review has found that face-to-face requests are 34x more effective than e-mail at generating action. And in a recent Center for Exhibition Industry Research survey of more than 9,000 exhibitors and attendees, 70% agreed that in-person meetings are a highly effective way to build and maintain customer relationships. We saw this dynamic firsthand at this October's Advertising Week in New York, one of our flagship events. The show delivered record-setting attendance and engagement this year, a strong affirmation of the appetite of high-quality in-person experiences that drive business results. At Emerald, our customers continue to prioritize face-to-face engagement as a core part of their sales and marketing strategy, recognizing the efficiency, credibility and measurable ROI live events deliver compared to digital and other channels. We see this as a structural feature of our business, and it reinforces Emerald's position as a trusted partner, helping businesses connect, meet, learn and transact more efficiently. A clear indication of that strength is our pacing for 2026, which reflects sustained customer confidence across our portfolio. We're seeing solid rebooking momentum for the first half of 2026, reinforcing the confidence our customers have in the value and reach of our portfolio. Ongoing exhibitor renewals and strong forward bookings highlight the resilience of our model and demonstrate that live in-person engagement remains a critical and effective growth channel across industries. Our international business also continues to make measured progress and remains an important long-term growth opportunity for us. While international exhibitors represent roughly 10% of total revenue, our exposure is balanced across regions with no material concentration risk. We're seeing continued momentum in markets such as Italy, Germany, the United Arab Emirates and Brazil, signaling growing global interest in accessing the U.S. market. As trade conditions stabilize, we anticipate a more constructive environment heading into 2026, and are encouraged by progress in this week's trade negotiations in Asia. Beyond financial performance, the third quarter underscores how Emerald continues to lead with customer connection and thought leadership. We're actively advancing our technology initiatives with the launch of an AI-powered event agent across selected shows. The platform automates many of the attendee interactions before, during and after the event. This marks an early step in how we're using AI to simplify the attendee experience and create more meaningful interactions on sites. This tool will help exhibitors and attendees access key event information in real time, improving service, simplifying setup and enhancing the overall customer experience. We're looking to expand this and other AI-driven platforms across our events later this year and into 2026. At the same time, we're sharpening our go-to-market execution through more strategic selling efforts and greater centralization of our marketing functions. These initiatives are designed to strengthen brand consistency, improve lead generation and create a more scalable commercial engine across the portfolio. For example, to demonstrate the value of live engagement, we recently brought senior marketers and business leaders together in a curated setting to showcase how in-person connections accelerate ideas, partnerships and growth. These experiences not only reinforce our customers' belief in the power of live events, but also highlights Emerald's role as a trusted partner driving innovation across the industry. Our continued focus to diversify the portfolio into higher-growth sectors that leverage Emerald's scale and best practices are strengthening the business and positioning us for sustained performance next year and beyond. With the completion of the Generis purchase in August, we've now executed 3 meaningful acquisitions this year, which advance our strategy to build a high-growth portfolio of live experiences that connect business people in attractive end markets and deliver measurable ROI to customers. This isn't about any single transaction. Rather, it reflects a deliberate and disciplined pattern of growth. Emerald remains a highly attractive acquirer of B2B events executing a focused strategy to optimize our portfolio, expand into additional high-value verticals and creating premium experiences that connect businesses operating in dynamic industries. Through Generis, we gained a leader in peer-to-peer executive event space. Generis hosts 11 events across the U.S. and 6 in Europe annually, engaging senior decision-makers through high-impact insight-driven formats, peer-to-peer connections and curated one-to-one meetings. With this addition, Emerald will host more than 50 peer-to-peer events annually, further solidifying our position as a premier platform for high-level results-oriented networking. At the same time, our efforts to build a centralized platform to deliver events at scale allows us to invest in new technologies and capabilities to make all of our events stronger. It also allows for a seamless sharing of best practices, scale cost benefits and improved margins over time. Moving forward, we will continue to take a strategic and selective approach to M&A, identifying opportunities that drive meaningful growth and long-term value for shareholders while enhancing the experience and outcomes we deliver for our customers. To sum up, our teams continue to execute with focus and consistency, advancing our strategy, deepening customer engagement and driving operational efficiency. The fundamentals of our business remain strong, and we're confident in our ability to deliver on our full-year commitments and build momentum into 2026. With that, I'll turn the call over to David to review our financial results. David Doft: Thank you, Herve, and good morning. Let's begin with a review of third quarter financials. The third quarter is by far our smallest, accounting for approximately 16% of pro forma full-year 2025 revenue based on our guidance range. Total revenue in the quarter was $77.5 million compared to $72.6 million in the prior year quarter. Reported Organic Revenue, which excludes the impact of acquisitions, scheduling adjustments and discontinued events, was down 6.8% year-over-year. As our seasonally soft this quarter, the Q3 decline primarily reflects the effects of ongoing construction at the Las Vegas Convention Center and to a lesser extent, some tariff headwinds, both of which specifically affected our largest event of the quarter and were anticipated in our guidance range. This event alone had an approximately 6% negative impact on Organic Revenue in the period. It's important to note that our overall exposure to tariffs at Emerald is quite limited. However, because this was our smallest quarter and our largest event in the quarter has some tariff exposure, the effect was more visible in the period than it would be on a full-year basis. Also, if we assume the recently completed acquisitions of This is Beyond and Insurtech were part of the portfolio in Q3 2024, Organic Revenue in Q3 2025 would have been down 2.9% compared to the prior year quarter. Note that Generis did not host any events in the third quarter, and therefore, we did not recognize any revenue from the transaction in the quarter, while absorbing about $1 million in costs related to Generis' SG&A. Year-to-date, total revenue was $330.7 million, an increase of 13.3% versus the prior year, primarily due to revenue from acquisitions and higher Organic Revenues. Year-to-date, Organic Revenues increased 1% year-over-year. The acquisitions of Generis, This is Beyond and Insurtech would have increased Organic Revenue growth to 4.3% year-over-year had they been part of our portfolio during the first 9 months of last year. Adjusted EBITDA was $12.8 million in the third quarter compared to $12.5 million in the prior year period, an increase of 2.4%. The increase was primarily driven by higher operating income from our events and continued management of underlying costs. Year-to-date, adjusted EBITDA totaled $90.8 million as compared to $68.6 million in the prior year period, an increase of 32.4%. The improvement was driven by strong revenue growth, particularly from the acquired businesses and ongoing focus on optimizing margins. Turning to our expenses. On a reported basis, SG&A was [$51.3] million in the third quarter versus [$40.8] million in the prior year quarter. Year-to-date, SG&A was $152.5 million as compared to $135.8 million in the prior year period. The increase in both periods is largely due to incremental expenses from acquisitions, higher stock-based compensation, remeasurement of contingent consideration and elevated legal and consulting costs related to our transactions. Underlying cost increases remain muted. In Q3, free cash flow was slightly negative as compared to a $6.7 million inflow in the prior year quarter. I want to note that free cash flow in the quarter was impacted by the timing of payables tied to one of our large shows where cash was paid to a vendor as early July this year versus June of last year. This timing shift resulted in a high single-digit million outflow in the third quarter, but had no impact on our year-to-date underlying cash generation. Additionally, as was the case in both the first and second quarter, underlying free cash flow in the third quarter would have been stronger than reported given the timing of recent acquisitions. Specifically, the Generis acquisition closed ahead of their second half events and most event-related cash was collected prior to the transaction, thus flowing to Emerald through a purchase price adjustment rather than through standard collection of receivables. As a result, those inflows are not reflected in reported free cash flow and cash from operations minus CapEx. We believe this is important context when evaluating the free cash flow conversion and strength of our cash generation. Our year-to-date free cash flow is similarly impacted by the acquisition of Generis in Q3, and this is beyond the Insurtech Insights in the first half of the year for a total of $30 million and from $5.5 million of fees related to our January 2025 refinancing of our debt that flows through the financials. Year-to-date, this impacted our free cash flow by $35.5 million, which we believe should be taken into account to understand the cash generation of the underlying operations of the company. Shifting to our balance sheet. We had $95.4 million in cash as of September 30 versus $156.4 million as of June 30. This is after funding the Generis acquisition, which closed in the third quarter. Our total liquidity is $205.4 million as of September 30, including the full availability on our $110 million credit facility. As of September 30, our net debt to covenant EBITDA ratio was 2.96x slightly below our sub 3.0x financial policy target following the acquisition of Generis. As we move forward, we continue to be committed to disciplined capital deployment across M&A, organic growth, managing our leverage and shareholder returns. In the third quarter, we repurchased approximately [116,000] (sic) [116,094] shares of our common stock at an average price of $4.87 per share under our share repurchase program. Since the beginning of the program in 2021, we have repurchased a total of 17 million shares of our common stock for $70 million. In recognition of our continued financial strength, Emerald's Board of Directors recently approved an extension and expansion of Emerald's share repurchase authorization, allowing for the repurchase of up to $25 million of our common stock through December 31, 2026. At the end of the third quarter, we had $20.3 million remaining available under the prior share repurchase authorization. The Board also declared a quarterly dividend of $0.015 per share. This decision underscores our commitment to returning value to shareholders while maintaining a balanced approach to capital allocation. Finally, as Herve noted, we have adjusted higher and narrowed our full-year guidance range to $460 million to $465 million in revenue and $122.5 million to $127.5 million in adjusted EBITDA to reflect the Generis acquisition, align with our year-to-date performance and provide a more focused outlook for the remainder of the year. As we have shared before, this outlook factors in the potential impact of tariffs. In summary, we're executing with financial discipline, maintaining a strong balance sheet and driving consistent performance in line with our expectations, all while progressing well in our efforts to strategically improve our portfolio for sustained profitable growth in the future. We remain confident in our ability to deliver on our full-year guidance and create long-term value for our shareholders. With that, we'll open the call for questions. Operator? Operator: [Operator Instructions] Your first question comes from Barton Crockett with Rosenblatt. Barton Crockett: Congratulations on the growth in Advertising Week. One of the things that just listening to you kind of walked through what's happening that I was wanting to explore was some of the commentary around tariffs and international. David, I think you mentioned something about a $6 million impact that I think you attributed to tariffs, but you're also talking about the construction in Las Vegas. And I just want to clarify, was that inclusive of both of those things? Or was that just a tariff impact? David Doft: No, that's inclusive of both of those items. The tariff impact is actually the lesser of the items in that impact. We've been talking all year, maybe even longer about the issues around the construction of the convention center, particularly related to larger shows that are in multiple halls that used to be side-by-side, but now are split on the opposite side of the convention center and it created a really difficult customer experience. And so following the first of those events, which really was last year, there was some pretty negative pushback that impacted our bookings for this year, both earlier this year as well as in this quarter. Thankfully, the construction is on track to be completed by the end of this year, which is great, which means that next year, our events will be able to go back to their normal structure and having halls next to each other, which will meaningfully improve customer experience again. So we're enthusiastic about cycling this impact next year. But unfortunately, it's something we've had to manage for the last few quarters. I think we've talked about it probably on every earnings call. And in this quarter, again, because it's such a small quarter, I know we're emphasizing that a lot, but it's true, and we had a large event that was impacted, it abnormally impacts our overall reported growth rate. But the bulk of the issue was related to the customer experience issues and kind of compounding over a couple of shows. And then the tariff issue was a bit more minor, but it was real for this particular event and a couple of others at Emerald, but not broad-based across the portfolio. Barton Crockett: Okay. All right. So you were spending some time talking about your international attendance around 10% of your total. And there was -- tariffs did factor to some degree into the discussion. So I'm just wondering, overall, this year, this kind of unusual trade environment, how much of an impact has that had, would you say? And does it feel like now that the world has kind of gotten accustomed to this whole tariff -- I mean, this whole kind of approach of trade policy in the U.S. that, that might be a bit of a tailwind as we go into next year? Are you getting that sense? Herve Sedky: Yes. So, this is Herve. So in terms of the impact of tariffs, we factored that into our plans for 2025. We had -- as we provided guidance, we had expected that tariffs would have some impact. And the reality is that in some markets, we have been impacted. So countries like China and Canada, we've definitely seen an impact. But as I mentioned in my prepared remarks, we've seen a -- and our international sales team has done a really good job of driving business from other markets that are looking to expand in the U.S. and to take advantage, quite honestly, of entering the U.S. market. And so the net effect of tariffs is a very manageable impact for our business overall, but we're definitely seeing in a handful of markets. David Doft: I think you're right, Barton, as we cycle this year, we're hopeful that next year is a bit more normal. I think it's too early to say that it's a tailwind, but I think the year-over-year change shouldn't be as meaningful. And I think for 2 reasons, right? One is the cycling of it and the uncertainty. And obviously, you take the hit upfront, there's not necessarily incremental hits, especially if things start getting incrementally better, and we're hopeful it will based on surely a little bit of movement this week with some of the Asian countries, though admittedly not fully where everyone wants it to be. But also, as Herve alluded to, the effort by our international sales team to reach into other markets to fill the gap will actually be a really nice benefit for us in the long term. And we've been talking about investment into our international reach for sales into our U.S.-based shows for a couple of years before the tariff issue was really an issue. So we already have been expanding meaningfully our international agent network, which are commission-based agents not on our payroll, but who are actively selling our events into dozens of markets around the country. I think we're up to about 100 of these agents. 2 years ago, I think we had 40. So that's more than double the number of people that are out there. And we haven't seen as much of the impact because of the tariffs of the benefit of that. But we see it in the underlying data in the reach into these other countries. And so if some of the more impacted countries from tariffs begin to normalize, then we should have that sort of tailwind. It's just -- it's a little difficult to know exactly when that's going to happen, but we are hopeful that at least the incremental hit will be there next year, which by nature is a benefit to our growth rate in 2026. Barton Crockett: Okay. And then, David, one other question I had within -- so I see obviously, your updated guidance range for 2025 to include the Generis acquisition. if that acquisition hadn't happened, would you be in a place where you would be reiterating the former guidance that you had? Or if you can update on that, that would be interesting. David Doft: Sure. So we are absolutely within the guidance range, excluding generics. It is the lower half of the range, to be clear. And there is some of the guidance impact on revenue, and it's more the mid part of the range on EBITDA. So we're tracking well on profitability. There's been a little bit more of the revenue volatility as we feared could happen, which is why we created the range we created. So it's all still within that range. But it is the lower half of revenue and kind of more mid-ish on -- or even mid to upper on EBITDA. Barton Crockett: Okay. And then in terms of the Generis impact, is this -- is this just like 6 months of Generis, so maybe the full year impact of Generis would be larger next year? David Doft: Correct. So Generis, their events are largely split between first half and second half. We closed the deal in the middle of August. So we'll have 4.5 months of Generis, but they have no events from June through September. So their third quarter this year, no revenue. So it's all expense. So we didn't miss out anything in the second half on revenue, and there'll be some events in the fourth quarter that we'll benefit from. But ultimately, the first half of the year is about $10 million of revenue that we didn't get from Generis, that we'll get next year. Operator: Your next question comes from Allen Klee with Maxim Group. Allen Klee: Yes. Just following up on you're mentioning that there was -- there will be $10 million incremental revenue from Generis next year. If we look at all the acquisitions you made in 2025 and you didn't make them all on January -- none of them on January 1. How much revenue did they have in 2025 that you were not able to recognize because of the timing of when you acquired them? David Doft: For the other acquisitions, it's de minimis. All of their events happened post close. There might have been a couple of dollars of online digital revenue, but not even $0.5 million. So it's basically 0 pre-close. So there's not going to be a pro forma benefit of incremental revenue in '26 for Beyond and Insurtech, only Generis has that by now. Allen Klee: Okay. And then following up on the Las Vegas construction comments. Is there a general sense of like over the whole year, how much of an impact that's had on your financial results so that we could think about maybe that recovers next year? David Doft: It's a little difficult to be precise on that admittedly. But we get a lot of customer feedback that's qualitative about why they may not come back or skip a version or 2 of the show. And this was the dominant factor in the declines at this show that -- and so we're -- it makes sense to talk about it, like we know it's real. There were a lot of complaints and people say, I'll wait until the construction is done to come back because it really did impact the experience. And with that, the ROI. And these shows are about ROI. But we know based on the prior years that the event was healthy and delivering. And so this is really the key change that took place -- that led to the changing dynamic and performance of the event. It's hard to give a precise number. It's a few million dollars if you back into the math. Allen Klee: Okay. And then you talked about your AI-powered tool. Could you maybe give an example so we can kind of understand what it's projected to do? Herve Sedky: Sure. So the AI-powered tool that we just launched and that we will be scaling across our events over the next few months is really an agent and an agent that allows our customers to interrogate and basically get answers to both exhibitors and visitors to anything that they need around the entire customer journey. So instead of going to the website and reading all the material or reading exhibitor manuals and going through a lot of data, we basically simplified that experience through this agent. And that's essentially what we've just rolled out. David Doft: And I think it's hard to comprehend the magnitude of the complexity sometimes of managing a trade show experience. The manual, Herve, is often a 50-page document with specifications and rules that are required by the venue, required by insurance, and required by -- obviously by us. So if we can make that simpler for people to interact, it's actually a huge timesaver and satisfaction driver when you can eliminate like frustration and how to deal with that. Allen Klee: Okay. Just -- I know you've been on a journey of -- what's the right word, to have -- do things across the -- everything that you have through one process to get scale and savings. Any update on those efforts? Herve Sedky: I think we're progressing well. We call that internally our platform strategy, and we're progressing really well, and we're seeing the evidence of that as we acquire businesses and are able to incorporate them into the broader Emerald. So there are a couple of things that we see immediately. One is the best practice sharing. We were able to learn from businesses that we buy. One of the benefits of buying businesses, of course, is the great sectors that they're in, their growth profile. But another one is that there are some really good learnings that we can take and then deploy across Emerald and vice versa. There are some things that we have at Emerald that have been extraordinarily successful that we're able to quickly implement within the acquired companies. So that's a massive benefit of the platform. And the other one is really cost and efficiency, as you'll see through a very disciplined management of our SG&A that as we acquire companies, that is something that we have very well under control. David Doft: Yes. I think the acquisitions have kind of muddied the water a bit in the reported financial -- but if you peel out the business that we've won in the last couple of years, underlying SG&A at Emerald is kind of flattish for 3 years now. So we're getting a lot of leverage out of the organization. And as we continue to scale, we expect that leverage to continue and drive incremental dollars to the bottom line and thus higher margins. It will take us some time with these new acquisitions because they're overseas, and we didn't have previous scale presence overseas to integrate that and drive the incremental savings out of those dollars. But when we buy things in the United States and we operate in our core market, which is the vast majority of our business, we're already seeing meaningful leverage and expect that to be more and more apparent in the coming couple of years as the growth of the business translates more into bottom line growth.. Allen Klee: You're talking about acquisitions. I'm just curious on the M&A environment, any comments on just how much is potentially out there now relative to in the past? And how you -- do you think valuations are -- where valuations are relative to where they've been? Herve Sedky: Yes. I haven't seen a major change in valuations. And the opportunities are there. I mean, I obviously won't go through much detail, but the pipeline is strong, and we are actively exploring a handful of opportunities. So we'll continue to keep you updated as we make progress. But I feel very confident in our ability to continue to grow through M&A. It's one of the important growth levers that we have, not the only one, but an important one and one that we'll continue to use. David Doft: Yes. As you know, Allen, a very key component of our strategy that we've articulated over the last few years has been around portfolio optimization, which is at its core, the reshaping of our portfolio to continue to enhance our exposure to more growth areas. And probably the best evidence of the progress we've made, particularly in the last year is the pro forma organic growth versus the reported organic growth at Emerald. And you can see, despite the -- obviously, those issues, the convention center and tariffs this year and all of that, that's impacting some of the legacy brands at Emerald. But at the end of the day, we feel great about investing into exciting fast-growing industries when we can find the #1 show that gives us very high visibility to accelerated growth longer term. And you could see what that could do for the overall Emerald performance. And that strategy continues to be at the core of what we do here. And we're very active, as Herve said, we have a deep pipeline, and we continue to look for exciting opportunities to bring [indiscernible]. Allen Klee: Yes. I saw in your slide deck, now I don't see it, but here it is, 90% of trade shows hold market-leading positions within their verticals, which is quite impressive, just your positioning. I was curious, they're not a large part of your business, but any update on commerce and content segments? Herve Sedky: Yes. I think on -- both on content and commerce, it's an evolution of both businesses. So on the content side, as you know, it's been an area that has been an anchor to our growth. And so we have been investing and continuously shifting that business from relying on advertising to being more of a lead gen model, and we're making some very good progress, especially in the last few months, which I'm very, very happy about. We'll report about that in the coming quarters. And then on the commerce side, we really shifted our focus to one of profitability, and we've made some material progress in terms of really driving a profitable commerce business, whereas it went from unprofitable to breakeven to now contributor to EBITDA, which we're very, very happy with the team's progress on that front. Operator: There are no further questions at this time. I would now like to turn the call over to Herve Sedky for any closing remarks. Herve Sedky: Well, thank you. And to wrap up, thank you all for your time and participation. As I mentioned, I'm really pleased with how we performed to date this year with how sales are trending for the rest of the year and into early 2026. Importantly, we're on track to meet the 2025 goals that we set at the beginning of the year, even as we manage the volatility at some small number of events and stay mindful of the broader economic pressures that we discussed. That's the benefit of our increasingly diversified portfolio. That said, I'm generally excited about what's ahead, continue to see our strategy and investments pay off with more value to our customers with new opportunities for our teams and strong EBITDA growth for our shareholders. And so with that, I thank you for joining and wish you a great day. Operator: Ladies and gentlemen, this concludes today's call. Thank you for participating. You may now disconnect.
