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Operator: Greetings, and welcome to the Adtalem Global Education First Quarter 2026 Earnings. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jay Spitzer, VP of Investor Relations. Thank you, Jay. You may begin. Jonathan Spitzer: Good afternoon, and welcome to our earnings call for the first quarter fiscal year 2026 results. On the call with me today are Stephen Beard, Chairman and Chief Executive Officer of Adtalem Global Education; and Bob Phelan, Chief Financial Officer. Before I hand you over to Steve, I will, as usual, take you through the legal safe harbor and cautionary declarations. Certain statements and projections of future results made in this presentation constitute as forward-looking statements that are based on current market, competitive and regulatory expectations and are subject to risks and uncertainties that could cause actual results to vary materially. We undertake no obligation to update publicly any forward-looking statement after this presentation whether a result of new information, future events, changes in assumptions or otherwise. Please see our latest Form 10-K, Form 10-Q for a discussion of risk factors that relate to forward-looking statements. In today's presentation, we use certain non-GAAP financial measures. We refer you to the appendix in the presentation material available on our Investor Relations website for reconciliations to the most directly comparable GAAP financial measures and related information. You will find a link to the webcast on our Investor Relations website at investors.adtalem.com. After this call, the presentation will be webcasted and archived on the website for 30 days. I will now hand you over to Steve. Stephen Beard: Thanks, Jay, and good afternoon, everyone. Thanks for joining us today. We delivered an outstanding start to fiscal year 2026. This marks our ninth consecutive quarter of enrollment growth. Total enrollment is up 8% year-over-year to 97,000 students. Revenue grew nearly 11% to $462 million, and we expanded our adjusted EBITDA margins by 100 basis points while delivering adjusted earnings per share of $1.75. That's growth of nearly 36% year-over-year. This performance demonstrates the power of our growth of purpose strategy and the operational excellence we've embedded across the enterprise. Walden grew enrollment for the ninth straight quarter and achieved record total enrollment. Our Medical and Veterinary segment posted its third consecutive enrollment cycle of growth. Chamberlain grew enrollment for the 11th straight quarter, and we're continuing to generate strong free cash flow while maintaining attractively low net leverage. Before I dive into the quarter, let me place our performance in the context of what's happening in health care. The health care workforce crisis continues to intensify. It's being driven by our aging population and accelerating retirements among practicing clinicians. This challenge is particularly acute in rural settings where nursing shortages alone are projected to triple by 2027 according to the National Center for Health Workforce Analysis. The shortage spans the entire health care workforce from physicians to technicians and represents a defining characteristic of health care for the foreseeable future. The industry is working to accelerate modernization through AI to augment practitioner efficiency, but these innovations don't solve the structural workforce challenge, and that's precisely where our opportunity lies. As the largest provider of health care-focused education in the country, we're well positioned to play a vital role as essential talent infrastructure. That opportunity has never been clearer or more compelling. Now, let me address Chamberlain's performance in the quarter directly. Chamberlain grew total enrollment by just over 2% in the first quarter to nearly 40,000 students, but that growth fell short of our standards. The primary driver was execution failures within our marketing and enrollment operations. We've completed a rigorous diagnostic, so let me be specific about what we found. First, we underperformed in local marketing effectiveness during our critical September intake cycle. Our local market campaigns didn't resonate as effectively as they could have in key metropolitan areas. And we failed to optimize our marketing mix quickly enough when we saw early warning signs. Second, we failed to convert inquiry volume at historical rates. Our enrollment funnel conversion rates fell below our benchmarks, which means we generated strong interest, but didn't close enrollments efficiently. That's an operational issue, and it's fixable. To be clear, this quarter's variance is driven by execution. The fundamentals of our Chamberlain platform remain attractively robust. Nursing demand has never been stronger. Chamberlain has a powerful brand that resonates with students and employers, significant capacity, a full breadth of nursing programs across multiple modalities. We have everything we need to serve this market effectively. We simply need to execute better at converting that demand into enrollment. Put another way, we're execution constrained, but not capacity constrained. So we've taken decisive action to strengthen performance. First, we've made operational improvements to our marketing mix with enhanced local market focus. We're reallocating resources to the channels and geography that drive the highest quality enrollments, and we're moving faster to optimize underperforming campaigns. Second, we streamlined our enrollment processes to reduce friction in the student journey. Every unnecessary step in our enrollment funnel is an opportunity to lose a student. So we're eliminating those barriers. Third, we've made key leadership changes at Chamberlain. Following the recently announced retirement of our current President, we're conducting a national search for Chamberlain's next leader. We've also restructured the senior leadership team to accelerate decision-making and sharpen accountability. These changes reflect our commitment to accountability. When we don't execute to our standards, we address it decisively. Looking ahead, we anticipate continued softness in post-licensure enrollment through the second and third quarters as we implement these changes. That's a realistic assessment based on enrollment cycle dynamics and the time required for our operational improvements to gain traction. However, we expect to return to stronger new enrollment in the back half of the year. We're already seeing early positive signals from our adjusted marketing approach and our restructured leadership team is moving with urgency and precision. To be clear, we believe this is fixable. We're leaning in to correct it with speed and discipline. And most importantly, this doesn't change our conviction in Chamberlain's long-term trajectory, its strength as a brand or our full year guidance as an enterprise. I also don't want to focus on this quarter's challenge to obscure Chamberlain's fundamental strengths and strategic progress. Our pre-licensure BSN programs continue robust enrollment. In just its fourth year, our online offering added nearly 750 students sequentially, now serving over 4,000 students in aggregate. Our second Atlanta campus in Stockbridge, which opened just 2 years ago, now has 600 students and our 24th location in Kansas City is now enrolling its first cohort starting this January. Taken together, that's all a testament to how quickly we can meet the market's demand for flexible, high-quality nursing education. We recently expanded our practice-ready specialty focused model through a partnership with the American Association of Post-acute Care Nursing. This addresses the critical shortage of post-acute care nurses. This new specialization joins existing tracks in critical care, emergency care, home health care, nephrology, oncology and perioperative nursing. Taken together, it further positions Chamberlain to meet the evolving needs of the health care workforce. Again, our fundamentals are strong, the market opportunity is massive, and we're addressing the execution gaps with rigor and accountability. Turning to Walden University. We delivered our ninth consecutive quarter of enrollment growth at nearly 14%, achieving record total enrollment of over 52,000 students. Walden's digital learning platform and flexible offerings continue to demonstrate strength as we innovate and deliver an increasingly seamless experience for working adult learners. We're optimizing our marketing mix, curating content for large language model recognition and building upon Walden's strong brand recognition. Our investments in program enhancements, the Believe & Achieve Scholarship offering and AI-enabled technology are translating directly into enrollment growth. We recently streamlined our professional doctoral programs, creating a more intuitive student experience with a simplified tuition structure, integrated scholarship support and a redesigned capstone process that enables students to build toward degree completion throughout their studies. Technology is enabling our faculty and advisers to spend less time on administrative tasks and more time on student-facing support. Walden's value proposition is clear and it is reflected in total enrollment growth across all degree levels and very, very strong persistence rates. In our Medical and Veterinary segment, we're showing consistent progress. Total enrollment grew 2.4% to approximately 5,300 students and key leading indicators across our medical schools are pointing to sustainable long-term growth. Notably, Ross Med had its largest September new student start in the last 5 years. And Ross Vet continues to operate near capacity, maintaining its position as a leader in veterinary education with a one-of-a-kind experiential learning model. Our partnership philosophy extends across all of our institutions as we create innovative ways to enhance educational access and remove learning barriers. AUC's partnership with the University of Lancashire in the U.K. remains our international hub. And we've established a new direct admittance partnership with the University of Wolverhampton, creating an additional pipeline for prospective students. We're expanding our global reach through a partnership with Sage in India, offering a pathway for Indian students to attend Ross Med upon completion of an advanced medical preparation program. And here in the States, we announced a partnership with ScribeAmerica, creating the MedPath program designed specifically for existing frontline health care workers to advance into medical school. This is an excellent pathway for experienced U.S. health care professionals to step up and help fill the physician gap. These partnerships aren't opportunistic. They're strategic investments in expanding access to in-demand health care education while strengthening our long-term enrollment pipelines. I also want to highlight our continued leadership in preparing students for technology-enabled careers. We recently launched a strategic partnership with Google Cloud to prepare health care workers for an AI-enabled future. This is the first partnership of its scale designed specifically for health care students and practicing clinicians, and it's fully complementary to our partnership with Hippocratic AI. We'll codevelop customized AI credentials for our students, including a foundational AI fluency course for every Adtalem student, plus specialized courses tailored for each career pathway, including nursing, physicians assistance, counseling and other disciplines. This partnership directly addresses one of health care's most pressing challenges while differentiating our institutions for prospective students and practicing clinicians. It's exactly the kind of forward-thinking investment that positions us as the leader in health care education. Our financial position remains exceptionally strong, giving us significant flexibility to execute our strategy and return value to shareholders. We're generating trailing 12-month free cash flow of $319 million. We have cash and equivalents of $265 million as of September 30. We increased our revolving credit facility by $100 million to $500 million, and we extended the maturity to August 2030. In addition, we repaid over $50 million of outstanding Term Loan B balance on October 29. We repurchased $8 million of shares in the first quarter with $142 million remaining on our $150 million Board-authorized share repurchase program through May of 2028. We're executing our capital allocation philosophy with discipline, investing first in student growth and then in strategic initiatives. We're maintaining financial strength and flexibility. We're returning excess cash to shareholders, and we're thoughtfully pursuing strategic M&A where we can find attractively valued assets that extend our capabilities or expand our presence in in-demand health care education markets. This brings me to our upcoming Investor Day on Tuesday, February 24, 2026. We're going to use that forum to provide much deeper visibility into our strategic road map, our capacity expansion plans, our long-term value creation framework and our capital allocation philosophy. You'll hear directly from our institutional leaders about how we're executing at the operational level. You'll see the operational discipline that allows us to invest in growth while expanding margins, and you'll gain a comprehensive understanding of how we're positioned to serve as the essential talent infrastructure for America's health care workforce. I encourage you all to join us either in person or virtually. Let me close with 3 clear statements. First, we're maintaining our full year fiscal 2026 guidance. That's revenue of $1.9 billion to $1.94 billion and adjusted earnings per share of $7.60 to $7.90. Second, our strategic opportunity has never been greater. The structural health care workforce shortage isn't going away. It's actually intensifying. We have the scale, the brand strength, the program breadth, the technology leadership and the financial resources to serve as the essential talent infrastructure for America's health care system. Third, we're going to continue to allocate capital with discipline, return value to shareholders and hold ourselves accountable to the highest standards of execution. That's our commitment to you, and we'll deliver on it. As I've said before, my objective above all else is creating category-leading long-term value for shareholders through operational excellence and strategic discipline. This quarter demonstrates that commitment. Our strong enterprise results show the power of operational discipline. We started the year with momentum. We're addressing challenges with clarity, speed and accountability. We're positioned to deliver on our commitments, and we're building a health care education platform that will create sustainable long-term shareholder value. I look forward to discussing all of this with you in greater detail at our Investor Day in February. And with that, I'll turn it over to Bob to walk through the financials in more detail. Robert Phelan: Thank you, Steve, and hello, everyone. We started the fiscal year with financial strength in line with our expectations as we continue to sustain our momentum. We are generating significant cash flow and have taken proactive actions to strengthen our balance sheet while also increasing our financial flexibility. We are well positioned to continue to execute our growth with purpose strategy and we will continue to be disciplined capital allocators. We are deploying capital to high ROI growth opportunities, focusing on maximizing our existing capacity. Further, our robust financials uniquely provide us with the ability to optimally invest in additional growth opportunities, bringing new capacity to market and providing innovative student-facing technology while continuing to increase our level of profitability. I'll now review our financial results and key drivers for our first quarter performance. Later in my remarks, I'll discuss our expectations and assumptions for the remainder of fiscal year 2026. Starting with the top line. Revenue in the first quarter increased by 10.8% to $462.3 million, driven by all 3 segments, in particular at Walden. Consolidated adjusted EBITDA came in at $112 million, up 15.8% compared to the prior year. This growth was led by Walden with Med/Vet contributing, partially offset by Chamberlain. Adjusted EBITDA margin of 24.2% expanded 100 basis points from last year. Adjusted operating income was $90.3 million, up 19% compared to the prior year as revenue growth and efficiencies generated operational leverage, which was partially offset by investments in our strategic growth initiatives. We continue to balance our strategic growth investments with our more efficient, integrated and scaled operational foundation. Our margin can fluctuate quarter-to-quarter as we remain flexible on how we deploy capital to generate the highest long-term return. Adjusted net income for the quarter was $64.9 million, up 28.5% compared to last year, attributed to adjusted operating income growth and lower interest expense resulting from our actions to reduce outstanding debt and our borrowing costs, partially offset by a higher provision for income taxes. Adjusted earnings per share was $1.75 or a 35.7% increase compared with the prior year. We repurchased 57,000 shares of our common stock at an average price of $134 within the quarter, resulting in first quarter diluted shares outstanding of 37.1 million or $2.1 million lower than last year. Next, I'll discuss the first quarter financial highlights by segment. Chamberlain reported first quarter revenue of $179.2 million, an increase of 6.7% compared with the prior year, driven primarily by growth in enrollments and pricing optimization. Total student enrollment during the quarter increased 2.2%, the 11th consecutive quarter of growth and our investments to grow our pre-licensure BSN online offering are yielding returns. Total enrollment growth in pre-licensure programs, along with high continued persistence rates was partially offset by post-licensure programs. Adjusted EBITDA decreased by 5.1% to $35.1 million for the quarter. Adjusted EBITDA margin of 19.6% was 240 basis points lower compared to the prior year as we reinvested revenue growth, focusing on bringing new capacity to market and continuing to invest in our students to support enrollment growth and academic outcomes. Turning to Walden. First quarter revenue of $190 million, an increase of 17.6% versus the prior year was driven primarily by strong growth in enrollments. Total student enrollment was up 13.6% compared to the prior year, the ninth consecutive quarter of growth from robust enrollment growth across all degree levels, particularly in master’s and undergraduate and continued high persistence rates. Growth in our health care programs was led by social and behavioral health and nursing. Our non-health care programs also grew in the quarter. Adjusted EBITDA increased by 29.5% to $61.9 million. Adjusted EBITDA margin expanded by 300 basis points versus the prior year to 32.6% as our operational excellence generated efficiencies and leverage that outpaced increased brand, student-facing digital investments and additional student support commensurate with the high level of new enrollment. For the Medical and Veterinary segment, first quarter revenue was $93.1 million, an increase of 5.9% versus prior year. Total student enrollment was up 2.4% as a result of our execution against our long-term strategic growth initiatives at our medical schools, and vet continues to operate near capacity. Adjusted EBITDA increased by 11.6% versus the prior year to $21.4 million. Adjusted EBITDA margin increased 120 basis points versus the prior year to 23% as we remain focused on operating our institutions efficiently while making long-term growth investments, leveraging our existing capacity and delivering academic outcomes. We started the third year of our growth with purpose strategy with strong results. Our operational excellence continues to fuel increased investments in future growth off of record levels of enrollment. We are sustaining momentum and in turn, we are maintaining our fiscal year 2026 guidance as we continue to execute our strategic and financial goals. Revenue in the range of $1.9 billion to $1.94 billion, approximately 6% to 8.5% growth year-over-year, with adjusted earnings per share in the range of $7.60 to $7.90, approximately 14% to 18.5% growth year-over-year. Looking forward to the remainder of the year, we continue to anticipate revenue growth to be higher in the first half of the year than in the second half. As Steve mentioned in his prepared comments, our maintained guidance contemplates softness in Chamberlain's top line in the second and third quarters. And as a reminder, for Walden, one academic week shifts from the third quarter into the second quarter this fiscal year. Our top priority remains to reinvest into our institutions and deliver positive student outcomes through our financial strength and dynamic capital allocation approach. And while we plan to make targeted investments during the second quarter, we remain committed to expanding our fiscal year 2026 adjusted EBITDA margin by approximately 100 basis points. Included within our guidance are the recent capital allocation actions as well as our continued strong cash flow generation. Finally, we continue to anticipate an effective tax rate to be higher than fiscal year 2025. We started the fiscal year with strength in line with our expectations. We will continue to execute on expanding access and delivering positive student outcomes, deploying capital to meet the health care education market's growing demand, maximizing long-term value and ultimately generating high returns for all stakeholders. And with that, I'll now turn the call over to the operator for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Jack Slevin with Jefferies. Jack Slevin: Nice work on the quarter guys. I want to start the commentary on Chamberlain and all the color you gave. But maybe just to get a little bit more granular there. I just want to understand sort of the range of outcomes that you're thinking about moving forward here given the really strong ramp you've had the last 2 years in enrollment. And sort of are we thinking this is something where we might see sequential declines in enrollment as you sort of get new starts back online? Or I'd just love to think through sort of the range of outcomes that you're thinking about in that second and third quarter guidance as you look at the Chamberlain volumes. Stephen Beard: Yes. So I'd encourage you to put the deceleration in post-licensure nursing into a discrete box. We don't believe this represents a go-forward trend in that part of the Chamberlain portfolio. We believe that our market position in post-licensure nursing remains strong. We've historically taken share in RN to BSN and expect to continue to do that. This is really, I think, a misstep on our part in relation to how we thought about marketing in advance of the September enrollment cycle. And so we've taken a hard look at where we went wrong, what we can do to remedy that. And we expect that while we'll see a tail on that deceleration flow through the balance of the year, we will recover, and we will continue to defend our position in post-licensure nursing at the same time, growing really, really attractively what we're doing in pre-licensure nursing, particularly with our BSN online program. So again, this is not a trend that has legs in our view. This is a onetime dislocation that's a result of our execution miss. But because it's within our control, we feel very confident about what that means for purposes of the out periods in post-licensure nursing, and that's why we're confident enough to maintain our guide for the full year. Jack Slevin: Okay. Got it. Super helpful. One follow-up on that front. So just to maybe look at the margin in the quarter pulls back a little bit in Chamberlain. Should I think about that as a reaction to some of the trends you were seeing intra-quarter? Or can you sort of spell out what you think about sort of that trajectory going forward on the cost side? Stephen Beard: Yes. Look, I think as we begin to recover the top line at Chamberlain to something consistent with what we would expect ordinarily, you'll see the margin expansion over the course of a full year period. So that, too, is a reflection of the temporary pressure on the top line from the performance miss in September. We expect to recover that as we approach the end of the fiscal year. Jack Slevin: Got it. Okay. Super helpful. Last one for me and more just sort of out of an abundance of caution given your stock traded off 5% yesterday. Just want to sort of clarify that you feel comfortable with where your systems, backbone and platforms from a technology standpoint are across your business, but probably in Walden would be the most relevant one. Stephen Beard: Just want to clarify the question. Just our technology infrastructure generally. Jack Slevin: Yes. I guess you had a peer yesterday or someone in the peer set that had sort of large issues around -- yes, do you get the question now? Stephen Beard: Yes, perfect. Thank you for the clarification. No, we feel great about the tech stack that we use to support the operations, both on the front end of the funnel as well as everything we deploy in support of the student journey. And in fact, we are really excited about some of the innovations that we're rolling out to both enhance and differentiate that student journey. So certainly sympathetic with what happened with one of our peers, but no analogous dynamic in our model to be concerned about. Operator: Our next question comes from the line of Jeff Silber with BMO Capital Markets. Jeffrey Silber: Sorry to go back to the Chamberlain issue. How do you know that this is not a competitive issue where you're losing share? Stephen Beard: Because as recently as 2 quarters ago, we were taking share in RN to BSN. We know -- you know and we know that's not a growth area in the way that it was many years ago, but we believe we still have one of the most attractive brands in RN to BSN. We believe that employers, in particular, are keen to see their RNs make the leap to BSN through Chamberlain's program. So there's nothing we're seeing in the competitive landscape that gives us any concern that we've lost our positioning relative to the alternatives. I just think as we've looked to move from an historical national-based marketing campaign to one that's more market specific, we had a misstep along the way. I think we've diagnosed that well. And I think you'll see the product of that correction over the course of the fiscal year. We intend to defend our position to RN to BSN given our legendary strength there, even as we grow our pre-licensure presence through BSN Online. So I don't believe we are suffering from any adverse competitive dynamics in post-licensure nursing. Jeffrey Silber: Okay. That's really helpful. Last quarter, you announced a partnership with Sallie Mae, and I was just wondering if we can get an update on how that's progressing and when we may see some announcement in terms of the specifics. Stephen Beard: Yes. We're working to finalize definitive documentation with Sallie Mae. My hope is that we'll be able to close that relatively soon, and I expect we'll be able to announce that. We're really encouraged by what that means for all the students we have across the portfolio and Sallie Mae's willingness to step up and support the broad program mix we have. But that work continues to be in flight, and we're certain we'll get it locked down soon. Operator: Our next question comes from the line of Alex Paris with Barrington Research. Alexander Paris: Add my congrats on the strong quarter. I have a couple of questions that are more industry-oriented. Earlier this year, the Department of Education announced increased verification efforts to root out fraud across all of higher education. I've talked with a couple of other companies in this space, one notably that had some issues with friction because of the fraudsters crowding out well-intentioned students, and that had an impact on new student enrollment. I'm wondering what your thoughts are there and maybe just some additional color about what you have to do now that you didn't have to do before? And are you seeing a spike in increased fraudulent activity in the enrollment process? Stephen Beard: Yes. So I'll answer the second part of the question first. We're not seeing any spike in go students or fraudulent enrollments or anything like that. We obviously are subject to the same administrative burdens associated with the department's focus on that as everyone else. But as we sit here today, we don't have any concerns that that's an issue across our program set. But obviously, we continue to monitor it closely. Alexander Paris: Yes, I was wondering if that might have been a contributing factor with the new student enrollment challenges at Chamberlain, but [indiscernible]. Stephen Beard: No. Really, at Chamberlain, 2 issues. One, the marketing mix we deployed in advance of the September cycle wasn't effective as hoped and wasn't executed as well as hoped. And then also at the conversion level, even where we were seeing strong demand with a number of missteps at the conversion level, which resulted in the diminished enrollment growth for that cycle. But I don't believe the verification issue had anything to do with the deceleration in enrollment at Chamberlain. Alexander Paris: Okay. Good. And then kind of shifting gears a little bit. I got 2 more. The Google Cloud partnership and these AI credentials that you're talking about for health care professionals, this would be both existing students as well as noncurrent students at Chamberlain and the other brands within the portfolio. Are these 4 credit courses? And as such, are they Title IV eligible given the increased coverage proposed in the Big Beautiful Bill for shorter-term credentials? Stephen Beard: Yes. As an initial matter, these are programs that will run alongside our existing degree programs. We're ways away from thinking about how to embed them comprehensively in our programs. Obviously, there are accreditation issues that come with that, but we think that's an opportunity down the road. We view this as a way both to provide a differentiated student experience by creating baseline fluency and AI tools across our student populations and to create stackable credentials that have real currency in the clinical marketplace. So Google has been in the certification and stackable credentials business for a while. It's really exciting to be able to partner with them in a way that brings what we do best together with what they do best. So not wholesale modifications to existing degree programs, but ancillary complementary certificate programs that run alongside our degree programs. Alexander Paris: Got you. Is there an additional cost for existing students? And likewise, is there a cost for non-existing students? Stephen Beard: No incremental additional cost for students. Alexander Paris: Got you. Okay. And then my last question is, again, industry-related. Given one of your competitors made an announcement about the impact of military, active duty, tuition assistance, I'm wondering what your institutional, your enterprise exposure is to military. And I suspect that's primarily GI Bill and VA. Stephen Beard: Yes. So active duty military exposure is pretty low, very low actually. Obviously, the platform you're referring to, that's a very large part of their model. So we've not really seen any problems with student disbursements, whether that's veterans benefits or traditional Title IV benefits. Obviously, it's something we continue to monitor as the shutdown drags on. But for the moment, that has not been an issue for our programs. Alexander Paris: Yes. That was my related question, government shutdown related. And then last question, kind of just a silly one. The February Investor Day, is that going to be held at your Chicago headquarters or elsewhere? Stephen Beard: It won't be in Chicago, TBD. I suspect it will be out East, but we'll have details for you pretty soon here. Stay tuned. Operator: Our next question comes from the line of Steven Pawlak with Baird. Steven Pawlak: On the marketing missteps at Chamberlain, I guess just kind of maybe piggyback off an earlier question, what gives the confidence that the marketing mix or marketing message in your other programs is appropriate that there isn't -- or that this is sort of contained and now addressed problem? Stephen Beard: Yes. So we deploy a central marketing center of excellence that then localizes our marketing programs for each of our institutions. So even though our institutions are like in the sense that they're all postsecondary, the unique marketing strategies across the portfolio do vary quite a bit. So we have every reason to believe that the root causes of the misstep in September with Chamberlain are Chamberlain-specific. And no reason to believe that they present any issue for any of the 4 institutions, and that's obviously borne out by what you see in the enrollment trends across those institutions. So it's a Chamberlain-specific issue. We have a tremendous amount of confidence in the steps we've taken to address it, and we're confident that, that will flow through results of operations over the course of the fiscal year. Steven Pawlak: Okay. And then on the sort of conversion challenges, is there a particular part of the funnel that students were sort of falling out of? Or was it maybe more the number of steps and sort of the increased friction points that you referenced? Stephen Beard: Yes. So any time there's a handoff of a student from one part of the enrollment journey to another, that's an opportunity for leakage. And at Chamberlain, we determined that there are opportunities to simplify and reduce the number of handoffs in a way that diminishes the risk of that kind of leakage. When our students are considering our programs, they're also considering other programs and our ability to stay in front of them to ensure they're getting the information they need to make an informed decision about enrollment. It is critical to preserve the kind of high conversion rates that make all the difference in our model. That just didn't happen in September, but we believe we know what needs to happen for the upcoming enrollment cycles at Chamberlain to change that outcome starting with January. Operator: There are no further questions at this time. I'd like to pass the call back over to Steve Beard for any closing remarks. Stephen Beard: I just want to thank the team across the Adtalem family for a really strong and robust start to the fiscal year. This is year 3 of growth with purpose for us. We've been incredibly pleased with the strategy, and we look forward to a strong third year of that strategy, but that is entirely down to the folks that support our students across our 5 institutions. So a sincere thanks to our teams. Operator: That concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and welcome to the Arrow Electronics Third Quarter 2025 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Michael Nelson, Arrow's Head of Investor Relations. Please go ahead. Michael Nelson: Thank you, operator. I'd like to welcome everyone to the Arrow Electronics Third Quarter 2025 Earnings Conference Call. Joining me on the call today is our Interim President and Chief Executive Officer, Bill Austen; our Chief Financial Officer, Raj Agrawal; our President of Global Components, Rick Marano; and our President of Global Enterprise Computing Solutions, Eric Nowak. During this call, we'll make forward-looking statements, including statements about our business outlook, strategies, plans and future financial results, which are based on our predictions and expectations as of today. Our actual results could differ materially due to a number of risks and uncertainties, including due to the risk factors and other factors described in this quarter's associated earnings release and our most recent annual report on Form 10-K and other filings with the SEC. We undertake no obligation to update publicly or revise any of the forward-looking statements as a result of new information or future events. As a reminder, some of the figures we will discuss on today's call are non-GAAP measures, which are not intended to be a substitute for our GAAP results. We've reconciled these non-GAAP measures to the most directly comparable GAAP financial measures in this quarter's associated earnings release. You can access our earnings release at investor.arrow.com, along with a replay of this call. We've also posted a slide presentation on this website to accompany our prepared remarks and encourage you to reference these slides during this webcast. Following our prepared remarks today, Bill, Raj, Rick and Eric will be available to take your questions. I'll now hand the call over to our Interim President and CEO, Bill Austen. William Austen: Thank you, Michael, and good afternoon, everyone. I am humbled, honored and excited to serve as Interim President and CEO of Arrow Electronics. I have been a Director at Arrow since 2020, and I deeply believe in the management team and strategic direction that we have been charting. I, along with the full board, are committed to maintaining continuity, driving execution and delivering results for our customers, partners and shareholders while we search for a permanent successor. During my first few weeks, I have been meeting with employees, customers, suppliers and investors. The message is simple. There will be no change in Arrow's commitment to excellence and customer service, which has been foundational within this business for 90 years. I have also taken the opportunity to listen to all parties to get an understanding of what makes us unique, respected and sets us apart from the competition. Our management team remains committed to our strategic direction. We remain focused on delivering high-quality innovative technology solutions for our stakeholders. As we review today's results and outlook, you'll see that we are executing well in a market that continues to gradually recover from a prolonged cyclical correction. The fundamentals across both our global components and enterprise computing solutions or ECS businesses remain resilient, and we believe we are positioned to emerge with improved momentum. I would like to comment on the U.S. Department of Commerce's Bureau of Industry and Security, or BIS, placing 3 of Arrow's Chinese subsidiaries on its entity list in early October. The Arrow team took decisive action and 10 days later, BIS informed us that it intends to remove these subsidiaries from the entity list and granted a letter of authorization to resume normal business activities. I am pleased with the prompt resolution to this matter, which underscores Arrow's robust and continuously evolving trade compliance program, a significant reason why suppliers and customers choose Arrow. Starting on Slide 3. In the third quarter, we delivered revenue above the midpoint of our guide as well as earnings per share above the high end of our guidance range. With contributions from both our global components and ECS segments. While we are taking decisive action to navigate the current environment and continue to improve operational and financial performance, I want to remind the investment community of Arrow's strengths and opportunities for growth. Turning to Slide 4. Arrow is a leader in electronic components and enterprise IT industries underpinned by a platform-based data-driven business model. We play a pivotal role in connecting the world's leading technology manufacturers and service providers. Our business operates in a large and growing market. We know that there are ample opportunities to grow our core product distribution business by leveraging our global logistics footprint to deliver the latest technologies to the market. The distribution total addressable market, or DTAM, for our core distribution business is over $250 billion, with demand for value-added services, extending Arrow's addressable market even further. Supporting the DTAM is the strength of 6 primary end markets that we serve, transportation, industrial, aerospace and defense, medical, consumer electronics and data center. We are well aligned with all 6 core markets and believe our strategy is on point for delivering long-term sustainable growth. As our business continues to evolve, we intend to drive profitable growth through a deliberate shift toward an increased mix of higher-margin value-added offerings in relation to the product distribution services. Suppliers and customers can rely on Arrow for a broad range of services, deepening our legacy relationships and opening the door to new opportunities. This has been a natural extension for Arrow, building upon our core distribution platform with accretive value-added offerings like supply chain services, engineering and design services and integration services, drilling down into a few examples. First, within our global components segment, our supply chain services offering is well established and positioned to support growth in AI infrastructure build-out. For example, many of the hyperscalers and even some of the other players that are making massive infrastructure investments in large language models need help with sourcing, managing, staging and provisioning of electronic components globally. Arrow supply chain services provides the support so hyperscalers get the right source in the right region of the world at the right time so they can build out their points of presence. In short, our customers stick to their competency and releverage ours, staging and moving materials throughout a very complex global supply chain, and we do it with confidence and ease. We are effectively enabling customers to outsource a piece of their entire supply chain or a piece of their bill of material to Arrow. They can then focus on what they do best, like research and development or go-to-market, we focus on what we do best and the result is a win-win. Supply chain services are accretive to our core business, and we expect that the global trend toward investment in AI will create a significant tailwind. Second, let's focus on our engineering and design services. Engineering and design services is another area where we become an extension of OEMs and suppliers product development and design team, not for days or weeks, but for quarters and potentially years to help them design the next generation of their product portfolio, gives us a completely different way to not only serve our OEM customers, but in some cases, even our traditional suppliers. Like supply chain services, engineering and design services carry a higher margin profile than the core business. And lastly, in our Intelligent Solutions business, we are involved in designing, building and testing discrete compute hardware and associated software that enables our suppliers to quickly bring unique appliances to the market. This is a growing unit and margin accretive to the core business. Another lever for margin expansion is our ability to create a productivity flywheel that focuses on driving costs out, which in turn creates reinvestment capacity for growth and margin expansion. Our efforts to date have focused on simplifying operations, consolidating resources and geographic realignment. Our productivity and cost-out efforts are becoming part of everyday life at Arrow as it creates reinvestment capacity and leverage in the business. One of Arrow's key differentiators is our diversified business model which enables Arrow to become more relevant to suppliers and customers, and it provides us the right to play more completely throughout the technology life cycle. In other words, we participate from design and planning to deployment and further to management and support of technology solutions. Our ECS business is a nice complement to our electronics business and is comprised of hybrid cloud and infrastructure software, hardware and services to deliver solutions, such as cyber security, data protection, virtualization and data intelligence, much of which is on the ramp to AI. This reflects our ongoing alignment to the higher growth demand trends across enterprise IT, many of which are now served on an as-a-service basis. This continues to contribute to the growth of our recurring revenue volumes, now roughly 1/3 of our total ECS billings. Within our ECS business, we are capitalizing on an opportunity to expand our addressable market and accelerate growth through evolving strategic outsourcing arrangements, which we have implemented with multiple large suppliers. Under the strategic outsourcing model, Arrow becomes the brand and the exclusive partner of the supplier in the region, taking control of the go-to-market activities. Our diversified business model that includes electronic components and enterprise IT solutions contributes to our capital allocation strategy because it creates more resilience on the balance sheet and helps us to continue to generate strong free cash flow over time. Our capital allocation strategy is focused in 3 areas: reinvesting in organic growth opportunities, M&A opportunities and returning excess capital to shareholders. As a reminder, we have returned approximately $3.5 billion to shareholders via share repurchase since 2020. As always, we are committed to carefully and rigorously evaluating all uses of capital with the ultimate goal of generating the highest risk-adjusted return on investment over the long term and maintaining an investment-grade credit rating. Before I turn the call over to Raj, I want to emphasize that Arrow remains committed to disciplined execution, strengthening our supplier and customer partnerships and delivering sustainable value for our shareholders. With that, I'll now hand things over to Raj, who will walk you through the financial results in more detail. Raj? Rajesh Agrawal: Thanks, Bill. On Slide 5, sales for the third quarter increased $890 million year-over-year to $7.7 billion, exceeding the midpoint of our guidance range and up 13% versus prior year or up 11% year-over-year on a constant currency basis. Third quarter consolidated non-GAAP gross margin of 10.8% and was down approximately 70 basis points versus prior year, driven primarily by regional and customer mix and global components and by product mix and a $21 million charge we took in ECS, which I'll detail in a moment. The charge reduced consolidated non-GAAP gross margin by 30 basis points. Our third quarter non-GAAP operating expenses declined $15 million sequentially to $616 million. The decline was largely driven by a reversal of stock-based compensation expense and cost savings initiatives, which more than offset higher variable costs to support top line sales growth as well as the impact of currency exchange rates. In the third quarter, we generated non-GAAP operating income of $217 million, which was 2.8% of sales. Margins remained flat sequentially due to continued headwinds from our regional mix and customer mix. offset by growth in our accretive value-added offerings and continued productivity initiatives. Interest and other expense was $55 million in the third quarter, and our non-GAAP effective tax rate was 22.5%. And finally, non-GAAP diluted EPS for the third quarter was $2.41, which was above our guided range, driven by a number of factors, including favorable sales results and a lower interest expense. The aforementioned charge lowered EPS by $0.31. Turning to Slide 6. Let's take a closer look at our global components business. Global components sales increased $610 million year-over-year and $271 million sequentially to $5.6 billion, above the midpoint of our guidance range and up 5% versus prior quarter. We continue to believe that the business remains in the early stages of a modest cyclical upturn reported by several key data points. Our book-to-bill ratios remain above parity in all 3 regions. Our backlog continues to improve, growing again in the third quarter. All 3 of our operating regions continue to perform at or better than seasonal trends. Sales for both semiconductor and IP&E components grew sequentially in the third quarter. Activity levels across our industrial and transportation markets remain healthy. These are our 2 largest verticals globally. Our value-added offerings, namely supply chain services, engineering and design and integration services performed well and remain margin accretive to our business. Stated lead times remain at low levels, and despite our continued backlog growth, visibility is needed relative to a normal environment. Inventory levels in aggregate have normalized, however, mass market customers are not recovering as quickly as compared to larger OEMs, which is a headwind to profit margins. This is not a typical to prior cycle, and we believe this sale of the market remains healthy and we're still seeing destocking among mass-market customers. Lastly, our APAC business was first in and first out of the downturn and continues to outpace the Americas and EMEA at this stage of the upturn. This again is not atypical, however, it does create a headwind to overall profit margins. Taking a closer look at each of the regions. In the Americas, sales were flat sequentially at $1.7 billion and strength in industrial and transportation markets drove our results. Sales in EMEA were $1.4 billion with industrial and aerospace and defense markets including resilient despite macroeconomic and geopolitical headwinds. And finally, our sales in Asia grew sequentially 12% to $2.4 billion, our growth was once again broad based, highlighted by strength in industrial, compute and consumer, along with continued EV momentum in the transportation sector, similar trends to what we observed in the second quarter. Global components non-GAAP operating income increased $10 million sequentially to $199 million, representing 6% growth. Non-GAAP operating income margin was flat sequentially at 3.6%. Turning to Slide 7 in our global ECS business. Global ECS sales increased $300 million year-over-year to $2.2 billion, above the midpoint of our guidance range and up 15% versus prior year. Global ECS billings were $5.2 billion, up 14% year-over-year. We experienced continued momentum in hybrid cloud infrastructure software, hardware and services to deliver solutions for cybersecurity data protection and data intelligence related to data center activity for AI investment. We again enjoyed healthy backlog growth in excess of 70% year-over-year to an all-time high as our mix of business continues to shift to more recurring multiyear revenue. As Bill mentioned, our ECS go-to-market strategy is broadening as we continue to improve the value that we provide in the distribution channel. From technical expertise and project management to mid-market channel enablement through our Aerosphere digital platform, which supports cloud and AI scale and acceleration, our ECS business is growing beyond the traditional distribution model and expanding our addressable market through new strategic outsourcing engagements. This new motion provides aero exclusivity, cross-sell opportunities and stickier relationships as Arrow becomes the sole operator in the market. From a margin point of view, if we are successful in selling the product well in the strategic outsourcing model, engagement is accretive. In the third quarter, we took a $21 million charge, largely due to lower profit expectations on multiyear contracts that have underperformed. Broadly, we believe these strategic outsourcing agreements will be margin accretive at a key part of our long-term business. We are learning from each agreement and believe it will better position our ECS business for the future. ECS non-GAAP operating income declined $12 million year-over-year to $65 million, driven by the $21 million charge. Non-GAAP operating income margin was 3% as the charge lowered margin by 100 basis points. On Slide 8, net working capital grew sequentially in the third quarter by approximately $450 million, ending the quarter at $7.3 billion, driven primarily by sales growth that led to higher accounts receivables. Our cash conversion cycle increased sequentially by 5 days in the third quarter to 73 days as a result. Inventory at the end of the third quarter remained at $4.7 billion, and our inventory turns continue to improve. We will maintain our focus on matching our inventory to associated demand trends as the current cyclical recovery continues. Cash flow used for operating activities in the third quarter was $282 million. On a year-to-date basis, cash used for operating activities was $136 million, which supported revenue growth of approximately 6%. Gross balance sheet debt at the end of the third quarter was $3.1 billion. Now turning to Q4 guidance on Slide 9. We expect sales for the fourth quarter to be between $7.8 billion and $8.4 billion representing an increase of 11% year-over-year at the midpoint of the range. We expect global component sales to be between $5.1 billion and $5.5 billion, in enterprise computing solutions, we expect sales to be between $2.7 billion and $2.9 billion, which is up approximately 13% at the midpoint year-over-year. We're assuming a tax rate in the range of 23% to 25% and interest expense of approximately $60 million. Our non-GAAP diluted earnings per share is expected to be between $3.44 and $3.64 and Details of the foreign currency impact can be found in our earnings release. I want to provide some color as you build your 2026 model. At this stage, the pace of the cyclical upturn is proving to be gradual given the level of broader macroeconomic uncertainty, many of the primary end markets that we serve are finding momentum and achieving year-over-year growth. However, regional and customer mix dynamics are presenting headwinds to profitability. It is our belief that similar to cycles of the past that the West will catch up to the east along with a recovery among mass market customers. We're seeing this in the leading indicators that we've highlighted. However, the pace of this shift appears measured as we look into 2026. We will provide more color during the fourth quarter earnings call. I'll now turn things back over to Bill for some closing thoughts as we look ahead. William Austen: Thanks, Raj. Turning to Slide 10. Looking forward, our key priorities are clear. First, we are seeing trends in our global components business that suggest we are in the early stages of a gradual recovery. Second, we will continue to leverage the strong secular trends in cloud and AI that is driving strong growth in both our Supply Chain Services business and in our ECS segment. Third, we are focused on delivering profitable growth through a persistent shift toward an increased mix of higher-margin value-added offerings and a continued execution of our productivity initiatives. Finally, we will continue to allocate capital to the highest return on investment opportunities with the goal of increasing returns for our shareholders. With that, Raj, Rick, Eric and I will now take your questions. Operator, please open the call for questions. Operator: [Operator Instructions] We'll take our first question from Will Stein at Truist Securities. William Stein: First, Bill, thank you for this introduction. I appreciate it and congrats on the good results. I'm hoping you can maybe clarify whether you might be a candidate for the permanent CEO position or are you limiting yourself to an interim role? William Austen: Thanks, Will. Nice to meet you. Good question. I'm really happy, humbled and honored to be in the interim role and I'm in the interim role. I am not on the candidate list for the full-time CEO role. At the Board level, we put a search committee together, led by Steve Gunby, our Chair. We have several Board members, and myself, on the initial committee. We are fully moving down the path at this point to finding a candidate. We have selected a search firm, of which I will not name at this point. And we are going to be in the throes of reviewing candidates in the not-too-distant future, but I am not -- I will not be one of them. I will go back to retirement. And I will remain on the board. Thanks for the question. William Stein: Got it. As a follow-up, really sort of taken into a different direction a little bit, whether it's you or Raj, could you maybe linger on the on the charge that the company took during the quarter, maybe explain what this contract was. Is it still in force? Is it completed? Is it abandoned? And what was the economic condition that gave rise to the charge? Rajesh Agrawal: Yes. Well, it's a good question. Let me -- since Eric Nowak is here, let me give it to him first to talk a little bit about what we're -- what these contracts are in terms of the strategy, and then I'll come back to the financial impact that we've seen. Eric Nowak: Thank you, Raj. We are talking about strategic outsourcing, and this is a fast-growing part of our business. Our suppliers are contracting to us diverse noncore parts of their business to focus on their own priorities. So we are implementing these models with several large suppliers in both North America and EMEA. And as Bill said already, under this agreement, Arrow is acting on behalf of the vendor for a given perimeter and becomes the brand. We take control of the go-to-market activities. So this new merchant provide us exclusivity, cross-selling opportunities, better margin and stickier relationships as we become the sole operator in the market, including for the white space of the supplier and sometimes also in other parts of the world. Rajesh Agrawal: Yes. So Will, I would just also add that we're really excited about these contracts. We've already gotten several hundred million dollars of billings this year, and that's going to be a big growth vehicle for us longer term for ECS and for the company. We do evaluate the performance on these contracts every period and the charges related to underperformance I would think about it as underabsorption of fixed fee payments that we're supposed to be making. And what I would say is that we're going to continue to grow through some growing pains. We're going to get some margin variability. But if you were to think forward a couple of years in terms of when these things get to steady state, we should be able to achieve double the gross margins on these versus what we achieve in the rest of ECS. So that's why we're really excited about it. So it should give us really good top line growth and bottom line growth. We called out the $21 million charge this quarter only because it's more material in size. We have taken some smaller charges during the first part of the year, but this one was more material we would hope that we wouldn't have anything material like that in the future, but we're likely to have some additional charges in the future that are just going to be part of our normal P&L. Operator: We'll move next to Ruplu Bhattacharya at Bank of America. Ruplu Bhattacharya: Raj, I want to delve a little bit more into the ECS margins. Typically, you see a strong growth between the September quarter and the December quarter. Can you talk about what you're seeing in terms of mix, hardware versus software? And how should we think about that sequential change in margins given this quarter had the charge and so it was lower than expected. So how should we think about that ramp between September and December? Rajesh Agrawal: Yes. Look, I would think about -- and we quantified the impact of the charge in the third quarter. So it was worth almost 100 basis points, so about 100 basis points. If you were to adjust for that, we would still we expect fourth quarter to be very strong for the ECS business, and that's really reflected in our outlook. You can see we gave you sort of the net sales outlook, but the billings growth, GP dollar growth and operating profit dollar growth should be quite good in the business. And margins should also be strong compared to last year. So we have no concerns about what the performance will be in the fourth quarter for ECS. Ruplu Bhattacharya: Okay. Maybe as a follow-up, if I can ask you, Raj or Bill. Bill, by the way, congrats on the interim role. If you guys can give a little bit more detail on the comment you made about things being recovering a little bit slower, which end markets or which verticals are you seeing slower growth in? And as it pertains to the outlook for regions, it looks like Asia remains strong. So just how should we think about margin progression in this environment? I know you're not giving full guide for '26 right now. But how does this temper your to 90 days ago versus what you have thought about components sgement margins and ECS segment margins going forward? William Austen: Yes. I'm going to -- this is Bill. I'm going to have Rick Marano answer that question to give you the insight as to how the verticals look in Asia. Richard Marano: Yes. So thank you, Ruplu, for the question. I would say kind of touching on what both Bill and Raj said overall, look we firmly believe we're in a recovery in the early stages of a gradual recovery in the marketplace overall. The leading indicators in all 3 markets remain robust, meaning book-to-bill, meaning backlog coverage and design starts as well are very positive for us at this point in time. Transportation and industrial, which are 2 very large verticals for us continue to respond in positive results for us, and they are leading the way for us in our Asian markets as well. And again, as Bill and Raj touched on earlier, we truly believe that based off of what we're seeing in APAC today as the market recovers in the West and the mass market recovers, we'll see both increased sales and margin accordingly as the year goes on in '26. Rajesh Agrawal: Yes. And Ruplu, let me just add on your question around the '26 trajectory. I did make some comments towards the end of my prepared remarks. . Primarily because we continue to see a gradual recovery. As we look at our leading indicators and how we see the business playing out during the course of next year, we do believe that it is recovering, that will be a gradual recovery. As we've looked at some of the models that are out there for the space that we operate in, they seem to be quite aggressive. And so we just wanted to make a point that we see more of a gradual recovery in the business next year. Ruplu Bhattacharya: Okay. If I can sneak one more in. Given the recovery that you're seeing in hardware and maybe it's a gradual recovery, you also talked about some new type of contracts. How would this impact your working capital and inventory requirements going forward? How should we think about cash conversion cycle in this environment? Rajesh Agrawal: Yes. I mean this is more on the ECS side with the newer contracts, newer distribution agreements that we talked about. Yes. I mean, look, we -- as I mentioned, we're still in the early stages. So we're learning from how these things will ramp up. There may be some more working capital required in some of these contracts, but we're still learning in its early stages. I think the key point to remember here, Ruplu, is that these things can be very margin accretive. And so it's okay to deploy a little bit more working capital if we have margins that are coming with it. And that's how we really think about it. So we're certainly going to manage the working capital appropriately. But ECS overall is relatively light working capital business, and it provides us higher returns, and I wouldn't see that changing time. Operator: [Operator Instructions] We'll go next to Joe Quatrochi at Wells Fargo. Joseph Quatrochi: Maybe just a couple, if I could. How big is the supply chain services today and some of the focus that you talked about in the prepared remarks is going after some of these AI insertion opportunities. What type of investment do you need to make on your side to address those? Rajesh Agrawal: Yes. Let me just start off. When we talk about value-added services, one of the items is supply chain services, the other couple areas are engineering design and then the integration services business that we have. Supply chain and most of these are not going to be that impactful from a revenue standpoint, but they're higher-margin businesses because we typically will get paid a fee for the supply chain services offering, and then for the engineering and design services. So we don't really talk about them in terms of what's the mix of the business. And -- but from a profit standpoint, all of these are very margin accretive. And they could easily be, in some cases, double or the gross margins that we get in the regular part, if I can say it that way, in the components business. And the great thing about these things is that we get paid fees for the services that we're providing. So whatever investment we're putting into this, we want to get compensated for it. And yes, and we certainly want to make sure that our costs are being covered in this kind of an offering. So these are -- this is really a win-win, win for all parties involved here. We're getting paid for the services we provide, and we're making money on that, but the parties that we're serving here, the large customers are also benefiting with our supply chain services. So we like the business, and it's a really good margin accretive part of our components business. Operator: And that concludes our Q&A session. I will now turn the conference back over to Bill Austen for closing remarks. William Austen: Thank you. And thank you, everybody, for joining the call today. Once again, I'm excited, humbled and happy to be here. Looking forward to being the interim CEO at Arrow until we find the permanent CEO and I'm really glad to be leading this team amongst this big global powerhouse of Arrow Electronics. So thanks for joining. Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Hello, and welcome to the Repsol's Third Quarter 2025 Results Conference Call. Today's conference will be conducted by Mr. Josu Jon Imaz, CEO and a brief introduction will be given by Mr. Pablo Bannatyne, Head of Investor Relations. I would now like to hand the call over to Mr. Bannatyne. Sir, you may begin. Pablo Bannatyne: Thank you, operator, and good morning to all. Welcome to the Repsol's Third Quarter 2025 Results Presentation. Today's conference call will be hosted by Josu Jon Imaz, our Chief Executive Officer with other members of the executive team joining us as well. At the end of the presentation, we will be available for a Q&A session. Before we start, let me draw your attention to our disclaimer. During this presentation, we may make forward-looking statements based on estimates. Actual results may differ materially depending on a number of factors as indicated in the disclaimer. I will now hand the conference call over to Josu. Josu Jon Imaz San Miguel: Thank you, Pablo. Good morning to everyone, and thank you for joining us. Repsol delivered a solid operational and financial performance in the first quarter of 2025, moving ahead on key projects, optimizing the asset portfolio and reinforcing its commitment to shareholder value and capital discipline. The energy landscape continues to be shaped by geopolitical stability and concerns of all our supply. In the U.S., gas prices softened compared to the previous quarter, yet fundamentals still point to a tighter market heading into next year. The Refining business continued to build on a positive momentum in a market characterized by additional supply deficit. Operations at our industrial sites restore activity levels following the disruptions caused by the Iberian outage in the second quarter. On the Commercial side, all business segments delivered a stronger year-over-year contribution. Retail fuel sales remained robust, well supported by seasonal trends. The adjusted income totaled EUR 820 million, 17% above the second quarter and 47% higher than in the same period of 2024. All four divisions improved their results over the third quarter last year. Cash flow from operations amounted to EUR 1.5 billion. The accumulated operating cash flow through September reached EUR 4.3 billion, 15% higher than in the first nine months of 2024. Net CapEx was EUR 0.3 billion in the quarter with a EUR 0.8 billion contribution from disposals, asset rotations and the EUR 0.2 billion received from the sale of tax credits in the Outpost project. The accumulated net CapEx to September was EUR 2.5 billion, including EUR 1.3 billion in proceeds from disposals and rotations. By quarter end, all the transactions announced in 2025 have been fully collected. Net debt stood at EUR 6.9 billion by quarter and an increase of EUR 1.2 billion compared to June, mainly due to integration of the new joint venture established with NEO Energy in the U.K. As part of the agreement, Repsol has retained a funding commitment of the commissioning liabilities related to a portion of its legacy assets. This amount was previously recognized as a nonfinancial liability in our financial statements. Repsol doesn't increase at all, Repsol exposure but it is now classified in a different way, it is classified as financial debt at the consolidated level. So is only, let me say, an accounting procedure and excluding the impact of U.K. integration, net debt would've been flat compared to June. Gearing rose to 20.5% by quarter end and 10.4%, excluding this remaining aligned with our strategic objective of preserving our current credit rating. Looking at the evolution of the main macroeconomic indicators in the quarter. Brent crude averaged $69 per barrel, 2% higher than in the second quarter and 14% lower than the same quarter last year. The Henry Hub averaged $3.1 per million BTU, 9% lower quarter-over-quarter and 41% above the same period driven by strong middle distillate differentials, the refining margin indicator stood at $8.8 per barrel, 49% higher than in the second quarter and 120% higher than the same period in 2024. Finally, the dollar continued to weaken against the euro with an average exchange rate of 1.17. Turning now to the Upstream performance. This division continued to deliver efficient and competitive growth, enhancing returns through new projects and portfolio management. We are improving the business and together with our partner, positioning the company for a potential liquidity event. Third quarter adjusted income was EUR 317 million, 28% below the second quarter and 11% higher year-over-year. Production averaged 551,000 barrels oil equivalent per day, about 1% lower than the previous quarter and probably in line with a year ago. Compared to the third quarter of last year, the impact of divestments and natural decline was offset by higher contributions from Libya and the U.K. In the U.K., the merger with NEO energy was completed in July. The new inventory is projected to produce around 130,000 barrels per day in 2025, increasing Repsol's net production in the country from around 30,000 to 59,000 barrels per day. On an annual basis, the JV is expected to contribute around $700 million of EBITDA for Repsol in 2026. In Indonesia, in September, we agreed the disposal of our stake in Sakakemang, completing our country exit after the disposal of our interest in Corridor announced in the second quarter. After this transaction, Repsol E&P is now present in 11 countries, 10 producing plus an exploratory position in Mexico, consistent with our strategic objective of concentrating operations on geographies where we hold the strongest competitive advantage. In this regard, the U.S. continues to strengthen its position as a strategic growth region within our Upstream portfolio. In the Gulf of America, the joint development of Leon and Castile reached first oil in September. And in Alaska, the first phase of Pikka is expected to start up early 2026. These projects, together with the upcoming startup of Lapa Southwest in Brazil are expected to add around 50,000 barrels of oil equivalent per day of new low emissions, low breakeven production by 2027. In addition, these developments have accounted for a substantial share of the upstream investment effort outlined to 2027 and their completion will allow us to transition to more normalized CapEx levels in the division at around or even below EUR 2 billion per year. Finally, as part of the preparation of our vehicle ahead of a potential liquidity event, Repsol E&P completed last quarter, a $2.5 billion bond offering, the largest in use U.S. dollars in Repsol's history. The offering structure in three tranches attracted a strong demand, underscoring the solid support for our upstream strategy. Continuing with the Industrial division, third quarter performance was driven by the consolidation of the refining up cycle and the solid contribution from the trading business. Following the impact of the Spanish outage on second quarter, operations activity at our industrial complexes returned to normalized levels, enabling us to capture the positive refining scenario. The adjusted income totaled EUR 315 million, 218% higher than in the second quarter and 70% above the same period a year ago. In Refining, our margin indicator climbed to levels not seen since the first quarter of 2024, supported by stronger product spreads, mainly in diesel. The premium of our indicator was $0.7 negatively impacted by the turnaround of Cartagena and planned maintenance at the C43 biofuels unit, and the absence of crude shipments from Venezuela. The C43 plant resumed full capacity operations in October. Distillation capacity utilization was 85%, while conversion units operated at 101% of nameplate capacity. Refining margins have remained robust. In the fourth quarter, with the indicator averaging $9.8 in October and $7.1 year-to-date, the export margin this morning was $13 per barrel. No major refinery turnarounds are planned this quarter, supporting healthy utilization rates. Fuels margins remain also at solid levels, driven by stricter regulatory mandates in Europe and lower imports. In the Chemical business, Market conditions in Europe remain challenging with flat demand and higher costs compared to other geographies. Repsol's petrochemical margin indicator declined by 22% over the previous quarter, driven by lower prices and higher energy costs. Our priority for this business remains lowering breakevens and expanding margins through differentiation. The Sines expansion scheduled to start in 2026 is expected to add around EUR 80 million of EBITDA at the current scenario. And in Puertollano, a new plants dedicated to highly specialized application is also planned to come onstream next year. In the wholesale and gas trading business, we received 5 cargos from Calcasieu Pass last quarter. This is in line with our goal of reaching a total of 11 cargos listed in 2025 contributing around EUR 100 million of incremental EBIT compared to initial plan. In our industrial transformation initiatives, the project to retrofit a former gas oil hydro-skimmer in Puertollano is expected to begin operations in the second quarter of 2026. An additional retrofitting project is currently under evaluation, which will become our third major advanced fuels facility in Spain. In Tarragona, the development of the Ecoplanta is progressing according to plan. Thus we signed our first offtake contract to supply renewable methanol to continue at this facility as part of our long-term agreement for the supply of renewable marine fuels. In hydrogen, during the quarter, we took the FID for our first large scale electrolyzer is going to be constructed in Cartagena, and we are finalizing the analysis for the approval of another two projects. These electrolyzers will constitute the main part of our total capacity in operation by the end of this decade. Moving now to customers. This division delivered the highest quarterly result in the history of Repsol's commercial businesses with all segments delivering higher contributions year-over-year. Third quarter adjusted income reached EUR 241 million, 22% above the second quarter and 34% higher than in the same period of 2024. EBITDA was EUR 434 million, a 25% increase year-over-year, bringing the accumulated figure through September to EUR 1.1 billion. This performance keeps us on track to deliver in 2025, the EUR 1.4 billion EBITDA targeted for 2027 in our plan. So this figure is going to be achieved this year. And all that is supported by resilient demand, efficiency gains, growth in power and gas retail in Spain and Portugal and the growth of aviation fuel sales in Iberia. In Mobility, sales of road transportation fuels grew 14% year-over-year, reaching pre-pandemic levels. The non-oil business delivered robust contribution margin growth in service stations, 10% above the third quarter of 2024. As of today, 56% of our network in Spain offers multi-energy solutions. In October, the range of renewable fuels available at our service station has been expanded with the incorporation of 100% renewable gasoline after our Tarragona refinery achieved the first industrial scale production of this product, a real technological milestone. Finally, in power and gas retail, we add 157,000 new customers last quarter for a total of 2.9 million clients by the end of September, on track to reach our 3 million target before year-end. Turning to low carbon generation. The adjusted income reached EUR 31 million, EUR 24 million higher quarter-over-quarter and EUR 38 million increase year-over-year. These better results were driven by renewables, the main driver, a higher contribution from combined cycles, whose activity increased to ensure system stability following the Spanish outage, the blackout we suffered in April. The average pool price in Spain was EUR 67 per megawatt hour, 71% above the previous quarter and 16% below the same quarter in 2024. The power generated by Repsol reached 3.3 terawatt hour, 39% higher year-over-year. Repsol has reached 5 gigawatts of installed renewable capacity under operation, and we expect to add another 500 megawatts before year-end, mainly driven by the startup of Pinnington Solar in Texas. We keep -- sorry, executing our business model based on building our projects from stretch and divesting in early stages of production to optimize financial structure and maximize returns. In the U.S., the 629-megawatt Outpost solar project achieved commercial operation in September joining Frye and Jicarilla that are already producing in the country. We are now in the process of closing the partial divestment of this development with cash in expected in 2025. In Spain, an additional asset rotation is also under negotiation for a 700-megawatt renewable portfolio, of which and that is an important fact to see in the current market situation, more than 400 are wind. Finally, earlier this month, we acquired an 805-megawatt wind pipeline with the end of hybridizing production at our combined cycle plant in Escatron in the Spanish region of Aragon securing the power supply for the future data center to be built in the area by a third party. Moving now briefly to a summary of the financial results. In this slide, you may find an overview of the figures that we have covered today. For further details, I encourage you to refer to the complete set of documents released this morning. Regarding our update outlook to the end of 2025. The cash flow from operations guidance remains unchanged at around EUR 6 billion, with the benefit of a higher refining margin indicator, as I explained before, and this effect is going to be partially compensated by the lower Henry Hub price and weaker dollar. Net CapEx is unchanged at around EUR 3.5 billion. I have the ambition to put this figure below EUR 3.5 billion by the end of the year, subject to the timing of the divestment processes under execution. Upstream production remains at an estimate of around 550,000 barrels per day. We will allocate EUR 1.8 billion to shareholder remuneration, EUR 1.1 billion for cash dividends and EUR 700 million to share buybacks to reduce capital at the higher end of our strategic cash flow from operation's distribution range. Following July 2 dividend payment, the total EPS distributed in 2025 has been EUR 0.975, an 8.3% increase over 2024. Our first capital reduction was carried out in July through the redemption of shares acquired for an equivalent amount of EUR 350 million and a second capital reduction for the same amount will be executed before year-end. For this, a new buyback program was launched in September of the acquisition of shares for the equivalent of EUR 300 million with the remainder, EUR 50 million coming from the settlement. In conclusion, Repsol is delivering on its commitments and the strength of our business model position us well to manage the uncertainties of the current environment. In the upstream, we are improving the margin of the barrels we produce, bringing forward our growth projects and upgrade in the portfolio. In Industrial, we are capturing the positive momentum in Refining while progressing on the transformation of our sites, building resilience to ensure the long-term sustainability of the business. Customer keeps increasing its cash contribution to the group, helped by a successful multi-energy story and a growing power retail business in Iberia. And in low carbon generation, we continue to deliver along our strategic lines, targeting free cash flow neutrality after factoring the proceeds generated by asset rotation. Ensuring strong distributions to our shareholders remains a key priority in our history of value growth. Always, of course, maintaining a clear commitment to our robust balance sheet and our net CapEx objectives. Next year, after the share capital reduction executed in 2025, our ordinary dividend per share will be around EUR 1.05 per share. I said around because that is going to depend on the exact figure of the shares we are going to redeem at the end of the current share buyback program. In 2026, the same key strategic principles will guide our path. After the release of our full year results in February, and in light of the changes in the macroeconomic, regulatory and business landscape that our industry has gone through our Capital Markets Day will be held in March and were we will provide updated projections to 2028. With this, I will turn it over to Pablo as we move on to the Q&A session. Thank you very much. Pablo Bannatyne: Thank you very much, Josu Jon. [Operator Instructions] As usual, I would like the operator to remind us Of the process to ask a question. Please go ahead, operator. Operator: Thank you. [Operator Instructions] Pablo Bannatyne: Thank you, operator. Let's get started with our first questions coming from Michele Della Vigna at Goldman Sachs. Michele Della Vigna: Thank you very much. And congratulations on the strong results and looking forward to the Capital Markets Day. Two questions, if I may. First, I wanted to focus a bit on biofuel, an area that you're growing very fast but also where we're seeing a tremendous improvement in margins. I was wondering if you could lay out what is the contribution at the moment from that business? And how big that could get next year with potentially further tightening with RED III and also higher volumes in the second half of the year. And then secondly, I wanted to come back to Venezuela. You're building up receivables. They are clearly difficult situations with the U.S. sanctions, I was wondering if there is any ongoing dialogue that could resolve the situation and allow you to take more Venezuelan cargos? Josu Jon Imaz San Miguel: [Foreign Language] Going to your first question, I mean, next year in 2026, taking into account the production we have in the co-process of our industrial activity plus the operation of C43, plus the second half of the year where we are going to have production coming from the retrofitting of Puertollano and adding the trading activity of these biofuels, plus the commercial side because you know that we already have 40% of our service stations commercializing this product. I mean to give you only a reference, not at the current levels of margins. But if we take -- roughly speaking $800, I mean I'm not giving, let me say, a guidance of prices because I don't have a crystal ball. But if we take $800 per ton as HVO minus UCO margin for 2026, with all these concepts, we will capture EUR 125 million of EBITDA. I mean roughly speaking, because that is not exactly -- it could be a rule, but you could add roughly speaking, EUR 30 million, EUR 35 million for every $100 per ton of margin. You have to take into account, Michele, you perfectly know that after investing in Puertollano, we will have a capital employed in this business of around EUR 400 million. So my point is that the business is performing in the right way. And that is -- it's positive. If you ask me if I see the current margins stay for coming months, I mean the normal situation will be to see some kind of going down of the margins because, I mean, we have had a lot of capacity out in turnaround program and so on in Europe. So that will be the most logical. But I mean, there is room to have a pretty good situation in this business. Going to Venezuela. I mean, let me say that as always, we are always to comply and will comply with all laws and regulations applicable for all operations in Venezuela. You know that we are still there. We maintain our presence and production in Venezuela. We are producing gas for the domestic market is our main activity in Venezuela. And I could confirm you that we maintain, and we are shipping going, maintaining a constructive and fully transparent dialogue with the U.S. administration at the moment to try to ensure a stable framework for our activities. I mean, and when I say a stable framework for our activities, this framework, of course, includes viable mechanisms or monetizing our products. So I mean, I'm not going to say that situation is okay because you know the difficulties that -- in political terms, the country is experiencing but let me say that I could confirm that we maintain this constructive and transparent dialogue with all the authorities, of course, including the American authorities. [Foreign language] Pablo Bannatyne: Thank you very much, Michele. Our next question comes from Alejandro Vigil at Banco Santander. Alejandro Vigil: The first one, I'm very curious about this strategic update in March, probably I'll have to wait for March to have more details. But you can elaborate about the reason for this update on potential moving parts of this strategic update. And the second question is about distributions. I agree that you are delivering these distributions in line with your range. But considering the strong