Jaime Marcos: Good morning to everyone, and thank you very much for attending our 3 Quarter 2025 Results Presentation. This morning, before the market opened, we published this presentation, along with the rest of the usual financial information at the CNMV and on our corporate website. For this presentation, we have today our Chief Financial Officer, Pablo Gonzalez. As usual, the presentation will last around 20 minutes, and it will be then followed by the regular Q&A. So without further delay, I will give the floor to Pablo. Pablo Gonzalez Martin: Thank you very much, Jaime. I will start on Page 3, where we show the main highlights of the quarter. Starting with the commercial activity, I would like to highlight that business volumes continue to improve 2% year-on-year, supported by stable loans and deposits and a significant growth in off-balance sheet funds, mainly in mutual funds, where we are growing an impressive 24% year-on-year, making 9% of net inflows market share. Total performing loans have stopped declining. And as you can see, they were stable in the year-on-year terms, supported by a 39% increase in new lending. Regarding profitability, gross margin grew by 4%, while total provisions fell 19%, leading to a net profit of EUR 503 million in the first 9 months of the year. That is 11.5% above the first 9 months of 2024. This is quite positive because I would like to remind you that a bit more than 1 year ago, when we presented our 2027 Strategic Plan, we explained you that the initial idea was to reach a net income above EUR 500 million in each of the 3 years of the plan, and we have already reached that target in the first 9 months of the first year. This improvement has also allowed us to reach a return on tangible equity adjusted by the excess of capital higher than 12%, while keeping the cost to income ratio at 45%. Recent trends in credit quality have also remained positive. The net NPAs ratio is now below 1% with gross NPA ratio at 3.7%, which is 115 basis points below the one we had 1 year ago, explained by a significant decrease of 25% in the stock of these assets. Total coverage continues to grow to 75.4%, well above the 70% that we had 1 year ago. The cost of risk also presented a positive trend, falling to 24 basis points in the quarter, which is below our initial guidance, and that is why we are now improving 2025 guidance. Finally, the bank's solvency and liquidity have also been strengthened. CET1 improved by 27 basis points in the quarter to 16.1%. The tangible book value per share plus the dividends already paid in the last 12 months grew by 10% year-on-year. The loan-to-deposit ratio remained at 70% and the liquidity coverage ratio close to 300%. So all-in-all, as you can see, during the third quarter, the trends remained quite strong, confirming recent positive trends. I will continue with the commercial activity on Page 5. As you can see, the total customer funds grew 2.9% year-on-year with the on-balance sheet funds stable and off-balance sheet funds growing 12.6%, supported by an impressive 24% growth in mutual funds. Bear in mind that mutual funds balances have gone above EUR 16 billion compared with less than EUR 13 billion 1 year ago. On the following page, we show you the details of the assets under management and insurance. As I just mentioned in the previous slide, assets under management have grown 13% year-on-year. In the case of mutual funds, the growth has been 24%. The market share in net inflows remain at 9%. On the right, we show the revenues from these two business that have improved by 10% in the last year, representing now 18% of total revenues in the first 9 months of 2025. Regarding loans during the quarter, total performing loans fell owing to second quarter seasonal advances. Excluding such effect, total performing loans fell 0.7% in the quarter. However, they were stable compared with the same month of last year. By segments, private sector loans fell 0.8% year-on-year with corporate loans decreasing a bit more than 2% and stable loans to individuals. As you can see, total performing loans are more stable than a few quarters ago, owing the improvement on new loan production that we show on the next slide. Private sector lending grew 39% year-on-year to EUR 7.1 billion, showing positive trends in all segments one more quarter. Business and self-employed segment is particularly noteworthy where formalizations in the first 9 months grew from EUR 3 billion to almost EUR 4.5 billion, representing a 47% increase. Mortgages, new lending grew 24%. And in consumer lending, we grew another 37%. On Slide 9, we would like to briefly remind you that we continue to make progress in our commitment to sustainability as part of the Strategic Plan. In addition to advances in social and governance matters, here I want to focus on the commitments made regarding the climate transition, where I would like to highlight a couple of figures. On one side, we have EUR 2.1 billion in green label bonds issued to date, which have allowed us to save 81,000 tonnes of CO2 in 2024 with ample collateral to continue issuing in the green format. On the other hand, as you can see, decarbonization targets cover a significant part of the finance portfolio, where we are showing strong progress. This is supported by our sustainable business, which we continue to drive by assisting our clients in their decarbonization pathway and offering specific ESG products. We now are continuing with the review of the P&L in the next section in Slide 11. Starting with quarterly trends. Net interest income was stable in the quarter, growing by a small 0.2% because lower cost of deposits and wholesale funding compensated the ongoing repricing of loans at lower rates. Total fees supported by non-banking fees were also stable despite the usual seasonality of the quarter. Gross margin reached EUR 515 million which is 5% below the previous quarter, mainly due to lower dividend seasonality. that, as you all know, is relatively higher every second quarter. Total costs grew 1% quarter-on-quarter, leaving pre-provision profit at EUR 276 million. Total provisions and other results were better than the previous quarter, among others, because we have a capital gain of around EUR 10 million from the disposal of a banking license this quarter. All these left pretax profit at EUR 232 million and net income at EUR 165 million, which is 5% above the third quarter of last year. In the first 9 months of the year, the net interest income fell 3.5%. However, higher non-interest income, including a 2.8% increase in fees left gross margin at EUR 1.573 billion. Total cost continued to grow at mid-single digit, in line with our guidance, leaving pretax profit at EUR 862 million, 2% above the previous year. The lower provisions booked this year left pretax profit at EUR 708 million, which is 8% above last year and net income at EUR 503 million, 11.5% higher than the first 9 months of 2024. As I said before, it is worth noting that when we presented our new business plan 9 months ago, we guided for a net income above EUR 500 million for the full year, something that we have already achieved this quarter. As we usually do, we will now review the P&L in more detail. Starting with the net interest income, on the next page we have the customer spread evolution. As you can see, customer spread fell 8 basis points in the quarter, mainly owing to the ongoing repricing of floating loans that was only partially mitigated by lower cost of deposits. However, our net interest margin grew 3 basis points in the quarter. As we have explained in the past, in our case, owing to our balance sheet structure with much more deposits than loans, customer spreads only shows one part of our business with clients because it is not considering the income that we do with the excess of retail funding that comes into the P&L through the structural debt portfolio. This is why for banks like Unicaja with a 70% loan-to-deposit ratio, it makes more sense to follow the net interest income margin trends and not only the customer spreads by itself. On the following page, we show the details regarding the quarterly evolution of net interest income that grew a small 0.2% in the quarter. As you can see, the lower cost of liabilities, mainly of customer deposits, mitigated one more quarter, the negative impact from the repricing of the loans at lower rates. Two different effects of similar amounts that explain the net interest income remaining stable for another quarter. If we move now on to fees, we can see how they were stable in the quarter and grew 2.8% year-on-year, a positive evolution explained by higher income from non-banking fees, mainly from mutual funds and insurance that are the 2 business where we are focusing our commercial efforts, compensating the lower banking fees that, as you know, are explained by the implementation of loyalty plans. In Slide 15, we show the details of the rest of revenues, which also shows a positive evolution in the year on all the lines and mainly due to the new banking tax, which, as you know, is now included in the tax line of the P&L, while in 2024 it was booked in other operating charges. Regarding total cost, personnel expenses continue to grow due to the salary improvements agreed with the unions and new hirings. Other administrative expenses also reflects some of the initiatives needed to implement our business plan, leaving total cost 5% above the previous year, in line with our mid-single digit growth guidance. In the right-hand side, you have our cost to income ratio that remained stable at 45%. On the next page, we continue with the cost of risk and other provisions. As you can see on the left-hand side, the cost of risk in the third quarter of '25 was 24 basis points, which is below our initial guidance of 30 basis points, one more quarter. This is why we have decided to formally improve such guidance to below that level for the full year. Other provisions that mainly include legal provisions were lower this quarter, but in line with our current guidance. Finally, other profit and losses included a positive one-off of around EUR 10 million in the quarter from the disposal of the BEF banking license. Overall, total provisions and other results improved from EUR 279 million 2 years ago to EUR 191 million in 2024 and EUR 155 million in the first 9 months of 2025, a very positive evolution that also has helped to further improve the profitability of the bank as we can see on the following slide. The ROTE of the bank continues to improve, reaching 10% in September 2025 or 12% when we adjust the excess of capital. As we saw before, our net income has improved from EUR 285 million in the first 9 months of 2023 to EUR 451 million in 2024 and above EUR 500 million in 2025, a significant improvement that has increased our return on CET1 to 17%. As most of you know, we believe that in our case, the return on CET1 is a good reference that isolates the relative larger accounting equity that Unicaja needs to have to fully absorb its higher solvency deductions. Finally, on the right-hand side, we have also included the tangible book value per share plus dividends that, as you can see, it has grown 10% during the last 12 months. Let's move now to the credit quality section in Slide 20. As you see in the slide, positive trends remain in place. NPLs are down 20% year-on-year with the coverage growing to 74%. Overall, NPAs are also down 25% year-on-year with coverage also improving to 75%, a very positive trend that remains and leaves total net problematic exposure below 1%. If we now move to solvency on Page 22, you have the quarterly bridge. Retained earnings represented 21 basis points after considering AT1 coupons and the accrual of a 60% dividend cash payout. The mark-to-market of our stake in EDP added another 9 basis points and the rest of the moving parts, mainly higher risk-weighted assets, explain a small negative of 3 basis points in the quarter. All in all, the CET1 fully loaded, reaching 16.1%. On the next page, we show you our MREL position. As you can see, our MREL ratio stands at 29.6% in the quarter, maintaining an ample buffer against the main requirements that you have on the right-hand side. Among them, I will highlight the MDA buffer that has grown above 750 basis points. Regarding liquidity, we continue to have a very strong position with a significant amount of liquid assets, a loan-to-deposit ratio of 70%, the NSFR at 159% and the LCR at 295%. All of them, as we used to say, are best-in-class in liquidity metrics. Finally, here we show the regular fixed income portfolio details that, as you all know, is a structural portfolio funding with excess of retail deposits. The duration of the portfolio has decreased a little bit to 2.5 years, owing to interest rate risk management. However, the yield has remained stable during last quarters at 2.6% despite the lower rates. To conclude, let me update you on our 2025 guidance in Slide 27. As you probably remember, in the second quarter, we increased our net interest income and fee guidance. This quarter, owing to the recent positive trends, we are improving a little bit further our net interest and cost of risk guidance. On the net interest income, as you saw during the presentation, the trends continue to be slightly better than initially expected, among others, owing to the fast decrease in the cost of liabilities that has compensated the negative impact of lending repricing. And So we increased our guidance for the year from above EUR 1.450 billion to above EUR 1.470 billion. On the other hand, as we have mentioned during the presentation, the cost of risk has been lower than initially expected, and we now believe it will be below 30 basis points for the full year. Because of these 2 upgrades, we now expect the adjusted return on tangible equity to be close to 12%, slightly better than the previous 11%. Finally, let me finish by reiterating that the first 9 months of the year have been very positive. We have been improving structural profitability while further reducing the problematic exposure and generating additional capital. All these, together with positive commercial trends that we expect to continue to improve further in the coming quarters. As a consequence of all these, our shareholders' remuneration has also improved, and it will continue to improve as we have reflected in our Strategic Plan. Thank you very much. I leave it here. And we can now move to the Q&A. Please, Jaime, whenever you want. Jaime Marcos: Thank you, Pablo. We will start now with the Q&A. Please remember to ask only 2 questions each one. Also remember to mute your line after your questions. Operator, please open the line for the first question. Operator: [Operator instructions]. And our first question comes from the line of Maksym Mishyn from JB Capital. Maksym Mishyn: Two questions from me. The first one is on the outlook for the NII. Your updated guidance implies a decline in the fourth quarter. Could you please give a little bit more color on what kind of magnitude should we expect? And why should it decline anyway? And the second question is on the excess capital. You keep on building it. When are we going to get an update on the potential deployment? Pablo Gonzalez Martin: Thank you, [ Maks ]. Let me get you through the outlook for NII. As you saw, we have updated our NII guidance for the year from above EUR 1.450 billion to EUR 1.470 billion. That's above that number. You have to think that we still have a couple more quarters of impact from the repricing of the floating rate loan book, mainly the mortgage book. because the reference has a lag of 12 to 14 months. So this will have an impact. In terms of the offset that has allowed us to offset the impact of the repricing due to the Euribor referenced in these last quarters have been the lower cost of deposits and the lower wholesale funding. Regarding the lower wholesale funding and deposits, the trend is going to be lower and won't be able to offset fully the impact from the repricing on loans. And the reasons, as you can imagine is both of them are referenced to short term, the 3 months and 6 months more than the 1-year Euribor. And so most of the deposits and the wholesale issuance has already been repriced last quarters. So taking all that into consideration, I think we have still a couple of quarters of slightly lower NII and then recovering from that. Regarding the second question on the excess capital and the update, we will update on our strategy on the uses of the excess capital. But what I can confirm is what we said in our Strategic Plan presentation at the beginning of the year is that this year the payout is going to be 60%. And for the whole period of the Strategic Plan, the 3-year was going to be around 85%. And regarding the difference between the 2, it could have different forms as additional dividend, share buybacks or different options. And So it gives you with the 2 years 2026 and 2027 with a close to around 100% payout to our shareholders. And to give -- to be more specific, I think we will do it in the whole year presentation. Jaime Marcos: Operator please, we can move to the following question. Operator: Next question from Carlos Peixoto from CaixaBank BPI. Carlos Peixoto: So if I may, a follow-up on capital. Just on the quarter itself there was a relative impact from RWAs and others of 3 basis points, given that RWAs were slightly up in the quarter. I was wondering if you could give us some breakdown between the effects that are included in there. A question on the ALCO portfolio. You have a decline this quarter. I'm wondering whether there is a change in strategy? Was this a punctal effect of maturities? Just how should we think about this portfolio going forward? And then if I may, just a third question on the loan book. You have -- there's a sharp decline in the SME book. I was wondering when could we start to see this trend reverting and also whether this drop is still driven by ICO loans maturing? Pablo Gonzalez Martin: Thank you, Carlos. I think you have 3 questions. I'll try to go through the 3 ones. Within the capital bridge, as you can see, we have -- the mainly driver is obviously the retained earnings and the valuation of our EDP position. And in terms of the risk-weighted assets, why it goes up, if you consider that we have around EUR 100 million in EDP and also in market risk another EUR 100 million. So most of that increase is explained by that. The remaining is explained by the credit and mainly due to mix position. And regarding the second question on our strategy for the ALCO portfolio, something has changed. The difference in terms of the impact on the average position of the portfolio is very stable. We already said we found some opportunities. But this year, we didn't have much maturities. For the remaining of the quarter, it's only slightly above EUR 200 million. And we have -- and we use some tactical positioning and fine-tuning with the position. Next year, we have a much larger, above EUR 2 billion maturities on the portfolios. And this will help us also in the NII for next year. And you have to think it's around 80, 90 basis points on yield, the portfolio that mature next year. So we will take opportunity and reinvest most of the portfolio. Obviously, the size of the portfolio will depend on commercial dynamics and the banking books, how the loan book grows and the on-balance sheet deposits evolve in the year. But the most likely scenario is that it's going to be very similar to the level that we have around EUR 29 billion to EUR 30 billion more or less. And the third question on SMEs. I think on SMEs, which is the segment that comes down more on a year-on-year basis, it comes down around 8%, 9% on a year-on-year. But I think what matters is the trend. If you look at the year-to-date, it only comes down to 3%. And on the quarter, it's only 0.6% in a seasonal low quarter because of the summer. So we are quite confident. We are turning the commercial strategy. We have developing -- we are developing and implementing some tools for our people, some solutions for our customer, so the value proposition for our customers, SMEs, but also midsized corporates is improving a lot. And we are building the value proposition and confident that the turning in the evolution of that loan portfolio is going to keep improving in the coming quarters. Jaime Marcos: Please operator, let's move to the following question. Operator: Next question from Ignacio Ulargui from BNP Paribas. Ignacio Ulargui: I have 2 questions. One on cost growth. How should we think about cost growth going forward and the cost to income outlook for the next couple of years? Should we expect the cost to income to improve further? And on a 9-month basis, you see a small deterioration impacted by revenue. Should you expect a bit of a normalization on that cost growth? And then a follow-up question on capital. Could you update us on what should we expect in terms of operational RWA inflation into the full year? Pablo Gonzalez Martin: Thank you, Ignacio. On cost growth, as we explained when we announced our Strategic Plan, we are in a process of improving and developing capabilities and talent in different segments that we are underrepresented in the market. And this implies and also the technologies that we are implementing and the AI and everything of all the new developments. This require hiring new people. We are hiring new people in areas where we don't have internal people, and this requires some investment in terms of cost. Also developing some platforms and implementing some platform and integrating with third-party platforms as well to develop the business. So in terms of cost growth, I think the -- we haven't guided the market for next year, but I think we will keep investing in improving our value proposition for our customers and developing capabilities in different areas. Regarding the cost to income, our guidance was below 50%, and we are below that figure and with some buffer because the revenues keep growing. So the [ jaws ] are still positive, and we will maintain this position down the line. And regarding the impact of operational risk-weighted assets in the first quarter or at the end of the year, it will be around close to 10 basis points. So it's not significant, and we can absorb that with our internal capital generation. Jaime Marcos: Please operator let's move to next question, please. Operator: Next question from Sofie Peterzens from Goldman Sachs. Sofie Caroline Peterzens: This is Sofie from Goldman Sachs. So one of your peers told us today that they have increased their rate sensitivity. Could you remind us what your rate sensitivity is and if you would consider increasing the rate sensitivity in your book? And then the second question is around kind of inorganic growth opportunities. We saw a failed deal in Spain. Does this create any kind of opportunities for you to think more about kind of M&A? And if you could just remind us how you think about M&A opportunities? Pablo Gonzalez Martin: Thank you, Sofie. Let me go through the 2 questions. I think in terms of rate sensitivity, as we explained, we started to hedge our interest rate sensitivity at the end of 2023 when we got the conclusion that rates were coming down, so we positioned the bank. That has allowed us to have a much lower NII reduction this year than originally expected. And this strategy has performed very well, obviously, within the bands that we can have within the regulatory framework that we have on our balance sheet. Regarding going forward, we are in a position more confident, and as we heard Lagarde yesterday, now it's more balanced. The ECB is in a good position. The interest rate, I think, is more stable and the optionality could be upside or downside depending on the economic evolution. Our base case is the economy performed well again in Europe, which is the same view that has the ECB, for instance. They consider and they mentioned the improvement considering the evolution of the economy in the major parts of Europe. So we still think we are very stable in terms of rates. In terms of our positioning, what does it mean? We still this year within that strategy that I mentioned, we have for next year, very flat NII sensitivity, so it's almost close to 0. Very low, very single-digit -- low single-digit interest rate sensitivity for the next 12 months. Going to the 12 to 24 months, still very low, but in the low to mid-single digit sensitivity. And then due to our -- we haven't renewed, but that's in the third year, obviously. And in the third year, due to our positioning because we have a lot of deposits that had a lot of duration due to their stickiness and the evolution throughout the years. So we, obviously, have more interest rate sensitivity, which we think at the moment is a good position. With a steeper curve and the evolution on rates that we think, we think we are well positioned for the coming years in interest rate positioning. Obviously, we will monitor that. We take decisions every month in the ALCO committee, and we keep trying to do our best to improve what is the original positioning of the bank and manage the interest rate sensitivity. Regarding inorganic growth and M&A, I think regarding sector consolidation, I can confirm you that we have the confidence and the support of our major shareholders and M&A is not in our road map. Mergers are not easy. They divert the focus of the business. And now we have -- after many years on M&A process, we have sufficient scale and scope to focus on our own business and develop into the full potential of our capabilities. And we still are working on that and focus on that, and we have the full support of the Board and the shareholders. And regarding other opportunities in M&A, what we are looking all the time it's something that we have to do is within our Strategic Plan, we explained that we want to grow in areas where we have less presence like private banking, like consumer lending. And in those areas, we are developing internal capabilities, looking at new platforms, new agreements and any other type of opportunities in the market. We look at everything if we can speed up that process. But even if we don't do any bolt-on type of transaction, in this we are obviously looking at anything that has the potential to improve and accelerate our development of those capabilities. And in that sense, we will keep looking at opportunities, always thinking on the shareholder value creation, which is our major objective. Jaime Marcos: Let's move, please, operator, to the following question. Operator: Next question from Borja Ramirez from Citi. Borja Ramirez Segura: I have 2. Firstly, on the NII trends, if I understood well, it may have been mentioned that NII may decline in coming quarters. I would like to confirm if this is correct or this is just the customer spread? And then my second question would be with regards to the strategic targets for market share in various loan segments, I would like to ask if you could kindly update -- provide an update on your market share targets. Pablo Gonzalez Martin: Okay. Borja, let's revisit a little bit the NII, as it's quite key for profitability down the line. I think we had a view on NII coming down more significantly in the year than finally it has happened. We have changed our guidance twice and again this quarter. And I think it's mainly due to the steeper reduction in cost and the better performance of the hedging and the strategic interest rate positioning of the bank that we have done in the last few quarters. Regarding the short term, the next quarter, obviously, even increasing our guidance for the year, we still think that we still have 2 -- at least 2 quarters of a significant impact on repricing in the mortgage -- floating mortgage book. And this will have been offset in the last few quarters by lower funding cost, either deposit cost or wholesale funding. And most of that impact is already behind us. If you look at the, as I said, the Euribor 3 months, in the second quarter was 2.10% in the third quarter, 2.01% and now it's 2.03%. And if you look at the 12 months, it's going up from the second quarter again in the third quarter and for this quarter it's also going up. So we don't think we have a lot of repricing from the liability that has a shorter duration and still some reposition. Obviously, we maintain a very large position in floating rates, on hedges in the asset side, so that will offset a little bit. But obviously, depending on the evolution on deposits and volumes, we will see. But the most likely is that we have lower NII for the next 2 quarters. And from that onward, we're still working, and it will depend, and we will give you more clarity. But obviously, the most likely is that we have some improvement from that level. And regarding the second question, it's -- if our strategic targets, I think in loans, we have a clear view that we have to improve. We have been improving in consumer for the whole year. And we, as I mentioned before, incorporates we changed the trend. I think it's important to give you some color. In the performing loans, the market grew around 3% in year-to-date, and we are growing close to 2%. So we are getting close already in this year, and the trends are changing. Obviously, in mortgages, we still have some reduction in the book. And the problem, as you can imagine, is the fierce competition in pricing, and we want to maintain. Our main target is to improve profitability and not volumes. And so we will maintain the discipline that we hope that is coming to the market, but still challenging to maintain the book in mortgages. Our target is to maintain and even improve the book. But obviously, this will depend on market conditions, not only on our commercial drive, because we have one of the best platform in mortgages. We are confident that our funnel is very streamlined and very well positioned to take the full benefit of the growth in the mortgage lending in Spain. But obviously, it will depend on market conditions. We hope that we'll get to more sense, but it depends, obviously, on how it evolves. Jaime Marcos: Please, let's move to the following question. Operator: Next question from Miruna Chirea from Jefferies. Miruna Chirea: I just had one on fees actually. So if we are looking at year-to-date fees, you are growing very well in non-banking fees. However, the payments and account fees are still very much under pressure. I was just wondering if you could give us an indication of what you expect for next years to look like in terms of growth in fees. And also when should we expect this rebound in banking fees to happen? And in the non-banking fees, is the level that you have now a sustainable level? Or should we think about a gradual deceleration there in coming years? Pablo Gonzalez Martin: Thank you, Miruna. Regarding fees, we updated last quarter our guidance because we are performing as you said, in non-banking fees, especially in mutual funds, but also in insurance. I think we in mutual funds growing at close to 10% market share and new inflows it's going to be tough, but we will try. And so our strategy in diversifying our income from different sources it's fully in line with this, and we are improving the value that we offer to our customers. So we think we can keep improving and growing the non-banking fees. And regarding the banking fees, we still think it's going to be challenged for 2026 and then improving from that onwards. But obviously, we have to fine-tune. We have done a lot in terms of loyalty programs and developing and having new value for our customer to increase our -- on the point-of-sale devices. So we are growing significantly on that and the SME value proposition will allow us to increase the transactional fees in the future, but probably next year is going to be challenging again. And we are confident maybe in 2027 is when we will see the increase in banking fees. But for the short term, still challenging in the banking fees, but offset by the non-banking fees that will keep growing. Jaime Marcos: Please operator, let's mover to the next question. Operator: Next question from the line of Hugo Cruz from KBW. Hugo Moniz Marques Da Cruz: I just wanted to ask you about the cost of risk. It keeps getting better. And I was just wondering if you could give us your latest view of your over the cycle level for cost of risk. So when could we start seeing? Would that be a higher level than what you have today? And when could we start seeing the pickup in the cost of risk? Pablo Gonzalez Martin: Thank you, Hugo. I think cost of risk has been another of the good news in the year. We were expecting to be around 30 basis points for the year, and we changed that to below 30 basis points, and obviously, being 24 basis points in this quarter. And the evolution on non-performing loans is quite positive as well, and we still have the view that we can maintain. We are quite confident with the credit quality of the portfolio. We already in the past did the full analysis of all the potential risk. Obviously, there's still uncertainty in the market. The geopolitical uncertainties is something that we will revisit in the fourth quarter. But going forward, probably the most likely is that we will be slightly lower than even the guidance that we have given. We're confident that our book is very sound and the analysis that we have done. So the fourth quarter is still -- we will review our -- the geopoliticals and the economic uncertainties. But from the actual portfolio, unless we have some economic shock or some geopolitical impact on the portfolio, we're confident that we have a very strong portfolio and cost of risk should be slightly lower in the coming quarters. Jaime Marcos: We have time for one more question, please, operator whenever you want. Operator: Next question from the line of Cecilia Romero from Barclays. Cecilia Romero Reyes: You were mentioning before that NII may fall in Q4 a little bit depending on loan and deposit volumes. Is there room in there to grow the ALCO to support the NII? And then I wanted to ask on fees. Q4 last year saw a strong pickup on fees of around 4.7% growth. Could we see something similar in Q4 this year? Pablo Gonzalez Martin: Thank you, Cecilia. Regarding the NII, you got the major lines. I didn't mention the other lines on the wholesale funding and the ALCO and liquidity position, I think more or less they will offset. We still -- our view at the moment, obviously, it will depend on the opportunities in the ALCO portfolio. As you know, we are sometimes opportunistic and if we see good levels to get into the ALCO portfolio, some good bonds for the long run, we might do so. But at the moment, with the numbers and the forecast that we have, it will have a slightly negative impact that will be offset by lower wholesale funding. So more or less, the remaining moving parts of the NII for the next quarter are quite flat. So it's mainly the impact of the repricing of the loans. And regarding your second question, the fees, if it's going to be better in the fourth quarter, obviously, we always have some seasonality on fees. And we don't have the actual review, but it might be some seasonality as it usually happens. Maybe slightly lower. Last year was a significant one, but we don't know how it's going to be this year. But the most likely is to have some seasonality impact in the fourth quarter. Jaime Marcos: Thank you very much, Pablo. Thank you all very much. We'll leave it there, and we are in touch. If you need further info, please do not hesitate to contact the IR team. Otherwise, we'll see you next quarter. Pablo Gonzalez Martin: Thank you.
Operator: Good morning, everyone, and welcome to the Lear Corporation Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that today's event is being recorded. At this time, I'd like to turn the conference call over to Tim Brumbaugh, Vice President, Investor Relations. Please go ahead. Timothy Brumbaugh: Thanks, Jamie. Good morning, everyone, and thank you for joining us for Lear's Third Quarter 2025 Earnings Call. Presenting today are Ray Scott, Lear's President and CEO; and Jason Cardew, Senior Vice President and CFO. Other members of Lear's senior management team have also joined us on the call. Following prepared remarks, we will open the call for Q&A. You can find a copy of the presentation that accompanies these remarks at ir.lear.com. Before Ray begins, I'd like to take this opportunity to remind you that as we conduct this call, we will be making forward-looking statements to assist you in understanding Lear's expectations for the future. As detailed in our safe harbor statement on Slide 2, our actual results could differ materially from these forward-looking statements due to many factors discussed in our latest 10-K and other periodic reports. I also want to remind you that during today's presentation, we will refer to non-GAAP financial metrics. You are directed to the slides in the appendix of our presentation for the reconciliation of non-GAAP items to the most directly comparable GAAP measures. The agenda for today's call is on Slide 3. First, Ray will review highlights from the third quarter and provide a business update. Jason will then review our financial results and provide an update on our full year guidance. Finally, Ray will offer some concluding remarks. Following the formal presentation, we would be happy to take your questions. Now I'd like to invite Ray to begin. Raymond Scott: Thanks, Tim. Now please turn to Slide 5, which highlights key financial metrics for the third quarter of 2025. Lear delivered $5.7 billion of revenue in the third quarter, an increase of 2% from the third quarter of 2024. Core operating earnings were $241 million, and our total company operating margin was 4.2%. Adjusted earnings per share was $2.79 and our operating cash flow was $444 million in the quarter, one of our strongest operating cash flows in our history. Our third quarter financial performance was at the higher end of our expectations despite the significant impact of a cybersecurity incident that disrupted production for one of our key customers, Jag Land Rover, for the entire month of September. Excluding the impact of Jag Land Rover disruption, total Lear third quarter core operating earnings and operating margins would have been higher than the prior year. Jason will provide the additional details on the impact of this disruption to our third quarter results and our full year outlook. Slide 6 summarizes key financial and business highlights from the quarter. As a reminder, our strategic priorities continue to be extending our global leadership position in Seating, expanding margins in E-Systems, growing our competitive advantage and operational excellence through IDEA by Lear and supporting sustainable value creation with disciplined capital allocation. The momentum of positive net performance we delivered in the first half of the year continued through the third quarter, contributing 50 basis points to Seating and 95 basis points to E-Systems margins. This performance was remarkable considering the third quarter of 2024 was also a very strong, making a very tough comparison for the year. It is a testament to our commitment to operational excellence and the benefits we are capturing from our investments in digital tools, automation and restructuring. Through the third quarter of the year, we delivered 70 basis points of net performance in Seating and 105 basis points in E-Systems. Our operating cash flow of $444 million was one of the highest third quarters in Lear's history, second only to the third quarter of 2020, which was skewed by working capital fluctuations resulting from the impact of COVID. Our strong cash flow generation allowed us to accelerate our share repurchases, which totaled $100 million for the quarter, while maintaining our dividend of $0.77 per share. The solid momentum we experienced in the quarter enabled us to raise the midpoint of our full year free cash flow outlook. Had it not been for the impact of the Jag Land Rover disruption, we would have further increased the midpoint of our revenue and free cash flow and increased our operating income outlook. We continue to extend our leadership in operational excellence through IDEA by Lear initiatives. To advance our employees' understanding and applications of digital and AI technologies, we have launched the Lear fellowship program with Palantir. This 12-week intensive training will engage 90 Lear team members from across functions, including IT, engineering, finance and purchasing, empowering them to harness AI capabilities to address real business challenges. This is the first such company-focused fellowship program for Palantir. They are excited to work with Lear because our company-wide commitment to use digital and AI tools to rapidly improve our business and manufacturing process and further improve our cost structure. I couldn't be more excited about the potential of this program, and I will be directly involved to gain the firsthand view into the transformative possibilities of these tools that they offer. We continue to win new business in both segments. In E-Systems, we have been awarded approximately $1.1 billion of business year-to-date. This is the fourth year of the last 5 years where Lear E-Systems has generated over $1 billion of business awards. In Seating, we won new business with several automakers, including awards with BMW, Ford Motor Company, Nissan, Hyundai and Jag Land Rover as well as awards with key Chinese domestic automakers. Our modularity strategy continues to drive new business. In the quarter, we won 4 ComfortFlex awards, including a conquest award with Hyundai and awards with BMW, Leapmotor and Seres. During the quarter, we took operational control of our second joint venture in China this year. The joint venture supplies key programs for Seres. Consolidating this joint venture is expected to add approximately $75 million to our reported revenue for 2025 and a significant growth in 2026. In E-Systems, key business wins include 8 wire awards, among which are conquest awards for Stellantis and 4 awards with Chinese automakers. We also received 2 new electronic awards for power distribution boxes on Ford Motor Company's F-Series trucks. For the third straight year, Lear led the J.D. Power U.S. Seat Quality and Satisfaction Study with 7 top 3 finishes. And our customers continue to recognize us for our dedication to quality and performance. Ferrari honored Lear with their highly coveted Fearless Organization award, recognizing us as a trusted supplier due to our commitment to transparency and reliability and dedication to quality. Nissan also recognized Lear for our industry-leading quality by granting us their 2025 Global Quality Award as well as their 2025 Global Quality Award in North America. During the quarter, we published our 2024 sustainability report, providing an update on our commitments to sustainability and governance. Slide 7 provides an update on the key metrics to track our progress on expanding margins and generating long-term revenue growth. In Seating, we won conquest awards for complete seats in Asia and South America as well as for seat components with several automakers across multiple regions. In E-Systems, we won 2 conquest wire awards with Stellantis in North America and the third conquest award with a key Chinese automaker. Awards for our innovative modular seat products continue to grow. We received 4 additional awards during the third quarter, including a conquest award combining lumbar and seat suspension for Hyundai. Our other solutions combine heat and our foam comfort layer for BMW and heat with seatbelt reminder functionality for both Seres and Leapmotor. These additional wins bring our total to 28 programs for ComfortFlex, ComfortMax Seat and FlexAir products. Our strong relationships with Chinese domestic automakers continue to deliver new business wins. In Seating, we won 5 complete seat awards with BAIC, Seres, Dongfeng, Leapmotor and SAIC. Four of our wiring awards in E-Systems were with Chinese domestic customers. IDEA by Lear and our investments in automation generated $20 million of savings in the third quarter, keeping us on track to deliver approximately $70 million of savings for the full year. Restructuring investments contributed approximately $25 million in savings in the third quarter, positioning us to achieve $85 million of savings in the full year. As a result of our strong operating performance, we are increasing our full year net performance outlook from $150 million to $170 million. This reflects the positive momentum in the benefits of both IDEA by Lear investments and restructuring actions. Our global hourly headcount reduction is 3,400 through the third quarter. Despite an increase in headcount due to the consolidation of our second joint venture in China, we anticipate the fourth quarter restructuring actions will allow us to approach our target by the end of the year. We continue to outperform our scorecard metrics. These strong results are key enablers to improve margins and drive long-term growth in both segments. On Slide 8, I'll highlight the strategic opportunities emerging as automakers accelerate their U.S. production plans. We are currently in advanced discussions with a North American automaker who is looking to increase volume on one of their signature platforms here in the United States. We believe the award is imminent, and we will provide an update when it's appropriate. We view this as the first of several incremental opportunities. While estimates vary, the total addressable market for increased U.S. production is significant. Automakers continue to announce commitments to increase their production footprints in the United States. We are currently in active discussions with multiple OEMs, including a luxury European automaker leveraging their existing U.S. facility, several Asia-based manufacturers expanding their footprint and North American automakers adjusting their portfolio to supply both Seating and E-Systems content. Lear is well positioned to maintain or increase our market share due to this shift. Our strong customer relationships, proven execution and extensive U.S. manufacturing footprint gives us a distinct competitive advantage. By investing in the automation and designing capital specifically optimized for our manufacturing processes rather than relying on the off-the-shelf solutions, we enhance operational efficiencies and we reduce our costs and we accelerate our speed to market. We remain the only supplier to have launched a full seat assembly plant in under 9 months in the U.S., a testament to our agility and operational excellence. We see the onshoring trend as a multiyear growth catalyst and a compelling opportunity to drive incremental revenue and margin expansion while supporting the administration's goal of increasing U.S. manufacturing. Slide 9 provides an update on 2 of our key pillars of our IDEA by Lear strategy. Our process innovation, leveraging digital tools and automation is transforming our operations, enhancing our competitiveness and delivering meaningful value creation. Lear's relentless focus on being the industry leader in technology-driven operational excellence is accelerated by our partnership with Palantir. The Lear fellowship program is a strong endorsement of our culture to embrace operational excellence. Today, we have over 14,000 users fully embedded on the foundry platform, driving performance across more than 10 global centers of excellence. We've deployed over 250 digital tools and AI use cases across product engineering, material purchasing, manufacturing, testing and inventory management, each contributing to smarter, faster and more efficient decision-making. Over the past 7 years, we've acquired 8 companies, each focused on advancing product and process innovation. Our global automation and digital team now includes more than 700 specialists. We've developed proprietary AI tools like Thagora, RoboSCAN and LearVUE. Thagora and RoboSCAN uses exclusive algorithms and automation to optimize the cutting patterns for our leather hides. LearVUE is a vision system that enhances our defect detection capabilities and ensures proper color and motion of our seats amongst other end-of-line function tests. And we built the industry's first automated assembly of our FlexAir, ComfortFlex and ComfortMax systems to demonstrate our innovative manufacturing capabilities to our customers and eventually to our investors in a production setting. By integrating approximately 80% of our capital, which is designed specifically for our manufacturing processes into our complete seat operations at a 20% to 30% cost advantage, we have a significant competitive advantage in both efficiency and scalability. These efforts are already delivering results. We expect approximately $70 million in cost savings this year with an additional $65 million to $75 million of savings annually in 2026 and '27. In addition to the cost benefits, these initiatives improve working capital and free cash flow. Our product and process innovations improve our underlying cost structure, resulting in stronger financial returns for new business quotes. These tools also enhance the safety, quality and ergonomics of our world-class operations and improve employee retention. Our digital and automation strategy is not just about operational excellence. It's a key driver of our long-term value creation. Now I'd like to turn the call over to Jason for a financial review. Jason Cardew: Thanks, Ray. Slide 11 shows vehicle production and key exchange rates for the third quarter. Global production increased 4% compared to the same period last year, driven primarily by higher year-over-year production in North America and China. Production volumes increased by 5% in North America, 1% in Europe and 10% in China. The U.S. dollar weakened against the euro and was flat against the RMB. Turning to Slide 12. I will highlight our financial results for the third quarter of 2025. Our sales increased 2% year-over-year to $5.7 billion. Excluding the impact of foreign exchange, commodities, tariff recoveries, acquisitions and divestitures, sales were down 1%, reflecting the impact of the JLR production disruption, lower volumes on other Lear platforms and the wind down of discontinued product lines in E-Systems, partially offset by the addition of new business in both of our business segments. The JLR disruption reduced our revenue by $111 million in the quarter. Core operating earnings were $241 million compared to $257 million last year, driven by the impact of the JLR production disruption and lower volumes on other Lear platforms, partially offset by positive net performance in our margin-accretive backlog. The JLR disruption, including the impact of trapped labor, reduced our core operating earnings by $31 million in the quarter. Adjusted earnings per share were $2.79 as compared to $2.89 a year ago, reflecting lower adjusted net income, partially offset by the benefit of our share repurchase program. Third quarter operating cash flow was $444 million, a significant increase to the $183 million generated last year due to improvement in working capital, partially offset by lower core operating earnings. Slide 13 explains the variance in sales and adjusted operating margins for the third quarter in the Seating segment. Sales for the third quarter were $4.2 billion, an increase of $138 million or 3% from 2024. Without the JLR disruption, sales would have increased 5% year-over-year. Excluding the impact of foreign exchange, commodities, tariff recoveries, acquisitions and divestitures, sales were up 2% due to higher volumes on Lear platforms, including the Ford Explorer and Aviator as well as the GM full-size trucks and SUVs in North America, the Hyundai Palisade and Xiaomi SU7 in Asia and the addition of new business such as the Tay 3 and the Seres M7 in China and the Citroen C3 Aircross in Europe, partially offset by the impact of the disruption to JLR's production. Adjusted earnings were $261 million, flat compared to 2024 with adjusted operating margins of 6.1%. Operating margins were lower compared to last year, primarily due to lower volumes and the mix of production by program, including the disruption of JLR, partially offset by strong net performance in our margin accretive backlog. Slide 14 explains the variance in sales and adjusted operating margins for the third quarter in the E-Systems segment. Sales for the third quarter were $1.4 billion, a decrease of $42 million or 3% from 2024. Without the JLR disruption, sales would have been down approximately 1% year-over-year. Excluding the impact of foreign exchange, commodities, tariff recoveries, acquisitions and divestitures, sales were down 7%. The decline in sales was driven by the JLR disruption and lower volumes on Lear platforms, including GM electric vehicle platforms in the Ford Escape and Corsair in North America and the Audi A6 and several Volvo GLE programs in Asia as well as the wind down of discontinued product lines, partially offset by the addition of new business such as the Renault 4 and 5, the Citroen C3 and C3 Aircross in Europe. Adjusted earnings were $60 million or 4.2% of sales compared to $74 million and 5% of sales in 2024. Lower operating margins were driven by the reduction of volumes on Lear platforms, including the disruption of JLR and the wind-down of discontinued product lines, partially offset by strong net performance and our margin-accretive backlog. Slide 15 provides global vehicle production volume and currency assumptions that form the basis of our full year outlook. We have updated our production assumptions, which are based on several sources, including internal estimates, customer production schedules and S&P forecast. At the midpoint of our guidance range, we assume that global industry production will be up 2% compared to 2024 or flat on a Lear sales weighted basis, driven primarily by lower volumes in our 2 largest markets, North America and Europe. From a currency perspective, our 2025 outlook assumes an average euro exchange rate of $1.13 per euro and an average Chinese RMB exchange rate of RMB 7.21 to the dollar. Slide 16 provides an update to our full year 2025 outlook. Our current outlook assumes no changes to current tariff policies or significant industry-wide disruptions due to Nexperia or other supply constraints. The primary adjustments to the midpoint of our guidance are as follows: Revenue is now expected to be approximately $23 billion or 1% higher than our previous guidance of $22.8 billion. This increase is driven by favorable volume on their platforms, foreign exchange and the impact of the consolidation of a seating joint venture in China, partially offset by the JLR production disruption. Core operating earnings are expected to be approximately $1.025 billion, unchanged from our prior guidance as higher volumes on our platforms and further improvements to net performance are offset by the impact of the JLR disruption. We are increasing our outlook for restructuring costs by $20 million to reduce excess capacity and lower our structural costs. At the same time, we are reducing our outlook for capital spending by $30 million. Operating cash flow is expected to be in the range of $1 billion to $1.1 billion, and our free cash flow is now expected to be approximately $500 million at the midpoint of our guidance, a $30 million increase, reflecting improved working capital, including better inventory management and lower capital spending, partially offset by higher restructuring costs. Slide 17 compares our October 2025 outlook to the midpoint of our prior 2025 outlook. Revenue is expected to increase by approximately $230 million, primarily due to higher production volumes on Lear programs, favorable foreign exchange and new business growth at a recently consolidated Seating joint venture, partially offset by lower JLR volumes. The midpoint of our core operating earnings outlook is expected to remain unchanged at $1.025 billion with operating margins of 4.5%. While higher volumes on existing Lear platforms and an increase of expected net performance from $150 million to $170 million are positive contributors, these benefits are offset by the impact of the JLR production disruption. Excluding the lower JLR production, the midpoint of our operating income outlook would be approximately $70 million higher and our full year margin would be above 4.7%. We have included detailed walks to the midpoints of our guidance for Seating and E-Systems in the appendix. Moving to Slide 18. We highlight our balanced capital allocation strategy. Our balance sheet and liquidity profile continues to be a significant competitive advantage for us. We do not have any near-term outstanding debt maturities. Our earliest debt maturity is in 2027, and our debt structure has a weighted average life of approximately 12 years. Our cost of debt is low, averaging less than 4%. In addition, we have $3 billion of available liquidity. Our capital allocation priorities remain consistent. We are focused on generating strong cash flow, investing in the core business to drive profitable growth and returning excess cash to shareholders. Given our current valuation and confidence in our ability to enhance the long-term value of the business, we believe the best use of excess cash is to prioritize share repurchases and our sustained dividend. At this time, we do not see a compelling strategic acquisition opportunity in either segment that would deliver superior returns. During the third quarter, our strong cash flow enabled us to accelerate our share repurchases to $100 million worth of stock, and we continue to repurchase additional shares throughout our quiet period. We increased the midpoint of our full year free cash flow outlook and are on track for conversion of approximately 80%, providing capacity to repurchase additional shares in the fourth quarter, exceeding our original $250 million target for the year. Now I'll turn it back to Ray for some closing thoughts. Raymond Scott: Thanks, Jason. Please turn to Slide 21. Our third quarter results demonstrate our relentless focus on areas of the business we can control and improving our structural profitability of the company. Unfortunately, the disruption of Jag Land Rover, one of our key customers in both segments obscured the underlying progress we are making to grow our revenue and strengthen our margins. We continue to win new business across our product lines in both segments, particularly in China. We still see significant opportunities in a robust pipeline. Our focused investments in restructuring and automation are resulting in strong operation -- operating performance and will drive margin expansion in both segments. Our strong focus on generating cash will allow us to achieve approximately 80% free cash flow conversion, and we remain committed to returning excess cash to shareholders. While it's still early to provide a specific outlook for 2026, we see several positive tailwinds over the next 2 years. These include the nonreoccurrence of the Jag Land Rover disruption, a strong and positive backlog and continued benefits from our automation and restructuring investments. In addition, the business solutions emerging from the Lear fellowship program with Palantir are expected to significantly enhance operating efficiency and reduce cost across the organization, including within our administrative and headquarter functions. Looking further ahead, our robust pipeline of opportunities, especially those driven by customers' onshoring efforts, position us for additional growth in '27 and meaningful growth beyond. I couldn't be more proud of the team's third quarter performance, and I'm excited about the opportunities ahead. And now we'd be happy to take your questions. Operator: [Operator Instructions] Our first question today comes from Dan Levy from Barclays. Dan Levy: I appreciate the disclosure for the fourth quarter on the JLR assumptions, and it seems like Nexperia, you're not really assuming anything. Maybe you could just talk about what the impact might be or what's embedded related to the Ford and Stellantis Novelis issue and just sort of any other broader supply chain issues we may be seeing? Does the guide fully reflect these points knowing that Nexperia is a bit of a wildcard? Jason Cardew: Yes, Dan, we were a bit cautious in our volume and production volume assumption for the fourth quarter, and it's really a combination of if there's additional risk related to the Novelis issue, if there's a slower ramp of JLR's production restart and if there's a modest disruption due to Nexperia, that's sort of captured in the range. So absent any meaningful change on those 3 issues, we would expect revenues to come in closer to the high end of the guidance range. And so you could say we sort of have $150 million of revenue protection from the high end to the midpoint for those 3 issues and then another $150 million from the midpoint to the low end. And I will say that there is about $55 million of impact for the Novelis-related production disruptions impacting both Ford and Stellantis. That's embedded in the guidance. So it would have to be something incremental to that. Anything that's been announced is captured in the guidance. And I will say that, generally speaking, JLR's restart and ramp-up of their facilities, there's really been a remarkable effort on the part of the customer and the supply chain just going from 0 back to approaching full production here in a relatively short period of time. So it's been pretty impactful for the company, but they've done a great job so far in getting their lines back up to rate. They're not all the way there yet, but we think by the end of November, they will be. Dan Levy: Great. As a follow-up, I wanted to ask about, Ray, you made a comment at the end of your prepared remarks about just some early considerations on '26 and specifically on backlog. And I know you'll give us a more defined set of backlog comments when you report 4Q. But maybe you could just give us a sense, given the moving pieces that we've seen here on how tariffs and reshoring may be shifting some of the production plans or how EV has shifted plans in North America. Is there still opportunity to have a healthy backlog in '26? Or is it possible that given some of these shifts, there's still a bit of an air pocket as automakers sort of figure out their product plans given the uncertainties here? Raymond Scott: Well, no, it's something, obviously, we've been dealing with it for over some time. It is starting, and we are seeing some stabilization in our customer plans for timing and volume on new programs, which is good. The industry, I think, is not yet back to a normal what we've seen historically source cadence, but we are heading in that direction. So I feel we're in a much better position to evaluate where we're at with '26, '27 and beyond. And in addition to the onshoring and the new program announcements by our key customers provides additional opportunities, like you mentioned, for incremental new business awards, GM with their additional volumes in Orion and Fairfax and Ford Motor Company is adding volume on their Super Duty in their F-150 pickup trucks and Stellantis with new derivatives now on the Grand Wagoneer and the new midsized trucks we do see catalysts for better sourcing environment and growth potential that will be meaningful for 2027, '28 and '29. But even before we consider those longer-term opportunities, and I think we have put ourselves in a very good position, like I said, to not just maintain our market share on those announcements, but even grow. We have increased confidence in our 2026 and 2027 backlog, which we expect will be approximately $1.2 billion. And that is after the net impact of canceled delayed ending programs such like the cancellation of what was the original Ram REV and the delay of the hybrid version, the build-out of the Escape and the Corsair are in our -- the backlog number I'm mentioning as far as a net number. And the later -- the late launch of the Audi A7 and Q9 are considered in that, and that's been almost a 12-month delay. So we still have a strong backlog in '26 and '27 despite all those significant changes or canceled programs. And so we're very optimistic on how we're looking at growth. And again, the new programs that we are currently quoting, particularly the onshore volumes, we expect will improve in the '27 time frame and beyond. And so I think perhaps more importantly, we continue to get very positive feedback from our customers on our automation and digital efforts. I think that's something that is very important. As our customers are considering onshoring, footprint is a key criteria, but they're looking at how they're going to change and the technology innovation that is going to go into these facilities. And so the timing couldn't have been better for us to have this complete automated facility that we have in Rochester Hills to really go through and experience our technology and the continuation of what we've done on the digital side is very impressive. And in some cases, we're getting incredible feedback from our customers. And so there's a lot of different things that are still going on. I was hopeful we'd have some announcements by now, but we're following the process and being respectful of our customers and where they're at. But I do feel very good about the feedback we're getting from our customers on those opportunities. And in E-Systems, I think we've done an excellent job. We have a lot more work to do. We're not by any stretch happy on where we're at. I think Nick and the team are doing an excellent job of expanding margins. And they've done a nice job this year, like I said earlier, the $1.1 billion of awarded business. And most recently, the new awards we're getting now with the domestic Chinese is critical. And most recently, we just got requests from several OEMs on potential conquest opportunities. And that was very surprising to get those requests. And so those are things I'm not going to get ahead of myself on those, but I see some very constructive good signs from our customers on continued growth in these systems. And so we will discuss a little more formal and update our backlog on the fourth quarter earnings call. But I feel really good. And again, I think we have a solid backlog right now, given all the canceled programs, delayed programs, what we've done. I feel better where the customers are at now. I think they've really sized up their portfolios. We have a good understanding of where they're at, and that's our net number, and we have a lot more opportunities. Like I said, hopefully, by the end of the year or early next year, we'll have some of these onshoring announcements. But I think from a technology innovation and automation, we put ourselves in a very, very competitive position to win some good business there. And so I'm very optimistic and positive on what we're doing with growth. Operator: Our next question comes from Joe Spak from UBS. Joseph Spak: I guess maybe one clarification here. On Slide 7, you're showing like you're ahead of the net performance targets year-to-date versus sort of the annual one. So I just want to understand, does that mean there's some bad guys in the fourth quarter because of some of the volume headwinds you're pointing to? Or are you trying to sort of imply that you're just running ahead and there might be a little bit better performance that you could eke out for the year? Jason Cardew: Yes. That's effectively what's implied in the full year guidance. And so we had a particularly strong third quarter, Joe, on that performance and some of what we had anticipated on commercial settlements, commercial negotiations, what were planned in the fourth quarter were pulled into the third quarter. And it's about $10 million that we were able to pull ahead. So Q3 is a little stronger than anticipated, and then that's offset in the fourth quarter. And then the other factor impacting sort of that sequential performance from the third quarter to the fourth quarter, we have some higher engineering spending, and that's a combination of spending and the timing of customer recoveries, particularly in E-Systems, where we had really strong new business wins this year, and we're ramping up the engineering resources to support those programs. That's a factor. And then on just salary compensation, this is the time of year where we have our annual compensation increases. So the fourth quarter reflects some additional costs relative to the third quarter. And then that's partially offset by some incremental performance through restructuring and IDEA by Lear. So those are sort of the net puts and takes. And again, I think I would characterize the guidance as appropriately conservative given the other factors I listed a moment ago in response to Dan's question with JLR, Nexperia and Novelis. And absent deterioration in those 3 areas, we would expect to outperform the midpoint. We do have an investor conference we're participating in, in early December, and we look to provide an update for investors at that point in time and how things are tracking. Joseph Spak: Okay. And then maybe just on some of the backlog commentary, right? I guess I just want to make sure I thought I heard the $1.2 billion number. Was that a '26, '27 combined number? I just want to -- maybe if you could clarify that. And then also related to some of the wins, and I know you even sort of talked about an F-Series win on distribution boxes this quarter. I think you already won some thermal. I know you've previously expressed some optimism that more can be done on the seat side, but I think that you had mentioned some of the sourcing decision for that program has been delayed. I'm just wondering if you have an update specifically there, whether that program has been awarded yet. Jason Cardew: Yes. So maybe I'll start and then Ray can answer the second part of the question. So to clarify, the $1.2 billion is, in fact, the 2026 and 2027 number. At this stage, it's roughly 50-50 between the years, so roughly $600 million in each of those 2 years. And so we had not previously provided a 2027 backlog at the start of the year when we updated 2025 and 2026. And a lot has happened. And we just felt like we had shared a lot of the headwinds impacting '26 and '27 with the program cancellations and programs that are ending production like the Escape and Corsair, but we hadn't talked about all the positives, which we've had significant new business awards in that '26 and '27 time frame in both business segments that helped offset it. We also have the benefit of this new business with Seres in China as a result of taking control of the joint venture there, excited about the growth potential of that as well. So I think on balance, all things considered, we're pretty happy with where we're at, and we feel like we have some additional upside for some of the sourcing and onshoring that is yet to take place, that may impact the sort of tail end of '27 and maybe more so '28 and '29. Raymond Scott: Yes. I think the process, albeit it's been longer than what we anticipated, I kind of look at 2 different buckets. One is the onshoring opportunities that we're engaged with our -- with different OEs throughout the U.S. and European customers and obviously, North American customers and looking at opportunities there. And those are taking, which I think is the right process, a lot of technical analysis, what we're going to do with automation, how we're going to lay plants out, how we're going to set up facilities near their facilities. Those are all very constructive, and I'm very confident that those are going in the right direction. The conquest wins or opportunities we've talked about are equally, I think, as balanced as far as opportunities and they're still available. They just through the processes take a little bit longer than what we would originally target it, but nonetheless, hasn't changed our optimism around our ability to win some really good conquest opportunities and then also the onshoring relative to some of the different OEMs I've mentioned. And so it's just taking a little bit longer. I was hoping that Jason mentioned an investor conference we're going to go at. Hopefully, we can let a little bit out there. But if not, as it's coming out and it's appropriate and we get approval from our customers to announce it, we'll make sure that you know. Joseph Spak: Okay. One really quick follow-up, just to make sure we're properly covered. That's the consolidated backlog numbers you're talking about, correct? Or does that include some... Raymond Scott: That's correct. Yes, that's just the consolidated. Operator: Our next question comes from Mark Delaney from Goldman Sachs. Mark Delaney: I guess, one topic I wanted to start with was around the increased ability to do automated manufacturing in the U.S. And you spoke about just how automated this new facility is. And so as you think about doing more work in the U.S. and hopefully supporting some of these programs that you referred to, could you just talk about the margin implications? I mean, I think clearly, labor costs tend to be higher in the U.S., but there's so much automation. So as you do that kind of a business locally, is that supportive of the near- and medium-term margin targets of the company? Jason Cardew: Yes. I think that looking at the onshoring opportunity specifically, we're seeing operating margins that are very similar to our North America seat business. And so the automation is helpful in terms of being able to offset maybe the higher cost of labor between Mexico and the U.S. and the net effect of that may be a little higher CapEx, but with the resulting benefit being strong operating margins in those facilities. And so -- and then on the conquest awards, sort of the same story. We see leveraging automation and our unique position with automation and our digital strategy as a way to earn higher returns on our seat business that we're conquesting and use that as a catalyst to expand returns or protect returns. And our overall returns in Seating are industry-leading now. So part of it is maintaining that level of ROIC that we have achieved pretty consistently over the last 10 years in the seat business. And so we don't see a real shift in terms of ROIC. You may have a little bit higher operating margin to fund the added investment, though. Raymond Scott: I think it's important, too. I mean, we emphasize this, how we're differentiating ourselves in the focus on not just product. We've really focused on the disruption of the purchasing model, and that's taking some time, but '28 significant awards with ComfortFlex, ComfortMax and FlexAir. That's a significant change in the purchasing model or what they've typically done. And so that is something that we're going through, and there's a significant savings and opportunity there in the way we're automating it. So it's tied to the manufacturing facility. And the acquisitions we've made, I think we got to look at -- we've been at this for over 10 years. And the timing is very good for the technology and innovation that we brought in. You cannot gap this out and catch up in any reasonable time. This is something we've been working on for a long period of time, and we're being recognized from our customers. There's feedback that we got that they're looking now at technology innovation within the supplier base, and we had a significant advantage over our closest competitor. And we're going to just keep pushing the gas on that. I mentioned that by having these in-house capabilities and building very purpose-built capital allows us to significantly take the cost down. That's very important. We're manufacturing our own capital now. Historically, we would buy 80%, 90% of our capital and very generic, very standard, very across the board use of capital. We're very purpose-built. And just like you think about VA/VE or cost savings through engineering designs on the product side, that whole opportunity exists, and we're seeing it. And I say 20%, 30%, we're going to push that even harder. And so we're seeing our capital numbers come down significantly. And I think the important ingredient here with our domestic Chinese that are pushing timing and now what we're seeing here with onshoring, the speed to delivery. We can get at that. It's very important to keep bringing up the most recent launch that we had here in the U.S. and be able to launch that in 8 months. That's because we have full control. So I think about a full-service manufacturing integrator, and there's not a lot of companies out there. We're benchmarking different companies and there's some great companies that we look at and say, okay, we got to gap that out. We have to prove that. But from product design to manufacturability, we have the elements. And so as we're having these -- why I'm so confident is the feedback we're getting from the customers. And again, a lot of this is about retention. The employees love the technology on the platform. We get great feedback on job satisfaction, the ergonomics, the ability to see better around inventory levels and how we can really focus on working capital. This is an accident when we look at our cash flow and what we're doing. These all benefit everything you want to check off. And so having a leadership position in that, the timing couldn't be better. And like I said, I'm optimistic. We were going to wait until we get the appropriate feedback from our customers on these awards. But I think that will just lead to more evidence on everything we're doing is in a constructive good way, disrupting how you think about just-in-time seating. And you can have others that talk about what they have and don't have, but having that ability to have it in-house is a differentiator. Mark Delaney: Well, I'll stay tuned for December 4. Hopefully, I get some news there at the conference. My second question was on net performance. I think, Jason, last quarter, you described an expectation that net performance in 2026 could be replicated relative to what you were seeing in '25. And at the time, that was $150 million. So as you look into '26 and think about net performance, is the $150 million level you've been expecting 90 days ago still reasonable framework at this point? Or any updates that you can share on your net performance thoughts for next year? Jason Cardew: Sure. I think just to clarify, what we've said is that we believe that what we can -- we had established a target for net performance in the business for this year, 40 basis points in Seating and 80 basis points in E-Systems and that we could replicate that in '26 and again in 2027. We've done better than that this year. As we're building our plan for next year, we'll provide more details on that. But I think it's north of $100 million of net performance in that range. If you, again, achieve 40 and 80 basis points in Seating and E-Systems, respectively, as we look out to next year. It's a key margin expansion catalyst for the business, and we're confident that we can continue to repeat the performance that we saw this year, maybe not to the $150 million or $170 million level now that we've had embedded in this year's outlook. We're certainly going to work towards achieving that. But I can say with confidence that we're -- we can generate 40 to 80 basis points, 40 in Seating, 80 in E-Systems of net performance in 2026. Raymond Scott: And I think it's important, we put those metrics out there because they really are driving us. And we are going to expand our margins in both business segments. That is the focus. That is the focus. And we're trying to illustrate with the ability to execute how we're getting at that. And having that confidence, why we're talking about is I think introducing IDEA by Lear and what we're doing prior to that really illustrated what the company can do. Our culture is built around getting at this. And so I think it's a baseline for how we see this year, but we're very confident in what we're going to be able to deliver next year. And it is going to be about expanding margins in both business segments. Operator: Our next question comes from Emmanuel Rosner from Wolfe Research. Emmanuel Rosner: I appreciate all the color on the onshoring opportunities. Any way to dimension this for us in terms of addressable market, it's either in terms of volume or revenue? Like how many units are you sort of like seeing customers looking to potentially bring to the U.S. and in what sort of time frame? Jason Cardew: I think the way that we can dimension it is, we've established and communicated a market share target in Seating, for example, growing from 26% to 29%. And we've said that we believe the onshoring on balance will support our market share or expand our market share. So I think it's premature to get into specifics around revenue dollars or units of production in terms of what will be done in the U.S. given the state of the discussion with customers, I think that, that kind of level of granularity would be misplaced at this point, Emmanuel. Emmanuel Rosner: Understood. And then I appreciate also the color on the backlog, certainly encouraging to see some wins for 2027. Can you also give us a sense of potentially the breakdown between your 2 product lines, Seating versus E-Systems within that? And how this -- how should we think about growth over market for E-Systems progressing from here between maybe the end of the wind down at some point and then some of these big wins that you have mentioned? Jason Cardew: Yes. So if we look at next year, Seating backlog is expected to be north of $700 million and E-Systems is right around negative $100 million. And so the biggest factor driving that next year is the balance out of the Escape, Corsair and again, wind down of the Focus and C-MAX in Europe, $230 million, $240 million of revenue that goes away on those kind of key platforms. We do have -- just to talk a little bit about backlog composition in both business segments next year, we have the Audi Q7 and Q9, which is that -- the Seres M7 and the Jeep Cherokee here in North America. Those are the big 3 programs that drive the bulk of the Seating backlog next year, but we also have some growth with BMW on their Neue Klass or NCAR program. And we have some growth with the global EV OEM with BAIC and with BMW. On E-Systems, we also have growth with a global EV OEM that rolls on next year. That was a conquest win for us. We have the continued ramp-up of the Volvo EX30 in Europe, which is a great program for us. And then we have electronics business with JLR, which we -- I'm sorry, with BMW, which we talked about when we announced our PACE award, a zonal control module with BMW that ramps up next year, and you see it's kind of the full impact of that production starting more in 2027 and 2028. That's the single biggest program over the next 2 years rolling on in E-Systems. As you highlighted, we are still digesting the wind down of product lines that we're exiting in E-Systems. Those numbers are consistent with what I shared on the prior earnings call. And so it's about $350 million over 2026 and 2027. So that's certainly going to weigh on growth over market over that time period. And then in 2028, you start to see, and in '29, the benefit of the conquest awards and new business growth opportunities that we've won this year and are pursuing throughout the balance of this year and into next year, like the F-250, where a portion of that was replacement business, but there's a significant portion of that, that was conquest. And we have several other opportunities that we're quoting right now in wire that would be conquest opportunities and lead to further growth in that window. And so the near-term growth of the market is going to be weighed down by the wind down of the programs and the roll-off of that Escape, Corsair program. Emmanuel Rosner: Just very quickly a clarification. So this wind down in E-Systems, that would already be included in the small negative backlog in 2026? And then -- would you talk about the breakdown of the backlog between businesses in '27, please? Jason Cardew: Yes. I think I'll save the '27 detail for the fourth quarter earnings call. It's more balanced in '27 than in '26. Again, in '26, the E-Systems backlog is negative, and that's independent of the wind down of the electronics business that we've spoken about in the past. Operator: Our next question comes from Colin Langan from Wells Fargo. Colin Langan: Just as we think about '26 margins, you mentioned this year, the starting point, excluding JLR would be 4.7% and then there's $65 million to $75 million of automation savings. Is that the right way to think about as we step into next year that the baseline is 4.7% and then you have the $70 million-ish of additional help. Any other factors that I should be considering? Or is that the right starting point? Jason Cardew: Yes. I think it's early, obviously, to provide pinpoint numbers for next year, and we're still deep in our planning process. But you've hit on some of the key puts and takes as we look out to next year. And I think the right way to model 2026 for Lear, the right exit rate to use for that is kind of the JLR adjusted operating margin of 4.7%, and that's why we thought it was important to share that with investors today. Looking at the S&P forecast, they're calling for lower production, particularly in North America, I think, down 2.5%. We haven't concluded our view at this point, but we're trying to use conservative volumes for our planning process in order to get the cost structure aligned and our margin improvement plans set based on that relatively conservative set of assumptions. And from there, you can overlay the benefit of our backlog, offset a little bit by the E-Systems wind down and the benefit of our net performance improvements, which will be higher in E-Systems than Seating. So kind of summarizing all of that, at a very early stage here, we do see revenues higher next year and earnings higher next year. We see margins higher in both segments, probably a little bit more in E-Systems. Raymond Scott: Yes. Just -- I mean, to summarize it, we're -- it's everything we're doing, I feel really good about the work we're doing around this net performance and what we're doing with IDEA by Lear. I think the topic that I brought up with this continued partnership with Palantir and what they brought to us with the fellowship program, I think, is really going to get us -- I think we've done a great job operationally in manufacturing, but now really getting at our administrative offices and our headquarters, those type of things are going to only continue to allow us to get at our cost structure. So we're going to expand margins in both business segments. I see that the results, what we're doing in our plants, what we're doing operationally, what we're doing with cash flow, very confident. And I think we have some great tailwinds despite some of this unfortunate customer downtime that's going to really push us into '26. And so we're going through it. The team, Nick and Frank are here. We all know it. We're going to expand margins and get more efficient, and we got the tools to do it. So I'm confident, and I think we have some good tailwinds heading into '26 despite everything else going on. Colin Langan: Got it. And then just lastly on buybacks. I think you commented that there's sort of no big M&A on the table. And the pace in the quarter, just $100 million, I think your commentary implies another $100 million. Is that maybe the pace we should consider that most of the cash flow starts getting allocated to buybacks? Or is that reading too much into the outlook? Jason Cardew: No, that is clearly what we are signaling here in the -- for the balance of this year and into next year. We think that's the best use of our excess cash. And we're targeting about $300 million in the fourth quarter. We had a program in place to buy throughout the quiet period. I think we've bought almost $50 million through the month of October, and we're going to continue through the balance of the fourth quarter. If we have a line of sight on a free cash flow number beyond the midpoint, we may buy back a little bit more even. We're going to be very opportunistic with our buyback program, and we see that continuing into next year. Now we do have our Board meeting in November where we discuss capital allocation. And so ultimately, that's a Board decision, but that is our current thinking. Raymond Scott: Yes. But we're focused on that cash. I like this quarter, the $444 million, and I love some of the things that we're putting in place around working capital and inventory levels. It's continuing to improve and we're going to continue to push the team because that cash is important, and we're going to continue to drive good results there. Colin Langan: Did you just say $300 million in Q4 in buybacks or $100 million, maybe I'm not sure if I misheard. Jason Cardew: $300 million for the year. Operator: And ladies and gentlemen, with that, we'll be ending today's question-and-answer session. I'd like to turn the floor back over to Ray Scott for any closing remarks. Raymond Scott: Yes. Thank you. And I'm sure the Lear team is on the phone. I just want to again extend my appreciation and thank you for a great quarter. I know we got a lot to do to finish up the full year, but I know -- like I say, we're built differently. I know we're all going to get at it, and we're going to knock this thing out of the park. So I appreciate everything you did in the third and looking forward to what we're going to achieve in the fourth. Thank you. Operator: And with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.