cash flow this year and potentially good expectations for next year if there is potential upside in your share buyback program of EUR 700 million? Josu Jon Imaz San Miguel: [Foreign Language] I mean I could confirm that -- I mean, this strategic update, that is a terminology discussion, obviously, it's irrelevant Alejandro, what I'm going to say. But I mean I prefer to talk about the Capital Markets Day because the strategy is defined and the strategy is written on stone and that means that the priority is going to be the shareholder distribution, as we defined in February 2024 plus the strong balance sheet for Repsol because for us, it's very important and a proven CapEx transforming and pushing in the growth process of the company. But that is going to be the priority of the strategy that is going to go on from next March on. So what is going to be the target? So you can't expect, let me say, surprises because these three principles are going to be defined and written on the stone. Saying that the Capital Market Day is going to try to give you because, I mean, things metrics are changing in two years and giving you a clarity about '26, '27 and '28 years, in terms of all kinds of operational and financial metrics. That is the end of the Capital Markets Day we are going to call for March. So -- but again, the strategic principles are written on stone. First, distribution for our shareholders, strong balance sheet and a prudent net CapEx. That's -- I mean, if you allow me, Alejandro probably, and you were right. The consensus of the market six months ago would be that we have problems to deliver this prudent CapEx in net CapEx terms because the perception after 2025 on the first -- sorry, 2024 and the first month of 2025 for the market could be, and you were right that the CapEx effort was very high at the beginning of this strategic plan. That was right because we were, let me say, paving the way for the growth for the projects we were investing in and we were taking advantage of the negligible debt we had at the end of 2023 for launching this view. But as you could see, I mean, at the end of September, net CapEx is at a figure of EUR 2.5 billion. And again, the target we have is EUR 3.5 billion for the end -- by the end, better said, of 2025. But my ambition is to be below this figure this year. And next two years, if you take and that is going to be probably speaking, what I have in mind, a figure close to this EUR 3.5 billion in 2026 and 2027, you can see that we are going to be in the low range of the net CapEx we defined in the range for our strategic plan, EUR 16 million, EUR 19 billion. Today, our view is that we are going to be at around EUR 16 billion in this period. So we are going, let me say, to elaborate a bit more, all these figures that you could see in the figures of this quarter that we are on track of going in this direction. So what you could expect in terms of general framework of distribution and I said, priority we are going to be, of course, in the range of what you said and you could be sure, Alejandro, that in the current program in the current market conditions is going to be delivered also next year. So -- but of course, I prefer to wait and talk about that in March in the Capital Market Day, that we are going to be in the range defined. And if we see a higher cash flow from operations and that could happen in the current environment, what you could expect, of course, is going to be -- in fact is going to go, better set, in that direction. Excuse me, sorry, this year's , Alejandro forgot. I mean, if we take EUR 6 billion of -- and we are in the higher range, 30, 35 of this -- of the range. I mean it's true that we are going to have probably, as I mentioned before, a higher refining margin. What I'm seeing for this fourth quarter in terms of Repsol refining margin is going to be probably in the double digit is how I see the refining margin of Repsol in this fourth quarter at double digit. But if you take this figure, I mean, we could add, let me say, roughly speaking, $200 million more to the expectations we had -- the guidance we had before. It's true that the dollar-euro exchange rate is showing us a weaker dollar. So that is, I mean, reducing a bit also the cash flow from operations for our businesses and slightly weaker Henry Hub comparing with the $4 million BTU of last guidance. I mean, all in all, it could be possible to be above the EUR 6 billion, I mentioned before, as guidance but the figure is going to be negligible. And I mean, you are going to understand that if we are EUR 100 million, EUR 140 million of -- above this figure, I mean, we are going to be open a program of EUR 40 million, EUR 30 million or EUR 50 million. So I mean, we prefer to say that is over this year 2025 and we talk about that in March, but always under the same principle we are applying now. Thank you. Pablo Bannatyne: Thank you very much for you question. Our next question comes from Alessandro Pozzi at Mediobanca. Alessandro Pozzi: The first one is on the Refining margin outlook. You mentioned the spot prices into the double digits. What is your view for the rest of the year and going into 2026? Do you think the current, say, strength is driven more by lack of products? Or is it concerns around the availability of these or maybe in 2026, so more of a panic buying right now. And the second question is on capital allocation, clearly, customer is delivering much better results. As you look at 2026 and 2027, what do you think are the areas of the business that can give you a better return and where you can probably increase CapEx in the next couple of years? Josu Jon Imaz San Miguel: [Foreign language] I mean, starting by your first question related to Refining margin. Of course, let me underline that is evident but I'm going to repeat that I don't have a crystal ball but analyzing from our experience and the facts and the indications we are seeing in the market, I'm going to jump a bit into the unexplored arena of seeing what is going to happen with Refining margins. So First, current evidence. I mean, as of today, this year, we have $7.1 per barrel in our system. This month, in October, this figure is at around $9.8 per barrel. And this week, I mean, what we are seeing is something in between $12, $14 per barrel. That's our facts. What is behind that? My perception is that we have two drivers and both drivers pushing this direction, demand and supply. Supplies are crystal clear. I mean, new refining projects in the Atlantic Basin, they are -- they continue facing delays and operational problems. You know Olmeca in Mexico, my perception is that the problem of Olmeca is not going to be solved in the short term. So that could go on next year. Dangote is having operational problems that is going to be probably solved by 2026. In the midst, we have seen -- I mean, everything we talk about that remember in February, when I said that we were seeing probably speaking 1 million barrels a day of discontinuing activities in the refining in the world. I mean, in Europe, Wesseling in Germany, Lindsay and Grangemouth in the U.K., they are close on track in the case of Lindsay, Houston and Los Angeles also in the U.S., Dalian in China, Osaka in Japan, Kwinana in Australia, I mean all that is going to add more than 1 million barrels a day of less production. We said that new projects this year, they were going to be slightly above 1 million barrels a day. But with the operational problems I mentioned before, in the case of Dangote and Olmeca, this figure is lower. And I mean, there is a new, let me say, a new fact over the last 2, 3 months that due to the attacks on Eastern European refineries, the best approach we could have today, and again, that is not easy to be reported in an accurate way because, I mean, in a war situation, truth is sometimes hidden but probably a figure close to 37%, 38% of the refining capacity in Russia has been attacked and probably a figure close to a 25% of the total capacity could be out of operation. So we are speaking about a very important figure that is 1.5 million barrels a day, fully unexpected. On top of that, we are seeing that over the last 2, 3 years in a very unfair way for competition, refiners from China, India and so on, they were taking advantage of not fulfilling the sanctions against the Russian oil. They were buying cheap Russian oil, refining this oil and putting this product in a very unfair competition way in the European market. Thanks to the policies of the European Union and the Trump administration related to enforce sanctions against this unfair way, all that is going to have an impact in the market. I mean if we go to the demand, I mean, demand is growing, that is also a fact to 0.6 million, 0.7 million barrels a day this year. In our markets, we are experiencing a high demand as you could see in our Commercial businesses. And we have to say that -- I mean, we are still -- we are not already in the European coal season. I mean the European coal season is going to increase pressure on diesel. If we add to that the new ECA regulation in the Mediterranean that are effective from May 1 that are boosting marine gas oil demand. And at the same time, we are seeing that gasoline is also strong because the new hybrids that they consume a lot of gasoline and so on. I mean, again, I don't have a crystal ball but I'm comfortable. It's not a commitment because it's not in my hands, of course, that we are going to see an average of double digit in Repsol this quarter, I mean, a refining margin with double digit. I mean, jumping into the 2026 is more complex. But I could say that the $6 per barrel we saw 1 year ago for 2026, I mean, we are going to be clearly above this figure. Probably the first quarter, we are going to experience a similar situation we are going to experience the fourth quarter of the year. We could see probably in the second half a more normal market in terms of supply. But all in all, I think that -- I mean, seeing margins of, I don't know, $7, $8 per barrel over 2026 is not going to be a surprise for me. Going to the capital allocation on the 2026, 2027, we are going to see, I mean, good results and improvement, clearly speaking in the Upstream, new barrels, Leon-Castile already in operation, Alaska that is going to start the operation at the end of -- or the first part, as I said, of the first quarter. U.K., where the improvement is going to be clear. So better margins, new barrels, more production, 570,000 barrels a day, roughly speaking, we will clarify this figure in the Capital Market Day that we are going to be at around this figure and a clear improvement in the Upstream. Going to the Industrial, as I mentioned before, better by margin, Puertollano, the retrofitting in operation, a higher refining margin, and I mean, I know that there is -- and I have a concern related to the Chemical business because the performance and what we are suffering in the market is very negative. We have a competitiveness program that we are enforcing new margins, reduction of energy cost, cost reduction. On top of that, we are going to see, so the derivative chemical even in this exit margin adding at around EUR 80 million of new EBITDA in a year. We also have the ultra-high molecular weight polyethylene plant in Puertollano. So all in all, the commitment I have with my Board is that next year, in this acid margin scenario, so with no, let me say, tailwind pushing margins, we could be EBITDA neutral in 2026, and we will have in 2027, a positive result in the Chemical business. Again, at the current bad margins environment. Of course, any tailwind coming from the point of view of margins is going to improve this figure. In the customer growth is going to go on because -- I mean, it's not because of market situation, it's structural because we are entering new businesses, retail, power and gas is a new business where we are growing. We already have EUR 200 million of EBITDA and growing 3 million customers this year. Probably next year, we will be at around 3.5 million customers. That is -- we could be close to this figure but we have a clear growth road map. We are growing in lubricants. In aviation, I mean, if you check the figures in Iberia, we are in historical flights. Overcoming year after year, the figures we have. We are growing in the non-oil, as I mentioned before. So this EUR 1.4 billion of this year is going to be a figure close to EUR 1.5 billion of EBITDA in this business by 2026. And I mean, you see in low carbon businesses, I mean, in power generation, you could see that we are improving the result. We will see ups and downs, but there is a clear structural trend. Why? Because we are reducing our cost, our unitary cost because we have a business to operate more gigawatts and month after month, we are adding new production. So the unitary cost is going to be reduced in coming months and in coming years. On top of that, with difficulties at the beginning in the U.S., but the rotation business, the rotation game is going to go in the right direction because the projects we have Outpost has a higher PPA than Frye. Pinnington has a higher PPA than Outpost. That means that things are going in the right direction. These 9 months, if you take the total concepts, you could see that this business is close to be neutral in cash terms. I mean that is not going. It's not structural. We are going to have in coming months, I mean, capital needs for this business. But we are not going to be far in the period of a Capital Market Day defined to see that this business could be able to grow with a minimum capital commitment from Repsol because it's starting to work the model. So my point is that this EUR 3.5 billion is going to be deployed in a prudent way in these businesses, reducing, let me say, slightly default in the E&P because the projects are already on track. In the Industrial business, we will put on track the projects I mentioned before, customer business, I mean, it's investing but the investment level in intensity is lower than in some other businesses. And in the case of renewable power, this effort, let me say, has an asymptotic direction towards being neutral in cash terms. Are we going to achieve this target in 2026? Probably not. But this time, it's not far. So thank you. Pablo Bannatyne: Thank you very much, Alessandro. Our next question comes from Biraj Borkhataria of RBC. Biraj Borkhataria: So first one, just on refining. I might have missed this but I understand you have no maintenance in Q4 but are you able to give a bit more detail on the first half of '26. Just thinking about your ability to capture $13, $14 refining margins over the coming months if that was to persist. And then second question is just on the financials. There is a very significant difference between P&L tax and then the cash tax you pay and the gap seems to be getting wider. Just trying to understand if there's any particular reason why those 2 numbers won't converge over time. So any color there would be helpful. Josu Jon Imaz San Miguel: Thank you, Biraj. I mean, going to your first question, I mean, let me say that this quarter, in 2025, what I have in mind is that we are only to turn around the 1 crude unit in Puertollano and the breaker. I mean, breaker with my whole respect to this unit because its fuel production is negligible in Tarragona. So that is going to be the only turnaround campaign this quarter. If we go to 2026, what we have in the program, I mean, accepting some hydrosulfuration units, some catalyst changes and so on that are negligible in days terms. The only large turnaround campaigns are A Coruña, that is the smallest of our refinery, where we are going to have the conversion units maintenance that is going to stay for something between 40, 50 days in 2026. And in PetroNor, we are going to maintain the coker and the coker stay out of service for 40 days more or less. I mean that is the only -- any kind of significant maintenance campaign neither in Cartagena nor in Tarragona, as I said before, some -- I mean, catalyst changes, a hydrosulfuration unit, but I mean, nothing relevant. And let me say that if we see this historical what is program, a program could happen. I hope that we -- and I expect we could cope with any incidents in this sense. But when we analyze the historical -- in historical terms, the turnaround campaigns, it's going to be a quite soft year in terms of maintenance campaign in coming 15 months. Going to your second question, of course, you could check the figure in a more accurate way with our IR team. But there is no anything relevant to report related to the P&L in tax and in cash. We are, of course, optimizing, as always, credit tax positions. You know that because we are investing hard, we have a lot of tax credits because the investment we are developing in some jurisdictions like I don't know, the U.K. and some others because the losses of the past. And probably in the whole year 2025, we could have a figure close to EUR 800 million at the end of the year. But again, we are trying to optimize these figures and trying to use the credit tax positions we have. So that's clear. Pablo Bannatyne: Thank you, Biraj. Our next question comes from Guilherme Levy at Morgan Stanley. Guilherme Levy: Two questions from me, please. The first one, thinking about the next steps around the listing of the E&P subsidiary in the U.S. You, of course, started to talk about a potential reverse takeover process. So I was wondering if there are any particular features that you would like to see in a potential target to be taken over in the U.S. if exposure to either gas, oil or to any particular basin would be preferred. And then second one, also in the U.S., can you provide us some color in terms of the hedges that you currently have on gas prices over the coming quarters? Josu Jon Imaz San Miguel: Thank you, Guilherme. I mean, we are preparing the company for being ready for a liquidity event in 2026. As I mentioned before, in July, liquidity event could mean first, an IPO, a reverse merge with a company listed in the U.S., a new private investor entering in Repsol. So I mean, that's the broad meaning of liquidity event. And again, for me, here it is more important, the road and the journey at the end. That means that we are putting all the effort first in having a better upstream with better barrels. We are delivering in terms of improving the portfolio. We are in less countries in better jurisdictions with better barrels. When I say better barrels in terms not only of more sustainable barrels but also in terms of higher cash flow from operation per barrel, we are putting on track the projects that is very important. In a period that has been complex in terms of inflation and so on in the market, we have been able to put projects on track that has happened in September with Leon-Castile and it's going to happen in coming 3 months with Alaska. So that is the full focus of the company in this sense. On top of that, we are working internally in all the requirements and reporting and so on to be prepared for any event in this direction. But again, we are not in a hurry. We don't need any proceeds coming from this liquidity event. We are seeing that day after day, we are improving the quality of our upstream. That means that we will be prepared alongside 2026. We are fully aligned with our partner, EIG in this strategy. And of course, we will be ready to take advantage of any opportunity in the market but not being in a rush, not jumping any opportunity that could appear in the horizon and having crystal clear that maintaining the control on the 51% of the stake in this business, so consolidating this business is a line for Repsol. So we are going to own in this way. Going to some color about the gas for -- I mean, in 2025, we have 55% of the volumes hedged already with a collar with no cost, 6.1, so capturing all the value, guarantee the $3 million BTU and capturing all the value up to 6.1. Next year, if we go to the first quarter, we have a 20% of the production in the first quarter in a collar 3.5, 12.3. That is a surprising figure. But I mean, it was done with no cost. That means that we are guaranteeing the $3.5 million BTU and capturing all the price to $12 per million BTU. On top of that, we have a collar over the whole production of 2026, covering 52% of the production with a floor of 3.2 and capturing the value up to $5.1 million BTU, and in 2027, we have already hedged at 12% of the production debt is with a floor of 3 and capturing the price up to $5.8 per million of BTU. So let me say, as I summarize, we are comfortable because we are guaranteeing a minimum that is going to give us the return we expect in the gas production we have. And on top of that, we have plenty of room to capture any upside appearing in the market. Thank you, Guilherme. Pablo Bannatyne: Thank you very much, Guilherme. Our next question comes from Ignacio Doménech at JB Capital. Ignacio Doménech: Just a question on asset rotation, both on Upstream and on Renewables. So starting with Upstream. There was some news regarding potential asset rotation in Pikka and Alaska. So I was wondering if you are comfortable with your stake there or you are planning to dilute part of the exposure to the asset. And then in terms of asset rotation in Spain, just wondering if you've changed any -- if you've seen any change in appetite, just thinking about the 700-megawatt portfolio you're planning to rotate. Josu Jon Imaz San Miguel: Ignacio, thank you. So going to your first question, I don't have any appetite to divest in the Upstream business. We are comfortable with the position we have in the upstream business. We are an oil and gas company. We are adding barrels. We are adding new barrels. And probably, let me say that Alaska is a company maker asset in terms not only because the barrels we are going to start producing in 2026 but because the potential growth that this asset in Pikka 2 in coke and so on could have around the current production in lands and fields that are already in the hands of the JV we have with Santos. So I mean we have always to consider any option because, I mean, the portfolio is -- has to be managed. But today, I don't have any appetite to dispose or divest Alaska, I mean, and I need, let me say, a real very high figure to consider any option for that because, I mean, we are very happy, and we are very close to the first oil. So we are going to start monetizing this asset in 3 months. So we will consider, as always, any option in any asset. But to date, we don't have any target and any appetite to divest any asset in the upstream or Repsol. Going to the renewable asset rotation in Spain, I mean, we are seeing a positive appetite. It's curious because if you analyze Ignacio and you perfectly know Spanish renewable business, we have been able to rotate in a very successful way all the processes we have had over the last 4 years. And remember that the last one happened 8 months ago, roughly speaking, with green coat in a basket of assets that I thought I have in mind was that they were around 400, 500 megawatts in Spain. And we are seeing a very high appetite for these assets because, I mean, you know that today, 400 new operational production in wind in Spain is a quite scarce asset because you know that wind is able to capture the prices over the whole day, capturing also high prices in some parts of the day. And the advantage of the minority part of this basket of assets that is solar is that the PPAs are already there and are very good PPAs because they were negotiated in the -- I mean, 2 years ago, roughly speaking, in the high peak of the crisis, energy crisis in Spain, when there was Spain and Europe, when there was a strong appetite to negotiate PPAs. So very good asset with very good PPAs with very good mix of wind, solar. And I mean, for an investor, it's a real attractive asset. So I'm probably -- in the case of Outpost, I think that we are going to be able to monetize or to cash in, probably we are going to be there before the end of the year. In the case of these assets, we will close with a high probability of the transaction this year in 2025. And I prefer to be prudent because the authorization competition and so on, we need in terms of permits, probably the cash-in could enter in 2026. But in any case, the expectations are very positive. Thank you. Pablo Bannatyne: Thank you very much, Ignacio. Our next question comes from Irene Himona at Bernstein -- Societe Generale. Irene Himona: Just one quick one for me. I understand some of your disposal proceeds are from selling tax credits. And I'm not sure I understand myself how that works. How would it influence, for example, the future economics of those projects, if you can perhaps elaborate a little bit? Josu Jon Imaz San Miguel: Thank you, Irene. I mean you know that all the assets we have in the U.S., they are covered by the IRA, not only the current one but also the rest of the assets we are going to develop because we have in a safe harbor 3 gigawatts more in the country. So that means that we shape, let me say, the much more in terms of the support of the IRA. And in the case of how it works, there are 2 ways to monetize this support the PTC and the ITC. The ITC is some kind of upfront cash coming from the tax administration that is, I mean, in the range of 30%, 40% of the CapEx, even 50% in some places because it depends if there are industrial training areas and so on, the support, the local support is higher. And in some cases, you have what is called the PTC. The PTC is some kind of continuous payment for 10 years in your operation but you could monetize up 50% in upfront payment of this PTC. And in the case of Outpost, this EUR 185 million, something that appear, roughly speaking, are the part fitting with this upfront payment coming from this PTC. So it's quite complex, Irene, because some projects they have the ITC, some others, the PTC take the message that all of them, they are going to have sufficient support in the range, 30% to 50%. And if you need more granularity about these projects, of course, be sure that the team of IR will be ready to give you more clarity about that, Irene. Thank you. Pablo Bannatyne: Thank you, Irene. Our next question comes from Matt Lofting at JPMorgan. Matthew Lofting: First, I wondered if you could add some thoughts and color on what you're seeing in the market on light heavy spreads and the sort of the cost effectively of the feedstock basket in the Refining business. Just thinking about that in the context of the moving parts in the market at the moment. It looks like some debits and credits, more barrels coming from the Middle East, on the other hand, some of the constraints around Venezuela, et cetera, that you talked about earlier and what all that means for the outlook on the premium over the benchmark. And then secondly, just Jon, I wanted to just pick up on the earlier points that you made around CapEx. you talked about the low end of the sort of the range on the 4-year plan. I just wonder whether there's a case and a sort of a need to be more ambitious on medium-term CapEx reduction below that range rather than the low end in the context of moderated upstream prices now versus early 2024 areas of the low carbon value chain and the economics of that being still more challenging and probably greater geopolitical uncertainty in the macro backdrop than was the case when you did the CMD 18 months ago. I appreciate the thoughts there. Josu Jon Imaz San Miguel: Thank you, Matt. I mean, going to the -- it's true that this third quarter and one of the factors impacting a negative way in the premium of the refining margin that -- I mean, it was pretty good at $0.7 per barrel, we expect a bit more was the scarcity of heavy crude oil in the Atlantic Basin. And the main factor was the reduction of the exports of Maya crude oil from Mexico in this summer. The potential, let me say, reasons or problems behind this decision, they were left behind. And this quarter, we are seeing more Maya in the market. So probably we are going to see higher discounts for the heavy crude oil. On top of that, I mean, the rest of the crude oil, I mean, Colombia, Canada, what comes from Middle East, I mean, Basra and so on, they are entering in our system. Also, I mean, a small amount coming from Italy, Albania and so on. So my perception is that this component of our refining diet is going to be better in the fourth quarter than in the third one. In the case of Venezuela, it's clear because, I mean, you perfectly know that the constraints in the market are higher. But what we could see could be a more favorable environment this fourth quarter comparing with the third one, mainly because the Maya crude oil could be the driver that changed. I mean, we will talk about the -- in the Capital Market Day about the CapEx effort and so on. But again, we are comfortable with the figures I mentioned before. If things are worse, there are plenty of room to reduce this figure. In the case of the -- I mean, in case of seeing low oil and gas prices, that is not the case today, and we are not seeing that. We have the unconventional buffer, as you know. So the E&P could reduce default but we are not now there. We don't want now to reduce default because we are seeing good prices and good returns. You see that we have been able not because a CapEx reduction mindset because we prefer to be prudent guaranteeing the returns in the decarbonization of industrial assets. We have reduced the hydrogen ambition in almost 2/3 by 2030 comparing with the figures we have 2 years ago in our ambition. We are also prudent about the future investments in renewable fuels in Spain. We are analyzing a third project, and probably that is going to be done but we want to guarantee that this project is going to have good returns, and we are analyzing this option. You see that we are also being very prudent in the development of guaranteeing the returns of the renewable power generation. So my point is that situation is different. We have reduced our CapEx in a significant way because we want to guarantee returns. And in case of needed, we will be ready to do it. But today, we are comfortable in these figures because, as I mentioned before, the distribution to our shareholders will commit is guaranteed under this scenario. The balance sheet is strong, and we could modulate the CapEx in this effort. Thank you, Matt. Pablo Bannatyne: Thank you very much, Matt. Our next question comes from Naisheng Cui at Barclays. Naisheng Cui: Two questions from me, if that's okay. The first one is on data center in Spain. I understand you also do some data center things as part of your business. I wonder if you can add a bit of color on that. What's your view over there on the sector? Then the second question is just to clarify on the $2 billion divestment target for the year. I understand you mentioned earlier, there's no appetite to divest any upstream asset, but can you get to the $2 billion by just divesting the remaining U.S. and Spanish asset, please, the renewable ones? Josu Jon Imaz San Miguel: Thank you, Naish. I mean, first, I'm not an expert in data centers, my first disclaimer. Secondly, if I have to imagine a place in Europe, where you need to have data centers, computation capacity and so on. And energy is an important driver and renewable energy is an important driver. It seems to me that Spain is the right place to develop this data center. So from this point of view, I'm quite positive about the possibility to develop this data center. We are not a data center operator. So we are not going to invest in this business. What we are doing is because there is an appetite from investors to be in data centers in Spain, we have an asset that is Escatrón a CCGT with 800 megawatts of power in operation. And because the current regulation, we could use the connection permits of this asset to promote around this asset, an equivalent figure, in our case, 800 megawatts of wind hybridization with this CCGT plan. For that reason, we acquired an early pipeline of 800 megawatts of wind assets in Aragon in this region that is going to be developed something between '28, '29. So that means that we have the unique opportunity to develop wind assets in Spain that, as I mentioned before, is a very valuable production. And we could use half of this figure, 400 megawatts to fit with renewable power, combining with the CCGT, a potential investor in the area. And what we have is we have water in the area because you know that this kind of CCGTs, they need the refrigeration cooling processes. We have land. We have good connections, fiber in IT terms in this area. So what we are going is to sell the right to develop a data center in the area to a potential promoter -- and on top of that, we are going to provide this data center with PPAs with self-consumption, combining the wind and the gas. So we are seeing as an opportunity. I mean, we are going to monetize an option we have. And there is -- what we are seeing is that there are a lot of people interested in these assets. So it seems to me that today are a lot of people ready or interested in investing in Spain in this business. But again, Naish, I mean, if you need more clarity, of course, we have our team to -- at your service my comment related to your question. I mean, when we go to the figures, -- as you could see in the first months, we got the figure of EUR 1.3 billion by September. I mean, I'm taking EUR 1 billion of divestments plus the EUR 0.3 billion additional coming from -- I think that EUR 100 million, roughly speaking, from Aguayo Project. Aguayo Project is the first rotation we did in Spain at the beginning of the year. But because we retained the 51% is not in our accounting divestments but you could see the cash entering in our accounting. And on top of that, we have the $200 million coming from the PTC I mentioned before of Outpost. All in all, EUR 1.3 billion by September. We expect EUR 300 million more coming from the rotation of the U.S., I mentioned before, Outpost and the cash-in is going to be -- we have very high probability before the end of the year. All in all, EUR 1.6 billion, that is going to be enough to reach this EUR 3.5 billion net CapEx. And as I mentioned before, what could be out in cash in terms of this year 2025 is the rotation of the 700 megawatts in Spain that because the permit and authorization process and so on could be probably closed but not monetized before the end of the year. In any case, because we have been more prudent in gross CapEx terms, we are going to be below this EUR 3.5 billion -- that is my ambition before this EUR 3.5 billion of net CapEx by the end of this year. Thank you, Naish. Pablo Bannatyne: Thank you very much, Naish. Our next question comes from Henri Patricot at UBS. Henri Patricot: I have 2 questions, please. The first one, I want to come back to the comments you made, Jon, on the customer business. You mentioned on track to reach the EUR 1.4 billion EBITDA this year and maybe close to EUR 1.5 billion in 2026. But actually, you're already very close to EUR 1.5 billion over the past 12 months. So I was wondering if you're just being a bit conservative on the outlook for 2026 or if there was some exceptional performance over the past 12 months in the third quarter, in particular, that will explain why we should expect a slower growth in '26? And then secondly, on the Puertollano advanced power fuels plant, which you now plan to start up in the second quarter and have the first contribution in the second half of '26. If I'm not mistaken, you're previously flagging start-up in early 2026. Wondering why it's taking a little bit longer and if there's a risk of further delay of this project. Josu Jon Imaz San Miguel: [Foreign Language] Going to your first question, I mean, EUR 1.4 billion of EBITDA, that is going to be this year. Cash flow from operations will be at around EUR 1.2 billion, roughly speaking, this year. I mean I think that I'm not conservative. I'm ambitious for 2026 when I say that EUR 1.5 billion of EBITDA is our target. Why I'm, let me say, ambitious because the target we are achieving now for customers in the retail and power business in terms of EBITDA are the targets we had for 2027. So we are anticipating 2 years the delivery of the strategic plan. Is this performance exceptional? I mean, I don't think so. I think that is structural. I mean, if you take what has happened with our customer business over the last 10 years, from 2016, 2017, we have doubled the EBITDA figures of this business. And we are developing this effort year after year. That is not because ups and downs in the market because we have had ups and downs over these 10 years. It's structural. And the reason is, first, new businesses, I mean, an EBITDA that was not there and now is there and is growing when new businesses mainly. I mean, I could talk about power and gas. I talk about lubricants that you know that now we have an international footprint. We will talk about the [ gas ]. I mean, this kind of business developed around the energy efficiency that is also new. On top of that, I mean, we have almost 10 million digital users of our app Waylet. That is a unique position, not only in the energy sector in Spain, in the retail leadership in Spain. So we are becoming a leading retailer in the country with more than 3.5 -- almost 4,000 sales points with 24 million customers, including Spain and Portugal without digital leadership. So it's structural. We are growing this business. Of course, we will have better and worse situation of the market. But let me say that with EUR 1.5 billion of EBITDA, I'm feeling quite comfortable. And in this sense, I think that it is ambitious. I mean, if you take the EBITDA of this business and taking into account the investment level in this business that, I mean, it's also growing because we are growing in the gas and power business and so on, that you could pay almost 60%, 70%, the 2/3 of the cash dividend of Repsol could be paid by the free cash flow of this customer business that is always hidden because we are in all forms always talking about Brent price, Henry Hub price, refining margin. But the reality of this business is there. The retrofitting of Puertollano, I mean, it's going to be in operation at the end of the first quarter. So there are some -- there is -- I mean, no material delay. Perhaps some weeks of commissioning the project, but that is not, let me say, material in a complex industrial project like that. It is on budget. It's going to be finished at the end of the first quarter. And in the second quarter of 2026, it's going to be fully operational. [Foreign Language] Pablo Bannatyne: Thank you very much, Henri. Our next question comes from Paul Redman at BNP Paribas. Paul Redman: Two, please. The first one is just on the EUR 3.5 billion of CapEx you're talking about, I think it's for next year. How much divestment is included in that? And will the cash in from the Spanish sale be included in next year's or this year's divestment target? And then secondly, you mentioned earlier, Jon, about a possible EUR 1.05 dividend for next year. I see that's in between your EUR 1.3 and EUR 1.1 dividend guidance or range for 2026. I just want to understand how you get to that EUR 1.05, what we need to think about. Josu Jon Imaz San Miguel: Thank you, Paul. I mean going to your first question, that is net CapEx, the gross CapEx is going to be higher. What we are seeing, clearly speaking about rotation today are mainly the 700 megawatts of Spanish assets I mentioned before that is going to be cash in, in 2026. Plus probably Pinnington in the U.S. that is going to be partially in operation at the end of this year, 2025 but we are not yet in the process of rotation and so on because you have to prove, let me say, the operation of the asset. So that probably is going to be in 2026. And I don't have in mind any other disposal now, but you know that we always are analyzing our portfolio in a dynamic way. But you are right. This figure is net gross is going to be higher, and we will give you more clarity about that in the Capital Market Day of March. And going to the dividend, I mean, as I mentioned before, and I'm sorry for not having the possibility to be more precise, but you are going to understand why. This year, the dividend has been EUR 0.975. What we have in the strategic plan is that the total amount distributed in cash is going to increase in a 3%. So there is a first effect of a 3% growing of this figure. But on top of that, the absolute amount is growing but we are going to have less shares in 2026 than the shares we had at the beginning of this year. Why? Because we are going to redeem and here is where I can't be more precise because we are still in the process of acquiring the shares in the share buyback process. But probably, I mean, we take the prices and so on, we are going to cancel a figure that is going to be close. And again, disclaimer is going to be close because this math effect to a 4.1%. When I take the 3% plus the 4.1%, we arrive to a figure that is going to be close to EUR 1.05. We will have a full clarity about this figure at the end of this year, knowing exactly the number of shares redeemed but we are going to deliver and we are going to do what we commit in our strategic plan in terms of distribution. Again, that is an important target and what we said on that is going to be delivered. Thank you, Paul. Pablo Bannatyne: Thank you, Paul. That was our last question today. With this, we will bring our third quarter conference call to an end. Thank you very much for your attendance. Operator: Thank you. This concludes today's conference call. Thank you for participating, and you may now disconnect.
Arthur Lee: Welcome, everyone, to the MPS Third Quarter 2025 Earnings Webinar. My name is Arthur Lee, and I will be the moderator for this webinar. Joining me today are Michael Hsing, CEO and Founder of MPS; Bernie Blegen, EVP and CFO, and Tony Balow, Vice President of Finance. Earlier today, along with our earnings announcement, MPS release a written commentary on the results of our operations. Both documents can be found on our website. Before we begin, I'd like to remind everyone that in the course of today's presentation, we may make forward-looking statements and projections within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. The risks, uncertainties and other factors that could cause actual results to differ from these forward-looking statements are identified in the safe harbor statements contained in the Q3 2025 earnings release, our Q3 2025 earnings commentary and in our SEC filings, including our Form 10-K, which can be found on our website. Our statements are made as of today, and we assume no obligation to update this information. Now I would like to turn the call over to Bernie Blegen. Bernie Blegen: Thanks, Arthur. Good afternoon, and welcome to our Q3 2025 earnings call. In Q3, MPS achieved record quarterly revenue of $737.2 million, 10.9% higher than the second quarter of 2025 and 18.9% higher than Q3 of 2024. This performance reflected the ongoing strength of our diversified market strategy, consistent execution, continued innovation and relentless customer focus. Let me call out a few highlights from the third quarter. Our diversified market strategy drove year-over-year revenue growth in all of our end markets. We continue to expand our automotive customer base with another major Tier 1 supplier adopting MPS for its next-generation ADAS solution. Additionally, we secured our first design win for a full BMS solution on a robotics platform, which further supports our transformation for being a chip-only semiconductor supplier to a full-service silicon-based solutions provider. Overall, we continue to demonstrate our ability to grow and swiftly adapt to all aspects -- all aspects of our business to the fluid geopolitical and macroeconomic environment. Our proven long-term growth strategy remains intact as MPS focuses on innovation and solving our customers' most challenging problems. We continue to invest in new technology, expand into new markets and to diversify both our end-market applications and global supply chain. This will allow us to capture future growth opportunities, maintain supply chain stability and quickly adapt to market changes as they occur. I will now open the webinar up for questions. Arthur Lee: [Operator Instructions] Our first question is from Josh Buchalter of Cowen. Joshua Buchalter: Congrats on another beat and raise. I guess to start, maybe you're guiding up about 1%. Can you give us the puts and takes of which end markets you expect to grow more or less? And of note, I think earlier, you mentioned enterprise data was expected to be flat to down 20%. Any updates to the guidance for that segment in particular? Bernie Blegen: Sure, Josh. When you look at Q3, I think that we saw a little bit better than anticipated performance in both our enterprise data and industrial markets. We had pretty much every other group as we anticipated. Looking ahead, and I know that you're interested in enterprise data, we're seeing a layering of additional customers that began this layering effect in Q4 and is providing this good momentum as we look ahead into the early part of next year. Michael R. Hsing: Well, I should add all these in script readout. Bernie mentioned a list of our market segment, they started growing. And we look back in the last few quarters, all these growth come from greenfield products that were released 2, 3 years ago. And now we see the result. And so in the near future in the next few quarters, we will see these will continue to enhance our revenues. Joshua Buchalter: Maybe a follow-up on that, Michael. I think you've been pretty clear, like philosophically, you have some reservations and even frustrations with the AI market because of the concentration and visibility. Given all the massive announcements over the last quarter even in that space, maybe you could spend a couple of minutes talking to us about just big picture philosophically, how you're approaching these huge forecasts. And I'm sure competitive sockets with massive scale. How do you guys figure out which opportunities to go after and service and your thoughts on the market just given -- I think you've had frustrations about it distracting from your diversified growth. Michael R. Hsing: Yes. As you said, yes, it is kind of a distraction, okay? But business is business, good money is good money, okay? We don't want to take bad money, okay? And -- but overall, the bottom line is MPS want to demonstrate in any segment of the market, we are the best, we have possessed the best technology and best customer service. And we're solving problems, we demonstrated that we can have qualities and shipments, okay, all these categories, we are the best company. And in terms of which AI company, we don't really care. We engage with the large companies and the small companies. And we want to demonstrate that this is the best technology. When revenue comes, it comes. And given times, as we said it, given time, every -- all the true color will show. Arthur Lee: Our next question is from Ross Seymore of Deutsche Bank. Ross Seymore: I guess for my first question, the automotive side of things. You talked about getting an incremental design win in the ADAS side of things. Can -- there's a lot of choppiness in that end market across different geos and at different points in time, cyclically, geopolitically, all those sorts of things. But from a secular growth perspective, can you just talk about ADAS as a percentage of your revenues now versus user interface or USB and those sorts of things? And how ADAS penetrating more of that market changes the growth rate, the content, the diversity of it. Just kind of want to capture that ADAS theme and what it really means to you. Bernie Blegen: Sure. Why don't I take a start at this. So I think that we've demonstrated a history of establishing a strong presence in various markets with differentiated technology. You might recall going back always with USB ports for automotive. And now it's ADAS. And what this does is it has a cascading effect where we're able to get adoptions and the design wins, and we call out when these begin to ramp. And that's actually been more important to us then the -- necessarily the -- what the SAAR is for a particular end market. And in this one, in particular, we have started with a lot of ADAS opportunities, particularly in the EVs because they're faster to come to market. But what that's given us the opportunity has been is to showcase all of our other technologies and now we're starting to see those ramp, whether it's in body electronics or different applications. What we're more excited about is as we look ahead and the transformation of the end market for automotive as it moves into 48-volt and zonal electronics. Michael R. Hsing: Yes, we don't know the breakdown, okay, to answer your question exactly. I mean maybe Bernie has some ideas, okay, but I think it's less than half. And I think it's well less than half. Bernie Blegen: It's considered less than half. Michael R. Hsing: Yes, yes, yes. Okay. And I'm just looking at the number of cars and also our revenues, and it cannot be more than half. But in the ADAS side, more and more cars and including combustion engine cars, they are adopting ADAS. We will see a significant growth in the next few years. That's where we anticipated, okay. Ross Seymore: I guess as my follow-up, pivoting to another thing you talked about in your press release of moving from a silicon -- chip-based supplier to more of a solution provider, how do you think about the gross margin implications of that over time? You guys were a few points higher than you are now a couple of years ago. We've talked about what does it take to get you back to kind of the upper 50s from the mid-50s-ish where you are today. Does that system approach help? Or is that actually a headwind in the gross margin as you go forward as much as it might even be operating margin accretive? Michael R. Hsing: I don't so. I don't think there will be a headwind and a lot of the large systems that we're building, okay, we're kind of learning how to do it. And it is creating a lot of issues once the volume goes up. And so we are learning. And I think as things get a lot better since last year, I guess, okay? I mean -- and it will improve quite a bit. We actually making our own test equipment as lot of people know about it, okay. We eat our own dog food and creating all fully automated test systems. Those type of products have never existed before. And I think ultimately, we'll improve the yield and improve the gross margins. Arthur Lee: Our next question is from Joe Quatrochi of Wells Fargo. Joseph Quatrochi: Maybe first, I just wanted to ask, embedded within the 4Q guide, is there any help you can kind of provide in just thinking about the end markets? I Think there's some seasonality to maybe like a consumer in the fourth quarter. And then I think enterprise data you guys were previously thinking that would be up somewhere like high single digit sequentially in the December quarter. Is that still the case? Michael R. Hsing: Okay, to anticipating a market, that's a very difficult call. And you guys are betting on which stocks, okay? I mean, it's difficult, okay. But we have our way of operating our business. We do the best. We do the best develop a technology, engage our customers closely and probably the same way that you pick -- how you pick the stocks, okay? And so you engage customers closely. Whatever happens happens. And you can't predict what the market is. And we don't do that actually. Bernie Blegen: And if I could just add to that, that since we last talked about the second half of this year, nothing has fundamentally changed in our positioning. Joseph Quatrochi: Okay. That's helpful. Maybe just also following up, but I think in the press release or your prepared remarks, you had a comment around the first design win for a full BMS solution for robotics platform. Can you talk about what drove that and how you think about the revenue opportunity ramping there and more wins in the future? Michael R. Hsing: We probably get too excited to talk about those. And the fact is that we got excited is because we see robotics happening. They kind of -- we kind of predicted it the BMS is going to happen, okay. And we got in and we're designing and it's our customers engage with us, okay, there's a ground-up system that we developed. And we see more and more this type of system will happen. So now this kind of system will be become a reality. So that's the reason we put out that. Tony Balow: Yes. And I'll just add on very specifically on that one. Clearly, we called it out because of the fact it was the first opportunity that we have the design win on. In terms of a revenue ramp, that's really starting in 2026 and it's not in and of itself necessarily a needle move around the model. But I do think it starts the wave of these full solution design wins that we might have going forward. Michael R. Hsing: Yes, that's kind of -- it's the same time when you're making the point that is, okay, we do start to do robotics stuff for actuators and the IC for actuators and the BMS charging, wireless charging. And these are back a few years ago. We even don't know that the robotics were taking off, okay? I've been talking about robotics since 2017 or '18. And -- but the AI assist robot more and more believes, that will really start taking off. And so that's kind of the projects that we think -- we pick the winners, okay? And we're glad to see it, that's why we're probably too excited to talk about this. Arthur Lee: Our next question is from Quinn Bolton of Needham. Quinn Bolton: Congratulations, Michael, Bernie and Tony. I just wanted to start with a big picture question, just looking through this earnings season. Intel has talked about sort of shortages of server CPUs, we've seen hyperscalers significantly increasing CapEx. NVIDIA talked about $0.5 trillion of demand in '25, '26. I guess my question is, about a year ago, I think you guys were seeing very, very short lead times in that business and dealing with some level of pricing pressure. I'm wondering as you look into second half and more importantly into next year, have you started to see any change in customer lead times? Are they giving you better forecasts across the enterprise data segment? And is the pricing on voltage regulators and vertical power, has that changed at all over the last quarter or so? Bernie Blegen: Quinn, thanks for the question. Let me start that this remains a very dynamic market. We're responding to a variety of requests when it comes to the orders and the expectations from our customers. So in some ways, we're getting improved predictability because we're adding -- we're layering, as I said, more customers into the mix. But as far as the market itself, and particularly with all the blockbuster announcements that have been coming out recently, you can see how quickly things are changing. And what our position is, is that we can't control our customers necessarily, but we can position the company to be as responsive as we can. Quinn Bolton: And is this sort of dynamic market? I mean if folks are scrambling sort of to get capacity. Has that had any lifting effect on pricing? And then I'll ask my second question. Michael R. Hsing: Any market segment started from the -- and ramp rapidly at the beginning always cause these imbalance, supply imbalance, okay? So in the AI side, clearly is like that. I mean once it goes on, things will smooth out. Bernie Blegen: Yes. And then being specific to your question, I don't think we've seen any recent or sustainable trends in pricing one way or the other. Quinn Bolton: Okay. Perfect. And then a second question for you Bernie. Gross margins have been sort of on a -- sort of ticking down over the last year or 2. Can you give us any sense, do you think they sort of stay in this mid 55%, 55.5% range. Is there some point next year that you start to see gross margins starting to move higher, either driven by mix or new products? Or should we be thinking about margins being fairly flat over the next year or 2? Bernie Blegen: Sure. As I've commented on prior calls, we've seen about 3 or 4 quarters in a row, where I'd say that we have seen a strong uptick in demand, and that continues even today. What makes this cycle different than ones that we've experienced in the past is that the orders are more short term in nature. We're not seeing a large buildup in backlog in future quarters. And so without that visibility, it limits our capacity to be able to manage the mix of business that we want to be able to have expansion in gross margins. So for the foreseeable future, until the demand profile changes to elongate the buildup of backlog, I believe that we're going to be in sort of the steady range, plus or minus 20, 30 basis points in the mid-55%. Michael R. Hsing: We have a lot of products, okay, a few thousand products, okay? And a few 40,000, 50,000 customers in to move -- and it's very stable margins. And with the transitions to more solution provided companies, okay, as I said earlier, and all this has to be automated, okay? And as time goes on the margin will improve and -- but not quickly. And that math is very big. And so we know it's operated on the low end of our margin profiles, but the longer term will improve and we stick with a gross margin range. Arthur Lee: Our next question is from Tore Svanberg of Stifel. Tore Svanberg: Yes. Michael, Bernie, Tony, congrats on another record quarter. By the way, some of that dog food you're referring to must be pretty proprietary stuff. But my first question is on the Enterprise Data segment. So that's about an $800 million business right now. And my understanding is you're on a journey here, right, and you're still selling predominantly chips. You are obviously moving into module subsystems, eventually systems. So I'm not looking for any numbers per se, but could you just sort of let us know where we are in that journey. I mean building an $800 million business with chips and where could we eventually go here with, obviously, more and more subsystem type solutions for enterprise data. Michael R. Hsing: If I understood your question correctly, okay, that I can answer that way. We're anticipating doing millions of millions, multiple millions units per month type of a shipment. And all of these integrated, highly integrated modules never existed before. So how do we test this thing, how we achieve the single -- low single-digit PPM failures, okay? That is we never encounter that kind of issues before, okay. And so we started using our own robotic systems to make that happen. So now we achieved very high volume, 100% automated, including reliability test. And that's our features. And the goal is building multiple million units a month for that, 10 million a month for that. That's the near term goal. Tore Svanberg: Yes, that's very helpful. And did you also have a response to my question on the enterprise data. Again, where are we in this journey towards delivering more system-level solutions, especially talking about rack level power and so on and so forth? Michael R. Hsing: This is at the very beginning, maybe I think it's module power still less than, way less than 1/3, okay. And less than 1/3 of our revenue and it grew in the last half year. And the -- we expected it to grow. Some got delayed and now started happening in the next years could be much more. Tony Balow: Maybe just to add on to the back of that, Tore, I think as you start talking about some of these solutions for 800 volts as we discussed, those are like '27, '28 revenue ramps. So I think it supports what Michael was saying that we're still at the front end of this opportunity in the data center for us. Michael R. Hsing: No, I think in the investment communities, okay, it's -- if you have 800 volts technology data center transformer is like a flip a switch. The light is turned on, it turns on. It's not like that, okay. The light to turn on, it takes a couple of years, okay, more than a couple of years to make -- to see the revenues, okay. These take 3, 4 years. Arthur Lee: Our next question is from Rick Schafer of Oppenheimer. Richard Schafer: And I'll add my congratulations to you guys. Just maybe if I could start with an auto question. Kind of a follow-up, but I know we talked about BMS robotics. But I know BMS becomes a bigger contributor for your auto segment next year. And you mentioned a couple of things, Michael, in an earlier question, but I'm just curious if you could give some guide rails or provide some guide rails about potential content trends for MPS as you start ramping some of those BMS opportunities? I mean again, not asking for dollar content per car, but does it double or triple those kinds of numbers? Like what does it do to your potential content per vehicle moving into that BMS space in a more meaningful way? And as part of your answer, I'm curious, where's some of the lowest-hanging fruit is for you guys? I mean, is it 48-volt, is it power isolation, that kind of thing? Michael R. Hsing: It's actually all of them, okay. BMS revenues for auto and for EVs is a bit far away, okay? And -- but our customer, it's a very -- this is a very concentrated market. There's a few players and a few, well it's not a few car makers and gradually, all of them, they have -- they want BMS. And so our customers are glad to see MPS is to develop that series, that type of a product, too. And in terms of other low-hanging fruits, okay, we see 48-volts as a trend. And we develop those products back a few years ago, like 5, 6 years ago, and we provide all these integrated solutions rather than these discrete ones, okay? And the size can be 6, 7x smaller. And the other one is the 800 volts for EV. And now all goes up from 400 volts to 800 volts, okay? And in the China market, a lot of cars already have 800 volts. So our silicon carbide solutions came in not for traction inverters and for control systems. These products will be shined. And so that's -- I pull out my hair at this moment. Tony Balow: And Rick, maybe just to shape you a little bit on timing there to make sure. I think what we said is the layering of opportunities in auto really sort of out of the end of this year and next year starts with design wins that we have, bringing new content to market per vehicle. You start to see zonal designs hit market next year then ramping through into '27. And then the BMS and traction inverter solutions they're really kind of more like '27 and beyond, just to make sure you understand sort of how those revenue opportunities are layering in. Richard Schafer: And if I could ask my follow-up just it's on HVDC. And I appreciate the timing and commentary you provided a second ago, Tony. But I'm also curious, I mean, I'm just trying to figure out the right way to think about that emerging market. I mean, like can you give a sense of how HVDA compares to sort of how you've described at your Analyst Day earlier this year. Maybe how you describe the 48-volt accelerator power opportunities or in any terms you want, just to try to give a sense of what that market represents to you guys or what you think it could. Michael R. Hsing: I think the 48-volt system is clear, there's a reason why the 48 volts, is going back to those telecom times, okay? And telecom systems, 48 volts plus/minus 48 volts? And plus/minus 45 volts. And first, it started with -- in the server side, we're talking about for years this thing. And it has to be the solutions because once your current goes up, everybody remembers the car using a 6 volt batteries and then it became 12, is ultimately moving up to 48 volts. I mean these are all for control systems, 48 volts and the data center is really happening 48 volts. I see -- that's why I predict all the building -- the building automations are going to be on 48 volts. And the building will be a DC power solutions. And the opportunity is great. And as we put out to engage our customers with the building automation systems, and we proved the point, actually, it's so welcome for that type of a product. And so that's my view at this time. Tony Balow: And rick, I think part of your question was also on the 800-volt high voltage DC for data center as well, right? Richard Schafer: Yes. Tony Balow: And I think on that one, we've been pretty careful about trying to go size the opportunity because, one, it's very far out. Two, we don't know how it will ramp in the market. I think what we have said is since we don't play in that part of the market today, the business we get is sort of all accretive to our overall SAM going forward. But I think we want to be careful about size in the market yet, given how far out it is and not knowing how it will layer into the data centers going forward. Arthur Lee: Our next question is from Gary Mobley of Loop Capital. Gary Mobley: Let me extend my congratulations on the continued strong growth and continued execution. I appreciate the fact that you still only have about 3 to 4 months of visibility given the capacity that you can support and the quick turns business you can support. But can you confirm whether bookings continue to improve sequentially and what are the seasonal considerations as we look out into the first quarter? Michael R. Hsing: It's again very difficult for us, okay, to predict that, okay, what's the booking, what's the -- where are the bookings. We build our inventories. We try to build, okay, we look at the inventory now, and we try to build up way below our models. And whatever comes we anticipate it, again, we can swiftly to adopt. Bernie Blegen: Just to add to that is that we really don't have a lot of visibility into the first half of next year. We can definitely point to the normal drivers as far as both enterprise data and automotive are very well positioned for new revenue ramps, but getting both the timing as well as getting that to balance out, we don't have a strong view on Q1 yet. Gary Mobley: Okay. Appreciate that. And if I'm not mistaken, your distribution inventory as of midyear was at the low end of your 5- to 8-week target range and it decreased in the June quarter. What was the trend sequentially for the September quarter? And when might you take that distribution inventory back up to maybe the mid- to upper part of that normal range? Bernie Blegen: Yes. Currently, the Q3 channel inventory was unchanged in terms of days from where it was in the prior quarter. So we take from that, that we're satisfying real demand at this point, which again is a reflection of the quick turns business that we're working with. Arthur Lee: Our next question is from Chris Caso of Wolfe Research. Christopher Caso: Yes. The first question is on enterprise data. And what are sort of the puts and takes as you look into next year? And of course, this year, there was some changes in market share in that, which affected that business. But I guess I'm going to assume that things are cleaner as you go from this year into next year? And I mean, one, do you expect to grow that business as you go into next year? Michael R. Hsing: Well, it's cleaner. You said that this year, the next year, this year, we are doing pretty good this year. And see, we -- and as I said earlier, the module business is growing. So all this area MPS technology shines. And the power -- the higher power, the better it is. And because we provide the highest density, power density products that fits this market perfectly. And in the next couple of years, you will see it. MPS is a major player in this market segment. And also the market is big. We -- it's not -- okay, we don't want a place, so we don't have to be MPS only, okay? We want to have multiple competitors. It's good for the industry. Bernie Blegen: Yes, I could see enterprise data growing in the range of 30% to 40% in 2026 for us. Much of that, though, would be back in the second half of the year. So while we've seen a number of new players that have been layered in, I think the material ramps are more weighted to the second half of '26. Christopher Caso: That's very helpful. If I could follow on to that since you provided a little bit of color on that, Bernie. When you look at that 30% to 40% growth, is that -- because I know that some of the vertical power of designs, for example, you have more content. What's the driver of that? Is it fairly broad-based? Is it skewed towards some of the ASIC solutions more towards vertical power, whatever kind of color you can give behind that 30% to 40% expectation? Michael R. Hsing: As a CEO, I don't know how to make a 30% to 40% cost. I don't know. And the opportunity is there, okay? If we didn't deliver 30% to 40%, the stocks I see from $900 to $400, what kind of f***** is that? And so I don't want to make them very hard, just waiting for the numbers, let the numbers show it. Arthur Lee: Our next question is from Kelsey Chia of Citi Research. Wei Chia: So my question is on the competitive landscape. And I was hoping if you could share more, especially with regards to material side of things like gallium nitride, silicon carbide, I think your biggest enterprise data customer has been signing a lot of partnerships with all these semiconductor companies and I was just wondering, MPS positioning in those. And if you actually see those materials as being important in the next generation of the power modules and chips. Michael R. Hsing: We do our own silicon carbide and we're building the modules. And also, we are seeing -- we are using again -- but that's a very, very early stage we are evaluating it. And also, don't forget about silicon, silicon power MOSFETs have evolved, we engaged a lot of new developments. And a lot of the data showed it can be very cost effective and also can compete with the silicon carbide. That's very new -- that's a very, very recent development. Wei Chia: Yes. Okay. Got it. And I would just like to have a sense of how do you guys feel today versus a quarter ago. Especially, you guys have come a long way since the start of the year when you're dealing with all these market share changes, visibility on the ASIC customers and things like that. And given the slew of announcements from all these big mega partnerships, how do you see that relative to opportunities? And also given the maturity of the supply chain, I believe, like things are probably -- the supply chain partners are getting to a good cadence. So how do you guys feel with regard to those recent announcements relative to your opportunity set? Michael R. Hsing: I don't measure quarter by quarters, I measure by multiple years. So I can't tell you that. Bernie Blegen: I guess the simplest way is we're very broadly indexed across not just the merchant vendors or large ASICs, but medium and small time opportunities. And all of these need to find their way into the marketplace. And it's right now, we're still very, very early in the process. So as Michael said, it's very hard to sort out in any particular time period. But I think that we're as well indexed amongst all the opportunities as anybody in this market. Arthur Lee: Our last question is from Jack Egan of Charter Equity Research. Jack Egan: I have one on enterprise data and then one on modules more broadly. So the shift to modules in vertical power delivery with the custom ASIC ramp should be a pretty big tailwind for MPS. I'm kind of wondering about what the main drivers have been at least so far for those customers that are switching from lateral to module to vertical power. So I'm not really sure if you have this level of granularity, but among the major benefits like higher power density, higher efficiency, smaller footprint on the top side of the board, et cetera, is there any one characteristic that's kind of being cited by your customers as the main reason that they are moving to those modules or vertical power delivery? Michael R. Hsing: Well, we don't see from a chip to module. Whoever stays with the module stays with module, starts with the module. Whoever stays with the chip, stays with the chip, okay? And so MPS provides both, okay, in both chip solutions and module solutions at this time. And so I don't know if it answered that question for you. Jack Egan: Got it. Okay. And then just kind of on the modules more broadly. I think I believe, if I understood it correctly, last quarter, you mentioned is that modules outside enterprise data could be like 10% to 15% of your total revenues. And so I was curious how much of your revenue base or I guess, addressable market outside enterprise data would be eligible for switching to modules. I mean, even if you're looking several years into the future, how high could that mix of modules outside enterprise data go? Michael R. Hsing: That's a good question, okay. And we want to -- we build those modules and again, very similar to enterprise modules, okay? And since 2017 industrial markets adoption is kind of slow, actually faster than telecom, okay. And these are 2 market segments that we focus on. And then to our surprise the auto industry also want to use it because it's easy to implement. And so -- they don't want the semi equipment. And that's a large segment, we didn't realize that, okay? I mean now we see all these revenues are happening there. So I think that in the next couple of years, it will be growing faster than 3 or 4 years ago. And so we're picking up a business -- the rate of increase is picking up. Arthur Lee: This concludes our Q&A session. I would now like to turn the webinar back over to Bernie. Bernie Blegen: I'd like to thank you for all joining us in this conference call. I look forward to talking to you again during our fourth quarter 2025 conference call, which will likely be held in early February. Thank you, and have a nice day.
Operator: Good afternoon, and thank you for joining us today for Ryan Specialty Holdings Third Quarter 2025 Earnings Conference Call. In addition to this call, the company filed a press release with the SEC earlier this afternoon, which has also been posted to its website at ryanspecialty.com. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements. Investors should not place undue reliance on any forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today. Listeners are encouraged to review the more detailed discussions of these risk factors contained in the company's filings with the SEC. The company assumes no duty to update such forward-looking statements in the future, except as required by law. Additionally, certain non-GAAP financial measures will be discussed on this call and should not be considered in isolation or as a substitute to the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most closely comparable measures prepared in accordance with GAAP are included in the earnings release, which is filed with the SEC and available on the company's website. With that, I'd now like to turn the call over to the Founder and Executive Chairman of Ryan Specialty, Pat Ryan. Patrick Ryan: Good afternoon, and thank you for joining us to discuss our third quarter results. With me on today's call is our CEO, Tim Turner; our CFO, Janice Hamilton; our CEO of Underwriting Managers, Miles Wuller; and our Head of Investor Relations, Nick Mezick. We had a strong third quarter and are pleased with our ability to continuously deliver value for our clients across our businesses. For the quarter, we grew total revenue 25%, driven by organic revenue growth of 15% and M&A, which added nearly 10 percentage points to the top line. Adjusted EBITDAC grew 23.8% to $236 million. Adjusted EBITDAC margin was 31.2% compared to 31.5% in the prior year. Adjusted earnings per share grew 14.6% to $0.47. We remained active in M&A this quarter and have a robust pipeline, positioning us well to execute on our disciplined long-term inorganic growth strategy. Our excellent growth was driven by strength in casualty across all 3 of our specialties and modest growth in property. We generated strong new business and had high renewal retention even in the face of a complex and evolving insurance and macro environment. This achievement reflects the unmatched expertise, execution and commitment of our world-class team. Our ability to execute at this level continues to set Ryan Specialty apart and strengthens our position as one of the most formidable forces in specialty lines insurance. Moving to our recently announced initiatives this quarter. We successfully onboarded key talent across Ryan Re and alternative risk and brought innovative products to market through the launch of our flagship collateralized sidecar, Ryan Alternative Capital Re or RAC Re. Separate from those initiatives, we continue to entrench Ryan Specialty as the destination of choice for top talent. We believe we have entered into a unique and potentially transformative period within the specialty and E&S market. As the industry reacts to a transitioning market, we are attracting more talented professionals that are looking for a platform that not only withstands market cycles, but powers through them. Over the last 15 years, we built a culture and business model that stands apart from our competitors. Throughout the quarter, we saw a significant opportunity to ramp up our recruitment efforts. As a result, we added a significant number of experienced professionals to our world-class team. We expect this momentum to continue in the quarters ahead. Growth and long-term value creation are in our DNA, and we will remain true to that by continuing to prioritize strategic investments, especially as it relates to talent, de novo formations, innovative products and solutions, M&A and technology. These are all key areas that will further reinforce our commitment to our clients and our leadership in specialty insurance solutions. We believe these investments will accelerate our ability to relentlessly capture market opportunities, enhance our competitive position and deliver durable value for our shareholders over the long term. As we've noted repeatedly, our recruitment, training, development and retaining of talent is the best and most accretive investment we can make as it will continue to drive our organic growth engine for years to come. These efforts are fundamental to our strategy as a leading high-growth company and will enable our long-term success. Stepping back, our performance through these first 9 months reinforces our confidence in delivering yet another year of double-digit organic growth in 2025, marking the 15th consecutive year of achieving this increasingly remarkable accomplishment. Additionally, we are well positioned to sustain similar levels of full year organic growth into 2026. Looking beyond that, we believe we will continue delivering industry-leading organic growth, a topic Tim will address in more detail shortly. Lastly, before turning to Tim, I want to congratulate both Steve Keogh and Brendan Mulshine on their promotions to Co-Presidents of Ryan Specialty. Steve and Brendan will continue in their roles as Chief Operating Officer and Chief Revenue Officer, respectively. While stepping into this expanded leadership position following Jeremiah Bickham's transition to serving as strategic adviser through the end of the year. Steve will be focused on driving operational excellence and advancing our technology and innovation efforts, while Brendan will lead across our 3 specialties to enhance alignment and continue to maximize client impact. This announcement reflects the strength of our roster and the versatility of our leadership team built for durability and continuity. I also want to thank Jeremiah for his nearly 14 years of distinguished service to Ryan Specialty and for his support as we transition our leadership team. His dedication has been instrumental to the growth and success of our platform, and we wish him the best of luck with his future endeavors. As we wrap up 2025, we remain confident in our ability to innovate and thoughtfully invest in our business. Through relentless execution and winning new business, combined with strategic investments in growth initiatives, transformative acquisitions over the last few years, numerous additions of top talent and accelerated investments in the high-growth areas, we have built a foundation that positions us exceptionally well for the future. As the culture of this terrific team, I want to reemphasize how proud I am of the team's ability to deliver exceptional total revenue growth of 25%, driven by 15% organic growth and 10% inorganic growth. I'm even more impressed with our ability to drive adjusted EBITDAC growth of 24%, especially considering the unique opportunity to attract top broking and underwriting talent and continued investments in technology throughout the quarter. Now I'm pleased to turn the call over to our CEO, Tim Turner. Tim? Timothy Turner: Thank you very much, Pat. Ryan Specialty had an outstanding third quarter as we once again delivered industry-leading results for our clients in the face of a very challenging property rate environment. As I mentioned on our prior call, we remain hyper-focused on successfully executing on what we can control and delivering an organic revenue growth rate of 15% for the quarter is clear validation that our strategy is working. Further, while the strong secular conditions have endured, it is our Ryan-specific growth drivers that are resonating. Most notably, our specialized intellectual capital, unique trading relationships at scale and an ability to innovate, evolve and stay ahead of the market. Ryan Specialty was built on a simple philosophy to skate where the puck is going. This is the opportunity Pat and I saw back in 2010. And in every instance where we have invested ahead of the curve, we have been rewarded. To that extent, as Pat highlighted, we are currently operating in the early stages of a unique and potentially transformative period within the specialty and E&S environment. We made substantial progress on this opportunity towards the end of the third quarter, capitalizing on the influx of world-class specialty talent. This type of strategic hiring provides us with an unmatched ability to position ourselves as the clear leader in the specialty lines industry over the long term, a trend we anticipate continuing in the quarters ahead as the industry's top talent continues to knock on our door. Additionally, as it relates to technology, the pace of change has been remarkable, driven primarily by advancements in AI and machine learning. These developments are reshaping our industry and the world around us, and we are committed to staying ahead of the curve. Of course, leveraging these opportunities requires meaningful investment. And as a result, we now expect full year 2025 margins to be roughly flat to modestly down when compared to the prior year. However, these are without a doubt the most impactful and most accretive investments we can make to ensure the long-term success and durability of the Ryan Specialty platform. Looking ahead, we remain committed to margin expansion over time while preserving the flexibility to prioritize strategic investments and capitalize on the opportunities when they arise. such as the current talent environment and also de novo formations, innovative products and solutions, M&A and technology. We believe this is the right approach to ensure continued industry-leading growth. In light of everything I've outlined, we are deferring the 2027 time line for our previously communicated 35% adjusted EBITDAC margin target. This reflects our commitment to capitalizing our growth opportunities like the ones we're seeing today and prioritizing long-term value creation over short-term benchmarks. As we've noted in the past, our strategy is designed to anticipate and address the evolving needs of our clients and trading partners. And we remain diligent on expanding our talent base and capabilities to satisfy these growing needs. We believe this is the best way to ensure that our value proposition remains dynamic, differentiated and most importantly, indispensable. We also understand the importance of the commitment we make to our teammates, equipping them with the most advanced tools to ensure innovation and top-tier service to our clients and trading partners has been and will remain an area of heightened focus going forward. These investments are fundamental to our strategy as a leading high-growth company and serve as sustainable fuel to our growth engine. Turning to growth. As Pat mentioned, we are increasingly confident in our ability to deliver yet another year of double-digit organic growth in 2025 and are in a great position to sustain a similar level of organic growth into 2026. Beyond that, we believe we can consistently deliver industry-leading organic growth on an annual basis in the years to come. Important drivers of our growth going forward are our expectation to continue capitalizing on the unique opportunity to recruit and onboard top-tier talent in the quarters ahead, while also training, developing and retaining the exceptional team we've built over the past 15 years. Continued growth in our casualty business, driven by solid flow into the E&S channel and our expertise in high hazard classes, our ability to offset another year of soft property pricing as was evident this year. Through Ryan Re, our reinsurance underwriting MGU for which we've thoughtfully staffed in anticipation of 1/1 renewals following the nationwide and Markel renewal rights deal. ongoing innovation through new product launches and investments in geographic expansion broadly across the underwriting platform, which includes alternative risk, Ryan Re as well as our newly announced sidecar, RAC Re. Contributions from recent M&A as well as the continued pursuit of future transactions as this year's M&A is next year's organic growth. And lastly, our confidence in continued growth across all 3 of our specialties. It is a very exciting time at Ryan Specialty, and we are taking advantage of the multiple pathways to strengthen our position as the global leader in specialty lines, while staying focused on creating long-term sustainable value for our shareholders. Turning to our results by specialty. Our wholesale brokerage specialty had a great quarter. In property, we returned to growth through our relentless execution, winning a high percentage of new business and head-to-head competition, supported by high renewal retention, continued steady flow into the E&S channel, partially offset by the rapid decline in property pricing in Q3. We expect the fourth quarter to face continued deterioration of property pricing given what looks like another benign hurricane season. However, our longer-term outlook remains optimistic given the frequency and severity of cat events, notwithstanding recent experience and the increasing population in cat-affected areas, creating an increased demand for E&S property solutions. With our deep capabilities, we will continue to deliver value for our trading partners and offer innovative products and solutions for the most complex issues our clients face, irrespective of the market cycle. We continue to expect property to be an important contributor to our growth over the long term. Meanwhile, our casualty practice continues to deliver very strong results, driven by excellent new business and high renewal retention. We were particularly pleased to see pockets of growth in our Construction segment in the quarter, aided by an increasing demand for the build-out of data centers. Further, we also saw strength in a number of other lines, most notably transportation, habitational risks, public entities, sports and entertainment, healthcare, social and human services and consumer product liability. Our professional lines brokers remain resilient and resourceful in identifying new opportunities. And despite ongoing pricing pressure, they too have seen solid growth this quarter. More broadly in casualty, loss trends driven by both economic and social inflation continue to influence carriers to increase rates, refine their appetite and in some cases, step back from certain products. As many of these risks move into the specialty and E&S markets, we continue to see the E&S market respond in a disciplined manner. We believe that the need for the specialized industry and product level expertise that Ryan Specialty offers has never been greater, and our value proposition has never been stronger. With typical loss trends likely to continue, we see a long runway for sustained casualty pricing in the non-admitted market. We remain confident that casualty will continue to be a strong driver of our growth moving forward and believe we will remain a leader in casualty solutions for years to come. Now turning to our delegated authority specialties, which include both binding and underwriting management. Our binding authority specialty continues to perform well, driven by our top-tier talent and expanding product set for small, tough-to-place commercial P&C risks. We continue to believe that panel consolidation and binding authority remains a long-term growth opportunity, and we are well positioned to serve our clients as this trend persists. Our underwriting management specialty also had a great quarter, driven by excellent results in transactional liability, reinsurance and casualty. We had significant contributions from recent acquisitions, which added over 30 percentage points to the top line growth of underwriting management. Our recent cohort of acquisitions continues to deliver meaningful contributions to our long-term delegated authority strategy, reinforcing the value of our broader strategic approach. Further within RSUM, we recently launched RAC Re, our flagship collateralized sidecar that adds meaningful diversified capacity to our underwriting platform. This innovative structure brings a large amount of committed capital, which we will deploy over a 2-year period. RAC Re strengthens our ability to accelerate growth, enhance flexibility through increased diversification of capital and respond swiftly to market opportunities, further demonstrating our ability to adapt to the ever-changing needs of the industry. Stepping back, our skill and discipline to manage these businesses through the current insurance cycle bolsters our ability to deliver consistently profitable underwriting results, growth and scale over the long term. We remain well positioned to capitalize on both organic and inorganic delegated authority growth opportunities. Now turning to price and flow. We have repeatedly noted that in any cycle, as certain lines are perceived to reach pricing adequacy, admitted markets have historically reentered select placements. In this cycle, however, that dynamic has not materialized in any meaningful way and the standard market has had little impact on overall rate or flow. As we've consistently said, we continue to expect the flow of business into the specialty and E&S market more so than rate to be a significant driver of Ryan Specialty's growth over the long term. This was once again demonstrated in Q3 as the flow of business into the E&S channel remains steady across all lines, helping us deliver industry-leading organic growth, notwithstanding continued property pricing headwinds. Turning to M&A. This quarter, we closed on the acquisition of JM Wilson, which is an excellent addition to our binding authority and transportation offering. Earlier this week, we announced the acquisition of Stewart Specialty Risk Underwriting, or SSRU. With approximately $13 million annual revenue, SSRU enhances our Canadian capabilities in key sectors, including construction, transportation and natural resources. Further on the M&A front, our near-term pipeline remains robust, including both tuck-ins as well as large deals. That said, we will only move forward when all of our criteria for M&A are met, most notably a strong cultural fit, strategic and accretive to the overall platform. To sum it all up, this was an outstanding quarter for Ryan Specialty, which is a testament to our day 1 philosophy, our enduring value proposition and the overall durability of this platform. When we first started, we had the vision to align RT Specialty with the deep product expertise and skill set at Ryan Specialty underwriting managers. Today, as we continue building out our business through strategic investments in world-class talent, that vision is translating into meaningful results. As the destination of choice for the best talent in the industry, our winning and empowering culture and nonstop focus on innovation continues to attract the best of the best and helps ensure our long-term success. Our scale, scope and intellectual capital built over the past 15 years remains the foundation of our ability to continue winning and expanding our market share over time. Our platform is exceedingly difficult to replicate as we built a competitive moat, and we will continue to invest further in our platform to widen the gap in our long-term competitive advantages that clearly set us apart from the rest of the specialty industry. With that, I will now turn the call over to our CFO, Janice Hamilton. Thank you. Janice Hamilton: Thanks, Tim. In Q3, total revenue grew 25% period-over-period to $755 million. This strong performance was driven by organic revenue growth of 15% and substantial contributions from M&A, which added nearly 10 percentage points to our top line. Adjusted EBITDAC grew 23.8% to $236 million. Adjusted EBITDAC margin was 31.2% compared to 31.5% in the prior year period. Our strong revenue growth was more than offset by the significant investments made in talent, including the colleagues that recently joined Ryan Re as a result of our expanded strategic relationship with Nationwide. In addition, we continue to execute on thoughtful strategic investments in recruiting at scale and in technology, further positioning us for sustained strong growth going forward. Adjusted earnings per share grew 14.6% to $0.47. Our adjusted effective tax rate was 26% for the quarter. Based on the current environment, we expect a similar tax rate for the fourth quarter of 2025. Turning to our capital allocation. M&A remains our top priority now and for the foreseeable future. We ended the quarter at 3.4x total net leverage on a credit basis and remain well positioned within our strategic framework. We remain willing to temporarily go above our comfort corridor of 3 to 4x for compelling M&A opportunities that meet our criteria that Tim outlined earlier. Our robust free cash flow generation and strong balance sheet provide us with the flexibility to continue executing on strategic M&A opportunities. Based on the current interest rate environment, we expect to record GAAP interest expense net of interest income on our operating funds of approximately $223 million in 2025, with $54 million to be expensed in the fourth quarter. As a reminder, the interest rate cap, which helped generate significant savings over the last few years, expires at the end of the year. Based on the current view of rates and at current debt levels, we'd expect interest expense to be roughly flat in 2026, more driven by the declining rate environment and the pace of M&A. Turning to guidance. As we mature as a public company, we want to provide clarity on 2 key elements of our medium-term financial guidance. On organic growth, we are confident in our ability to deliver yet again another year of double-digit organic growth for the full year 2025. As Tim outlined, we are in a great position to sustain this level of full year organic growth into 2026, and we believe we will consistently deliver industry-leading organic growth on an annual basis moving forward. On adjusted EBITDAC margin for the full year 2025, we are now guiding to an adjusted EBITDAC margin that could be flat to modestly down as compared to the prior year, which reflects our recent execution to capitalize on the unique opportunities Pat and Tim outlined earlier. With that said, this could move modestly based on our recruiting efforts over the next few months. While these initiatives will continue to create near- to medium-term margin pressure, we want to emphasize that recruiting, training, developing and retaining talent is the most impactful and most accretive investment we can make. As a result of our progress in Q3 and in light of the significant opportunities outlined by Tim, we are deferring the 2027 time line for our previously communicated 35% adjusted EBITDAC margin target. This exemplifies our commitment to long-term value creation over adherence to short-term benchmarks. However, looking ahead, we anticipate modest margin expansion in most years while maintaining the flexibility to prioritize strategic investments, particularly those in talent, de novo formations, innovative products and solutions, M&A and technology. Our overarching focus moving forward is on continuing to swiftly grow our business to enhance our position as a global leader in specialty lines. We believe this is the best way to ultimately drive and create additional long-term value for our shareholders. As we close out 2025, we expect to see a continued decline in property pricing, coupled with the potential for heightened competition during the fourth quarter, our second largest property quarter. Yet in the face of these challenging market conditions, we are extremely proud of the resilience of our team as we pursue our 15th consecutive year of double-digit organic growth. Looking ahead, we see significant opportunity to continue establishing ourselves as the destination of choice for the industry's best talent, further differentiating ourselves as a preeminent firm in the specialty lines insurance sector for decades to come. With that, we thank you for your time and would like to open up the call for Q&A. Operator? Operator: [Operator Instructions] Our first question will come from Elyse Greenspan from Wells Fargo. Elyse Greenspan: I was hoping to spend more time unpacking the 15% organic growth, especially like you guys had revised down guidance last quarter. So it seems like the 15% was probably above what you guys had expected when you connected a few months ago. So can you just like help me break it down between how much came on that 15% from submissions versus rates versus new initiatives? And anything that you can -- was there anything one-off relative to the 15% that you guys printed in the quarter? Janice Hamilton: Elyse, this is Janice. So -- thanks for the question. We had a great quarter, as everyone has said, already, top line growth of 25%, the adjusted EBITDA growth of 24%. We think that, that really does reflect the investment that we've made in the platform that we've set ourselves up to perform exceptionally well going forward. And you could really see the evidence of that this quarter. You alluded to the fact that last quarter, I mentioned that we anticipated that between the third and fourth quarters, fourth quarter would be lower effectively than our guide range and Q3 would be higher, largely just based on the business mix that we experienced. And that was part of the reason we also don't guide by quarter. If you look to what happened in the first half of the year when Q1 relative to Q2, we anticipated a similar dynamic in the third and fourth quarters this year. Overall, though, we grew significantly from a casualty perspective across all of our specialties. Tim can talk a little bit about what the drivers of that were, but largely submission growth and new business as well as high renewal retention across the board. Property, Tim also mentioned in the discussion that we actually grew this quarter, and that was driven by new business and high renewal retention as well as continued steady flow into the E&S channel. We also saw pockets of growth within construction, largely based on the build-outs of data centers. Those can be large and lumpy. So to your point earlier, that's an area that we do expect to continue the opportunity for growth, but it may not always be consistent. We've also seen significant and great underwriting results across transactional liability, driven by increased capital markets activity, structured solutions, reinsurance as well as from all of our acquisitions. we believe we're really well placed to continue to win across the board, and that was evident this quarter. Tim, is there anything you'd want to add on casualty or property? Timothy Turner: No, I think that says it all. Thank you. Elyse Greenspan: And then I guess just to expand on that, like I'm looking at the revenue breakdown, right? And I know that, that's an all-in basis. But wholesale -- it looks like wholesale grew by 9%, and there was pretty 17% in binding authority, but underwriting management, right, grew 66%. So I'm just trying -- was some of that construction stuff that you're pointing to, was that more on the binding and underwriting side that that's what drove the outside revenue growth in those 2 businesses in the quarter? Janice Hamilton: Yes, Elyse, I'd say underwriting growth in the third quarter actually isn't drastically different than what we've seen in prior quarters there. We continue to see really strong underwriting growth just based on continued investment there. I called out structured solutions, reinsurance and our acquisitions, but largely transactional-based business such as transactional liability, where we had the influx from all of the capital markets activity this quarter. Construction from the build-outs, that's primarily within the wholesale book of business. But again, I mentioned that casualty was strong also across the board, across all 3. Miles Wuller: And Elyse, it's Miles here. We appreciate -- sorry. I mean just to decompose those numbers are obviously total. And so they are representing the annualization of a very successful and material M&A campaign in the last 18 months. But they also below that, they do represent sustained increases in PC collection representative of our profitable underwriting across the cycle. And then as Janice said, strong organic growth that we remain really proud of. Elyse Greenspan: And then my last question, you guys changed -- it looks like you might have changed how you're talking about guidance. Like is it double digits for this year? Is that to mean that you think you will come in at 10%, right? So the fourth quarter will be a decent decel from like the 11% year-to-date? Or is that just setting like kind of a low bar for the full year? Janice Hamilton: Elyse, you're absolutely right. We are adjusting the way in which we're talking about guidance going forward to align more with the common industry practice. So the double digits from where we were guiding last quarter, 9% to 11%. Obviously, the reference to double digits brings the floor up to 10%. When we think about the fourth quarter, as I mentioned earlier, we anticipated that the property headwinds and the business mix that we're expecting to see in the fourth quarter would drive relatively lower organic growth compared to Q3. Some of the headwinds that I mentioned, so property, we're continuing to expect 20% to 30% rate reductions as well as increased market competition just as we get closer to the end of the fourth quarter, a phenomenon that we saw last year, and we expect will still prevail this quarter this year. We also expect just based on what we've seen to date in construction or how much the additional interest rate cut that was announced yesterday will do to get more shovels in the ground on that business. So it could be a headwind, but there's also the potential for additional of the data center build-outs that I called out earlier. In addition to that, just broader economic uncertainty around the government shutdown, transactional liability for us could be a headwind. But you're absolutely right that thinking about the double digits and the 10% effectively is the 4 is what we're calling out. But just overall, we would expect the fourth quarter to have lower organic growth than the third. Operator: Our next question will come from Alex Scott from Barclays. Taylor Scott: First one I had for you is on the margins. And just thinking through the back part of the year, it totally makes sense that there will be some pressure related to building out a team for the nationwide transaction in particular because you don't have revenue yet, but you got the expenses. I get that. Are there things like that where you have to build out sort of maybe ahead of when you actually begin getting revenue with other types of business as we kind of go into next year? And the reason I ask is if you don't have like a similar setup, then would you still expect to get some margin improvement in '26? Or is it something that's just going to get pushed out here further? Janice Hamilton: Yes. So I'll start that one. And then, Tim, I think you can maybe talk a little bit about how the investment in the teams work that we've been talking about on the call. So Alex, you certainly called out the reference to the fact that building out from the Markel renewal rights deal that Nationwide did that we've been appointed to underwrite for. We brought on a number of teammates from Markel over the last quarter that is part of the margin headwind. We've talked about that in the last quarter and then in this quarter. The other call out was just starting to build out more from an alternative risks perspective. That is an area where we are anticipating revenue growth in the future, but we are seeing those employees starting to build out new products and solutions. So that's why we mentioned that on the call. And then as it relates to other talent, Tim mentioned this in his prepared remarks, that we have had a significant opportunity to invest in and under, which at this point, as they begin to come online, we often see that they're not accretive until the second or third year. And so that is where a lot of the near- to medium-term margin pressures are coming from that we called out. Tim, do you want to talk a little bit more about that opportunity? Timothy Turner: Sure. From the very beginning, we built the business by investing strategically, whether in talent, de novos, acquisitions or technology. You've seen us do this in many different aspects over the last few years. We've constantly anticipated where the market is going, and we benefited immensely from those investments. We're also focused on operational excellence. We can always become more efficient. We know that. Very excited about the business alignment and operational alignment that we have with our new co-Presidents. They'll be working across the business throughout the system in a collaborative way. We're happy to make that trade off on margins over the near term or when the balance shifts in favor of larger growth opportunities. So we're very focused on margin, and we're optimistic through '26 in the future. Janice Hamilton: Yes. I would just clarify, for 2026, because of the timing of when a lot of these new hires will be coming on, 2026 will again, for us, be a significant or a big investment year. So we would still anticipate those margin pressures going into 2026. I mentioned the 2- to 3-year kind of 2 to 3 years to start to become margin accretive. So 2026 -- and will depend also on how successful we are on the continuation of our recruitment efforts for the remainder of the year. But I just want to make sure that it's clear, going forward, absent a significant investment year like we've talked about this year that will continue to play through into '26 and early 2027, we would expect to see modest margin improvement, but we want to make sure that we're still giving ourselves the flexibility to prioritize these strategic investments. Taylor Scott: Got it. That's all clear. Second one I had for you is on the construction part of your business. I mean it sounds like this quarter was good because you had some lumpy win or wins there. But I guess when I think about it more broadly, is that going from being a headwind to beginning to open up? Was that just a one-off? I'm just trying to understand how to think about construction, particularly with the newly acquired business coming online, what that looks like in 4Q in terms of year-over-year comps and so forth. Miles Wuller: Absolutely. Well, Miles, I'll start with the underwriting side, which is predominantly property side of construction, and I'll hand it over to Tim. But I think my message is going to be relatively consistent from the prior quarter. So there are headwinds persisting that we want to acknowledge. So borrowing costs remain elevated. The tariffs are real, high inflationary costs remain around building inputs. And there is an emerging labor shortage likely emanating from a more robust stance on immigration. All that said, though, we're seeing great flow in the space still. We have exceptional products set to win, both large, mid and small. I'd want to emphasize, I think we highlighted on the last call, U.S. Assure was our acquisition into the SME specialty space. Technical risk underwriting was a long-standing de novo in the large and complex. We utilize the best components of both those practices to launch a mid-market solution that's been effective for about a month that's accelerating growth. And so as Jan has touched on, we absolutely feel we're winning. There's just not enough groundbreaking going on right now. So the average time between quote and groundbreaking is protracted. That said, we're deeply committed to the space. The 5 million-plus structural shortfall in available housing units in the U.S. persists. And we do believe that the 2 rate cuts so far this year are going to help flow into end of the year. Timothy Turner: And I would just add that we know from several metrics that we receive from our clients and the markets that we're industry-leading in construction in both property and casualty. And so what new projects come into the pipeline, we're getting a high percentage of the opportunities. They're quoted, they're waiting for the trigger, and we're optimistic that we'll be finding more of those. But again, that uncertainty is lurking. It's important to know that a big part of our construction practice group is renewable property and casualty. We have a very significant book of general contractors, subcontractors and artisan contractors at every level, some of the largest in the country, middle market and of course, our small commercial is loaded with construction business. So we keep a very close eye on it, and we believe this environment could very well improve, and we look forward to finding some of these larger projects. Operator: Our next question will come from Brian Meredith from UBS. Brian Meredith: A couple of them here. First one, Tim, I think I heard you correctly about 30 percentage-plus points in your underwriting management business of M&A. That would kind of imply like a 35% organic revenue growth rate in that business. Is that right? And how sustainable is that type of organic revenue growth in that business? Janice Hamilton: So I think what we've said before, Brian, and I'll start this one if Miles wants to add on as well. But I think we've always said that each of our specialties was built for double-digit organic growth. We certainly saw the opportunities within underwriting managers this quarter. There were a number of areas that were fueled by capital markets activity and other -- the construction piece and some of the items that Tim talked about. I mentioned structured solutions and reinsurance. So we're continuing to expect that underwriting managers will continue to contribute double-digit organic growth. But I would also call out that there are other reconciling items between the comments that Tim made about M&A and also organic growth, just being that around profit commissions. Timothy Turner: And I would add, we have some tremendous growth in areas like transportation, social and human services, renewable construction, as I mentioned, habitational, sports and entertainment, public entity and municipalities, classes of business that are firming by the day, loss leaders in the reinsurance world and segments of the business where our strategy has been highly effective. We believe we have the best brokers, and we've built facilities behind it to strengthen our value proposition with the client. So there's a lot of movement in that business and great growth opportunities. Brian Meredith: Makes sense. And then second question, I'm just curious, does the market environment, meaning the pricing environment at all influence your, call it, talent investment decisions like if we're in a softening kind of property market, are you less likely to lean into that area? Timothy Turner: Yes, it certainly influences our decisions in those areas. And obviously, things that are ultrasoft like public D&O and cyber, we backed off that build-out over the last couple of years, but accelerated in professional liability in health care, social and human services. We've mentioned our professional liability brokers who are industry-leading, pivoted and went deep into health care and social services, and that's paid off for us in a big way. Operator: Our next question will come from Meyer Shields from KBW. Meyer Shields: Great. Hopefully, I'm coming through. Janice, you mentioned a couple of times the typical 2- to 3-year time horizon for full productivity. And I'm wondering whether -- or maybe differently why the current situation that I think is underpinning the investment approach, wouldn't that translate into faster productivity basically if retailers are looking for an alternative wholesale broker? Janice Hamilton: Tim, do you want to talk a little bit about the dynamics of bringing on this additional talent? I've mentioned before that it takes sometimes 2 to 3 years for them to become fully accretive. Timothy Turner: It does. And Meyer, we're always recruiting. We're always training and developing opportunistic on hiring competitors and other talented professionals around the industry, but it does take a couple of years for them to be accretive. So there's a little bit of a hangover. We pointed that out. But again, we're very much opportunistic on that. The timing of that isn't always perfect, but it's all about A-rated talent, the highest caliber talent. We're constantly looking for it. We know it's differentiating. And when it's available and they're knocking on our door, we seize the moment. Meyer Shields: Okay. I think I get it. Second question, I'm just curious of industry operations. We've heard a number of people, including you folks talk about maybe increasing competition for business to hit full year 2025 budgets. Does that offer any opportunity for higher broker compensation? Timothy Turner: No, I would say not. It's -- most of it is formulaic and very predictable. Miles Wuller: Yes. We're quite disciplined as an industry, Meyer, when -- regardless of rate drifting up or down. It's -- we've -- if you look back over our published history, our net retains in both underwriting and brokerage have remained pretty consistent. Operator: Our next question will come from Andrew Kligerman from TD Cowen. Andrew Kligerman: I wanted to build out a little bit on some of the prior questions, notably the recruitment and hiring of talent because that seems like the only constant to help gauge one of the drivers of growth. So I'm kind of hoping that, a, you can kind of help frame what was the growth in organic hires, not acquired hires, but the growth in organic hires over the last couple of years. Could you kind of help frame that? And the part B of it is looking into the fourth quarter and looking at your double-digit guidance, the math would be that you could do 5% or 6% organic growth and still hit the 10% for the year. So the part B of the question is, are you feeling like you'll be on the north side of the 10% in the fourth quarter or the lower side? I mean we're a month into the fourth quarter. How are you thinking about that? Timothy Turner: Well, I'll take part A, Andrew. We know historically, the most accretive thing we can do is to recruit talent and to train and develop our own. And so you know about the Ryan University, our internship program. We're putting several hundred kids through that a year, and we've been doing that for several years now. We can see the clear pathway to the most accretive profitable thing we can do is weave that into recruiting existing talent and building out these teams so that we can have the industry-leading breadth and depth in niches of business that get firm. We follow these niche firming phenomenons and can accelerate with deep bench strength. And that's really the key to capturing this business when the flow increases significantly. Janice Hamilton: And then I'll take Part B from that, Andrew. So yes, you mentioned the fourth quarter. I said earlier, we always anticipated that the fourth quarter would have lower relative organic growth. The math checks out for that to be around 6%. I mentioned that there were a number of different potential headwinds the macroeconomic uncertainty associated with construction and also capital markets activity for transactional liabilities. So there's an opportunity there for lumpy good guys, lumpy bad guys effectively that we want to make sure that we've had a range around internally. Also, property, we always anticipated that assuming a benign hurricane season, which looks to be the case that we would continue to see that 20 to 30 basis points -- sorry, 20% to 30% rate reduction continue. And it's hard for us to put a number on the impact specifically for what that's going to look like in the fourth quarter when we've got additional market competition. So we're comfortable with the increasing certainty around double digits, but I'm not going to put any more specifics around where we might sit at the top or bottom end of what that could look like. Andrew Kligerman: That's a fair response. And I'll just end it with another tough question. Hopefully, you can give me some direction on it. So previously, the way I was thinking about EBITDAC margin was it was 32% in 2024 and the likelihood would be that it kind of came to 35% in 2027. And again, very valid reasons for not getting there in '27. But any way to kind of share your views on where it might go in '27 or when you might get to 35%? Janice Hamilton: It's a fair question, Andrew. When we think about the 35%, the target is achievable. But as we've stated, the fact that this unbelievable opportunity from a talent perspective is something that we want to make sure that we have the opportunity and the capacity to capitalize on, which is going to put us in a position to have margin pressures for '26, some of that continuing into '27. But we believe going forward, a modest amount of margin expansion is still reasonable to anticipate. And so the walk to the 35% will certainly be slower, and we'll take advantage of these opportunities when they come up, whether that's in talent or technology. Right now, the balance is shifting towards the investment as opposed to the margin expansion. But over time, I think it's fair to anticipate margin expansion -- modest margin expansion on an annual basis. Operator: Our next question will come from Rob Cox from Goldman Sachs. Robert Cox: Question on the London operations. Recently, we've been hearing some market commentary around disruptions surrounding the London specialty marketplace and at least one large retail broker discussing starting some operations there. Could those disruptions be a tailwind to your business? And can you talk about how Ryan's offering stands out there and the defensibility of that business? Timothy Turner: Sure, Bob. I'll try to answer that. First and foremost, we always do what's in the best interest of our client when it comes to approaching London. In wholesale, we're there to support the retailers in their most difficult placements, which oftentimes encompasses a full-blown marketing exercise, including London. And we have a 15-year history of finding the best independent broker in London. And as you know, they use us when they need us, and we use them when we need them. And that need continues to grow. But what's happened is there's been a little bit of shifting in London, as we know. And we're revisiting our strategy in London, and we're constantly looking at how we can improve our offerings to our clients. Looking and being sensitive to things like conflicts, channel conflicts and distribution friction. So we're very sensitive to it. We are, again, revisiting our strategy there, and we will keep everyone posted. Robert Cox: That's helpful. And then I just wanted to follow up on shifts from the E&S market to admitted or vice versa. It sounds like it's not happening on a broad basis still. Are there pockets where you are seeing that? And could you share any information on that by product or geography? Timothy Turner: We're really not. We haven't seen any measurable migration back into the admitted standard market. It's been mostly competition within the non-admitted surplus lines world that are driving rates down in property as an example. So it's the secular and structural changes that we've seen over the last 20 years that have developed over 100 non-admitted surplus lines platforms, including MGUs. And many of the large standard admitted big brand companies have either bought or developed non-admitted companies. So the business is tending to stay in that channel. There's no real reason to pull it back into admitted that we can see. So again, the competition is really within the non-admitted market. Operator: Our next question will come from Bob Huang from Morgan Stanley. Jian Huang: So maybe my first question is really a question on your commentary around AI, machine learning. So one of the major issues when we look at M&A roll-ups is that over time, you will end up with multiple redundant systems from the IT side and then data ends up getting siloed and then there are multiple systems, multiple passwords. As you're implementing AI projects, obviously, one of the problem is how to have connected data and also have data governance regulating that. Just curious how you're thinking about aggregating data and as you continue to do more M&As in the market and then how you're thinking about that tech implementation as you're moving towards a more AI-centric platform. Janice Hamilton: Bob, I'm happy to start, Miles, if you want to add anything to that. Yes, Bob, I think we've always -- we've been a very acquisitive company. Technology is an area that sometimes acquisitions come with a very strong platform. Sometimes acquisitions come with the expectation that they're going to move on to the RT Specialty platform. We're very thoughtful about how we approach that integration and the timing of it. We're always continuing to enhance our own technology platforms to be able to utilize data and AI. Obviously, with the transformation that has occurred in the AI industry over the last couple of years, the opportunities continue to evolve very significantly. And so it's always making sure that we're able to identify what the best opportunities are for consolidating our platforms, our data and be able to put AI on top of it. But even in the absence of consolidating all the platforms, there are solutions out there that today utilize AI to get to submissions faster, to be able to clear faster, to be able to elevate the role of the underwriter. And we're very much focused on all of those different use cases today, irrespective of the current technology landscape. Miles Wuller: Okay. Well, I'm just going to chime in, Bob, that everything you said is real and astute and spot on. But I want to highlight a couple of kind of competitive advantages of Ryan Specialty underwriting managers that we've had over the years. So -- over the last 10 years, we've made great strides in putting all of our MGUs onto centralized back-office system, that's policy issuance, that's sub-ledger. And although certainly, these new large acquisitions are currently operating in separate environments. We've got the great benefit of data scientists already on staff, actuaries on staff. That data has been a big part of our ongoing success. We use it to raise new capital. We use it to drive better results to the carriers. So I do -- your comments are spot on, but I do want to highlight some of the investments and structural advantage we have as a firm to manage those integrations. Jian Huang: Okay. The MGU point is very helpful. My second question is around the organic growth. I know a lot of people have talked about that already. So apologies if we went over this. But if we were to think about new client growth and existing client growth, right, is there a way for us to kind of split out within casualty, how much of that growth is new clients and how much of that is existing clients? Is there a way for us to think about that from a casualty perspective? Timothy Turner: Well, I would say that the customer base and the client base has been consistent. There's the top 100 Tier 1 retailers, global, national, regional, the 40-plus private equity roll-ups and then regional brokers. Then there's Tier 2, Tier 3, tens of thousands of retail brokers. So we have marketing approaches and production approaches to all 3 layers of customers, and we target them in different ways. So we're constantly rotating new marketing approaches and solutions to them based on their need profile. And we get measured every year. We're RFP-ing constantly in Tier 1 in the top 100. And they give us data on where we stand with them and like our markets do. So we know where we stand in terms of market share with them. We know much more is available for us to capture. So it's a constant challenge for us to rotate talent in different disciplines in different regions based on most of it driven by niche firming phenomenon. We shift talent into those areas very quickly. So it's a day-to-day, very active approach to the business with our retail customers. Operator: And our final question today will come from Josh Shanker from Bank of America. Joshua Shanker: A year ago, I can imagine you were a kid in the candy store looking at the market opportunity. And you said, you know what, by 2027, we can focus on margins over growth. And here we are a year later. I think you're still that kid in the candy store, but you realize how much opportunity there is. How has the opportunity set changed over the past 9 or 12 months that you're reining in and saying, now is not the time to focus on margins, now is the time to focus on growth. Timothy Turner: Well, the availability of talent is a big driver of that. And there's lots of factors that create those opportunities, changing situations with competitors, professional brokers and underwriters that want to change in their career path. We've been a destination of choice, and we've been very, very fortunate that they knock on our door, and we get opportunities with them. But the timing of that and the opportunities are never consistent. They're lumpy. And when we get those opportunities, we have to move quickly and swiftly. And again, it's the #1 most accretive thing we can do. It's... Joshua Shanker: But what you're seeing is there's just more opportunities now than there were a year ago. It's even better than it was a year ago. Timothy Turner: Absolutely, definitely. Miles Wuller: And it's also the attraction of our platform. So it's the investment we've made in tools, capabilities, products, access to distribution. So we -- I think in past calls, we spent a lot of time highlighting those investments as creating a destination of choice for organic talent as well as it's played into destination of choice as an acquirer. Janice Hamilton: Sorry. I was just going to add a little bit more on we mentioned earlier thoughts question with regard to AI. But just with the changing landscape from a technology and AI perspective, there are certainly more opportunities today to be investing in technology than where we were sitting a year ago. Joshua Shanker: And when partners see what you've done for Markel and what you're going to be doing for AXIS, have you seen a big swelling of the pipeline opportunity for you in reinsurance going forward from new partners? Patrick Ryan: We think that there is. This is Pat, that there are going to be additional opportunities. There are some discussions being held. There are a lot of -- quite a few subscale reinsurers. A lot of people are looking at should they be more focused on their core business. And that was the Markel decision there. We certainly believe that we have a unique ability to fill that need because we have the very strong credit rating and brand value of Nationwide Mutual. And we have an outstanding leadership team, outstanding teammates, underwriters behind that leadership team. So the industry is recognizing that. Reinsurance is becoming a much more important functional contribution to the capacity that needs to be brought into the E&S market. So yes, there's just a lot more focus on reinsurance. We uniquely are positioned with this brand exclusive with Nationwide Mutual fund reinsurance and our talent to seize those opportunities as they unfold. We can't predict when or how many, but clearly, there's interest. Operator: Thank you. That concludes the Q&A session. I will now turn the call over to management for closing remarks. Patrick Ryan: Well, thank you very much for your good questions, your continued support, and we look forward to talking to you again a quarter from now. Thank you.
Operator: Greetings, and welcome to the Bright Horizons Family Solutions Third Quarter Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Flanagan, Group Vice President of Strategic Finance. Thank you. You may begin. Michael Flanagan: Thank you, Shamali, and welcome to Bright Horizons' Third Quarter Earnings Call. Before we begin, please note that today's call is being webcast, and a recording will be available under the Investor Relations section of our website, investors.brighthorizons.com. As a reminder to participants, any forward-looking statements made on this call, including those regarding future business, financial performance and outlook, are subject to the safe harbor statement included in our earnings release. Forward-looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially and should be considered in conjunction with the cautionary statements that are described in detail in our earnings release, 2024 Form 10-K and other SEC filings. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statements. Today, we also refer to non-GAAP financial measures, which are detailed and reconciled to their GAAP counterparts in our earnings release, which is available under the Investor Relations section of our website at investors.brighthorizons.com. Joining me on today's call are Chief Executive Officer, Stephen Kramer; and our Chief Financial Officer, Elizabeth Boland. Elizabeth Boland. Stephen will start by reviewing our results and will provide an update on the business. Elizabeth will follow with a more detailed review of the numbers before we open it up to your questions. With that, let me turn the call over to Stephen. Stephen Kramer: Thanks, Mike, and welcome to everyone who has joined the call. We delivered another quarter of solid execution and performance with revenue increasing 12% to $803 million and adjusted EPS growing 41% to $1.57, both well ahead of our expectations. Demand persisted from both client employees and employers for our broad suite of education and care benefits, and our teams executed with discipline and focus. This quarter's performance positioned us to finish the year with strong momentum and confidence in our ability to deliver on our strategic objectives. Let me start with back-up care, which was a clear standout in the third quarter as it has been all year. Revenue increased 26% to $253 million with strong broad-based demand for all care types across our own supply and our partner network. The momentum we saw in early summer carried through the quarter, particularly in our programs catering to school-age children, supported by working parents' significant needs during the school breaks. More employees use care, existing users leaned in further and more employers signed on to offer the benefit, notably new clients, MIT and Appian Corporation. Our operations team executed exceptionally well, delivering record levels of care during this compressed high-intensity period. And our marketing and technology teams continue to progress our personalization efforts to attract and stimulate use among client employees. Back-up care continues to be an exciting growth engine, both financially and strategically and a core pillar of our long-term value creation. While today, it stands as our largest driver of revenue and profit growth, we believe we are still in the early innings of the opportunity. Our current reach spans more than 1,000 employers and millions and millions of eligible employees, but employer adoption and usage remains modest relative to its potential. Our strategy to close this gap is focused on expanding the number of unique users within our existing client base, increasing frequency of use among those who already value the service and continuing to grow our client roster. As we look ahead, we will continue to invest to support the growth of back-up care, expanding capacity, deepening personalization and reinforcing the value proposition for both employers and client employees. A critical differentiator in our model and our ability to deliver on this growth is the breadth and quality of our delivery network. Our full service centers remain foundational in that effort, serving as a direct source of care and as an essential infrastructure that supports reliability, responsiveness, quality and scale across our global platform. Now moving to our full service centers. Revenue in full service increased 6% to $516 million, driven by a combination of enrollment growth, tuition increases and new center openings. We added 3 new centers this quarter, including 2 centers for a new higher ed client and a third location for Dartmouth Hitchcock Medical Center. These openings not only reinforce our leadership in employer-sponsored child care, but also underscore the enduring importance of on-site care as a strategic workforce solution. Enrollment in centers opened for more than 1 year increased at a low single-digit rate, while average occupancy ticked down to the mid-60s sequentially given the usual summer to fall seasonality. While the pace of enrollment growth has moderated over the course of the year, we continue to see the fastest growth in select centers operating below 40% occupancy. Centers in the 40% to 70% occupancy range also continued to show enrollment growth and margin improvements. And among our top-performing centers, those with occupancy above 70%, we continue to have strong profitability, while the natural cycling of last year's strong occupancy levels tempered our overall enrollment growth. Outside the U.S., our U.K. full service business continues to regain ground. Enrollment growth has continued with increased demand among working families, a segment we are well positioned to serve, and more favorable government support to families. Operationally, we are seeing the benefits of disciplined cost management, improved staffing and retention and an improved labor environment. The U.K. remains a strengthening component to our full service segment and is now on track to contribute modestly positive earnings in 2025. As we exit 2025 and plan for 2026, our focus in full service remains on delivering quality at scale, expanding occupancy and fulfilling increasing amounts of backup use. We are also ensuring our portfolio is aligned with long-term opportunities for growth and margin improvement. Moving on to our education advisory segment. Revenue grew 10% this past quarter to $34 million, ahead of our expectations, led by the continued strength of College Coach, which contributed both top line growth and strong margins. In addition, EdAssist expanded its participant base as employees continue to explore education benefits to support their career development. We believe that our investments in this product offering and customer experience position us well to meet the evolving client upskilling needs and create value over time. We added new clients to the portfolio this quarter, including Sony Music and Premier Health Partners, expanding our reach and reinforcing the relevance of education and coaching benefits in today's landscape. Before I turn it over to Elizabeth, I want to take a moment to reflect on one of the most meaningful traditions at Bright Horizons, our awards of excellence celebration. This year, we once again had the privilege of gathering in person to honor the extraordinary contributions of our employees. With more than 20,000 nominations from colleagues, families and clients, the awards and the events were powerful reminders of the deep impact our teams have on the lives of those we serve. Celebrating together with our Westminster, Colorado and Newton, Massachusetts teams was a true highlight, a chance to recognize the passion, care and commitment that define our culture. To all our employees, thank you for the work you do every day and for the difference you make in the lives of children, families, learners and employers around the world. In closing, this terrific quarter reflects strong contributions across all of our service lines. As we look ahead, we remain focused on building a more integrated Bright Horizons, one that aligns our delivery model, technology and client partnerships to provide a more seamless experience for working families. Our broad portfolio is central to this effort and back-up care stands out as a cornerstone of our One Bright Horizons strategy, serving as a strategic lever for strengthening client relationships, enhancing employee productivity and driving enterprise-wide value. Given our results year-to-date and our current outlook for Q4, we are upgrading our full year earnings guidance. We now expect revenue to be approximately $2.925 billion, representing 9% growth, and we are increasing our adjusted EPS to a range of $4.48 to $4.53. With that, I'll turn the call over to Elizabeth, who will dive into the quarterly numbers and share more details around our outlook. Elizabeth Boland: Thanks, Stephen, and greetings to everyone on the call tonight. Let me start with our financial highlights. Revenue for the third quarter grew 12% to $803 million, driven by continued growth and disciplined execution across each of our segments. Adjusted operating income rose 39% to $124 million, with operating margins up roughly 300 basis points over the prior year to 15.5%. Adjusted EBITDA increased 29% to $156 million and represents an adjusted EBITDA margin of 19% in the quarter. Lastly, adjusted EPS of $1.57 came in well ahead of our expectations, supported by strong back-up revenue performance and operating leverage. Breaking this down a bit further into the segment results. As noted, back-up care revenue grew 26% in the third quarter to $253 million, driven by strong demand over the peak summer season. At this high watermark of utilization for the year, we also delivered significant operating leverage as adjusted operating income of $95 million increased $25 million over the prior year, and that translates to an operating margin of 38%. Full service revenue of $516 million was up 6% in Q3, mainly on pricing increases, modest enrollment gains and an approximate 125 basis point tailwind from foreign exchange. The centers that we have closed since Q3 of 2024 did partially offset these top line gains. Enrollment in our centers opened for more than 1 year increased low single digits across the portfolio. As Stephen mentioned, occupancy levels across our portfolio opened for more than 1 year averaged in the mid-60s for Q3, improving over the prior year, but naturally stepping down sequentially from last quarter given typical summer seasonality. In the specific center cohorts that we've previously discussed, we continue to show improvement over the prior year. Our top-performing cohort, that is centers above 70% occupied, improved from 42% of these centers in the third quarter of '24 to 44% in the third quarter of '25. The bottom cohort of centers, those under 40% occupied, improved modestly from 13% last year to 12% this past quarter. Adjusted operating income of $20 million in the full service segment increased $8 million over the prior year and represented 4% of revenue in the quarter compared to 2.6% in the same 2024 period. This improved operating leverage was bolstered by higher enrollment to help drive that growth in earnings. Lastly, educational advisory revenue, which increased 10% to $34 million, delivered operating margins of 26%, an improvement over the prior year with strong flow-through on the higher utilization of services. Recurring interest expense was $10 million in Q3, down from $12 million in Q3 of 2024, largely due to lower interest rates and lower overall borrowings. The structural effective tax rate on adjusted net income was 27%. Relative to the balance sheet, through September of this year, we have generated $203 million in cash from operations, made fixed asset investments of $59 million and have repurchased $105 million of stock. We ended Q3 with $117 million of cash, and we've reduced our net leverage ratio of 1.7x net debt to adjusted EBITDA. Now moving on to our updated 2025 outlook. We're updating our '25 guidance for both revenue and adjusted EPS to reflect the outperformance in Q3 as well as our expectations now for Q4. We now expect revenue to approximate $2.925 billion and adjusted EPS to be in the range of $4.48 to $4.53. In terms of our updated full year outlook by segment, we expect full service revenue to grow roughly 6%, back-up care to grow roughly 18% and ed advisory growth to be in the high single digits for -- again, for the full year. What this full year outlook translates to for Q4 is overall revenue in the range of $720 million to $730 million and adjusted EPS in a range of $1.07 to $1.12. So with that, Shamali, we are ready to go to Q&A. Operator: [Operator Instructions] Our first question comes from the line of Andrew Steinerman with JPMorgan. Andrew Steinerman: So obviously, I wrote a report sizing out the back-up care industry recently and your back-up growth was just tremendous. I surely wanted to ask you about the sustainability of these type of growth rates. I remember that you like to refer to kind of low double-digit growth as the sustainable rate, but you're growing above that now and into the fourth quarter. Elizabeth Boland: Yes. So thanks, Andrew. We're just looking at each other, who goes first. So thanks for the question. Well, as noted, we're looking at now, given the performance in the third quarter, which was certainly very substantial and outsized to our own expectations. We're looking at about 18% growth for this year. And that reflects, obviously, the growth over our prior year. And continuing that going forward, we would -- still it's early days. We're not going to be providing detailed guidance yet for 2026. But as we look ahead, certainly, that low double digits ticking up a bit probably from that to maybe 11% to 13% would be where we would be looking for next year, but it is a model that does have a tremendous amount of opportunity, as Stephen alluded to in terms of the piece parts of how we can grow that. And maybe I'll turn it over to him to talk a bit more about that. Stephen Kramer: Great. Thank you, Elizabeth. And Andrew, thank you for the note that you put out. It highlighted a really critical part of our business. And when we think about the long-term sustainability around the back-up care business, we were very encouraged this quarter, but candidly, for the whole year around our ability to continue to grow both the user base as well as the frequency of use. And look, at the end of the day, we're really focused around getting new users from among our client base, but also making sure that those who use return. And so when we think about the full scope of the opportunity, at this point, we have, call it, over 1,000 clients out of tens of thousands of potential clients. We have, call it, 10 million lives that we have the ability to impact. They're eligible for these services, of which we have less than 10% penetration. And so when we really think about the opportunity, we're really looking at it through that lens and believe that long term, this continues to be an important part of our growth algorithm. Operator: Our next question comes from the line of George Tong with Goldman Sachs. Keen Fai Tong: You mentioned enrollments increased in the low single-digit range. Can you clarify what low single digits means and if your full year enrollment growth outlook is still 2%? Elizabeth Boland: Yes. So we had -- as we talked about last quarter, George, we had probably about 2% growth last quarter and are looking at something closer to 1%, 1% plus this quarter. So low single digits being a little bit of a taper from where we saw last quarter, and that's the pace at which we would expect to exit the year similar to that 1%, 1% plus. Keen Fai Tong: Got it. That's helpful. And I guess following up on that, what would you think could be positive catalysts to drive a reacceleration in enrollment growth? Is it going to be external and market-driven? Or are there internal initiatives that you have that can help pick up that growth? Elizabeth Boland: Yes. I mean certainly, the opportunity through what we're controlling our own initiatives include a variety of the improvements to the customer experience, the ability to move from inquiry or just interest in a place to actual registration and enrollment. We have a number of both initiatives in terms of more effective marketing, more targeted outreach to our customers, connecting customers who are part of our employer base across our network of centers. So there are a number of initiatives in that way, but just smoothing the experience for a parent who is able to register and then -- and start using care when they need it. But certainly, I think external factors are in play. There is, I think, an environment from an economic standpoint that is -- continues to be a bit unsettled with different pressures on the consumers and the return to office cadence continues to be moving faster in some areas than others. And so parent demand can be somewhat variable there. But we're pleased with our general placement of our portfolio in terms of being close to where working families are living and/or working and where employers are able to generate a concentrated amount of use, but we are also mindful of the pressures on the end consumer who does typically pay the lion's share for this service. So being affordable in the market, our value proposition very visible and available to parents to see, those kinds of things are certainly in our control. Operator: Our next question comes from the line of Jeff Meuler with Baird. Jeffrey Meuler: Just given those economic conditions that you just referenced, how are you planning tuition pricing, I guess, in calendar year 2026 for full service? Elizabeth Boland: Yes. On balance, Jeff, we're looking at around a 4% average that would be at the higher end of our historic range. But in this kind of an environment, it's a bit of a middle-of-the-road pricing strategy. We have, as you know, a variable implementation of that. So that's an average, but we do make individual localized decisions that take into account market factors, other choices or competitors that may be in an environment. And in the centers that we have that still remain under-enrolled, we may take a more aggressive pricing approach. And in those that have higher demand, we may price higher. And by aggressive, I mean we may go lower than that average and then we may price higher than average where the demand is higher. But the average is looking to be in the neighborhood of 4%. Jeffrey Meuler: Okay. And then for back-up care, just with that big opportunity and also just with the demand we're seeing and the strong execution we're seeing in your results, I guess, how are those factors intersecting with the budgetary environment as clients do calendar year 2026 planning and budgeting for your service? Are they kind of leaning in like we've seen in the strong results this year? Or is there any sort of increased hesitancy for budgetary reasons? Stephen Kramer: Sure, Jeff. So we are through the lion's share of our renewal season at this point. And first, I would say that our clients were really pleased with the way this year has turned out for them and their employees. The feedback has been incredibly strong from their employee base, which is a real marker of the importance of the back-up care service. I think we have done an increasingly positive job of articulating the ROI, especially as it relates to productivity related to our service. And so I think we're well set up going into 2026 for our clients to continue to be interested in investing. Contextually, back-up care still represents a really small part of a benefits budget. And so when they think about some of the larger items like health care or even a 401(k), those are areas where, obviously, those are significant in terms of their investment. I think that for any individual client, while the kind of growth that we've experienced over the last several years is important for our business, I think it's very reasonably absorbed by our client base given that context and the importance of the service. Operator: Our next question comes from the line of Manav Patnaik with Barclays. Manav Patnaik: My first question was just in the back-up performance this quarter, where did you see the outperformance versus kind of the expectations of the guide that you had given? And maybe I don't know if that correlates with the context on, Stephen, you said it's very early innings in back-up care. Like is that new logos, upsell, a combination of both? I was just hoping for some color there. Stephen Kramer: Sure. Happy to. So I think we mentioned a couple of new logos. But in any given year, the reality is that the vast, vast majority of the growth that we experience is from the existing user base and existing client base. And so what we really saw was our ability to grow new users and continue to get existing users to come back and reuse was an important component of the outperformance. Clearly, in this quarter, we saw good use across the different use types, but school-age programs were an important component of the quarter. And what's nice about school-age programs, in particular, is our ability to flex up and down given ratios, given flexibility of space and the numbers of new opportunities through Steve & Kate's as well as through our extended network. And so all those things taken together really allowed for our outperformance. Manav, if you'll remember from the last quarter call, we highlighted that we saw some strong indications of early reservations. And I think what ended up happening was that got compounded with working families who came much more closer to the date of needed care and ultimately drove what we saw this quarter. Manav Patnaik: Okay. Got it. And Elizabeth, just you've given some good helpful color for the fourth quarter and some early look at '26. I was hoping you could just fill in the gaps on the margin front, like where do you think margins end up in '25? And then anything to keep in mind when we model out next year? Elizabeth Boland: Yes. So we obviously, maybe ticking through the different segments. So full service this quarter had a nice step-up in margin, 140 basis points or so. We would expect to finish off the year in the 125 basis points or so range for the full year. And back-up care obviously had a very strong quarter this quarter. The volume of use helps that. And we would expect to be at the upper end of the range. We've given a range of 25% to 30% as our expected long-term sustainable target for the back-up care segment. And so with the performance in the third quarter and that kind of volume, we would expect to be at the higher end of that range, again, for the full year. And then the ed advising business in the 20% or so plus, low 20s as we've seen in the last couple of quarters. Operator: Our next question comes from the line of Toni Kaplan with Morgan Stanley. Toni Kaplan: At least 3 of your representative clients have announced headcount reductions in the thousands in the past 6 months, 2 of which in September and October. Should we expect to see any impact from that? Or because of your multiyear contracts and maybe back-up care strength, would that offset any impact from those? Stephen Kramer: So Toni, I think the question you just asked was related to layoffs at some of our clients and the impact that, that might have on their investment. What I would say is I would hearken back to what I shared about the low penetration that we have within the existing eligible base of employees within our client employees, right? So at a sort of sub 10% penetration, we categorically have a lot of room even with some reductions in force. And so yes, we have multiyear contracts. But ultimately, what is going to drive the day in terms of where we see continued investment is going to be in our ability to continue to get new users and to get existing users to repeat their use. And so given the small penetration that we have, our expectation is that with our efforts, we should continue to see good progress going forward even in those accounts that are having reductions in force. Toni Kaplan: Great. Maybe in your experience of companies where they do have reductions in force, do they typically change their benefit levels? I'm sure there's like a delay or anything like that, but have you ever seen full service clients switch to back-up care? Or is that not really a thing because they've already normally built a center already? Stephen Kramer: Yes. So I think on the center side, as we've shared, I mean, that's a really long-term decision. And so I think clients generally, unless they get into an incredibly compromised position, generally will persist with their center. And so again, I think on the center side, we see really good retention rates on the basis that a client will understand that there'll be better and worse cycles and they'll continue to push through that. I would say on the back-up side, from a program design standpoint, again, we don't typically see clients change their program design, for example, how many uses an individual employee can have access to because ultimately, when they do find themselves in situations where they are reducing their force, what that really means is they're expecting more from the employees that remain. And so given that back-up is so aligned with being a productivity tool for employees who use it, employers generally understand that for those that remain, they need all the support that they can get as it relates to staying focused on their work. Operator: [Operator Instructions] Our next question comes from the line of Josh Chan with UBS. Joshua Chan: Stephen and Elizabeth, congrats on the good quarter. I guess on back-up, as you think about going into next year, how are you planning to resource the business, I guess? And if you were faced with kind of surprisingly high demand again, how do you or what do you do to kind of fill capacity in that scenario? Stephen Kramer: Yes. I mean look, we go through an extensive planning cycle, and we look at our expected demand client by client, and then we also look at it geography by geography. And so we have a really comprehensive team that focuses on the BI behind the business and then a provider relations team that really tries to map what expected demand is against the provider network that we have. And so what I would say is that we have fairly sophisticated tools to make sure that we don't get caught out with extra demand that can't be fulfilled. And because both in our own centers as well as in our own Steve & Kate's Camps in home care delivery as well as all of our extended partners, we are leveraging sort of excess capacity on any given day. We have a really good track record of being able to fulfill a high percentage of the care requests that ultimately are required. And so I appreciate the question. I think it's an important one, and we spend a lot of time making sure that we invest behind the capacity to make sure that it is available for our clients and their employees because that is such an important metric to those who we serve. Joshua Chan: And I guess how does the backup strength, does it alleviate the need for you to raise enrollment quickly in full service as you think about maybe having some of that capacity to serve your strong back-up demand? Does that change the way you're thinking about enrollment in full service? Stephen Kramer: Well, I'll say -- I'll start and then perhaps Elizabeth will play color. But I think if we take a step back on that question, which I think is an important one, as I shared in the prepared remarks, our center footprint is a critical component of our ability to fulfill back-up cases. And so when we think about the value of that center footprint, we are increasingly seeing the amount of care that we can fulfill through our own network of Bright Horizons centers as an important sort of shared resource between back-up and full service. So the implication of what you just said is true, which is the strategic value of our full service centers is not just about how quickly can we enroll, but it is also about how much demand can we fulfill on the back-up side of our business in our own centers because clearly, when we think about the margin profile for the company, the margin profile for the company of fulfilling back-up care cases, obviously, is strong and therefore, is important to make sure we're able to deliver on. Elizabeth Boland: Yes. And Josh, there's certainly some cases where we have been in a position where a center has not only pretty significant back-up demand, but predictable enough back-up demand that we can dedicate a room or 2 to specifically cover back-up care and/or school-age care in the vacation weeks and other things like that. So there are good opportunities for us to utilize the full service footprint in the way that you described that goes to what Stephen is talking about from the strategic fulfillment side of the equation, but also just utilizing the capacity that exists. In our full service centers now, certainly, some are still under-enrolled, but they have always had capacity since we don't operate full every day. And it's been both a helpful muscle that we've been able to develop over time. And as our systems of placement get more -- both speedier and more accurate from a time placement standpoint, we're able to fulfill more of that care. Operator: Our next question comes from the line of Stephanie Moore with Jefferies. Harold Antor: This is Harold Antor on for Stephanie Moore. Just real quick on the U.K. I know you guys are seeing some improvements there. So I just wanted to get any more color. What percentage of the centers are there? What percent of revenue is it running? And I think you wanted to break even this year. I guess how has it been running year-to-date compared to your projections? And then I guess, what would you be saying -- what would you be thinking the contribution to '26 would be? Just anything around that would be very helpful. Elizabeth Boland: Yes. Thanks for the question. And certainly, the team have been very hard at work in the U.K. to bring that well-positioned portfolio back to its prior operating capability. And the performance this year has been both steady. It's been steady for several quarters now, but it has been steady and improving enough that we are comfortable with the visibility of being more on the positive side than just breakeven side for the U.K. And as we look ahead to 2026, the performance for the U.K. has been a contributor to the improvement in the margin in full service this year. It still is a headwind, probably 50 basis points or so headwind. And as it continues to improve and contribute to next year, that will -- it still is trailing where we are in the U.S. business as an example. So it still is a bit of a tailwind but it will contribute to our momentum as well next year. Full service overall, I think that the point about enrollment, we talked about tuition rate increases, et cetera. Overall, we would continue to expect to see some margin expansion next year, maybe not at the pace that we're seeing this year, more like 50 to 100 basis points of margin expansion, but the U.K. would be a component of that. Operator: Our next question comes from the line of Jeff Silber with BMO Capital Markets. Ryan Griffin: This is Ryan on for Jeff. Just had a quick follow-up question on the pricing for next year. Just based on the data we track on child care service wages, they've been growing around 4%. I'm not sure if you're seeing anything differently. So wondering how you see the wage inflation dynamic evolving? And then what is your confidence level in just being able to price over that? I know it's a little bit different by market, but just in relation to the 4% pricing you said on average for next year? Elizabeth Boland: Yes. We have -- I appreciate the context of some general market factors. We tend to be paying at certainly the median to higher on wages. And so we feel like we will be able to sustain that. We have typically targeted a 100-basis point spread between average tuition increases and average wages. And we would, at this point, expect to be able to sustain that given where we see our labor cohort. So I think confidence -- we do feel confident that we can price ahead of wage, balancing out, as mentioned before, some of the conditions where we may be a bit more aggressive on price in order to continue to drive demand and enrollment in the centers that are more underperforming. Ryan Griffin: That's very helpful. And then just for the follow-up, I was wondering how we should be thinking about the net center openings for next year. Are you in a position now where you think you'll be a net closer of centers just looking at the, I think, the 12%, sub-40% utilization you called out? And how do you kind of think about that going into the next year? Elizabeth Boland: Sure. So this year, we had -- I think we entered the year looking to be plus/minus close to net 0 on the openings versus closures. And given the cadence of where we have a number of centers that are in development that have pushed into the early part of next year. So our openings are trailing by a handful this year. And then we have also been opportunistic about some of the closures. So we expect that we will be net closing this year, probably closer to 5 to 10 centers. As we look ahead to next year, and so that would be closures in the neighborhood of 25 to 30 or so centers. So we would be looking to close, I would estimate at this point, we're still in the planning process for 2026, but a closure level in that same range. So we may not be net positive in 2026, but that is really down to the -- those centers that are in the sub-40% occupied, as you mentioned. There's probably 80 P&L centers in that cohort. There are a handful of client centers, but there's 80 that are in our sort of P&L responsibility. And of those, a portion of them are operating at a level where they're partially covering their rent, and they have some strategic opportunity with the client relationships that Stephen mentioned, some back-up use. So not all of those would close, but they -- that's the group that would be the most likely candidates for closure. Stephen Kramer: Okay. Well, thank you very much. Really appreciate everyone joining today's call and wishing you all a good night and a happy Halloween. Elizabeth Boland: Thanks, everybody. Operator: And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Greetings, and welcome to the Digimarc Corporation Q3 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, George Karamanos. You may begin. George Karamanos: Thank you so much. Welcome, everyone, to our Q3 conference call. Riley McCormack, our CEO; and Charles Beck, our CFO, are with me on the call today. On this call, we'll provide a business update and discuss Q3 2025 financial results. This will be followed by a question-and-answer forum. We have posted our prepared remarks in the Investor Relations section of our website and will archive this webcast there. For those of you dialing in, this is a reminder that we are simulcasting a presentation that Riley and Charles will walk through today. If you would like to follow along with the slide, I would encourage you to join our webcast as referenced in our earnings press release shared earlier today. Before we begin, let me remind everyone that today's discussion contains forward-looking statements that have risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially. Riley will now provide a business update. Riley McCormack: Thank you, George, and hello, everyone. On this call, we will walk through Digimarc's Q3 performance, highlight our strategic progress across product innovation and commercial execution, share updates on our financial metrics such as ARR and cash burn, and provide clarity on where we are focused heading into the last quarter of the year. In Q3, we made significant progress in advancing towards widespread adoption of our gift card solution and closed multiple upsell opportunities in the product authentication space, including our expansion to a sixth country with a global tobacco company. We quickly turned an inbound inquiry from a major pharmaceutical company into a paid pilot for a novel application of our product authentication solution that, depending on pilot results, may have wide applicability not only across other pharmaceutical companies but additional industries as well. We launched a revolutionary new digitized security label solution to help brands upgrade from analog, easy-to-replicate and low value-add holograms. And we made significant progress advancing our digital authentication offerings, while in parallel growing pipeline, setting ourselves up to take full advantage of this nascent and exciting market in 2026 and beyond. We also continue to harvest the benefits of our recently completed corporate reorganization. Operationally, it has allowed us to increase our focus on the areas most likely to deliver the scalable and repeatable business we must always focus on delivery. Financially, the reorganization has resulted in a meaningful reduction in operating expenses and cash usage, and we remain on track to deliver positive free cash flow and positive non-GAAP net income in Q4 of 2025 even with our recent decision to invest in more resources to accelerate growth in our focus areas of retail loss prevention and digital authentication. As has been shared previously, our 3 focus areas are retail loss prevention, product authentication and digital authentication. We have several significant ARR generation opportunities in front of us, such as protecting the world's gift cards that exhibit strong demand-pull characteristics with a goal of much quicker time to revenue relative to some of our identification use cases. The decision to focus our time and resources on these 3 core areas was supported by deep market research, validated by customer feedback and further confirmed independently by work we commissioned from our consulting partners. With that said, we remain firm believers in our positioning and our ability to execute on the various ecosystem-driven opportunities, as they eventually become ripe enough to actively pursue. Our greatest near-term opportunity is retail loss prevention and more specifically, our gift card solution. On this front, we made substantial progress in our march towards gaining widespread adoption, aided in large part of the industry's hyperfocus on finding a solution to the fraud that is creating an existential threat to their business. The global gift card industry is estimated to represent approximately $1 trillion of stored value, having reached this impressive milestone due to the many benefits these cards provide all stakeholders, most importantly, consumers. Unfortunately, this large market opportunity has not escaped the attention of sophisticated state-sponsored bad actors and industry growth is currently being negatively impacted by the ever more advanced attacks targeting this global currency. Digimarc's 28-year history working with the world central banks to protect the vast majority of banknotes in circulation worldwide, combined with our decade-plus experience at retail front-of-store, ideally positions us to help this industry reaccelerate its growth. In addition to reducing fraud in the many direct and indirect cost of that fraud being borne by brands, retailers and consumers, our solution also -- also allows the entire industry to improve the marketing, merchandising and giftability of gift cards. These 3 elements were critical pillars of the industry's historic growth and all 3 have been negatively impacted by existing security solutions. Along with fraud reduction, the ability for the industry to reinvest in these 3 pillars to yet against supercharge sales is becoming another selling point of our solution. Our solution also allows for reduced packaging waste and improved sustainability, a value proposition that is resonating with some iconic global brands and is compliant with the ever-increasing number of regulations being put in place, most front of mind currently in the U.S. are the Maryland and New Jersey laws. As more industry participants are exposed to our solution, additional benefits become clear, a wonderful byproduct of being the first adaptable, extensible and technology-driven security layer in this dynamic industry. We provide a solution that is more secure than the highest security solutions on the market today while allowing the industry to regain the use of the powerful growth tools they've had to abandon these past few years. Turning now to the results from our initial rollout. The first Digimarc-protected gift cards reached shelfs in August. Major brands participating included Target, Home Depot, Nordstrom and Blackhawk Network multi-retailer cards. The response has been extremely positive and all KPIs have been easily surpassed. These KPIs include multiple metrics measuring the effectiveness of our solution plus our impact on the industry's operational efficiency. As we've shared in the past, one of the most powerful facets of this opportunity is that laggards in the adoption of our gift card solution will bear the compounded cost of an increasing percentage of an ever-increasing amount of fraud. We and our partners believe this positions us for powerful demand pull dynamic. The detailed results of our initial role have been widely shared within the industry, and we expect multiple major retailers to start selling Digimarc-protected gift cards within the next 2 quarters, carrying an expanded number of closed-loop brands as well as initial open-loop cards. As a reminder, closed-loop cards are gift cards that can only be redeemed at specific retailers. Open-loop cards are issued by the credit card companies and can be redeemed at any location where that credit card is accepted. As a reminder, we intend to predominantly sell our solution to gift card manufacturers who will apply our technology during their normal printing process before delivering the cards as they currently do today. We have built our go-to-market strategy around trying to solve for 2 often conflicting goals, providing a revolutionary new solution and minimizing impact on the ecosystem's existing workflow. I think the team has done an incredible job of doing just that. We are currently in commercial discussions with 8 gift card manufacturers as well as 1 additional direct customer. These discussions are being shaped, as they always are, by our desire to be an excellent partner to the industry and thus balance, a, the dynamic that laggards in adoption will bear compounding cost of fraud and b, the immediacy of a much broader rollout. Our plan is to ensure we contract for enough 2026 committed annual capacity so we can incredibly address burgeoning industry concerns about whether there will be adequate capacity to avoid the potential for involuntary laggards and then quickly move from commercial discussions to working with our initial partner or partners to flawlessly execute on the expected impending ramp of Digimarc-protected gift card production. The time lines to deliver this large ramp are very tight, and therefore, our goal is to quickly move to the contracting stage and to only contract with a small subset of these 8 printers right now, as we believe with the right partners, we can strike the optimal balance between our 2 goals. Turning now to our product authentication solutions. We closed multiple upsell deals with existing Digimarc Validate customers, reflecting both increased contract value and the expansion of our solution to new geographies and new brands, including the expansion of our solution in the sixth country with a global tobacco company with operations in approximately 175 more. As we've repeatedly stated, when we solve our customers' most challenging problems, we expect to be an upsell and cross-sell company for a very long time. We also closed a paid pilot with a major pharmaceutical company that approached us with a pressing problem they've been unable to solve using other means. I am proud of how quickly and how deeply the team diligenced the problem, allowing them to find a potential solution using existing Validate capabilities. I'm equally