Operator: Greetings, and welcome to the W.W. Grainger Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Kyle Bland, Vice President, Investor Relations. Please go ahead. Kyle Bland: Good morning. Welcome to Grainger's Third Quarter 2025 Earnings Call. With me are D.G. Macpherson, Chairman and CEO; and Dee Merriwether, Senior Vice President and CFO. As a reminder, some of our comments today may include forward-looking statements that are subject to various risks and uncertainties. Additional information regarding factors that could cause actual results to differ materially is included in the company's most recent Form 8-K and other periodic reports filed with the SEC. This morning's call will focus on our non-GAAP adjusted results for the third quarter of 2025, which exclude the $196 million loss recognized from the pending sale of our U.K.-based Cromwell business and the proposed closure of our Zoro U.K. business. Definitions and full reconciliations of our non-GAAP financial measures with their corresponding GAAP measures are found in the tables at the end of this presentation and in our earnings release, both of which are available on our IR website. We will also share results related to MonotaRO. Please remember that MonotaRO was a public company and files Japanese GAAP, which differs from U.S. GAAP and is reported in our results 1 month in arrears. As a result, the number discussed will differ from MonotaRO's public statements. With that, I'll turn it over to D.G. Donald Macpherson: Thanks, Kyle. Good morning, everyone, and thank you for joining today's call. As headlined in the release, our third quarter results were fueled by consistently strong execution from our team. Despite the continued external uncertainty, our customers remained focused on improving their operations through increased efficiency and productivity. The value of the fundamentals of having inventory where and when they need it and a partner who understands their business and can bring the right solutions. As I spent time in the market with large customers this past month, these themes ran true. I was proud to see Grainger deliver the critical fundamentals that help our customers every day. I recently had great discussions with an aerospace customer and municipality about how Grainger's deep-rooted inventory management expertise can save them time and reduce costs. I saw that when we deliver great service experience, customers take notice and it leads to more opportunities and deeper relationships. I also had the opportunity to speak with several experts focused on technology. Tech and AI will continue to be an ongoing focus for Grainger, enabling us to provide great solutions for customers and drive productivity in our operations. The promise of these new transformation technologies has never been greater, but the key will be leveraging our proprietary data and know how to build solutions that connect to business processes and create a more seamless user experience. I'm excited about the work we're doing to bring more digital capabilities to both our customers and team members to make things better with every interaction. Making these better and staying focused on what matters is core to how Grainger operates, and we take that responsibility to heart in our communities as well. Last month, at our annual Bucket Build in Lake Forest, more than 500 Grainger team members came out to pack over 4,000 disaster relief kits. This included filling 5-gallon buckets with essential cleaning supplies and hand tools that will help families and individuals begin the process of recovery after a natural disaster. Grainger has a long-standing commitment to emergency preparedness and response efforts. And this is another reason I'm proud of how the Grainger team lives our principles every day. Now moving to our third quarter results. We delivered a solid performance that in total outpaced our August formal guide, particularly on the gross margin line. Total company reported sales for the quarter were nearly $4.7 billion, up 6.1% on a reported basis or 5.4% on a daily constant currency basis. Gross margins for the company were 38.6%. Operating margins were 15.2%, and diluted EPS finished the quarter up $0.34 to $10.21. Operating cash flow came in at $597 million which allowed us to return a total of $399 million to Grainger shareholders through dividends and share repurchases. Our results continue to reflect tariff-related LIFO inventory valuation headwinds, consistent with what we discussed last quarter, which came in lighter than expected in the period. As Dee will discuss, without this LIFO impact, our operating margin would have increased year-over-year in the period. Looking ahead, while we're continuing to see more costs in the market, these LIFO headwinds will eventually dissipate as inflation cools and our gross margin will recover to our run rate expectation. As you likely saw, we recently announced that we've entered into an agreement to sell our U.K.-based Cromwell business and plan to fully exit the U.K. market. Given the economic dynamics post-Brexit, we had to alter our assumptions around the go-forward potential in the region. With this planned divestiture, we are now focused entirely on growing our North America and Japanese businesses where we can deliver the greatest long-term impact. Overall, while it has been an eventful few months, the business continues to perform well and in line with expectations. With this, we are narrowing our earnings outlook, which Dee will outline in a few minutes. It's important to note, we factored in the October headwind from last year's active hurricane season and an estimated impact from the government shutdown. As we wrap up 2025, I'm confident that we'll continue to serve our customers well, deliver on our financial commitments and drive solid results for all stakeholders. I will now turn it over to Dee to go through the details. Deidra Merriwether: Thank you, D.G. Turning to Slide 7. You see the high-level third quarter results for the total company, including $4.7 billion in sales, up 5.4% on a daily constant currency basis. While gross margin finished ahead of our previously communicated expectations on a less-than-expected LIFO impact, we were still down 60 basis points year-over-year as segment mix headwinds and tariff-related cost impacts within the High-Touch business weighed on results. This led to total company operating margins of 15.2% for the quarter, down 40 basis points compared to 2024, but 70 basis points ahead of our communicated expectations. Diluted EPS for the quarter was $10.21, up $0.34 or 3.4% higher than the prior year period. Moving to segment level results. The High-Touch Solutions segment delivered solid growth quarter. In total, sales were up 3.4% on both a reported and daily constant currency basis. Results were driven by volume growth and price inflation for the segment, with the latter improving as tariff costs continue to be passed. From an end market perspective, our indicators suggest that the MRO market remained muted as the heightened inflationary environment continued to weigh on demand. For Grainger specifically, we saw strong performance with contractor and health care customers and improving results with manufacturing customers which helped to offset slower growth in other areas of the business. For the segment, gross profit margin finished the quarter at 41.1% and down 50 basis points versus prior year, driven by similar things to what we discussed last quarter. We saw negative but improving price/cost spread as we progress negotiations with suppliers through the quarter and pass incremental price in September. Further, we pulled through LIFO to reflect the impact of supplier cost increases, albeit less than expected as certain increases were pushed into latter periods. These 2 tariff-related headwinds were only partially offset by mix and freight. I would note that if we excluded our LIFO headwind and wanted to compare across our peer set, which report on FIFO, our implied FIFO gross margin rate would have increased year-over-year. On SG&A, margin improved in the period as continued investments in our seller initiatives and marketing were more than offset by productivity and sales leverage. Taking all this together, operating margin for the segment finished at 17.2%, down 40 basis points versus the prior year quarter. Now focusing on the Endless Assortment segment. Sales increased 18.2% on a reported basis or 14.6% on a daily constant currency basis, which normalizes for the FX tailwinds realized in the period. Zoro U.S. was up 17.8%, while MonotaRO achieved 12.6% growth in local days, local constant currency. At the business level, Zoro continues its momentum driving efficiencies with marketing spend and working to further enhance the customer experience, including improved search, better fulfillment and continued optimization of their assortment. Taken together, these actions are driving strong growth from its core B2B customers, along with improving customer retention rates. At MonotaRO, sales growth remained strong with continued growth from enterprise customers, coupled with acquisition and repeat purchase rates with small and midsized businesses. On profitability, operating margins increased by 100 basis points to 9.8%, with favorability across the segment. MonotaRO margins remained strong at 13.2%, up 80 basis points and Zoro margin improved to 5.8%, up 150 basis points, with both businesses benefiting from gross margin flow-through and healthy top line leverage. Overall, we had another strong quarter across Endless Assortment, and we expect the team will carry this momentum forward as we wrap up the year. Before moving into guidance, I wanted to share a brief update on where we're at with tariffs. In the third quarter, we remain engaged in active dialogue with our supplier partners and use our September price increases to help offset continued cost pressure. While our initial pricing actions back in May only apply to a small portion of our products, largely those where Grainger imports the product directly, the September increase was much broader and included initial pricing actions on supplier imported products, where we had finalized negotiations. As we move into the fourth quarter, we're seeing inflationary pressure continuing to build, including impacts from the recent Section 232 expansion. As a result, we are taking some incremental pricing actions to better align price/cost timing as the tariff landscape unfolds. These actions are only modest in nature, but are in addition to the price passed earlier in the year. On profitability expectations for the fourth quarter, we anticipate gross margins will improve sequentially with our normal seasonal recovery and improving price costs. The LIFO impact is expected to be roughly consistent quarter-over-quarter. Looking ahead, based upon what we're hearing from suppliers as part of our annual cost cycle, we expect further inflationary pressure into 2026. With this, assuming no further material changes to the current tariff landscape, we are -- we now anticipate the inventory accounting dynamics from LIFO will persist over the next couple of quarters until inflation cools. That being said, consistent with our long-term earnings framework, we anticipate gross margin will stabilize around 39% for the total company, subject to normal quarterly seasonality. While we will experience continued segment mix headwinds and some pressure within a subset of our private label assortment, these will be offset as price/cost normalizes back to neutral and the LIFO impact subsides. On LIFO specifically, we thought it would be helpful to provide a view of how inventory accounting dynamics impact our gross margin over time, especially because of how the cycle is playing out relative to 2022. While LIFO expense is always a drag relative to implied FIFO margins, it's not typically a material impact in every period depending on what else is impacting our gross margin results. As you can see on Slide 12, during periods of normal cost inflation, the LIFO headwind, the difference between LIFO margin and the implied FIFO margin is roughly 20 to 30 basis points, reflecting the real-time impact of higher costs flowing through our P&L. As we enter into a heightened inflationary cycle, like what we see in 2022, and like what we're seeing again today, this LIFO impact becomes more pronounced as the difference in COGS diverges between the 2 inventory methodologies. However, as inflation cools, the LIFO expense will normalize, LIFO and FIFO margins will converge. And as this happens and we pass further price, our reported margin will recover. With this, we expect our total company gross margins will stabilize around 39%, consistent with our long-term earnings framework. Now moving to the updated outlook for the remainder of 2025. As D.G. mentioned at the beginning of the call, we're narrowing our full year 2025 adjusted EPS outlook, which reflects slightly lower sales to account for the Cromwell divestiture updates and the impact of the government shutdown, which we're assuming reaches a resolution by mid-November. These top line headwinds are offset by higher margins, resulting in an EPS midpoint consistent with the prior guide. In total, the updated guide includes daily organic constant currency sales growth of between 4.4% and 5.1% and a diluted adjusted EPS range of $39 to $39.75. If you squeeze to the annual guide to get an implied fourth quarter, the revised revenue outlook implies a Q4 daily organic constant currency growth rate of 4% at the midpoint, which assumes more than 3 points of price contribution to revenue within the High-Touch segment. October growth is off to a slow start of approximately 1% on a preliminary daily constant currency basis as we lapped a fairly significant hurricane-related benefit in the first 2 weeks of the month and as we face current year headwinds from the government shutdown. However, if we just looked at the last 2 weeks of the month, which excludes the prior year hurricane impact, October total company sales are up in the 4% to 5% range on a daily constant currency basis, more in line with what we saw in the third quarter, but still reflecting the impact of the government shutdown, which is weighing on public sector sales. Annual margin expectations have increased from our previous guide due to improved price/cost and LIFO timing. If you were to squeeze the implied operating margins from the updated annual guide and focus on the fourth quarter, it shows a sequential step down in the fourth quarter to around 14.5% at the midpoint. While the puts and takes are different, this sequential movement is roughly in line with normal seasonality. Overall, despite the tariff-related noise over the last couple of quarters, we remain poised to deliver a solid year. Before I hand it back to D.G., I thought it would be important to reiterate our long-term earnings framework in light of the recent tariff uncertainty and as we look ahead. While we have made some minor edits to CapEx to reflect the latest estimates around our global DC expansion, the core tenets of our framework remains solidly intact. We remain confident we can drive share gain in the U.S., while the EA business in the teens, stabilize total company gross margins around 39% and grow SG&A slower than sales through process improvements and technology. Taken together, these actions will drive attractive returns, and we remain well positioned to deliver great results for our shareholders for the years to come. With that, I'll turn it back to D.G for some closing remarks. Donald Macpherson: Thanks, Dee. As we head into the final months the year, our team will continue to navigate the complex environment and deliver value for our customers, our communities and our shareholders. And as Dee mentioned, we continue to work through this inflationary environment and the challenges from the government shutdown. And while there is some short-term noise, we remain confident in our ability to pass through cost increases and achieve the core tenets of our long-term earnings framework. We'll continue to stay focused on driving strong execution, providing industry-leading service and building innovative capabilities to deliver on what matters most to our stakeholders. And with that, we will open it up to Q&A. Operator: [Operator Instructions] Our first question is from David Manthey with Baird. David Manthey: All right. That was a very clear presentation of the business. Thanks for outlining all of that data. Question on the 2025 guidance and the Cromwell. So Cromwell is held for sale as of September 30, so I assume you're taking any assumption out for that. And just ballpark-ish, we talking about $75 million, $80 million, I'm guessing. And then from an operating income standpoint, those Cromwell operating losses are pretty immaterial. Is that all correct? Deidra Merriwether: Yes. So two things I'd point you at. We kind of adjusted for the Cromwell impact. And if you go back to the press release that we issued around our proposal to exit the U.K. in total and incorporated both that impact as well as the impact that's being proposed for Zoro U.K. So in total, it's about $40 million. David Manthey: That's $40 million in revenues for Cromwell and Zoro U.K. as held for sale in the fourth quarter? Deidra Merriwether: Correct. David Manthey: Okay. All right. And then on the pricing actions that you've taken thus far in the fourth quarter 2025, should we assume that those are in Endless Assortment? I think you said your next opportunity to adjust contract pricing on High-Touch customers would be Jan 1. So is that another bite at the apple when we turn the page to 2026? Donald Macpherson: No. We -- obviously, the actions we've taken were September 1. Those have flowed into the fourth quarter, and that was a normal price cycle increase. And November 1, now we're taking another one, and that will flow into contracts as well as noncontract business, and that's all High-Touch related. Zoro has had good price inflation this year based on some strategic changes they've made. Operator: Our next question is from Christopher Snyder with Morgan Stanley. Christopher Snyder: Sorry, I was on mute. So you guys said that, I guess, ex LIFO, the gross margin would have been up year-on-year, which I guess implies a LIFO headwind of something at least 70 basis points. I guess my question is, you guys are kind of saying you'll maintain a roughly 39% gross margin through these LIFO headwinds. So I guess as the LIFO headwinds go away, does that 39% go to something closer to 40%, just assuming that we're in a 70 bps LIFO headwind backdrop? Deidra Merriwether: Thanks for the question, Chris. So as we've noted during this period of time when we are comparing our results versus those who may be reporting on FIFO, we do have more of a negative impact directly related to the LIFO impact on gross margins. And so what we attempted to do here with our information is to recast and imply FIFO gross margin number for Grainger for more easily -- easy comparability. But as you know, as we go through the cycle and others eat through the less expensive FIFO layers, and we're already there with LIFO, we believe gross margins will become a little bit tougher for them. And we -- as we pass -- continue to pass price, our gross margins will continue to elevate, as you noted. However, there are more things besides LIFO that impacts gross margin. Product mix, freight and other areas where we receive -- where we're gaining some favorability, we deem that -- some of those things may not be as favorable in the future as price becomes more favorable. And so that's why we stick to a longer range outlook of around 39% or around the area of 39%. That doesn't mean it can't be a couple of basis points better than that in the future. We just don't want to project out too much because all the information we have today around tariffs and other cost inflation is what we have to use to project from this point. Christopher Snyder: I appreciate that. That was helpful. I guess, if we look at the Q4 guide, overall company up 4%. So High-Touch, I guess, would be below that, maybe something more like 3%, which is effectively all priced. So it seems like the guide is calling for no volume growth within High-Touch. I mean I know the backdrop has been challenged for a while, but that business has continued to grow volumes even if modestly through the first 3 quarters of the year. So is that step down in Q4 to maybe zero just all because of these government contracts and the risk associated with that? Or is there also maybe macro softening alongside that? Any color there would be helpful. Deidra Merriwether: Yes. In Q4, we have 2 challenges, one of which you called out, which is the impact to our business related to the government shutdown. And the other one related to the benefit received in the prior year in October related to the hurricane. We range bound that last year of about $30 million, $40 million in the month of October. So that's also a challenge that we're cycling in Q4. Donald Macpherson: The one thing I'd also point out is if you look at October by segment, which we don't typically talk about, but government has obviously impacted substantially. Everything else looks normal effectively. So it is mostly -- it is entirely just the government impact that we're seeing from both the hurricane, which affects state governments, 3 states that obviously in the Southeast that were hit hardest last year and then the federal government given the shutdown. Operator: Our next question is from Jacob Levinson with Melius Research. Jacob Levinson: I realize there are some advantages on the tax front using LIFO inventories, but I wanted to ask if there's been any discussion in terms of shifting the FIFO. It just seems like the last couple of years, we've seen a lot of companies that had LIFO accounting actually moving to FIFO just given maybe a stickier inflation backdrop. Donald Macpherson: Yes, yes. So we obviously have talked about and evaluated. I mean the thing you need to probably realize is if you make that change, you end up having a cash payment, not an earnings payment, but a cash payment effectively for the accumulated taxes you saved at whatever tax rate is today. So it's not an inconsequential number. So we need to weigh that versus the benefit of being on FIFO and having easy compares. Right now, we're not going to make that change. We might in the future. Jacob Levinson: Okay. That makes sense. And then just on the government shutdown, I realize these are unfortunately becoming more regular occurrences. But in your experience, is there normally some catch-up in demand once the shutdown is over? Because I'd imagine a lot of these facilities are just mothballed right now. So once you ramp back up, maybe there's some pent-up demand there. Donald Macpherson: Yes. So what I would say is the nature of the shutdown and this one in particular, obviously, some of the nonmilitary entities that we would serve are completely shut down. Typically, you wouldn't see much of a catch-up from those. But we also are seeing this impact given the lack of the number of people who are furloughed and purchasing people who are furloughed. We're seeing a little bit of slowdown in military and other areas as well. And so some of that may come back, but typically, it wouldn't all come back. You see a little bit of it maybe come back if there's catch-up projects they stop doing. But we would expect something between zero and something not huge to come back on that. Operator: Our next question is from Ryan Merkel with William Blair. Ryan Merkel: Just sticking with the government. Did you guys size what the impact you expect in 4Q is from the government shutdown? Donald Macpherson: Yes. I mean, basically, the way to think about that is every day, 1 point or more impact on our total business. And so if it goes 6 weeks, it will be 0.5 point. If it goes all the time, it will be 1 point or more impact. That's what we've seen so far. I would say that if it doesn't get resolved, it could become even bigger if it goes on a long time. But that's what we typically would see and expect to see now. Ryan Merkel: Okay. Got it. And then it sounds like put through another price increase in 4Q, and that would be off cycle for you, which I think I thought you were trying to stick to the national account timing there. So is that sort of a change in how you're doing things? Or why the off-cycle price increase? Donald Macpherson: I think a lot of this is just probabilistic. So when tariffs first hit, we actually didn't know how they would play out and we didn't want to get out in front of it. So we've been actually taking price increases when we have cost increases as opposed to speculatively. And there's been over 1,000 negotiations with our suppliers at this point often. That's not normal for the record. And so what we saw was a number of cost increases come in after -- between the time we set the 9/1 prices and the time we would now. And so what we've done is we've raised price to compensate for that, and we think it's the right thing to do, and our customers understand that. Deidra Merriwether: And I would just add, a lot of that is price changes and corrections based upon what we're seeing in the marketplace. So I wouldn't assume that, that change was as big as like the 5/1 change as an example. Operator: Our next question is from Stephen Volkmann with Jefferies. Stephen Volkmann: Great. And apologies for beating this dead horse, D.G. But the price increase in November, was there any aspect of that, that would be -- I think your word was speculative? Did you try to get ahead of any of this? Donald Macpherson: No, it's not speculative. It's just matching what we're seeing and what we're seeing in the market. we're sticking to our pricing tenants, which are basically priced to market at this point. Stephen Volkmann: Okay. Great. And then I think you also talked about in your private label business, some headwinds, competitive kind of headwinds. How does that play out? Or what can you do to sort of address that going forward? Donald Macpherson: Well, we don't think we're uniquely exposed or at competitive disadvantage in private brand. But what has happened with some of the larger tariffs is the difference between a private brand product, in some cases, and the national brand product can become very tight. And so then we have decisions to make as to how much price we take in those situations. And so we're still working through all of that. It's a subset of our private brand. It's not -- all of them, it's not a huge portion of them, but for some of those cases, we have to decide how we treat those strategically. Operator: Our next question is from Christopher Glynn with Oppenheimer & Company. Christopher Glynn: So I appreciate the comments at the beginning on how you're looking at AI and adopting new technology. You've always been very tech forward and investing at scale. And so I'm curious what you're envisioning with that from both sides, commercially layering into the outgrowth algorithm versus the cost of serve side and margin potential. Donald Macpherson: Yes. I think -- so what I would say is it's going to require all of the above to be successful long term, we think. And we have been out in front in certain areas with AI, thinking about back-end processing and customer service in those areas that are kind of obvious to attack. I don't -- everybody is going to be doing those things is my expectation. And so creating advantage is probably going to be more on the commercial side and leveraging our data, our product, our customer data to create solutions that provide better experiences for customers. And so we are investing heavily there as well. We think both areas are going to be critical to our success. Christopher Glynn: Great. And then last quarter, you mentioned elevated bidding activity for your new large business. Curious how that pipeline is playing out? And should we think of that as incrementally constructive to the outgrowth algorithm perhaps for interim period? Donald Macpherson: Yes, we think we're doing well. I don't know that I'd say it's constructive for the outgrowth at this point, but we think things are going well on that front. And you probably know in our business, having big contracts and getting all the volume are 2 different things sometimes. And so you have to have the contracts and then you have to win at the local level, and we know that. And so that's really how we construct our business and our focus. Operator: Our next question is from Ken Newman with KeyBanc Capital Markets. Kenneth Newman: Maybe first, just to clarify, sorry if I missed this in response to Dave's first question, but any help on just how to think about the operating profit or loss in the other segment now that Cromwell is divested. Is that segment going to be profitable in 4Q? Or just how do you think about that normalize into next year? Deidra Merriwether: Okay. So the exiting the U.K., it shows up in 2 areas. It shows up in other kind of where Cromwell was, and that's the vast majority of it and a little bit in EA because that was the Zoro U.K. business. So that will positively contribute once we close the deal from a profitability perspective. And it's like in the teens from an operating -- not in the teens, 20-or-so basis point improvement in operating margin. Kenneth Newman: Okay. That's helpful. I appreciate that. And then for the follow-up here, it looks like there was a pretty sizable increase in midsize customer growth in High-Touch U.S. this quarter. Is that primarily a price versus volumes mix? And then maybe just any color on how you think about how sustainable midsized customer growth can be going forward and its impact on mix? Deidra Merriwether: Yes. So we believe we're doing really well with midsized customers, but the majority of the difference in the increase, I believe, is 7% in the noted slides is really due to some softer comps in the prior year. Donald Macpherson: And I would just add that I think we have a lot of opportunities with midsized customers, and we're learning, and I think we'll continue to do better, but it's not immediate to Dee's point. Operator: Our next question is from Sabrina Abrams with Bank of America. Sabrina Abrams: So the gross margins in the quarter were, I guess, a lot better than expected. And I know you've spoken to some stuff around LIFO expense timing, but it wasn't a pretty big delta. Just want to understand if there were any benefits from bringing down inventories quarter-over-quarter or anything about LIFO layers. And maybe if you give more color on exactly what happened with the LIFO timing? Did suppliers choose to eat increases? Deidra Merriwether: Yes. Thanks for the question, Sabrina. So it's really around the fact that LIFO is really difficult to estimate because based upon your inventory purchase and the specific changes on cost, you have to be able to estimate that by SKU. And then whatever you sell, you have to go back in prior periods and pull those adjustments and make a very good estimate for your prior year inventory at the same time. So we do the best we can at trying to estimate a pretty complicated quantification of LIFO impact. And so our team here was -- always continue to negotiate with suppliers. And based upon where those negotiations landed, some of those cost increases are being pushed into prior periods. And so based upon that, that is some of the LIFO charge improvement. In addition to that, we have some benefit from price/costs as well. That impacts gross margin. And then also -- we also had benefits from favorable mix and freight. Sabrina Abrams: Okay. Got it. And maybe if you could talk a little bit about market growth has been -- your daily sales growth has been very stable this year with the exception of, I guess, what's handing in Q4, and you've already explained that. But barring that, just any early thoughts on how you're thinking about the growth in 2026? Are you thinking it will be similar to this year? Donald Macpherson: So we'll provide that information at the end of the year in January. We typically don't provide that. We do expect to have a significant price rollover, as you might guess. And so -- and we still expect to gain share at our target rate. So -- but we will have more news on what we think the market will do as we get to that point. Operator: Our next question is from Neal Burk with UBS. Neal Burk: I wanted to ask about asking the price question another way. We hear about some price fatigue with respect to customers in the industrial channel. Can you talk about your conversations with your suppliers? I think you mentioned over 1,000 negotiations. So is there a sense that they're not fully passing on costs and so the inflation you see is a bit below market? Donald Macpherson: Yes. I don't know if it's a bit below market. What I would say is that for a manufacturer, they have decisions to make about whether they pass percent or dollars. And I would say that a lot of them have passed somewhere in between that 2 in many cases. So just because the headline is 20% tariff increase, they may not pass 20% in all cases. And so we've seen really a mix of things and a wide range of things from our suppliers on that front. Neal Burk: Okay. And I know we'll get more on this one in January, but like any kind of initial thoughts on 2026, not so much on the top line, but you mentioned gross margins around 39%. So any kind of like puts and takes when we think about how that drops through to operating profit? Donald Macpherson: I mean I would just point to 2 things that probably set us up well, one is the LIFO thing we've been talking about that should improve as the year going on and the other is exiting the U.K. market. If we can exit the U.K. market, that will help, too. So I would only point to those 2 things at this point. We'll talk about others as we get to the end of the year. Operator: Our next question is from Deane Dray with RBC Capital Markets. Deane Dray: I was hoping as we close the books on Cromwell, D.G., you can share some of the lessons. This was not the first time Grainger had tried to expand in Europe. There was also Fabory. So what doesn't work with the MRO model in Europe that's kind of moot now, I think. But then more importantly, don't you still have all kinds of opportunity to outgrow North America and it's still highly fragmented. So isn't that still the growth opportunity? So two questions here. Donald Macpherson: And the second one is really easy. So yes, we do think the opportunity is to grow in North America. And in Japan with MonotaRO, we've got great growth opportunities there. I'd say Fabory and Cromwell are very different experiences. I think Cromwell is a very good business. We bought it right before Brexit happened. We thought we had an opportunity to learn and build off that platform for Zoro U.K. and then potentially think about expansion and learn about the European market. That turned out to not be true, obviously, when Brexit happened. And at some point, it becomes clear that you've got a midsized business that isn't really material to our portfolio. And we want to make sure that our attention goes to things that really matter from a -- that can move the needle for us. And so that's why we made the decision. We do think Cromwell is a good business and will continue to be a good business going forward. Deane Dray: Good to hear. And then just to clarify on the government shutdown, and I appreciate how you sized it. Is there been any difference in behavior, demand, I mean, between federal, state, local? I mean, this is -- the focus is on the federal shutdown, but what's been the ripple effect across the rest of your government business? Donald Macpherson: Very little. Actually, I think the state business is down in October only because of the hurricane, basically. So if you look -- remove the hurricane from the 3 states that had big hurricane events last year, state would be on a good path. Local hasn't really been impacted that much. So from a government shutdown perspective, it's really the military so far that's been hit and things like VA hospitals that are linked to federal that have had slowed down as well. Operator: Our next question is from Nigel Coe with Wolfe Research. Nigel Coe: I appreciate the attempt to teach in on LIFO accounting. I'm accountant by training, and it fries my brain. So -- but it's a good effort. It's a really good effort. Donald Macpherson: We've