as excited for us to successfully execute on the pilot because if we can indeed solve this problem, our solution should be widely applicable across the entire pharma vertical and other verticals as well. Finally, we also launched a revolutionary new digitized security label solution to help brands upgrade from analog, easy-to-replicate and low value-add holograms. This label can be authenticated by consumers and field agents with mobile phones and other devices, providing deterministic B2B or B2C authentication with analytics all in one place. Touching now on our digital authentication solutions. As mentioned on our last 3 calls, we chose to be conservative about this area's contribution to 2025 ARR. We made this decision to help ensure we remain focused on optimizing our work in this area for the long term as opposed to making decisions that might lead to short-term revenue but would come at the cost of our ultimate potential scale. Not only did we exceed our annual target in the first 6 months of the year as we shared last year, but we are now in a position to harvest the fruits of this decision in 2026 and beyond. The twin catalyst of the relentless advance of AI models and agents and the rapid progression of content credentials have created a wave of awareness and urgency for a robust, scalable, secure and imperceptible perpetual and deterministic solution to address the many trust and authenticity problems growing in the digital world. We expect this space to continue its recent noteworthy growth and evolution. While some of the nascent digital use cases might be served, at least in the interim with good enough offerings, what has become apparent to us in the last few months is that the aforementioned twin catalysts are opening the market for use cases where good enough just simply will not do. Our technology, our history, our credibility, our expertise, our experience and our first-to-market with and co-leadership of the digital watermarking component of the C2PA standard are all coalescing to ensure we are well positioned to serve this ever-growing wave. We pioneered this space. This is quite literally what we were born to do, and the market is finally here. After deep analysis across 3 vectors, market demand, our technological differentiation and buyer synergy, we have narrowed our focus in the digital authentication space to 4 use cases, multiple flavors of leak detection, internal compliance, piracy prevention and royalty monitoring. Our pipelines of both opportunities and partners are growing prior to widespread marketing efforts and we are now resourcing this area with the expectation it will be a significant contributor to our 2026 growth and beyond. We are confident in the opportunities provided in our 3 key focus areas and are excited by the results our increased focus are already beginning to deliver. Ecosystem-based sales are great because of their size, but the sales cycles can be slow, expensive and multiple constituencies must adopt before meaningful ROI is unlocked. Our strategic shift allows for the building of a scalable and repeatable business where we could fail fast, iterate and win often and allow these massive but not yet quite ripe for the picking opportunities to provide the potential for another layer of tomorrow's growth. I will now turn the call over to Charles to discuss our financial results. Charles Beck: Thank you, Riley, and hello, everyone. Ending ARR for Q3 was $15.8 million compared to $18.7 million for Q3 last year. The decrease reflects $3.5 million from the DRS contract that lapsed in Q2 this year. Excluding this headwind, ARR grew $600,000 year-over-year. That growth, however, was largely muted by higher other customer churn and are choosing to be strategically price aggressive on products outside of our focus areas. As I've stated previously, we expected these impacts as we sharpened our go-to-market focus. We believe the churn is now largely behind us, except for the renegotiation of the retailer contract we mentioned last quarter, which will reduce ARR by $3.1 million in the fourth quarter. Despite this headwind, we expect ARR to trough in Q4 and to reaccelerate thereafter into 2026, largely from increasing penetration of our gift card solution and growth in digital authentication. Total revenue was $7.6 million, a decrease of $1.8 million or 19% from $9.4 million in Q3 last year. Subscription revenue, which accounted for 60% of total revenue for the quarter, decreased 13% from $5.3 million to $4.6 million. The decrease largely reflects the impact of the expired DRS contract I referenced on the prior slide. Service revenue decreased 27% from $4.2 million to $3.1 million, reflecting lower government service revenue from the central banks as expected, given the lower 2025 program budget we have discussed on prior earnings calls, and no revenue from HolyGrail recycling products in Q3 of this year as those projects concluded earlier this year. Subscription gross profit margin was 86% for the quarter, flat with Q3 last year. On the last earnings call, I shared that we expected to see a downward blip in our subscription margins for anticipated costs we would incur to migrate our customers from legacy platforms to Digimarc Illuminate. Due to some incredible work from our team, we actually saw an immediate reduction in our costs, with subscription costs decreasing 13% year-over-year. We expect to generate additional savings as we continue our work. Service gross profit margin was 57% for the quarter, down 4 points from 61% in Q3 last year. The decrease was due to a more favorable mix of revenue and cost last year. As a reminder, we expect service gross profit margin to typically be in the mid-50s. Operating expenses were $12.8 million for the quarter, down $4.5 million or 26% from $17.3 million in Q3 last year. The large reduction in costs reflects lower compensation costs due to the reorganization in Q1 this year and lower other cash costs from our streamlining efforts. We still expect even more cost savings in Q4 from our streamlining efforts as not all the benefits were fully realized in Q3. Non-GAAP expenses, which exclude noncash and nonrecurring items were $8.6 million for the quarter, down $5.5 million or 39% from $14.1 million in Q3 last year. Again, the decrease is due to the impact of the reorganization and streamlining efforts. Net loss per share for the quarter was $0.38 versus $0.50 in Q3 last year. Non-GAAP net loss per share for the quarter was $0.10 versus $0.28 in Q3 last year. We remain on track to generate positive non-GAAP net income in Q4 even with our recent decision to invest in more resources to accelerate growth in our focus areas of retail loss prevention and digital authentication. Regarding cash flow, we ended the quarter with $12.6 million in cash and short-term investments. Free cash flow usage was down considerably from $7.3 million in Q3 last year to $3.1 million in Q3 this year, a decrease of $4.2 million or 58%. The decrease largely reflects a significant reduction in our total expenses. Looking forward, we remain on track to deliver positive free cash flow in Q4 despite our recent decision to invest in more resources to accelerate growth in our focus areas, again, of retail loss prevention and digital authentication. Looking further ahead, we expect to rebuild our cash balance via operating cash flow throughout 2026. For further discussion of our financial results and risks and prospects for our business, please see our Form 10-Q that will be filed with the SEC. I'll now turn the call back over to Riley for final remarks. Riley McCormack: Thank you, Charles. In the wake of the relentless acceleration of AI models and agents, a vacuum of trust and authenticity is being created. Trust is fast becoming the only currency that matters and the future will belong to companies that make that currency scalable. We believe Digimarc is ideally positioned to lead that charge. We are focused on delivering a future where humans and intelligent systems alike can verify what's real, protect what matters and move forward with confidence. We are focused on filling the ever-expanding vacuum by positioning ourselves to deliver trust in every interaction, spanning both the physical and digital worlds. We are building the trust layer for the modern world, a layer that is needed now more than ever and is forming a massive opportunity we were created to deliver. Operator, we'll now open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Jeff Bernstein with Silverberg Bernstein. Jeffrey Milton Bernstein: Just a couple of unrelated questions. One, can you just give an update now on HolyGrail? What's happening there now? Riley McCormack: Yes. So Jeff, it's in our slide. We gave an update on what we're doing and not just HolyGrail, right, across all recycling opportunities. So as we announced a couple of quarters ago, Belgium is getting going and there's conversations in Germany. And actually, we included a link in our deck. You can click on some more details on both of these. Jeffrey Milton Bernstein: Okay. And so these are still -- Belgium is a full country pilot essentially, right? Riley McCormack: Yes. Jeff, if you go to the website, you can see all of this. It's on flexibles, but yes, it's across all of Belgium. Jeffrey Milton Bernstein: Yes. Got you. Okay. All right. And then you mentioned the impact in Q4 of the retailer contract renegotiation. Does that mean that there's still some revenue there or there's still something going on there or is it just that the contract lapsed and there's the impact in Q4? Riley McCormack: Yes. We still have a relationship. It's still a value customer. We're not going to talk about any customers by name or details, but I would point you, Jeff, to what I shared in the last call in my prepared remarks and an update Charlie provided today, but they're absolutely still a customer, and have wonderful opportunities with them across loss prevention specifically in the gift card space. Jeffrey Milton Bernstein: Got you. So -- but that prior particular contract is over, not being renewed? Riley McCormack: Correct. We have a contract renegotiated that led to large downturn. So yes. But we still have other contracts open with them, Jeff. Jeffrey Milton Bernstein: Right. Understand. Understand. No, that's perfect. And then just interested in your thoughts around the -- I guess, it was AB 853 in the final version or whatever, but the California AI-related law that got passed that had some digital watermarking language in it. And what, if anything, it means? Or is it sort of really a long-term kind of opportunity? Riley McCormack: Yes. Unfortunately, this one did not have digital watermarking language in it. They talked about a couple of requirements that might play on this space. Our belief is a couple of things, and this hasn't changed, is that, first of all, there is not a single system of trust and authenticity in the world that is based on, I guess, fakes or synthetic content being marked as such, right? It's always an opt-in because that's where the value comes if it is removed. So one, I would -- our belief has always been that, yes, it might be important to label certain things as AI-generated. But really what's important is giving human beings the ability to optionally to not mandate, right, respect privates to mark their items as authentic. That's how systems of trust and authenticity work. And then two, without having a permanent tether, right? So what this law is talking about is metadata. And metadata right now -- until Internet is completely re-architected, which I don't think is going to happen in the next couple of hundred years, metadata is stripped out. So excited to see governments take action in terms of a step in the right direction. I don't -- our belief is this doesn't go anywhere near far enough and the previous bill from last year would have addressed all of these concerns, and we'll see how this plays out. But I would also point you to, Jeff, when we talk about our digital space, right, you'll notice that providence and authenticity is not necessarily an area we're focused on right now. That's for a couple of reasons. This might be an area where good enough for the time being is good enough, but more importantly, regulations are not quick catalysts for revenue. So even when a regulation were to take place and -- look, we've seen this in your first question about recycling, right? PPWR passed a couple of years ago, it still takes the time. So we're not looking for regulation to drive business. I think regulation is a nice sort of cleanup, maybe to get the last 10% or 20% of the market. But we're focused on selling things that actually people are really interested to purchase themselves because of an immediate ROI, not because some government says something because some other government is going to say something else. Operator: [Operator Instructions] Your next question comes from the line of Jeff Van Rhee with Craig-Hallum Capital Group. Vijay Homan: This is Vijay Homan on for Jeff Van Rhee. Just kind of a quick one. You've got the first few retailers using Digimarc-protected cards. Just kind of curious how that's going to ramp? Is that about winning more partners, adding more of their retailers, adding geographies? Just kind of what will be the drivers of that ramp? And what are the steps that are going to take you from A to B? Riley McCormack: Yes. Great question, and the answer is all of the above, right? So our focus in the industry and our partners' focus is on lighting up more and more retailers, lighting up more and more brands for those cards to flow through those retailers both in the U.S. and other countries in North America and countries around the globe and also cards that aren't necessarily sold through these existing channels today. So the answer is all of the above. What we've talked about with our initial rollout was the results, and that's giving the confidence -- the industry the confidence to take this in a broader direction across multiple different vectors. Vijay Homan: Okay. Got it. And then just one more. You kind of -- you made some executive changes to the sales org obviously with Tom Benton leaving. If you could just walk us through some of the go-to-market changes that have come out of that and kind of some of the additional steps you foresee taking? Riley McCormack: Yes, I'm not sure what you're saying in terms of what's the go-to-market. Can you ask the question maybe more directly where you're trying to get at? Vijay Homan: No, I was just curious if there's any updates there. Just anything kind of that's changed now that the personnel is different. Riley McCormack: No, nothing has changed. We still have the full rev team and marketing team moving forward with their jobs. Operator: There are no further questions at this time. This now concludes our question-and-answer session. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Ladies and gentlemen, welcome to the DexCom Third Quarter 2025 Earnings Release Conference Call. My name is Abby, and I will be your operator for today's call. [Operator Instructions] As a reminder, the conference is being recorded. I will now turn the call over to Sean Christensen, Vice President of Finance and Investor Relations. You may begin. Sean Christensen: Thank you, operator, and welcome to DexCom's Third Quarter 2025 Earnings Call. Our agenda begins with Jake Leach, DexCom's President and Interim CEO, who will summarize our recent highlights and ongoing strategic initiatives, followed by a financial review and outlook from Jereme Sylvain, our Chief Financial Officer. Following our prepared remarks, we will open the call up for your questions. At that time, we ask analysts to limit themselves to 1 question each so we can provide an opportunity for everyone participating today. Please note that there are also slides available related to our third quarter 2025 performance on the DexCom Investor Relations website on the Events and Presentations page. With that, let's review our safe harbor statement. Some of the statements we will make on today's call may constitute forward-looking statements. These statements reflect management's intentions, beliefs and expectations about future events, strategies, competition, products, operating plans and performance. All forward-looking statements included on this call are made as of the date hereof based on information currently available to DexCom, are subject to various risks and uncertainties, and actual results could differ materially from those anticipated in the forward-looking statements. The factors that could cause actual results to differ materially from those expressed or implied by any of these forward-looking statements are detailed in DexCom's annual report on Form 10-K, most recent quarterly report on Form 10-Q and other filings with the Securities and Exchange Commission. Except as required by law, we assume no obligation to update any such forward-looking statements after the date of this call or to conform these forward-looking statements to actual results. Additionally, during the call, we will discuss certain financial measures that have not been prepared in accordance with GAAP. Unless otherwise noted, all references to financial measures on this call are presented on a non-GAAP basis. This non-GAAP information should not be considered in isolation or as a substitute for results or superior to results prepared in accordance with GAAP. Please refer to the tables in our earnings release and the slides accompanying our third quarter earnings call for a reconciliation of these measures to their most directly comparable GAAP financial measure. Now I will turn it over to Jake. Jacob Leach: Thank you, Sean, and thank you, everyone, for joining us. Before we begin, I'd like to take a moment to recognize Kevin Sayer, who is not on the call today, and as many of you know, has taken a temporary medical leave. Kevin, I know you're listening today, and I look forward to catching up with you after the call. Now on to the quarter. Today, we reported third quarter organic revenue growth of 20% compared to the third quarter of 2024. We continue to benefit from category growth, recent CGM access expansion and solid share performance in both our U.S. and international businesses. In the U.S., we again saw more of our new customer starts coming from the entire type 2 population as we benefited from the growing type 2 coverage and expanded reach within primary care. As a reminder, we now have coverage established for anyone with diabetes with the national formularies of 3 of the largest commercial PBMs. This includes active coverage for nearly 6 million type 2 non-insulin lives, which represents about half of the type 2 NIT commercial population in the U.S. Of course, the journey is not done, and we will continue to work tirelessly until we have coverage for this entire population of more than 25 million Americans. What continues to give us confidence is the growing body of CGM outcomes evidence for this population. This leads us to believe that this access expansion is a matter of when, not if. Given the significant level of CGM usage that already exists among this cohort, we have more real-world evidence available today than we have ever had in any of our prior advocacy campaigns. We already have seen positive updates to the latest standards of care for this group, which we expect to be further strengthened as randomized controlled trial data continues to emerge. This summer, we saw the first wave of non-insulin RCT outcomes presented at the annual ADA conference, and we are now working to build on that with our own well-designed RCT. We built our trial to be representative of the wide spectrum of people with type 2 diabetes and look forward to providing a readout early next year. Similar to our MOBILE and DIaMonD Studies, we believe this data set can become the cornerstone of our ongoing type 2 evidence road map. This not only helps us advocate for the remaining type 2 lives in the U.S., but it also helps us as we push for greater type 2 coverage across the globe. As our customer base becomes increasingly diversified with this broader coverage, we have also continued to iterate our product experience to make it more personalized for each of our users. One example that I'm particularly excited about is a new feature called DexCom Smart Basal. As we continue to learn more about the type 2 customers on basal insulin and their health care providers, we've observed several trends. First, there is apprehension to start basal insulin for those who truly need it. More than 1 in 3 patients avoid basal insulin altogether because of the fear of hypoglycemia. For those who are on basal insulin, about half of the customers who ultimately progress to mealtime insulin never reach an optimal dose of basal insulin. And for those that do, it typically takes several months to find the right dose. We have an opportunity to make this experience so much better for our customers. DexCom Smart Basal is a titration module built within the DexCom app that is designed to make basal insulin titration and management simpler, faster and personalized for our customers. Our algorithm team designed this new software to learn from the daily glucose patterns of customers and better identify the ideal timing and dose of their basal insulin. With Smart Basal, we also expect to improve adherence and greatly reduce the required workflow for the prescribing community as titration has historically required ongoing manual inputs and frequent office visits. DexCom Smart Basal is currently under review with the FDA and for CE Mark. Once available, this feature will further advance our value proposition amongst the type 2 basal population and for the physicians that treat them. We also continue to enhance the value proposition of Stelo with ongoing software updates, broader distribution and new metabolic health partners. I'm very proud of how far Stelo has come in such a short period of time. In just the first 12 months in the market, Stelo has surpassed $100 million in revenue and has increased awareness of what CGM can do for everyone to improve metabolic health. We are continuously making the app more personalized and engaging. We simplified ordering and reordering and our growing base of partners has enabled broader health insights for our customers. And this is just the beginning. We'll continue to make this feel like more of a consumer experience over time. We've also been getting a lot of inbound interest recently in bringing Stelo to the international market and look forward to these extensions in relatively short order. In addition, everyone at DexCom is very excited for the broader launch of our G7 15-day system. Over the past few months, our team has done an incredible job securing reimbursement for this product at the same net price to DexCom and low out-of-pocket cost for our customers. In fact, we now have contracts finalized with Medicare, every major commercial payer and our commercial DME partners. By finalizing these contracts, we've cleared a key step to enable our broad-based launch. As we've previously mentioned, we're currently in our initial launch with our Warrior community as we gather feedback for our broader launch. We are looking forward to our broader rollout in the coming weeks. As we expand this launch, we are also continuing to innovate on the entire customer service experience. We recently introduced a completely new digital experience called My DexCom Account, which is rolling out country by country as we speak. My DexCom Account is a new online account portal that streamlines and simplifies the DexCom digital experience. Built on direct customer feedback, this new platform will allow instant connectivity for online support, real-time visibility into orders or open tickets and active tracking for sensors. It will also greatly simplify service requests for our customers as the site can autofill necessary user information, including the serial number of a sensor that may require service. Between updates like this, our new pharmacy replacement model, ongoing software investment and our continued focus on product performance, we are demonstrating our commitment to advancing the customer experience. And this is just as true today despite some of the media that has been circulating on this topic. So let me make one thing clear. The customer is and will always be the North Star for this company. This is what drives us every single day, and it's what's also driven me here at DexCom for over 20 years. That will not change. I recognize the investment community is attempting to interpret data on this topic. As we recently shared, our complaint rates for G7 have been largely stable over the past couple of years, and this continues to be the case across important categories, including sensor performance. But I also want to speak to our loyal customers and prescribing community today. If any of you have an experience with DexCom that does not meet your expectations, we understand and that is not good enough for us. We're always listening and we're always making improvements as a result. For G7, this has included improvements in Bluetooth connectivity, improvements to the adhesive and most recently, addressing deployment challenges that we identified earlier this year. Through this ongoing work, our product continues to get better. Status quo has not and will never be our guiding light. I'm confident to say that the quality of the sensors coming off our lines today is exceptional and meets our high standards and the expectations of our customers. To close, I just want to note that I am honored and excited to be serving as DexCom's next CEO. During the fall conference circuit, I had the opportunity to lay out my initial vision as the next CEO and share my conviction in this business over the long term. I look forward to sharing even more over the coming months. Our future remains very bright. Our team is incredibly strong, and the opportunity ahead of us to transform metabolic health is unlike that at any company I can think of. With that, I'll turn it over to Jereme for a financial update. Jereme Sylvain: Thank you, Jake. As a reminder, unless otherwise noted, the financial metrics presented today will be discussed on a non-GAAP basis. Reconciliations to GAAP can be found in today's earnings release as well as the slide deck on our IR website. For the third quarter of 2025, we reported worldwide revenue of $1.21 billion compared to $994 million for the third quarter of 2024, representing growth of 22% on a reported basis and 20% on an organic basis. As a reminder, our definition of organic revenue excludes the impact of foreign exchange in addition to non-CGM revenue acquired or divested in the trailing 12 months. U.S. revenue totaled $852 million for the third quarter compared to $702 million in the third quarter of 2024, representing an increase of 21%. As Jake mentioned, we continue to see all areas of type 2 diabetes become a bigger contributor to our U.S. new starts given our broader presence within primary care, significant new coverage within the non-insulin market and the continued growth of the basal market. We'll work to further build on this momentum, particularly as we push for even broader coverage for this group. International revenue grew 22%, totaling $357.4 million in the third quarter. International organic revenue growth was 18% for the third quarter. This marked our third straight quarter of accelerating growth internationally with particular strength coming from regions where we have expanded access in recent quarters. For example, France continues to stand out as one of our fastest-growing markets year-to-date. In fact, our growth in France has accelerated during every quarter of 2025 as we have built off the significant new coverage that we finalized late last year. Canada also performed very well during Q3 as we saw a nice uptick in demand followed quickly behind our new coverage in Ontario. As a reminder, in both of these markets, we now have coverage secured through basal insulin use, and we expect more markets to move this way over time. These are great examples of the type of growth we can deliver as this type 2 coverage emerges. Our third quarter gross profit was $741.3 million or 61.3% of revenue compared to 63.0% of revenue in the third quarter of 2024. During the third quarter, we made continued progress in stabilizing our global sensor supply as we were able to fully restock our level of educational samples in the field and further rebuild our finished goods inventory levels internally. Given this progress, we were able to taper back our investment in expedited shipping by the end of Q3. In fact, we recently began shipping via ocean freight once again, beginning the transition back to more cost-efficient methods of transportation as we close 2025. While these supply dynamics have progressed in line with our plan, our third quarter gross margin was impacted by scrap rates at our manufacturing facilities that were higher than expected, albeit an improvement from the second quarter. As Jake mentioned, earlier this year, our team identified certain third-party components that were contributing to an uptick in deployment issues for our sensors. While we have since addressed that issue directly, we have chosen to provide extra scrutiny to supplied products to ensure the highest quality product gets into the field, even if this results in higher costs in the near term. We expect these scrap rates to continue to improve in the coming months. Operating expenses were $468.4 million for Q3 of 2025 compared to $413.9 million in Q3 of 2024. Despite some of the challenges on gross margin, the company has been incredibly focused on managing operating expenses even as we increase our investment in R&D spend. Operating income was $272.9 million or 22.6% of revenue in the third quarter of 2025 compared to $212.0 million or 21.3% of revenue in the same quarter of 2024. Adjusted EBITDA was $368.4 million or 30.5% of revenue for the third quarter compared to $300.1 million or 30.2% of revenue for the third quarter of 2024. Net income for the third quarter was $242.5 million or $0.61 per share. This was the highest quarterly earnings per share in the history of our company. We remain in great financial position, closing the quarter with greater than $3.3 billion of cash and cash equivalents. We had a very strong free cash flow quarter, which helped us increase our cash and cash equivalents balance by nearly $400 million, even as we repurchased shares over the course of the quarter. This cash level provides us with significant flexibility. And given where our shares are currently priced, we plan to settle our upcoming $1.2 billion of convertible notes in cash. In addition, we plan to remain in the market this quarter, repurchasing additional shares. Even after settlement of this convert, we'll have plenty of cash on hand to assess ongoing capital allocation opportunities, including additional repurchases. Turning to guidance. We are raising our revenue guidance to a range of $4.630 billion to $4.650 billion, representing growth of approximately 15% for the year. For margins, we are lowering our 2025 non-GAAP gross profit margin guidance to approximately 61% to reflect the additional scrap dynamics we discussed earlier. For both non-GAAP operating margin and adjusted EBITDA margin, we are now guiding to a range of 20% to 21% and 29% to 30%, respectively, as we expect to offset some of the gross margin pressure through continued OpEx leverage. With that, we can open up the call for Q&A. Sean? Sean Christensen: Thank you, Jereme. As a reminder, we ask our audience to limit themselves to only 1 question at this time and then reenter the queue if necessary. Operator, please provide the Q&A instructions. Operator: [Operator Instructions] And our first question comes from the line of Travis Steed with Bank of America. Travis Steed: First, I want to send well wishes to Kevin. I hope things are going well. Look forward to having you back. But the question is there's been a lot of attention on Street '26 estimates and what your growth might look at -- look like in '26. And just curious if there's any color you could share with us today as we start to think about our 2026 growth and the modeling at a high level. Jacob Leach: Yes. Thanks, Travis. While we're not going to provide specific guidance for '26, I'm happy to give you a little color on how we think about framing up our guide for '26. So the way we look at it as we're building it up for the year, when you start the year, a lot of different variables that can play out throughout the course of operating throughout the year, there's lot of puts and takes. And so we obviously -- that's why we often frame it based on a range. And so when I think about the current coverage landscape that exists today globally, so those that today have coverage and access to CGM, it certainly unlocks and affords a nice runway of growth for the next couple of years, and certainly in that double-digit range. But I think as we look at our range, the top end of our range is probably slightly below where the Street is today for our base case. Certainly, there are opportunities for us to outperform should they happen, things like expanded access and our ability to take share based on our innovation pipeline. But from a base case perspective, we really think that the top end of that range probably comes in just under where the Street is. Operator: And our next question comes from the line of Larry Biegelsen with Wells Fargo. Gursimran Kaur: This is Simran on for Larry. So I just wanted to maybe start off with the commentary around G7 and G7 performance and the noise during the quarter. It sounds like those issues have been resolved from an engineering standpoint or a manufacturing standpoint. So can you just please confirm that? And then has the noise been disruptive to new starts or prescribing patterns in Q3 at all? And do you expect it to be disruptive in Q4 or 2026? Jacob Leach: Yes. Thanks, Simran, for the question. So as I mentioned, we feel really good about the quality of the sensors that we're producing, both from accuracy, reliability and also addressing those deployment challenges that we ran into at the beginning of the year. Our team has learned a tremendous amount about those and been able to really solve them in the factory. So we're feeling great about the product. I've actually been out in the field recently talking to customers, spending quite a bit of time with both prescribers and those using our products and really listening and making sure that we're addressing all their concerns and understanding what they're experiencing. And I am hearing from all of them that things have improved since those deployment challenges we experienced in the front half of the year. So we feel really good about where we're headed. Jereme Sylvain: Yes. And then to your question on potential impact on patients in the field, around the fringes, we have heard questions out there. And so those are things we're out addressing, as Jacob mentioned, getting out into the field and making sure folks understand what happened. And the reality is we see that the complaint rates, while they're consistent with where they've been in the past, we know those types of complaints are the frustrating ones. So there's likely been a bit of an impact on new starts here over the course of the third quarter. The good news is we're still hundreds of thousands of new customer starts in the U.S. and certainly strong outside the U.S. as well. So while the quarter was impacted by slightly below a record, still really strong performance over the course of this quarter and really proud of that. I'm really excited about what happens now as we've addressed any of these concerns out there. We're really excited to see how this impact along with our sales force, along with some of the educational samples that are available, along with supply being in a good position, that will impact us here in the fourth quarter and beyond. Operator: And our next question comes from the line of Robbie Marcus with JPMorgan. Robert Marcus: I wanted to ask, as you look at the new patients, where are you seeing the most growth? Is it kind of slowing down in type 1 and type 2 intensive and getting most from basal and nonintensive? And do you need to do anything differently out in the market and whether it's advertising or the field force to keep driving uptake of these increasingly new and important patient groups? Jereme Sylvain: Sure, Robbie. Yes, this is Jereme. I can answer that. I think where we see the growth, we still see strong performance really across all the type 2 markets. That includes intensive as well. So we've seen a lot of new patients coming in type 2 intensive basal and certainly in non-insulin as coverage is out there. We still see a decent amount of type 1 patients. But of course, as you know, type 1 is most penetrated and smallest population. So naturally, as we get bigger and more coverage, you're going to see that. To your question then how do we go to market and where do we go, you're 100% right. I mean our teams are constantly looking at where we call, who we call on, which channels we market in and where folks go. And so we do think about it a little bit differently. I often compare it to shaking a tree, right? Sometimes you shake a tree, you got to move to the next tree to shake it. And so we are doing those kinds of things as we look at where the opportunities are. So well taken, something I know the internal team has been looking at and we'll continue to look at is making sure that we continue to drive the growth and find the patients. I mean when you look at how much coverage is out there, there are many more people with coverage than there are people that are already using CGM. So there's a lot of opportunity out there to go get. Operator: And our next question comes from the line of Danielle Antalffy with UBS. Danielle Antalffy: Jake, I just wanted to follow up on Travis' question, and thanks for the color you gave in the framing. I guess I just want to clarify one point, and that is, so it sounds like that is assuming no expanded coverage. I mean how -- what are your latest thoughts on potential for expanded coverage in 2026? And I guess the bigger question is, will you guide according to your thoughts on expanded coverage? Or will you only reflect guidance based on coverage today? And I'll leave it at that. Jacob Leach: Yes. Thanks, Danielle. Yes, to be clear, when we think about a base case for next year's guide, it includes the coverage that we have today, what the landscape looks like, both across insulin use and noninsulin use and then as we look globally. So that's really how we're going to think about our base case guide for the year. Jereme Sylvain: Yes. And as we move through the course of the year, we'll make sure we point out the wins that are significant, right? There's always little wins here and there, but the wins that are significant. And Danielle, you know there's some potential big wins out there, both across non-insulin, basal and even really -- even as you get into some more emerging markets. So there's a lot of opportunities for wins. But again, our base case won't include those. Operator: And our next question comes from the line of Matt Taylor with Jefferies. Matthew Taylor: I guess I'll stay on the thread for a minute. You've gotten the 6 million commercial lives covered. I think based on MOBILE and prior analogies, we might expect it will be natural to see you have that readout, submit it and get NIT2 coverage by the end of next year around that time frame. But there's been some chatter that maybe that comes earlier. I don't know exactly where that's coming from. Could you talk about the potential to get broader NIT2 coverage earlier in '26? And what would be the mechanism to do that? Jacob Leach: Yes. Thanks, Matt. So I think, as I mentioned before, this is really our expectation that it's not if, it's just when this coverage is going to come. The benefits for users are so clear in this population of non-insulin users as we continue to see further expansion, whether you look at it from the cost savings perspective to a payer in the first year or you really look at those outcome results that patients get. One of the things I think about is the study that we did in primary care in a very focused area in Ohio, where when we started that trial, the patients -- there was over 170 patients in that study, only one of them was meeting the ADA's recommended guidelines around A1c. And then within the 12-month period, more than half of that group was hitting the recommended target, and that was all based on CGM use and this is, again, a non-insulin population. So just that type of powerful outcome is clearly some of the things that's powering this expanded coverage over time. So timing is hard to predict, but we're going to be ready for it when that coverage comes. Operator: And our next question comes from the line of Joanne Wuensch with Citibank. Joanne Wuensch: And Kevin, I hope you feel well soon. My question has to do with the 15-day sensor. It sounds like it's in limited launch right now with the Warriors and then it will expand. What does it take to expand into a broader group? And how do we think about the revenue contribution as well as the operating margin or gross margin potential? Jacob Leach: Yes. Thanks for that question. We are incredibly excited about this product launch, and it is in the Warrior community today. We've got a number of folks on the sensors. And we're getting great feedback both about the performance of the sensors as well as the new extended duration and the accuracy of the product. And so we plan to be shipping into -- with our channel partners here in the next couple of weeks to really being out that broader launch. And a lot of like getting ready for that was around making sure we got the coverage, as I mentioned, making sure we're working with our insulin partners on the integrations and really just doing all the training and everything necessary to make this a very successful introduction of our next innovation. Jereme Sylvain: Yes. And to your question on the margin impacts, given the timing of the rollout, we've never really expected it to be a big contributor this year. It will have a pretty nominal contribution from a gross margin perspective and from a revenue perspective. We do expect next year, it becomes an opportunity to go after additional patients for those folks that certainly are looking for longer wear time. I think it's a great opportunity there. And clearly, from a margin perspective, all of the things we've historically said around the 15-day product, that still all rings true. So I think as that rolls out, we'll be pushing it out into the field. And we'll give you updates over the course of 2026 based on how that rollout is taking place. But we sit here in a great position to launch it because our coverage is going to be robust when we launch it. Obviously, we're going to have partners that are going to be ready to catch it and handle it and integrate it. And so having both of those ready, I think, is going to provide for a really exciting 2026. Operator: And our next question comes from the line of David Roman with Goldman Sachs. David Roman: I appreciate the feedback and updates regarding the performance of G7 and what you're seeing in your own data. Can you maybe go into a little bit more detail about some of the actions you're going to undertake to ensure that, that message is clear within the broader community? And one of the just highlights that comes to mind here is the extent to which there is such a consumer element to this category versus some of the other segments that all of us follow. You have a much broader swath of stakeholders to target. So maybe just talk to us about what the plan is to make sure that the message is consistent across all relevant stakeholders and maybe what investments you're making to enable that? Jacob Leach: Yes. Thanks for the question, David. So we are out in the field. That's one of our primary communication points with customers, both the prescribers and our users. So we're out there making sure they understand all the things we've done to address this issue. One of the things I'd like to introduce is the fact that we mentioned that our complaint rates have been generally stable over time, and that is true. One of the things we have seen though is at the beginning of the year, we saw those complaints around out-of-box failures increase. And what was really good to see is that the -- those increases in rates there were offset by decreases in accuracy complaints, Bluetooth complaints, a lot of things over time that we've been working on. So as we fixed the issue with the deployment, we really do anticipate seeing those complaint rates come down overall, which has really been our goal for a while. When it comes to engage with consumers, we're really looking at how do we make sure that the message is clear on exactly what performance looks like and how much we've done to improve things. And so that's really the message that I'm carrying as well as our entire sales team and all of our team members here are really focused on interacting directly with our customers. Operator: And our next question comes from the line of Marie Thibault with BTIG. Marie Thibault: Just wanted to go back to the scrap rate issue, make sure I understand that better. It sounds like that had to do with materials around deployment. Is that to do with the inserter specifically? And as we think about it improving, is that something we can put in the rearview going into 2026, going into the 15-day rollout? What's kind of the timing on putting that all behind us? Jereme Sylvain: Yes. And that's -- the way you think about it is exactly that. It's how the needle ultimately drops the sensor off into the skin. And I think you can expect to see that really playing out. We're expecting some of that to dissipate here into Q4. The underlying -- when you look at the underlying standard performance and the standard costs and margin, that's been really, really solid year-over-year. In fact, what you would see is you'd be really pleased with what that looks like. So what you're seeing is and what's playing through in the results is a few hundred basis points of what's played out in the combination of freight and some of the scrapping we're doing around these deployments. So what I would expect to see as we move into 2026, and as Jake alluded to, we're really putting this behind us, we'd expect a lot of that to dissipate. That gets you back to more of where we expect it to be a more normalized margin rate. And then you have the contributions, of course, of 15 days. So we do expect to be in a good position as we exit this year and get into next year. And with some of the things Jake had alluded to with lower warranty rates around Bluetooth, complaints around either accuracy and/or adhesives. As these get to be fixed as well, I think that's also a potential opportunity. So some work to be done here, but I think we're putting it behind us. Obviously, we see -- we've improved a little bit from Q2. We expect to improve again in Q4. And you can see that implied by our guidance, which puts us in a good spot as we move into 2026. And we'll give you one more clarity when we give official guidance for 2026 here in the next few months. Operator: And our next question comes from the line of Matthew O'Brien with Piper Sandler. Matthew O'Brien: And again, I hope Kevin is recovering right now. But just wanted to talk about the guidance for Q4. We -- on a 2-year stack basis, we've decelerated here in Q3, especially domestically. And I think Q4 is also implying a pretty -- another step down on a 2-year stack basis. And I think, again, most of that's probably domestic based on how well you're doing internationally. Why is that decelerating? And then if you do the 2-year stack in Q4, it's a little less than 10% growth. Why are we comfortable in low double digits in '26 if you've got some deceleration here at the end of '24 -- sorry, end of '25? Jereme Sylvain: Sure. Yes. Let me maybe talk about the quarter and just especially maybe more importantly, the guidance. I think that's what you're getting at is exit rates. And we understand we are getting at. So I'd first and foremost say, when you look at the year over time, the one thing to be mindful of is we are starting to see a more normalization in the seasonality of our business. So I think first, you have to remember, and that's been happening over years now. And I think as you go back, you'll see it, where the contribution as a percentage of the full year has been declining in Q4. And the contribution from Q1 has been increasing. And I would expect that to continue to take place this year. So as you're comparing it, I think the one thing to be thoughtful about is Q1 actually has now a seasonality benefit. You saw it this year, quite frankly. So I think you expect to look at it from that perspective. When you peel that back, actually, what you're seeing is a pretty solid stack growth rate. I mean when you peel back those -- remember, that Q4 dynamic now has been happening now for multiple years. So I think it's important that as you zoom out and you think of it from that perspective, you look at the underlying patient base, which I think your models will show the underlying user growth has been solid. I think what you're also expecting to see is the delta between unit volume growth and revenue start to come closer. You're seeing it here in the third quarter, and you're going to see it here for the back half of the year. So you put all those together, solid underlying user growth, which is how we really measure the business, and that continues to go well with consistent pricing and then the seasonality effect in effect, I think you can start to see exactly how we're thinking about next year. And that's just as a base case. So hopefully, that gives you some context. Always happy to talk further about it, but I would include those as you're assessing kind of modeling seasonality. Operator: And our next question comes from the line of Michael Polark with Wolfe Research. Michael Polark: I wanted to ask on gross margin and the fourth quarter implied guide, which were the last 2 questions. So I guess I'll follow up on the gross margin, Jereme. I heard a few hundred basis points cumulatively from scrap and freight. Can you spike out or remind us on just how much is the freight component, how much is the scrap component as we run that out through the rest of the year into '26? Jereme Sylvain: Yes. It's a little -- yes, it's basically 50-50. It's in that ballpark of the impact. If you remember, we had in Q1, we had to expedite some freight and then we talked about for the rest of the year being about 75 bps for the rest of the year -- on the full year numbers, by the way. So you can see why on the full year, when you put it all together, it's about 50-50. Now as we get back to more ocean freight, and we expect to do that here, obviously, we put some stuff on ocean here exiting the third quarter and into the fourth quarter. Next year, the goal is to have a majority, if not all of our product really moving via ocean, especially as it comes over from Malaysia. So I'd expect to see certainly some benefit there. And as again, as Jake alluded to, the out-of-box failures through the work we're doing around sensor deployment as that comes down, again, we expect to see that dissipate. So think about 50-50 on both of those. And you can think about that on this year. So it gives you your jumping point exiting off of 2025 as to how to think about 2026. Operator: And our next question comes from the line of Jayson Bedford with Raymond James. Jayson Bedford: Maybe just for me on the type 2 uptake, can you just comment on the utilization within this user base versus those type 1 users? Jacob Leach: Yes. Thanks, Jayson. So when we think about the utilization of our system across different customers, obviously, AID customers have the highest utilization, greater than 90% or so. So really, because of the fact that they need those sensors to power their system, they're high utilization in that group. And as you kind of step down into the intensive insulin users, not on AND, you're still in that north of 85% utilization for that group, again, because of all the benefits of the CGM and the fact that they're on intensive insulin. So I want to make sure they don't have the issues with hypoglycemia or anything. Now if we start to take a look at the broader type 2, starting with basal, that group historically has been pretty strong on utilization between like 80% to 85%, so pretty close to those IIT users. And that, again, really comes from the benefit -- shows the benefit they're getting from the product. And we saw that in our MOBILE Study. We asked patients after they participated in that study, we want to continue using CGM. And 95% of them said yes, and we saw high utilization rates during that study. And that's what we see in our field data. And as we step down into the non-insulin type 2, it's lower than the previous categories, but still around that 75% utilization mark. And so something that we're seeing also in our Stelo product as we have quite a few type 2 non-insulin users there that don't yet have coverage for CGM. They're using Stelo, and that's definitely the highest utilization group for our Stelo product. Operator: And our next question comes from the line of Shagun Singh with RBC Capital Markets. Shagun Singh Chadha: I was just wondering, to what extent are the quality issues impacting new patient starts or did in Q3? When do you expect to return to record levels? And do you need that expanded access to return to record levels again? Jereme Sylvain: Yes. So I think we covered a little bit earlier, and I know you're jumping between calls. The expectation is there's a little bit of an impact here in Q3, and we've seen it. And we've said basically that Q3 was still hundreds of thousands of patients, but just slightly below a record here. The expectation is certainly as we move into Q4, I mean, the internal expectations for Q4 is to push and get back to those records. And obviously, next year and we get into 2026, our assumption is going to be record new year for patients in 2026. And that's, again, in our base case. And so -- and that's with existing coverage. So I don't think we need necessarily new coverage to push into that. And that wouldn't be our expectation going into it. Obviously, more coverage provides more opportunity, but those would be our expectations. And hopefully, that gives you some context. Operator: And our next question comes from the line of Brandon Vazquez with William Blair. Brandon Vazquez: Jereme, you were talking a little bit about the gap between growth in the volume and pricing closing a little bit. I was curious if you could quantify it at all, where if you do the math kind of in the U.S., especially, where our model suggests something like $1,400 to $1,500 annual revenue per patient somewhere in that ballpark, down a lot over the past couple of years, as you've alluded to. Where -- are we in the ballpark there on that pricing? And then how does that pricing trend over the coming years? Where do pricing declines on a year-over-year basis start to level out? Jereme Sylvain: Sure. Yes. I don't think you're far off. I mean, at the end of the day, we give patient numbers at the end of the year, and you can do the math globally, and we've talked about kind of the various splits. So I think you're in the general ballpark there. The price -- the year-over-year price isn't much of an impact channel by channel. And so I think that's really important to note. We don't necessarily have significant pricing impacts, say, retail to retail or DME to DME year-over-year. Those typically fall in that 2% to 3% range. Where we typically see it is in mix. And in mix, it's where you have folks moving -- typically, there's been a move to the pharmacy over time. That has been stabilizing over time. And so what you're seeing is you're starting to see that coming in. And you'd expect it to see it come in, and we talked about this at the beginning of the year. So it's playing out as we expected. The interesting thing going forward is just going to be -- and this is why it's not necessarily giving a number, but it's just talking through how it's going to work. As you start to think about where coverage exists today and as coverage gets knocked down, most of the new coverage opportunities are coming via the pharmacy. So you think about type 2 coverage, type 2 coverage in NIT is coming through the pharmacy. So that's where your volume is going to continue to grow. On the flip side, there's been a lot of talk about CMS coverage for type 2 and where that would be. And a lot of that would come through our DME partners, where you have Medicare fee-for-service going, and that would then change the method over time. In both of those models, remember, the price year-over-year isn't necessarily impact. It's where patients are getting access to their product and then therefore, the underlying mix that makes that up. So I think what I would say is price isn't the challenge. It isn't the headwind, it's more mix. And the mix has really stabilized. But usually, what happens is when we pick up a lot of new coverage, that's a good thing at the end of the day. And obviously, a lot of coverage in type 2, that's a great thing. And hopefully, and I know we've kind of talked about it a little bit here earlier on the call, we're expecting a time when there's CMS coverage over type 2 non-insulin and that could swing it the other way. So it's just important to have your model set up that way. It will help you follow along. Operator: And our next question comes from the line of Jon Block with Stifel. Jonathan Block: The OpEx leverage has made up for some of the gross margin shortfalls throughout 2025 to help with margin expansion this year. And so I'm just curious, when we think about 2026, is that sort of like a pure role reversal due to 15-day. And Jereme, you mentioned the underlying GM getting better? Or are there arguably additional OpEx opportunities that you still have? I guess what I'm getting at is how do we think about catch-up spend, if that's the right way to frame it into '26 on the OpEx line? Jereme Sylvain: Yes. So what I would say is the work we've done this year is less about catch-up spend and deferral and things along those lines. It's really the work we've done is more around -- how do we get more efficient leaning into tools, leverage? Where do we hire folks in the world and how do we support things? How do we leverage the investments we've already made in technologies that we've made, quite frankly, years ago. So I don't necessarily know that there's a lot of catch-up spend. But we have done a lot of great work around it this year. And so we'll give you a guide next year as we get there. But I mean, we do obviously talk about opportunities for gross margin in 2026, and we expect there to be those opportunities there. In turn, I think there's an opportunity to continue to lever in OpEx over time. We'll see the pace in which we do that. I think there's -- we want to balance investment and don't want to necessarily miss out on opportunities. If there happens to be expansions in coverage next year, we want to be well suited to take advantage of that. So we'll make sure we balance the 2. But we know at the end of the day, our goal is to continue to deliver operation margin improvement over time. So we'll make sure we balance those 2 in the best interest of growing the business long term, but also delivering results back to shareholders. Operator: And our next question comes from the line of Bill Plovanic with Canaccord. William Plovanic: The first off is really, I was wondering if you could talk just about the cadence of the new patient starts as we went through the quarter. Was it back-end loaded, front-end loaded to give us confidence that the fourth quarter might become a record quarter? And then I just -- I know you talked in general about attrition rates, but have you seen any trends in the attrition rates, especially as you dealt with some of the quality issues? Jereme Sylvain: Yes. I'll start with the second one first. The attrition rates have been relatively stable. It's all within the normal kind of ranges we look at. We pay a lot of attention to it. We track it really every week, we have a report out. We pay close attention. So we keep a close eye on it, and they've been stable. In terms of trends over the course of the quarter, I think what we're seeing, at least I'll maybe say anecdotally because I think it takes us a little time to get all the patient data in. I think you guys know this, it takes about 45 to get it all in. So I don't want to make any sort of statements about the back half of September other than I think it's very easy to take some of the anecdotal evidence. And we're hearing a lot of very positive anecdotal evidence. As we speak to our sales leadership and as they kind of pulse the field, I think the sensor deployment issues as those have waned in samples in the field and those have waned in the doctor's offices, you're seeing a lot of anecdotal positive feedback. And obviously, that then typically leads to performance. So it'd be too premature for me to give you a readout on September until I have all the data in the hands, and that's the prudent thing to do. But anecdotally, I think we're very encouraged by what we're hearing. And Jake, you've been meeting with physicians all the time. Maybe you can walk through kind of what you've been hearing out there. Jacob Leach: Yes, certainly. So we are hearing from our prescribers that they had some challenges earlier in first half of this year, in particular, around some of those deployments kind of flowing through into both their offices and then into the customers' hands. And when customers have issues, they tell their prescribers about it, and we heard from everybody. And so when we saw it, we jumped on it and we resolved it. And it's very consistent feedback as I talk to users and prescribers that things have improved dramatically. That being said, issues can still happen, right? You can have an accuracy issue. You can have sensor fall off. All those things, that's why we're making the investment in our service platform and making sure ultimately that it is a competitive advantage for us. The digital investments that we've made are just the beginning around making it easy for customers to get exactly what they need. And that's been a focus of mine, particularly over the last 6 months, looking at how can we improve what we're doing. We've had a lot of plans that have been in place, and I think we've got a lot more coming. So it is a real area of focus for us to make sure that the experience of our users is the best possible. Operator: And our next question comes from the line of Mike Kratky with Leerink Partners. Michael Kratky: I'd echo sending our best to Kevin. I'd like to circle back on a prior question, just about the breakdown of price versus volume growth in your U.S. 3Q number. So our expectation is that we would probably start to see you anniversary some of the significant pricing headwinds that you've seen just coming from channel shifts. So to what extent do you really see that in the third quarter? How should we think about that moving forward, both in 4Q and '26? Jereme Sylvain: Yes. It's a good question. You clearly see some of it based on the growth number, right? And the unit volume growth is based on a patient base. And our ultimate unit volumes don't necessarily change as much quarter-to-quarter. They're based on underlying patient growth. And so what you see is a comp delta there. And that comp delta, as you know, is a channel mix issue last year that certainly hit us that we're anniversary-ing this year, and that's why you see the growth rate number there. So clearly, what you're seeing is a narrowing based on the growth rate this year, but it's a bit artificial. It's a little bit -- this is a bit higher than you otherwise would have seen because of the comp to last year. But nevertheless, you are seeing it. And so I think you can see it here playing out in the third quarter. I think you'll see it play out in the next quarter as well. Certainly, the comps get a little bit different next quarter. So I think that's important to be mindful of. But as you step back over the course of the year and you look at the growth rate in the U.S., I think what you're going to see is underlying unit volumes and revenue performance are starting to tighten up. And that's what we've talked about over the course of the year. So quarter-by-quarter, it can get a little lumpy just based on some of the challenges we had last year. But step back, you can see that playing out over time. And to your point, we do expect to see that playing out in 2026. Operator: And our next question comes from the line of Richard Newitter with Truist Securities. Richard Newitter: I was just wondering, keeping with the very preliminary 2026 commentary, can you describe what's in your base case for any kind of competitive dynamics, possibly even intensifying with Abbott coming out with a dual analyte. Would love to just kind of hear what you're factoring in there. And then same kind of question, just what else are you willing to tell us about 2026 puts and takes as the base case as we're thinking about next year? Jereme Sylvain: Yes. And I appreciate the question. Our goal in at least talking to this was to give you guys some directional feedback as to what the base case would look like next year. Now the base case doesn't represent what I would say is what we aspire to be over time, right? The base case is what I would say is a prudent way to start with the puts on the year. And so things like assumption around competitor product, those are absolutely always considered in there. Obviously, we'll be thinking through anything from coverage -- from known coverage decisions this year, which are already obviously in those base numbers. We'll consider all of that really around the world. So that's why we give you some of that context. And getting into the specifics, I think we got to give you the official guidance before we then get into the official specifics. And that's why we're a little hesitant to start walking through each of the specifics. Obviously, we have a budget for next year. We have a long-range plan, a 5-year long-range plan that we all have in-house here. We'll meet with the Board here in December and roll that out for you guys as we get into next year. But again, I think the context was trying to make sure everybody had an idea for how we were thinking about base case, and we'll get into those specifics when we officially give guidance because then you can put math officially to the numbers. Operator: And our next question comes from the line of Josh Jennings with TD Cowen. Joshua Jennings: I wanted to just -- I know it's only been a couple of months since ADA in the 2Q call, but just any updates on the G8 platform and whether or not ketone sensing has kind of moved up the priority list? And any time lines when we could learn more or any time lines you can provide just in terms of when G8 could move forward towards commercialization. Jacob Leach: Yes. G8 is an incredibly important part of our product portfolio in the future and our future innovation. It is a multi-analyte platform. And as we think about just in general, the cadence of innovation and what we're looking at is we're really focused on meeting broad user needs. So unmet needs across a broad base. We think about it in the type 1 space. We also think about it in some of the higher growth segments as well as the market like our Smart Basal technology that we were talking about. That's a really important way to drive growth in that basal population and really meet those unmet needs. So yes, certainly, multi-analyte is an important part of the future platform. But as we look at G8, we're not going to get into the time lines now. But we will -- one thing I want to let everybody know is we are planning to put together an investor event first half of next year. We're actually going to hold at our Mesa manufacturing facility to give you guys a glimpse into our operations and our high-volume manufacturing plant. And that will be a good opportunity for us to talk about things like LRP and the portfolio of products and all the things we plan to do to drive this business forward. Operator: And our next question comes from the line of Matt Miksic with Barclays. Matthew Miksic: Can you hear me okay? Jereme Sylvain: We can hear you. Matthew Miksic: Terrific. So one question. I'm not sure if this has come up, but it's one of the things we hear in the community recently is some folks holding on to G6 or going back to G6. And I'm just wondering if that's a factor in sort of manufacturing efficiency or line management and what your thoughts are on how and when you'll be able to transition off of that? And I have one quick follow-up, if I could. Jacob Leach: So yes, for G6, we are consistently transitioning customers over to G7. And so the number of G6 users is consistently coming down. We have heard of some folks going back to G6, and it's a very small number. It doesn't really move the needle much at all. And we're going to continue to make sure that G7 meets the needs of all users across the whole spectrum. So no one has a reason to stick with G6. Now we know that as we've seen in some of our previous upgrades between generations, when people are familiar with the technology and they're happy with what they got, they're going to -- they may stick with it, right? And so over time, we're going to keep moving people over to G7. And we haven't announced the official conclusion of G6 in the market. We will, when the time is right, and we'll make sure we give people a heads up when that's going to happen. Matthew Miksic: Okay. That's great. And then on just general product strategy, the DexCom ONE strategy overseas, I think, has been successful in some geographies and kind of met the need that you had set out for that program. But generally, DexCom, of course, has been kind of a core central line product with much of the innovation building generations around the same -- the central platform. I was just wondering if, at some point, you're thinking about adjacencies or alternative approaches to helping patients manage diabetes or other glycemic elements of their life, but with a truly different platform, not a different version of G7 or G8. I'd love to get your thoughts. Jacob Leach: Yes. I appreciate that question, really going into the thinking of broad markets and how do you address those unmet needs. DexCom ONE+ is doing great and a lot of that growth in France that we talked about is on that platform, and it's really allowed us to compete in market segments that we weren't previously because we were focused on the G Series products and the more acute end of the diabetes spectrum. So yes, DexCom ONE+ is a super important part of our portfolio approach to serving the needs of different customers. And the mobile apps and the experience are different there. I mean one another example I'd kind of point to as we expand the opportunity here is Stelo, right? Stelo is a product that spans a pretty broad spectrum of users from type 2 all the way down to prediabetes and then those that are looking at better understanding the metabolic health. We will be taking that product internationally next year. And so we'll see it in a number of markets where we've had a pretty good request and demand for Stelo outside the U.S. And we are -- Dex Basal is a great example. I kind of mentioned it before, but that ability to help a prescriber and a patient really get to the right outcome safely in the clinical study around Dex basal, it was focused on getting people to the optimal dose as fast as possible with no hypoglycemia, and that's what we saw in that study. And we're also excited about the opportunity for it to drive better adherence. So once users, they're going on insulin for the very first time, they're taking an injection. They've maybe never done injections before. There's some apprehension there. But when you show them how much better their diabetes control is when they've got the right dose of basal insulin, it's pretty motivating. And so we do expect to see some adherence improvements there and really just drive general outcomes. So focusing on outcomes for the broad population is what we're trying to do here, and we do it in a number of different ways through different products and different software experiences. Operator: And our final question comes from the line of Anthony Petrone with Mizuho. Anthony Petrone: Best wishes to Kevin as well. Maybe one on gross margin as it relates to the G7 transition and one on just penetration. When you think about the transition to G7, how long do you think it will take to fully roll over the 10-day to 15-day? And what does that do to gross margin once you're kind of on a 15-day heavier user base? And then some chatter just on penetration, even competitive results. When you think about type 2 noninsulin-intensive hypo risk and basal-only, you have basal-only penetration at 20% to 25% and non-insulin-intensive hypo at under 5%. What do you think a reasonable penetration for those 2 segments is over your long-range plan? Jereme Sylvain: Yes. So I'll start with maybe the second, which is getting into the markets. And we've always talked about basal as an example, being a market that should get to about 60% penetration over time. And that's kind of our crystal ball. But it's been pretty darn accurate as we thought about type 1 historically and type 2 intensive. So it's what we think about, obviously, somebody taking insulin, having that sensor on there is a really nice thing, and we've proven time and time again the combination of the sensor plus insulin plus now obviously, DexCom Smart Basal in there. That's a huge opportunity to meet an unmet need in a growing market. So we're really excited about that offering and that can help people manage it. So we do expect that. In the non-insulin and the type 2 hypo-risk population, it's hard to know. That's such a big wide swath of population, especially type 2. And those hyper-risk folks, while they're covered, they do kind of sit typically -- they're typically seen like a type 2 patient, right? So we expect that to be -- 60% is obviously higher than we would -- it would be a high mark there just given where we think basal is. But anything more than 5%, which is where it is. And as it goes up to 10%, 15%, 20%, you're talking about millions and millions and millions of people on the product. So more to come as we go there. We know it's a lot more than today. And we know that with coverage, it's going to be a lot more than today. So we're really excited about that. To your first question on gross margin, what can 15-day do and how long will it take? If you look at historical patterns of how long it's taken from G5 to G6, G6 to G7, it does take a couple of years. As Jake alluded to, folks do get comfortable with technology and to get folks to change over, it does take a little bit of time. Our goal is obviously to go faster. And obviously, with the form factor very similar across 10-day and 15-day, I think there's an opportunity, but it does require a different script. So we're going to work on it over time. We'll give you more feedback as it's getting out into the field. We obviously -- as we get into guidance next year, we'll give you a little more color about what our assumptions are, and we'll have a little bit of time under our belt. So more to come on that one. But the impact obviously is significant for us as we move more and more from 10-day to 15-day and 3 sensors to 2. And obviously, the impact on margin can be significant. But it could also allow us to grow the business more, going into markets where with maybe a DexCom ONE+ product or other products where that 15-day wear life allows us to really compete with what would be a cash pay or a lower reimbursement market. So it allows both. It allows top line growth and going after more markets, and it allows opportunities to expand margin. Very excited about it. Operator: And ladies and gentlemen, that concludes our question-and-answer session. I will now turn the call back over to Mr. Jake Leach for closing remarks. Jacob Leach: Okay. Thank you, everyone, for joining us today, and thank you for the well wishes to Kevin. I know he really appreciates that. And I'd like to wrap up the call today by expressing my deep appreciation to all the employees of DexCom. I'm extremely proud of this team and how we've continued to focus on serving our customers and not getting distracted. In the end, our core values are clear, and we will continue to be unrelenting in our mission to empower people to take control of health. We have a remarkable opportunity to improve the lives of millions of people around the world, and I couldn't be more excited about the future. Thanks, everybody. Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Good day, ladies and gentlemen. Welcome to the Third Quarter 2025 Illumina Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the call over to Head of Investor Relations, Conor McNamara. Conor Noel McNamara: All right. So we'll kick things off. Today, we will review our financial results released after the market close and provide prepared remarks before opening the line for Q&A. Our earnings release is available in the Investor Relations section of illumina.com. Joining us on today's call are Jacob Thaysen, Chief Executive Officer; and Ankur Dhingra, Chief Financial Officer. Jacob will start with an update on Illumina's business, followed by Ankur's review of the company's financials. We will be discussing certain non-GAAP financial measures on today's call, and a reconciliation to GAAP can be found in today's release and in the supplementary data available on our website. Please note that unless otherwise stated or when referring to our end markets, all year-over-year revenue growth rates discussed in our prepared remarks are presented on a constant currency basis, excluding the impact of foreign exchange fluctuations. In addition, all references to China refer to our Greater China region, which also includes Taiwan and Hong Kong. This call is being recorded, and the replay will be available in the Investors section of our website. It is our intent that all forward-looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Illumina files with the SEC, including our most recent Forms 10-Q and 10-K. With that, I will now turn the call over to Jacob. Jacob Thaysen: Thank you, Conor, and good afternoon, everyone. In the third quarter, we delivered another strong performance with revenue, non-GAAP operating margin and diluted EPS all above our guidance range. We reported total revenue of $1.08 billion, and we returned to growth ex China, up about 2% year-over-year. Non-GAAP operating margin was 24.5% and non-GAAP diluted EPS was $1.34, both reflecting strong year-over-year expansion and above our guidance. This performance reflects the momentum we're building through the NovaSeq X transition, especially in the clinical markets, where sequencing consumables revenue grew at a high single-digit rate year-over-year. Given this strength, we are raising our total full-year 2025 outlook with staying disciplined as we monitor macro and funding dynamics through year-end. In our end markets, clinical continues to accelerate. Customers are advancing new assays that demand increasing sequencing capacity and intensity. And the NovaSeq X is proving to be the ideal solution, delivering higher throughput with the same trusted accuracy and workflow as the existing NovaSeq 6000 instruments. Growing sequencing volumes are more than offsetting transitional pricing effects, driving a sequential and year-over-year increase in consumables revenue. In research, we saw stabilization in demand, even as many labs continue to manage spending carefully in light of regulatory and funding uncertainty. Our teams remain closely engaged with customers to help sustain their work. We were also encouraged by the resilience of our business in China, where our revenue came in ahead of our guidance despite ongoing export restrictions. As a reminder, a fraction of our business is served by OEM partners that sell our instruments and consumables into specific customer segments. We have now received approval to serve those partners through the manufacturing of select instruments locally in China. While this marks a measured step forward, we have not yet reached a long-term resolution related to our operations in China, but we remain in dialogue with the relevant agencies. Now, turning to our strategy. In Q3, we made significant progress across the 3 pillars that underpin our long-term financial targets, growing our core sequencing business, scaling into multiomics and expanding our services, data and software capabilities. Together, these pillars are shifting the conversations from cost per gigabase to delivering the highest quality biological insights at the lowest end-to-end cost. Starting with our core sequencing business. In Q3, we had another strong quarter for the NovaSeq X with more than 55 instruments placed in line with our goal of 50 to 60 placements per quarter. Most importantly, we achieved the milestones we have set for our high-throughput transition to the NovaSeq X. Our goal was to reach approximately 75% of high-throughput gigabases shipped and 50% of high-throughput revenue on the X platform by year-end, and we exceeded both here in Q3. Our results highlight the strength and elasticity of sequencing demand. NovaSeq X consumables revenue growth accelerated even as conversion from the NovaSeq 6000 increased, demonstrating that our transition strategy is working. Clinical remains the primary driver, supported by new assay approvals, positive reimbursement decisions and growing demand for more sequencing-intensive tests, all trends that position us well for sustained growth. As pricing headwinds ease and research end markets stabilize, we believe these dynamics will put us back on track toward our long-term revenue growth targets. Moving to our second pillar, scaling into multiomics. Following our announcement, announced acquisition of SomaLogic in Q2, which we continue to expect will close in 2026, we launched Illumina Protein Prep in Q3. This co-developed proteomics assay brings the power of NGS to protein analysis through a simple integrated workflow that delivers scale, precision and accessibility for labs of all sizes. Illumina Protein Prep can measure up to 9,500 proteins per sample and provides highly consistent results in about 2.5 days with minimum hands-on time and at a lower cost per insight. Importantly, Illumina Protein Prep integrates with Dragon and our upcoming Illumina Complete multiomics software suite, extending our end-to-end capabilities from sample prep through data interpretation. Beyond proteomics, earlier this month at ASHG, we expanded our multiomics portfolio with the launch of our 5-base solution, an integrated library prep and software offering that simultaneously reads genetic variances and DNA methylation. Using proprietary chemistry and our new DRAGEN algorithm, 5-base preserved both variant and methylation information in a single workflow, delivering accurate single-base resolution while reducing complexity and cost. Turning to our third pillar, expanding our services, data and software capabilities. Earlier this month, we introduced BioInsight, a new business created to accelerate the use of genomic and multiomics data in drug discovery and research. BioInsight brings together our population sequencing programs, data partnerships and software and AI capabilities under one structure, creating a more strategic platform to collaborate with governments, biopharma and research institutions. By combining advances in sequencing, economics and AI, BioInsight enables customers to generate and interpret data at a greater scale, positioning Illumina to capture new opportunities in this fast-growing space. In the near term, BioInsight will focus on large-scale data generation partnerships with longer-term plans to further monetize data, software and AI-enabled services, adding another layer of growth that supports our long-term financial targets. Together, these initiatives show how we are executing on our strategy, expanding Illumina's reach from sequencing to multiomics and from data generation to biological insights. They reflect an innovation road map that is delivering for customers today while setting the stage for what comes next. Throughout the quarter and ASHG, I met with many customers, those enthusiasm for our recent launches and upcoming solutions like Constellations with CLIA. These discussions are one of many ways we gather customer feedback, and we continuously integrate those insights into our road map. Customer focus and understanding are core to how we operate and my own conversations are an extension of that discipline. We are focused on what matters most to them, making sequencing easier, more accessible and more affordable, which helps us build stronger partnerships and better solutions. As a result, customers are expanding into new sequencing-intensive applications, broadening the reach and impact of our technology. At ASHG, these conversations reaffirmed our leadership position, built on end-to-end solutions, the quality and consistency of our data and proven reliability and service and highlighted the trust customers place in Illumina as a long-term partner. That feedback strengthened our conviction in the path ahead and our ability to extend our leadership for years to come. Looking ahead, we remain focused on disciplined execution and building our momentum from Q3. Clinical will continue to be our primary near-term driver of revenue growth as NovaSeq X volume more than offsets conversion pricing headwinds. We also anticipate a gradual return to growth in our research business as pricing headwinds abate and end markets stabilize. Together, these dynamics position us well going into 2026, giving us confidence in our ability to achieve high single-digit revenue growth and 20% non-GAAP operating margins by 2027, excluding Greater China. With that, I'll turn it over to Ankur to walk through our Q3 results and outlook before we move to Q&A. Ankur Dhingra: Thank you, Jacob, and good afternoon, everyone. I will give you an overview of our third quarter financial results, provide more color about revenue, expenses, earnings and capital deployment and then speak about our outlook going forward. Before I get into the details of the financial performance, let me give you a high-level view of how the third quarter played out. In Q3, our business outside of China returned to growth, an important milestone towards our long-term goals. We made significant progress in the NovaSeq X transition with over 75% volume and over 50% revenue now transitioned to X. High-throughput consumables had strong growth in our clinical business, driven by continued expansion of X. Revenue exceeded the top end of our guidance range, was roughly flat globally and grew approximately 2% year-over-year ex China. Non-GAAP operating margin expanded by 190 basis points to 24.5% and non-GAAP diluted EPS of $1.34 grew $0.20 year-over-year. Now let me provide you details of our financial performance. Third quarter revenue of $1.08 billion was roughly flat year-over-year on both a constant currency and reported basis and ahead of the top end of our guidance range. Revenue, excluding China, which makes up 95% of our revenue, grew approximately 2% year-over-year. Greater China revenue was $52 million. Sequencing consumables revenue was $747 million, roughly flat year-over-year and up about 3%, excluding China, both on reported and constant currency basis. High-throughput volumes continue to grow as customers across research and clinical take advantage of the NovaSeq X instruments. In clinical, momentum remains strong with double-digit revenue growth outside of China, driven by broader adoption of comprehensive genomic profiling and growing use of sequencing-intensive applications like MRD. In research and applied, consumables sales declined high single digits outside of China, reflecting continued funding uncertainty and pricing dynamics tied to the X transition. To give investors better visibility into these dynamics, we have added new disclosures for revenue outside China, showing instruments and consumables revenue and also consumables revenue growth by clinical and research segments. This can be found on Slide 10. The X transition progressed significantly in Q3, roughly 78% of volumes and 51% of revenue in Q3 was sequenced on X. 91% of research volumes were sequenced on X. The clinical X transition has progressed to roughly 64% of volumes in the quarter. Our customers are taking advantage of X's capabilities to increase content on their assays, expand into new indications and taking whole genome-based approaches, as you may have seen with several product launches and approvals in the last few months across therapy selection, MRD and genetic disease indications. Now that we have achieved this transition milestone, we thought it would be helpful to illustrate the conversion patterns with our clinical customers. On Slide 12, we look at the 40 customers that have fully transitioned to X as of Q3, and we see how elasticity of demand played out. For this group of customers, volume offset price in year 1 and then revenue and volume both accelerated in year 2. We continue to be in deep dialogue with our clinical customers about their growth trajectory and their 6K to X transition plans. These plans support a view of continued revenue growth in 2026 and beyond. Specifically, business with our largest customers is projected to grow faster than the overall company average rate, at least over our strategic plan period. Taken together with the range of new assays coming to market and these discussions with our customers, gives us confidence that clinical demand will remain strong as the X transition advances. On sequencing activity, total sequencing GB output on our connected high- and mid-throughput instruments grew at a rate of more than 30% year-over-year, driven by robust strength in clinical, but a more muted growth from our research customers. Moving to sequencing instruments. Revenue of $107 million was up approximately 3% year-over-year in Q3 and 6% ex China on both a reported and constant currency basis, driven by the broad adoption of the MiSeq 100 in the low-throughput space. NovaSeq X placements were strong at over 55 in Q3. In line with recent trends, over 50% of Xs placed in Q3 were to clinical customers. In Greater China, our instruments business was down approximately 54% due to restrictions on exportation of instruments into China. Sequencing service and other revenue of $147 million was down approximately 3% year-over-year, below our expectations. The decrease was mainly due to the timing of certain strategic partnership revenues. Moving to the rest of the Illumina P&L. Non-GAAP gross margin of 69.2% for the third quarter. Tariffs impacted gross margins by roughly 220 basis points on a year-over-year basis. Non-GAAP operating expenses were $484 million, which is down approximately 6% or $33 million year-over-year, reflecting results of multiyear cost reduction programs while prioritizing key growth investments. Non-GAAP operating margin was 24.5% in Q3, expanding 190 basis points year-over-year. Non-GAAP operating profit grew approximately 9% year-over-year, reflecting increased operating leverage from the improved cost structure. Looking at our results below the line, non-GAAP other expense, which is largely comprised of net interest expense, was $13 million and non-GAAP tax rate was slightly higher than expectations at 18.6%. We continue to assess long-term tax structure optimization to balance U.S. R&D benefits with efficient credit utilization across jurisdictions. Our average diluted shares were approximately $154 million, roughly $3 million lower than last quarter, driven by an increased level of share repurchases, net of dilution from employee equity awards. Altogether, the non-GAAP earnings per diluted share of $1.34 grew 18% year-over-year and came in well above our guidance range. Moving to cash flow, balance sheet and capital allocation items for the quarter. Cash flow provided by operations was a robust $284 million. Capital expenditures were $31 million and free cash flow was $253 million. In Q3, we repurchased approximately 1.24 million shares of Illumina stock at an average price of $97.10 per share for a total of $120 million. At quarter end, we had $684 million remaining on our share repurchase authorization, and we intend to continue to repurchase shares opportunistically. Additionally, last quarter, we entered into a definitive agreement with Standard BioTools to acquire SomaLogic and other specified assets. We are working with regulatory authorities to obtain clearance and still expect the deal to close in the first half of 2026. We ended the quarter with roughly $1.28 billion in cash, cash equivalents and short-term investments and gross leverage of approximately 1.6x gross debt to last 12 months' EBITDA. Now moving to guidance for the year 2025. As you may have seen in the press release, we are increasing our guidance for 2025. Starting with revenue. We're raising our revenue guidance for the Greater China region by $20 million to approximately $220 million for the year. For the Rest of the World, we're projecting revenue growth between 0.5% and 1.5% on a constant currency basis, unchanged at midpoint. Hence, we now anticipate total Illumina constant currency revenues to decline in the range of minus 0.5% to minus 1.5%. On a reported basis, that equates to Illumina revenue in the range of $4.27 billion to $4.31 billion, up $20 million at the midpoint relative to last guidance. Now shifting into our product assumptions for rest of the world, excluding China. We now expect sequencing consumables growth between 2.5% and 3% towards the higher end of our prior guidance of 1% to 3%. This increase reflects strong performance in Q3, driven by sequencing consumable volume growth from our clinical customers. We are reiterating our guidance range for sequencing instruments decline of minus 6% to minus 4%. The offset is in services related to timing of certain strategic partnership revenues. Moving down the P&L, reflecting our strong execution and results as well as increased revenue expectation from China, we are increasing our non-GAAP operating margin guidance by approximately 60 basis points at the midpoint to a range of 22.75% to 23% -- we now expect full year 2025 non-GAAP tax rate to be approximately 20.5% and our full year 2025 weighted average shares outstanding of roughly 156 million shares to reflect our Q3 repurchases. Bringing it all together, we're raising our non-GAAP diluted EPS guidance by $0.20 at the midpoint to a range of $4.65 to $4.75, reflecting 13% growth year-over-year at midpoint. This guidance implies that for Q4 2025, we expect our year-over-year revenue growth in rest of the world ex China to step up to the 4% and China contributing $33 million in Q4. As we close out 2025, we are quite encouraged by the momentum we've built from the successful NovaSeq X transition and the continued strength of our clinical business to the progress we've made preparing for multiomics launches across single cell, spatial and proteomics. Looking ahead to 2026, we see 3 key trends. First, in clinical, we expect dynamics similar to this year, strong volume growth and continued transition to X. Second, in research and applied, we anticipate conditions to remain muted, consistent with the latter half of 2025, with pricing headwinds easing now that 91% of high throughput volume has transitioned to X. And third, our planned 2026 multiomics launches will begin contributing to growth as and when research end markets recover. Altogether, we expect the end markets in 2026 to look similar to the second half of 2025. We'll provide detailed 2026 guidance when we report our Q4 results. In closing, I want to once again express my sincere appreciation to the Illumina team for their continued focus and disciplined execution throughout this year. This quarter was extremely encouraging as we returned to growth and made significant progress towards our short- and long-term goals. Thank you for joining our call today. I'll now invite the operator to open the line for Q&A. Operator: [Operator Instructions] Our first question comes from Puneet Souda with Leerink. Puneet Souda: If I could, I'll just wrap my questions into one. Thanks for the details on the $33 million for China that you are implying versus the full year, I'm just trying to understand how should we think about China in sort of '26? You seem to be isolating China as you are moving forward. Maybe if you could provide some color there. And then a bigger question here is what competitively has been announced at ASHG. Is that leading to any freezing on the research and applied side of the market? I appreciate you providing more color on the clinical. And then the last part, if I may, clinical growth, 12%, thank you for that. How should we expect that for the full year and '26, if you could? Jacob Thaysen: Puneet, this is Jacob. So thanks for that one question, which I think had a few smaller parts. But let me start with the China setup. First of all, I'm very pleased with the performance in China. As you know, we still haven't resolved the situation in China, but we made a good step forward here by now being able to serve our OEM partners so they can serve their customers in China. So I'm with instruments. So I'm really pleased about that. I'm also very happy to see how Jenny, our General Manager in China and the Illumina team continues to serve our customers in a challenging environment. They've shown really resilience in this. And of course, what we're also seeing and we continue to be very pleasantly surprised about is how well or how much our customers do want to continue to work with Illumina. They continue to see the high quality and innovations, and they want to see us stay in the market. We are taking this right now, quarter-by-quarter. It will be too early for us to go in and give you a view on '26. But clearly, again, we need to find a way to resolve the situation, and we continue to work with the regulators in China to find a solution for that. Operator: Your next question will come from Doug Schenkel with Wolfe Research. Douglas Schenkel: Two questions. So the first, as I think about 2026, based on how you described trends in your prepared remarks, there's 3 things that really jump out to me. One, it seems plausible that research revenue could be flat to down low singles next year in a somewhat stable funding environment given the state of the transition to the X. Two, clinical revenue should grow, but maybe mid-single digits to high single digits as volumes grow and customers continue to transition to the X, keeping in mind the slide that you presented on 3-year precedent with clinical customers. And then third, China could be a 50 to 100 basis point headwind to growth. So like when I pull those 3 things together, mathematically, it gets me to low single-digit revenue growth, at least as a starting point for next year. I'm just wondering if that's a reasonable framework. And then the second thing is, operationally, you have managed to expand margin about 50 basis points year-to-date in a period where total revenue is down a couple of points. including a close to 25% year-over-year decline in high-margin China revenue. So it's been really impressive. I'm just wondering what does this mean as the margin outlook or the margin outlook as the environment normalizes? Because on one hand, you could argue you already pulled forward a lot of operating levers to get to these levels. On the other hand, the fact that you've accelerated operating efforts the way you have could lead to pretty material flow-through when revenue starts to pick up again. So I just -- Ankur, it would be great to just know how you're thinking about this. Jacob Thaysen: All right, Doug, thank you for the questions. And let me start again on '26. As I said before, we're not going to go in and give guidance. We do think it's highly appropriate to wait until we have a better sense for how what will happen over the next quarter here and how the market evolves and also the regulatory space, of course, from a China perspective. That said, I think that the framework you're putting out looking at clinical being the driver of growth in next year also, where we are seeing more muted environment for research. And I think we're seeing it more like a second-half environment as we see it right now, it is stabilizing, but still soft. And then we think there will be some contribution from some of our new launches of our multiomics products here. How we think about it right now, we are not taking -- I wouldn't take China into the consideration at this point of time for -- in our framework. That's too early to see where this is -- where China is going. I would say overall, on the -- how we are operating the company and how disciplined the team has been on executing, I feel good about the opportunity we have to further expand our margins. And I feel really good about, as I mentioned in my prepared remarks, moving towards our goal of 26% in '27 and above going forward. Ankur Dhingra: Yes. On the margin side, good question, Doug. Very pleased with the performance, especially as some of the result of the actions that we've been taking coming through here in this quarter as well. We're pleased with 190 basis point operating margin expansion during the quarter. So we've taken a lot of cost structure actions. I'm looking forward, there are still several plays that are yet to reflect the full benefit in our P&L, especially in our gross margins, where we continue to work with optimizing our manufacturing footprint. And on the OpEx side, our sense is we've put in a lot of structural plays in move. Some of those have to play out. But at the same time, we are making growth investments as well. So going forward, I do anticipate additional margin expansion coming both from cost action, but also most certainly, much stronger operating leverage given where we are from a cost structure perspective. Operator: Your next question will come from Vijay Kumar with Evercore ISI. Vijay Kumar: Congrats on a nice sprint here. Two quick ones, Jacob, Ankur, for both of you. On consumables, I thought the expectations for the quarter was something like 720, 725-ish, given China headwinds. I recognize China came in better. Was there any pull forward in academic and government segments? Like how would you -- when you look at the consumables growth of 3% rate, what was -- what is macro versus this transition impact? If you could just parse that out. And Ankur, for you, I think in the past, you've said 500 basis points of margin expansion. Is that still relevant given off of current levels given you guys have executed in margins? Jacob Thaysen: So Vijay, thanks for the question. And yes, we are excited about Q3. We think -- and consumables were definitely a highlight of the quarter also. It continues to see momentum. What you're seeing is how the quarter played out. There's not been any pull forward either from China or what we've seen from NIH. We're very pleased to see that the grants are starting to flow again, but it did not -- there was no catch-up effect from actually spending from NIH customers, so to say, grant receivers. So we're not seeing that at this point of time. But we are, of course, hopeful that more will happen. But I think it will take time for this to stabilize even further. Ankur Dhingra: Yes. So the only thing I would add, bulk of the overperformance, rest of the world came from clinical side there on the consumable side. So very robust demand there. And then on the margin expansion, the 500-basis point was the goal we had set ourselves when we had the Analyst Day last year with a starting point where our base was much closer to about 21% or so. So we're marching towards in aggregate, getting to that 500 basis points over time. But as I've said, the business, the way it is at close to 69%, 75%, 70% gross margin, we do hire long-term opportunity in that space, but we'll talk about it once we achieve our first milestone and then go from there. Operator: Your next question will come from Tycho Peterson with Jefferies. Tycho Peterson: A couple of quick ones. So as we think about research being muted next year per your comments, how are you thinking about multiyear grants and then on the flip side, allowing labs to potentially tap into indirect funds for capital equipment and also pent-up demand? So that's the first question. I also understand you don't want to talk about '26 a lot, but can you grow earnings in your view, given China and Roche headwinds? And then maybe for Ankur, on the consumables for this quarter, how much of the beat was China and tariff surcharges? And then what -- you didn't really explain gross margins, down 130 basis points year-over-year. Can you maybe touch on that? Was that all pricing? And what are the levers that you're implementing to offset? You said there's some GM levers coming. Jacob Thaysen: Okay. So the first question was the research part. So I think still, there's a lot of in and outs on both single-year grants and multiyear grants. I think what we're seeing right now is that while grants has been granted, we have not seen many of the researchers starting to spend the money yet. And I think if you think about an academic researchers right now, usually, they might get several grants during the year. So it's not the one grant that drives and necessarily decision. It's predictability of the grants coming also. And I think that's a little bit what we are still and what the market on the academic market is still waiting to see is the new predictability. Can they expect that grants are also flowing in '26. So I think there's a little bit of that uncertainty that has to play through before we start to see a more normal situation. So we will definitely be ready to respond, and I'm actually quite pleased with our lineup in multiomics also that will be very relevant for this type of customers when the funding is coming back. We are very confident and believe we can grow our earnings also in '26. And I think we have proven that here in '25. It's been a lot of headwinds from many different angles. And I think you can definitely see that we have been able to do so. So that brings my confidence for what we can do in '26 also very high. Ankur Dhingra: Okay. Let me address the other 2 parts there. One, on the gross margin side, down 130 basis points, almost 220 basis points is from tariffs, which we'll talk about -- we're working towards mitigating some of those. The remainder base gross margin was up about 90 basis points accordingly. So the base business is continuing to do very well, and we are working towards, over time, find a way to mitigate the impact coming from tariffs. Your question about the beat on consumables, so roughly half and half in China and outside China. Most of the outside China is in clinical. The surcharge was exactly where we guided it to be. It came in right at the forecast. Operator: Your next question will come from Dan Leonard with UBS. Daniel Leonard: Apologies for that. One question on the growth in clinical consumables. That double-digit growth rate, did that include any positive lumpiness in there? Or do you view that as more run rate? Jacob Thaysen: Dan, thanks for that question. We are very pleased again with the performance for Q3 and also definitely the clinical performance. As you also saw in the prepared remarks, but also in the slide that we had a very strong movement going from 44% of revenue in the high throughput on the X now up to 51% at the same time, also moving a lot of volume. So I think it really speaks to that when we are -- even with the shift and the transitioning that we can grow in -- even when we have a fast transitioning. That's what you're seeing. There's no specific lumpiness in this. I wouldn't count on that this is the run rate from now on, but I do believe that we will continue to have strong growth in the clinical space. Operator: Your next question will come from Patrick Donnelly with Citi. Patrick Donnelly: Maybe one, I know Roche has been mentioned a few times. Would love just your guys' perspective on the competitive environment. Jacob and Ankur, I know you're both up at ASHG, talking to a lot of customers seeing the product. So can you just give us your perspective on the competitive landscape, what factor that plays into '26 and just how you're thinking about any pressure or freezing that could offer to the market, particularly on the clinical side? Jacob Thaysen: Yes. Patrick, thanks for the question. And as I mentioned before, we've always had competition in this space. We definitely have a lot of competition right now, and I love it. I think competition is great for us and how we think, how we push ourselves and how we thereby also become a better partner for our customers. What I also see out there is that most of our competition -- competitors are trying to compete and differentiate on one dimension only. But in reality, as you also mentioned here, we've been in conversation with many of our customers, and our customers are much more sophisticated than looking at one single dimension. They are actually looking at multidimension as highest quality data combined with the best workflow and lowest end-to-end cost. And as I see it, and I think also our customers resonates with our customers is that Illumina is really the only one that's delivering across all these dimensions and continue to innovate also. So I feel really good where we are and the competitive situation. Operator: Your next question will come from Mason Carrico with Stephens. Mason Carrico: Assuming similar market trends next year. How sustainable is the 50 to 60x per quarter moving forward? What does the pipeline look today? And maybe assuming we get a flattish NIH budget, do you think X placements could remain stable around these levels? Jacob Thaysen: Yes, Mason, so thanks for that question. We started the year coming out and guided towards a 50, 60 placements per quarter. And remember, in '26 -- '25 when we provided this guidance, what happened afterwards was, of course, our challenging situation in China, combined with the challenges in NIH and funding. And yet, we have still been able to deliver on that algorithm. And I also expect here that Q4 will look stronger than the average of the year, which is usually do. We always have a stronger instrument placements in Q4. So I think -- and what I see is that I don't see no reason why -- any reason why that trend wouldn't continue into next year. But at this point, it's too early to actually give you specifics on exactly how we think about that range. Ankur Dhingra: Mason, from an end market perspective, if you look at the overall sequencing demand, we still see a significant number of sequencing-intensive applications that are both in the clinical as well as in research space that are building and continuing to build traction and momentum here. So we do see a several-year further expansion of the sequencing ecosystem, which actually should translate into placements as well. Operator: Your next question will come from Catherine Schulte with R.W. Baird. Catherine Ramsey: Maybe in research and applied, it looks like the NovaSeq X transition is almost complete there. Just curious, how has the gigabyte output looked in that customer group this year, just as we try to think about underlying activity levels? And then related, are you baking in any government shutdown impact for the fourth quarter? Jacob Thaysen: Yes, Catherine. So I'll start by the first one, looking at the transition here and we're very pleased -- but also as expected that the NovaSeq X would transition much faster in the research and academic environment. As you can -- as you might know, is that what is happening there is that when a researcher have finished up their project on the 6 when they get the new project, they can immediately start on the X and do a bigger single cell project or whatever else they are working on in that particular research environment. That's very different from the clinical space where you have to validate and you have to make sure that it works on the new platform before you move over. So we're very used to and we expected that research applied would move much faster. And now with the transition done, we see that, that pricing headwind is, of course, reducing. So we are, of course, encouraged about the future. That said, there's still, of course, concerns about NIH funding, and they'll be muted for the time being. So maybe, Ankur, you can a little more. Ankur Dhingra: So Catherine, in terms of actual GB volume growth, the -- as you may have probably worked through with where our research revenue growth in consumables has been, the GBs have grown both in clinical and in research during the quarter. Clinical was much, much stronger. The growth rate in research has come down relative to what the historical growth rates have been, but it is still growing. Now the overall funding environment has played out where the actual demand in that space and the activity has become muted, but the GB still grew, albeit below the 30% kind of number that we've talked about. Operator: Your next question will come from Kyle Mikson with Canaccord. Kyle Mikson: Congrats on the print and all the updates, really good. Yes. Ankur, for you on the quarterly R&D expenses declined a bunch quarter-over-quarter. It's like the lowest dip below $230 million for the first time since 2021. Wondering if that's -- if this is a new run rate or will it grow from here? And how much of it relates to the recent or the upcoming launches of new products as well as your efforts to remain competitive, obviously, too? And then just one quick one on the clinical. That looks like it's accelerating. What's specifically driving that? And there are there other catalysts that could unlock further growth? Jacob Thaysen: Yes, Kyle. So let me start on this. This is Jacob, on the R&D. And I'm very pleased with how Steve, our CTO and the R&D team is driving a disciplined execution of the R&D and the portfolio. And -- but we also, at the same time, we're very disciplined on how we spend our money and how we think about OpEx going forward. And I think that's the result you're seeing. But what I'm really pleased about is that I continue to see improved productivity in the R&D organizations also. So I'm excited about what we have in our portfolio and what will come out over the next few years. Some of that we have talked about, a lot we haven't really shared as of yet. So much more to come. Ankur Dhingra: Yes. Thanks, Jacob. On the -- your second question, Kyle, the -- okay. The clinical acceleration during the year, think about it in 2 ways. We've talked about the number of X placements and more than 50% of the Xs being placed in the clinical over the last several quarters and a significant number placed during the last quarter, talked about the validation of Xs in the clinical takes a little bit longer than what it has in the research environment. So the -- what we believe we are seeing the effect of is a lot of our large customers launching and getting approval for several new tests in some even in early detection, definitely in therapy selection, also in MRD and in genetic disease, even if you just line up the number of tests that have been approved in the last 2, 3 quarters alone, you will see the significant new activity that is getting added, right? And a lot of these larger highly intensive tests have been enabled on X given the amount of sequencing intensity of these new tests take. So we think it's the clinical market is building momentum, and there is legs to this momentum going forward as well. The eventual growth rates in itself will pan out the way they would pan out, but there's a lot of good fundamental momentum building in that business. Jacob Thaysen: Yes. And I also remind that we did a lot of X placements in Q4 and Q1 in '25 here in Q4 '24, and that's playing out now. You can see that many of those went into the clinical space, and that's where you start to see volume coming from also these placements. Operator: Your next question will come from Jack Meehan with Nephron Research. Jack Meehan: You've given a lot of very helpful comments around 2026 framing thoughts. In the past, you've talked about a goal of double-digit EPS growth. I was just curious with the building blocks that you've laid out for us, just your confidence that you think you can deliver on that next year. Jacob Thaysen: Jack, good to hear from you. And yes, we continue to -- as I mentioned also in the call, we continue to -- of course, we were not guiding when we were at our earnings -- our investor set up here last summer. We were not providing too much detail on the EPS as far as I recall, it was more on the operating margin, where we said we were going to -- where we're going from 500 basis point up to 26%. But with that also comes, of course, strong EPS growth. So we're confident we can continue to grow the EPS in that range we were talking about also here. Now we're not -- it's too early again for us to give specific guidance for next year, but we believe we can continue to do so. And I think we have proven very well in very tough environments that we've seen both in '24 and here in '25 that we have expanded the EPS. And our aim is to continue to do so in the same level. Ankur? Ankur Dhingra: Yes. Thanks, Jacob. Jack, yes, we still have several levers that we continue to work on from an overall earnings expansion perspective. Clearly, getting the OpEx cost structure to a level where we have much stronger operating leverage was an important point, and we feel we're getting close to that. So keeping discipline on that spending is one crucial aspect. We still continue to work on several of the programs that we've kind of outlined before. And the results of some of those are yet to play out in the P&L. We've talked about setting up our core centers of excellence in Singapore. We've talked about centers of excellence in India. We've talked about continuing to work on the gross margin on our instruments. These are all levers that we continue to play and still have additional value to be dried. And on top of that, as we return to growth and with a better cost structure, there should be better operating leverage, too. So in short, yes, our focus is to continue to expand our earnings going forward. We'll talk about the specifics, of course, for 2026 when we get to the guide. Operator: Your next question will come from Tom Stevens with TD Cowen. Daniel Brennan: Great. This is Dan Brennan. Congrats on the quarter. Maybe just a couple. So I know a few questions have been asked on the X transition, but the 900 basis points of like sequential increase of volume on the X from 55 to 64, like could we see another 900 basis points in 4Q? And kind of how do we think about getting to the research kind of level for the X, which is 90%? Like how long will that take, do you think? And then b, in terms of research, can you just break down a little bit like what you're actually seeing from your U.S. academic and government customers? Like what have those trended year-to-date in the third quarter? And if we do get a flat budget or even like a CR, do you think that would be enough to see like a nice uptick in spending? Or what are you hearing from customers about what will allow them to spend more in the research customers? Jacob Thaysen: Yes, Dan, thanks for that. I think at the last earnings call, we had a lot of conversations with all of you about why the transition was slowing. And now we have a conversation about why it's accelerating. I think first and foremost, what's important is that revenue accelerated with the acceleration of the conversion. So we're very pleased with that, and we continue to see that, that trend will continue. I will caution and overinterpret deceleration and deceleration quarter-by-quarter. The trend is what we want to look at. So where we are in a quarter from now, we will take that and see that. But it's 1 quarter, it's too early to say whether it's -- how much we are accelerating, whether that's a new line we should go after. But overall, I'm very encouraged where we are. And more importantly, I'm encouraged about that we continue to grow through an accelerated conversion. If we look into the academic environment, as I mentioned before, we're pleased to see that the grants are flowing. I think it's -- from now on, it's more and getting predictability in the grant flowing and the predictability that the researchers can actually expect to get also future grants because they are not planning their spending based on one grant, they're spending on what is expected to come over the next few quarters. So I think that's the next -- this was a great checkmark that we now see that NIH is spending. The next checkmark is, of course, we need to have the budget approved at least a CR. And finally, of course, we need to see that the grants are flowing regularly. So I think that's the steps we have to go through. How long time that's going to take? I don't know exactly, but it's going to move into '26 for sure. Operator: Our next question will come from Subbu Nambi with Guggenheim. Subhalaxmi Nambi: First, 2 quick ones for me. First, it looks to me, Ankur, that you're expecting a bit of a step-up in Q4 instrument revenue outside China up to $125 million. Do I have that right? It would still be down year-over-year, but it's a decent sequential step-up. So what are you assuming relative to historical norms when it comes to budget flush? And second, as a follow-up to Catherine's question, is that the right way to think about research customers that most of the X transition is done? I ask because unlike clinical, which you did a nice job addressing in the slides, I would think you get to the other side of the transition and start growing again more quickly. Is that right? Jacob Thaysen: So Subbu, let me start on overall. I think there's nothing uncommon in having a very strong Q4 in instrument placements. That is the usual way we look at it. So I don't consider that as a budget flush, but it's very normal in the Q4, and we saw that last year and we've seen the other years also in Q4 is usually stronger. And that's not an Illumina thing, I think that's a life science -- at least what I know, a life science tools industry phenomenon. So we expect that also for Q4, but we are not building in any specific time of flush -- budget flush. Ankur? Ankur Dhingra: Yes. Subbu, good questions. So Jacob's addressed the Q4 instruments. Certainly anticipating and the forecast assumes a pickup up there, not as big as the 91 placements that we had in Q4 last year. That's not what we're assuming in our forecast, but if that happens, that will be a nice upside overall. In terms of the research market looking forward, you have it right in the sense vast majority of our -- the volumes in the research market have transitioned to X, implying that as and when those markets return to growth or even in a stable environment, the actual pricing headwind should start to dissipate from that and resulting into a better revenue performance or revenue growth performance. We're also pleased with the series of multiomics that are getting launched. So we feel we're very well positioned as and when those markets return as well. So yes, thinking about the right way. Operator: This concludes the Q&A section of the call. I would now like to turn the call back to Conor McNamara for closing remarks. Conor Noel McNamara: Thank you for joining us today. A replay of this call will be available in the Investors section of our website. This concludes our call. We look forward to seeing you in upcoming events. Operator: This concludes today's call. We thank you for your participation. You may disconnect at this time and have a great day.
Operator: Good day, and welcome to the National CineMedia, Inc. Q3 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Chan Park, Senior Vice President of Finance. Please go ahead. Chan Park: Thank you, operator, and good afternoon. I'm joined today by our Chief Executive Officer, Tom Lesinski; and our Chief Financial Officer, Ronnie Ng. I would like to remind our listeners that this conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 as amended. All statements other than statements of historical facts communicated during this conference call may constitute forward-looking statements. These forward-looking statements involve risks and uncertainties. Important factors that can cause actual results to differ materially from the company's expectations are disclosed in the risk factors contained in the company's filings with the SEC. All forward-looking statements are expressly qualified in their entirety by such factors. Further, our discussion today includes some non-GAAP measures. In accordance with Regulation G, we have reconciled these amounts back to the closest GAAP basis measurement. These reconciliations can be found at the end of today's earnings release or on the Investor Relations page of our website at ncm.com. Now I'll turn the call over to Tom. Thomas Lesinski: Thank you, Chan. Hello, everyone, and thank you for joining our fiscal 2025 third quarter earnings call. As we shared on our last call, advertiser sentiment stabilized through the summer as brands regained confidence navigating the broader economic landscape. We are encouraged to see that momentum carry into the third quarter, where we saw a clear rebound in demand across key advertising categories, including retail, automotive, wireless and government, reflecting a return to normalized spending patterns after the tariff-related pullback earlier this year. Driven by July's strong slate, including Jurassic World Rebirth, Superman and the Fantastic 4 First Steps, we delivered results in line with our expectations, achieving top line growth despite a softer late summer box office and industry-wide decline in attendance. NCM's quarterly audience was 109 million across our network, down 11% compared with the third quarter of 2024, in line with the third quarter box office. Our overall attendance was lower, 11 films in the quarter grossed more than 50 million domestically, up from 9 titles last year, highlighting the strength and continued draw of tentpole releases even in a slower market. The successes of July's hit releases underscored the continued cultural relevance of cinema and reaffirm the enduring power of our platform to connect brands with deeply engaged audiences. Importantly, attendance trends improved toward the back half of September, finishing on par with 2024 strong performance, which was the highest level since 2019. As such, we remain optimistic that the strong holiday slate ahead, featuring several highly anticipated titles will reignite theater attendance in the fourth quarter. Despite the overall decline in both the domestic box office and attendance, NCM delivered year-over-year growth in the third quarter with total revenue of $63.4 million and adjusted OIBDA of $10.2 million, both in line with our expectations and primarily driven by an increase in inventory utilization. This performance reflects the resilience of our business, one that continues to translate audience engagement into meaningful advertiser value even in a weaker industry environment. Throughout the third quarter, we continued to advance our key growth initiatives, scaling our Programmatic offering, expanding our self-serve platform and strengthening our local sales organization. On the Programmatic front, we continue to see strong year-over-year acceleration. This quarter, we delivered approximately 4x the Programmatic revenue compared to last year, achieving our strongest Programmatic quarter ever. With additional platforms coming online early next year, we will significantly expand our Programmatic footprint and unlock an even larger addressable market. We anticipate the growth trajectory will continue as advertisers embrace our platform's ability to deliver targeted measurable campaigns at scale. In self-serve, we continue to gain traction with midsized and regional advertisers who value cinema's attention environment and the ease of direct booking. Our self-serve platform continues to accelerate adoption with third quarter revenue up 23% quarter-over-quarter, driven by expanded business development outreach and CRM-based activation. Behind the scenes, predictive AI models now identify, score and route high-value local leads, powering scalable small and medium businesses and mid-market expansion and helping our teams engage advertisers more efficiently. Together, our Programmatic and self-serve channels are broadening NCM's reach, deepening relationships with brands and positioning us to capture a greater share of the evolving advertising landscape. Our local sales transformation is also progressing. We continue to work to enhance our team's capabilities, adding senior talent with deep regional expertise and refining our structure to align more closely with market opportunities. These changes are enabling a more data-informed consultative approach to engaging high-value local and regional advertisers, helping us connect cinema scale and storytelling power with the precision of locally relevant campaigns. We believe this refined strategy positions us to reduce churn and attract new advertisers to our platform. Across our network, NCM's valuable inventory led by our premium Platinum Spot continues to stand out among advertisers who recognize the environment, reach and measurement capabilities of NCM's unique platform. Platinum continues to deliver exceptional results, achieving an impressive 89% ad recall in a recent tech advertisers' campaign, surpassing industry benchmarks and driving strong gains across brand relevance, excitement and preference. These benchmarks reinforce its position as the most engaging and high-impact placement within the theatrical experience. Additionally, we enhanced our Platinum offering at select theaters by reducing added flexibility within the ad spot, which has driven higher utilization and improved advertiser satisfaction. Our 4DX format is also exceeding expectations, achieving approximately 85% ad recall in a recent automotive advertisers' campaign and generating triple-digit lifts in awareness, reaffirming the power of immersive cinematic experiences in driving superior brand outcomes. Complementing this inventory is our NCMX data platform, which continues to enhance advertisers' campaigns with data-driven targeting, insights and digital extensions. Last quarter, we announced the launch of our Bullseye product, which is already seeing strong traction in the marketplace and demonstrating the power of localized data-driven storytelling. A recent cellular campaign delivered more than 283,000 verified incremental store visits, representing a 110% lift, underscoring Bullseye's ability to seamlessly integrate into our tech stack and enable scalable, high-impact local activations. Alongside Bullseye, our Boost solution leverages our proprietary moviegoing data and new geo-triggered capabilities to target consumers near campaign-specific locations, connecting brands with verified audiences in high purchase intent moments to drive measurable off-line actions. Together, these initiatives strengthen our differentiated position as a performance-driven media platform that combines the power of the movies with data-enabled precision. As we invest in our platform and innovation, we also remain focused on expanding NCM's advertiser base. In the third quarter, we strengthened our full funnel attribution through our partnership with iSpot, a leading real-time TV and video ad measurement platform. This integration incorporates theatrical exposure data into iSPot's cross-screen measurement framework, enabling advertisers to quantify cinema's incremental reach and conversion velocity alongside linear and streaming channels. Early results are very compelling. The recent travel industry advertisers campaign delivered 3x faster conversion rates than linear TV. 95% efficiency at 10% the cost of TV and more than 8.4 million incremental impressions among audiences unexposed to television. These results validate cinema's role as a high-performing cost-efficient channel within diversified media mixes and reinforce the measurable impact of the theatrical experience in driving both upper and lower funnel performance. We are optimistic about the months ahead as we entered what is historically NCM's strongest period of the year. Upcoming tentpoles, including Wicked for Good, Avatar Fire & Ash and Zootopia 2 are already driving significant advertiser excitement and early commitments across multiple categories. Demand for Wicked for Good has been exceptionally strong with inventory approaching sellout levels a month ahead of the film's upcoming release date. The robust lineup, coupled with steady improvements in pacing and demand reinforces our confidence in a strong finish to the year. Importantly, we expect sustained momentum through year-end to further reinforce advertiser confidence in cinema as a high-performing media channel that delivers both attention and measurable impact. With increased advertiser demand, a healthy box office pipeline and continued traction across our Programmatic and self-serve platforms, we are well positioned to capitalize on expected strong attendance in the fourth quarter and execute against our strategic priorities for long-term growth. With that, I'll now turn the call over to Ronnie. Ronnie Ng: Thank you, Tom, and good afternoon, everyone. For the third quarter, NCM delivered results consistent with our expectations, reflecting the continued momentum we saw towards the end of the second quarter and stability in the demand for cinema advertising, which led to the highest third quarter monetization in the last 5 years. As Tom noted, the tariff-driven uncertainty that weighed on earlier quarters subsided during the period, with brands showing renewed confidence navigating the current macroeconomic environment. That stability translated into improved advertiser demand, particularly across several key categories, signaling progress from the pullback we experienced earlier in the year. NCM's total revenue for the third quarter was $63.4 million, within our guidance range of $62 million to $67 million and up 2% year-over-year. This increase was driven by stronger national advertising demand, improved inventory utilization and continued traction across our Programmatic and self-serve channels, partially offset by lower local and regional spending and softer beverage revenue. While the third quarter box office underperformed versus industry expectations with inconsistent performance among new releases, the stabilization of advertiser demand drove higher monetization in July and August, offsetting some of the softness in attendance. National advertising revenue totaled $49.9 million, up 6.6% from $46.8 million in the prior year period. This was driven by strong scatter demand and improved utilization of inventory as well as increased adoption of our digital buying platforms, partially offset by a decline in CPMs and lower overall attendance. Compared to the prior year, national CPMs held firm in the upfront marketplace, but declined in the scatter market due to an increase in Programmatic buying and improved demand in the seasonally slower September month when compared to historical periods. That said, the third quarter marks our strongest Programmatic performance since its launch, growing 82% sequentially. Additionally, Platinum revenue was up 19% compared to the prior year, achieving the highest third quarter Platinum sales in NCM's history. Platinum monetization grew significantly with revenue per attendee up 33% year-over-year, driven by strong growth in inventory utilization and a slight increase in CPMs, an encouraging sign that our amended AMC deal, which has been in effect for only a short 3 months is already driving results. Overall, national revenue per attendee was $0.46, up 20% year-over-year and the highest third quarter national ad revenue per attendee in the last 5 years, reflecting the success of our ongoing efforts to optimize pricing and yield through our Programmatic and self-serve capabilities. Local and regional advertising revenue was $9.6 million compared to $11.4 million in the prior year period. While local markets continue to recover more gradually, we are encouraged by improving activity in government and travel categories, which partially offset lingering softness in health care and professional services. As Tom outlined, we remain focused on strengthening this channel by enhancing our sales talent, new coverage models and data-driven insights that better connect local advertisers with NCM's engaged audiences. Turning to our expenses. Third quarter total operating expenses were $65.2 million, down from $69.9 million in the same period last year. Excluding onetime items, depreciation, amortization and noncash share-based compensation, our adjusted operating expenses were approximately $53.2 million, a slight decrease year-over-year, primarily attributable to lower attendance-driven costs. Due to our continued disciplined cost management efforts, SG&A expenses remained relatively flat in the third quarter as we strategically offset important investment dollars elsewhere in the business. Personnel-related expenses were slightly lower compared to the prior year period and theater access fees decreased year-over-year, reflecting lower attendance levels. Third quarter adjusted OIBDA was $10.2 million, in line with our guidance range of $7.5 million to $11.5 million and exceeding $8.8 million in the same period last year, driven by the modest top line growth. Total unlevered free cash flow for the quarter, as defined by cash flow from operations less capital expenditures, was negative $1.8 million compared to negative $2.4 million in the prior year period, driven by slight year-over-year increases in capital expenditures and system optimization costs, offset by improved adjusted OIBDA. Year-to-date, NCM has generated total revenue of $150 million compared to $154.5 million in the same period last year. National advertising revenues were flat, while local advertising revenues declined 22%, primarily reflecting macroeconomic uncertainty in the second quarter and offset by the third quarter stabilization in national advertising. Total adjusted OIBDA for the period was $1.9 million compared to $10.7 million in the prior year, driven by the top line headwinds, offset by normalization following prior year cost reductions. Turning to our consolidated balance sheet. At the end of the third quarter, the company had $32.9 million of cash, cash equivalents, restricted cash and marketable securities compared to $40.3 million at the end of the second quarter of 2025. We had 0 total debt outstanding at quarter end. Our capital allocation priorities remain focused on returning capital to our shareholders, while investing in technology and talent to enhance our advertising platform. Specifically, we continue to invest in expanding inventory monetization tools, improving our self-serve and Programmatic capabilities and deepening advertiser relationships through new sales initiatives and training. Under the dividend program, we reinstated this year, we announced a quarterly dividend of $0.03 per share today, amounting to $2.8 million. This quarter's dividend will be paid on November 26, 2025, to stockholders of record as of November 10, 2025. There were no share repurchases during the third quarter as we had accelerated repurchases opportunistically in the first half of the year and manage liquidity through a seasonally higher use of cash for working capital. Year-to-date through September 25, 2025, NCM has repurchased 3.3 million shares at an average price per share of $5.78 for a total of approximately $18.8 million. Since quarter end, we've repurchased over 100,000 additional shares at an average price per share of $4.08, reflecting our continued confidence in the business. We are optimistic that the advertising momentum from this quarter will continue heading into the fourth quarter. The remainder of the year includes a number of highly anticipated releases scheduled for the holiday release window. In particular, blockbuster events such as Wicked for Good, Avatar Fire & Ash and Zootopia 2 have each generated strong advertiser demand and upfront sponsorship commitments. These releases are expected to drive both attendance and related revenues, positioning us for a strong close to the year. Turning to our guidance. For the fourth quarter, we expect revenue to be between $91 million and $98 million and adjusted OIBDA to be between $30 million and $35 million. Notably, our fiscal fourth quarter includes an additional week compared to the prior year. As a result, we expect total attendance growth to outpace industry trends and lead to a correspondingly lower revenue per attendee. We anticipate a strong holiday box office slate with optimism that greater consistency in film release cadence and performance will continue to attract advertisers to NCM's platform for our differentiated offerings and unmatched reach with sought-after audiences. With advertisers already showing heightened interest in the Thanksgiving to Christmas slate, continued recovery at the box office and regaining advertiser confidence against the macroeconomic backdrop, we remain well positioned to capture demand and deliver value for our shareholders. Operator, please open the line for questions. Operator: [Operator Instructions] Your first question comes from Patrick Scholl from Barrington Research. Patrick Sholl: I just wonder if you could talk a little bit more about the Programmatic and the ad categories that are adopting that. I guess to the extent that you maybe talk about like just if you're seeing expanded budgets from existing partners or maybe just some of the ad categories that you are seeing, adopt that format. Thomas Lesinski: So, Patrick, thanks for the question. So, we're really happy with the performance of Programmatic. We've been investing in it for over a year now. Our Programmatic business was approximately 4x higher than it was a year ago. And I think importantly, the vast majority of clients who are coming in from Programmatic are new clients. And the categories, I can tell you, are all over the map in terms of different segments. But I think the most important thing is we're literally reaching people who had never been cinema advertisers before. And as Programmatic grows as an industry level phenomenon, as it continues to grow, we actually couldn't be happier with our investment in Programmatic and the growth we're seeing, especially driving new client relationships. Patrick Sholl: Okay. And then on the guidance that you provided with -- on EBITDA, with the revenue growth is the renewal with AMC kind of the main driver of like the maybe lower conversion of the revenue growth to profit growth? Or can you just maybe talk about like what sort of revenue increases you kind of need to get that positive trend on EBITDA? Ronnie Ng: Yes. So Patrick, this is Ronnie here. So thanks for the question. So as we noted in our prepared remarks that this quarter versus the prior year period -- prior year, there is an extra week here. And so, our fiscal quarter year will end this year on January 1 versus last year, it was December 26. So, what you have is this extra week between essentially Christmas and New Year's that will have really high attendance. And so, because of that, we obviously would be paying more dealer access fees versus the prior year and thus, the margins will reflect that. As comparison, if you were to -- if you look back at last year, if you were to add that extra week, the attendance would increase almost 14%, when you look at last year's fourth quarter. Operator: Your next question comes from Eric Wold from Texas Capital Securities. Eric Wold: A couple of questions. One quick one, just to follow up on that last comment, Ronnie, on the incremental attendance in the extra week between Christmas and New Year. Obviously, typically a high attendance period of the year with people hitting movies and high attendance. Is the assumption that it's just the mix of films and maybe the mix of attendance is just not as valuable of an advertising attendance. And so yes, it's high attendance may be not as valuable to advertisers for you to advertise in front of. Is that the thought process there in terms of the impact on the quarter? Ronnie Ng: So I think the way to think about it is that, obviously, the fourth quarter is very attractive to advertisers. That period really starts mid-November all the way up to Christmas essentially. And that's the high seasons. We have consistent sellout demand, especially in Platinum, post-show periods are mostly sold out. And when you get past that Christmas holiday season, that demand tends to soften a little bit despite kind of a lot of more attendance showing up because a lot of families take their kids to the movies. So, the demand is not -- although still high, it's just not anywhere near the same as the weeks leading up to the holidays. Eric Wold: Got it. And then maybe a high-level question, but there's been obviously a lot of press, and this is obviously nothing new. There's always been the question of known franchises versus new IP at the theater. And recently, there's been a lot of press around smaller titles, new IP, not doing well at the theater. Are you seeing any trend from advertisers? Obviously, the blockbuster films, you mentioned Wicked selling out almost a month ahead of time. And I assume that's the case in most blockbuster films. So with the new IP, are you seeing any patterns from advertisers maybe waiting a little bit closer now to release date and tracking and getting a better sense of tracking, especially now that they have the ability to use Programmatic to latch on to it before they want to maybe commit to a campaign to get a better sense of how that film is likely to do before they want to commit their advertising to it. And if that is the case, how are you kind of planning around that? Ronnie Ng: I actually think, Eric, it's really not the case. People generally are buying impressions and they're buying forecasts and estimates. People are not really being that specific when it comes to a smaller independent release or a new IP and avoiding it. Generally speaking, people are buying the entire flight across a variety of movies. So, while obviously, there's overperformance on things like Wicked and Avatar and Zootopia, there's not a reverse effect on unknown IP. So we're not seeing that phenomenon. And yes, when a movie does really well that no one's heard of, there is incremental buying happening on it the following week, weekend. And some of that's Programmatic or just bought in our regular scatter market. Operator: Your next question comes from Mike Hickey from the Benchmark Company. Michael Hickey: Just curious, Tom, when you look at -- obviously, we've got a pretty good view of '25 here. It's been some opportunities and challenges for you guys. Just when you think about '26, Tom, can you sort of paint the picture? I think you're probably optimistic on attendance, but I'm just curious how NCM from a growth perspective fits into '26, looking at national local, your Programmatic and maybe the key catalysts that we should look forward to in terms of driving growth and leverage from your model? Thomas Lesinski: So, what I would say is that first thing first. So, the fourth quarter is pacing very well, up in a way -- not up -- up a fair amount from the prior year. So I see the momentum from Q3 going into Q4 and the advertisers are back. Any of the tariff issues that we highlighted in Q2 have gone away. So we're looking at really good momentum from Q3 going into Q4, and we expect that to follow in through '26. The box office estimates for next year look actually quite good. I think it's been pretty well documented that it's going to be another growth year in box office and attendance. So I think, fortunately, the momentum is really good right now and the confidence we're seeing from advertisers and the relationships they're growing, especially with the addition of Programmatic and self-serve. And we're pretty confident that local is going to rebound as well. So, I think the third quarter and the fourth quarter are really setting up for momentum into next year. And we're confident that '26 is going to be a great year for us and for the box office. Michael Hickey: Is your decision to put back the dividend here versus maybe a more aggressive buyback or M&A? Just curious, Ronnie, your view on capital allocation here and into '26. Ronnie Ng: Yes. So, on capital allocation, obviously, we're committed to our dividend, and we continue to do that this quarter. We believe that's an important part of our capital allocation strategy and more a way to reward our shareholders on a more consistent basis. In terms of the buybacks, like we always said, obviously, we're opportunistic when it presents ourselves with that. We were doing that fairly aggressively in the first half of the year, buying up to nearly $19 million worth of stock. Obviously, we slowed down here, but that's really in cadence with the negative unlevered free cash flow that we're seeing in this period. And we're just mindful of the working capital needs of the company in the third quarter, especially in July and August is typically where we see a lot of uses of cash due to working capital. I'll say that, though, like we said in our prepared remarks, post the third quarter after September 25, we were -- we did pick up additional over $100,000 -- or 100,000 shares in the market. So I think it's really -- we'll continue to utilize and look at all of the options available to us in terms of capital allocation and then also be mindful about the free cash flow nature seasonally throughout the year as well. Michael Hickey: And then last question. How are you guys thinking about your cost structure here? Obviously, you've taken it down a lot. Are you comfortable with where you're at? Or do you think there's opportunities here, AI or otherwise in terms of getting maybe some incremental cost savings into '26? Thomas Lesinski: Yes. I think it's a little early to really talk about '26, but I do think we've taken a hard look at efficiencies in AI. Every year, I think we've done a good job of managing our expenses. We've been fairly engaged with AI opportunities. So more on that soon. But clearly, there's some opportunities for us. I think not just for efficiencies, but also to generate more opportunity. AI is not just a cost savings tool. It's also a lead generation CRM tool that can enhance our ability to reach in clients. So we're looking at that and we'll be able to give you more update on that next quarter. Operator: There are no further questions at this time. I would now like to hand the call back over to management for any closing remarks. Thomas Lesinski: Yes. So I want to thank you guys all for joining us today. NCM continues to attract top advertisers with our unmatched reach among the most sought-after audiences and our differentiated inventory complemented by our industry-wide leading data capabilities. So after navigating a challenging second quarter, our clear focus and discipline in our strategic execution enabled us to deliver solid results as the advertising market stabilized in the third quarter. Looking ahead, we're well positioned to capitalize on the exciting holiday film slate, and we're very optimistic that we'll carry positive momentum through the remainder of the year. We're grateful for your support, and we look forward to seeing you all at the movies. Thank you. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, and welcome to the Q1 Fiscal Year 2026 ResMed Earnings Conference Call. My name is Kevin. I'll be your operator for today's call. [Operator Instructions] Also, please note, this conference call is being recorded. [Operator Instructions] Let me hand the call over to Salli Schwartz, ResMed's Chief Investor Relations Officer. Sallilyn Schwartz: Thanks, Kevin. I want to welcome our listeners to ResMed's First Quarter Fiscal Year 2026 Earnings Call. We are live webcasting this call, and the replay will be available on the Investor Relations section of our corporate website later today. Our earnings press release and presentation are both available online now. During today's call, we will discuss several non-GAAP measures that we believe provide useful information for investors. This information is not intended to be considered in isolation or as a substitute for GAAP financial information. We encourage you to review the supporting schedules in today's earnings press release to reconcile these non-GAAP measures with the GAAP reported numbers. In addition, our discussion today will include forward-looking statements, including, but not limited to, expectations about our future financial and operating performance. We make these statements based on reasonable assumptions. However, our actual results could differ. Please review our SEC filings for a complete discussion of the risk factors that could cause our actual results to differ materially from any forward-looking statements made today. I'll now turn the call over to Mick. Michael Farrell: Thank you, Salli, and good morning, good afternoon and good evening to everyone on the various time zones, and welcome to ResMed's First Quarter Fiscal Year 2026 Earnings Call. I'm very proud of our global team of 10,000-plus ResMedians, who have delivered a strong quarter with 9% reported revenue growth or 8% on a constant currency basis, with multiple areas of high performance. Across U.S., Canada and Latin America, our team drove high single-digit growth in devices at 8%, and the same team also delivered double-digit growth in the masks and other category with 12% growth. For Europe, Asia and Rest of World devices, the team achieved high single-digit growth at 7% on a constant currency basis. These businesses collectively comprise more than 75% of our quarterly revenue. For Europe, Asia and Rest of World in the masks and other category, we had mid-single-digit growth at 4% on a constant currency basis, following a strong comp from Q1 last year, where we grew at 11% in constant currency in this category and region. I'm confident that we will accelerate to high single-digit growth in this category, starting in the current quarter. We are focused on continued strategic expansion of our mask portfolio with new product innovation, which I'll talk about in a couple of minutes. And we're also focused on driving mask resupply through education, awareness and execution. Increased mask resupply benefits patients, home care providers as well as payers and health care systems. And yes, it also benefits ResMed. This increased focused on mask and accessory resupply is fully aligned with our ongoing investments to accelerate growth in our direct-to-consumer markets around the world, including China, India, Korea, Australia and New Zealand. As I noted above, I'm confident these efforts will accelerate our Europe, Asia and Rest of World masks and other category with solidly and sustainably back to high single-digit growth. ResMed's residential care software or RCS business delivered mid-single-digit growth with 6% reported and 5% constant currency growth. We saw strong performance from our MEDIFOX platform, our core Brightree platforms with good growth in the MatrixCare home health business, yet a challenging growth environment for the skilled nursing facilities segment. Now that we have integrated our RCS business into our global revenue team, we will drive portfolio management with increased investment in the high-growth higher-margin parts of that RCS portfolio while reducing exposure to the lower growth, lower-margin areas, such as the services businesses. We're confident that we will execute successfully on our portfolio management work and reaccelerate growth in our RCS platforms, moving from mid-single-digit growth here at the start of fiscal year 2026, accelerating to mid- to high a single-digit growth in the back half of fiscal year 2026 and achieving sustainable high single-digit growth with double-digit operating profit growth in 12 months from now. RCS is a key synergistic enabler of our core sleep and breathing health business through demand generation and especially through resupply programs. In this way, our RCS business forms a core part of our long-term growth strategy. During the quarter, we also continued to execute well on our ongoing work, driving operating leverage. Our global supply chain team delivered 280 basis points of year-over-year gross margin expansion. These results, along with our disciplined approach to business investments in both R&D and SG&A translated to another quarter of strong double-digit earnings per share growth. I'd like to take this opportunity to thank not just our supply chain team, but the entire ResMed global team for their ongoing commitment in serving patients in more than 140 countries worldwide. ResMed continues to build the world's largest digital health ecosystem, encompassing sleep health, breathing health and health care technology delivered right in the home. Over the recent quarters, I've highlighted 3 key themes for these earnings calls, one that ResMed is committed to operating excellence and driving operating leverage while simultaneously delivering new products to the market. We are an innovation machine and an operational excellence machine. Two, ResMed is a compelling investment opportunity with huge addressable and growing markets and strong executable growth especially amidst global macro uncertainty. And three, ResMed's excellent free cash flow and strong balance sheet position, position us to both invest in the business and simultaneously return capital to our shareholders. Our first quarter results are another demonstration of these important business elements, and I'll talk briefly about each of these 3 themes. On the first theme of operating leverage, I shared with you last quarter that ResMed has a pipeline of opportunities. One key area of focus has been optimization of our freight expense. Another area of focus has been our multiyear productivity programs that include improved planning systems and large-scale automation. These efforts, among others, helped deliver the 280 basis points of year-over-year gross margin expansion that we saw in this first quarter. We will continue to execute on these opportunities over the remainder of fiscal year 2026 and beyond. We'll update you here every quarter as we continue to deliver great results. I've also previously highlighted the evolution of our global manufacturing footprint. In addition to our recently announced expansion of our Calabasas, California facility, which doubles our U.S. manufacturing capacity, we are pleased to announce that with our strong ongoing growth in the United States that we are investing to establish a third facility, a third distribution center. This new facility will be in Indianapolis, Indiana, the heartland of the Midwest, and it will expand our distribution capacity. It will improve product velocity of delivery and enhance our overall network resilience by positioning inventory closer to our customers. We expect the Indianapolis facility to be operational in 2027. Once this facility comes online, ResMed will be able to ship to around 90% of our customers within 2 days. These efforts will also increase the capacity for our Made in America product to build on what we already do right here in the U.S. On the topic of ResMed as an innovation machine, our R&D investments in the next generation of market-leading masks, cloud connected device platforms and digital health software position us well to keep delivering the world's smallest quietest, most comfortable, most cloud-connected and most intelligent therapy solutions for sleep apnea, insomnia, respiratory insufficiency and beyond. Just this week, we rolled out 2 world firsts for ResMed. These are the first 2 full face fabric masks available on the market. This brand-new AirTouch F30i mask platform is so innovative. We are launching 2 masks variants right out of the gate. First, the F30i comfort, which is a premium price mask with a fabric-wrapped frame as well as an incredibly comfortable fabric-based oronasal patient interface. This amazing new product was launched earlier this week in Australia and will be launched into additional markets in the near future. Second, just yesterday here in the U.S. market, we launched the F30i Clear, which is a traditional silicon frame mask, but it still has that innovative, incredibly comfortable fabric oronasal patient interface. This variant will be launched into our B2B channels and our home care provider customers as we continue to launch to additional markets beyond the U.S. These products expand ResMed's AirTouch portfolio of fabric-based mask offerings, delivering advanced comfort, mobility and interchangeability for patients. They're designed to help more people start, stay and be on therapy, CPAP therapy for life. We're also excited to continue executing against our road map for incorporating ML, AI and generative AI technology into our digital health products. Last quarter, I talked about how we integrated our personal sleep health digital assistant that we call Dawn into our myAir platform in the Australian market. Dawn allows ResMed to provide personalized 24/7 support to our users, giving them an intuitive, empowering way to get help right at the moment they need it, right on their own time. Based on that success, during the first quarter of fiscal year 2026, we launched Dawn on the myAir platform right here in the U.S. market. Ultimately, Dawn strengthens the role of myAir as the central hub for therapy support for patients. This connectivity leads to increased long-term adherence, which in turn leads to better patient outcomes, lower total cost of care for payers and better resupply volumes for providers and for ResMed. Watch this space as we build and scale this amazing AI-based technology globally. We also recently launched in a limited beta program in Australia, a new feature that we call Comfort Match. Now Comfort Match is an AI-enabled comfort setting technology that sits on the myAir platform. Comfort Match is intended to help people become more confident, more comfortable and more adherent to therapy. By engaging with patient settings such as humidification levels, air temperatures, heated tubing options and beyond, we will help patients define their optimal sleep health and breathing health environment faster, more easily and more efficiently, right from the start of their therapy journey. Drink set up, the Comfort Match technology receives information about a person's profile and through advanced machine learning suggests a personalized combination of comfort settings with the goal of maximizing adherence. We will measure the success of this technology in consumer engagement, improved patient perceived comfort as well as hard clinical outcomes such as patient adherence. Based on early trials, we are very excited that this technology will deliver for patients, for physicians, for providers and for payers and beyond. At ResMed, we view AI as a technology resource that will amplify and personalize care by identifying patents surfacing insights and enabling personalized interventions, we are creating AI-based technologies that will help caregivers spend more time focusing on people rather than paperwork. For our patients, our AI technology translates health data into clear guidance, clear support and encouragement, empowering them to take an active role in their own therapy. As a result, we believe that our AI tech investments will provide returns through accelerated access to care through improved patient outcomes while also making care more personal, more proactive and ultimately more effective. Moving on to ResMed's SG&A investments. We remain focused on demand generation, demand capture and demand curation, as critical components to our long-term growth. Earlier this year, we expanded our offering of continuing medical education or CME programs to educate and to enforce or reinforce with physicians the benefits of CPAP, APAP and bilevel therapy as the clinical gold standard frontline treatment for any patient diagnosed with sleep apnea in accordance with Sleep Medicine guidelines. We have continued to see incredible uptake from primary care physicians or [ PC piece]. To date, the CME programs have been completed nearly 40,000 times by more than 22,000 unique PCPs, demonstrating that health care providers have taken multiple courses. Surveys at the end of these courses have consistently shown that 75% of providers intend to change their clinical practices related to improving sleep and breathing health based on what they learned. We will continue to drive select and targeted direct-to-consumer awareness campaigns to build sleep apnea awareness as well as ResMed brand awareness globally. The ultimate goal is to help undiagnosed patients to find their optimal path weighted treatment. With more than 2.3 billion people worldwide who need our solutions for sleep apnea, insomnia or respiratory insufficiency, it is our clear obligation to help them know the world's leading brand in the field, which is ResMed. Immediately after that, though, our role is to be what I call a digital sleep health concierge to help that person find a path to screening, to diagnosis and ultimately, to therapy for life. On the sleep medicine clinical research front, you will see ResMed continue to invest in important studies that highlight new evidence in sleep health. In late August, we announced the publication of a landmark study in the Lancet Respiratory Medicine Journal projecting a significant rise in obstructive sleep apnea, or OSA, prevalence in the U.S. over the coming 3 decades due to a variety of factors, including an aging population and increased chronic disease awareness. The study estimates that by 2050, OSA will affect nearly 77 million U.S. adults representing a relative increase of nearly 35% from 2020, and ultimately impacting nearly half of all adults age 30 to 69. These epidemiology data include all of the estimated impacts of new drug classes, including GLP-1s. The bottom line from this epidemiology research is that the prevalence of sleep apnea will continue to increase. So our work is ongoing to help the many millions here in the U.S. and the billions worldwide who need us. Last month, ResMed announced the launch of the Sleep Institute, a global clinical insights initiative, which is partnering with clinicians, researchers, policymakers and health system leaders to deliver objective noncommercial evidence-based insights that help inform care innovation, support policy decisions and elevate sleep as a global health priority. The Sleep Institute debuted at the World Sleep Congress in Singapore with an expert-led symposium examining barriers in diagnostic pathways for OSA and new scalable solutions to help improve access and outcomes. Even as we have continued our investments in both R&D and SG&A, ResMed again delivered strong net operating profit growth in the first quarter. Indeed, ResMed remains a compelling investment opportunity amidst global macro uncertainty. We continue to closely monitor the global trade environment and the evolving regulatory landscape. As I noted last quarter, because our products are used to treat patients with chronic respiratory disabilities, they have been subject to global tariff relief for decades, and we have reconfirmed that with U.S. authorities earlier this year. It's important to note that this relief has continued in the context of other Section 232 investigations, and we expect it to remain true for the investigation of medical supplies that was announced in late September. ResMed was one of the many organizations across Medtech that submitted formal public comments regarding this investigation to the U.S. Department of Commerce. There were over 800 official comments made from our industry which we see as a good show of strength from our colleagues in the field. Our submission at ResMed focused on ResMed's significant and expanding, in fact, doubling of our U.S. manufacturing, our broad domestic hardware and software R&D teams our global headquarters that's located right here in San Diego, California as well as our expansion of not just our U.S. manufacturing, but also our many U.S. jobs in research, development, and commercial operations here in the U.S. As the incoming Chairman of the industry group called AdvaMed from January 1, I'll be -- on the front lines of our med tech industry's response to this 232 investigation. 