had so many whiteboard sessions in the last few months. It's ridiculous. Nigel Coe: I know. But the more we dig into it, the more confusing it comes. But just on -- I don't know if you quantified it, Dee, but we calculated about $52 million impact this quarter, just the change in the LIFO reserve. I'm assuming that's the charge. And then I think the PR talks about still some impact in the first half of -- or by mid-2026, I think, is the wording. Would you expect more moderate impacts in the first half of next year? Deidra Merriwether: So yes, your math is right. And what I will say about next year is that we're right in the middle of the cost cycle for 2026, which is why it's so difficult for us to talk about 2026 outlook because we're not done with that. So -- but what we do know is more cost is coming into the year. And so therefore, we're going to have additional LIFO impacts into the year. And so without having crisp numbers to lay out at this point, we know we're going to have a LIFO impact. We know we're going to have additional cycles of price to pass as a result into 2026. But as it relates to actually sizing those incremental things that haven't been locked down right now, it's really hard to do. But we do think as we get through the back half of next year, we'll be in a good position because we would have had multiple pricing cycles to catch up on any impacts and new costs that come through. Nigel Coe: Right. Okay. And then obviously, good news on -- that the price is starting to come through here. How do we think about price elasticity? And the spirit of the question is there is a sort of a vague kind of aura of price fatigue out there with some companies. And I'm just curious how the customers are sort of responding to these price increases. And how do you think about elasticity of demand, especially for the white label goods? Donald Macpherson: Yes. So we are having very good conversations with our customers. They are seeing everybody come to them with what we're talking to them about generally. So we haven't really seen price fatigue, and we've been very measured in how we've done this. I guess there could be a point where that might be a challenge. But certainly, for most of what we sell, it's a very small portion of our customers expense. And so we find that as long as our prices are competitive, we are usually in a good shape. Operator: Next question is from Tommy Moll with Stephens Inc. Thomas Moll: I want to tighten up my understanding here on the U.K. exit. Two-part question. The $40 million sales impact that was over what time frame? And then the 20 basis points operating margin impact, just want to clarify, you meant to say or what you meant was assuming the exits go as planned, that would be the uplift to consolidated company margin? Deidra Merriwether: Yes. So yes, the $40 million is just tied to Q4. And the 20 basis points impact is for total company on an annualized basis. Thomas Moll: Okay. And the $40 million, Dee, is for the entirety of Q4, correct? Deidra Merriwether: So we're estimating that we will be able to close on the Cromwell deal by the end of November, early December. Donald Macpherson: And that's the $40 million from that point, effectively. Thomas Moll: After that point in time? Donald Macpherson: Yes. Deidra Merriwether: Correct. Donald Macpherson: And that's both Cromwell and what we expect to happen at Zoro U.K. as well combined. Thomas Moll: Perfect. Okay. We're clear now. And then just on High-Touch and the exit rate on pricing. For the fourth quarter, I think you said somewhere north of 3 points and then also that there are continuing supplier conversations suggesting there's probably going to need to be more pushed, let's call it, first half '25. So as we just think about the wrap here -- excuse me, first half '26. As we think about the wrap, I mean, could we end up in a world where 2026 pricing on High-Touch is, I don't know, 4 points or better if we just put all these data points one after the other? Deidra Merriwether: Yes. I mean, we're estimating that the wrap will be close to 3. So since we don't know the other numbers, it's highly likely that it's going to be north of 3 for next year. Operator: Our next question is from Guy Hardwick with Barclays Capital. Guy Drummond Hardwick: Most of my questions have been answered, but just a quick one for me. Looking at the sales growth by customer end market for High-Touch Solutions U.S., warehousing is down mid-teens, which is sharply against the kind of trend or slightly up, slightly down each of the last few quarters. Can you explain that? Donald Macpherson: Yes, sure. That's entirely around one customer where there was a shift is what I would say. Guy Drummond Hardwick: Was that a lost contract or closure of facility, that sort of change? Donald Macpherson: Yes, just a contract adjustment. Operator: Our next question is from Patrick Baumann with JPMorgan. Patrick Baumann: I had a couple of quick ones here. Touch on the volume trends at High-Touch again. What do you estimate the MRO market volume did in the third quarter? And in context of that, can you touch on if you're still happy with the returns you're getting on your investments, your share gain investments? Donald Macpherson: Yes. Yes, roughly 2% on volume for the -- that's still below 2% in volume for the quarter, 2%. Deidra Merriwether: Market. Donald Macpherson: No, you're talking about market or volume? Patrick Baumann: Market. Deidra Merriwether: Market. Donald Macpherson: So market would have been down 2%. Deidra Merriwether: That's correct. Donald Macpherson: I'm sorry, I thought you're asking what our volume was. Our volume would have been 1% to 2% in the quarter. And yes, the short answer is yes. We are seeing significant returns on our investments, getting more effective and more efficient in some of those investments. So yes, we're pretty bullish on what we're seeing from what we're investing right now. Deidra Merriwether: Yes. And I would just point you to our return on invested capital is still north of 40%. It was lower than prior year. However, the main impact from that is just us continuing to build assets and in this case, build networking assets related to a lot of investments that we're making in DC capacity to ensure that we have great service and availability. Patrick Baumann: Okay. And then my follow-up is on the margin side again. So the LIFO charge I get is hard to size for '26, so we can make our assumptions around how much of that 80 to 90 basis point drag to add back as a starting point. But the slide mentions price/cost as being negative as well. Can you size that? I assume that's incremental to that 80 to 90 basis points. And then as you sit in front of the whiteboard and game theory if the IEEPA tariffs are ruled illegal, mechanically, how do you guys think about that in terms of the flow-through to results? Deidra Merriwether: So I'll start and then D.G. can kind of focus -- follow. So as we look at -- when we look at next year, we're still going to have LIFO impact, right? They're still going to exist. The difference will be our price will continue to build and so we will see gross margin from a Grainger perspective improve into next year as it relates to that. Now the piece that we don't -- and that's based upon all we know today, right? We're working on additional cost increases. When we start the year, generally, we -- based upon the cost negotiations, we push through cost increases in line with the negotiations that we have completed. And so the cycle kind of will start again. And those details we don't have to share. But usually, LIFO weighs heavily on our business at the beginning of the year. And then again, we catch up from a price perspective through our cycle of increases. So LIFO will not be going away. Some -- it will normalize. What we're experiencing this year would normalize. But then we will be on a path where price will continue to build. And that's why we feel pretty confident that as we get to the second half of next year, just like we're ending this year, if you look at the midpoint of the guide that we're going to be at about of 39%. Donald Macpherson: Your second question is probably more theoretical at this point, which is if tariffs are illegal what would happen. First of all, we have followed the guide -- our own guidelines here that we only do things that actually are happening. And so we would have to actually see what the law change would look like and figure out what would happen. I'd say 2 things. One is we have worked closely with suppliers to tag what the tariff cost increases are. So we could and we would know how to unwind those if that was, in fact, required. We could do that. And certainly, as that happened, we would then, of course, get a benefit because when we took the lower cost product in, then we have the reverse of what's happened in some way. But I don't know how big a benefit that would be. So we'd have to come back to you and model all that if that, in fact, happened. Operator: Our next question is from Chris Dankert with Loop Capital Markets. Christopher Dankert: I guess focusing on Endless Assortment here. Nice results. Maybe can you comment on how much of that's being driven by the more targeted selection continue to provide some benefits? How much of that is kind of the customer acquisition flywheel, just larger invoice size? Maybe just any commentary on kind of what we're seeing in terms of trends inside EA. Donald Macpherson: Yes. So what I would say is that most of the improvement we've seen in -- I'll start -- I'll focus on Zoro because Zoro has been a pretty big shift in terms of performance, has been improved fundamentals on getting more attractive customers and then getting them to buy frequently. Average order size hasn't really changed at all. It's all been frequency of orders when you look at it. That's been the driver. And that's been better customer acquisition, so acquiring customers with the right products that gives us higher probability of actually getting a repeat. And it's also just doing better at marketing to those customers and creating a relationship on a digital -- through digital means. So really, the fundamentals have improved a lot, and we've seen repeat rates go way up. We've seen them do things as a business with pricing that has helped, and we've seen service improve on. So all those things have contributed to improved performance. Christopher Dankert: Got it. And I guess as a follow-up, I mean we're seeing better drop-through now on the SG&A leverage. Are there any additional investments similar to the Tokyo DC or anything else we should keep in mind into 2026, 2027 that would impact kind of that drop-through rate? Or should we expect pretty good incremental margins in EA going forward from here? Donald Macpherson: Other than Meadows, I don't know of any other investment that is on the horizon. They would have a lot of capacity in both Osaka and Tokyo after Meadows, and that be the expectations they would fit for a while. Operator: There are no further questions at this time. I'd like to hand the floor back over to management for any closing comments. Donald Macpherson: Great. So thanks for joining the call today. One thing I'd highlight is that I think the underlying business trends are really good and we're doing a lot of great things to improve the customer experience to prepare to improve our cost structure, to continue work on building technology and building service capabilities through the right network changes on the distribution center network. So while we spent a lot of time talking about LIFO, I hope you get the sense that, that's not really what we're focused on. As a business, we're focused on actually underlying performance, and we feel like the underlying performance is pretty good. With that, I wish you all a safe and happy Halloween. And thanks for joining the call today. Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning, everyone. Thank you for standing by, and welcome to the Cenovus Energy's Third Quarter 2025 Results Conference Call. [Operator Instructions] As a reminder this call is being recorded. I would now like to turn the meeting over to Mr. Patrick Read, Vice President, Investor Relations and Internal Audit. Please go ahead, Mr. Read. Patrick Read: Thank you, operator. Good morning, everyone, and welcome to Cenovus' 2025 Third Quarter Results Conference Call. On the call this morning are CEO, Jon McKenzie; and CFO, Kam Sandhar, will take you through our results. Then we'll open the line for John, Kam and other members of Cenovus' management team to take your questions. Before getting started, I'll refer you to our advisories located at the end of today's news release. These describe the forward-looking information, non-GAAP measures and oil and gas terms referred to today. They also outline the risk factors and assumptions relevant to this discussion. Additional information is available on Cenovus' annual MD&A and our most recent AIF and Form 40-F. And as a reminder, all figures we referenced on the call today will be in Canadian dollars, unless otherwise indicated. You can view our results at cenovus.com. For the question-and-answer portion of the call, please keep the one question with a maximum of one follow-up. You're welcome to rejoin the queue for any other follow-up questions you may have. We also ask that you hold off on any detailed modeling questions, you can follow up on these directly with our Investor Relations team after the call. I will now turn the call over to Jon. Jon, please go ahead. Jonathan McKenzie: Great. And thank you, Patrick, and good morning to everybody. To begin the call, I'd like to recognize some of our employees for safely achieving a number of critical accomplishments and milestones over the quarter. Coming into this year, we set some very ambitious goals for the company in 2025 and our execution has been near flawless. What make these achievements even more satisfying is that we have remained focused on the safety of our people, the communities in which we operate in the environment. Now for example, at the West White Rose project, we completed some intricate and critical work in the third quarter that included installing the top sides on the gravity-based structure, making subsea connections at 120 meters below the ocean surface and completing a turnaround of the SeaRose FPSO. These operations require thousands of offshore hours and were completed in one of the most hostile operating environments, the North Atlantic and I'm incredibly proud of our people and their continued commitment to our core values as we meet our goals and milestones. Now before I get to the results, I'd also like to take a moment to speak about the MEG acquisition. As many of you are aware, MEG shareholder vote, which was scheduled to take place yesterday has been postponed to next Thursday, November 6. The delay is to give time for MEG to respond to a regulatory inquiry related to MEG's consideration of the amended terms of the transaction-related matters. The inquiries associated with a complaint raised by a former employee of MEG, who holds approximately 4,000 shares. We do not expect this inquiry to have any impact on the transaction. There continues to be very strong support for the transaction for MEG shareholders with 86% of the shares voted in favor of the transaction. We expect the vote to proceed as planned next week. Cenovus remains resolute in our commitment to this transaction. When completed, this acquisition combined with the organic growth we are already delivering across our business is transformational to this company. Subject to shareholder and court approval, we anticipate closing this transaction in November and welcoming the MEG team and moving quickly to capture the identified synergies and beyond. Now turning to the quarter. We've spoken about 2025 as being an inflection point for our company, where the investments we've made in our people, our assets and in the growth of our business start to come through. The third quarter results are a proof point of more to come. We achieved the highest ever upstream production of 833,000 BOE per day, highlighted by the best ever performance of our oil sands assets which contributed 643,000 barrels per day. At Christina Lake, production was 252,000 barrels a day in the third quarter, supported by the ramp-up of volumes from Narrows Lake. In the quarter, we brought on 3 well pads at Narrows Lake, which are continuing to ramp up as expected. We expect Christina Lake to sustain or exceed its current production rates in the coming quarters. At Foster Creek, we achieved a production record of 215,000 barrels per day in the quarter. As part of the Foster Creek optimization project, we brought on 4 new steam generators online in July and they've already supporting consistently higher production from the asset, well ahead of schedule. Commissioning of the water treatment and deoiling facilities is underway and approaching completion. New pads will be brought online in the first quarter of 2026. We have effectively brought forward a portion of the growth from this optimization project that was really not expected until 2026. We expect to build on the high level of production in the coming quarters as we fully utilize the steam capacity and complete the project. At Sunrise, we executed a turnaround in September and production was 52,000 barrels a day in the quarter, with turnarounds at both sides of the plant completed in the year and followed by an efficient ramp-up, we expect Sunrise to exit the year around 60,000 barrels a day. The first of the new well pads from the East development area at Sunrise is planned for start-up in early 2026. Development of the high-quality reservoir in this region will deliver the next phase of growth from the asset over the next 2 years. The Lloydminster Thermals produced 96,000 barrels per day in the quarter, the assets have performed very well despite 18,000 barrels of production from Rush Lake facilities remaining shut in as strong performance from the other assets in the region offset some of the lost volumes. At Rush Lake, we have confirmed the integrity of the asset and are working towards a phased restart of production prior to the end of the year, subject to approval by the regulator. We expect to safely ramp up production through 2026. At West White Rose, I'm pleased to say the commissioning is nearly complete and there has been an extraordinary achievement by everybody involved, and we will be drilling from the platform prior to year-end and seeing first oil in the second quarter of next year. Now moving to the Downstream. We had an excellent third quarter. The Canadian refining business continues to run well with crude throughput of 105,000 barrels a day and utilization rate of about 98%. In U.S. refining, we delivered record production with crude throughput of 605,000 barrels per day and utilization rate of 99%. Our assets ran as expected during the quarter with high rates of utilization and availability. And this in conjunction with seasonally higher -- or seasonally stronger crack spreads generated positive refunds flow for the business. Cost control in the downstream has been a focus area for the business, and we continue to see unit cost trend downward towards competitive benchmarks and with the sale of WRB, which closed at the end of the quarter, our downstream business is now fully owned, operated and within our control. Now I'll turn it over to Kam to walk through some of the financial results. Kam Sandhar: Thanks, Jon, and good morning, everyone. In the third quarter, we generated $3 billion of operating margin and approximately $2.5 billion of adjusted funds flow. Operating margin in the Upstream was approximately $2.6 billion, an increase of around $450 million from the second quarter, driven by our strong operating performance and higher realized pricing in the oil sands. Oil sands non-fuel operating costs of $9.65 per barrel decreased quarter-over-quarter due to lower turnaround activities and higher production volumes. We continue to make progress on reducing operating costs across the upstream business and expect to see further reductions as we bring on the West White Rose project, realize a full benefit the Foster Creek optimization project and continue to see steady ramp-up at Sunrise. Our downstream business demonstrated strong performance in the quarter with operating margin of $364 million. This included $88 million of inventory holding losses and $38 million of turnaround expenses partially offset by a $67 million benefit related to the receipt of the small refinery exemption at Superior. In the U.S. refining per unit operating costs, excluding turnaround expenses were $9.67 a barrel, a decrease of $0.85 a barrel from the second quarter and over $3 a barrel relative to the same quarter last year. The reduction in OpEx was largely driven by performance from our operated assets which delivered operating cost of approximately $9.90 per barrel in the third quarter. Adjusted market capture for the U.S. refining business was 65% in the quarter, this was supported by a capture rate of 69% from our operated assets, which benefited from the small refinery exemption at Superior and increased refined product exports from the dock at Toledo. The sale of our 50% interest in WRB refining closed at the end of the third quarter. In addition to the cash proceeds of $1.8 billion received on October 1, the transaction eliminated Cenovus' share of drawn credit facilities associated with the joint venture of $313 million, resulting in a total value received at $2.1 billion based on preliminary closing adjustments. Results from our U.S. refining business will only include our operating assets beginning in the fourth quarter, and we have updated our 2025 guidance to reflect the sale of Wood River and Borger. Capital investment of $1.2 billion was driven by a consistent level of sustaining activity across the business in addition to the continued advancement of our key growth projects. With the West White Rose project now substantially complete, we continue to expect our growth capital to come down significantly in 2026. At the end of the third quarter, our net debt was approximately $5.3 billion prior to the receipt of the $1.8 billion of cash proceeds from the sale of WRB. We returned $1.3 billion to shareholders in the quarter through dividends and share buybacks. We took the opportunity to allocate more capital to share repurchases in the third quarter following the announced sale of WRB. This included the purchase of about 40 million shares at an average price of $22.75 per share. The total value of the share repurchase in the quarter was $918 million which is approximately $175 million higher than our excess free funds flow in the quarter. Subsequent to the quarter and through October 27, the company purchased another $409 million worth of shares or about 17 million shares. And as Jon noted, following the approval by MEG shareholders, we expect the acquisition of MEG Energy to close in November. Total consideration for the transaction is expected to be a split of 50% cash and 50% Cenovus shares. This equates to a maximum of approximately $3.8 billion in cash and the issuance of $160 million Cenovus shares on a fully pro rata basis. Pro forma, our balance sheet remains strong with less than 1x net debt to cash flow. And going forward, we'll continue to be opportunistic with our share buybacks while living within the guidelines of our financial framework. As we head into 2026, our major projects are nearing completion and our growth capital is coming down. Combined with the strength in our balance sheet, the business is positioned well to support our near-term growth plans and remain resilient even at the bottom of the cycle commodity price. I'll now turn the call back to Jon for some closing remarks. Jonathan McKenzie: Great. Thank you, Kam. As I mentioned earlier, we set some ambitious goals for ourselves and the company for this year, and I couldn't be more proud of the way our people have taken up the challenge. We've largely completed our growth projects and are seeing the benefits of higher production with more to come over the future quarters. Our downstream business has been relentless in driving performance across the portfolio of assets and the sale of WRB gives us full operational, commercial and strategic control of our downstream business while monetizing our non-operated business at an attractive price. Our business is blessed with a deep inventory of development opportunities at low supply costs below $45 WTI and underpinned by a fortress balance sheet. We are focused on aligning our strategy, business plans and priorities and look forward to building on a quarter-over-quarter growth and value for the foreseeable future. And with that, I'm happy to answer your questions. Operator: [Operator Instructions] Our first question comes from the line of Menno Hulshof from TD Cowen. Menno Hulshof: Just a question on portfolio streamlining. If we assume that the MEG deal closes towards the middle of November, like you've talked about, how should we be thinking about asset sales potential in the context of what would be a more levered balance sheet? I know you get this question a lot, but any updated thoughts there would be helpful. Jonathan McKenzie: One of the things that we are always very cognizant of Menno is the amount of leverage we keep on our balance sheet, and we've always run with an underlevered balance sheet, which allows us to do transactions like this very comfortably. So there is no burning platform to need to delever after doing this transaction. We're very comfortable with the level of debt that we're going to be taking on to get this deal done and through time, we'll get back to the $4 billion of net debt, but there is no urgency to do asset sales or something like that in an effort to get there. And that being said, we always look at the portfolio. We always should think about how we want to position ourselves and if opportunities arise. We're always live to those, but certainly, there's nothing that would say that we need to do something tomorrow. We would never do a transaction like this if we felt it was going to corrupt the balance sheet and put our equity holders in harm's way. Menno Hulshof: Great. And then maybe moving on to the downstream, we're sort of moving into November now, sort of 1/3 of the way through the quarter. How would you frame the setup for U.S. Downstream for Q4. And then maybe on a related note, how much should we expect market capture to be impacted with the Wood River border assets no longer in the mix? I'm guessing it's no more than, call it, 1 to 2 percentage points, but any thoughts there would help. Jonathan McKenzie: Well, in Q3, our market capture was actually higher in our operated assets than they were in the non-operated assets. But I've got Eric Zimpfer with us this morning. So maybe I'll turn that question over to him to see how he's thinking about Q4 and market capture. Eric Zimpfer: Yes. Thanks, Jon, and thanks for the question, Menno. Yes, I'd say I certainly think the third quarter is a testament to the work that the team has done, and I think has been something that has really been a focus area for the year. And really proud of the results of what we're seeing in the third quarter. As we look at the fourth quarter, I think there's a couple of things I think about in terms of the underlying performance, continue to be encouraged by the trajectory. So reliability improvements that we've made have really give us a foundation. I think the cost focus that we've had throughout the year and the results that we're seeing with the lower cost base is something that, again, we continue to focus on and will continue to be something that we emphasize going forward. Yes, any time you get into the fourth quarter, you expect margins to start to come off, cracks start to weaken. We're already seeing some of that. There's some strength right now. But I think having a strong business and strong underlying performance gives us the ability to kind of weather through some of the market challenges that you inevitably expect in fourth quarter and then also in the first quarter as well with the PADD II region specifically. In terms of the market capture, I'd just maybe emphasize. Reemphasize what Jon shared, that has been a continued area of focus for us. A number of things that we've worked to really help strengthen our market capture. The U.S. operated portfolio really outperformed the collective portfolio in terms of what we saw in market capture. So continue to be encouraged, but it's something we are continuing to focus on and try to figure and look for opportunities to grow that market capture even more through our synergy opportunities as well as accessing some markets where we can have some higher netbacks and better product placement. Operator: One moment for our next question. Our next question comes from the line of Patrick O'Rourke from ATB Capital Markets. Patrick O'Rourke: Maybe just to sort of continue on the downstream theme there from Menno. Just wondering, now with the fully operated portfolio with the integration in the kits, sort of what the flexibility is going forward in terms of the product slate. It's a little bit lower on, call it, diesel distillate yield and maybe some of your Canadian peers, is there an ability to raise those things, capture premium products? And then you've spoken to pushing product in the more premium markets, Eastern Canada, et cetera. What progress you've made on that so far. Eric Zimpfer: Yes. Thanks, Patrick. It's a great question. In terms of the portfolio, I think one of the things I'm really excited about is with the opportunities of the U.S. portfolio, I think, particularly around the synergies each refinery has its unique configuration that allows us to maximize the value. But one of the things we've really started to lean into is how do we optimize across the entire portfolio? And how do we get the best product yield across portfolio and not just asset by asset, but really thinking about it at a portfolio level. I think that gives us a tremendous opportunity. And I can think particularly in the Ohio Valley area, where we're able to optimize, whether it's our premium production, premium gasoline production whether it's balancing our distillate feedstocks and maximize their distillate production truly an area where we're continuing to explore and we see -- we certainly see some potential benefits and also the opportunities to do some investments in the future to look at how do we continue to make the best products from our kit. In terms of kind of the second part of your question on accessing the markets, continues to be an area of focus. PADD II is, we think, a really good region for us, but the opportunity to place products outside of PADD II and find more advantaged markets is really important to our strategy. I would point to -- we've made significant progress in how we're managing the Toledo marine facility. And that has given us the ability to put products into a number of different regions outside of PADD II whether it's in the Canadian markets, whether it's into Upstate New York or whether it's into other regions on the Great Lakes. But tons of opportunities there. We're really excited about the opportunity to further explore that. And see great upside there. Patrick O'Rourke: Okay. Great. And then just in terms of free cash flow allocation priorities, I know with the initial MEG transaction, you came out with sort of a formula in terms of allocation of balance sheet versus shareholder returns, 50% than 75% finally 100%. Today's updated deck just really speaks to the 100. And I know you said it wouldn't necessarily be formulaic on a month-by-month, quarter-by-quarter basis. But maybe if you could comment sort of on the game plan in terms of allocation today between delevering and share buybacks. Jonathan McKenzie: Sure. Kam, you've done a lot of work on this. Why don't you take this one? Kam Sandhar: Yes. So Patrick, I would kind of separate sort of from the MEG transaction what we're doing today. Obviously, we spent the last year to -- even longer than that, getting the balance sheet to where we are today, which is at that $4 billion target. So putting MEG aside for a second, I would say the plan would be to return 100% of our excess free cash flow because we are at our long-term debt level. And we'll be -- we continue to see that as a really good opportunity today, and we'll continue to utilize our free cash flow to return that cash back to shareholders. And I'd say for now, given where the share price is, and we continue to see it as an attractive place to deploy capital, you should expect that excess free cash flow to go towards share repurchases. Obviously, as we get to the point where MEG does close, which we still expect here in November, we will adjust that framework to be a bit more balanced with deleveraging and shareholder returns. So the plan would be as we bring the debt back down to around that $6 billion, we'll be kind of around 50-50. But as you pointed out, it's not going to be so prescriptive in formulaic. We'll be thoughtful about how much we put on the balance sheet and how much we repurchase shares. And some of that will depend on commodity prices and free cash flow. But think of those as guidelines versus formulas going forward. But I think overall, the goal would be to get back down to the $4 billion, that is still our ultimate target. We have an approach where we want to make sure we get the balance sheet back to that $4 billion. Obviously, our cash flow base, our growth we've got plus the plan with the MEG assets, we'll put the company in a really good position from a leverage point of view. But we view our balance sheet as being something that's going to stay pristine, and it allows us flexibility and opportunity like we've been able to pursue on the MEG transaction. Operator: Our next question comes from the line of Alexa Petrick from Goldman Sachs. Alexa Petrick: I wanted to ask maybe switching gears. As we think about West White Rose, you've made a lot of progress there. What are some of the gating items and then any early thoughts on what that production path could look like for 1H 2026 versus 2H? Jonathan McKenzie: Yes. We haven't given guidance for 2026, '27 and '28 yet. But what we have said publicly about West White Rose is that we are largely through commissioning that project now and we'll be drilling well prior to year-end with first production expected in early second quarter 2026. That still remains the direction of travel. But Andrew, maybe you could just provide a little bit more detail on where we are and what that path may look like. Andrew Dahlin: Yes. No. Thank you, Alexa. Yes, maybe to go a little bit back in time and just catch up too. So obviously, in July, we placed the top sides on top of the CGS. We deep -- as Jon said, we're deep into the commissioning and start-up activities, and that actually included the -- all the subsea so we connected the West White Rose platform to the Sea Rose in terms of all the pipeline work, et cetera. We'll be drilling by year-end and then indeed, first production in Q2 of 2026. In terms of production ramp-up, it's not -- we're going to drill roughly 5 wells per year. It's roughly a straight line from 2026 through to 2028. And what we've said is in 2028, gross volume should be around 80,000 barrels a day, which net Cenovus share is roughly 45,000 barrels a day, Alexa. Alexa Petrick: Okay. That's helpful. And then I recognize it's still a bit early, but you've talked about significant amount of growth CapEx coming off next year. Any early thoughts on what that magnitude could look like? And what are some maybe other offsetting considerations we should be keeping in mind? Jonathan McKenzie: Yes. So where we've really guided the market, and we'll formalize this when we come out with our budget in December. But if you look at spending the last couple of years, we've been around CAD 5 billion, which would include somewhere around [ 1.5, 1.7 ] worth of growth capital. And what we've been guiding to is 2026 will look different with all of these growth projects kind of rolling off the agenda. So what you should be thinking about is on an unaffected basis, not including MEG, we would be around $4.2 billion. Take out WRB from that kind of brings you to around $4 billion And that's kind of where we think the budget pre-MEG is going to sit. And then we've also suggested that in 2026 when you add in MEG assets, we would probably be adding about another $800 million for sustaining and growth capital on the MEG assets in 2026. So maybe I've really just already given you the budget for 2026 capital. But that's kind of what we've been saying, and I think it's very consistent with where we've been taking the market over the last few months and years. Operator: [Operator Instructions] Our next question comes from the line of Manav Gupta from UBS. Manav Gupta: I am so sorry about this for UBS IT issues. I wanted to ask you, there are a number of organic growth projects, which you are pursuing, which could deliver over 100,000 barrels of organic volume growth on top of MEG and so can you update us what's the progress over there? How are those projects progressing? Jonathan McKenzie: Yes. I'm not sure where the 400,000 barrels came from Manav. Manav Gupta: No. 100,000. 100,000. Jonathan McKenzie: Sorry, I think you said 4, you kind of worried me I thought maybe our messaging had been confused. Manav Gupta: No. 100,000, sir. Jonathan McKenzie: Yes. What we've been guiding the market to is about 150,000 barrels of growth. And it really comes from heavy oil, conventional and offshore so right across our portfolio. So on the East Coast, as Andrew mentioned, we look to ramp up the West White Rose project, about 45,000 to 50,000 barrels a day by 2028. That growth starts in '26 and progresses linearly through '26, '27 and into '28. And that's kind of the biggest piece of the growth profile. What we're seeing in Narrows Lake with the tieback to Christina Lake, is the 20,000 to 30,000 barrels a day starting to materialize there, and you'll see Christina Lake in that 250 to 260 range. We talked about adding 80,000 barrels a day of steam capacity at Foster Creek, which would add about 30,000 barrels a day to that asset. Today, we're already seeing about [ 20 ] of that with the early steam that we brought on. in Q3. But you should see that continue to ramp up in 2026 as we bring on well pads as well finished, the water handling and deoiling sections of that growth. In Sunrise we're just getting into what we call the V PADD, and these are in the Eastern region of Sunrise. These are some of the most prolific PADDS that we've got in our inventory, and we expect to see production grow from 55,000 barrels a day to close to 75% over the next couple of years at Sunrise. And then the other growth comes from our conventional and cold heavy businesses. But what you'll see from us as we progress through time and get through '26, '27 and in '28 is production will increase into that kind of 950,000 barrel a day range. Manav Gupta: Very helpful. My quick follow-up here is, during the quarter, the buyback was very strong. The buyback went up materially did the net debt? I'm just trying to understand, was this just a timing issue where the PSX deal had been announced and those cash proceeds are probably coming in somewhere in the fourth quarter. That's why the buyback and the net debt went up at the same time, if you could clarify on that. Kam Sandhar: Sure, Manav, it's Kam. So I think one thing just to keep in mind is our reported net debt at the end of September was $5.25 billion. That did not give consideration to the $1.8 billion that we brought in for the sale of Wood River and Borger. So after -- shortly after quarter end, we dropped back down to $4 billion but what I would say is we announced the sale back in early September. We very intentionally obviously knew the timing of closing and when we get the cash. So we actually accelerated some of our buyback program through September and in October. So I think what I would tell you is I think we're going to continue to steward towards that $4 billion going forward. Obviously, MEG transaction when that closes, we'll change that. But I think to the extent that we can, we'll continue to use 100% of excess free cash flow to buy back shares. But the debt -- the goal is to kind of hold the debt in and around that $4 billion. But obviously, the reported debt number at the end of September did not have or did not reflect the proceeds we received from the sale. Manav Gupta: That's exactly what I thought. So it was just a timing issue. The buybacks are in 3Q and the proceeds coming in a little later. Operator: Our next question comes from the line of Patrick O'Rourke from ATB Capital Markets. Jonathan McKenzie: Welcome back, Patrick. Patrick O'Rourke: Just wanted to kind of build on the comments there with respect to narrows. In the public data, we're seeing that sort of in the 15,000 to 16,000 in September, so getting close to the low end of that range. a bit of differentiation on well performance. We're only working with September here. You guys have the hindsight of more recent data. I would assume, through -- close to through the month of October. Just wondering how well performance is trending relative to type curve and any time frame around when you get to the bottom of that 20,000 range. Jonathan McKenzie: Yes. So I'm going to turn this over to Andrew to give some detail, but we started steaming 2 well PADDS back in July and brought on about 18 wells on the X5 and 6 PADDS. We're currently steaming the third PADD, and we brought on, I think, 6 of 8 of those well pairs. And these are ramping up as expected. But Andrew, you're all over this every day. So why don't you add some good color. Andrew Dahlin: Patrick, we were totally on top of this, and we're seeing exactly what we expected from those wells and that they are strong without giving too many numbers. I can tell you here that production in October is now up into the 20-something thousand barrels a day, 22,000, 23,000 barrels a day. Indeed, we're producing from 3 PADDS pads, we're ensuring that we've got great conforms across all of those PADDS. And then here in early Q1 of next year, we'll bring the fourth pad on. So no, we're very comfortable and very confident in the performance we're seeing at Narrows Lake and ultimately in the delivery of that growth of the Christina Lake asset. Operator: There are no further questions registered at this time. I would now like to turn the meeting over to Mr. Jon McKenzie. Jonathan McKenzie: Great. And thank you, operator. And I think we're grateful and surprised. There were no questions about MEG but be that as it may, this concludes our conference call, and thank you for joining us. As always, we really appreciate the interest in the company. And thank you to all, and have a great day. Operator: This concludes today's program. You may all disconnect. Thank you for participating in today's conference, and have a great day.
Operator: Greetings, and welcome to the Strattec Security Corporation's First Quarter Fiscal Year 2026 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Deborah Pawlowski, Investor Relations for Strattec. Thank you. You may begin. Deborah Pawlowski: Thank you, and good morning, everyone. We greatly appreciate you joining us for Strattec's First Quarter Fiscal 2026 Financial Results Conference Call. Joining me on the call this morning are Jennifer Slater, President and CEO; and Mathew Pauli, Vice President and Chief Financial Officer. Jen and Matt will review our financial results, the progress being made to transform Strattec and our outlook. You can find a copy of the news release and the slides that accompany our conversation today on the Investor Relations section of the company's website. If you are reviewing these slides, please turn to Slide 2 for the safe harbor statement. As you are aware, we may make forward-looking statements on this call during the formal discussion as well as during the Q&A. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated on today's call. These risks and uncertainties and other factors are discussed in the earnings release as well as with other documents filed by the company with the Securities and Exchange Commission. You can find these documents on our website as well. I want to also point out that during today's call, we will discuss some non-GAAP measures, which we believe will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release and slides. With that, let me turn it over to Jen, who will be referencing Slides 3 through 5. Jennifer Slater: Thank you, Deb, and welcome, everyone. We started fiscal 2026 in a solid position, and our financial results are a direct testament to the actions we have been taking to transform the underlying operations of Strattec to improve our earnings profile. The progress reflects the significant effort by our team and the magnitude of change we have been implementing. Revenue grew nearly 10% in the quarter, while gross profit margin expanded 370 basis points and EBITDA margin expanded 310 basis points to 10.2%. Margin improvements are a result of higher sales, pricing actions and cost reduction activities. We continue to actively manage our cost structure and implemented an additional restructuring action during the quarter that is expected to provide approximately $1 million in annualized savings that will be fully realized in the third quarter of this fiscal year. We also had solid cash generation of $11 million and ended the quarter with just over $90 million of cash on the balance sheet. We believe this provides us the capital to continue to execute on our transformation plans while providing a cushion during these rather turbulent times for the automotive industry. I'll talk more about the short-term automotive industry headwinds that have been layered on top of the impact of tariffs after Matt covers the details of the quarter results. Mathew Pauli: Thanks, Jen, and good morning, everyone. Let's begin with Slide 6. First quarter gross profit increased $7.4 million or approximately 40% on 10% sales growth, while gross margin expanded by 370 basis points to 17.3%. Gross profit improvement was a result of strategic pricing actions, higher production volumes, some modest contributions from tooling and $1.3 million of restructuring savings. These gains more than offset $500,000 in unfavorable foreign currency, $200,000 in net tariff expenses and $1.1 million increase in statutory labor rates in Mexico. Sequentially, gross margin improved 60 basis points on relatively similar revenue as bonus accruals normalized and tariff recoveries helped to offset the unfavorable impact of foreign currency and higher warranty reserves. Selling, administrative and engineering expenses, or SAE, were $15.9 million, a $2 million increase year-over-year, reflecting the investments in the business transformation. As a percentage of sales, SAE was 10.4%, somewhat similar to the prior year and within our expected long-term range of 10% to 11%. Let's move to Slide 7, where we summarize our profitability. Net income attributable to Strattec for the quarter on both a GAAP and an adjusted basis was up meaningfully year-over-year, reflecting the progress we've been making with the transformation even as we invest to drive the progress. Adjusted EBITDA was $15.6 million, representing an adjusted EBITDA margin of 10.2%. Our results reflect the team's commitment to delivering sustainable margin improvement. As I've noted before, over the long term, we believe the business model would suggest low teen EBITDA margins. Reaching the double-digit level, we believe, demonstrates the validity of this expectation. Now turning to Slide 8, which highlights our cash flow, balance sheet and capital priorities. Operating cash flow was more normalized, $11.3 million for the quarter, coincidentally similar to the first quarter of the prior year. We had capital expenditures of $1.5 million in the quarter or about 1% of sales. While we are investing in the business, we tend to not be capital intensive. We expect CapEx to be higher over the next several quarters as we advance our plans to accommodate the changes we are making to modernize the business. We now have $90 million of cash and approximately $53 million available under our revolving credit facilities. Subsequent to the end of the first quarter, we did enter into an amended and restated $40 million revolving credit facility, which extended the maturity until October 2028. We believe we are in a secure position with our cash balance to continue to advance our transformation plans as well as begin to investigate what M&A may look like for us. I'll caution that we are in the very early stages of this discussion internally about what that scenario could be. Right now, we won't have much more to add to the conversation, but we believe acquisitions could be a part of our longer-term future growth. If you turn to Slide 9, I'll hand it back to Jen to review the conditions in the automotive industry and the actions we're taking. Jennifer Slater: Thanks, Matt. As you know, we are heavily dependent on volume to deliver profit. I am sure you are all aware of 2 significant events that have impacted auto production. First, an aluminum supplier had a fire in its facility, which will impact production levels for some of our major customers during our second quarter and potentially into our third fiscal quarter. The return to full production and restocking dealer inventory levels for our customers can take months to make up for lost time. The second major event is the result of international trade restrictions on a chip supplier that has caused shortages of semiconductor chips to the automotive industry. At this time, we do not know the full impact to how our OEM customers will respond as the industry looks for alternative sources. We will use this time to build finished-good inventories to be able to better serve our OEM and aftermarket customers, reduce expedite costs and be prepared for anticipated demand rebound as OEM customers catch up for lost production time. Importantly, we will continue to monitor demand signals and take appropriate actions to align our cost structure as needed. Despite these constant industry macros that disrupt progress, we are in a better position to manage the current issues facing our major customers than we would have been last year. Let me update you on our transformation plan. We have started modernizing our operations with automation. While some of the improvements we are making may seem menial, each one makes a difference. For example, we are starting to automate certain manual assembly stations in our Mexico operations. These relatively simple automation projects have been validated, and we are applying this automation process to other production lines. Our commercial efforts are centered on gaining new customers as well as capturing future vehicle platforms with existing customers. To do this well requires a deep understanding of our products, cost structure and where our value add is generated. We still have more work to do on this front, but we are continually assessing our operations and product portfolio to drive value. Regarding the sale of our Milwaukee facility and the modernization program, we have come to the conclusion that our best route is a sale leaseback. This should provide us a better return on the building, reduce the challenges of moving production operations, allow us to rightsize our floor space requirement and redesign production flow. In conjunction with this decision, we will be consolidating our test lab to Auburn Hills, Michigan. This will put it closer to the customer and the commercial team for greater collaboration and oversight. We also plan to move the corporate offices to a more modernized facility to advance our culture and enable better productivity. We have been producing results that demonstrate the effectiveness of our efforts to drive profitability, and we believe we have a great foundation upon which to grow. I'd be remiss not to thank the team that has made this happen. With that, operator, we're ready to open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of John Franzreb with Sidoti. John Franzreb: Congratulations on another good quarter. Jen, I'd like to start with your ongoing review of operations. What can you share with us that's new compared to what we discussed in fourth quarter results? Jennifer Slater: John, thanks for your question. I touched a bit on some of the automation work we're doing. And I think as we go through this transformation, and we really started with the basics, we're now moving on to where there are simple processes that we can leverage automation. And then for new -- for future products, we'll look at are there more transformational ways to automate our manufacturing. So it's really just a progression of our thinking as we're stabilizing the underlying operations and moving to the next phase of modernization. John Franzreb: And how should we think about the change in CapEx as you start to automate? What does the CapEx budget, say, for 2026 look like versus 2025? Mathew Pauli: John, it's Matt. On a full year basis, our CapEx budget is about $12.5 million. So it's about 2% of our sales. But the automation -- the cost of automation has come down over the years. So it's not a significant investment from a CapEx standpoint. Jennifer Slater: And I'll maybe just add on to that, John, just to give you an example. There's really simple automation processes that we're starting with. So where you're manually putting a screw into a part, we've proven that, that's an easy thing to automate. Automation costs really have come down. And so they're quick payback to look at those simple ways to automate our processes. Deborah Pawlowski: You want to talk on the Mexico restructuring too, the most recent... Jennifer Slater: Yes. I think we also talked about that. We did do -- we continue to look at our cost structure, John. And so we have done another look at our Mexico operations. We continue to drive efficiency in Mexico. And so we will see in our Q3 more favorability from further restructuring that we've done in Mexico. John Franzreb: And actually, that kind of dovetails nicely into maybe you looking at the footprint of the company, relocating the labs, changing corporate offices and now going to a sale leaseback in the Milwaukee facility. Can you just talk about your thought process and some of the moves you're making here? And does that maybe optimize what you think the manufacturing and the corporate footprint should look like on a go-forward basis? Jennifer Slater: Yes. I think it gives us flexibility. So we're optimizing for what we have today, making sure we're utilizing the space, getting a better process flow, moving the things and consolidating where we're closer to the customer like the test lab and then driving our continued culture change. So it's an ongoing process, John, to make sure that we're leveraging the footprint that we have to where our business is today, but where we think we're going to be in the future, along with providing ourselves flexibility. John Franzreb: Okay. And in Slide #9, you're signaling a cautionary outlook, certainly next quarter and change. Can you talk about the potential impact to the company on the fire and the semiconductor production, I don't know, disruption. Can you kind of quantify what you are thinking and the timing of all this become -- normalizing against? Jennifer Slater: Yes. When we started the year, John, we said that we would really be in line with North America production because we would be lapping some of our launches and the pricing actions that we had last fiscal year. And with that in line, we thought we would be modestly flat -- or flat to modestly down. That didn't anticipate the supplier issue or the chip shortage. So we do see that, that will be an impact here in the quarter because our customers have already announced some time out. I know our customers will work like they always do to make as much of that up as they can, and it will be a timing issue. But right now, there's too much uncertainty to say what the full impact of those will be for the full year for us. Operator: We have no further questions at this time. I'd like to turn the call back over to management -- I'm sorry, I would like to turn the call back over to management for closing comments. Deborah Pawlowski: No, I just saw that we had an investor hop into the queue, Christine. Maybe we can take them. Operator: Our next question is from [ Ethan Star ], a private investor. Unknown Attendee: Great quarter. And my question is regarding the automation products that -- to further improve gross margins, what types of return on investments do you expect from those? And when might such returns show up in quarterly results? Mathew Pauli: Yes. It's less than a 1-year payback, [ Ethan ], and I think we'll start to see some of those results in the second half of this fiscal year. Unknown Attendee: Okay. Great. And then on Page 4 of the slide deck, it says that Strattec is developing relationships with other North American vehicle manufacturers. Are you able to tell us anything about this at present? Jennifer Slater: No, not specifics, [ Ethan ], but we have talked about that we've had a pretty limited customer reach with the North American OEs and our products can add value to other customers in the region. And so as we start thinking about where do we have opportunity with our power access products and our digital key, we're looking to support the customers we have today, but also expand our customer base. Operator: We have no further questions at this time. I'd like to turn the floor back over to management for closing comments. Deborah Pawlowski: Thank you very much, everybody, for joining us here today. We will be presenting Monday at the Gabelli Automotive Symposium in Las Vegas. So we will be posting the presentation associated with that on our website Monday. And in the meantime, if you have any questions, my contact information is on the website, and I look forward to talking with you. Have a great day. Thank you. Operator: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
Operator: Good afternoon, ladies and gentlemen, and welcome to the conference call of Intesa Sanpaolo for the presentation of the third quarter 2025 results hosted today by Mr. Carlo Messina, Chief Executive Officer. My name is Nadia, and I will be your coordinator for today's conference. [Operator Instructions] I remind you that today's conference call is being recorded. At this time, I would like to hand the call over to Mr. Carlo Messina, CEO. Sir, you may begin. Carlo Messina: Thank you. Welcome to our 9-months 2025 results conference call. This is Carlo Messina, Chief Executive Officer; and I'm here with Luca Bocca, our CFO; Marco Delfrate and Andrea Tamagnini, Investor Relations Officers. We just delivered our best ever 9-month net income at EUR 7.6 billion, of which EUR 20.4 billion (sic) [ EUR 2.4 billion ] in Q3. Common equity Tier 1 ratio increased more than 100 basis points. Annualized return on equity is 20% and earnings per share grew 9%. These are excellent results, confirming we are well on track to deliver our full year net income target of well above EUR 9 billion. including Q4 managerial actions to strengthen future profitability. The 9 months and the third quarter both recorded all-time highs for commissions and insurance income. Costs are down, asset quality remains top notch and customer financial assets grew to more than EUR 1.4 trillion. We keep investing strongly in technology, enabling the acceleration of our workforce generational change. This year, we are returning EUR 8.3 billion to our shareholders, including the EUR 3.2 billion interim dividend to be paid in November. On top of this, an additional capital distribution will be quantified at year-end. Our results once again confirm the resilience of our well-diversified business model, further validated by the EBA stress test where Intesa Sanpaolo was a clear winner. This outstanding outcome reinforces our leading position in Europe. This is also reflected in the 2-notch upgrade by Fitch moving ISP above Italy and the 1 notch upgrade by DBRS. Our strong profitability allow us to confirm a world-class position in social impact to fight poverty and reduce inequalities. I'm proud of these results and thank our people for their excellent contribution. Now let's turn to Slide 1 for the key achievement of the first 9 months. In the first 9 months, we delivered record high profitability and efficiency, NPL stock and ratios at historical lows, strong capital growth and high increasing and sustainable value creation. Slide #2. In this slide, you can see the impressive continuous growth in net income. Slide #3. In the first 9 months, we delivered a significant increase in return on equity, earnings per share, dividend per share and tangible book value per share. In a few weeks, we will pay an interim dividend almost 10% higher than last year. Slide #4. In Q3, we confirmed our excellent organic capital generation capability with a 40 basis point increase in common equity Tier 1 ratio. Slide #6 (sic) [ Slide # 5 ]. Net interest income has increased over EUR 400 million compared with 2 years ago despite a 90 basis points drop in Euribor. Euribor is now stabilizing at a level consistent with the normalized interest rate scenario, and our hedging strategy will continue to sustain net interest income in the coming quarters. Slide #6. In the first 9 months, commissions and insurance income grew 5%. Q3 performance was excellent with 7% yearly growth and stable Q-on-Q despite the usual summer business slowdown. Slide #7. We also managed to reduce costs despite tech investments reaching EUR 5 billion. Slide #8. As said, we are in a comfortable position to confirm our 2025 net income guidance of well above EUR 9 billion. Moreover, we clearly have significant excess capital, giving us a lot of flexibility for growth and additional distributions. Slide #9. Our performance allow us to benefit all our stakeholders. The new medium, long-term lending to families and businesses grew 40% on a yearly basis. And let me just focus on the contribution to the public sector because in taxes in the first 9 months, we gave contribution for EUR 4.6 billion that is equivalent to the amount of the new taxation that the government is looking from the banking sector. In 9 months, we paid the same amount. So contributing hopefully to social inequalities in the public sector. Slide #9 -- Slide #11, sorry. In a nutshell, in the first 9 months, net income was up 6%. We accrued EUR 5.3 billion in cash dividends, and we delivered a best-in-class common equity Tier 1 ratio growth. Please turn to the next slide for a closer look at our P&L. Slide 12. This slide shows the building block of our 9-month P&L with improved results across nearly all items. Please turn to the next slide for the third quarter results. Very briefly, in the third quarter, revenues were supported by the highest ever Q3 commissions and insurance income. We decided not to push on trading, keeping flexibility for the coming quarters. Costs were down on a yearly basis, and we increased NPL coverage. Please turn to Slide 14 for a look at net interest income. We are firmly on track to deliver net interest income well above the 2023 level. Further growth is expected in 2026. Slide #15. This slide provides more details on the net interest income evolution. The Q3 decline was mainly due to the further reduction in Euribor and the impact from the 6-month and 1-year repricing of loans. Slide #16. Customer financial assets were up strongly on a yearly and quarterly basis. In Q3, we had EUR 3 billion growth in retail current accounts and EUR 10 billion growth in assets under management. Let's now move to Slide 17. Slide 17. commission growth was driven by wealth management fees. We can count on our unmatched advisory [indiscernible] and our fully owned product factories are a clear competitive advantage. Slide 18. The contribution from Wealth Management and protection activities is 43% of gross income and assets under management inflows are growing. Please turn to the next slide for a closer look at insurance income. Non-motor P&C contribution was the main driver for insurance income growth, and we still have significant upside potential. Slide 20. The contribution from commissions and insurance income to revenues is by far the highest in Europe after UBS. Please turn to Slide 21 for a look at costs. Operating costs are down with personnel costs decreasing 1% and administrative cost 1.5%. Slide 22. We have high flexibility to further reduce costs, thanks to our tech transformation. By 2027, we will have 9,000 exits with savings of EUR 500 million. Slide 23. We have a best-in-class cost-income ratio in Europe. Let's move to Slide 24 for a look at our asset quality. Asset quality remained excellent, and we registered the lowest ever NPL inflows. Slide 25. Our NPL stock [ is ] clearly among the best in Europe. Slide 26. As you can see, we remain very well positioned in terms of Stage 2. Slide 27. Our annualized cost of risk is stable at 25 basis points with NPL coverage up to more than 51% and stable overlays. We see no signs of asset quality deterioration. Slide 28. Our NPL coverage is clearly among the best in Europe. Slide 29, our Russia exposure is now less than 0.1% of the group's total loan with local loans close to 0. Slide 30. We have a rock solid and increasing capital position. Common equity Tier 1 ratio increased to 13.9%. Let's move to Slide 31. ISP [indiscernible] of the EBA stress test, we had a very low adverse scenario impact on our common equity Tier 1 ratio. The next best performing peer showed an impact 3x higher. In the next 3 slides, you have the usual update on our sound liquidity position and ESG actions. But let's move to Slide 36 to see how ISP is fully equipped to succeed in any scenario. Slide 36. Our profitability and capital position remains strong even in adverse conditions. We have a very resilient business model. Our asset quality is top notch, and we have already deployed EUR 5 billion in tech investments, including artificial intelligence, we are key enablers for future efficient gains. Slide 37. Intesa Sanpaolo stands out in Europe across key metrics and is better positioned than peers to face any future challenge. Slide 38. In this slide, you can appreciate our unique positioning, thanks to our commissions-driven and efficient business model. Let's move to Slide 39 for a few words on the strength of the Italian economy. The Italian economy remains resilient and the recent upgrade of Italy's rating confirms the country's strength. We expect Italian GDP to grow this year and next. Slide 40. The Italian companies are in a stronger position today compared to the past. Their debt-to-equity ratio has decreased over time and their liquidity buffers are at all-time highs. Slide 32 -- 42, sorry. This slide offers a recap of our best ever 9 months and the reason why we are fully equipped to succeed in the future. To finish, please turn to Slide 43. Slide 43. We are in a comfortable position to confirm our full year net income guidance. 9-month performance once again demonstrates the quality of our business model. We are a sustainable 20% return on equity bank, one of the few in Europe able to combine high profitability with long-term strength. In Q3, we started putting away in the and continue in the fourth quarter to reinforce future profitability. We are delivering one of the highest capital returns and dividend yields in European banking while maintaining a rock solid capital position and continue to lead on social impact. At the same time, we are accelerating the generational change of our workforce, investing in skills and new talent to ensure the group continues to grow and innovate in the coming years. Thank you for your attention, and we are now happy to take your questions. Operator: [Operator Instructions] And now we're going to take the first question. And it comes from the line of Antonio Reale from Bank of America. Antonio Reale: It's Antonio from Bank of America. Just a couple of questions for me, please. One on growth and the other one on capital distribution. So my first question is, well, what do you think it will take for a bank like yours to be able to show some loan growth going forward and at the same time, not dilute your 20% ROTE. So basically supporting growth while keeping the same level of profitability sustainable through time. The second question is to do with your capital. I think this quarter was a positive surprise. And I think yet it's not being rewarded by the market today. I think part of the issue might be that this excess capital has been trapped there in the bank as you've been basically remunerating shareholders only from your earnings, almost 100% total payout, but you've not paid out the excess capital. So the question is, could you consider paying shareholders also out of your excess capital? And related to that, I mean, you're no longer the highest paying cash dividend bank in terms of payout for what it's worth really. Do you think it will make sense to pay more than 70% dividend payout, so tilting the mix even further towards cash dividends? Carlo Messina: So thank you, Antonio. The point on growth is something that we analyzed in comparison the real potential of value creation. We are shifting a significant portion of our [indiscernible] into very low default rate loans. So we reduced in a significant way the default rate of our portfolio, so moving to close to 1% in the range of 0.7%, 0.8%. So the reduction was massive in the last year, and this will continue because we think that for a bank like us in mainly concentrated in wealth management and protection business model with a significant sustainability in the earning power, what is important is to concentrate on the ability to not generate nonperforming loans in the future. So that means that the growth in loan book will be, for sure, accelerating mainly in the sector export related in the sector that are linked with the new generation and new funds. But in our perception, this will bring the growth in the range of 2%, 3% in 2026, but not more than this. So the main driver could be for sure, for the recovery and growth in terms of net interest income 2026 will be the loan growth, but the acceleration will be part of a story that will balance also the cost of risk for the future. So that for us is fundamental having -- you know that Italian banks in the past had significant negative surprise from the loan book. We want to avoid to be in case of future crisis to be again in the same position. That's the reason why we are so concentrated in maintaining a net nonperforming loans ratio very low and [indiscernible] not diluting the coverage of the nonperforming loans that for us is fundamental also to proceeds in further reduction of the stock because 0 nonperforming loans is the ideal way of working for a bank that is really focused on wealth management and protection like Intesa Sanpaolo. In terms of capital distribution, obviously, capital distribution and the excess capital is related with the business model because from one side, we have a very limited need of capital. So our capital related to unexpected losses today is very low because as you had the occasion to see in the EBA stress test, our resilience is really strong. So our real excess capital is really significant in comparison to the past and in comparison to all the other peers. At the same time, the capital distribution is something that we will reassess in the new business plan. We have a clear evidence of other players that are working on a payout ratio that is much higher cash dividend payout ratio that is much higher than the one that we have in Intesa Sanpaolo. So this is something that we are evaluating. And at the same time, also what we can do with the excess capital, not only the current excess capital, but also the excess capital that we will generate in the next years because the run rate of 20% ROE bank will, by definition, create significant excess capital for the future. And this is part of what we are starting for the new business plan, but we have to discuss with the Board of Directors and then to propose and submit also to the supervisor. And then as soon as we have completed this process at the beginning of February, we will announce a new dividend policy. But obviously, the capital -- the excess capital, the real substantial excess capital significant and we do not see any kind of M&A opportunities. So by definition, the capital is -- the excess capital is of our shareholders. Operator: And now we take our next question. And the question comes from the line of Sofie Peterzens from Goldman Sachs. Sofie