1 Of 14 industries that has been investigated by the department. And I see our industry as actually quite analogous in potential outcome to that of the aircraft industry. And the aircraft industry saw some very favorable outcomes after their investigation and the details of their commentary. We are confident that ongoing tariff relief should still apply for ResMed and for our many patients with important disabilities that need access to care. Let me also briefly comment on the competitive bidding program that CMS has stated that it plans to resume in late August, ResMed its comments on the proposed methodology that will apply to our home medical equipment or HME customers. We remain committed to advocating for policies that protect patient access to care and for policies that promote fair and sustainable reimbursement for HMEs. At this point, like everyone else in the industry, we are awaiting further information, including intended timing for the program, product categories that will be included or not included in bidding methodology details. ResMed will continue to support our HME customers and the millions of U.S. Medicare beneficiaries who rely on us, both for access to market-leading, high-quality sleep and respiratory care at home. We are fortunate to be able to remain fully focused on executing our 2030 strategy, including delivering value to all of our constituents. ResMed's strong free cash flow, our robust balance sheet provide us with significant flexibility to both invest in our business and return capital to shareholders. You guys will see us continue to selectively invest in our digital Sleep Health Concierge capabilities, including screening protocols, clinical tools, seamless workflows and cloud connected care pathways. We'll be looking to expand the diagnostic funnel to keep up with the new patient flow that will come from ResMed's own demand generate -- demand generation efforts as well as the greater awareness of sleep apnea that has been and will be generated by the promotion of GLP-1 medications that can be used to partially treat or, as I say, half treat OSA. And the accelerating momentum in consumer wearables that are capable of not just sleep health monitoring, but also sleep apnea detection. ResMed's ability to integrate with multiple other wearable ecosystems and the growth in patients using ResMed products has driven the number of API calls per second up more than 40% year-over-year in this quarter. The first quarter of fiscal year 2026 was the first time that we had more than 3 billion total API calls in a single quarter. The bottom line is that interoperability works, digital health works. People want to combine health data for lower costs, better outcomes and to bend the curve of chronic disease and to better manage these disorders and diseases that they have and that we treat. ResMed also returned significant capital to shareholders through a combination of dividends and share repurchases. As you're aware, last quarter, ResMed's our Board of Directors authorized another increase in the quarterly dividend for fiscal year 2026. We also increased our targeted share repurchase activity for fiscal year 2026. And during the first quarter, we returned over $238 million to our shareholders. Before I turn the call over to Brett, I would like to take this time to thank the ResMed Board Director has just recently announced his retirement, Rich Sulpizio, for his amazing years of contribution to ResMed. We announced that Rich will not stand for reelection at our upcoming annual meeting of shareholders, which will be November '19, 2025. And he will retire after that meeting. Rich has been a long-time mentor to me and to many executives in the technology and health care industries, including at Qualcomm, CI Technologies and of course, right here at ResMed. Rich had always brought Canada Energy and a people-first mindset to every boardroom conversation. We'll continue to do that in his legacy. I'd also like to formally welcome Nicole Mowad-Nassar to ResMed's Board of Directors. The call was elected to our Board August 15 and has been appointed to the Compensation and Leadership Development Committee. Nicole is President of the Global Allergan Aesthetics business, and she's a Senior Vice President at AbbVie. Nicole brings 3 decades of pharmaceutical industry experience, a sharp commercial lens, a deep commitment to patient access and a strong orientation towards digital health as well as consumer and patient engagement. Nicole is a great addition to the ResMed board. One final note on the Board, I'd like to congratulate Chris DelOrefice on his recent appointment as Chief Financial Officer of Ulta Beauty in the consumer cosmetics retail industry. We are fortunate to have both Chris and Nicole bring their experience with consumer-driven aesthetics products and retail products to our Board discussions. Their insights will be increasingly critical as ResMed builds its brand presence with consumers around the world to augment our amazing B2B businesses. Quarter-after-quarter, ResMed has demonstrated its ability to consistently deliver both financially and operationally. We've established a leading market position globally in an underpenetrated market that still has a very long runway for growth. This underpins our confidence in our ability to deliver for consumers, for patients, for physicians, for providers for payers, for our communities and, of course, for you, our shareholders. With that, I'll hand over to Brett to go through a deeper dive into our financials, and then we'll open the floor for questions. Brett, over to you in Sydney. Brett Sandercock: Great. Thanks, Mick. In my remarks today, I will provide an overview of our results for the first quarter of fiscal year 2026. Unless noted, all comparisons are to the prior year quarter and in constant currency terms, where applicable. We had strong financial performance in Q1. Group revenue for the September quarter was $1.34 billion, a 9% headline increase and 8% in constant currency terms. Revenue growth reflected positive contributions across our product and resupply portfolio. Year-over-year movements in foreign currencies positively impacted revenue by approximately $16 million during the September quarter. Looking at our geographic revenue distribution and excluding revenue from our residential care software business, sales in U.S., Canada and Latin America increased by 10%. Sales in Europe, Asia and other regions increased by 6% on a constant currency basis. Globally, on a constant currency basis, device sales increased by 7%, while masks and other sales increased by 10%. Breaking it down by regional areas. Device sales in the U.S., Canada and Latin America increased by 8%. Masks and other sales increased by 12%, reflecting continued growth in resupply, new patient setups and incremental revenue from our recent VirtuOx acquisition, which we acquired in Q4 FY '25. In Europe, Asia and other regions, device sales increased by 7% on a constant currency basis, and masks and other sales increased by 4% on a constant currency basis, impacted by a strong prior year comparable. Residential care software revenue increased by 5% on a constant currency basis in the September quarter, led by robust performance from our MEDIFOX DAN business, partially offset by weaker performance in our senior living and long-term care software business. As Mick mentioned, we are reviewing our investment priorities within RCS and are working on initiatives to drive improved growth in the RCS portfolio. During the rest of my commentary today, I will be referring to non-GAAP numbers. We have provided a full reconciliation of the non-GAAP to GAAP numbers in our first quarter earnings press release. Gross margin was 62% in the September quarter and increased by 280 basis points year-over-year and by 60 basis points sequentially. The increases were primarily driven by component cost improvements and manufacturing and logistics efficiencies. Changes in average selling prices had a minimal impact on our gross margin, both on a year-over-year and on a sequential basis. Our supply chain team continues to make progress on our pipeline of gross margin expansion initiatives, and we remain focused on making sustained long-term gross margin improvements. Looking forward and subject to currency movements, we still expect gross margin to be in the range of 61% to 63% for fiscal year 2026. Moving on to operating expenses. SG&A expenses for the first quarter increased by 8% on a headline basis and by 7% on a constant currency basis. The increase was primarily attributable to additional expenses associated with our VirtuOx acquisition and growth in employee costs as well as ongoing marketing and technology investments. SG&A expenses as a percentage of revenue improved to 19.4% compared to 19.5% in the prior year period. Looking forward and subject to currency movements, we still expect SG&A expenses as a percentage of revenue to be in the range of 19% to 20% for fiscal year 2026. R&D expenses for the quarter increased by 10% on both a headline and constant currency basis. The increase was primarily attributable to increases in employee-related expenses. R&D expenses as a percentage of revenue were 6.5%, consistent with the prior year period. Looking forward and subject to currency movements, we still expect R&D expenses as a percentage of revenue to be in the range of 6% to 7% and for fiscal year 2026. During the quarter, we recorded a restructuring related charge of $16 million, following a company-wide workforce planning review to better align our capabilities with our 2030 strategic priorities. Restructuring costs were comprised of employee severance and other onetime termination benefits. The restructuring charge has been treated as a non-GAAP item in our first quarter financial results. Operating profit for the quarter increased by 19%, underpinned by revenue growth and gross margin expansion. Our operating margin improved to 36.1% of revenue compared to 33.2% in the prior year period. Our net interest income for the quarter was $9 million. During the quarter, we recognized unrealized losses of $6 million associated with our minority investment portfolio. This negatively impacted our Q1 earnings per share by -- sorry, by $0.04. Our effective tax rate for the September quarter was 22.3% compared to 19.2% in the prior year quarter. As we noted in our last quarter call, the increase in our effective tax rate was primarily due to the impact of global minimum tax legislation introduced in certain jurisdictions that became effective from July 1, 2025. We still estimate our effective tax rate for fiscal year 2026 will be in the range of 21% to 23%. Our net income for the September quarter increased by 15% and non-GAAP diluted earnings per share increased by 16%. Movements in foreign exchange rates had a positive impact on earnings per share of approximately $0.02 in Q1 FY '26. The cash flow from operations for the quarter was $457 million, reflecting strong operating results and disciplined working capital management. Capital expenditure for the quarter was $43 million, and depreciation and amortization for the quarter totaled $48 million. We ended the first quarter with a cash balance of $1.4 billion. At September 30, we had $669 million in gross debt and $715 million in net cash, and we have approximately $1.5 billion available for drawdown under our revolver facility. We continue to maintain a solid liquidity position, strong balance sheet and generate robust operating cash flows. Today, our Board of Directors declared a quarterly dividend of $0.60 per share. During the quarter, we purchased approximately 523,000 shares under our previously authorized share buyback program for a consideration of $150 million. We plan to continue to purchase shares to the value of approximately $150 million per quarter during the remainder of fiscal year 2026. Going forward, we will continue to invest in growth through R&D, deploy further capital for tuck-in acquisitions and continue our dividend and share buyback program. And with that, I will hand the call back to our operator, Kevin, to provide instructions for our Q&A session. Operator: [Operator Instructions] Our first question today is coming from Davinthra Thillainathan from Goldman Sachs. Davinthra Thillainathan: Yes. Mick and team, I appreciate the time. Can we just touch on your new mask that you have launched in Australia and in the U.S. Could you just highlight the unique attributes of this product? And also, if I understand this right is in the full face category and it builds on the nasal launch towards the back end of calendar year '24. So if you could just help explain just the importance of that full face category and tie that into your ambitions to accelerate growth in March, especially in ex U.S. regions? Michael Farrell: Yes. That's a great question, David. And so yes, it's the AirTouch F30i and really incredible, I would say, fabric-based technology that, as you know, in Singapore, we've had a fabrics engineering team working for a while. And we had recently launched our AirTouch N30i, a couple of quarters ago and have had really good success with that nasal mask with fabric touching the face. And so we had this in development. We accelerated it up. And you're right, this is a full-face mask. So it's high price, high margin. It's about the roughly 30%, 40% of people breathe through both their nose and their mouth while they sleep. So they need an oronasal mask. And so for those people, 1/3 plus of people, the AirTouch F30i is coming to market. And we've got 2 variants of it, one, which I'll call sort of the premium one, which would be more, as you said, in the sort of direct-to-consumer cash pay markets. I think China, Australia, New Zealand, India, Korea, Singapore, et cetera, et cetera. And that's called the F30i comfort. And that has fabric not only in the part touching the face, but all over the head gear as well. So every part touching your body is like the sheets that you sleep in the bed. The other variant is called the F30i clear. And that is for markets sort of that are B2B markets, our home care provider markets, where we have a more economical version, but it's still has the advanced technology where the part touching the face has this new fabric or nasal patient interface. So watch this space. We've seen really good success with the N30i over the last couple of quarters. I think we're going to do the same in the full face category here. We're changing the basis of competition in masks away from liquid silicon rubber LSR away from silicon to fabrics. We're going to sell both, but I think this is going to be a very exciting product for us and it will help us, not only have high single-digit growth in the Europe/Asia rest world category, which we're going to be back to that this quarter and continue on it. I'm more excited about what it can do for patients around the world who want more comfort and more care and these masks do that. Thanks for the question, David. Operator: Your next question is coming from Laura Sutcliffe from Citi. Laura Sutcliffe: I think you spoke at the end of the prepared remarks to potential sort of tuck-in acquisitions. I think historically, you've said there'll be focus sort of refining the patient funnel improving retention within the funnel. I assume that because there's most for you to gain here. So could you just talk to how much work there is to do, how leaky is the funnel right now and perhaps sort of allude to how that fits into the ResMed 2030 strategy? Michael Farrell: Yes. Thanks for the question, Laura. Look, it's a good one. And as you saw, we have done a couple of tuck-in acquisitions in this area of the patient funnel, helping with access to very easily usable home sleep apnea testing tools like our Ectosense acquisition and the NightOwl product. That is now being launched to our U.S. sales force. We did that at the sales meeting a couple of months ago. And so then in addition to that, we acquired a home sleep apnea testing services company called VirtuOx. And that team is hard core, dedicated entrepreneurs that now have -- and they came to our salesman here in the U.S. as well. They now have access to the ResMed capabilities. And I actually just got the quarterly update from the team on the advisory board and their numbers are doing really well. We are doing really well in terms of getting NightOwl, getting other homes sleep apnea tests to patients and bringing them through the funnel. So that really strong 8% growth we saw in U.S. devices. I do think that sort of, I would say, beating sort of that mid-single-digit growth, which we say is the market growth without that, some of these tuck-in acquisitions of VirtuOx and the NightOwlproduct have helped with that. In addition, of course, we had the tuck-in of the Somnoware acquisition, which is software, for pulmonary and sleep medicine practices. So we're helping provide efficiency, seamless flows, so that the pulmonary doctors and the PCPs have better interactions and easier interactions with each other. Yes, I'm not going to single exactly what we are looking at for the future, but I can tell you more like that technologies and capabilities to help with that seamless, frictionless flow from sleep concern consumer to screening, diagnosis, treatment and set up. As you said in your question, Laura, there is churn in the channel. There is leakage in that funnel. And our goal is not only to bring more patients into the funnel at the top through demand generation, capture and curation, like our CME programs that I talked about in the prep remarks, but also to minimize the lots of people as they go through there. And how do you do that? You interact better. You provide seamless and easier alternatives to go through the system. So I think having Dawn our generative AI product, there's sort of digital sleep health Concierge, improving access to that capabilities of that, interoperability of that. Think of the 3 billion calls, API calls into and out of our AirView system. That means people want to know about their sleep health and their breathing health. And we need to combine it with all those other data around chronic disease. So I really do think the investments from big pharma, they're putting in D2C advertising, including using basketball stars and all this late night stuff don't sleep on OSA campaign. It's going to bring patients into that funnel. And so ResMed's goal is to maximize the opportunity of getting that screening, positive diagnosis, positive therapy for the gold standard, whether or not they have additional therapies like GLP-1s or others, making sure the gold standard happens at that time and that we maximize that 90-day adherence, year 1 adherence and beyond. So the game is not done. There's a lot more to do. We're going to keep executing on NightOwl and VirtuOx and Somnoware and looking at others that can help drive further growth in the future. Thanks for the question, Laura. Operator: Next question is coming from Saul Hadassin from Barrenjoey. Saul Hadassin: Mick, you touched on this made in America strategy, Mick, and the Indianapolis distribution center expansion. I'm wondering if you can talk to your plans as it relates to actually manufacturing in the U.S., and I know you spoke about this last quarter at Calabasas. But just to be clear, how do you see product manufacturing evolving in the U.S. as it relates to being able to develop all products, CPAPs, masks, not just the motors. If you could touch on that, that would be great. Michael Farrell: Great question, Saul. And I won't go into the detailed plans that we have to expand in Calabasas and Moreno Valley in Indianapolis and Atlanta. But I can tell you across our footprint here in the U.S., we've got a really broad manufacturing and distribution capacity world-class. And Shane Azzi and his supply chain team not only looking at inbound supply, but that manufacturing distribution, getting 90% of customers within 2 business days of delivery is sort of world-class and well above top tier for Medtech. And so that's where we're looking at going. Yes, look, we do see certain policies coming in from Washington and being the incoming Chairman of AdvaMed I'm very much across all that is coming and may or may not come. And you think about customers like the VA and others that the U.S. government approach. I think it's just a good strategy for ResMed to not only have our Made in America motors, as you said, our made America masks that we already have, but to have capability for Made in America devices. And so we will be setting up lines for that and be able to flex up and down as the needs of our U.S.-based customers and our global customers go there. The bottom line is the vast majority of our global volume does come out of the U.S. It's well over 50%, 60% of our global volume. So bringing more manufacturing here. And we learned this in COVID that having manufacturing close to where the demand is, is needed when there's uncertainty -- geopolitical uncertainty. And so we're looking at all that and saying ResMed is a steady ship through all this macro uncertainty. We've been so good with all these changes in up and down. I'm just being really good at delivering for our customers. We want to have the ability to do that no matter what happens. And so we're preparing for that. And we're doing things for the long term. We're not doing them in response to a particular government. We're saying, well, what's right for us in 2030, 2035 and then what overlaps what rules may or may not come in. And that's why we're doubling our U.S. manufacturing capacity and broadening from just motors to masks and potentially devices as well. So watch this space. Operator: Our next question today is coming from Lyanne Harrison from Bank of America. Lyanne Harrison: I might ask on U.S. devices. Obviously, very strong growth there in comping a strong previous quarter as well. Can you talk about the demand in initiatives that you have in place? And how do you measure which ones are really delivering in terms of generating that demand? And you do mention mid-single-digit growth for the device market. But certainly, what we are seeing this quarter is at high single digits. Can we expect high single digits going forward, given all those demand initiatives that you have in place? Michael Farrell: Yes, Lyanne, look, it's a really good question. And you and many of the other analysts here have followed our work here very closely on demand gen, demand capture demand curation. And so you know it's not a simple algorithm. It's not a simple customer acquisition cost to lifetime value that you might see in a retail industry or an online-only type company where those equations are relatively simple. [indiscernible] dial, you get this response. It's quite complicated in health care. And so we've actually become quite sophisticated. I think, in where, how and when we have targeted social media and digital media driven demand gen campaigns where we look at not only is there an age group and a demographic that's open to that demand gen, so that it's available demand gen, but the capacity for screen diagnosis and prescription of referrals is there within that particular demographic, geography and capability. And so -- yes, look, I do think we outperformed what the market growth would have been without good execution there in Q1, right, with 8% growth in our U.S., Canada and Latin America devices on a reasonable comp as you noted. I'm not here to raise our guidance and say, "Oh, we're suddenly going to go to high single-digit growth in devices on a consistent basis in the U.S." But I do think that we can systematically move up 25, 50, 100 basis points from what the growth will be. We can move ahead sometimes and do really well and then we can just slowly and steadily move it up as well. And what we're looking for is that sustainable market demand, demand generation improvement. It is nice to have the tailwinds of $400 billion, $500 billion pharma company throwing a lot of D2C advertising that we can't afford to do with our P&L. That don't sleep on OSA campaign and all their other stuff is going to bring patients into the funnel. So our question then comes like -- how many of those 22,000 PCPs were trained are actively now prescribing CPAP as gold one front line therapy to every patient that comes through. They say they're going to do that close to the education, but what happens in practice? Have we connected them to a VirtuOx? Have we connected them to other home sleep apnea testing services because it doesn't have to all be from us. We want that patient well taken care of and brought through the funnel. So yes, I think it was a great work by the team in U.S., Canada and Latin America in the quarter. And let's not forget, they also did great work in resupply, you saw 12% growth of U.S., Canada and Latin America masks and other categories. So that very good growth in the mask resupply and the VirtuOx services and all the other parts that go into that. So very excited about this growth and its ability to continue it. But it's an ongoing game of innovation in marketing technology, demand generation technology and then also channel evolution, which relates to Laura's question about making sure the infrastructure is there as well. So we're combining all this together well. U.S., Canada and Latin America team did very well in the quarter, and we're going to continue to execute on that. Thanks for the question, Lyanne. Operator: Our next question is coming from Steven Wheen from Jarden. Steven Wheen: Just a question for Brett in response to the global minimum tax jurisdiction and the impact on your tax rate. I think from your previous calls, you've indicated that there's other benefits that you're likely to get through R&D sort of credits or offsets or sort of staff concessions. I wonder if you could sort of help us understand what the sort of compensating factors may be for that lift in the tax rate in out of Singapore? Brett Sandercock: Yes, sure, Steve. Yes, we now have an agreement under refundable investment credit or ROIC with the Singapore government, which is now effective into this quarter. So we are getting some offset that would flow through COGS, SG&A, R&D through the P&L. So that offsets it to some extent, but not completely, but we do get some benefit that's coming through. You'll see that over time. I think that will build over time as well. Through FY '26 into FY '27. So we are getting the benefit of that, but it's not -- it doesn't offset the tax impact. Operator: Our next question is coming from David Bailey from Morgan Stanley. David Bailey: Yes. Mick, just the commentary around PCP awareness rising prevalence in the U.S. in relation to OSA. First part is, where do you think the penetration of the U.S. market is at the moment? And then secondly, in terms of RePAP as an opportunity for growth, how do you sort of see that at the moment and going forward as well? Michael Farrell: Yes, David, it's a good question because it looks at both parts the RePAP, which is a growing part of our devices side and the new patient flow that we spend a lot of our time for in the devices category. Look, I think PCP awareness is key. I want all 40,000 of the PCPs that I think will be targeted by this work from the pharmaceutical industry that are high-volume GLP-1 providers, and that already have access to home sleep apnea testing protocols. And so we're going to work through really strongly to make sure that we hit all of those primary care physicians and make sure their education is there and that we are there with commercial solutions for them to be able to drive that. And yes, the rising prevalence from the data that was published in the Lancet. We're ready for that. We know there's an aging population. We know there's increased chronic disease awareness, and we know that people are finding out more, not just in the big pharma ads, which is sort of temporal compared to these wearables that people are now managing their health and their fitness. And when it starts to identify sleep breathing disturbances or specifically sleep apnea. They're going to seek treatment and they are. And so we've got to be aware for both of these at the primary care level. To your question around penetration in the U.S. market. Look, I think when you take those numbers up to $77 million by 2050, where we're at in our penetration rates and the growth towards that. The U.S. market is sort of in that sort of 15% -- under 20%, sort of 15% to 20% penetration. The Europe market is in that sort of 10% to 15% penetration rate. And of course, in Asia Pacific and Rest of World, we're well sub-5% penetration. And our growth rates are struggling to keep up with the rise of prevalence. And so those percentages don't change as fast as I'd like them to change in terms of penetration. I'd like them to increase higher and higher because ResMed is finding better and better solutions to get there. But we're just finding more and more patients as people age and get aware, frankly, of these chronic diseases. And so both of those are good things. But yes, sort of in that 15% to max 20% sort of in the U.S. range is sort of where we see penetration now. And thanks for your questions. It's a complex equation of getting that PCP awareness and driving people appropriately into the funnel, but we're working on it and the team performed very well this quarter. Operator: Next question is coming from Brett Fishbin from KeyBanc Capital Markets. Brett Fishbin: Nice overall quarter for Sleep & Respiratory, but I think the 1 area to maybe nitpick was just the mid-single-digit growth trend in SaaS which is a little bit below your typical levels. I was hoping you can maybe just unpack a little bit more in terms of the incremental headwinds you saw in those couple of end markets. And then just the assumptions underlying your expectation of returning to mid- to high single-digit growth near term and high single-digit growth next year? Michael Farrell: Great. It's a good question. And yes, as you know, the Software as a Service part of our RCS business is incredibly strong, and that's where we're really looking to focus. So core MEDIFOX, core Brightree and then MatrixCare home health, all Software-as-a-Service businesses that have higher growth and higher margins. So we are investing in those. What you saw in the quarter and what I talked about for this fiscal year is that we're going to focus less on what I would call the lower margin, lower growth areas. Their services revenue, I think IT services, implementation services, which you need to have some of, right, for new customers that are coming on board with your ecosystem, but you don't need to expand on them and have them beyond what is needed. And you can actually use third parties to provide those lower-margin areas where private companies are happy with lower growth, lower margin areas and they're not best suited as part of a strategic like ResMed in a global RCS platform. So I'm going at portfolio management that we're looking at for that, where we're going to invest more and more in the SaaS platforms, as you noted, and less and less in the services part of that. And that was what contributed to the couple of hundred basis points delta there from Q4 to Q1. But as I said in the prepared remarks, and we've got the plan and we're executing on it. I spent a lot of time. We've now rolled this business into our global revenue side. So Michael Fliss, our Chief Revenue Officer, and really importantly, with Joachim who runs our MEDIFOX business, Tim who runs our MatrixCare business and Gregg, who runs our Brightree business. We're looking at every element of portfolio management is saying, let's invest for the long term. Let me get investment into the core platforms that are really servicing these home medical equipment companies, really servicing this home nursing and home health companies and our expandable and sustainable growth and can get us back to where we should be, which is high single-digit growth in the top line, but also double-digit growth on a net operating profit basis. So watch this base as we go through that. I think it's the right time to do this because our core business is performing so well. And I think it's the right thing to do for the long term because there's great synergistic impacts -- look at the growth of masks and accessories in our U.S. at 12% this quarter. That was helped by our Brightree, not only Brightree resupply, but Snap and not just Snap and Brightree, but Snap for other areas. And so have we over-indexed on the resupply and a little less on the core platform maybe. And so I think what we're signaling here is we're going to invest in the core platform in Brightree and really make sure that's not only best in class and best market share, which it is, but it's innovating faster and faster to help more and more HME customers come on board. So I think it's the right time for this portfolio management, and we're investing with those businesses. We've got 3 really strong leaders that are putting their plans together and executing and I met in person with them all this quarter. And I'm really excited about what we've got ahead for our SaaS-based businesses in Brightree in home medical equipment and synergistic impacts as well as our work in MEDIFOX and home health on MatrixCare. Operator: The next question is coming from Mike Matson from Needham & Company. Joseph Conway: This is Joseph on for Mike. I appreciate taking our questions. I guess maybe just a quick one on NightOwl. Obviously, it's pretty early days into the launch, but I was just wondering if you could give any more color around metrics? And how it's converting fleet patients and lowering that pretty high fleet patient backlog that you guys have called out? Much appreciated. Michael Farrell: Yes. Thanks for the question, Joseph. And yes, we don't really split out exactly what the NightOwl numbers are. But what I can tell you is, compared to where we thought we'd be in the growth of our VirtuOx, which is the home sleep apnea testing service that runs NightOwl as well as ApneaLink as well as even competing diagnostic tools, but mostly NightOwl. We're seeing really good growth. That team is performing well and driving patients through the funnel. I mean, you saw that in the 8% growth in devices in U.S., Canada, Latin America. Do I think there's more room for growth? 100%. Do I think that the big pharma, big tech, bringing patients in is going to be a tailwind? For sure. But it's an ongoing game of saying, let's make sure we get those NightOwl's to every geography, to every primary care position who needs them. And more importantly, frankly, offer the service to that primary care physicians so they don't have to buy the diagnostics because most of them want a service that can provide it for them. So it's really a combination of NightOwl wrapped in the VirtuOx service as well as providing for the pulmonary physician growth of somewhere, so that they can manage the systems and read the studies and get them back to the primary care physicians who can then see their own patient, write the prescriptions and then the care can be managed for life. So a bit of a complex equation. But I can tell you that the growth is good in VirtuOx, growth is good in NightOwl and that's what's contributing to our core business growth, which was strong, not just in the U.S. but also in Europe, Asia, Rest of the World. We saw pretty good sort of 7% growth in devices across Europe, Asia, Rest of World this quarter. And obviously, not driven by NightOwl its not as available there, test some more on larger, more complex on sleep apnea testing systems and in lab, but we're even doing well in driving patients through there. So no patient left behind. We want to make sure the $2.3 billion have access to care and the $1 billion with sleep apnea have a better approach and NightOwl is a good part of that. Operator: Our next question today is coming from Andrew Goodsall from MST. Dan Hurren: Sorry, it's actually Dan Hurren. Look, thanks for your comments that you made before around competitive bidding. But sort of reflecting back, I'm not sure you actually gave us your thoughts on what you think the range of outcomes will be. But your commentary is bullish and confident as ever. So I guess you must have a view on how competitive bidding will play out, So perhaps I'll push you there a little bit just to narrow your thoughts on the range of outcomes there? Michael Farrell: Yes. Thanks for the question, Dan. I mean look, this is our 15th year probably 60th quarter of watching the competitive bidding landscape right from when this launched in sort of 2010. And I think the HME customers are very sophisticated. They understand their costs and they understand how to bid, and so they're working through all that. So no matter what the scenarios are, the last round that we saw in 2021, just 4 years ago, they did a really good job of looking at their costs and bidding appropriately. And then we saw those bidding rates be right in line with what they thought. And then the government sort of went back and reassessed. Look, maybe we'll just stick to an inflationary adjustment approach. Look, I think the HMEs will do the same thing. They'll bid appropriately. They know where ResMed is, which is we're here to support you. But this is something where we know where the costs are, their costs have gone up from 2021 to now, there's been inflation across it. They should bid appropriately in there working through the process through AAHomecare and all these groups to work out how to do that well. So I think we've got a mature sophisticated HME base that will bid appropriately. And I think the outcomes will be appropriate for them because they know the inputs they put into that system are the outputs they'll get. And they know that ResMed will be here to support them with the best smallest, quietest, most comfortable most cloud-connected and most capable systems, and that together will help take cost out of the system by keeping people out of hospital, out of ERs and that this is about really that equation, which is sleep apnea diagnosis and treatment is a cost saver for the health care system. That's what I advocate for us as Head of [indiscernible] there about all of Medtech. There's an ROI of Medtech for the U.S. government. It's a very good investment for them. And so that applies to both the lobbying on the 232 as well as on competitive bidding. So I'm confident that the outcome of this will be good because the sophisticated players going in and they know what to do and they know that the beneficiaries are the ones they should focus on. And that's what we're all here to serve them. Operator: Thank you. We are now at the 60-minute mark, I'm going to turn the floor back over to Mick for any further closing comments. Michael Farrell: Well, look, thank you for joining us for the earnings call today. Our fiscal year 2026 is off to a great start, strong 9% headline, 8% constant currency growth. On behalf of more than 10,000 ResMedians serving people in 140 countries worldwide, I'm pleased that they were able to deliver you another strong quarter of performance and for all our shareholders. We look forward to speaking with many of you over the coming weeks and to all of you here in 90 days. I'll hand back to Salli. Sallilyn Schwartz: Great. Thank you, Mick. I'll echo Mick, thank you for everyone for listening, and we appreciate your time and interest. If you have any additional questions, please don't hesitate to reach out directly. Kevin, you may now close the call. Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Operator: Good afternoon, and welcome to Arthur J. Gallagher & Company's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. If you have any objections, you may disconnect at this time. Some of the comments made during this conference call, including answers given in response to questions, may constitute forward-looking statements within the meanings of the securities laws. The company does not assume any obligation to update information or forward-looking statements provided on this call. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to the information concerning forward-looking statements and Risk Factors sections contained in the company's most recent 10-K, 10-Q and 8-K filings for more details on such risks and uncertainties. In addition, for reconciliations of non-GAAP measures discussed on this call as well as other information regarding these measures, please refer to the earnings release and other materials in the Investor Relations section of the company's website. It is now my pleasure to introduce J. Patrick Gallagher, Jr., Chairman and CEO of Arthur J. Gallagher & Company. Mr. Gallagher, you may begin. J. Gallagher: Thank you. Good afternoon, everyone, and thank you for joining us for our third quarter '25 earnings call. On the call with me today is Doug Howell, our CFO, as well as members of the management team. Before I start, I'd like to acknowledge the damage caused by Hurricane Melissa in the Caribbean. Our thoughts are with all those impacted, including our own Gallagher colleagues. Our team of experts have been mobilized and are on the ground helping our clients and colleagues. Moving to our financial performance. We had a terrific and obviously very active third quarter. Our two-pronged revenue growth strategy, that's organic and M&A, delivered revenue growth of 20%. In fact, over the last 30 quarters, we've delivered double-digit top line growth 26 times. This is now our 19th straight quarter of double-digit growth. Clearly, our relentless client-centric, team-driven and welcoming culture is thriving. Underlying that headline revenue growth, we posted 4.8% organic, grew adjusted EBITDAC 22% and expanded adjusted EBITDAC margins by 26 basis points, demonstrating we are getting substantial benefits of scale and the value delivered by our strategy of constantly focusing on improving our productivity while delivering our high-quality services. EPS for our combined Brokerage and Risk Management segments, we posted GAAP EPS of $1.76 and adjusted EPS of $2.87. That would have been $0.22 higher had we levelized for the intra-quarter revenue seasonality related to AssuredPartners that we closed on August 18. Doug will unpack this timing aberration in his comments. The punchline is our business continues to shine and the early days of the AssuredPartners folks coming together with the Gallagher team is off to a terrific start. Already, we're selling together. We're showing that we are better by being together. Moving to the results on a segment basis, starting with the Brokerage segment. Reported revenue growth was 22%. Organic growth was 4.5%. Relative to our September IR Day commentary, we did see a little pressure on contingents and a few large life insurance cases shifted out of the third quarter. Adjusted EBITDAC margin headline shows flat year-over-year at 33.5%. But when we exclude merger and acquisition, interest income, it shows underlying margin expansion of 60 basis points. Doug will give you a bridge from last year. That's terrific work by the team to stay vigilant in our relentless pursuit of being more productive every single day. Let me provide you with some highlights behind our Brokerage segment organic. Within our retail operations, we delivered 5% organic overall within P&C with U.S. up more than 7%, international flat, driven by less renewal premium increases and lower contingents. Employee Benefits posted around 1% organic, driven by lower-than-expected large life cases. Shifting to our wholesale and specialty businesses. In total, we delivered organic of 5% with the U.S. outperforming our international businesses slightly. As for reinsurance, it's a relatively small quarter and organic here was in the high single digits. And while not in our organic growth numbers, AP's third quarter organic was 5%. That really shows you that a terrific sales-driven culture is joining our team. So we continue to deliver organic growth across retail, wholesale and reinsurance. Let me provide some thoughts on the P&C insurance pricing environment. Overall, global insurance renewal premium changes remain in positive territory, and we continue to see more carrier competition across property classes, particularly shared and layered programs and cat-exposed risks, resulting in renewal premium decreases. With that said, carriers continue to push for increases across most casualty classes, which are more than offsetting the property decreases. Let me provide a further breakdown on our third quarter global insurance renewal premium changes, which includes both rate and exposure by line of business. Property down 5%; casualty lines up 6% overall, including general liability up 4%, commercial auto up 5% and umbrella up 8%; U.S. casualty lines are up 8%, and that increase has been consistent over the past 12 quarters, suggesting domestic carriers are recognizing continued pressure; package, up 5%; D&O down 2%, we think perhaps close to bottoming out; workers' comp up 1 point; and personal lines up 6%. So while property is down 5%, many lines are still seeing increases. In fact, global renewal premium change, excluding property, remains around 4% with good accounts getting some premium relief and accounts with poor loss experience seeing greater increases. Looking at differences in renewal premium changes by client size, we continue to see some bifurcation. For middle market and smaller clients generating less than $250,000 of revenue, renewal premiums were up about 3%. For larger clients generating more than $250,000 of revenue, renewal premiums were down 1%. So many of the market trends that we have been highlighting for the past few quarters persist today. As for the reinsurance market, a very small quarter for us. Looking towards January 1 renewals, the industry remains healthy. There's adequate capacity to meet expected demand. Property coverages continue to favor reinsurance buyers, while casualty reinsurance dynamics are more stable with continued caution for U.S. risks. Moving to Employee Benefits. We continue to see solid demand for talent retention strategies given the resilient U.S. labor market. Further, managing rising health insurance costs is becoming increasingly important for our clients as they deal with continued medical cost inflation. So we are engaging with employers to help them alleviate the pressure from rising medical and pharmaceutical costs. Moving to some comments on our customers' business activity. While the U.S. government shutdown has halted economic data releases, our proprietary data, which has been an excellent indicator of the economy, continues to show solid client business activity. Third quarter revenue indications from audits, endorsements and cancellations remain nicely positive. Interesting, through the first 3 weeks of October, our revenue indications are showing even more positive endorsements and lower cancellations than in September. So while we are watching our customers' business activity carefully, we are just not seeing signs of an economic downturn. Regardless of market and economic conditions, I believe we are very well positioned to grow. From our leading niche experts, vast proprietary data, award-winning analytics platform, extensive product offerings, outstanding service and global resources, this puts us in an enviable spot competitively. As we sit today, we are seeing Brokerage segment fourth quarter organic of around 5%, which would bring our full year organic to more than 6%. Moving on to our Risk Management segment, Gallagher Bassett. Third quarter revenue growth was 8%, including organic of 6.7%. We saw strong new business revenue and excellent client retention in the third quarter and believe these favorable dynamics will continue through the end of the year. Accordingly, we expect about 7% organic growth in the fourth quarter. Third quarter adjusted EBITDAC margin was 21.8%, a bit better than our September expectations. Looking ahead, we see fourth quarter and full year margins around 21%, and that would be another great year for Gallagher Bassett. Let me shift to mergers and acquisitions, starting with some comments on AssuredPartners. Since the mid-August close, dozens of Gallagher leaders and hundreds of others have been traveling to AP offices and hosting gatherings. We've been sharing our stories with thousands of our new colleagues and highlighting all the tools and expertise that is now at their fingertips. I, too, have attended many of these meetings and events. And I have to tell you, the level of excitement all of us have witnessed during these visits is literally palpable. We have shared a view that we will be better together. 1 plus 1 will be greater than 2, and there is immense value creation for our clients, carrier partners and shareholders. Equally important, they know they are now home, and they are getting the resources they have desperately needed for years. For those that are ready to join the amazing Gallagher culture, I welcome you. Outside of AP, we completed 5 new mergers, representing around $40 million of estimated annualized revenue. This brings our year-to-date estimated annualized acquired revenue to more than $3.4 billion or 30% of full year '24 revenue. That is fantastic. And for those new partners joining us, I'd like to extend a very warm welcome. Looking at our pipeline, we have about 35 term sheets signed or being prepared, representing around $400 million of annualized revenue. Good firms always have a choice and it would be terrific if they chose to partner with Gallagher. I'll conclude my prepared remarks with some comments about our Bedrock Gallagher culture. As I am meeting with colleagues, both new and old across our global network, it's always impressive to me how quickly new employees and acquisition partners come together as part of the Gallagher family of professionals, how we embrace the Gallagher Way and enhance our offerings and services to clients. As tenant #24 of the Gallagher Way reminds us, we must continue to building a professional company together as a team. And I believe this spirit of teamwork and shared purpose is precisely what is driving our success today. That is the Gallagher Way. Okay. I'll stop now and turn it over to Doug. Doug? Douglas Howell: Thanks, Pat, and hello, everyone. Today, let me first address the third quarter impact from rolling in revenues from AssuredPartners. So let's go to Page 7 of the CFO commentary document that we provide on our website. Over the last 30 days, we finally got usable AP data down to the customer level detail. That gave us the policy inception data necessary to implement our 606 accounting and harmonize revenue accounting methods. First, it's important to note that the new detail did not change our annual view of revenue or EBITDAC. Second, however, it did reveal that AEP's business is much more seasonally skewed than we could previously estimate. Two tables here on Page 7 help unpack this. The top table shows you the inter-quarter seasonality. It's easy to see first and fourth quarters have considerable seasonality, which you should consider when building your models. What this table doesn't show is the intra-quarter seasonality. So we've added the lower table. What this shows, while we owned AP for half the quarter, only about 40% of the policy inception dates were between August 18 and September 30. That produces an $80 million revenue difference to our September IR Day estimate where we used a 50% assumption because we owned it for half of the third quarter. That causes a $0.22 shortfall to our indicated September IR Day estimate. You'll see that in the yellow column in that table. It does impact some of my other commentary, but I'll highlight those throughout my remarks. All right. With that said, let's go back to the earnings release, and let's go to Page 3. Brokerage segment organic growth of 4.5%. That's about $11 million of less revenues than our September IR Day thinking. Half of that relates to those lumpy life sales that didn't get closed. And we've talked about that, how that can impact organic a little bit from time to time. That cost us about 30 basis points of growth. The other half or so relates to contingents. While there is some geography with supplementals, we did have an unfavorable estimate change related to one of our international programs. That cost us about 20 basis points of growth relative to our expectations. Looking forward to the fourth quarter, we see organic around 5%. A couple of items that influence our thinking when we make that estimate. First, as we discussed in our IR Day, we are in the midst of our annual update on 606 estimates. When all that settles, that could move that growth estimate 0.5 point either way. We know that's just accounting, but it can cause some noise. Second, always a little sensitive to the timing of those large life sales. If buyers believe rates may come down even more, they might push those into '26. That said, if we were to deliver fourth quarter organic around 5%, we would finish the year with organic above 6%. That would be a terrific year. Flipping to Page 5 of the earnings release to the Brokerage segment adjusted EBITDAC table. Third quarter adjusted EBITDAC margin was 33.5%. That's flat year-over-year on the headline. But as I do each quarter, let me walk you through a bridge from last year. First, if you pull out last year's 2024 third quarter earnings release, you'd see we reported back then adjusted EBITDAC margin of 33.6%. Now adjusting that using current FX rate, and this quarter is about 10 basis points. So FX adjusted EBITDAC margin for third quarter '24 is about 33.5%. From that starting point, the roll-in impact of M&A used about 200 basis points with more than 2/3 of that impact coming from the seasonality of AssuredPartners. Interest income, including the cash we are holding for the AP closing through mid-August, added about 140 basis points of margin. And most important, organic growth of 4.5% gave us about 60 basis points of margin expansion this quarter. This bridge helps you quickly see we continue to deliver terrific underlying margin expansion. As for fourth quarter, we don't see anything that causes us to change how we view underlying margin expansion potential. We still see terrific opportunities. Sticking on Page 5, the Risk Management segment organic growth was 6.7%. That was in line with our expectations, and that resulted due to strong new business revenues and excellent retention. We expect favorable new business and retention again in the fourth quarter, so it's looking like another quarter of organic growth in the 6.5% to 7% range. Adjusted EBITDAC margin of 21.8% was better than our September IR Day expectations. And looking forward, we still see full year margins closer to 21%. Let's turn now to Page 7 of the earnings release and the corporate segment shortcut table. Each of these adjusted lines came in close to the midpoint or just a bit better than our September IR Day expectations. All right. Let's leave the earnings release and go back to the CFO commentary document. Starting on Page 3 with our modeling helpers. Most of the third quarter '25 actual numbers, which were given, excluding AP, were close to what we provided back in September. Looking forward, we are including AssuredPartners in our fourth quarter figures for depreciation, amortization and earn-out payable. Also, please always take a few minutes to look at the impact of FX as you refine your models. Turning to Page 4 and the corporate segment outlook for the fourth quarter 2025, not much change here from our IR Day 6 weeks ago. Flipping now to Page 5 to our tax credit carryforwards. Again, not much change from our IR Day. But as a reminder, it's a nice cash flow sweetener to fund future M&A that doesn't show up in our P&L, but rather via our cash flow statement. Turning to Page 6, the investment income table. We've updated our forecast to reflect current FX rates and changes in fiduciary cash balances. These numbers assume one future 2-basis-point rate cut in December. Shifting down to Page 6 to the rollover revenue table. The third quarter '25 column subtotal around $137 million before divestitures. That's pretty close to our September estimate. Looking forward, the pinkish columns to the right include estimated '25 and '26 revenues for brokerage M&A closed through yesterday, excluding AssuredPartners. And just a reminder, you always need to make a pick for future M&A. Moving down the page, you'll see that we expect fourth quarter '25 Risk Management segment rollover revenues of about $16 million. All right. Flipping next to Page 7, I hit on the major takeaways upfront in my comments, but heads up on a couple of items as you use this page to build your models. First, take a hard read through the footnotes. This table shows our midpoint estimates. It uses a placeholder assumption for growth and also does not include synergies. We still see annualized run rate synergies of $160 million by the end of '26 and $260 million to $280 million by early '28. And the second point, the noncash items that we show here, mostly depreciation and earn-out payable are also reflected in the Brokerage segment fourth quarter estimates on Page 3. So please don't double count those. Moving to cash, capital management and M&A funding. When I look at available cash on hand plus future free cash flows plus investment-grade borrowings, over the next couple of years, it's looking like we might have $10 billion to fund M&A before using any stock, still at multiples with a terrific arbitrage. So before we go to Q&A, a few sound bites on our 9-month combined brokerage and risk management adjusted results. Revenue up 17%, net earnings up 27%, EBITDAC up 25%, organic year-to-date at 6.6% and EBITDAC margin over 36%. Those are stellar results, and I see us finishing '25 strong and '26 is looking like another terrific year. Okay. Back to you, Pat. J. Gallagher: Thank you, Doug. Operator, if we can go to questions, please. Operator: [Operator Instructions] Our first question is from Elyse Greenspan with Wells Fargo. Elyse Greenspan: My first question, I want to start on AssuredPartners. When we're thinking about, well, I guess, new business by AP, I'm assuming that, that's in the M&A line, but then what about synergies? Is that -- does that fall in the M&A line? Or is that something when they start coming online that will be included within organic revenue growth? Douglas Howell: Well, the revenue synergies that we get out -- get from -- that goes into the AssuredPartners P&Ls will be given credit to them, not to us. If there is something that we would book, for instance, a broader base contingent commission or supplemental that impacts our books, that would go into the legacy Gallagher organic growth. So to a certain extent, if we pick up some more on the AssuredPartners book of business, that would not -- that would understate organic revenues. Does that help? Elyse Greenspan: Yes, that does help. And then I guess -- I mean, I think in the past you guys have said that next year, right, feels a lot like this year. You just said that the full year is going to be, I think, just more than 6%. Based on how you guys are seeing everything today, is there more precise guidance just in terms of the organic outlook that you're looking at for 2026? Douglas Howell: Yes. We're in the middle of our budget and planning process, but I still think we feel comfortable that next year -- '26 could look a lot like '25. We still believe that. Early indications that we're having terrific success in our Reinsurance business. We're having terrific success in our P&C businesses. So as a matter of fact, when you really pull back the organic growth in the P&C business, it's been pretty consistent over the last 5 to 7 quarters when you strip out property cat. So basically, our business are still running very similar and today is what we were seeing throughout the year. So that's what makes us feel comfortable that next year could be a lot like this year. Elyse Greenspan: And then my last one is on M&A. When you guys talk about the pipeline, I'm assuming that's now like a combined Gallagher and AP pipeline? And how has -- now that you guys have closed on the AssuredPartners acquisition, how has, I guess, the M&A from their side of the house? How is it like added to the pipeline as well as just when you think out about kind of your bolt-on M&A over the course of like the next year or 2? J. Gallagher: Elyse, give us a couple of weeks on that. I mean we just really got closed, and we're kind of getting around that. As I said, we've been doing a lot of visits. We're going to have most of their folks in the field come to the home office over the next 1.5 months or so. And that pipeline has not been yet put into our pipeline report. They did have a good pipeline. Things we're working along. And of course, we're going to bring them together with our M&A people. But I don't have a real good handle on that yet. We're hopeful that, that business and those opportunities will roll that over to us, but I haven't seen that yet. Douglas Howell: Yes. One thing qualitatively on that is that what's happened is, as I sit down and talk to some of the branch managers that -- or agency presidents that have come over that have been merger partners and assured partners, I think a lot of them are frankly, we're kind of surprised that we'd be so interested in them. They're in smaller communities necessarily. Their books -- they're not quite as large. So I think it's opened up the eyes to -- of those 30,000 agents and brokers out there that of all sizes, we have an interest. If you want to sell, you want to take care of your customers, you want to get better together, our doors are open for that M&A. So that's -- I think there's an awakening that we want good producers that want to produce some good agency leaders that want to stay on and be a part of the business. So I think that's going to lead for us getting more looks and more swings at the plate. J. Gallagher: It will also take a little while recook, if that's the right word. People are naturally cautious. We're going down a discussion and track with AP. You've now gone a different direction with Gallagher. How are you feeling about that? Are you still wanting to put the recruiting press on me? Or are you feeling a little bit hesitant? I think people want to naturally watch that. I'm very hopeful that when it starts to cook, it should cook well for us. That's what I'm hoping. Operator: Our next question is from Andrew Kligerman with TD Securities. Andrew Kligerman: So I just actually want to build on Elyse's question. The first one on the organic growth. I recently spoke with 2 competitors in the small to middle market brokerage area. And both of them kind of said, in this shallow pricing environment, 4% to 6% is a good organic run rate, that it's very doable and likely. How does that strike you? I mean does that feel like the strike zone as opposed to in the past, you were looking more at upper single digit just given the pricing environment? Douglas Howell: Yes. I think if -- we stood on January 1, remember, we thought that we would be somewhere between 6% and 8%, and that's where we're going to fold out. The difference is on some of that is our reinsurance business, our international business. So I think that you've got a good nose into what might be Main Street U.S. retail. I think where we top up on that is because of our wholesale business that performs well, our programs. We've got that business, and then we've got our reinsurance business. So those are the things that make me feel being more on the upper end of that spectrum that range than within that range. Andrew Kligerman: Got it. And then going back to M&As, and I get it's kind of too early to talk about AssuredPartners pipeline and so forth. But just in terms of A.J. Gallagher appetite, if a deal were to present -- a large deal were to come across here, your desks or if a deal outside of the United States that were large to come across your desks, would that be something you could do at this stage, just given the sheer size of AssuredPartners? J. Gallagher: Absolutely, yes. Operator: Our next question is from Gregory Peters with Raymond James. Charles Peters: I guess -- first of all, I appreciate the disclosure on Page 7 of your CFO commentary. And Doug, I think you mentioned or just reiterate it, the $160 million of synergies that's not in these estimates, you can confirm that. Is that -- can you talk about the geography of that? Is that going to be -- is that going to be in the operating expense? Or is that going to be revenue and operating expense? Or -- and I'm not asking to pinpoint by quarter, just ballpark where you think those synergies, how those are going to show up when we get to the year-end '26? Douglas Howell: Yes, I think by the time you get into '26, it's easy for me to always say 1/3, 1/3, 1/3. We're going to get 1/3 for revenue uplift. We're going to get 1/3 because better -- coming together, we'll have some efficiencies in our workforce, and I think 1/3 of that will come from our operating expenses. The more exciting number really comes when you get to that as you start to push $300 million of synergies out over the next year, Really over the next 1.5 years after the end of '26. I think you're going to see terrific opportunities for us to deploy our technologies. The AI that we're working at right now. Greg, you've been around the story a long time. We have spent 20 years transforming our business. We have capitalized on labor arbitrage. We've deployed technologies. It's just part of our DNA. You put that over our tracks, and you put that $3 billion over our proven places where we've been able to deliver efficiencies, productivity and raise quality, I think it's ripe for a tremendous, tremendous amount of better together even -- maybe even better than what we're saying right now. J. Gallagher: I think the better together stuff, too, Greg -- this is Pat, is the whole revenue side of things. I think there's a lot more closeness in terms of what we're producing, and there's a lot more opportunity to trade together. They are clients of RPS, but not to the same extent nearly that our present platform does contribute to RPS. They've got a host of business, although they're a spread middle market broker, they do have a ton of business in the U.K. We've identified literally millions of dollars of business opportunities to trade with ourselves there. And so just across the board, we've already produced $1 million of new accounts with them in 6 weeks, that are accounts we both mutually had in our prospect system. We went out together with our tools, their connections, our connections, they made it easy for that buyer to join us. There's literally thousands of those opportunities. So I think the trading better together is a real opportunity. Charles Peters: And in your answer, you mentioned that you're going to have -- the AP gets credit for in their book for their revenue synergies. And so it seems like you're keeping 2 books for the purposes of getting through the earn-out period. But am I to infer from your comments that you're going to be taking or trying to encourage the AP retail reps to use RPS as opposed to other sources. Is that going to help drive your wholesale organic. Or does that -- if something like that happens, is that going to AP book, and we don't see that manifest itself in terms of organic results for AJG? Does that make sense? J. Gallagher: I'll let Doug comment on how we'll account for it. He's got that down, but let me tell you about the opportunity. As you know, probably about 5 or 6 years ago, we went through the arduous task of going out to our retailers and cutting back from probably 500 separate wholesalers being used across the entire platform in absolutely no coordinated way. And we moved that across to 4 specific strategic relationships, one of which was RPS, our owned wholesaler, recognizing that we needed others besides just ourselves. That, I call it arduous because it was trench warfare and we got it done. And by the way, we did that to benefit our clients and improved it over and over again. Well, AP is just Gallagher 15 years ago. So we're going to have to go through that process, and we're not mandating the use RPS, but we will start the process in the new year of saying, look, there's basically 5 and that we'll add one to that and that will be it. And we're going to just keep pushing and pushing and pushing. And that, of course, does include what we would hope to be an outsourced -- an outsized opportunity for RPS. And Doug can talk about the accounting. Douglas Howell: Yes. Greg, in that example, if we move it from wholesaler X, Y, Z to RPS, that would be considered organic growth in our legacy numbers. And we're talking about another 10 months of this, right, on that. So that would be legacy Gallagher organic growth. If we -- if they come on to a base commission schedule, where we were getting 16% commission and they were getting 14%, that extra 2% of that base commission would be credited to that AssuredPartners' historical branch. Does that keep us from having to consolidate these businesses for purposes of that solely? No. There's a self-adjusting mechanism because it's going to go to the producer -- that extra compensation will go to the producer and for us to track the producer, whether they move from branch A to branch B., it's not going to produce any more difficulty. We're not keeping them separate from us. There is no earnout on AssuredPartners other than those that they bought were still on an earn-out. So we will have their earnouts, but those will go away in another 1.5 years too. So it's not going to put a burden and we're not doing anything to keep. We're trying to put everybody on the same system and get everybody in the same playbook as fast as possible. Charles Peters: I guess for the final sort of cleanup question just back to market conditions. There's a lot of rhetoric in the marketplace about where we are in the pricing cycle. And I noted your comments that you're seeing some continuing stability and especially your middle and small market exposures. But maybe you can -- Pat, you've been around, I don't know what number cycle you're on at this point in time, but there's a number of them. And I'm just curious how you think this is going to play out over the next 2 or 3 years because certainly, it seems like large account property is under a lot of pressure, and there are some other areas where there's pressure points? J. Gallagher: Yes. I'd be glad to talk about that. I've done this in the past, Greg. So it's consistent with my previous comments. Surprising to me a couple of years ago when I was in London, we've just gotten done putting forward and selling 300% renewal increases on our public company D&O book. And I was with the FI team in London. They said, Pat, this thing is going to soften fast. And I'm like, how can that -- wait, how can that happen? D&O is going to start to drop down and so is cyber. And go, guys, you got to be kidding me. And that started about 2.5 years ago and continues while at the same time, during that period, other lines were continuing to firm. So what I think we're seeing this time, which is different from the cycle in the late '80s into the '90s and different the cycle in 2005 is that there's less of all lines down, all lines up, which is why we try to give it in our prepared comments. The property market clearly is in a good spot for clients. It's been a hard place for clients for the last number of years. They're getting some relief. That's a positive thing. When you take a look at the casualty market, isn't it interesting that we're still seeing rate increases there as they look to the tail on that stuff and realize they've got to adjust to it. So I do believe that you have cycles within the cycle, which is different than the past, and this is my fourth. It's different than I've seen in the past, and I think kind of makes sense. So I think we're always one storm or one disaster away from a firming property market. Casualty takes a long time to sort of figure out. You don't know your cost of goods sold and it bleeds in, and then you've got ancillary lines like package and what have you. The interesting thing to me is that this is also bifurcated in a different way than it was in the past. Our large accounts are demanding discounts and they're getting bigger ones, makes some sense. They wield more premium. Smaller accounts, which were in the last cycles down as well, not so strong. So we'll see how this all shakes out. But I think the dominant theme here is it's going to be cyclical, it is cyclical, but I think it will be by line and by results by line, cycles within the cycle. Operator: Our next question is from Meyer Shields with KBW. Unknown Analyst: This is [indiscernible], on for Meyer. My first question is a follow-up on the pricing dynamics. We do see some deceleration in casualty, so 6% this quarter. Do you think the trend will continue to decelerate or stabilize from here? Just wondering like what is your expectation going forward? J. Gallagher: So what you're saying -- let me make sure I understand the question. You're seeing a deceleration in the casualty pricing increases, not a decrease in casualty pricing? We're not seeing that. We disagree with that. Douglas Howell: Yes. Listen, I think that on a quarter-by-quarter basis, you could get a little bit of mix difference that might cause us to look at. But let's face it. This thing is marching up at 6% to 8% a year, has been for 3 or 4 years. I don't think things are getting less risky out there. I think that the carriers are being smart by staying ahead of this and continue to march forward on the casualty pricing. The other thing too is, remember, I know you're asking questions about rate. There's also exposure unit change underneath it. And then also our customers -- remember this. When rates are coming down, they opt-in for more insurance. They buy more insurance. When rates are going up, they opt out of it. So the actual -- we're actually seeing revenue increases in lines that are higher than what rate declines that we're seeing in it. So the fact is people are buying more insurance within that line, i.e., more exposure. They dropped their deductibles, they raised their limits, so they're buying more. So the brokers will never show -- will never track 100% of rate because of this opt-in and opt-out. And we used to speak about that a lot 10 years ago. So it's not just rate, it's just what are our customers' budgets going to afford. Now as our customers grow, we'll sell more insurance, too. A person has 100 trucks and they go to 105 trucks, they got to buy 5% more truck insurance. Unknown Analyst: Got it. My second question is kind of on the industry. So we noticed one broker continues to expand its wholesale operation in London and recently enters the U.S. retail market. Just wondering what's your take on this? And how does this impact that Gallagher? J. Gallagher: Well, I'm not going to comment on our competitor strategy. Things are perfect for us. Operator: Our next question is from Mark Hughes with Truist Securities. Mark Hughes: The employee benefits, you had some slippage in a couple of large life cases. But as a general line of business, how do you see that shaping up for fourth quarter 2026? Douglas Howell: Well, the fourth quarter is a time where we do a lot of our helping customers enrollment. We see that as pretty strong right now. I think that there's a lot of help as people are trying to change the dynamics. So we're helping folks on with that. I think that it gets into the executive comp lines where people are looking for their strategies coming into proxy season. And the base medical sales right now, too. I think that human resource leaders are waking up to the spiraling -- the increasing cost of medical inflation, both on utilization and then cost on the utilization. So you're having a frequency that pop up. I think this is going to be a time where if you go back, I don't know x years ago, I think there's always a war for talent. But right now, I think human resource folks are really working hard on this escalating cost of medical inflation. That will put some opportunities into our books here in the fourth quarter, and I think it will keep us really busy next year. Mark Hughes: Yes. How about new business. Pat, in your experience at this time in the cycle, things are a little -- understanding that casualty is still up and still is a tough market. Is it a little easier or harder or about the same to go out and get new business? J. Gallagher: No, Mark, I think you're raising a good question. It's kind of an interesting time. First of all, it's nice in a time like this, you can deliver for your clients. So it's not -- we're not constrained by capacity in just about anyway. At the very same time, you have our littler competitors, and you'll recall that we compete 90% of time against smaller players. They can surprise us with a quote we didn't expect. You can end up sitting there and saying this is a great deal and someone will come in with something crazy. At the same time, quite honestly, our clients are not happy. They've gone through 5 years of listening and listening to increases and what have you. We've been able to show them with our data and analytics, why it's happening, where it's happening, what to expect. But sometimes that local guy will get a shot at something and deliver a price, we've got to match or what have you. So I think that it's both a very good time for new business because our people that are aggressive on the phone out talking to people can really deliver. At the same time, we have to reemphasize and resell the existing book we have. And I think we're good at that. Overall, I think it's probably a positive for new logos, and it's probably less of a positive for top line revenue growth. Operator: Our next question is from David Motemaden from Evercore ISI. David Motemaden: I had a question just on the property market. It was encouraging that RPC held in at down 5%. I think it was down 7% in the second quarter. Just given the light storm season, I'm just wondering how you're thinking about just the property market overall going forward, not only for the fourth quarter, but then also for next year? J. Gallagher: I think the property market is going in a direction that makes some sense given the fact that they've got good results. The cat bond industry is doing well, record ILS activity. Reinsurers are making a good return on what they put at risk. I think there is more capacity available. I think there's continued pressure on the downside. Douglas Howell: And that influences our pick. If it was down 5% to 7% this year and what we post this year. And next year, if it's down 5% to 7%, that's baked into our outlook for next year. J. Gallagher: I will say this, David. I do not sense a dramatic decrease coming in the fashion of past cycles where all of a sudden you turn around, it's off 15%. I'm not sensing that at this point. David Motemaden: Got it. That's helpful. And so the sort of like a down 5% to 7% is embedded, Doug, and your early thoughts on next year looking similar to this year? Douglas Howell: That's right. David Motemaden: Okay. Great. And then also it seems like the RPC was fairly stable with what you guys had said in some of the other lines versus September. Just if I think holistically about the book, could you just talk about what RPC is trending at or what it was in the third quarter compared to the second quarter and maybe where it was in the first quarter? Douglas Howell: Yes, I think overall that we're seeing basically a 4% increase across the book. I think Pat said that in the early part of his comments, probably got lost in there a little bit that overall, we're still seeing a business where the rate and exposure are moving north of 4%, 5%, something like that. David Motemaden: Got it. And then maybe if I could just sneak one more in. I noticed that you guys generated about $500,000 on AssuredPartners fiduciary balances in the third quarter. I would have thought that, that would be a decent size opportunity for you guys. Is that something -- it doesn't look like much of a change in your fiduciary expectations for the fourth quarter. I know the interest rate environment has changed a little bit. But how are you thinking about the fiduciary cash at AssuredPartners? And how much revenue do you think you can generate off of that next year? Douglas Howell: I think it's a great opportunity over long term. If you go back, and I think one of you or might have been Adam Klauber, was asking a lot of questions about what we're doing in order to channel working capital? We would talk about consolidating bank accounts over and over and over 10 years ago, and we really did a great job of bringing more efficiency to our free cash flow management, our pooling across divisions and then also just the ability to quickly harness the fiduciary monies and put them into interest-bearing accounts. So I see it as a terrific opportunity. I got to go back and take a look at our assumptions going forward, and we'll probably update those in December a little bit. But by and large, I think over the next few years -- and we haven't baked that into our synergy assumptions when I've been talking, but there will be an opportunity for us to consolidate those accounts and harvest those cash flows faster. And at an interest rate that's a little bit higher than it was 10 years ago, there's a pretty good payback on that. Operator: Our next question is from Ryan Tunis with Cantor Fitzgerald. Ryan Tunis: Definitely like one of my favorite leadership teams has been Pat, Doug, Ray, but I got a couple of kind of tough questions. First one for Pat, second for Doug. So first one, I was going through some old transcripts like I think it was 2013, maybe 2014, but it was when the last hard market was kind of in this situation, and you guys were doing 1% organic. And like what I'd say, Pat, is like you sounded like on those transcripts the same way you do now. We're killing it, we're doing everything. J. Gallagher: Positive, bullish and really excited. Ryan Tunis: Exactly, but you're doing 1% organic and like that was execution, and now you're talking about 6%. So my question for you is like what is actually different because like I think you appreciate this time in the market. I'm curious, what you're thinking about why you'd be able to do 6% now and back then 1% was good? J. Gallagher: Well, it's really simple. I mean, first of all, the market is not falling off below us as fast across all the same lines. Right now, we're dealing with still across all of the lines a positive 4%. If you go back to '13, '12 and '14 and look at the -- what was actually happening, it was until about '15, '16 that any price increases anywhere, we're coming into positive territory. So we're now -- our renewal book is still producing 3% to 4% organic. And yes, property is down. And of course, at the time when we were talking in '12 and '13, I think we had a pretty clear vision of what we're trying to accomplish. And even though the pricing environment was down, we saw opportunities to do good acquisitions to become more efficient. At that time, people -- we're over 20-plus years now of working with our colleagues in the GCOE, both in India, in the Philippines, in Scotland, in Las Vegas. We're up about 16,000 people providing over 500 services to us around the world. Yes, there's an arbitrage in cost there from employment, but there's really a huge increase in productivity and quality as well. What we do is better, and I think we saw that. We were very excited about it. And I look back at those times and at that very time, what you'll recall, we were telling you is that the two-pronged approach. People look at acquisition activity go up. You bought that growth, that didn't count. Well, last I looked, when you buy something at an arbitrage in many instances as much as 50%, someone's giving me $1 for $0.50. I think that's a pretty good deal. And I see the same dynamics now. In fact, if anything, the dynamics are stronger in our presence now because we are bigger, our brand is stronger, our data and analytic capabilities. Just take 2012, we did not have any real capacity to take structured data and tell you the things we told you tonight. What happened in work comp last month in Oregon? I can tell you. In fact, I can tell you what happened yesterday. Our data lake, OneSource, now actually comprises 3 years of the AP data. We've gotten that done in less than 2 months. So when we go with Gallagher Drive to the field, and we talk about people like you buy this, and this is what's happening to rates in our book, that's real Gallagher/AP data. As of today, by SIC code, by line, by geography. Customers want that stuff. So do we weather up and down rates? Yes. Ryan, just pull up the chart and look at our TSR, seems like it worked. Douglas Howell: Before you get a tough question for me, let me throw on one thing. 2013, no international presence to speak of. We did -- we hadn't done any acquisitions and built the business we have in the U.K. Australia, New Zealand. You didn't have reinsurance. RPS was, yes, use them if you want. We didn't have the programs that we have now. So when -- back in then, Gallagher Bassett was a pretty good grower and still is a pretty good grower in the claims business as people saw the value that they create. We're a different business today by far. The excitement hasn't changed about our opportunity because we still see opportunity, still see opportunities to trade better with ourselves, to take more market share, to outsell our smaller competitors. So it's a different franchise today than it was in 2012. That should bring you some optimism that if we're posting 1%, then make 6% look pretty easy now. J. Gallagher: I wouldn't say easy. Douglas Howell: Ryan, next, give me my hard one. Ryan Tunis: Here you go. So your hard one, Doug. It's not easy, but like you're known on the Street definitely for throwing a real fast ball, like 101, you always nail everything. I go back to 2020. It's like you had a bug in everyone's room. You know exactly what you're going to do. This wasn't like the most uncertain environment in the history of the world. There's been a couple of quarters here, though, where we've had an investor preview, and then you've fallen a little bit light. I'm a little worried you are over worked. But I'm wondering like where is the fast fall a little bit in terms of being able to like forecast adequately or accurately exactly what's going to happen? Douglas Howell: The 5% that we talked about in September, I did give you a heads up that there could be some slippage because of the large life sales. That's $11 million on a $3 billion quarter. So yes, that one, I told you was coming. The adjustment in the contingent commission line that they have to true up for an international program that sometimes have some 3-year rating on it. I just didn't have insight to it, but across about on a contingent contract where we've probably got about 600 different contingent contracts, that cost us $4 million too. You're right. Of the $11 million out of $3 billion, I was off my game on those 2, half of it got past me. Ryan Tunis: No, no. I love you guys. Douglas Howell: You're right. I missed $4 million out of $3 billion, sorry. Operator: Our next question is from Andrew Andersen with Jefferies. Andrew Andersen: Just as we're thinking about kind of the building blocks to organic here, I think you've talked about international a bit as maybe being additive or incremental. I guess if I look at some international retail, U.K., Canada, Australia and New Zealand, it's kind of been like low single-digit year-to-date. Are you expecting some uplift in '26 or kind of steady in that market? Douglas Howell: Listen, I think right now, our businesses are performing about where they're going to perform next year. I got to say I'm always pleasantly surprised about our specialty business in the U.K. They are creative, they use our tools. They have great market insight. I'm really excited about niche experts that we have in our business. When we pick up the AP business, it makes our niches stronger. And also we're picking up some terrific new niches out of the AP where they've got some really smart people. So where we have our smart people, they hit it out of the park all the time, and we have the steady smart people that are in kind of tough markets. So I don't see a lot of difference between what we just talked about here this year, next year. Our guys and gals are doing a terrific job out there of servicing their clients. And so I don't see a lot of difference. If that was the essence of the question, I am just not seeing us -- any places where we've got any weakness right now. Andrew Andersen: Got it. And then in the past, we've talked about maybe 6% organic underlying expansion of 60 bps or so. How should we think of maybe the sensitivity there if that growth is being led by specialty, which I would think is a little bit higher margin versus retail, which is maybe a little bit below? Any sensitivity would be thinking about there? Douglas Howell: Listen, our specialty business is pretty complex. The professionals that we have on staff, to service that. It's not just somebody a generalist that goes out and talks about how you're selling on an oil well or on a SpaceX cargo or on the marine placement. Those tend to actually have some heavier support cost that goes along with it. And our benefits business, the actuarial services that we provide in particular, that was coming out of the Buck acquisition. So I think our niche retail business, where we're really strong in a particular niche across -- it doesn't matter whether it's the U.S., Australia, New Zealand, so that runs a pretty good margin. So I wouldn't -- I wouldn't say that specialty is necessarily a laggard when -- that retail is a laggard to specialty when it comes to margins. Operator: Our next question is from Katie Sakys with Autonomous Research. Katie Sakys: Just a quick one from me. I realize it might be a little bit too soon to tell, but thinking about the 200 bps headwind from roll-in on this quarter's Brokerage adjusted EBITDAC margin, how might we think about impact from rolling of M&A going forward? Douglas Howell: All right. Good question. I think that, first of all, you have to think about the seasonality that we show on Page 7 of only getting half a quarter -- not even half a quarter, 40% of a quarter and how that causes -- because you got more of a steady fixed cost structure on a lower 1.5 -- month period? How do I see it going forward? Let's just take the fourth quarter in particular. I think that AssuredPartners, because of the seasonality of their business might hurt margin by about 1 point. I think the roll-in of businesses that we bought that naturally run lower margins would probably be about 40 basis points of a headwind. I think that lesser interest income, et cetera, might be somewhere around 0.5 point, but the underlying margin we're seeing in the fourth quarter, still in that 40 to 60 basis points, -60 basis point expansion. So if you think in ranges like that, that we're going to get 0.5 point increase from organic. We're going to give back a point because of the seasonality of that assured and then the natural roll-in of M&A targets that have not yet reached our margin levels is another 0.5 point on. So that's how I'm thinking about it. Operator: Our next question is from Rob Cox with Goldman Sachs. Robert Cox: Just a question on reinsurance brokerage. Just wanted you guys to help me out here. So you've been growing in excess of your 2 larger peers in this business for a while. It sounds like you're still confident here. If pricing takes another leg downward, I'm just trying to gauge your confidence level in still being able to achieve like high single-digit organic here, and is that due to growth in adding new accounts? Or is that growth in accounts that you already have? J. Gallagher: I think it's both. But I'll tell you one of the things that has worked out, Rob, at a level that I'm very, very proud of. When we did the Willis transaction, one of the things we told the investment community and our people is that we thought there was an advantage of making sure that our retail operations, our wholesale operations and our reinsurance operations were seen together on the same page, helping each other produce and service clients. And frankly, that's a bit of a different model than some of our competitors. And that has worked to a level that I think is better than any of us expected. So our team is talking all the time. We are connected at the hip. You can see that the CIAB, that's the Council of Insurance Agents and Brokers, just had their, rendezvous, if you will, out at The Broadmoor a month ago. And the meetings are comprised of all the parties that are trading with those companies, the discussion on strategies are together, and I think that's a big part of it. And so I think that when I look at where we are, we've had good growth with our existing clients. We've been able to help them, and we're very appreciative of that, and we have added new accounts. Now the thing that I'm kind of excited about with AP, quite honestly, is that they're trading with a lot of smaller markets that we've never traded with. I won't get into a bunch of names, but you know them all. And yet we didn't really transact. And AP has very good relations with those companies. So coming out of The Broadmoor, we're kind of excited to say, this doesn't diminish our continued commitment to our large trading partners that we've had at Gallagher forever, but adding some new people to the list that AP already has a real positive relationship with, I think, once again, will be tied together at the hip. It will be good for production on all sides. So I think new account opportunities benefit from that as well as penetration from our existing business. I continue to be very, very bullish on reinsurance. I'm very impressed with our team there. We've got a very smart group of people. Douglas Howell: Two other adds on that. Every time we open up a new carrier relationship on the retail side and have it, it opens up the opportunity to not only do reinsurance, but also to do claims management for them. Our Gallagher Bassett unit has a terrific carrier outsourced practice on that. And that's not runoff, that's carrier outsourced of white labeling their programs. And the second thing, too, is on our reinsurance program, we are really strong in casualty. So another step down in property. I think there's going to be lots of appetite to buy more reinsurance, but we are pretty heavy in casualty. So that -- you can't think about the entire reinsurance book as being a cat property book. Hope that helps. Robert Cox: That's super helpful. And just wanted to follow up on contingents. I mean, profitability for these insurers seems to be pretty good. And I think those are a little lag there. So I'm just curious if your thought process on contingents plays into your thought process on relatively stable organic growth next year? J. Gallagher: Yes. I mean I think, look, when the carriers are doing well, and we're on a contingent commission, and that's a very big part of what we're doing as wholesalers, MGAs and program managers, we do well. So I feel good about that, and we're pleased to see those carriers that we've been representing and partnering with doing well, and we'll get our fair share of contingency on that. Now the other side of that is that we have supplementals, which are not subject to profitability, but are subject to growth. And there, again, I think we're seeing very good growth. And I do also believe that the arrangements that we have with many of the carriers that AP does trade with, our arrangements are stronger than theirs. So we're going to -- they're going to benefit from that. So all in all, I feel good about our supplementals and contingents going into next year. Douglas Howell: Yes. And by fact, they are growing at about 1.5x as fast organically as what we're growing in the retail -- in the applicable books of business. So they are outpacing slightly on the organic growth. And as we think about next year being like -- we're not expecting a spike up in those or a spike down. The carrier profitability is good as that could be a little bit of an upside case and organic for next year. Operator: Our last question is from Mike Zaremski with BMO Capital Markets. Michael Zaremski: On the organic viewpoint next year, what's your estimate of embedded in there on lumpy life sales? I know you guys don't love us asking about it or maybe I'm wrong, but you do keep bringing it up. So I feel like I have to ask. Douglas Howell: No, actually, we don't mind you asking about it all because I think it's informative on some of these small little -- a couple of million dollars here, a couple of million dollars there. We think we'll have a good year next year as rates drop, next year, if you believe that to happen. Either 1 or 2 things are going to happen. Rates are going to drop, and so they're going to have people that want to come in and buy this because it's a cheaper product from, so that should fuel demand. If rates become stable, we're not going to have people wait around for the next drop. So I think -- and a lot of these are products that you have to buy them at a certain point. So you can play with timing the market by a quarter or 2. But by and large, I don't see -- I see '26 being a more favorable drop -- backdrop for these products than '25 was. Now over the course of the year, they don't vary all that much in total magnitude. It's this noise between quarters that sometimes causes us to talk about a lot. It's a great product. We're really good at it. It's needed. It's necessary. And I think '26, we could be pretty excited about it. But it hasn't influenced our pick in terms of what we see for next year. But I can see an upside case on that, too. Michael Zaremski: Okay. So not quantifying it, but I guess I ask and other ask is if we look at the RPC trends in recent quarters, and I think you unpacked some of your thoughts next year for property to David's question. It would kind of would imply that if we assume the current RPC trend sticks that 6% to 8% is just -- is a high bar, unless there's just, right, other factors, which maybe it's lumpy life, and you just alluded to maybe there's maybe there's the contingent and sub trend growing faster or it's reinsurance. So I know I'm saying a lot, but maybe is there -- should we not be focusing on kind of the RPC as much as we used to because there's kind of other levers you have to pull on organic to be able to do so well next year on a decelerating kind of pricing environment? Douglas Howell: Listen, we've always said that -- again, I'll go back to my first comment on one of the first questions today is that we're in this opt-in era when it comes to coverages. So that would be the departure from. As people get cuts in their base rate, they're going to buy more insurance. So that should fuel next year. I believe there's a lot of underbuying of insurance that's going on. I think that people over the last 5 years have underbought. I think that we still -- there's a big elephant in the room and that is replacement cost. I don't believe -- I think the carriers have paused and trying to get rate for that a little bit. I think they've got to get back on that because replacement costs are still skyrocketing. And so I think there'll be -- there's an upside case there as carriers get back on trying to get more rate for the exposures that are underinsured values on that. So it's not a direct correlation by any means. That's why we weren't growing our property business 20% when property was up 20%. We're growing half of that. So that's the area that we're in right now, is that people are going to opt-in to buy more coverages. I think we're going to win more business because we get to use our tools and resources to demonstrate in a calmer environment that you get more from buying through Gallagher. The value we're bringing, I think clients see that. Our retention is good. Like Pat said, there are some angry clients that probably are going to -- want to get a new fresh face across the table. But I think our team is doing a good job to show you, "Stick with us, and we'll get you through this." Michael Zaremski: Okay. That's helpful. And maybe just lastly on M&A. So to the extent -- I'm sure you guys will hit your targets on Assured in terms of all the synergies and whatnot. Clearly, it will be a great deal for everybody. So curious if there's other Assured's out there. Obviously, there's a lot of roll-ups out there. But I recall, Pat, you said that for Assured, you didn't get a look at lots of those properties that Assure had purchased, so you kind of felt more comfortable doing this deal because they didn't say no to Gallagher in the past. But -- so are there other similar ones out there? Or maybe you just would be willing to do more of just other roll-ups that might have been looked at Gallagher in the past, too? J. Gallagher: Yes, I think there's a lot of them. I do. I think there's a lot. And I also think that they -- remember, there's 30,000 agents and brokers that's firms in America that are independent firms. So there's lots of opportunities for us to continue building our pipeline and should another opportunity like an Assured come along, we'll take a very hard look at it. Douglas Howell: But I think it should be clear. Like you say, there are so many terrific family-owned agencies out there that I think that we're going to get our fair share of those along the way, too. So we love our tuck-in strategy. But if there's a big one that comes along and only 5% of them told us no when we were looking at them, I think that would be a terrific opportunity for us. J. Gallagher: Well, thank you again, everyone, for joining us. We've had a great 2025 thus far. And as you can tell, I remain very excited about the rest of the year and beyond. To our now 71,000-plus colleagues, thank you for all that you do for our clients day in and day out. We've got the best team in the industry, and I think it shows. Thank you all for sticking around late in the evening, and have a good rest of the evening. Operator: Thank you. This will conclude our conference. You may disconnect your lines at this time, and thank you for your participation.