Caroline Peterzens: This is Sofie from Goldman Sachs. My first question would be around net interest income. How should we think about the net interest income trough? Do you think it's fair to assume that net interest income will trough in the next 1 or 2 quarters? Or when do you expect net interest income to trough on a quarter-on-quarter basis? And also, if you could just remind us of your rate sensitivity and how do you think about the replicating portfolio tailwinds that we should expect for net interest income? And then my second question would be around the banking tax in Italy. How should we think about the potential banking tax or levy for Intesa? Carlo Messina: So on net interest income evolution, I want just to make a clear point on net interest income because I read some point on net interest income that I think in this quarter, I need to have some clarification. So when we gave the outlook on our net interest income, we gave a clear indication that the third quarter could have been a third quarter in which we can have a reduction in terms of net interest income in comparison to the second quarter. And the reason is mainly related to the fact that we have, in the third quarter, a concentration and we had a concentration of repricing on the loan book. So we had the majority of our loan book that had made repricing during this quarter. We still remain only with EUR 8 billion of loans that we repriced in the fourth quarter. So this is the real bottom that we reached in this quarter because we had an impact of roughly between the repricing on a 6 months and 12 months Euribor of 100 basis points on an amount of 50 billion in this quarter. So this means that we had the peak of the negative contribution in this quarter, but was expected by us. So that was not a surprise. That the reason why we confirm our guidance and also because refinancing on the loan book will be only EUR 8 billion, concentrated in a volume of loans of EUR 8 billion. So very limited amount in comparison to our portfolio. So we think that in this quarter, we can have a rebound in terms of net interest income and then maintain the speed that will allow us to have in 2026 net interest income that can increase. So that's our expectation on net interest income. On the other side, banking tax. On the banking tax, we -- obviously, for the real figure, we will have to wait until the final process in parliament, so in which we will have the law approved. What I can tell you is that the impact that we can have both on net interest -- net income and on net equity from our side is totally manageable. And our commitment today are also including a potential impact coming from taxation. So absolutely not worried about this kind of impact. Operator: And the question comes from the line of Marco Nicolai from Jefferies. Marco Nicolai: So the first question is on insurance income. I see that it's picking up. So if I look at the year-on-year growth in the third quarter, it's actually improving quite a bit compared to the previous quarters. So can you tell us what's happening here? And if we should expect for the future, the same level of year-on-year growth in this line in insurance income? And then another question on isytech. Just wanted to know where you stand in terms of the group transition to this new tech platform beyond the isybank customers? And so what do you expect in terms of efficiencies from this platform, both in terms of cost efficiencies and also in terms of revenues upside, let's say, from this platform? Carlo Messina: So thank you. On insurance, we are working in order to have further [ acceleration ] business. The momentum is very positive and the penetration is in such a position that can allow us also to have significant further increase because we increased penetration, but we remain with a penetration between 13% and 14%. And we think that there is room to have significant further penetration in the next years. So insurance is and will remain and especially property and casualty insurance is and will remain an engine for growth that for the group is really strategic. Also, if you look the growth in terms of market share in the areas in which we are investing is really impressive. So we are increasing the value of this company and the value of the acceleration of the product between the different networks of the group and especially in the Banca de Territori network. Isytech is, for sure, important for Isbank, and this will allow to have further potential increase in terms of clients, in terms of revenue. But let me focus on what is in reality for us, isytech because isytech will be the pillar of the new business plan. isytech will be the key driver of the new plan, especially for the cost reduction. We think that the massive investments of the cloud and the possibility to write off the mainframe could be -- the investments in mainframe could be the most important part of the story of a plan that will be a plan based on cost reduction and efficiency. So this will be the clear lever that we will use in order to gain competitive advantage, not only in terms of client revenues, but in terms of efficiency. So this will remain a strategic lever, and we will elaborate more in the presentation of the business plan. Marco Nicolai: When do you plan the presentation of the business plan again? Carlo Messina: Should be in occasion of the results of the year-end, so the beginning of February. Operator: And now we take our next question. And the question comes from the line of Ignacio Ulargui from BNP Paribas Exane. Ignacio Ulargui: I have 2 questions, if I may. The first one is on fees. Looking to wealth management fees and looking to the asset inflows in the quarter, seen a very strong performance despite the summer seasonality. Just wanted to get a bit of a sense of how you think fees will go through in coming quarters and the progression of shift from AUC to AUM, how you see your clients on that step? The second one is on the capital movement in the quarter. If you could elaborate a bit more on the RWA improvement, the 10 basis points. Was there anything related to moves? Linked to that, should we expect any hit from operational RWAs in the fourth quarter? Carlo Messina: Okay. So starting from fees, we expect to have a very good performance also in the next quarter by definition. So fourth quarter will be a quarter in which our expectation is to have a growth -- significant growth in terms of fee and commissions, but also an acceleration during the year of the business plan. In the plan, we are planning to reinforce the ability to make conversion in terms of asset under administration and also the portion of time deposits that will expire during the period of the plan. We are increasing and we will elaborate on the presentation of the business plan, but I can anticipate that the amount that is workable is really massive and increased in comparison with the EUR 100 billion that originally we gave as the workable -- real workable part that we gave to our network, we are increasing this amount and they will start in 2026 to work with target that will be selective client by client. But this is and will remain an area in which we can deliver organically a significant growth in terms of fee and commissions. In terms of capital movements, we had in this quarter benefits in terms of risk-weighted assets is also related to this reinforcement of the quality of our loan book. So the reduction in terms of default rate has allowed us to improve the condition of the risk-weighted assets. And this is part of the story that I was mentioned before. This will continue to be part of our story. And we think that this can give satisfaction also during 2026. In terms of the trend for the last quarter, we will have a further positive evolution in terms of capital ratio that our expectation. And we will compensate an increase in operational risk that can come from the revenues average of the last 5 years because you know that 3 years because you know that the rule in which you can calculate the risk on a standard basis is based on 3 years revenues. And so we had like all the other banks in Europe, an increase in revenues. So this will bring an increase but will be more than compensated by the other reduction in risk-weighted assets. Operator: And the question comes from the line of Britta Schmidt from Autonomous Research. Britta Schmidt: Just coming back on net interest income. You mentioned that hedging means that you can sustain this net interest income for the coming quarters. So should we read into this that this is the level we should expect unless we see loan growth pick up? And then just a clarification, what is in the other net interest income that declined in 3Q in the quarter? Is that related to NPLs? Or is there anything else in there? And then on capital, just 2 clarifications, please. I think there was a pillar increase of around 15 basis points. Maybe you can give us some color as to why that increased? And whether you could just confirm that any insurance dividends are yet to be recorded in your capital? And maybe if you have an impact on that, that will be helpful as well. Carlo Messina: Luca bocca will answer to your questions. Luca Bocca: Okay. I can start with NII. NII, we will have some decrease in the quarter in the financial component, but it is related to the classical situation in that line that are NPLs and the difference between loan and deposit. So the capital that is noninterest bearing asset liabilities. So it is something that is normal that decrease during a negative trend in the Euribor, but it will remain stable in the next quarters. And according to the question to insurance income, you are right, we are in Danish compromise. So RWA of insurance income is included in the credit risk. And during the quarter, we can have the payment of a dividend to decrease the level of RWA related to that kind of line. And this is one of the measure of optimization that we can have during the fourth quarter to compensate the increase in operational risk. Operator: And the question comes from the line of Andrea Filtri from Mediobanca. Andrea Filtri: The first question is if you could give us a sort of sensitivity of your fees to the market performance? And the second is an unbiased view on Italian M&A. There are articles every day on the combinations, potential combinations in Italy. How do you see the end game looking like in terms of market structure for the Italian market? Carlo Messina: So looking at the sensitivity to the market performance, our expectation is that in case of a reduction of interest rate, we can increase our fee commission income in a significant way because this calculation is made moving through the capital gain embedded in our assets under administration that we can switch -- that we can ask our clients to switch into asset under management. So we think that in case of a reduction of 50 basis points of Euribor, the increase could be in the range of some EUR 100 million of commissions. This will depend on the kind of portfolio. A significant portion of our -- of the portfolio of our clients with a reduction of 50 basis points could become significantly capital gain positive. So in case of potential switch, we can accelerate the growth of our fee and commissions income. In terms -- that's very important for the gross income -- the gross inflows, not only for the net inflows. So in case of a reduction, we are really positive. In case of an increase in interest rate until a level of 50 basis points, our expectation we will remain more or less at the same level. This will depend also on the market performance of the equity markets. Then we will see what can happen. Our base case is that our fee and commissions can increase in a significant way during 2026 and 2027. Looking at the M&A environment in Italy, I have to tell you that I don't think that there will be some significant move in the next months during 2026, we will see what can happen for the other competitors that didn't close deal during 2026. In any case, Intesa Sanpaolo will be not part of any kind of consolidation in the banking and insurance framework. Operator: Now we'll go and take our next question. And it comes from the line of Andrea Lisi from Equita. Andrea Lisi: The first question is if you can already provide us an indication on the managerial action you are aiming to put in place in the fourth quarter, especially given your indication regarding the new business plan that will be a plan of further efficiencies. And so if you can provide some color on them. The second is if you can provide an update of your direct digital platform from 2026, how is evolving the collaboration with BlackRock to create the new digital wealth management platform for European private and affluent clients, what should we expect and what should we have updates? And how should we make in your international growth in this segment? Carlo Messina: So looking at the managerial actions, we will obviously wait for the final figures of 2025 in order to define the managerial action and the focus will be on the sustainability of future results. The first part of the job [indiscernible] the cost base. So this will mean that we will work on some areas in which we can anticipate some cost reduction that we can have for the future. So making some write-off in some areas in which we can improve profitability, mainly related to the IT system cost base. This will be the majority of the efforts that we are doing in terms of studying the potentiality. Then we still have a significant number of people that asked to leave the organization at the timing of our agreement, and we didn't -- we were not in a position to allow them to leave the organization. At the same time, we remain also with some areas of potential reinforcement also on the credit side, if this will bring to a potential reduction in terms of risk for the future. And so we will also work in this part of the story considering that we are in a very good position in terms of run rate of the cost of risk. So these are the most important areas in which we will concentrate in order to evaluate the managerial actions. On the BlackRock, I will ask Luca to answer to your question. Luca Bocca: Yes. The partnership is continuing to develop. In Italy, Aladin solution is fully operative on all the different clients that we have, especially in the Private Banking division. So you see the very good performance in commission are also driven to the excellent level of service that we offer to the Italian client. On the European platform, we are planning, as you can see at Page 60 to launch the platform not only in Belgium but in the fourth quarter of this year and some hundred million of new financial asset can arrive in the next quarter. But again, in the business plan, we will provide also a number on this kind of lever. Anyway, we are starting to have also new inflow of money in Belgium and Luxembourg. Operator: Now we're going to take our next question. And it comes from the line of Andrew Coombs from Citi. Andrew Coombs: Just follow up with a couple of numbers questions. Firstly, just on the trading income, the client contribution was fairly stable, but the capital markets are fair bit weaker. Could you just elaborate on what drove that swing in the capital markets trading results? And then the second question, just coming back to the deposit hedge on Slide 15. You talked about EUR 2.5 billion maturing a month, so close to EUR 30 billion a year. If I take that implies the entire book would turnover in about 5.5 years. So your average duration would be just shy of 3 and you said it's 4. So can you just help me square the circle on that one, please? Carlo Messina: So on the trading income, we had some negative mark-to-market, especially in some participation, mainly we can mention the Euronext participation that was really strong positive in the last quarters and this has reduced the positive contribution. So this is the most important part of these items in the trading income. Then in any case, we decided to be very conservative in order not to force profitability in this quarter because we have already reached the level of our profitability that we want to deliver this year. And so we are already to prepare for the new business plan. In the second question, I will ask Luca. Luca Bocca: The duration is 4 years because it's the average duration based on the different buckets that we cover with a different level of our stable deposit. So it's 4 years with repricing of more or less EUR 3 billion every month in the region of EUR 9 billion every quarter. So it's something that you need to wait for the different bucket of our deposit. In any case, you can assume a repricing at the level of today of 10 basis points more or less every quarter, and this is the reason why we are have another increase in the yield of our hedging portfolio in the 2026 of around EUR 400 million of positive contribution. Operator: And now we're going to take our last question for today. Just give us a moment, and it comes from the line of Delphine Lee from JPMorgan. Delphine Lee: Just 2 on my side. So I just wanted to ask on fees because you've had a very strong year, fees growing mid-single digit, but that includes wealth management fees growing double digit. Going forward, do you think you can continue to achieve the same kind of levels -- or just if you can give us any color of how you're thinking about the moving parts within fees? And then my second question is just a follow-up. I can't remember if you responded to the question, but another question around the cash dividend payout. Considering other banks, other Italian banks are looking at increasing meaningfully their dividend payout ratio. Is this something you're considering as well as part of your new business plan? Carlo Messina: So on fees, I can confirm you that we are working in order to have a double-digit growth in terms of wealth management and commissions. This will be part of the strategic story of the group and the increase in terms of amount of assets under administration and deposits that can be transformed into asset under management and the increase in people that we will have during the business plan, global advisers and the 360-degree services, this will bring us to have trend in terms of fee and commissions income that is and will remain the most important part of the story of our business model. In terms of cash dividend payout, as I told in the first question, I think that this will be evaluated with all the new dividend policy of the group. It is clear that until some months ago, we were the best-in-class in terms of cash dividend. Today, there are other players that can be considered as part of benchmarking that we can analyze in terms of evaluating the new dividend policies. But do not forget that we will have to deal also with a significant excess capital. So the mix between dividend payout and share buyback, we will be part of the new dividend policy. But 70% would be a minimum for sure. Operator: Thank you. Dear speakers, there are no further questions for today. I would now like to hand the conference over to the management team for any closing remarks. Carlo Messina: No, only thank you very much, and we will have the occasion to have also the analysis of the business plan in the next presentation, and you will have all the drivers that will allow us to be a sustainable 20% ROE bank. So thank you very much. Operator: This concludes today's conference call. Thank you for participating. You may now all disconnect. Have a nice day.
Operator: Good morning, ladies and gentlemen, and welcome to the Third Quarter 2025 Arbor Realty Trust Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the call over to your speaker for today, Paul Elenio, Chief Financial Officer. Please go ahead, sir. Paul Elenio: Okay. Thank you, David, and good morning, everyone, and welcome to the quarterly earnings call for Arbor Realty Trust. This morning, we'll discuss the results for the quarter ended September 30, 2025. With me on the call today is Ivan Kaufman, our President and Chief Executive Officer. Before we begin, I need to inform you that statements made in this earnings call may be deemed forward-looking statements that are subject to risks and uncertainties, including information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. These statements are based on our beliefs, assumptions and expectations of our future performance, taking into account the information currently available to us. Factors that could cause actual results to differ materially from Arbor's expectations in these forward-looking statements are detailed in our SEC reports. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today. Arbor undertakes no obligation to publicly update or revise these forward-looking statements to reflect events or circumstances after today or the occurrences of unanticipated events. I'll now turn the call over to Arbor's President and CEO, Ivan Kaufman. Ivan Kaufman: Thank you, Paul, and thanks, everyone, for joining us on today's call. As you can see from this morning's press release, we had another active and productive quarter with some very significant accomplishments that are worth noting. First, we continued our strong progress of creating substantial efficiencies on the right side of our balance sheet with a new $1 billion CLO that we issued in the third quarter with tremendously accretive terms. This deal was priced at 1.82% over, contained 89% leverage on a 30-month replenishment feature and generated an additional $75 million of liquidity. The CLO securitization market is incredibly constructive, and we're very pleased to be such a prolific multifamily originator and a seasonal well-recognized securitization platform, which allows us to consistently access the market and grow our platform. And with the pricing levels we are seeing in the market, which has only gotten tighter since our last deal. We were able to compete very effectively in today's extremely competitive market and generate a strong levered returns on our capital. We also successfully [ called ] one of our legacy CLOs in October, refinancing these assets within our current banking facilities, the bulk of which have replenishment features that allow us to substitute collateral as these loans run off. This was a great trade for us as a CLO was past this replenishment period and with delevering and becoming less efficient. After the unwind, we are now financing these assets through these loans at similar prices to the CLO we redeem and very significantly, we're able to pick up another $90 million of liquidity to enhance leverage. One of the more significant accomplishments we had this quarter was the realization of a $48 million gain from the sale of a portion of the assets in the Lexford portfolio. If you recall, our equity investment in its portfolio was a focus of the first short seller report, which claimed that this was a fraudulent transaction and that we were misleading our shareholders as to the value of these assets. In fact, the reality was exactly the opposite. This was by far 1 of the best restructurings we have ever accomplished. Including the large game we recorded this quarter, this investment has generated over $100 million of income over its life span, the return of $67 million of preferred equity on top of us receiving all of our invested capital back. And there is still a portfolio of assets that we expect to be able to liquidate in the near future. We're also very successful in selling our interest in the legacy assets that we expect to close at the end of the business today. This transaction will generate approximately $7 million of additional income in the fourth quarter, which combined with the gain from the Lexford transaction, totaled $55 million of income that we generated from 2 of our legacy investments. This gives us a tremendous amount of flexibility to be very aggressive in addressing our legacy issues. Our goal is to resolve these noninterest earning assets, which are creating a tremendous drage on earnings as quickly as possible. We believe it will take until the second quarter of next year to accomplish our goals. When completed, we will have effectively resolved a significant amount of our troubled assets and set up with a much better improved run rate of income, which will go a long way towards increasing our earnings and being able to grow our dividend again sometime in 2026. And very importantly, we will accomplish all of this with a very minimal impact on our book value, which is something no one else can say in our space. As I mentioned on the last call, the prolonged elevated rate environment has put certain borrowers in a position where they are running out of steam and are having differently raising additional equity to continue to manage their assets. As we've stated before, we believe that the third and fourth quarter of this year will be the bottom of the cycle. And again, we are working very hard to quickly through our loan book and redeploy our capital into the performing assets and improve our run rate of income for the future. Certainly, with the 2 recent interest rate cuts and the likelihood that we could potentially see 1 more cut this year, we are starting to feel more optimistic about the rate environment moving forward which we believe will provide some need -- some much needed relief for our borrowers. This positive trend gives us some wind at our backs for the first time in a while. As this trend continues, we believe we will be able to meaningfully grow our origination volumes and start to move more assets off our balance sheet, which will increase our earnings run rate and position us well for the future. As I mentioned earlier, we've taken an aggressive approach to resolving our legacy assets through a myriad of different strategies, including modifying loans, taking back assets as REOs to own and operate and bringing in new sponsors to take over assets and assume our debt and create a more current income stream. We continue to examine all loans that are showing signs of distress and are accelerating the process of taking control of the real estate and working quickly towards an accretive resolution. This has resulted in a temporary spike in our delinquencies. And again, we look to expedite the resolution process of these loans, the number of which we have targeted to take back as REO and flip to the sponsors. This will take a few quarters to complete. And in the interim, we'll temporarily reduce our net interest spreads until we complete the resolution process. However, when the smoke clears, we will have cleaned up the vast majority of our legacy book and create a more stable and growing run rate of income in the future. Turning now to our third quarter performance, as Paul will discuss in more detail. Our quarterly results included the large gains from Lexford investment, as I mentioned earlier. This provides us with the unique ability to be able to be very aggressive in accelerating the resolution about problems loans without materially impacting our book value. The timing of these resolutions will take place over the next few quarters, which created some lumpiness in our quarterly earnings going forward. However, we are committed to continue to make our quarterly quarter dividend for the balance of the year. And if we accomplish our goals effectively, we'll be able to improve our earnings run rate and put us in a good position to consider an increase our dividend again sometime in 2026. And I can't stress this enough, we are accomplishing all of these goals without a material change in our book value unlike the rest of our peers who've experienced significant book value deterioration. As I mentioned in our last call, the balance sheet lending business is incredibly competitive right now. There is a tremendous appetite for deals and a significant amount of capital out there chasing each transaction. As a result, we are being highly selective and have closed about $400 million in the third quarter, putting us just around $850 million of volume for the first 9 months of the year. The guidance we gave at the beginning of the year of $1.5 billion to $2 billion of bridge production for 2025 was reflective of our views that market would become overheated. And as a result, we [ dialed ] back our production numbers for 2025 to a more conservative level. We do have some large highly -- high-quality deals in our pipeline, and we think we are likely to close by year-end, which gives us confidence that we may be able to come in with our original guidance despite the extremely competitive landscape. The bridge lending business is an important part of our overall strategy as it generates stronger returns on our capital in the short term while continuing to build up our pipeline of future agency deals. And with the significant efficiencies we are seeing in the securitization market, we're able to continue to produce strong leverage returns on our capital despite this extremely competitive landscape. In the Agency business, we had a tremendous third quarter, originating $2 billion of loans, which is the second-highest production quarter in our history. We had a very strong October, originating $750 million, which puts us -- puts our 10-month volume numbers at $4.2 billion, making us very comfortable that we will easily surpass our origination guidance of $3.5 billion to $4 billion and the best year production number of $4.5 billion as well. This is a tremendous accomplishment, especially given the rate environment, which we were in for the better part of the year. This is a tremendous testament to the value of our franchise and the resiliency of our originations network with a loyal borrower base that we have cultivated over the many years. We can continue to do a strong -- we continue to do an excellent job in growing our single-family rental business. We originated approximately $150 million of new business in the third quarter and another $200 million in October, bringing our 10-month numbers to $1.2 billion. We also have a strong pipeline, giving us a comfort that we were able to meet our internal guidance of between $1.5 billion to $2 billion of production for 2025. This is a great business as it offers 3 turns on our capital through construction, bridge and permanent lending opportunities and generate strong level of returns in the short term while providing us significant long-term benefits by further diversifying our income streams. And again, with the efficiencies that we're seeing in the securitization market and in our bank lines, we are generating mid- to high teens returns on our capital, which will contribute to increased future earnings, especially as we continue to scale up this business. In our construction lending business, we are having great success in growing out this platform with a real influx of new opportunities that we're seeing to do larger loans on high-quality assets with very experienced developers. In the third quarter, we closed $145 million of deals and another $65 million in October, bringing our 10-month numbers to around $500 million. We also have a very large pipeline of roughly $185 million on the application and another $675 million of additional applications outstanding and $900 million of deals we are currently streaming, given us confidence that we can up our guidance for the year from an initial $250 million to $500 million to $750 million to $1 billion for 2025. And Additionally, and very significantly, the size of our current pipeline gives us real visibility into how we will be starting our 2026 which, by all indications, we expect will produce meaningful growth over 2025 numbers. And so between our Agency business, bridge lending program, SFR and construction platform plus our mezz and PE business, we expect to originate between $8.5 billion and $9 billion in volume this year and what was -- which was a very difficult environment for the vast majority of the year. And again, we have started to feel more optimistic about the rate environment, which we believe will lead to more robust origination volumes in the future. In summary, we had a very active and productive quarter with many notable accomplishments. Clearly, the outlook for interest rate environment has significantly improved from where it was in the beginning of the year, and we are feeling more optimistic as a result. We feel we now have some wind at our back and will allow us to continue to grow our origination volumes and generate strong returns on our capital from the significant improvements and efficiencies we've created on the right side of our balance sheet. We also feel that the gains we have generated from our legacy investments puts us in a great position to accelerate the resolution of our legacy book and create a much improved run rate of income going without materially affecting our book value. And these improvements, coupled with the growth we are expecting in our originations platform will go a long way in allowing us to achieve our goals by being able to grow our earnings and dividends in the near future. I will now turn over the call to Paul to take you through our financial results. Paul Elenio: Okay. Thank you, Ivan. In the third quarter, we produced distributable earnings of $73 million or $0.35 per share. As Ivan mentioned, a portion of these earnings were associated with the large gain we recorded this quarter from the Lexford exit investment, which will partially offset some of the accelerated losses and reduced interest income we will experience temporarily from the resolution of some of our problem loans over the next few quarters. As discussed earlier, the resolution of these loans will likely occur over several months, which will cause our quarterly earnings to fluctuate during that time period. We will do our best to give as much forward guidance as we can as it relates to any realized loss we will incur as we continue to make progress in resolving the bulk of our legacy book. As to the income Ivan mentioned, that we will generate in the fourth quarter from the sale of our legacy asset, this is related to a land development deal that we have -- we've had on our books since 2006 called Homewood. We had $128 million of loans in this asset that were written down to $50 million many years ago, again, on an asset that was originated prior to the great financial crisis. We sold the note for $59 million, which should result in a $9 million reserve reversal and a $1 million distributable earnings charge in the fourth quarter. Additionally, some of these loans were in our TRS as they were not considered good REIT assets. And as a result, we will receive a $20 million tax deduction in the fourth quarter, which will reduce our tax expense by approximately $7.5 million and increased distributable earnings. With respect to accrued interest on modified loans, in the third quarter, we reversed approximately $18 million of previously accrued interest, the majority of which were related to new delinquencies during the quarter which, as we discussed earlier, is reflective of where we believe we are in the cycle. This adjustment, combined with $6 million in back interest collected on a loan payoff in July, which we referred to in our last call has resulted in us reducing the total accrued interest on modified loans by $13 million this quarter, even after accruing an additional $11 million in interest on modified loans that are performing in accordance with their terms. We have also started the process of accelerating the resolution of problem assets by reworking some of our loans at lower interest rates in and efforts to create a higher run rate of future earnings going forward on loans that were likely to default in the near future. This resulted in a reduction in interest income of approximately $8 million this quarter and will affect interest income going forward by about $4 million a quarter. As stated earlier, we have taken an aggressive approach in dealing with our troubled assets. And as a result, our delinquencies have risen this quarter to $750 million at September 30 compared to $529 million at June 30. This peak stress reflects where we are in the cycle. And again, we're working very hard to take control of these assets quickly and we rework these loans with higher quality sponsors and provide a more consistent run rate of income going forward. In fact, in October, we took back $110 million of these assets as REO and expecting another $40 million to be foreclosed on in November and December. We're