Operator: Good day, and welcome to the Western Digital First Quarter Fiscal 2026 Earnings Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Ambrish Srivastava, VP of Investor Relations. Thank you, and over to you. Ambrish Srivastava: Thank you, and good afternoon, everyone. Joining me today are Irving Tan, Western Digital's Chief Executive Officer; and Kris Sennesael, Western Digital's Chief Financial Officer. Before we begin, please note that today's discussion will contain forward-looking statements based on management's current assumptions and expectations which are subject to various risks and uncertainties. These forward-looking statements include expectations for our product portfolio, our business plans and performance, ongoing market trends and our future financial results. We assume no obligation to update these statements. Please refer to our most recent annual report on Form 10-K and our other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations. In our prepared remarks, our comments will be related to non-GAAP results on the continuing operations basis, unless stated otherwise. Reconciliations between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the Investor Relations section of our website at investor.wdc.com. Lastly, I want to note that when we refer to we, us, our, or similar terms, we are referring only to Western Digital as a company and not speaking on behalf of the industry. With that, I will now turn the call over to Irving for introductory remarks. Irving? Tiang Yew Tan: Thanks, Ambrish. Good afternoon, everyone, and thank you for joining us today. Across industries, adoption of AI is expanding, fueling innovation, reshaping business models and ushering in a new wave of digital transformation marked by higher productivity and richer user experiences. As agentic AI begins to scale at several industries and multimodal LLM become the norm, we are seeing a steady acceleration of AI use cases and applications, driving robust ongoing demand for the data infrastructure that enables this growth. AI is not only a consumer of data, but a prolific creator of data as well, both synthetic and real world. It is reshaping how data is being generated, scaled, stored and monetized. Data is the fuel that powers AI and it is HDDs that provide the most reliable, scalable and cost-effective data storage solution, playing a vital role in storing the ever-increasing zettabytes of data created by the AI-driven economy. To cite an example of how AI is transforming various industries, one of the world's leading medical institutions is using an AI workflow that analyzes over 7 billion images derived from 14 million deidentified patient records. This process enables predictive analysis, improves the speed and accuracy of diagnostics to deliver enhanced patient outcomes. Such applications are generating massive volumes of new data that is being stored. At Western Digital, we are also leveraging AI internally to enhance productivity and accelerate innovation across our organization. For example, in engineering, AI is helping to modernize our firmware, enabling us to deliver new features quickly to our customers and in a more cost-effective manner. In our factories, we are seeing productivity gains of up to 10% in select AI use cases. AI tools are improving yield, detecting defect patterns through intelligent diagnostics and optimizing our test processes. In parallel, they are also being used to up-level our technician capabilities, enabling them to perform higher skilled tasks, accelerating issue diagnostics and troubleshooting. Across corporate functions, AI is streamlining workflows, making the organization more efficient every day. The rapid adoption of AI and data-driven workloads at hyperscalers is driving robust demand for our products and solutions. To fulfill the demand of more exabytes of storage, our customers are increasingly transitioning to higher capacity drives. Shipments of our latest ePMR products offering up to 26 terabytes CMR and 32-terabyte UltraSMR capacities continue to grow at an impressive pace, surpassing 2.2 million units in the September quarter. Our ability to reliably scale our ePMR technology and transition customers to higher capacity drives is one of several ways we support the growing demand for exabytes. We are also investing in head wafer and media technology and capacity to drive areal density higher. In addition, we're increasing our manufacturing throughput by leveraging automation, AI tools and enhancing our test capabilities. We recently inaugurated our system integration and test lab, 25,600 square foot state-of-the-art facility in Rochester, Minnesota, to enable rapid adoption of our next-generation high-capacity drives. This lab provides dedicated test capabilities that mirror our hyperscale customers' production environments, enabling collaborative integrated product development with our customers, accelerating qualification cycles. Thereby ultimately shortening time to market for our products and time to value for our customers. The AI-driven growth in data storage is accelerating demand for higher capacity drives, which comes with greater manufacturing complexity and longer production lead times. As a result, our customers are providing greater visibility into their long-term needs, which in turn strengthens our partnership and helps us to support their future growth requirements. Our top 7 customers have now provided purchase orders extending throughout the first half of calendar year 2026. And 5 of them have provided purchase orders covering all of calendar year 2026. I'm also pleased to share that 1 of our largest hyperscale customers has signed an agreement covering all of calendar year 2027. These commitments underscore both essential role of our products in the AI data economy and our customers' strong confidence in our product road map, including the transition to HAMR technology. We are making rapid progress in our HAMR development and are on track to start HAMR qualification for 1 hyperscale customer in the first half of calendar year 2026. And to expand the qualification process to up to 3 hyperscale customers through calendar year 2026. The key focus of our qualification efforts is to ensure the highest level of reliability, quality and scalable performance so that once qualification is complete, our customers have strong confidence in our HAMR products and can rapidly deploy them at scale. This positions us well for the ramp-up of volume production in the first half of calendar year 2027. In parallel, we will begin qualification of our next-generation ePMR drives in the first quarter of calendar year 2026, building on our industry-leading ePMR technology, a trusted, scalable and proven solution that our customers are very familiar with and that has been used reliably in their data centers. Together, our ePMR and HAMR technologies will enable high-capacity drives that meet the growing demand for exabytes from cloud and AI workloads. Our platforms business is also sharing in the upward momentum, driven by overall growth of on-prem and cloud storage, including AI and social media applications. We will continue to invest in this business as more opportunities unfold and continue to scale up. Innovation lies at the heart of what we do. We continue to expand our proven ePMR road map even further while bringing new technologies, including HAMR to market. In parallel, our engineering teams are focused on improving data, throughput speed and bandwidth of our drives as well as power efficiency. Major progress is being made on all fronts. And we will keep all stakeholders, including customers and investors updated on any new developments. Let me now turn to our quarterly results and capital allocation updates. For the fiscal first quarter, Western Digital delivered revenue of $2.8 billion, non-GAAP gross margin of 43.9% and non-GAAP earnings per share of $1.78. Free cash flow for the quarter was $599 million. This quarter, yet again underscores our business' strong free cash flow generation. We remain confident in the long-term strength of the business and our balance sheet. As a result, this quarter, we significantly increased our share repurchases, and I'm pleased to announce that we will increase our dividend per share by 25% to $0.125 per share. Kris will discuss our capital allocation in more detail later. Looking ahead, we're excited about the opportunities AI continues to unlock for our business even as we navigate macroeconomic uncertainties. For the fiscal second quarter of 2026, we expect continued revenue growth driven by data center demand and improved profitability led by the adoption of higher capacity drives. Let me now turn the call over to Kris, who will discuss our fiscal first quarter results and the outlook for the second fiscal quarter in more detail. Kris Sennesael: Thank you, Irving, and good afternoon, everyone. As a strategically focused hard disk drive company, Western Digital plays a critical role in enabling the data-driven AI economy. The company is executing well, fulfilling customers' rapidly growing exabyte demand while delivering strong financial performance. During the first quarter of fiscal 2026, revenue was $2.8 billion, up 27% year-over-year, driven by strong demand for our nearline drives. Earnings per share was $1.78. Both revenue and EPS were above the high end of the guidance range. We delivered 204 exabytes to our customers, up 23% year-over-year. This includes 2.2 million drives of our latest generation ePMR with capacity points up to 26 terabytes CMR and 32 terabyte UltraSMR. Cloud represented 89% of total revenue at $2.5 billion, up 31% year-over-year, driven by strong demand for our higher capacity nearline product portfolio. Client represented 5% of total revenue at $146 million, up 5% year-over-year. Consumer represented 6% of revenue at $162 million, down 1% year-over-year. Gross margin for the fiscal first quarter was 43.9%. Gross margin improved 660 basis points year-over-year and 260 basis points sequentially. The improved gross margin performance reflects continuous mix shift towards higher capacity drives and tight cost control in our manufacturing sites and throughout the supply chain. Operating expenses were $381 million, slightly exceeding our guidance range driven by higher variable compensation on stronger-than-expected results. Operating income was $856 million, translating into an operating margin of 30.4%. Interest and other expenses were $44 million, and taking into account an effective tax rate of 17% and a diluted share count of 369 million shares, EPS was $1.78. Turning to the balance sheet. At the end of our fiscal first quarter, cash and cash equivalents were $2 billion, and total liquidity was $3.3 billion, including the undrawn revolver capacity. Debt outstanding was $4.7 billion, translating into a net debt position of $2.7 billion and a net leverage EBITDA ratio of just below 1 turn. Operating cash flow for the fiscal first quarter was $672 million, and capital expenditures were $73 million, resulting in strong free cash flow generation of $599 million for the quarter despite the fact that we made our final repatriation tax payment during the quarter of $331 million. During the quarter, we increased our share repurchases to approximately 6.4 million shares of common stock for a total of $553 million and made $39 million of dividend payments. Since the launch of our capital return program in the fourth quarter of fiscal 2025, we have returned a total of $785 million to our shareholders by way of share repurchases and dividend payments. Also, today we announced that our Board has approved a quarterly cash dividend of $0.125 per share of the company's common stock, payable on December 18, 2025, to shareholders of record as of December 4, 2025. This marks a 25% increase over the dividend announced in April and speaks to the long-term confidence we have in our business. I will now turn to the outlook for the second quarter of fiscal 2026. This outlook includes our current estimate of all anticipated or known tariff-related impacts on our business in this period. We anticipate revenue to be $2.9 billion, plus/minus $100 million. At midpoint, this reflects a growth of approximately 20% year-over-year. Gross margin is expected to be between 44% and 45%. We expect operating expenses to decrease on a sequential basis to a range of $365 million to $375 million. Interest and other expenses are anticipated to be approximately $50 million. The tax rate is expected to be approximately 17%. As a result, we expect diluted earnings per share to be $1.88 plus/minus $0.15 based on a non-GAAP diluted share count of approximately 375 million shares. In closing, this was another strong quarter for Western Digital with results exceeding expectations. The guidance for next quarter reflects continued tailwinds in our business as we remain focused on strong free cash flow generation and demonstrating our commitment to creating long-term value for our shareholders. With that, I will now turn the call back to Irving. Tiang Yew Tan: Thanks, Kris. Our leading technology road map, combined with our scalable, reliable and strong product portfolio is highly recognized by our customers. This is demonstrated by the longer duration agreements we've signed with our major customers. Western Digital's consistent execution, combined with powerful AI-driven tailwinds, position us to deliver strong results and robust cash flow over the long term. As data creation continues to accelerate, our innovation and operational and fiscal discipline enables us to capture these opportunities efficiently and drive sustained shareholder value. With that, let's now begin the Q&A. Ambrish? Ambrish Srivastava: Thanks, Irving. Operator, you can now open the line to questions, please. To ensure that we hear from as many analysts as possible, please ask one question at a time. After we respond, we will give you an opportunity to ask one follow-up question. Operator? Operator: [Operator Instructions] We have the first question from the line of C.J. Muse from Cantor Fitzgerald. Christopher Muse: Storage demand is off the charts. And part of the great narrative for the HDD industry is an oligopoly acting very rational with supply. On the other hand, we're seeing SSD adoption rise for certain AI workloads given the tight overall storage supply. So my question, how do you plan to meet rising customer demand while keeping supply/demand in balance? Tiang Yew Tan: C.J., thank you for the question. I hope all is well. Our focus is really to -- on a couple of things. One, ensuring that we continue to quickly and reliably deliver increasing higher capacity drives. A good example is the current PMR product that we have that's -- where we shipped over 2.2 million units last quarter that equates to roughly about 70 exabytes of data in total. And that product is expected to ship well north of 3 million units this quarter. So it's a real demonstration of our ability to deliver exabytes to customers at scale. The second thing is that, as we've highlighted in the past, our unique innovation around UltraSMR. This quarter, our UltraSMR and CMR mix is roughly 50-50. As you recall, UltraSMR gives us a 20% capacity uplift over CMR and a 10% capacity uplift over standard SMR. Those capabilities, plus the fact that we'll be launching our next-generation ePMR drive very soon. It starts qualification in Q1 of calendar '26, and we anticipate it will go into ramp in the second half of calendar year '26, will give customers an ability to take advantage of higher capacity drives. Second, we've been working very closely with customers to mix them up in terms of capacity points as well. So if you go back a year, the average capacity for our top 7 hyperscale customers has increased 21% year-on-year. So that's a very strong testimony to how capacity points in our drives have scaled up. We also continue to invest into areal density technology improvements and capacity as well as we stated from the very onset of us spinning out as the stand-alone hard drive company. Those investments will continue to be able to deliver greater areal density improvements without the need for any additional unit capacity. We're also looking at increasing our manufacturing throughput by leveraging more automation, AI tools that we highlighted in the script and also enhancing our test capabilities. This increase in productivity of our existing footprint will enable us to deliver more exabytes to our customers as well. And last but not least, as we highlighted in the script as well, the investments that we've made into our [ test ] labs to accelerate qualification is a key part of our ability to bring higher capacity drives faster to customers and therefore, fulfill the need for exabytes as well. And maybe just let me end my comments by being very clear about one statement, we are not adding any unit capacity to our portfolio right now. Ambrish Srivastava: C.J., do you have a follow-up? Christopher Muse: Yes, Ambrish. I guess on gross margins, great, 660 bps uplift year-on-year. But obviously, we're always looking forward. So how should we think about incremental gross margins from here? Is there a framework that we should use? Kris Sennesael: Yes, C.J. So I'm really pleased with the gross margin in Q1, delivering 43.9% gross margin, which, as you pointed out, was up 660 basis points year-over-year and 260 basis points on a sequential basis. Even when you look at the incremental gross margin in the quarter on a sequential basis was approximately 75%. As you've seen in the prepared remarks, we've also guided for Q2 fiscal '26 with further gross margin improvement in the range of 44% to 45%. So that gives you to 44.5% at the midpoint, which gives you on or about 65% of incremental gross margin on a sequential basis. Looking forward, obviously, as a company, we're going to continue to focus on further gross margin improvements. And I'm comfortable to have incremental gross margins on a sequential basis of approximately 50%, and that will drive some further gross margin improvement. Operator: We have the next question from the line of Aaron Rakers from Wells Fargo. Aaron Rakers: I think in the prepared remarks, you alluded to even further extending out UltraSMR. It's good to hear kind of a reaffirmation of the HAMR road map. But I'm curious if you could unpack that a little bit more if there's further room above and beyond the 36 terabytes that you see for UltraSMR, is there a 12-platter stack? I know one of your smaller competitors recently made some announcements around that. I'm just curious of how far before we can get to HAMR if there's further potential upward expansion on average capacities? Tiang Yew Tan: Yes, Aaron. So as we've highlighted in the prepared remarks, we've pulled in the qualification process of our next-generation ePMR product to the first quarter of calendar year 2026. Initially, in our road map, it was in the first half of calendar year 2026. In the current road map, the capacity points are scheduled to be at 28 terabytes CMR and 36 terabytes UltraSMR, but I'll say we have very innovative and creative engineers. So they will obviously continue to push the capacity points, and we'll see where we get to by time we actually get to production ramp and qualification completeness. On HAMR, as you mentioned, we also pulled forward the qualification process by half year. As we've highlighted in our road map in the past, the plan was to start HAMR qualification in the second half of calendar year 2026. We've now pulled that in into the first half of calendar year 2026 with one customer and we look to expand that to up to 3 customers by the end of the calendar year. And that's really a testimony to the comments I've made last quarter, where I said I was very pleased with the progress that we've been making in terms of areal density improvements, in terms of our capability to build a highly scalable product. Our focus now is ensuring that we are able to deliver products with the right reliability and right yields that are similar in sort of capacity and capability to our ePMR portfolio, which is what our customers expect of us. Ambrish Srivastava: Do you have a follow-up? Aaron Rakers: Yes, I do. I guess thinking about kind of sticking with C.J.'s comments, we're always kind of looking forward. Historically, there's been some attributes of seasonality to think about into the March quarter, but it sounds to me like you're pretty much stocked out from a capacity perspective through calendar '26. So curious if you have any thoughts on how we should maybe think about seasonality or whether or not that even applies for the March quarter at this point? Tiang Yew Tan: Yes. I mean, C.J. -- we guide 1 quarter at a time, but I would say the business has structurally changed. Close to 90% -- 89% of our business is data center right now. So there isn't really any seasonality associated to it. It's really driven by the deployment schedule of our large hyperscale customers. If there's any seasonality, it really applies to the 10% to 15% of our business that we have in the channel and our client and consumer portfolio. But I think your comment is a fair one. There really isn't, by and large, any material seasonality to our business going forward. Operator: We have the next question from the line of Erik Woodring from Morgan Stanley. Erik Woodring: Irving, your February Analyst Day feels like it was in a completely different time in the market, even though it was only 8 months ago. At the time, you talked about kind of 16% to 23% exabyte growth and something like 7% annual price per terabyte deflation. It's probably safe to say that the market has inflected since then. And just -- so I'd love to just get your updated thoughts on how we should be, maybe thinking about the growth of these 2 metrics over the next few years. Just any update you could share? Tiang Yew Tan: Yes. Thanks for the question, Erik. I think we gave a base case of 15 exabyte -- 15% CAGR exabyte growth with an AI uplift case of 23%. We're definitely seeing exabyte growth trend more towards that 23% growth rate, especially as we get into these longer-term agreements. In fact, firm POs, we have pretty much throughout all of calendar year '26, and we have agreements now for '27 and discussions with customers for durations even longer than that. We are clearly seeing demand trending more towards that 23% range. And then on the cost side, I think, the sort of mid- to high single-digit cost down is probably still a safe assumption. Ambrish Srivastava: Do you have a follow-up, Erik? Erik Woodring: Super. I do. Irving, I'd just also love to get your perspective on how short do you think demand is relative -- or excuse me, supply is relative to demand today? And just based on kind of your new product introduction time line, when do you think that supply can maybe more materially expand such that your EV growth really reflects more so demand than supply? Tiang Yew Tan: Yes. Thanks for the question, Erik. Look, I think calendar year 2026, the supply-demand balance is going to be -- continue to be very supply constrained with the ramp-up of the new capabilities. Both on the ePMR portoflio and HAMR, we expect to see more exabytes probably coming on stream in the second half of calendar year '27. Operator: We have the next question from the line of Amit D. from Evercore. Amit Daryanani: I guess maybe to start with, Irving, it sounds like you're pulling in, at least the start of the HAMR qualification a bit earlier than expected. Can you just talk about how long does it normally take for a product to go from qualification to deployment and do you see HAMR being roughly in line to that? Or could it be done quicker? Tiang Yew Tan: Yes. Thanks for the question, Amit. Yes, we are pulling in our HAMR qualification by half year, as I mentioned, from the second half of 2016 into the first half of '26. If we use our ePMR portfolio as a proxy, we typically are able to go from start of qualification to completion and ramp in roughly 2 to 3 quarters. That's the sort of target that we're working to. And that's why we talked about the ramp in the first half of calendar year '27 for our HAMR products. But again, I reiterate our focus is really on ensuring that we not only qualify a product and can ramp it, but we're delivering a reliable product to our customers as well. The last thing we want to do is qualify product, ramp it up, and then we have production level challenges with our customers. So that's what our focus is on. But in the meantime, we serve our next generation of ePMR that we are starting qualification in calendar Q1 of '26. That we anticipate to qualify in 2 quarters and ramp very quickly thereafter as per the current generation of ePMR that we've delivered as well. Ambrish Srivastava: Do you have a follow-up, Amit. Amit Daryanani: I do .You folks talked about leveraging AI internally. Can you just talk about what sort of productivity savings you think Western Digital can realize as you deploy AI internally? And does that sort of imply that as revenues keep growing, even as you keep OpEx flat in the $370 million, $375 million range. I'd love to just understand what does AI implementation internally mean? What does that mean from a productivity or savings basis for the company? Tiang Yew Tan: Yes. Thanks for the question. We have a series of AI initiatives that spread across the enterprise, as we've highlighted in the prepared remarks as well. We are clearly seeing a benefit in our manufacturing operations with -- for AI use cases where we're seeing 10% productivity gain. It's really resulting in faster -- better yields and faster throughput of our products. We've also started to use AI in helping us rewrite some of our firmware. We are seeing gains in the space of about 20% productivity gains there. So -- but it's still early days. I think there's quite a -- still fair amount of experimentation and exploration, but we see tremendous opportunity in the sort of early use cases that we've been able to apply AI into the enterprise has yielded very positive results. Operator: We have the next question from the line of Wamsi Mohan from Bank of America. Joseph Leeman: This is Joseph Leeman on for Wamsi. How should we be thinking about the mix of a $2.2 million ePMR drive you shipped in the quarter? I'm not sure if I heard correctly, I think you said it was about 70 exabytes. So that's about 31 terabytes per drive. Does the mix change from quarter-to-quarter? Or is that just going to trend higher, especially once the next qualification comes through? Tiang Yew Tan: Yes. So your numbers are right. So it was 2.2 million units sold and delivered, roughly 70 exabytes. This quarter, we are planning to ship over 3 million units. We don't anticipate the mix to really change that much. So it's pretty much, pretty consistent based on the customer profile that we have. Ambrish Srivastava: Did you have a follow-up? Joseph Leeman: No follow-up. Operator: We have the next question from the line of Karl Ackerman from BNP Paribas. Karl Ackerman: I was hoping you could discuss the breadth and stickiness of the announced price increase you disseminated in September. In particular, since much of your volume is on long-term agreements, are ASP improvements only to volume that is not on LTAs? So could you talk about that, that would be helpful. Tiang Yew Tan: Yes. The letter that we sent out, Karl was predominantly to our channel customers. So it really affects predominantly our client and consumer portfolio and probably the lower end of our nearline capacity drives. And that was -- that's really roughly only about 10% to 15% of our business. For all our hyperscale customers that are on some POs, LTAs, those are discrete commercial arrangements that we have with them that were not affected by that letter. Ambrish Srivastava: A follow-up for you, Karl. Karl Ackerman: Excuse me, yes, if I may. I was -- it seems you have several months remaining to divest the remaining stake of SanDisk without incurring a tax penalty. Having said that, that investment in SanDisk is proving quite prescient. So could you perhaps update your thoughts on whether you intend to divest remaining stake and/or if you do -- and if you do, what your cash usage plans would be, whether to pay down debt, invest in head and media, buybacks, et cetera. Kris Sennesael: Yes. So during Q1 of fiscal '26, we did not monetize the remaining stake in SanDisk. And so we still have 7.5 million shares. It is our intention to monetize that stake prior to the expiration of the 1-year anniversary of the separation, which is February 21. Last time when we did the monetization, we did a debt for equity exchange and we haven't made up our mind how we are going to do it, but it could potentially be a similar transaction like we did the first time. Operator: We have the next question from the line of Tom O'Malley from Barclays. Thomas O'Malley: I wanted to go into the long-term agreements. Irving, during the pandemic, we've been conditioned with kind of the DRAM and NAND suppliers to think about long-term agreements to something that is really good while things are moving up and to the right and kind of get torn up when things correct. Could you talk about the hooks that are in these agreements? Are these take-or-pay? How are they structured so that you feel confident around your ability to get value for the length of agreements that you're signing? Tiang Yew Tan: Sure. As I highlighted for 5 of our hyperscale customers, we actually have firm POs. So these are not LTAs. These are firm POs that have been placed on us. And for 1 of our largest hyperscale customers, we have an agreement for all of calendar year '27 with quite significant amount of commercial teeth in them. So it's quite a different environment where I would say we are moving to a world where we have firm purchase orders. And even with longer-term agreements, there are appropriate commercial terms in there to protect ourselves in the case of any adjustments in their forecast. Ambrish Srivastava: Do you have a follow-up, Tom? Thomas O'Malley: Yes. I've been asking this question throughout earnings here. We heard from Lam about their impact to AI spend. I asked Seagate just on what they think on $100 billion of AI spend you would see from a benefit to their business. They kind of talked about a high single-digit percentage of CapEx traditionally has gone there. Do you guys have any different view or would you be more nuanced in the way you looked at that? Kris Sennesael: Yes, I would say it's a bit more nuanced. We do track it. There's not a direct correlation to it. Obviously, the big spend in AI goes to GPUs and HBMs and power. But we've seen the percentage of CapEx on HDDs go from probably low single digits to trending more towards the 4% to 5% range. Operator: We have the next question from the line of Harlan Sur from JPMorgan. Harlan Sur: Congratulations on the strong execution. This year, it looks like nearline exabyte growth is trending more towards that sort of 35% range for the full year. You drove 36% year-over-year growth in June, 30% growth during the September quarter. You've got an order book that extends out over the next, call it, 12 months, which is reflective, like you said, of your customers' exabyte demand profiles. Does the forward exabyte demand profile really suggest the normalization back to a 23% demand CAGR as you talked about, Irving, or is that more of a supply constraint-driven profile and demand is really trending above that range. My point is that given all this AI infrastructure investment in compute, networking, memory and storage, a 23% bit demand CAGR may not be too conservative, but wanted to get your views. Tiang Yew Tan: Yes, it's a good question. I would say it's still an evolving environment where the CAGRs continue to increase. As I mentioned, if you go back just less than 12 months ago, we thought mid-teens was the right number. We're now seeing trending to the 23% range. With potential as we fast forward to the '27, '28 time frame to increase even more, but that's something we're working through customers to ensure that we continue to drive areal density improvements to be able to support the CAGR growth that they're expecting going forward. So it's something we're working very closely with them. I think the big difference is that in the environment that we're facing, we're getting much deeper insight into our customers' forward-looking exabyte requirements, a much closer partnership in terms of how they want to more rapidly adopt a higher capacity drives to be able to support their data storage requirements going forward. Ambrish Srivastava: You have a follow-up, Harlan? Harlan Sur: Yes, just a quick follow-up. So on the UltraSMR mix shift, good to see the team at a 50-50 mix. I don't think you guys answered this question, but given the order book, POs, LTAs, what is the mix trend on UltraSMR into 2026? And is this mix shift towards UltraSMR a rather important part of the driver of the stronger incremental gross margin flow through? Tiang Yew Tan: Yes. We said we will see the mix of UltraSMR continue to increase over time, both as existing customers who have qualified UltraSMR, increased their UltraSMR footprint and we have another 2 customers that are going through UltraSMR qualification, as we speak right now. So we anticipate the take-up of UltraSMR to be an increasing part of our portfolio and continue to grow going forward. Kris Sennesael: Yes. And Harlan, just in general, the transition to higher capacity drives typically translate into a better gross margin profile. Ambrish Srivastava: And if I may add, Harlan, if I may add, this is Ambrish. Remember, UltraSMR is also translatable to our HAMR. So that's something to keep in mind as well. Operator: We have the next question from the line of Asiya Merchant from Citigroup. Asiya Merchant: Great results here. If I can, just trying to unpack pretty strong beat relative to the guide. Given that you guys are in these long-term agreements and there is capacity constraints, just if you could help me unpack what drove the upside? Was it some pricing that came through? Was there some extra drive that you were able to push through. I don't know if it was a mix shift. If you could just help me unpack that, that would be great. Kris Sennesael: Yes. So as it relates to the upside in revenue was mostly driven by great execution by our manufacturing operations organization, pushing really hard on the supply side and improving yields, improving throughput and that created some upside on the supply side for us from a revenue point of view. Also on the gross margin side, we had some upside there, mostly driven by a strong price environment where we have seen some modest low single-digits ASP per terabyte increases on a sequential and a year-over-year basis. In addition to that, as I just indicated, the shift to higher capacity drives is definitely benefiting the gross margin profile. And our customers, they want more exabytes, and they know they can get more exabytes as they move faster to higher capacity drives. And so that was definitely beneficial. And in addition to that, again, the operations team is executing strong on driving down cost internally as well throughout the supply chain and a combination of all of that provided some upside in the Q1 financial results. Ambrish Srivastava: Do you have a follow-up, Asiya? Asiya Merchant: Sure. And how should I think about then, given you guys have been running very well on your productivity initiatives, how should we think about that cost decline, especially given you have some calls that are ramping up faster than expected. How should we think about the cost declines here in the outer quarters. Kris Sennesael: Yes. Again, the team continues to execute really well. Again, a combination of moving to higher capacity drives, which results in a lower cost per terabyte, but then also really working on productivity, yield improvements, test time reductions and driving operational efficiencies throughout the whole supply chain. And so a combination of all of that is delivering the mid- to high single digits cost per terabyte reductions that we've indicated at the Analyst Day and that you have seen being executed in the last couple of quarters. Operator: We have the next question from the line of Steven Fox from Fox Advisors. Steven Fox: If I adjust your free cash flow for the tax payment, it's $930 million against the non-GAAP net income of $655 million. I'm assuming there's something unusually positive in that number. And I'm trying just to right size how we should think about free cash flows relative to net income going forward because that's just a tremendous performance in 1 quarter. Kris Sennesael: Yes. So very pleased with the very strong free cash flow of $599 million. This is the second quarter in a row where the free cash flow margin is well above 20%. So great execution there. As it relates to Q1 of fiscal '26, we had a major reduction in our working capital. So in part driven by a reduction in our DSOs as the billings linearity during the quarter is very strong. Days of inventory was slightly up, but also the days payable went up. And so great execution there by the team. Unfortunately, as you know, once you've obtained some major reductions in working capital, it's hard to repeat that each and every quarter. It's our goal to maintain it at this level, but you will not see the incremental benefit that we saw in Q1 of fiscal '26. Anyhow, I think going forward, I feel comfortable with a free cash flow margin in the plus 20% range. Ambrish Srivastava: Do you have a follow-up, Steve? Steven Fox: Yes. Just real quick on the prior question. So it's maybe a chicken and egg question, but you said the customers are recognizing the need to mix up to get the exabytes they need. So is it the fact that they're pushing harder on you that you're then pushing harder on your development team to get these higher mix products out? Is that sort of the dynamic that's going on? Tiang Yew Tan: I think it's a win-win scenario, Steve, that sort of both organizations are working very closely. Customers obviously want higher capacity drives to fulfill the exabyte demand. It's also beneficial for them from a TCO standpoint. Don't forget when you have high capacity drives, rack densities are much higher, and therefore, TCO is much better as well. And from our standpoint, it's a great way for us to better support the demand that our customers have on us and for us to be able to support the strong growth trajectory that we are seeing both in cloud and in AI going forward. Ambrish Srivastava: Thank you, Steve. Operator, can we have the last question, please? Operator: We have the last question from the line of Krish Sankar from TD Cowen. Hadi Orabi: Strong quarter. This is Eddy for Krish. I do have a long-term question regarding the shortages. It seems like you and your main peer are very disciplined about adding capacity, which, of course, makes sense from a financial standpoint. But I do wonder how you balance that discipline on one hand with the risk of pushing customers more towards SSDs because they have no other choice. Which in turn results in more NAND capacity in the industry, which lowers NAND prices longer term. So it's a tricky situation, and it would be great to know how your company is planning on navigating this? Tiang Yew Tan: Yes. Thanks for the question. It's something we look closely at as well. I think the good news is that AI, as we highlighted, is a prolific generator of data, and therefore, more data is getting stored as the value of data increases. So all boats are rising. The demand for NAND bits, hard drive bits and even tape bits are increasing as a result. And there are specific use case that makes sense for them to use SSDs. But fundamentally, if you look at data center architectures and the tiering between SSDs, HDDs and tape that is unlikely to change over time, right? And we anticipate that HDDs will continue to remain roughly about 80% of the bits that start within the data center. And it's also important to recognize there are some -- there are inherent TCO benefits of HDDs as there are reliability challenges in terms of the number of rights that QLC can handle as well. So given all that dynamics, we don't anticipate seeing any major change there. There may be quarter-to-quarter variations because of supply-demand dynamics. But sort of the 80% of exabytes being stored on HDD, we anticipate will be the case going forward as well. Ambrish Srivastava: Do you have a follow-up, Eddy? Hadi Orabi: Yes, sure. Thank you, Irving. Your main peer did purchase Intevac earlier this year, which sells equipment that are needed for HAMR. And you guys sounded pretty positive about the qualification. I do wonder if you have fully navigated the risk from the Intevac purchase or it's something that's still in progress today. Tiang Yew Tan: Yes. We have fully mitigated the risks related to Intevac. As we highlighted when the acquisition first happened by our peer, all our HAMR development is actually being done on a separate system called ANELVA that's provided to us by Canon. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to the management for any closing remarks. Tiang Yew Tan: Thank you all again for joining us today and for your interest in Western Digital. At Western Digital, we continue to make good progress executing on our strategy. We look forward to sharing more with you on some of the exciting new innovations that we've been working on and the steps that we are taking to create long-term shareholder value. Let me close by giving a shout out to all our employees, our Western Digital drivers and our ecosystem partners who show up every day, making a difference for our customers, shareholders and each other. Thank you all very much, and have a wonderful day ahead. Operator: Thank you. The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome to the Third Quarter 2025 ICF Earnings Conference Call. My name is Lauren Cannon, and I will be your operator for today's call. [Operator Instructions] Please be advised that today's conference is being recorded. I will now turn the call over to Lynn Morgen of AdvisIRy Partners. Lynn, you may begin. Lynn Morgen: Thank you, operator. Good afternoon, everyone, and thank you for joining us to review ICF's third quarter 2025 performance. With us today from ICF are John Wasson, Chair and CEO; and Barry Broadus, CFO. Joining them is James Morgan, Chief Operating Officer. During this conference call, we will make forward-looking statements to assist you in understanding ICF management's expectations about our future performance. These statements are subject to a number of risks that could cause actual events and results to differ materially, and I refer you to our October 30, 2025, press release and our SEC filings for discussions of those risks. In addition, our statements during this call are based on our views as of today. We anticipate that future developments will cause our views to change. Please consider the information presented in that light. We may, at some point, elect to update the forward-looking statements made today, but specifically disclaim any obligation to do so. I will now turn over the call to ICF's CEO, John Wasson, to discuss third quarter 2025 performance. John? John Wasson: Thank you, Lynn, and thank you all for joining us to review our third quarter 2025 results and discuss our business outlook. This was another quarter of resilient performance for ICF, demonstrating the importance of our diversified business model, our agility in managing costs within a dynamic business environment and the strength of our business development activities. Key takeaways from our third quarter results are: first, the continuing shift in our business mix with revenues from commercial clients, state and local and international government clients increasing by 13.8% and accounting for 57% of the quarter's revenues, up from 46% at the same time last year. Second, the continued robust performance in commercial energy, where revenues increased 24%, reflecting the sustained strong demand for ICF's advisory and implementation services. Third is the strong growth in our higher-margin commercial revenues, which together with our careful cost management resulted in a 10 basis point improvement in adjusted EBITDA margin, in line with our plan to maintain margins despite reduced revenue. And lastly, the value of our contract awards, which surpassed year ago levels, resulted in a book-to-bill ratio of 1.53 for the third quarter. Our year-to-date contract awards of $1.8 billion, together with our $8.4 billion pipeline supports our outlook for a return to growth in 2026. We had expected third quarter revenues to be approximately $15 million higher than reported. This variance was primarily due to delays in the ramp-up of our recently won international government contracts, although that situation is getting progressively better. And another factor was the slowdown in federal government procurement and project activities, particularly in our programmatic public health and human services areas in the latter half of Q3, leading up to the government shutdown. With the federal government on everyone's mind, I will begin my business review with our results in that area and how the government shutdown has affected ICF to date. In the third quarter, our federal government revenues declined 3% sequentially, representing a 29.8% decline from last year's third quarter. The dollar amount of our total 2025 federal revenues impacted by contract cancellations did not change in Q3 as we have not experienced any material new cancellations since our last report on July 31. However, expectations for Q3 federal revenues, as I just mentioned, were affected by the slower pace of program and procurement activity this quarter as things slowed down considerably in advance of the shutdown. There are several good news items to report in our federal government work for Q3. Approximately 1/2 of our third quarter contract awards represented work for federal government clients and about 1/2 of these wins represented new business, including broadening of scope on current contracts. This new award activity, combined with our high recompete win rates is a good indication of how well ICF's capabilities are aligned with the needs of our federal agency clients. In particular, you can see from today's release that we are winning both our recompete and new work in IT modernization. Our differentiated approach to building agile, flexible and lean engineering and product teams is allowing us to deliver value quicker and more efficiently than competitors. Approximately 80% of the work we currently perform in this area is in agile scrums and sprints and more than half is under fixed price or outcome-based contracts, which is aligned with the shift in federal contract procurement parameters. And we're also seeing growing client interest in ICF Fathom, a new suite of tailored artificial intelligence solutions and services designed specifically for federal agencies. This is a production-ready solution that can integrate seamlessly into existing systems at scale to unlock the full potential of AI to support mission outcomes. We have won a few initial contracts and have seen very positive response to this launch from several of our federal agency clients interested in areas such as citizen engagement, technical assistance, program evaluation and policy modeling. Now to the financial impact of the government shutdown. In the month of October, we estimate that ICF's revenue will be reduced by approximately $8 million and gross profit by approximately $2.5 million as a result of the current government shutdown. Our IT modernization practice has seen relatively few stop work orders. The majority of stop work orders have been related to our public health and human services work. Also, proposal activities have continued in IT modernization, although there has been some slowdown. All in all, the impact on ICF to date has been painful, but manageable, and we view this as a temporary situation. While we have taken steps to reduce costs associated with work that has been curtailed, we currently plan to retain key staff, which will position us to quickly recoup the majority of these revenues in future periods. You will see that we filed an 8-K this afternoon, noting that our named executive officers will take a 20% salary reduction for the length of the shutdown in consideration of the impact of the shutdown and in support of our employees and clients. Now I'll move on to our nonfederal government work, which accounted for 57% of our third quarter revenues and is making a positive difference for us as we navigate dynamic market conditions in the federal space. Revenues from our commercial, state and local and international government clients increased 13.8% year-on-year in the third quarter, led by a 24% increase in revenues from commercial energy clients. Our consolidated third quarter margins benefited from the increased contributions from our fast-growing commercial energy work, which represented 30% of our third quarter revenues, up from 22% in last year's third quarter. Additionally, our long-standing work for commercial clients has given ICF the experience and infrastructure to effectively work in this [indiscernible] a competitive advantage in today's federal market as federal agencies are being encouraged to adopt a more commercial business model. Third quarter revenue growth from commercial energy clients was led by strong demand from our utility clients for ICF's industry-leading energy efficiency programs and expertise in flexible load management, electrification, grid resilience and affordability, expertise that is closely aligned with the needs of our utility clients as they respond to increased demand for electricity. We are executing on new and expanded programs as well as gaining market share in both residential and commercial energy efficiency program development and implementation. Additionally, in energy advisory, we saw higher demand for our grid engineering, renewable development and transaction services. And in environment and planning, we benefited from increased renewable and transmission permitting, construction monitoring and wildfire restoration projects. We continue to see evidence that our commercial energy business will sustain its strong growth. Despite the lack of support for renewables by the new administration, we believe that renewable and storage development by the private sector on nonfederal lands will continue due to the advanced economics of these technologies and the need to meet the demands of rapid load growth. Additionally, we work across a full suite of resources supported by this administration, including natural gas, nuclear and coal that will also be important in optimally serving emerging needs for power and we have seen an uptick in development and M&A activities in these areas. We continue to benefit from the rapid increase in electricity demand associated with AI, data centers and other large loads by providing a broad range of services necessary to plan, site, permit, connect and manage such facilities. ICF is currently working with utility clients, hyperscalers and independent power and renewable energy firms, providing services ranging from location analysis, transmission planning, distribution engineering and construction permitting through community engagement and workforce development. The major growth challenge, the range of complex technical issues involved and the diversity of stakeholders make ICF well positioned for continued growth in this area. Moving on to state and local government clients. Our revenues increased 3.8% in the third quarter, primarily reflecting year-on-year growth in our technology work in the disaster recovery arena. ICF is currently supporting 95 active disaster recovery projects in 22 states and territories. This includes new contracts in California, Oregon, Virginia and Michigan, which were awarded during Q3. We continue to see HUD-funded procurement opportunities resulting from the nearly $12 billion appropriation to enable long-term recovery from disaster declarations in 2023 and 2024 and are actively positioning to compete for these procurements. Additionally, in response to uncertainty with respect to the future role of FEMA, state governments are showing additional interest in disaster case management, individual assistance as they consider the potential implications of taking on additional responsibility for initial disaster response and recovery efforts. ICF is actively engaged with state emergency management agencies, and we are broadening our partnerships in emergency response, disaster survivor assistance arena as the states prepare for the possibility of additional responsibilities. Our climate, environment and infrastructure services represent the other major component of our work for state and local government clients and revenues in this market have remained relatively stable. As federal emphasis on environmental protection declines, we are seeing many states increase their efforts to fill the gap, creating opportunities for ICF and state planning, rulemaking, stakeholder engagement, permitting and compliance. We're also experiencing increased demand for sectors with strong economic activity, including data centers, fiber networks, minerals extraction and transportation. And we're working on synergies with our disaster management teams in supporting states with recovery efforts, including Florida, New Jersey and others. We continue to benefit from solid revenue growth from international clients in the third quarter. Revenues increased 8% year-on-year. We have won key recompetes and new business. As I mentioned earlier, the ramp-up of the new contracts we've won with the European Commission and the U.K. government late in 2024 and earlier this year has been slower than we originally anticipated as we expected double-digit revenue growth in the second half of this year. We have seen sequential acceleration in the number of task orders being issued under these contracts over the last 2 quarters, but we now do not expect the full benefit of these contracts until 2026. To sum up, our third quarter performance demonstrated the benefits of ICF's diversified client base, our agility in adapting to challenging market conditions in the federal government and our success in winning recompetes and new business. I'm sure that many of you have seen the release we issued today simultaneous with our earnings announcing that Barry Broadus, our CFO, is retiring, and we have named 2 of our senior [indiscernible] new roles. First, let me say that Barry has been a tremendous asset to ICF. He has strengthened our financial capabilities, built a strong finance team and positioned ICF to take advantage of future growth opportunities. We certainly wish him all the best in his retirement. We are fortunate to have a strong group of talented leaders like James Morgan and Anne Choate to help drive our future growth. We have to have James Morgan, currently COO, to take on the additional role of CFO following the publication of ICF's full year 2025 financial results. In addition, Anne Choate, currently Executive Vice President, will take on the role of President of ICF early in 2026. I look forward to working closely with both of them to drive organic growth and acquisition growth and to implement financial strategies to build our future growth and profitability. So with that, I'll now turn the call over to Barry for a financial review. Barry? Barry Broadus: Thank you, John. We say that it's been a pleasure to work at ICF over these past 40 years. ICF is truly an amazing organization with an outstanding team of dedicated and passionate professionals. Serving as the ICF's CFO has certainly been the pinnacle of my career. I could not end my career working with a better team of people. That said, I am now pleased to provide you with some additional details on our third quarter financial performance. Third quarter revenues totaled $465.4 million compared to $517 million in the third quarter of 2024 and relatively stable with the $476.2 million reported in this year's second quarter. The year-over-year revenue comparisons reflect ongoing headwinds in our federal government business, partially offset by the continued strength across our commercial, state and local and international client base. On a year-to-date basis, revenues decreased 6.2% and revenues, excluding subcontractor and other direct costs declined 4.3%. Revenues from commercial, state and local and international clients increased 13.8% in the quarter, led by the robust growth in our commercial energy business, which posted a 24.3% year-over-year increase. On a year-to-date basis, our energy business grew approximately 25% and represented 28% of our total year-to-date revenues. The strength in this client category underscores the ongoing demand from our utility clients for ICF's expertise in energy efficiency, flexible load management and grid resilience solutions, capabilities that are increasingly critical as they address our country's growing demands for electricity. The continued strong growth in revenues from our nonfederal government clients offset a significant portion of the 29.8% year-on-year decline in federal revenues in the third quarter, reflecting the continued impact of the contract funding reductions and the procurement delays that John mentioned in his remarks. On a sequential basis, federal revenues declined only 3% as the impact of contract cancellations has remained stable following our second quarter earnings call. To date, we have seen an impact on 2025 revenues of approximately $117 million and a total backlog impact of approximately $420 million from contract cancellations and stop work orders with no material increases since our last call on July 31. Third quarter subcontractor and other direct costs declined 11.8% year-over-year and represented 24.2% of total revenues, down 50 basis points from the 24.7% in the third quarter of 2024. The decline was primarily tied to lower pass-through revenues in the federal business. As a result, a higher percentage of our revenue was tied to ICF direct labor, which generates higher margins. Third quarter gross margin expanded 50 basis points to 37.6%, primarily driven by a continued shift in our business mix towards higher-margin commercial revenues, including the uptick in our energy business. Gross margin also continues to benefit from a higher proportion of ICF direct labor that I mentioned as well as a more favorable contract mix as fixed price and T&M contracts represented 93% of our third quarter revenue, up from 88% in the year ago quarter, while our cost reimbursable contracts accounted for only 7% of third quarter revenues. Indirect costs declined 7.9% to $122.3 million and represented 26.3% of total revenues. As we have discussed on recent calls, we remain focused on managing our indirect costs while continuing to invest in growth areas, expand our capabilities in AI and other technologies and implement systems and tools that increase our efficiency and will support our future growth. As we navigate the current government shutdown, we will continue to be mindful of tightly managing our costs by balancing short-term results with our plans for a return to growth in 2026. Thus, the shutdown continues, it will impact our fourth quarter margins as we need to maintain a certain level of staffing and core capabilities in order to ramp up quickly once the shutdown is lifted. Third quarter EBITDA totaled $52.8 million, down from $58.2 million in the third quarter of 2024. And adjusted EBITDA was $53.2 million compared to $58.5 million in last year's third quarter. As a percentage of total revenue, adjusted EBITDA margins expanded 10 basis points to 11.4%, reflecting our gross margin expansion as well as our success in executing cost management initiatives. Net interest expense in the third quarter amounted to $7.9 million compared to $7.2 million in last year's third quarter due to a higher average debt balance related to the AEG acquisition in December of last year as well as our repurchase of ICF stock. Our tax rate was 22.7%, above the 13.8% in the prior year quarter. In this year's third quarter, we incurred a onetime negative tax adjustment related in part to certain tax provisions and the new legislation signed into law this past July. As a reminder, last year's third quarter tax rate benefited from tax optimization strategies and several onetime tax benefits the company enjoyed at that time. Additionally, as we discussed in our last call, our full year 2025 tax rate is expected to be approximately 18.5%. And we also estimate that our tax rate for 2026 will be in the range of 21%. From a cash tax perspective, we expect to realize approximately $30 million in cash savings in 2025 and additional $40 million in 2026, resulting from provisions of the new tax legislation I mentioned. Net income totaled $23.8 million or $1.28 per diluted share compared to net income of $32.7 million or $1.73 per diluted share in the third quarter of 2024. Non-GAAP EPS was $1.67, inclusive of a $0.04 per share impact related to the negative tax adjustment I just noted. Last year's third quarter non-GAAP EPS was $2.13. Our backlog stood at $3.5 billion at quarter end, up approximately $180 million as compared to the second quarter of this year due to the robust book-to-bill total of 1.53 that John previously noted. 52% of our backlog is funded. Our third quarter new business development pipeline stood at $8.4 billion and is approximately 4.3x our trailing 12 months revenues. Third quarter operating cash flow was $47.3 million, up from $25.5 million in the comparable quarter last year. Year-to-date operating cash flow totaled $66.2 million. Days sales outstanding were 82 compared to 80 days in the prior sequential quarter, and third quarter capital expenditures were $5.5 million as compared to $5.2 million in last year's third quarter. We ended the quarter with debt of $449 million, down from $462 million at the end of the second quarter. The third quarter debt reduction was in line with the debt reduction in the same period last year. 39% of our debt carries a fixed rate, and we are tracking to have approximately 45% of our debt at a fixed rate by year-end. Our adjusted leverage ratio was 2.13x at quarter end. And absent any acquisitions, we expect our leverage position to decrease by about 0.25 of a turn by year-end. Our approach to capital allocation remains consistent and disciplined. We are focusing on investing in organic growth, pursuing strategic acquisitions in attractive markets, paying down debt, sustaining our quarterly dividend payments and executing an opportunistic share buyback. As we noted last quarter, we have been prioritizing debt repayments to position ICF for acquisition activities in 2026. Today, we announced a quarterly cash dividend of $0.14 per share payable on January 9, 2026, to shareholders of record on December 5, 2025. For modeling purposes, for the fourth quarter, we estimate the year-on-year percentage decline in revenues and non-GAAP EPS to be similar to what we experienced in the third quarter. This assumes the impact of the government shutdown remains consistent with the estimated reduction of approximately $8 million in revenue and $2.5 million of gross profit for the month of October and the government shutdown extends through the end of the year. We have also revised our cash flow guidance to a range of $125 million to $150 million from approximately $150 million to reflect the potential collection delays related to the shutdown. In addition, other full year guidance metrics include the following: Our depreciation and amortization expense is now expected to range from $20 million to $22 million, down from $21 million to $23 million. Amortization of intangibles is expected to remain between $35 million and $37 million. We anticipate interest expense to range from $30 million to $32 million. Capital expenditures are now anticipated to be between $23 million and $25 million, down from the prior range of $26 million to $28 million. As we previously noted, our full year tax rate is expected to be approximately 18.5%. And finally, we expect the fully diluted weighted average share count to be approximately $18.6 million. And with that, I will now turn the call back over to John for his closing remarks. John Wasson: Thanks, Barry. Our year-to-date results have put us squarely within the guidance framework we provided for 2025 at the beginning of this year, and we stated that a 10% decline in revenues, GAAP EPS and non-GAAP EPS from 2024 levels was the maximum downside risk we foresaw from the loss of business primarily from federal government clients during this transition year. At that time, we also noted that our guidance framework did not consider the potential impact of an extended government shutdown. As I previously mentioned, in the month of October, we estimate that the shutdown will reduce ICF's revenues and gross profit by approximately $8 million and $2.5 million, respectively. Based on this monthly impact continuing, we are pleased to be able to maintain our original guidance framework for revenues and non-GAAP EPS even if the government shutdown extends through the end of the year. Looking ahead, we continue to be confident in our ability to return to revenue and earnings growth in 2026. This outlook is supported by the continued growth from our nonfederal government clients, improvement from portions of our federal government business, recent contract wins and the large pipeline of opportunities. Also, as Barry mentioned, we are keeping our powder dry as we consider potential acquisitions in 2026 that will provide additional growth momentum, and we have substantial authorized capacity for share repurchases. Our professional staff across all markets and geographies have been instrumental in helping us navigate difficult business conditions and their ongoing commitment to ICF and our clients underpins our ability to drive long-term growth. With that, operator, I'm pleased to open the call to questions. Operator: [Operator Instructions] Our first question comes from the line of Tim Mulrooney with William Blair. Timothy Mulrooney: I wanted to start off by saying congratulations to Barry on a well-earned retirement and to Anne and James on the promotions. You bet. So sorry, I've been hopping around calls here, so apologies if I missed it. But did you give an indication for how much you expect your federal business to be down in the fourth quarter? John Wasson: I don't -- no, we did not give a Q4 estimate for what the government business would be down. And in the fourth quarter, obviously, year-to-date, we've reported those numbers, we're down about 22.7% at the end of the third quarter. Obviously, the government shutdown will be down further in the fourth quarter. Barry, I don't know if... Barry Broadus: I mean -- I would say that absent of the government shutdown, we expect that our fourth quarter federal revenues will be down more than what we had in the third quarter. But if you include the government shutdown and the impact that we mentioned, it would be more than -- substantially more than the third quarter decline. Timothy Mulrooney: Yes. That makes sense. And you did give the full -- your total revenue assumption, so we can -- trying to back into it. In your guidance assumptions, you said that you're expecting an $8 million revenue hit per month from the shutdown, which on the surface, I think, is less than what we were expecting. Is it just that many of these projects are still progressing along just without government interaction? Is there something that we're just not fully appreciating here, the dynamics around this business? John Wasson: Well, I think it's a mix. I mean, we certainly have had a set of projects that were placed in stop work. And based on the activity on those projects, that's -- and that occurred early in October. So we saw those impacts quite quickly, and that amounts to $8 million of impact for October. And I think -- so for the quarter, we would expect a $25 million impact on revenues and a $7.5 million impact on gross profit, just extrapolating on those numbers. And so we think that's a good number. And given that we saw those impacts early in the month and really haven't seen material increase since early October, and we feel pretty good about that number. It is certainly the case that a portion of our government business continues to operate and has not been impacted by the government shutdown. There's a portion that has been impacted by the shutdown. In certain cases, we can continue to work it's fixed price and we have funding and we have the appropriate technical direction. And then we've seen the processor shut down. And so I think that number, the $8 million a month, $25 million for the quarter in revenues, we think it's a good number. And there's obviously uncertainty around it. As you know, with this administration, there's been a lot of change. But I think we feel pretty good about that number and I think that is likely to be the impact we'll see from the government shutdown if it goes all the way to the end of the year. Timothy Mulrooney: Got it. That's helpful color. And just lastly, as I'm still sticking on this federal government, I wanted to ask about your commercial energy business, which is a very exciting area, but I'll leave that to others. Just sticking with the federal government or the federal business. As we think about you moving into 2026, we were all thinking about a return to growth. But I'm wondering, does this shutdown impact things that you were expecting to come in early 2026 that may be pushed out now because of the shutdown? Does it cause delays and how the contracting works or anything like that? How should we think about the impact on future work, not necessarily how it's impacting you during the shutdown, but after the shutdown is over? Is there any knock-on effects? John Wasson: No, it's a good question. I mean I would say a couple of things. One is, for the work that's been impacted by the shutdown, the $25 million -- typically, in prior shutdowns, once the work comes back, we will do that work. So it's a push to the right. If history is any guide at that foregone revenue, we would recoup it over the remaining life of the contract in future years. And so we would expect for that to happen again. And so I do see it as a shift to the right with the impacts we've seen. I would say also if the shutdown goes at the end of the year for those clients that we're seeing these impacts, it's certainly going to impact awards and potential modifications. And so it could have some impact early next year in terms of the level of business if the awards get delayed or the modification still comes quickly. But I think that's how we think about it. I think ultimately, I would expect that most of the revenue from the shutdown will be pushed to right, and we'll get it back over the life of the contracts. Operator: Our next question comes from the line of Tobey Sommer with Truist. Tobey Sommer: I wanted to start with just a follow-up on that shutdown. You had a pretty good book-to-bill in the quarter. We have been kind of expecting lower than that. I'm curious how those new wins are ramping and if the shutdown is pushing that process off to the right, in particular, of course, for new or takeaway work rather than recompete wins? John Wasson: Yes. I would say, as you know, Tobey, our federal business, we kind of break it into 2 components. One of the -- roughly half of it is kind of in the IT modernization technology arena. There, I would say that we've -- the procurement environment and the work we're doing has continued. We haven't seen as significant impact as we've seen in the portion that's programmatic. And so -- and I think some of the awards you see in Q4 certainly are in the IT modernization area and we would expect those to ramp, and we expect the modifications to continue. So I'm less concerned or would not expect a slowdown or disruption in the ramp-up of those efforts. Where we see most of the impacts of the government shutdown is in our programmatic work at Health and Human Services. Many of those agencies are impacted by the shutdown. That's also impacted the procurements there. So that portion of the business, I think, will take longer to rebound post shutdown in terms of procurements and plus that's certainly reflected in our -- in how we're thinking about Q4 and the guidance we've given. And as we think about returning to growth for next year, I think our view right now is we've clearly indicated we expect to grow in 2026, and I would think at least a low single-digit level. Obviously, 58%, 59% of our business is growing quite robustly. We expect that to continue. In terms of the federal business, I think we would expect our IT modernization business, so roughly half to return to growth next year. And then the half is programmatic, will not return to growth until 2027. We'll have tough comps there, and it will take more time. But with that mix, we're confident we can get back to growth for next year. Tobey Sommer: Okay. Let's switch gears a bit and maybe we can talk commercial and -- commercial energy. Which service lines and offerings within your portfolio are experiencing the best demand and sort of superior growth? And what, if any, areas are lagging and understand with such a rapid rate of growth for the collection of them lagging doesn't necessarily mean you're not achieving fairly good growth? John Wasson: Well, I think -- no, it's a good question, Tobey. I think as you know, our commercial energy business, through 3 quarters, 70%, 75% of that business is designing and implementing utility programs, energy efficiency, electrification, load management, doing the marketing for those programs. We're seeing tremendous growth there, tremendous opportunity. We've been winning new contracts. We've been taking away market share. We've been winning our recompetes. And I think with the increased significant demand for electricity, those programs will continue to be a key component. And so certainly the utility program implementation is extraordinarily strong. I would say our kind of the energy advisory business, so where we really do more front-end advisory work for utilities on a range of issues from generation to transmission to demand forecasting, demand load management, grid modernization, many aspects of that business are enjoying very robust growth given, again, the strong demand for energy. We do expect our energy advisory business to have double-digit growth next year. I think the only area that's been challenging is in the renewables area, certain components of the work we do around certainly offshore wind or implementation of renewals on federal lands. This administration is not supportive of that. So there has been some impacts on projects in that area. But I have to tell you that in the scheme of our overall energy business, it's pretty de minimis. I think on an annualized basis, the entirety of that business might be up to $10 million a year. We certainly are losing a significant portion of it, but that is the one area where this administration is not as supportive. Having said that, as I said in my remarks, we also do have capabilities around key generation assets that this administration does support natural gas, nuclear and coal. And so we're seeing