working very hard at bringing in new sponsors to take over assets and assume our debt over the next few quarters, which will create a longer-term benefit of creating a more predictable run rate of income. This will come with a short-term temporary effect of reducing interest income, as I mentioned earlier, as we accelerate the process. This strategy will also result in a quicker ramp-up in our REO book as we look to accelerate the process of bringing in new sponsors to take over the real estate and assume our debt. In the third quarter, we took back $122 million of new REO assets, putting our REO book at $470 million at September 30. And as I mentioned earlier, we're expecting to take back another roughly $150 million of loans in the fourth quarter. And again, we're working hard to dispose of some of these assets very quickly, which should keep us in the range that we previously guided to of between $400 million to $600 million of REO assets that we will own and operate. In the third quarter, we recorded an additional $20 million of net loan loss reserves on our balance sheet loan book, $15.5 million of which were specific reserves with the remaining $4.5 million being general CECL reserves. The additional specific reserves that we recorded this quarter are consistent with our strategy of accelerating the resolution of problem loans as we look to mark certain loans that we are marketing for disposition to where we think we can execute a sale. This could result in roughly $15 million to $20 million of realized losses next quarter if we're successful at liquidating all these assets quickly, which will be partially offset by the $7 million of income we generated from the sale of the Homewood asset. And again, this will very importantly allow us to increase our run rate of income going forward and create a more predictable earnings stream. In our Agency business, we had an outstanding third quarter, as Ivan mentioned, with $2 billion in originations and $2 billion in loan sales, which generated $10 million more in gain on sale income this quarter. The margins on this business were 1.15%, which are down from prior quarter due to some large off-market portfolio deals we were able to capture, which contain lower margins and smaller servicing fees. We also recorded $15.5 million of mortgage servicing rights income related to $2 billion of committed loans in the third quarter, representing an average MSR rate of around 100.78%, which again reflects the larger deals we closed this quarter with lower servicing fees. Our fee-based servicing portfolio grew 4% this quarter to approximately $35.2 billion at September 30 on record third quarter originations. This portfolio has a weighted-average servicing fee of 36.2 basis points and an estimated remaining life of around 6 years, and will continue to generate a predictable annuity of income going forward of around $127 million gross annually. In our balance sheet lending operation, our investment portfolio grew to $11.7 billion at September 30 from originations outpacing runoff for the third straight quarter. Our all-in yield in this portfolio was 7.27% at September 30 compared to 7.86% at June 30, mainly due to stopping the accrual of PIK interest on certain loans, modifying some loans with rate reductions, new third quarter delinquencies and a reduction in SOFR. As mentioned earlier, we do expect this run rate to improve meaningfully over the next few quarters as we look to accelerate the resolution of our delinquencies. The average balance in our core investment was $11.76 billion this quarter compared to $11.53 billion last quarter from growth in the portfolio. The average yield on these assets decreased to 6.95% from 7.95% last quarter, mainly due to the significant nonrecurring adjustments I spoke about earlier, including reversing accrued interest and lower rates on modified loans, combined with the additional delinquencies we experienced in the third quarter. Total debt on our core assets was approximately $9.9 billion at September 30, the all-in cost of debt was approximately 6.72% at 9/30 versus 6.88% at 6/30, mainly due to a reduction in SOFR. The average balance in our debt facilities was approximately $10 billion for the third quarter compared to $9.5 billion in the second quarter, mainly due to funding our third quarter growth and the addition of our new senior notes in July. The average cost of funds on our debt facilities was 6.88% in the third quarter compared to 6.87% for the for the second quarter, excluding interest expense from levering our REO assets, the debt balance of which is separately stated on our balance sheet and therefore, not included in our total debt and core assets. Our overall spot net interest spreads were 0.55% at September 30 compared to 0.98% at June 30 from stopping accrued interest on certain loans and from new delinquencies and modifications at lower rates. We estimate that this new run rate will temporarily reduce our quarterly earnings by $0.05 to $0.06 a share that again, we believe we will be able to improve upon meaningfully as we resolved our troubled assets over the next few quarters. So in summary, we're very pleased to have produced significant gains from a few of our legacy investments, which will put us in a good position to be able to accelerate the resolution of our legacy book. This will take us some time to complete. In the interim, we will experience some fluctuations in our quarterly earnings. When completed, we will resolve the lion's share of our legacy assets and built up a more predictable and growing run rate of income for the future which will complement the growth in the origination platforms that we're expecting from the improved rate environment and go a long way towards helping us achieve our goal of growing our earnings and dividends in the future. That completes our prepared remarks for this morning. I'll now turn it back to the operator to take any questions you may have at this time. David? Operator: [Operator Instructions] We'll take our first question from Steve Delaney with Citizens Capital Markets. Steven Delaney: Well, thanks for a very detailed layout. I mean, you guys have your hands full and kind of a multi-front war, but you seem to understand the game plan very well. I'm trying to understand it. It seems to me that you have 3 steps as you're looking at your portfolio, to modify what you can where you have a viable partner and property, it's not to foreclose and then obviously to eventually move those foreclosed properties to a sale. I guess in terms of -- let's start with the loan [ mezz ]. Can you look at the portfolio now and guess or can you give us an estimate of like what inning we're in terms of the loans that are left in the portfolio that are performing have not needed to be modified. Do you have a sense for how stable those properties and those loans might be over the next 6 to 12 months? Or do you have concerns that there could be slippage in that? So I guess -- are you down to solid borrowers with improving market conditions or this triage process? Again I'm trying to get a sense for how many additional potential loan mods might come up in the next couple of quarters. And I apologize for that long-winded question, trying to express what I was getting at. Ivan Kaufman: Sure. Let me walk through from a macro standpoint where we are. And in terms of what inning we're in, it also depends on what market we're in. Different market reacts a little differently. But generally, when we do a modification, people are bringing capital to the table. And remember, this is a full long period of time that people had to continue to bring capital to the table with the elevated interest rates. So it's 1 thing when you bring capital to the table and rates remain elevated and you keep on having to bring capital to the table. So most modifications have a duration to them. And then if rates remain elevated and the market doesn't recover, they have to bring more capital to the table or there is a future modification potentially that will happen if the asset doesn't improve. Where we become very aggressive is if the asset is not improving because the people are not managing effectively or don't have the capital to maintain that asset. That's where we've become extraordinarily aggressive. So we don't want a deteriorating asset, and that's where we stepped up our efforts. We're at a different point in the cycle. And we also view that these assets with the right amount of capital and right amount of management, they will stabilize. And that's why you see a little bit of a peak. There are certain markets that have been extraordinarily hard hit and kind of been whiplashed. I would say markets like San Antonio, like Houston. Those are markets that under the prior administration, the Biden situation really took over these assets and really negatively impacted these assets. And they are quite a few of them. And we're not the only one who's had these happened to our assets, it's across the board. And then, of course, with the change in administration, that began to change and we got control back on those assets. Unfortunately, with the new administration,and what we've seen is if they've had massive [ ICE ] rate and emptying of properties that were perhaps 88% or 90% occupied, and they're stripping down 20% to 25%. And that's why we've seen a little bit of an acceleration on our part now in Houston and in those markets that going to take control over those assets and restabilize those. So that's a little unique to those markets. But what we are seeing, which is a great interest is when we do take back assets where in the past, maybe we had 1 or 2 people who are interested in buying these assets. We probably have 3 or 4 people, and the appetite for these assets is growing and growing and with the drop in rates and a little bit of return of liquidity, we're seeing some real strength. We're also seeing a lot of benefit right now to good management, where if you have good management and you have the right CapEx to improve your units, where we've had a lot of economic issues in terms of economic collections on some of these assets, we're seeing if these assets are run correctly, they'll fill up and they'll be the right paying tenants, and that's why we're stepping in as well. So the peak in our delinquencies are reflective of our attitude that somee of these assets are better in our hand or even transition to new people. Paul mentioned, we have about $750 million in delinquencies. We have resolution and clear sight that within the next 45 days, about $500 million of those will be resolved either through recapitalization of modifications or finding new borrowers and stepping into those deals. So we are being aggressive. We're very optimistic that we'll get through those. We do expect 1 more wave until in the fourth quarter, which we're prepared for and we're taking an aggressive approach to try and resolving the majority of these legacy issues. So we're hopeful that by the end of the fourth quarter, we would have really addressed each and every 1 of these transition, ones out of ownership that's not doing a good job. And well towards my comments that by the end of the first quarter, we should be in a real position to change our run rate and get these either resolved income-producing or dispose-off appropriately. I want to point out that there's 2 aspects that we focus on maybe a little different than everybody else, which are important to note. We focus not only on our dividend, which, of course, has outperformed everybody else and our guidance was to maintain our dividend for the year because we believe that this is just a little lumpy right now, but more significantly, Steve, if you look at the company's performance, we really have a growth in book value of 23% over the last 5 years, and everybody else has declined 27%. There's a 50% change in book value relative to us and everybody else. So we're managing through this with a nominal change in book value, we're maintaining a tremendous dividend. And I think that is where we're looking at as business operators to manage both of those items. It's a long-winded response, but it wasn't an easy question. Steven Delaney: Paul, I know it wasn't an easy question. And we do note that the stability in the book value because we've seen some a big drop in some of your peers with additional 5 rated loans. Just to wrap it up, and I really appreciate that thoughtful response. It seems like to me we're 1 to 2 quarters away of having the problem loans on your books as REO. The first step is to get it into REO. And it seems like by mid -- certainly by mid-2026, you're going to be in a very active REO sales process. As far as -- to finish the loan mod, take back what you have to take back in 2026, hopefully sell a lot of real estate. Ivan Kaufman: Yes. But I want to point this out, and I think this is important because we're a little different than everybody else. We have a very diversified business with a lot of skill sets. And if you take a look at the Lexford transaction, which was something everybody said, "Oh my God, you're taking that back." We had $67 million of preferred equity on that portfolio. Not only do I get back to $67 million, not only do we make hundreds of millions of dollars on these and get a good income stream going forward. We took assets that were in the mid-80s, low 80s in occupancy, improved these assets, got them in a great position, had a great asset. And now look at the impact of creating another $50 million. We still have assets on our books. So we have to be guided as good operators as producing what we need to produce, and we have very diversified income streams. And yes, we can generate gains, and we can have the patience to have the right kind of gains. And what we will do is we look at the REOs and see, is it quicker to dispose of them now at the right levels? Or do we need to give them a little TLC and get them a little bit better. We can be patient unlike other people. Operator: We'll take our next question from Jade Rawani with KBW. Jade Rahmani: The $18 million accrued interest reversal that was booked a quarter, does that mean that the current level of interest income for the third quarter is a reasonable baseline to use. It was $208 million, reflects most recent interest rates as well as interest rates on most modified loans. And then I think it sounds like you expect originations potentially to drive either a flat to slightly higher portfolio in 4Q. So do you have any comments on the run rate of interest income? Paul Elenio: Yes. Jade, it's Paul. It's a good question. And the answer is no to the first part, and let me give you some guidance. As I laid out in my prepared remarks, we did see, as Ivan mentioned, some elevated defaults this quarter given where we are in the cycle and how aggressive we're being to be able to resolve things quickly and take back assets before they deteriorate. So we did reverse $18 million of accrued interest, mostly related to delinquent loans and loans we remodified, but on a run rate, that's a onetime adjustment in my mind. On a run rate, that's going to cost us $4 million going forward because we reversed interest as of June 30 that we had accrued of $18 million, but we're losing interest on those accruals going forward of about $4 million. So the $18 million is onetime, the $4 million is recurring. Additionally, we had modified loans during the quarter, some we had to remodify where we gave additional relief. Due to the structure of some of those mods, it cost us $8 million for the quarter in interest, but it's only going to cost us $4 million going forward on the rate reduction. So we have $4 million going forward in a run rate reduction from stopping PIK interest on certain loans. We have $4 million in reduction from lower interest rates on mods. And on the new delinquencies, right now, and I want to go through this, that would affect the run rate going forward by $8 million. If you add up those 3 numbers, that $16 million in reduced interest income on a run rate going forward. However, that's before we resolve anything. And we've already agreed to on $225 million of loans. We've already agreed to reposition and sale with new interest rates of like SOFR plus 250 for the most part and that's picking us up $3 million in the fourth quarter alone before we even get into the items that Ivan mentioned, getting our [ 750 ] down even further to like [ 250 ]. Some of that will happen at the end of the quarter. It won't impact the fourth quarter as much but it will impact the run rate in the first quarter going forward. So the long answer is interest income went down by about $34 million this quarter, roughly due to $18 million of reversed accrued interest, another $4 million from stopping the accrued interest, $8 million from modified loans, $5 million from delinquencies. That $34 million was offset by about $7 million or $8 million in back interest and fees we collected and about $5 million in growth in our portfolio for a reduction in interest income of $22 million. I see the reduction of interest income going forward, starting at $16 million for the reasons I talked about the $4 million of PIK, the $4 million of mods and the $8 million of delinquencies, but we've already improved that by $3 million on loans we know we've executed. So now I'm down to $13 million of a reduced interest income going forward. And that's my $0.05 to $0.06 I was referring to. However, having said that, that $3 million that we improved already in the fourth quarter was just the fourth quarter impact, and those were done like mid-quarter. So the first quarter will be impacted by $5 million instead of $3 million. So that brings that $13 million down to $11 million. And then everything Ivan talked about, we're working on will likely bring it down further. So we look at this as the third quarter got hit by some reversals and some elevated delinquencies. The fourth quarter will be hit by a lot less. And in the first quarter and second quarter, you should see drastic improvements to our run rate to get us back to where we were and then above. Ivan Kaufman: Jade, I want to make 1 comment. Paul mentioned that we reduced our spread on a long to 250. I want to be very clear that the market spreads today on new originations are 225 to 275. So some of the relief that we're giving is really reflective of where the market is and adjusting the borrowers down to today's market and giving them consideration for where lending spreads are. So while we're seeing spreads come in a little bit, it's really reflective of the current market spreads. It's not really a discounted spread to the market. Jade Rahmani: That's helpful. I'll have to go through the numbers in more detail after this. But on interest expense, similar question. I went in the wrong direction despite the positive developments on financing. So were there any onetime items in interest expense causing it to be elevated for the structured business at that $176.2 million for the third quarter? Paul Elenio: Yes. So Jade, there was a couple of things. One, so interest income, you saw it went down by $22 million. I just laid out all the pieces for you there. The other side of it is interest expense went up about $10 million, $5 million of that -- some of that is growth in our portfolio, right? So I had $6 million or $7 million of income from growth in portfolio and then I had debt increase, obviously, as I leverage the growth of that portfolio. But we also issued the $500 million of senior bonds in early July, so that full effect was in the third quarter as we laid out in our last quarter for our run rate. And also, we had a little bit of double interest in the third quarter, which won't repeat because we paid off our converts in August but we issued the senior bonds in July. So we weren't allowed to pay our converts off until August. So we had like a 1-month of double interest on those 2 bonds that will go away. But the big reason that interest expense is up is because we issued $500 million of senior bonds to grow our portfolio. Jade Rahmani: Got it. That's clear. Lastly, if I could, GAC credit it has been pretty benign. I don't know if you follow Greystone, which is owned in joint venture by a CRE services company. but it looks like they had a big spike in credit loss provisions in their agency multifamily business. Now I'm seeing Arbor's results and the provision was for risk sharing $8 million, double what it was last quarter and higher than the recent run rate. So can you comment on what drove the increase, if there were any loan book putbacks, any cases of fraud or if it's just broader credit deterioration and if that's something that will be a headwind going forward? Ivan Kaufman: Yes. I think if you look at Fannie Mae and if you look at our all-in numbers, They were in [indiscernible] peak part of that delinquency. You run that at a very low delinquency and of -- constant right now, it increased a little bit. Like all lenders who had a little bit of a portfolio in New York City, you've had some distress on the rent control and rent stabilization, not material, but it does move the needle a little bit. We're all working through a change in the economic climate, which shows in across the board delinquencies at the agencies. It's just where we are in the cycle. Paul Elenio: Yes, Jade. And given Ivan's commentary, what we said with everything else, we think peak stress is Q3, Q4 leak into Q1 a little bit. So we are expecting, I guess, similar reserves for Q4, maybe a little bit less in Q1, given where we are, but it's just based on where the peak stress is. Operator: We'll take our next question from Rick Shane with JPMorgan. Richard Shane: First, if we could talk a little bit about Homewood and the sale there. it looks based on the disclosures that you're selling that property basically at the reserve value, maybe a slight uptick versus the reserve value. But the original carrying value of the loans was $112 million. I'm curious if there is some realized -- or actually the original cost base is well above that because there's a $71 million reserve. Is there going to be a realized loss in the quarter that we need to think about in terms of distributable income? Paul Elenio: Yes. So Rick, it's Paul. Great question, and I'm glad you asked it, and I'll give a lot of color on it. So we did have between all the Homewood pieces, we had about $128 million of UPB on the loans. We wrote it down to $50 million by taking almost 80 million reserves many, many years ago. All but $10 million of those reserves that brought it to a net carry of $50 million, we're taking way before COVID when AFFO and FFO reflected reserves as realized losses. So the only portion that has not been brought into AFFO, FFO, which has been superseded by distributable earnings was $10 million of reserves we took around the time of COVID. So as you pointed out, we have a carry value of $50 million, we sold it for $59 million. When the accounting gets done, we believe what's going to happen is we're going to have a reversal of a reserve of $9 million, right, because we have more reserve than we sold it for, but we'll have a distributable earnings hit of $1 million because technically, the distributable earnings carrying value is $60 million, and we sold it for $59 million. So we'll have only a $1 million realized loss, we believe, on that sale because all the other reserves had already been taken through AFFO and FFO before we went to distributable earnings because this is an asset that goes way before the great financial crisis, as you know. And then we're going to pick up $7.5 million of real GAAP income and distributable income and book value growth from the savings on the tax side because a lot of these loans are in our TRS, and we are a taxpaying entity in the TRS and we get to save the taxes on that. Richard Shane: Got it. Okay. That makes sense. And thank you for walking me down GAAP accounting memory lane. I did not actually remember that. So that's very helpful. The other thing is that contractually, that was a loan that had about a 10% coupon, you did not accrue interest on that. Is there any accrual reversal associated with that? Or should we just look at this as you sold a loan that was effectively generating a 0% interest rate and there was no cash flow associated with that. So there's no nuance there. Paul Elenio: Yes. So there's a couple of nuances we should talk about. You're exactly right. Per disclosures, which you read correctly. This loan had an accrual rate for many, many years. But when it was struggling, we did not accrue any of that interest, none of that interest is accrued in my books. So there's no reversal of interest. And in this deal, as Ivan will point out, we are ending up -- we are providing a little bit of seller financing, and we are ended up with a performing loan now at 10%. So not only are we going from alone that was 0%, we're getting about $6 million or $7 million of cash in the door, we're saving $7.5 million in taxes with an offset of about $1 million distributable earnings hit, but we have like a $53 million loan that's going to earn 10% now and be current. So we took an asset that was earning 0%. We created some cash. We created some income, GAAP and distributable, and we have a performing asset going forward that's adding to our run rate. Richard Shane: Got it. And was that loan unlevered on your balance sheet? Paul Elenio: Yes. Richard Shane: Okay. That's really helpful. And the other thing I'd just like to talk about is when we look at the income from REO, property income fell 20-plus percent sequentially and property operating expenses went up modestly. And that's despite the fact that there is more REO. So trying to understand what is going on there? And I would like to understand potentially the implications for lower cash flows in terms of recovery values. Paul Elenio: Okay. I'm going to let Ivan talk globally about the REOs. Let me give you some numbers and then he's going to go into where the market is. You have to remember, some of the loans we're taking back is REO, we're taking them back because we want to make sure that we won't see significant deterioration. Some of them are coming back and we've been emptying some parts of the building. Their occupancies are super low, probably 40% occupancy. So now our job is to go in there, do what we need to do to get to manage these assets and get the occupancies up. So right now, some of those assets are, as you said, throwing off negative NOI, and I think it was about $3 million for the quarter. in the third quarter and that spiked up because we took some more assets back. We're getting our hands around those assets. We are taking back more REO. I have it probably projecting around the same number despite bringing more REO back. But that number will improve quickly. And I'll let Ivan talk about it as we get in there and we rework these assets, you're going to see occupancy go up a lot. And when it does, that NOI weren't positive at some point, correct, Ivan? Ivan Kaufman: Yes. And I think, Rick, you're hitting on something very important. When we take back REOs that need a lot of work. We will empty those building out and do the work and get the occupancy up. When the occupancy gets up, we're going to sell those assets. So you'll see a little bit of the spike. You'll see them all down. And then as they get leased up, those will be disposed of, and then new ones will come in. So expect that to go up and down. We track that. We track the occupancy. We track the CapEx. And we've had a few on our books that we've actually stripped down to 0. We have all the units, and now they're going to start to lease up very quickly, and we're targeting those which were deeply damaged to dispose of in the third quarter of this -- next year. And right now, they're going from 0 and they're gaining like 10 to 20 points in occupancy. And when they get to 70, 75, we'll look to dispose of those. So it's going to be very lumpy, but the philosophy is strip them down, take the pain and then move them on. Richard Shane: Okay. That's very helpful to understand what's going on. And then just 1 last housekeeping question associated with it. It sounds like when you were doing this, you're obviously making significant investments in the properties, are you capitalizing those investments? Or are you expensing them? Paul Elenio: Yes. Most of the times, if you're making improvements to the real estate, you're capitalizing them, it's increasing your basis. Most of the work is done to improve the assets value correct. Operator: We'll take our next question from Crispin Love with Piper Sandler. Crispin Love: Paul, just based on your comments on an earlier question on interest income, there was a lot there, so I just want to make sure I'm thinking about it correctly. It seems that you're confident that the third quarter is trough in NII, just given the onetime hits being larger than the go-forward impact. Is that accurate or prior to potential forward stress that could impact that run rate? Paul Elenio: Yes, I think that's accurate. So the way we look at it is we do expect we'll have some more delinquencies, but we're going to resolve a lot more than we're going to have new. So we think this is probably peak. There were some onetime adjustments and reversals of the accrued interest I mentioned on some delinquencies that we accelerated. But yes, we expect this to be -- we do not expect the fourth quarter to have the same run rate as the third quarter. In fact, if you look at the numbers that we gave in the press release today, and I spoke about in my commentary, Crispin, we're showing a spot rate of $7.27% going forward of 9/30. That's an all-in yield on our $11.7 billion book. It was 7.86% spot rate as of June 30. If you do the math, that's $16 million. So what I'm telling you is net interest income came down $22 million after growth, but it really came down $34 million for the adjustments I laid out. Now we're saying, it's going to spot go down $16 million, but that spot has already been improved by $3 million, as I mentioned, on loans we've already worked out and sold. So now I'm down to $13 million. And yes, new ones will come on, but we're also, as Ivan mentioned, real-time conversations, which aren't in my numbers, we're resolving a lot more of the [ 750 ] than we originally planned, we do quickly. So by the end of the fourth quarter, I hope to have a lot more of that resolved and that run rate will improve drastically in the first and second quarter of next year. So that's why when we laid out our commentary, we said it will take us to probably around the second quarter of next year to accomplish our goals. And when we accomplish all of our goals, our run rate will be back up, plus the growth in our portfolio from the improved environment and our origination platforms, we'll start to see that turn. Crispin Love: Great. And then just on the $48 million gain on the Lexford portfolio. Can you just give a little bit more detail on that transaction. How long has that been in process? And who was the buyer there? Ivan Kaufman: So I guess, it's an asset that we took back from the great financial crisis, and we've been managing that [indiscernible] creating significant gains. And I guess we made a decision based on where we are in the cycle that it would be good to monetize those gains and especially in light of the criticism that we got that they were really degraded and caused a lot of the short interest in the short reports as bad transactions. So for us, wanted to be very clear that they were good transactions. And that not only were they good, there was substantial profitability. As an operator, we felt by creating those gains, it gives us a lot of flexibility in trying to manage our business and accelerate these legacy issues. And keep in mind, we still have a good portion of those assets left as said in my script. So we just thought it was good timing. It spoke about the credibility of our performance on those assets. And it really negated some of the accusations that have been thrown at us with clarity, and that's kind of the reason we did it. In terms of the buyers, we don't really disclose. We -- very heavy interest. We have 5 buyers for them. This is very competitive process. And it was a good portfolio. We had a great experience with the buyer. It's a public record. I'm not really exposed who they are. but they were well bid and there's a deep audience for that portfolio as well as for the balance of the portfolio that we have. Crispin Love: Okay. Great. And then just a final question. You mentioned the $48 million gain that you did talk about in the prepared remarks, I believe, an additional $7 million you expect to come through. Should that come through in income from equity affiliates as well? Paul Elenio: No, that $7 million, Crispin, was referred to the Homewood transaction. So what we said is that we had a $48 million gain. What we said in our prepared remarks is we had a $48 million gain from Lexford. We still have a portfolio of assets that we'll look to dispose of in the near future. So whatever comes out of that, comes out of that when it happens. And then in addition to that, in October, which should close today, we're closing on the sale of the Homewood note, which will generate about $6.5 million, $7 million of GAAP income and distributable income in the fourth quarter. Operator: We'll take our next question from Lee Cooperman with Omega Family Office. Leon Cooperman: An observation and a question. So the observation is I think that your experience when you take control of this real estate show that the real estate was well underwritten when was originally underwritten. But when you foreclose and default the property, your experience has been very good. So should you not take a bow for that? Number one. And number two, with the stock is now trading below book value, with you having an optimistic outlook in the second half of next year, do you -- are we willing to [indiscernible] some capital? Or would you want to hold on to the capital? Paul Elenio: With respect to -- we have a share buyback program out there. We'll look at the best use of our capital. As you know, a lot of our insiders, including me, continue to buy stock as it goes below book. And when the company has the right capital, we'll make that evaluation. So we do view that as an opportunity. With respect to the REOs, it's very interesting. If I said to everybody on this call that the loans that we're originating today, I would say that they could withstand as I said back 4 or 5 years ago, they could stand this, underwritten to a certain rate spike. Keep in mind that when we took these loans on, SOFR was quarter, it went up to 5%. Nobody could have underwritten a 4.75% increase in SOFR. We always said we can underwrite a 200 to 250 basis point spike in SOFR. This is unprecedented. Also, keep in mind that the treasury was 150, 125, 150. The treasury went up to 5, these are unusual moves and they prolong. So there has actually been a very, very difficult environment, but we do feel that when we get these REOs back, if we improve them and put them back in order, we're doing very well. We're getting very close to where we mark them. Sometimes a little above, sometimes a little around it, but our marks are pretty accurate. And we've been doing a really good job. So we have the skill set to do it. And we're very effective at it. And we're very pleased with the ones that we've taken back and as I said earlier, we'll look to dispose those probably in the third quarter, and we're comfortable with how those are going. Operator: And there are no further questions on the line at this time. I'll turn the program back to Ivan Kaufman for any additional or closing remarks. Ivan Kaufman: Okay. Thank you, everybody, for participating. We are at a very difficult point in the cycle. We're prepared for it. We've actually anticipated it. We'd rather not [ be here ]. But as operators, we're addressing it. We have a lot of tools to address it. Thanks for your participation, and we look forward to next quarter's call. Take care. Have a great weekend. Operator: This does conclude today's program. Thank you for your participation, and you may now disconnect.
I see the one-year suspension of the Entity List affiliate restrictions as a clear upside catalyst for U.S. semiconductors, which are the engine of this bull run. The trade truce was extended a year, with the U.S. average tariff cut to 47% by halving the fentanyl tariff; now 10%.