opportunities there. Tobey Sommer: And then specifically within energy, and this is probably somewhere in between commercial and your government energy business. But when the shutdown began, there was news around Department of Energy canceling some clean energy and infrastructure awards. Is ICF impacted at all by those kinds of actions that have been happening more recently? John Wasson: No, we haven't -- I don't believe we -- I'm not aware of any material -- I'm not actually aware of any shutdowns on our DOE contracts. Honestly, Tobey, I think the extent that we saw impacts in DOE was due to contract cancellations around DOGE and GSA earlier in the year. And so the work that remains, I think, is generally continuing, and we haven't seen impacts from a stop work perspective. Operator: [Operator Instructions] Our next question comes from the line of Marc Riddick with Sidoti. Marc Riddick: So I just wanted to add my congratulations to Barry and James. And certainly, Barry, it's been a pleasure working with you and all the best for your retirement and certainly looking forward to continue to working with the team going forward. So I just wanted to express my gratitude there. Barry Broadus: Thanks, Marc. Marc Riddick: I wanted to touch a little bit on -- so the growth areas that we're looking at that as we go into next year, and I know you're going into planning and the like. But I was wondering, as we look at the non-federal are the areas that are actually growing and doing really well right now, can we sort of maybe talk a little bit about how you feel about your bandwidth there, given the growth that you've seen, the growth that you could potentially see in the near term there and the type of bandwidth where you are now and maybe other investments in personnel, technology or the like to sort of be able to extract those opportunities? John Wasson: I would say that we're certainly investing materially in the key growth markets to take full advantage of that includes recruiting new talent to help us win and develop the work and bring new skills, investing in technology, software and leveraging AI to grow those businesses. And so we're certainly making some appropriate investments, and that's where the investment focus is right now. The primary focus of the investments in ICF are in those markets. In terms of recruiting the talent, I think that we're investing a lot in recruiting, and we're able to recruit the talent to be able to stay in front of that. I think as we look to next year, we certainly expect double-digit growth across commercial -- the combination of commercial, state and local and international. We can do it quite robustly in commercial energy. We have a strong recruiting engine there. We're a market leader in these markets, and -- and the talent inside the firm helps us find the best talent outside the firm. And so I think we'll -- so I think we can -- we'll be able to retain and recruit the talent. I do think we expect as these international projects ramp -- continue to ramp up for next year, we'd expect very strong double-digit growth in our international business. And again, we've been working the recruiting for that quite well. And I would say the same in the state and local. So I think we're making the appropriate investments. We'll ensure we have the talent. We have a pipeline of candidates. And so as the work comes in, we will not have backlog that we're not able to translate into revenue quickly, we will let that happen. So I think we feel quite good about our ability to translate contract wins into revenue quickly. Marc Riddick: Okay. Okay. That's helpful. And then there were on a couple of occasions, I guess, within prepared remarks, some commentary around potential for inorganic investments and cash usage prioritization and the like. And I know certainly, you're going to be addressing that and looking that over again as we go through your planning process. But I was wondering maybe if you could take us through what you're seeing out there right now from the acquisition pipeline potential front. I mean, are you seeing much in the way of -- like what does the pipeline look like as far as volume? We're seeing more and more M&A activity generally, but maybe you can sort of share your thoughts of what you're seeing as to attractive opportunities and valuation levels currently? John Wasson: [indiscernible] I'll speak to M&A and Barry can speak to cash flow. I think in terms of our M&A strategy, I think M&A remains an important component of our overall strategy. As you know, if you look at the history of ICF, we've certainly been acquisitive and it's been an important part of our overall growth story. I think right now, we're quite focused on looking at opportunities in the energy arena that could add scale or add geography or add key capabilities in the core markets we serve across both the advisory business and the program implementation business. And so we're certainly out in the market looking at those and -- and I think that would be -- if we could find the appropriate opportunity with the right strategic fit and the right cultural fit, we would certainly take a hard look at that. I mean I think with everything going on in the energy arena, the valuations are certainly fulsome, but we're looking there. I think we've also looked at opportunities around fast recovery and infrastructure-related work in state and local markets. And I think there are opportunities out there in those markets. In the federal market, we've -- I think we're less likely to do something. I mean I think it remains a challenging market. The valuations are challenging. I think we certainly are looking at opportunities in IT. And so I wouldn't rule that out, but I think the federal market brings obviously, challenges given the state of that market and the uncertainty in it. And so I think our primary focus is around energy and around asset management and infrastructure. And I guess, Barry, I'll let you -- do you want to talk about the broader investment. Barry Broadus: I would say, as I noted in my remarks that we continue to focus on paying down debt. Expectations is that from a leverage position, we'll be below 2x levered at year end. And that would provide us with capacity to go after various assets that we think are appropriate. So we'll continue to stay focused on that and pay down the debt as we've done in the past and be looking at [indiscernible] to see we can put some of that dry powder to use. Operator: Our next question comes from the line of Kevin Steinke with Barrington Research Associates. Kevin Steinke: So you mentioned when talking about the commercial energy business, obviously, you're winning new business there and you're taking market share. I was wondering if there's any way you could kind of frame the size or the extent of the market opportunity there, maybe in terms of the continued opportunity to win new business and take market share, maybe just either in terms of the utilities you might not be working with or states you haven't penetrated or the opportunity to continue penetrating and winning additional business with existing clients? John Wasson: I think that -- I think we still think there's material opportunities for us to -- there will be new opportunities. There will be opportunities for takeaways and takeaway businesses from competitors. And obviously, as we win recompetes, we hope we can expand the scope of those. I think it's -- I mean, in terms of the size of the market, then this market is north of $2 billion. I don't think we're constrained by the size of the market. I think we're strongest in residential and commercial energy efficiency. I think our market share is perhaps in the 15% -- 10% to 15% range. I don't think we're constrained by that. And so -- and I think our track record is quite strong on being able to compete effectively for this work and deliver integrated solutions. And so I don't think we're -- I don't think we're constrained by the size of the market or our market share. I think there's certainly a material additional opportunity for us. Kevin Steinke: Okay. Great. And on your second quarter call, you had also -- when talking about the guidance framework for 2025, you had mentioned given the slowdown now in the pace of contract cancellations with the federal government that you probably wouldn't be at the low end of that guidance framework. Is that still the case given that you haven't seen any more cancellations in the federal arena? Or kind of does the shutdown make that kind of full range still within the realm of possibility? John Wasson: I would say that -- obviously, when we gave -- as I said in my remarks, when we gave that range at the beginning of the year, it did not assume a federal government shutdown. And I think -- and certainly in our second quarter call, we indicated the [indiscernible] 10% on revenues. I think -- let me say it this way. I think prior to the government shutting down and -- prior to the government shutdown, I think our expectation and our expectation was, and I think we had confidence that from a revenue perspective, we'd be down 6% on the year in that range without a government shutdown. And we were progressing on that and felt that confidence through a good part of Q3 until we hit the point where it became clear that the government shutdown was quite likely, and we began to see impacts prior to the shutdown in terms of the level of procurement and certainly in our Health and Human services arena. I think -- with the shutdown now, I think we will be towards the lower end of the range. And we've given you -- I think Barry gave you guidance on how to do that. But certainly, the federal government shutdown and the magnitude of the revenue and profit impacts will move us towards the lower end of the range. I just do want to say we are quite proud of the fact that we -- with our kind of range we gave, which was without a government shutdown, we've been able to manage the business through the first 9 months of the year, stay firmly within that range, maintain our profitability at levels prior to this administration. And then now with the government shutdown, we can maintain that range. Obviously, we'll move -- it will have an impact, but we'll stay in that range. And I think that's quite -- something that I feel quite good about and quite proud of. I mean I think it's -- when we gave that, we gave that range, our initial range very early in February. There's a lot of interest in people for us to kind of quantify what was the maximum downside risk of the new administration of those activities, GSA activities, changes in procurement, federal employees leaving the government. So we gave that guidance very early, and it stood the test of time, and we've managed to it. And so I think that -- so I'm proud of that. And then I think now we have this government shutdown. We're managing that very carefully. We have a playbook to do it. And we'll deliver results and we'll stay in the range -- that range will hold with a government shutdown. And we'll manage our profitability and part of the business outside of federal will continue to grow double digit. And so -- so I know that's a long-winded answer to your question, Kevin, but we'll certainly be in the range now with this government shutdown. It will have some impact, temporary impact. I do think that the revenues will come back in over the life of the contracts, whether that's in the next year or 18 months. And we -- so that's -- I guess that's kind of how I see the guidance. And we do feel good about how we've managed through all this. Kevin Steinke: Yes. I appreciate that. Very helpful. And yes, a nice job on forecasting that out with so much uncertainty. But I guess just my last question. With James taking on the CFO role, is that how you see that going forward as kind of a more a permanent arrangement with both a dual COO, CFO role? Or would you eventually... John Wasson: I would say that -- I'd say a couple of things. One is, I mean, I think as you know, James was CFO for 8 or 9 years in his first 8 or 9 years at ICF. He then transitioned into the COO role for the last 5 years -- 5 or 6 years. And so he's done both those roles. I think he is, in some ways, uniquely qualified to do both those roles. And I think given where we are and the size and scale of the firm and the maturity of the firm and the strength of the team behind Barry, I think it makes sense to combine this. So James' new title will be Chief Operating and Financial Officer. And whether that remains or we change it down the road, I haven't got that far. I'm just pleased James can take on this role. At the same time, we're also asking Anne Choate, who's done a phenomenal job growing our energy business, has been at ICF for 30 years. She's going to take on the role of managing our operating groups and our business development function, who has been reporting to me. But I think she'll bring a tremendous focus on translating our strategy into growth, driving growth managing -- making sure we -- our clients are delighted with our work and driving business development. And so I think it's great opportunities for both of them, and it will allow me to focus on strategy in a time of significant change, M&A, developing the next generation of leaders and representing ICF externally. And so I think that's how I see it. I think we're -- I think it's -- I'm just pleased we have the bench here to do this. And I think one of the things we've done really well over here is to provide opportunities for folks to grow their career at ICF. I think this is another indication. And Anne's promotion has a ripple effect in our energy business, which will give a number of key leaders there additional responsibilities, which I'm really pleased to do, and we'll certainly continue to do that as we go forward as... Kevin Steinke: I just wanted to add, it's been a pleasure working with you, Barry, and best wishes for your retirement. Barry Broadus: Thank you, Kevin. Likewise. Operator: I'm showing no further questions at this time. I would now like to turn it back to John Wasson for closing remarks. John Wasson: Okay. Well, thanks, everybody, for participating in today's call, and we look forward to connecting at upcoming conferences with you. Thank you. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and welcome to the Alexander & Baldwin Third Quarter 2025 Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, October 30, 2025. I would now like to turn the conference over to Tran Chinery. Please go ahead. Tran Chinery: Thank you, operator. Aloha, and welcome to Alexander & Baldwin's Third Quarter 2025 Earnings Conference Call. With me today are A&B's Chief Executive Officer, Lance Parker; and Chief Financial Officer, Clayton Chun. We are also joined by Kit Millan, Senior Vice President of Asset Management, who is available to participate in the Q&A portion of the call. During our call, please refer to our third quarter 2025 financial presentation available on our website at investors.alexanderbaldwin.com. Before we commence, please note that statements in this presentation that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve a number of risks and uncertainties that could cause actual results to differ materially from those contemplated by the relevant forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding possible or assumed future results of operations, business strategies, growth opportunities and competitive positions. In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts and future or conditional verbs such as will, may, could, should and would as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements. Such forward-looking statements speak only as of the date the statements were made and are not guarantees of future performance. Forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from those expressed in or implied by the forward-looking statements. These factors include, but are not limited to, prevailing market conditions and other factors related to the company's REIT status and the company's business and the risk factors discussed in Part 1, Item 1A of the company's most recent Form 10-K under the heading Risk Factors, Form 10-Q and other filings with the Securities and Exchange Commission. The information in this presentation should be evaluated in light of these important risk factors. We do not undertake any obligation to update the company's forward-looking statements. Management will be referring to non-GAAP financial measures during our call today. Please refer to our statement regarding the use of these non-GAAP measures and reconciliations included in our third quarter 2025 supplemental information and presentation materials. Lance will start today's presentation highlighting Alexander & Baldwin's third quarter highlights and CRE results and then hand it over to Clayton for a discussion on financial matters. To close, Lance will return for final remarks and open it up for your questions. With that, let me turn the call over to Lance. Lance Parker: Thank you, Trent. That was a lot. Great job. Aloha, and thanks to everyone joining us on the call today. Overall, our third quarter results exceeded expectations, and I am pleased by the progress we've made throughout the year. Our full year outlook remains positive. And as a result, we are raising our FFO guidance. Turning to quarter highlights. Our CRE portfolio performed in line with expectations and experienced same-store NOI growth of 0.6% for the quarter. Subsequent to quarter end, we executed a renewal with an anchor tenant in Kailua Town at an 11% lease spread, reflecting continued leasing strength. On the internal growth front, we continue to build momentum. At Komohana Industrial Park in West Oahu, we broke ground on two new buildings, a 91,000 square foot warehouse pre-leased to Lowe's and a 30,000 square foot one on spec. We've already seen early interest in Building 2, underscoring demand for newly constructed industrial product in the market. We expect both buildings to be placed into service in the fourth quarter of 2026 and generate $2.8 million in annual NOI when they are stabilized in the first quarter of 2027. On Maui, vertical construction at our build-to-suit project at Maui Business Park remains on schedule, with completion anticipated in the first quarter of 2026. This project is expected to add approximately $1 million in annual NOI when it is complete. Earlier this year, we executed a strategic backfill at Kaka'ako Commerce Center, successfully leasing two challenging vacant floors to a single tenant, bringing occupancy to 96.3%. During the third quarter, the company completed all required contingencies and the tenant exercised their option to purchase 3 floors. This transaction provides an additional source of capital for future acquisition opportunities. On the external growth side, we're seeing increased momentum in the Hawaii investment market, including three large portfolios being marketed for sale, and we are actively pursuing acquisition opportunities aligned with our long-term growth strategy. Turning to our third quarter CRE highlights. We executed 49 leases in our improved-property portfolio, representing approximately 164,000 square feet of GLA, and $3.3 million of ABR. Our blended leasing spreads increased 4.4% on a comparable basis. Our leased occupancy was 95.6%, 160 basis points higher compared to the third quarter of last year and 20 basis points lower sequentially. Economic occupancy at quarter end was 94.3%, 130 basis points higher than the same period last year and 50 basis points lower than last quarter. SNO at quarter end was $6.4 million, including $3.1 million related to our two build-to-suit projects and $700,000 for our ground lease at Maui Business Park. We remain confident in our full year outlook. Our CRE portfolio continues to perform well, and I'm encouraged by the progress across our internal and external growth initiatives. With that, I'll turn the call over to Clayton to discuss financial results and our full year outlook. Clayton? Clayton Chun: Thanks, Lance, and Aloha, everyone. Our portfolio generated $32.8 million of NOI in the third quarter, representing an increase of 1.2% over the same period last year. This growth was primarily driven by higher base rent year-over-year. Same-store NOI was $31.9 million for the quarter, a 60 basis point increase year-over-year. Consistent with our prior guidance, we experienced modest growth in the third quarter. This was due primarily to the impact of tenant move-outs that occurred earlier this year, and have since been backfilled and onetime recoveries in Q3 of 2024. Additionally, higher bad debt expense related to a few isolated tenants further tempered growth in the quarter. Third quarter CRE and Corporate-related FFO per share of $0.30 grew $0.02 or 7.1% from the same quarter last year. This improvement was attributed to lower G&A and higher portfolio NOI. Total company FFO for the quarter was $0.29 per share. In addition to the $0.30 from CRE and Corporate previously mentioned, FFO for the third quarter included an operating loss of $298,000 from Land Operations as there were no land parcel sales in the quarter. Annual carrying costs in Land Operations continues to be in the range of $3.75 million to $4.5 million. G&A was $6.1 million for the quarter, approximately $1.4 million lower than the same period last year, primarily reflecting certain nonrecurring and transaction-related items as well as the timing of recurring expenses. In line with prior guidance, we expect full year G&A to range from flat to $0.01 per share lower as compared to 2024. As Lance mentioned earlier, a tenant at Kaka'ako Commerce Center has exercised its purchase option of three floors, two of which they currently lease. The sale is expected to close in the first quarter of 2026 and will generate $24.1 million of proceeds that we expect to recycle into an acquisition property via a 10/31 exchange. Turning to our balance sheet and liquidity. At quarter end, we had total liquidity of $284.3 million, and our net debt to adjusted EBITDA ratio stood at 3.5x. Approximately 89% of our debt was at fixed rates, and our weighted average interest rate was 4.7%. Consistent with historical practice, the company's Board of Directors plans to declare a fourth quarter 2025 dividend in December with payment in January. Given our year-to-date performance, we are pleased to update our 2025 guidance as follows. We are reaffirming our guidance of full year same-store NOI growth of 3.4% to 3.8%. Implied in this guidance is our estimate for the fourth quarter, where we expect a 4.4% same-store NOI growth at the midpoint. We are raising our guidance for CRE and Corporate FFO and expect our full year results to be within a range of $1.13 to $1.17 per share due primarily to the lower-than-expected interest expense in the third quarter. Total FFO is now expected to be $1.36 to $1.41 per share, up $0.01 from our previous guidance. We feel confident about our portfolio, and we've positioned ourselves to close out the 2025 year strong. With that, I will turn the call over to Lance for his closing remarks. Lance Parker: Thank you, Clayton. To wrap up, I'm pleased with our overall performance. This is the third consecutive quarter we've raised guidance, reflecting our continued confidence in the full year outlook. Our CRE FFO for the year has outperformed initial expectations, driven by strong portfolio performance, better-than-expected expense management and steady progress across our growth initiatives. As we look ahead, we remain optimistic about how the year is shaping up and focus on executing our strategy to drive long-term value for shareholders. With that, I'd like to turn the call over to questions. Operator: [Operator Instructions] Your first question comes from Rob Stevenson of Janney. Robert Stevenson: Either Lance or Clayton, can you talk about when the $6.4 million of ABR from the SNO leases start to impact earnings or the bulk of that as we start thinking about 2026 in our model? Is that like halfway through the year? Is that towards the end of the year? How should we be thinking about when that $6.4 million comes online? Clayton Chun: Rob, this is Clayton. So I'll start off and then either Lance or Kit can chime in and elaborate. But with respect to the SNO, we typically anticipate normal SNO to become economic over like 9 to 12 months. What's embedded in the SNO importantly is a couple of our development projects that are currently ongoing. And so one of those is a build-to-suit on Maui, and that's about $1 million, and that's expected to come economic in Q1 of next year. We also have Komohana, which is a build-to-suit for Lowe's. And that one is going to be really more in the fourth quarter or Q1 of 2027 time frame, and that was about a couple of million. Robert Stevenson: Okay. That's helpful. The -- you said that the $24 million that you're getting on the purchase option that you're going to 10/31 that. Has the asset that that's going to be rolled into been identified yet? Or is that still to be determined? Lance Parker: Rob, it's Lance. No, it has not yet been determined. I've spoken in the past just about the fact that our market is starting to open up from an investment standpoint. There's a few active portfolios being marketed. So our investment team has been really busy in underwriting opportunities. We feel confident, particularly given the timing that it won't close until Q1 of next year that we'll have sufficient time to identify and close on the uplink. Robert Stevenson: Okay. And then, Clayton, you said that you're still expecting -- despite the reduced G&A in the quarter, you're still expecting sort of flat to $0.01 a share lower versus '24. If I look at '24, you were just under $30 million. You're at, call it, $20 million year-to-date. And so is that you guys are going to be somewhere between, call it, $9 million to $10 million of G&A in the fourth quarter. That sounds right? Clayton Chun: We are expecting an uptick in G&A in the fourth quarter. I think if you do the math, it would be around 9-ish. But what that's really reflecting is just we did have some timing differences that were part of our Q3 numbers. And so there's some element to that. In addition, we've been pretty open about the fact that we've been actively pursuing opportunities in the market. And so our guidance does reflect that there would be some transaction-related costs associated with those pursuits. Now having said that, we are taking steps to mitigate these items and control costs to the extent that we're able to, but that's really what our G&A guidance currently reflects. Robert Stevenson: Okay. And then last one for me. Did you guys -- did the entirety of the Sam's Club TI hit in the third quarter? And if so, what was that? Clayton Chun: It did. We paid that out, and it was about $19.6 million. Operator: Your next question comes from Alexander Goldfarb of Piper Sandler. Alexander Goldfarb: So just a few questions. First, and forgive me, my Hawaiian is not good, so if I butched the name. Kaka'ako, the two floor sale in that asset. Is that something common that you have in other properties? And do you have it in the rest of this building? Just we normally don't see tenants sort of buying out their floors. Yes, we see that overseas in various foreign markets, but in the U.S., a little less common. So just curious if there are other buildings or other parts of this building that have that same structure and if that's something that we may see more of as a way for you guys to extract value. Lance Parker: Alex, it's Lance. I'm going to give you a solid sea on the Hawaiian because you nailed the first half. The second half of the pronunciation was a little rough, but I appreciate the effort. So Kaka'ako Commerce Center, if you may recall, that is a 6-story industrial building that we own in urban Honolulu. We had one floor that was vacant in all of 2024. It was the sixth floor. It was pretty challenging. So first, I just want to kind of commend the team for coming up with a really creative solution that allowed us to backfill not just that floor, but a second floor to the same tenant. And one of the ways that we attracted this tenant is we actually put a CPR or a condo map on the building so that we could divide each of the 6 floors into individual units. And we provided an option to that tenant to purchase, which they have now exercised. So it is unique to the space. It's a unique building. We don't have anything else like it in the portfolio. But again, it was a really creative solution, one, to take the overall leased occupancy in the space to over 96% and then allow us to extract some capital and recycle it into other strategic investments. Alexander Goldfarb: Okay. The next question is, I appreciate the commentary on the land overhead, the $0.01 loss just because there are no land sales. Is that something that we should think about for next year, like as we're modeling '26, just think about that there's a negative $0.01 per quarter if there aren't any land sales? Clayton Chun: So Alex, it's Clayton. So with respect to next year, as you know, we haven't guided for 2026 at this point. Now having said that, what we have provided guidance on is the run rate for Land Operations. And so in that, we have indicated that there's $3.75 million to $4.5 million, which is the annualized run rate. We are very conscious and taking steps to manage those costs as best as possible. As we're able to further monetize and streamline, we're going to be bringing that cost down further. But at this point, this is what we have for our run rate, and we'll give you more information in the fourth quarter as we guide to 2026. Alexander Goldfarb: Right. But basically, absent land sales, it's $0.01 a quarter is the drag. Lance Parker: We do also have some offsetting revenue. We've got some land leases in some of the non-core assets that we still own in Land Operations. But to Clayton's point, in the absence of any activity, which we have typically not guiding to because we acknowledge it's episodic, you should or could expect a modest loss in the Land Operations division. Alexander Goldfarb: Okay. And then just finally, on the rent spreads, first of all, great to see you guys raising guidance. So I don't want to take away from that. But on the new rents, recently, they've been slightly negative. And the renewals have been positive, which is great. But just sort of curious, why would -- I usually would see like new rent spreads would be much higher than renewals, and here, you guys seem to be trending the reverse. So is there something peculiar about the past number of quarters, the types of deals that have been rolling? Or what else is sort of driving this dynamic? Lance Parker: Well, I'll start first with just what happened in Q3, Alex. And I think it's sort of a similar dynamic for prior quarters where in some cases, and it certainly was this past quarter, we have one tenant that sort of disproportionately impacted our numbers. Alexander Goldfarb: Yes. Yes. You guys have talked about... Lance Parker: Yes. So in this case, it was one tenant in Kailua, and we had basically moved the use from a residential brokerage operation to a PoleArity Studio. That deal, it was more about the fact that the prior tenant was above market than it was that the new tenant was below market. But just for context, I mean, we're talking about a 2,000 square foot space and the absolute dollar impact was about $33,000 of ABR. So at least from our perspective, it's more just -- it was a deal as opposed to anything that's reflective of the portfolio as a whole. Alexander Goldfarb: Okay. Yes. I mean when you look at the volume, it's pretty clear the new deals are very -- it's a very small sample set versus the renewals more robust, which is why I asked if it was just the peculiarities of what it was. So that's helpful. Operator: Our next question is from Mitch Germain of Citizens Bank. Mitch Germain: Do you guys have the same-store number if you remove that onetime item in the prior, I think you had onetime reimbursement. If you remove that, where would your same-store have been for the quarter? Clayton Chun: Mitch, it's Clayton. So I'll take that one and Kit can chime in to the extent needs more elaboration. But our same-store NOI growth, it was impacted by a couple of key factors there, one of which was the onetime item related to bad debt. We also had a couple of nonrecurring items related to real property tax that really was pertaining to Q3 of last year. And so if you were to take those into account as well as some move-outs, we actually quantified that to be about 370 basis points collectively. And so that would have got you more in line with what we were experiencing same-store NOI growth for the first half of the year. So three main factors, just to recap, it's the bad debt, there were the RPT onetime items that related to last year, and then we had known move-outs that happened. And so that was economic in Q3 of last year, but not this year. Kit Millan: I just wanted to add also, I think it's important to note that those no move-outs, all of them have been backfilled. They're not all economic yet, but they will all be economic in Q1. And the final one is the Komohana ground lease that we are now converting to a new build and space lease property. Mitch Germain: Perfect. Lance, you seem pretty bullish about acquisition prospects. It seems like that tone has continued. I'm curious about the competitive landscape. And are you seeing a lot of that private capital back now that the lending markets appear to be a little bit more efficient currently? Lance Parker: So we've talked in the past, Mitch, just about the typical construct of the competitive market that we play in where typically lower-priced assets from a -- just a dollar standpoint. We're usually competing with local buyers, sometimes smaller family offices here. And then when we get into larger assets, typically $100 million plus, you'll start to see Mainland capital, whether it's on the private side. Rarely, we'll see any public. We don't have too many REITs in our asset classes. And kind of that middle space is where we tend to see less competition from the extremes. So specifically to what we're seeing in the market, look, we're just really sort of seeing it open up. I referenced a few portfolios. So there's two retail portfolios that are currently being marketed. There's an industrial portfolio that's currently being marketed. Portfolios and scale typically are larger and more expensive. And so we are seeing some Mainland capital explore the marketplace sort of typical in terms of the types of people that we compete with. And then usually, where we have the competitive edge against buyers like that is the fact that we're here, we're local, and we know the assets typically better than Mainland buyers. And so we're optimistic that we'll be able to make some of these or other opportunities that we're looking at work. Obviously, at the end of the day, it's going to be subject to pricing. But hopefully, that gives you just some color in terms of what we're seeing in real time. Operator: Your next question comes from Brendan McCarthy from Sidoti. Brendan Michael McCarthy: Just wanted to start off looking at the ground lease portfolio, the 36-acre industrial space. I know that, that was up for renewal, I think, this year. Just curious if you can provide color on how we can think about the renewal process there? Or I think I noticed in some marketing materials that you're considering developing that internally. I think it's the HART yard. Just curious as to how we can think about that asset. Lance Parker: Brent, it's Lance. So we've talked about the likelihood of that ground lease renewing. We still have that perspective. I think it's highly likely that we end up renewing the tenant there. We are in early discussions despite the fact that it does naturally expire at the end of this year. So premature to provide any color in terms of where we think that ends up. And then longer term, we have been articulating just the internal growth path that we have as a result of our land inventory. Some of it is currently ready to build in Maui Business Park. Others in Kahului, like this 36 acres is currently under covered ground leases. So we're getting active income while we can plan. But that's really more sort of longer-term value creation once we get through the renewal process, and that probably takes us out a few more years before we go active on that. Brendan Michael McCarthy: That makes sense. And any detail on the potential ABR step-up opportunity there with the renewal? Lance Parker: Again, just because this is sort of live, probably inappropriate and premature for us to discuss. But hopefully, by our next call, we'll have more insight in how that kind of played out. Brendan Michael McCarthy: That makes sense. Understood. And then looking at capital allocation, I know you discussed a favorable outlook, improving outlook on the deal market and then you have these internal development opportunities. How can we kind of think about share buybacks? I know we discussed this on a previous call, but considering where the share price is, is that -- are share buybacks something that you're increasingly looking into? Clayton Chun: I'll take that. Brendan, it's Clayton. So yes, with respect to the share repurchases, we do have a program that is in effect, and that is one of the tools that we have in our capital allocation toolkit. So obviously, as the stock price fluctuates, that does weigh into our consideration. But at the end of the day, we kind of look at capital allocation just from a risk-adjusted return perspective. And so that would entail whether it's placing capital for acquisitions, for internal development opportunities as well as share repurchases. And so we are considering that, and we'll make decisions according to the opportunities that are in front of us. Operator: [Operator Instructions] Your next question comes from Gaurav Mehta of Alliance Global Partners. Gaurav Mehta: I wanted to ask you on the portfolios that you discussed. I think you said two retail and one industrial. Can you provide some color on what kind of pricing and cap rates are you seeing on those portfolios? And just to clarify, are those portfolios you're looking at for your own acquisition or they are being marketed for sale in the transaction market? Lance Parker: Gaurav, it's Lance. Just because these are live deals, I'm not sure it would be appropriate for me to talk about our perspective on cap rates. And just to the second part of your question before I just provide a little bit more detail, I would say, look, we look at every opportunity that comes into the market. We typically don't talk about deals that we're actively pursuing or actively considering until we get further along in the process, typically after we close. But that all said, our perspective on the market in general is sort of holding from where we were last quarter. I would say, expected pricing in the market, call it, 5 to 6 cap type deals in general. And you may see flex on either side of that depending on the type of asset we're looking at, depending on the quality of the property that it may be. So value-add type deals, for example, you would expect to see some expansion on that cap rate. Ground leases, you would expect to see some compression on those cap rates. But in general, that's sort of our perspective of where the market is today. Gaurav Mehta: Okay. Second question I wanted to ask you on your office portfolio. The office property, Lono Center, I noticed the occupancy on that property is 37%. I just want to get some color on that property and generally, what you're thinking about your office portfolio? Is that something you want to hold? Or is that something you want to recycle at some point? Lance Parker: So Lono Center is actually one of two office buildings that sits on a 19-acre block that we own in Kahului on Maui. We purposefully were driving occupancy away from that building into our Kahului office building. And the thinking was that could have been an individual disposition, maybe even an owner-user type sale. But we do have that 19-acre block currently on the market. We have it listed for sale. We've been in discussions with a buyer. I think we may have disclosed that last quarter. So we are actively looking to dispose of what we've talked about in the past, again, is nonstrategic asset class for us, recycling that capital into more strategic investments. And so as we sort of head into the end of the year, we can probably provide a little bit more color in terms of where that process stands. Operator: There are no further questions at this time. I will now turn the call over to Clayton Chun. Please continue. Clayton Chun: Thank you, operator, and thank you all for joining us today. If you have any follow-up questions, please feel free to call us at (808) 525-8475 or e-mail us at investorrelations@abhi.com. Aloha, and have a great day. Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Riot Platforms Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. Please also be advised that today's call is being recorded. I would now like to hand the conference call over to Josh Kane, Vice President of Investor Relations at Riot Platforms. Please go ahead. Joshua Kane: Thank you, operator. Good afternoon, and welcome to Riot Platforms Third Quarter Earnings Conference Call. My name is Josh Kane, Vice President of Investor Relations. And joining me on today's call from Riot are Jason Les, CEO; Benjamin Yee, Executive Chairman; Colin Yee, CFO; and Jason Chung, EVP and Head of Corporate Development and Strategy. On the Riot Investor Relations website, you can find our third quarter earnings press release and accompanying earnings presentation, which are intended to supplement today's prepared remarks and which include a discussion of certain non-GAAP items. Non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP and are included as additional clarifying items to aid investors in further understanding the company's third quarter performance. During today's call, we will be making forward-looking statements regarding potential future events. These statements are based on management's current expectations and assumptions and are subject to risks and uncertainties. Actual results could materially differ due to factors discussed in today's earnings press release, in comments and responses made during today's call and in the Risk Factors section of our Form 10-K and Forms 10-Q, including for the 3 months ended September 30, 2025, which will be filed later today as well as other filings with the Securities and Exchange Commission. With that, I will turn the call over to Jason Les, CEO of Riot Platforms. Jason Les: Thank you, Josh. Riot is in the process of transforming into one of the most meaningful data center developers and operators in the market today. The demand for data center capacity is insatiable and growing, and our unmatched portfolio of large-scale land and power assets positions us to significantly capitalize on this opportunity. I am incredibly excited to announce the completion of several key milestones and additional ongoing strategic initiatives, which we are currently undertaking as part of the development of our data center business and more broadly as part of the ongoing transformation of Riot. In particular, I am proud to announce today that we are initiating the Core & Shell development of the first 2 buildings at our Corsicana data center campus, representing a combined 112 megawatts of critical IT data center capacity. We have already been securing long lead equipment and plan to mobilize construction of these 2 buildings beginning in Q1 2026. This announcement has been enabled by 4 key achievements this quarter. During the quarter, Riot acquired an additional 67 acres of land directly adjacent to our original Corsicana site, greatly simplifying the development of our full 1 gigawatt of approved power capacity and enabling the completion of our campus design at Corsicana, completed the campus design for Corsicana with a plan to transform the entire site into a 1 gigawatt utility load data center campus, completed the basis of design for our standard data center build, which has deepened our technical engagement with hyperscaler, neocloud and enterprise customers and continue to build out our in-house data center expertise with veteran data center sales, design, engineering and construction talent. These achievements further advance the ongoing process of transforming Riot into a large-scale, multifaceted data center enterprise. We are investing in building out our data center business in order to enhance our conversations with prospective tenants and leverage competitive tension in our leasing process, all with a view towards maximizing the value generated from our portfolio of land and power assets. We are announcing this development of 112 megawatts of critical IT capacity as just an initial milestone in our development pipeline, which consists of nearly 2 gigawatts of secured utility load power, and we will continue to announce further development plans as we progress on our strategy and advance further on customer discussions. Riot is transforming into one of the most meaningful data center companies at the center of the Fourth Industrial Revolution. We have a significant portfolio of readily available power, an incredibly strong balance sheet and the world-class talent necessary to deliver on our plans. The demand for data center capacity has never been more robust. And on behalf of all of our shareholders, we are incredibly excited to be executing on the enormous value creation opportunity in front of us. Riot has a tremendous advantage today in our unmatched portfolio of fully approved power and land located within highly desirable data center markets. We have made significant progress in establishing our data center business, which serves as the foundation not only for maximizing the value of our power portfolio today, but from which we will also continue to scale and capitalize on new opportunities. Over the course of this year, we have completed third-party expert assessments of our 2 primary sites, Corsicana and Rockdale. Added data center and real estate development experience to our Board of Directors and engaged financial advisers to assist on discussions with strategic and financial partners and on the broader leasing negotiation process. Most recently, I am pleased to announce we have completed the basis of design for our data centers. Completion of this basis of design has enabled us to deepen our engagement in technical and engineering level outreach with potential tenants, begin procurement of necessary long lead time equipment and begin construction on our first 2 buildings. We will provide additional information on our basis of design later on today's call. We have also further progressed on the ongoing infrastructure development at Corsicana, including the 600-megawatt substation expansion, where the first 400-megawatt auto transformer of this expansion development is now on site being installed and remains on track for energization in Q1 next year and the Core & Shell development of the first 2 buildings of our Phase 1 development plan, which will allow us to deliver full build-to-suit data centers in 2027. On the hiring front, the build-out of our data center team has continued at an aggressive pace. We have in place key leadership across product development, construction, engineering, sales and marketing, which has allowed us to complete the basis of design and rapidly move towards initiating construction. We will continue to build on this momentum by adding additional positions that underpin our data center business and support future leasing, operational and growth targets. We have made substantial progress on our design program, which will support Corsicana and other sites and have completed a standardized data center basis of design that meets Tier 3 resiliency and efficiency expectations for prospective tenants in the market. Advancing our basis of design is critical as we engage prospective tenants on specifications and customization. Our design philosophy emphasizes flexibility to address the needs of a range of potential customers and use cases. That flexibility includes multiple building formats, including single, 2- and 3-story configurations in order to maximize campus capacity. In addition, our design is centered around a 7 module or 7 mod format. With this format, we are standardizing around a 7 plus 1 component design, 7 components plus 1 additional component of redundancy. Our basis of design can easily be adapted to the requirements of any tenant. Each 7 mod is a data hall representing 14 megawatts of critical IT load capacity, and there are two 7 mods per floor totaling 28 IT megawatts per floor. Therefore, a 2-story building will have four 7 mod data halls, 2 per floor, representing 56 IT megawatts and a 3-story building will have six 7 mod data halls representing 84 IT megawatts. We are confident that this sits within the range of tenants desired topography and allows us to easily adapt to each of the requirements. If a tenant wants more redundancy, we can easily build that in and vice versa. Riot's basis of design establishes the foundation for our data center development and has been designed in a manner that is intentionally replicable beyond Corsicana, enabling faster, more efficient equipment procurement and delivery on future development in order to quickly seize upon any market opportunities going forward. One of the most important differentiators we are developing at Riot is the assembly of an industry-leading in-house data center team with expertise across design, engineering, sales, procurement, construction, operations, marketing and administration. As highlighted here, our growing team brings deep, directly relevant experience in building and delivering mission-critical data centers. We have in place the team to deliver on our first phase of construction and development with collective experience completing over 200 data center projects, totaling nearly 5 gigawatts of capacity. Data center development talent is in high demand, and we are incredibly proud of the depth of capabilities and experience that we have already been able to attract to Riot. The quality of the data center team we already have in place today is a critical advantage in ensuring that potential tenants and partners are confident in our ability to deliver at scale. These internal data center team capabilities are further reinforced by our engineering business, comprised of ESS Metron and E4A Solutions, which provides integrated manufacturing, commissioning and maintenance expertise. These complementary units create meaningful synergies and strengthen our ability to rapidly execute on an expanding data center development program. In September, we successfully acquired a collection of parcels that total 67 acres contiguous with our original Corsicana site for total consideration of $40 million. Early on, Riot identified this plot of land as the most ideal site for immediate development of our data centers, and I am excited to share an update on what this acquisition has enabled for us. The new parcels proximity to our Corsicana site enables rapid development as it is immediately adjacent to our existing site and therefore, will not require additional easements or transmission construction, which could potentially have extended delivery time lines. The ideal condition, gradient and location of this new parcel will allow us to quickly begin development and strengthen confidence in our delivery time lines. Most importantly, the additional acreage we now own next to our existing Corsicana site ensures the ability to completely utilize our 1 gigawatt of fully approved power on Riot owned land for data center use, all in a connected campus layout. Together with the previous land acquisitions announced last quarter, Riot now owns 925 acres surrounding the Corsicana area, securing long-term development flexibility and fully completes all necessary land acquisitions for potential build-outs. Our now expanded footprint at Corsicana has allowed us to complete our campus design for the entire site, which we envision taking place across 2 development phases. Development of Phase 1 will encompass 504 megawatts of critical IT load, consisting of six 56-megawatt buildings and two 84-megawatt buildings spread across both the excess developable acreage on our original Corsicana site as well as on our newly acquired immediately adjacent parcel. As previously announced, Core & Shell development on buildings 1 and 2 has already been initiated, and we anticipate the first building to be completed in Q1 2027. The overall pace of development in Phase 1 will be driven by tenant commitments and leasing progress, and we are sequencing capital expenditures to maximize power to value conversion. Phase 2 will be comprised of three 56-megawatt buildings, representing 168 megawatts of critical IT load and over time, will eventually supplant our existing Bitcoin mining data centers. The completion of our data center designs has enabled us to take the next steps on delivering full build-to-suit Tier 3 data centers. With our initiation of the development phase of our first two 56-megawatt buildings at our Corsicana site, we will begin construction in Q1 2026 on the Core & Shell of the first 2 buildings. The Core & Shell construction will consist of a build-out and enclosure of the main structure of the data center, generator buildings and completed power yards, an open interior with operational elevators, docks, logistics areas, lighting, fire protection and security. It will also include the first steps on electrical, plumbing and HVAC infrastructure, which will support full data center build-out and tenant fit-out. Construction of Core & Shell buildings will be completed in phases with the first building expected to be completed in Q1 2027 and will be followed by full fit-out of the data hall with IT equipment, cooling and power delivery systems. The first phase of construction of the Core & Shell is the most time-intensive but capital-light portion of the build-out with total expected development cost of $214 million, representing approximately $1.9 million per IT megawatt for the first 2 buildings. Initiating construction on this time line, coupled with procurement of long lead time equipment allows us to provide certainty during leasing discussions of our forecasted energization in 2027. As we progress further in leasing discussions, we will provide cost estimates and time lines on the build-out and delivery of the complete and full build-to-suit of the first two 56-megawatt data centers. Riot has long focused on maintaining 3 strategic pillars in relation to our Bitcoin mining business, significant scale of operations, being a low-cost producer and maintaining a strong balance sheet. These strategic pillars formed the foundation of Riot's vertically integrated approach to Bitcoin mining and the development of a unique portfolio of large-scale powered sites supported with significant cash and Bitcoin on hand. As our strategy has evolved, so has our approach to our Bitcoin mining business. We no longer see Bitcoin mining operations as the end goal, but instead as a means to an end, and that end is maximizing the value of our megawatts. Over time, this means transitioning the megawatts in our power portfolio for data center development. Ready-for-service power in the right locations is increasingly scarce and valuable, which in turn forms the basis for the enormous value creation opportunity ahead of us. Monetizing megawatts is how we translate that advantage directly into shareholder value. Bitcoin mining continues to be a very valuable tool to monetize Riot's large-scale portfolio of power, and our Bitcoin mining business continues to be highly profitable. We will continue to utilize the opportunity Bitcoin mining brings to secure power and drive strong cash flow that we will leverage to support the ongoing transformation of our overall business. We just discussed our Power First strategy, which underpins the evolution of our business. On Slide 15, we wanted to provide some context on the underlying significant size and scale of Riot's power portfolio. While many peers reference pipelines of prospective projects, Riot's portfolio totaling more than 1.8 gigawatts is fully approved and available today. This positions Riot as having one of the largest data center power portfolios in North America. It's also important to consider location. This slide presents total megawatts, but not all megawatts are the same. Approximately 1.7 gigawatts of our total capacity is located in the Dallas and Austin regions, 2 of the most attractive data center markets in the country, offering compelling proximity to existing hyperscaler and enterprise core architecture and tenant demand. On Slide 16, we show enterprise value per megawatt across selected peers in the Bitcoin mining space. We view this as a useful lens on how the market values power portfolios today. Some of the companies to the left of Riot have announced lease arrangements and have seen their valuation multiples rerate significantly. Riot currently trades at a meaningful discount to this peer set despite having one of the largest fully approved and readily available power portfolios in the industry. As we execute our data center strategy and convert megawatts into contracted data center leases, we anticipate the market will increasingly reevaluate the underlying value of our power portfolio from a data center lens, leading to a re-rating and multiple expansion on our valuation as well. More broadly, as the market matures, we expect investors will increasingly differentiate on the quality of power, meaning location, cost of power, schedule certainty and interconnection and on the credit quality and profitability of underlying projects and leases. Our plan is focused on delivering against these dimensions. I will now turn the call over to Colin Yee, CFO, to present our third quarter financial update. Colin Yee: Thank you, Jason. For the third quarter of 2025, Riot reported total revenue, which consists of Bitcoin mining and engineering revenue of $180.2 million as compared to $153 million for the previous quarter, an 18% increase quarter-over-quarter. Net income for the third quarter equaled $104.5 million or $0.26 per fully diluted share compared to net income of $219.5 million or $0.58 per fully diluted share for the prior quarter. Non-GAAP adjusted EBITDA for the third quarter was $197.2 million as compared to non-GAAP adjusted EBITDA of $495.3 million for the prior quarter. During the third quarter, Riot produced 1,406 Bitcoin as compared to 1,426 Bitcoin in the prior quarter. The slight decline in Bitcoin production quarter-over-quarter was driven by growth in the global hash rate of approximately 8%, which exceeded Riot's growth in hash rate deployed of approximately 3%, though partially offset by continued improvements in our operating efficiency and utilization rate, which reached 86% this quarter. This improvement in our utilization rate in the third quarter was achieved despite more active employment of our power strategy in the third quarter, during which we successfully generated $31 million in power credits, lowering our net cost of power to $0.032 per kilowatt hour and further solidifying our position as a low-cost leader in the sector. Riot ended the third quarter holding 19,287 Bitcoin with a market value at the end of the quarter equal to $2.2 billion. I will now turn the call over to Jason Chung, Riot's EVP of Corporate Development and Strategy. Jason Chung: Thank you, Colin. During the third quarter, the benefits of Riot's large-scale, efficient Bitcoin mining operations and our unique power strategy were all clearly demonstrated in the overall profitability profile of our Bitcoin mining business. The highlighted column in green provides a step-by-step walk-through of the key profitability drivers of our operations in the third quarter of 2025. Top line revenue drivers for our Bitcoin mining business include the average global network hash rate, Riot's average operating hash rate, average network hash price and our total Bitcoin production for the quarter, which when taken together, resulted in a reported third quarter Bitcoin mining revenue of $160.8 million. Total direct cost per Bitcoin for the third quarter was $46,324 and when applied to the 1,406 Bitcoin we produced during the quarter, results in a reported Bitcoin mining gross profit of $95.7 million or 59% on a gross profit margin basis. Total Riot SG&A for the third quarter equaled $69.8 million, of which noncash stock-based compensation expense represented $32.9 million, resulting in total Riot cash SG&A of $37 million this quarter. Total Riot cash SG&A also included $7.5 million in temporary litigation-related costs and advisory fees as well as costs associated with our engineering business. By breaking out our total cash and noncash SG&A, our intention is to give investors as much insight as possible into the underlying value of our key operating segments. Our Bitcoin mining and engineering operations demonstrated incredibly strong profitability this quarter. And going forward, we will continue to leverage the significant cash flows being generated from our efficient scaled operations to support the ongoing rapid development of our data center platform. Our engineering business is a core asset that uniquely differentiates Riot as we scale into large-scale data center development. In an environment where long-lead electrical infrastructure represents a major constraint to development, owning the manufacturing set from end-to-end creates powerful strategic advantages for Riot. Built through the acquisitions of ESS Metron in December 2021 and E4A Solutions late last year, our engineering capabilities combine manufacturing, engineering design and servicing into a vertically integrated platform predominantly focused on data center-grade power systems. Delivery times in the market for key components have extended, but by directly owning and coordinating these capabilities within Riot, we benefit from direct control over the development of long lead critical items, deep supply chain visibility, longer equipment life cycles and resulting lower total cost of ownership and significant total CapEx savings for Riot. Wall Street analysts have cited low and medium voltage switchgear as among the most supply-constrained items for data center development, which our engineering business is a leading provider of. By internalizing these development capabilities, we are able to meaningfully derisk the most constrained elements of the development cycle. This not only lowers unit costs, but also protects time lines, ensures design quality and enables predictable on-time development. These synergies translate into directly measurable value and derisk the transition of our megawatts into value-creating data center development. Since our acquisition of ESS Metron, Riot has realized approximately $23 million in cumulative CapEx savings on equipment purchases to date, and we anticipate ongoing savings and logistical benefits to scale alongside growth in our data center operations. Riot's operating model continues to scale efficiently. And as the scale of our operations has grown, we are seeing the results of the work we have been putting in to proportionately reduce SG&A and realize a more durable cost structure as we transition to developing data centers. SG&A has remained relatively flat over the past 4 quarters, while our revenues have grown by more than 110% year-over-year, demonstrating the significant economies of scale that Riot now enjoys. This reduction in proportionate SG&A has been built on 3 key pillars, each implemented over the last several quarters and which are becoming increasingly visible in our financial results. Number one, Rhodium settlement and asset acquisition. In the prior quarter, we successfully settled this legacy hosting contract, which previously led to ongoing losses and litigation costs. The settlement of litigation and asset acquisition reduced legal costs and eliminate future drag on earnings. Number two, reduction in stock-based compensation. We have previously highlighted the accounting impact from the onetime special awards granted in 2024. Noncash charges associated with this onetime grant of approximately $25 million per quarter will drop to approximately $8 million in Q3 2026 and thereafter roll off entirely, significantly reducing noncash stock-based compensation expense. Number three, increasingly disciplined internal budget process. We have enhanced our accountability-based budgeting and tracking system throughout Riot. Teams now operate against more clear targets with monthly variance reviews, driving greater predictability in run rate SG&A, inter-department coordination and a continuous improvement cycle, which will be critical as we onboard new hires and systems in support of our data center business development. Together, the impact is visible in our Q3 results. Revenue increased to approximately $180 million, up 18% quarter-over-quarter, while total SG&A came down and also improved significantly on a proportionate basis. Importantly, we are pairing cost discipline with selective hiring in core areas where hiring is directly tied to expanding our data center development capabilities. We are simplifying our cost base, reducing nonrecurring drags on earnings and have dramatically improved run rate visibility. The result is a structurally leaner organization that can scale data center development with greater operating leverage and stronger earnings quality over time. I'll now turn it back over to Jason Les for closing remarks. Jason Les: Thank you, Jason Chung. Riot is in an incredibly advantageous position today because of our industry-wide unique combination of significant scale of readily available power capacity in key high-demand jurisdictions, experienced credible data center leadership and development capability, strong balance sheet underpinned by more than 19,000 Bitcoin and $400 million in cash on hand and significant access to the capital markets, large-scale, efficient Bitcoin mining operations, generating hundreds of millions of dollars in revenues and cash flows, which will support the growth of our data center business and battle-hardened and experienced management and operations teams. With this framework and these strengths in place, our mission is clear. Riot will maximize value across our entire power portfolio with a view to ensuring full utilization of our available power capacity and pipeline, leaving no stranded power capacity behind, progressively shift power capacity towards data centers, strategically expand our power assets, utilizing Bitcoin mining where advantageous and increase our shareholders' exposure to value-accreting assets. We are strategically positioned at the confluence of surging compute demand and constraints on availability of power, offering compelling potential for shareholder value creation. We will now open the call up for questions. Operator? Operator: [Operator Instructions]. Our first question comes from John Todaro with Needham. John Todaro: Congrats on all the progress, guys, especially at Corsicana. Great to see. Obviously, there's been a number of leases now signed in the space. Can you just give us an update, in particular, on the discussions you're having with potential tenants for those first few builds and what you need to do from here to get a finalized lease? And then I have a follow-up question. Jason Les: Sure. thank you for that question. Now what -- I can't comment specifically on any ongoing discussions. But what I will say is that we are incredibly encouraged by our current position in the market. Of course, it's no secret that there's this explosion in AI going on. And alongside with that, demand for power is insatiable, and it keeps growing amongst all players in the market, hyperscalers, enterprise customers, new clouds, all of these companies are incredibly power constrained. And just as recently as this week and in particular, earnings calls yesterday amongst hyperscale companies, we've heard additional commentary indicating, if anything, the bottleneck is growing for power. Data center infrastructure looks like it's likely to extend for years to come -- that they -- the demand is increasing for them, and they keep thinking they're going to catch up and they're not catching up. And -- they have historically tried to build on their own, and now they're looking for third parties to lease from in order to meet their data center commands. Meta commented that they keep thinking that they're being too aggressive or being very aggressive in overbuilding and they keep finding themselves on the short side instead. So a lot of positive commentary that I think validates the strategy that we have going on and validates the value of the assets that we have. What I would say also is we are very focused on high-quality credit -- high-quality potential tenants. And that's because we're very focused on building this data center business at Riot off on a strong foundation. And these types of tenants, they have enormous power requirements and CapEx budgets, but they're also very careful to commit to. The projects that they're looking for, they need a lot of certainty on delivery time lines and those ready for service dates and have very minimal risk on power approvals and permitting and that sort of thing. And that is why we have worked so hard and have taken the time to take these key steps that derisk our sites and ensure maximum credibility in order to deliver on the time lines that they're looking for. We've done that with the team we put in place, completing our basis of design and now advancing on technical and engineering discussions and now initiating the development of the Core & Shell buildings at Corsicana. So what I would say is the steps that we've taken all have been taken to position Riot in front of top-tier potential tenants and set us up to execute on leasing and then match our ability to deliver with the time lines that -- another thing I'll add is everything that you hear about how short on power the market is for at least the next few years and how frenzy demand is for anyone who can reliably deliver power within that time frame, that is absolutely real. We've consistently heard from the leading industry experts, from partners and potential [indiscernible] it has strong validity to the power available. So we continue to receive a significant interest in that site. So we feel very good with where we're at right now. We've completed the steps outlined earlier in the year that we believe were necessary to make Corsicana ready and as an attractive development as possible. And we feel like we are just in a great position to move forward. And that is the key driver behind today's announcement on initiating the Core & Shell builds at Corsicana and that is it. John Todaro: That's great. That's super helpful. And then just as a follow-up, because you did talk about the constrained power environment, which we're obviously seeing as well. But I guess within that, is there still some additional power out there that you guys could procure? Do you still feel comfortable? Is there additional capacity out there that maybe you could get to add to the pipeline? I don't know, call it, maybe power that's available before 2028. Just maybe frame up some of that too on the supply side and what maybe additional you could procure. Jason Les: Yes. We are very active on working on building out our power pipeline beyond just the 1.7 gigawatts that we have at Corsicana and Rockdale. But let me turn that question over to Jason Chung for some more color. Jason Chung: Thanks, Jason, and thanks, John, for the question. We remain very active in looking at opportunities to expand our power portfolio and a large number of opportunities that continue to come across our plate, and we do spend a lot of time as a team evaluating these opportunities. That being said, we've got a tremendous opportunity for value creation on our plate right now, and that's really the primary focus of the management team here. So we do look at opportunities, and we'll act when there's an opportunity that's compelling enough for us to do so, but with perhaps a bit of a higher threshold in terms of where we allocate our time and resources given what we have in terms of our power portfolio that needs to be developed today. Operator: Our next question comes from Paul Golding with Macquarie. Paul Golding: Congrats on all the progress with the site and the basis of design. I wanted to ask, so it sounds like the proactive construction or commencement of construction of this 112 megawatts of Core & Shell is not a change in approach given you're still looking at prospective hyperscale tenants. But I wanted to ask in terms of maybe, Jason Les, your comments around facilitating the most optimal negotiations and getting leverage in these negotiations. Could you give some color or unpack how having these shells being constructed earlier than signing that deal that may come in the future, how that is factoring into these discussions, where it's coming into play? Is it the lead time allows you to take more price? Is it maybe helping you attract higher investment-grade counterparties? And then a follow-up on the comments around ESS Metron and the Engineering segment. Just in seeing how much revenue has grown there and the backlog that's built up, how are you thinking about measuring out third-party engagements for that segment versus internal given the project you're undertaking at Corsicana? Jason Les: Thanks, Paul. So let me answer your question. Well, the first part of your question in 2 parts. The first thing I want to stress is, just to be clear, what we're announcing today with the Core & Shell development is not a shift in our strategy. What I want the market to understand is this is an unveiling of our strategy and how we know that we can best serve the market here. Our focus is owning and operating build-to-suit data centers and the team that we have in place at Riot has the full ability to deliver on that. So what we bring to the market, which is so important to all types of customers, but particularly hyperscale customers is a derisked project. And I think that comes through [indiscernible] our power approvals are in place. We have up to 1 gigawatt of utility power at Corsicana. That power is running today. We can demonstrate the validity of that power to customers. Two, we have a team in place that has deep experience building the type of data centers that we're talking about, build-to-suit Tier 3 data centers in the configurations that hyperscalers are looking for. We also have a balance sheet that's able to support development of this project. And with the announcement today, we're showing that construction of the Core & Shell is already underway for the data center. So all of these elements allow us to communicate the level of certainty to power and ready for service to date that hyperscaler tenants require. The other thing I want to say is what we announced today in the development in the Core & Shell is the first step in the eventual build-out of a full Tier 3 data center. And what [indiscernible] powered shell, it's $214 million or $1.9 million per IT megawatt, it's actually a little bit more than just a powered shell. Beyond just the water type building, we are also completing generator buildings, fully operational elevators, fully finished admin areas, security, access control systems and power distribution. So what we're actually built in a way that we are providing the components that we know every hyperscaler will require, and we're positioning these buildings so they can very quickly become Tier 3 data centers when those tenant specifications are finalized. And I'll also [indiscernible] our teams have deep experience and knowledge in building these types of data centers and understand how to make them usable by any potential tenants while providing the flexibility for the tenant to meet their specific specifications. What we're also doing is procuring equipment and locking in our delivery time lines now so the finished data center can be in line with the timing that hyperscale and -- the timing of hyperscale and enterprise customer buying habits. Now I know that was a lot, but let me just summarize by saying this. We are executing on a strategy to position us in front of the highest quality tenants and give us more certainty on how and when we will deliver on them and deliver on building build-to-suit data centers. This is all under the framework of maximizing the value of the assets that we have. And ultimately, I believe today's announcement is an indication of our confidence in our strategy and our team's ability to successfully develop the data center business along the time line that we envision. And then your engineering question. ESS Metron, E4A solutions comprising Riot's engineering business has a lot of strategic benefits. Primary reason that we acquire these companies is for controlling our supply chain and derisking that. We've also -- in our presentation, Jason Chung talked about the cost synergies that we're realizing there as well. Riot is actually a small portion of ESS Metron's overall business. 90% of ESS Metron's business are data center projects. In fact, some of the biggest data center projects in the country that I'm certain that you've heard of. So they have a growing business themselves, and they're able to balance the internal demand from Riot and the growing demand reflected in the growing backlog for all these data center projects all over the country. Operator: Our next question comes from Greg Lewis with BTIG. Gregory Lewis: Jason, I was hoping you could talk a little bit more about Phase 1 in terms of how you're thinking about the sequencing, the decision to go with 2 buildings, not 1 or 3? And just how should we think about the timing of the shells being built? And then is this something where the next phase is really going to just be customer dependent, and we're kind of waiting on the customer to see how we think about advancing the shells. Jason Les: Yes. Thanks for the question, Greg. So the quarters shell -- we've already started. I want to highlight that we're talking about building at Corsicana, which is already an active site. A substation is already active on that site, of course. We already have the pad ready for these first 2 buildings. So this is a development that's far along, and it's just these buildings themselves that construction will begin on in the first quarter of 2026. And then we expect the first Core & Shell to be completed in the first quarter of 2027. And because we're building a little beyond the Core & Shell, what we actually call Core & Shell Plus, we are in a position from that point to very quickly get those into build-to-suit turnkey data centers. This is just the beginning of what our development plans will be. Obviously, we have a total IT load campus capacity at Corsicana of at least 672 megawatts, and we're announcing just 112 megawatts today. The pace of future announcements will be, I think, guided by industry demand and the pace of customer conversations. But we felt it was very important to start development right away based on the demand that we are seeing, based on the types of discussions that we are having. And I think you can expect future developments to be announced as we progress on our strategy and we progress on conversations with potential counterparties. It is relatively simple for us to continue to add on additional buildings. So we're talking about these first 2 buildings here. And if we have a conversation with a customer who is then demanding significantly more capacity than that, then we are positioned to rapidly spin up additional developments to support their needs. So we're in a great position to be flexible and be aggressive with meeting time lines. Gregory Lewis: Okay. Super helpful. And I realize there's probably a lot more that needs to be discussed about Corsicana. But I was hoping to get maybe some thoughts on Rockdale. Just as we think about that, everyone -- obviously, Corsicana has been talked about as being one of the best data center sites in the U.S. given its scope, size, proximity to Dallas. But could you talk a little bit how you're thinking about Rockdale? Is that something where we need to really have Corsicana built out before we kind of pivot and start developing opportunities at Rockdale? Or is this something you think maybe we could do concurrently? Jason Les: Yes. Thank you for asking about Rockdale, Greg. Rockdale shares many of the same characteristics that make Corsicana a highly attractive site for data center development. Just like Corsicana, Rockdale has large-scale secured power, active and operating today, 700 megawatts fully approved, electrical infrastructure already in place. Now keep in mind, we already operate one of the world's largest Bitcoin mining data center campuses on that site. So it is an active operating site. And it also has ample land, water and fiber that can satisfy and is located in close proximity to Austin, which is a leading technology. So collectively, we think this makes Rockdale a very attractive site. Most importantly, having that power approved and in use today significantly derisked the development execution from a potential tenant's perspective, and that gives them greater confidence in the opportunity. Today, we are working to enhance the attractiveness of Rockdale for high creditworthy prospective tenants. And while we do so, we continue to focus on Corsicana as our near-term development opportunity. So today, Rockdale provides Riot with additional optionality for future development of our data center business. But in the meantime, our mining business there continues to generate strong cash flow and helps finance our growing data center business. So Corsicana is a near-term focus for data centers, but Rockdale is the next logical step in the process. So I'm emphasizing discount Rockdale from our development pipeline as we continue to work to make the site tenant ready in the meantime. And I feel confident about our ability to execute there. Operator: Our next question comes from Reggie Smith with JPMorgan. Reginald Smith: Congrats on all the progress. Two quick questions for me. I love that you guys are thinking about maximizing the electrons at your 2 sites. I was curious like what's your thinking today on neocloud? Maybe talk us through the pros and cons of becoming neocloud like iron or someone else and how you're thinking about that? And then I have one follow-up. Jason Les: Yes, Reggie, thanks for the question. We are always looking to maximize the value of our megawatts here. So that's something that we are thinking about and evaluating all the time. What we believe is the best first step for Riot to maximize value is to focus on this build-to-suit colocation model. Our sites are in very desirable locations. They have very desirable ready-for-service dates. So we believe the best way that we can unlock value today is by building data centers and getting these leased with high-quality tenants. And that's why we're focused on developments that can serve a wide variety of the market. We're focused on building data centers that can meet the needs of any hyperscalers that can service all types of enterprise customers and has the potential -- I'm sorry, and can serve neoclouds as well. And of course, that means it could potentially serve an internal neocloud business if we decide that we wanted to go that way. So it's something that we'll think about and evaluating, but build-to-suit is a priority today. Reginald Smith: Not closing the door on that, but right now, build-to-suit is where you're going. Perfect. And then I guess second question, we've seen quite a few deals struck in the space the last couple of months. I don't think any of them are as ideally located as you guys are in terms of being close to a major city. Are you talking to clients more? Or do you think you're getting a higher mix of kind of inference clients inquiries for your site? And should we expect better pricing when a deal is struck because of where you guys are located versus other sites? Or at least are you pushing for that? Like I would imagine that's a point of negotiation where you guys are thinking like, look, we've got great locations. And so what may have flown in a more remote location, we even expect more. Is that the right way to think about it? Jason Les: Yes. I think the location of our sites, but also the timing of being ready for service is what positions us to get the best possible deal here. We believe with what we have that we can command very strong economics. And for us, it's twofold. It's both the types of deal economics that we think we can secure with the assets that we have, but it's also the types of tenants that we believe that we can secure with the assets that we have. I would say that I think we're very confident today based on the level of interest that we've received that we could easily enter into a contract with the neocloud. But what we are focused on is building a platform that will be able to service a range of potential tenants, hyperscalers, enterprises and neoclouds. And so our priority is building our data center business on a strong foundation. And we think that means that with what we have, we can attract high-quality, which beyond just the name recognition and beyond just the economic terms we can get in the lease make benefits available to Riot in terms of value creation and access to attractive project financing terms. So it's twofold, Reggie. It's -- our assets, we believe both can command strong economics, but can also command because of the properties can command very high-quality tenants. Operator: Our next question comes from Brett Knoblauch with Cantor Fitzgerald. Brett Knoblauch: I think it was just as recently as June as you guys hired Jonathan kind of lead the data centers team. I'm curious where else on the maybe the hiring front, you guys have made hires and to what extent there's more hires that you need to go out and make? Or do you think that team is kind of fully in place at this point? Jason Les: Yes. Thanks for the question. One of our ongoing priorities is building out our team. And what we're doing is building this team in sequence with the steps that we're at in building the business. So you can kind of think of it as like a pendulum where [Technical Difficulty] starts with focus on engineering [indiscernible] and then as the development and engineering part advances, then it swings into the sales side and then eventually swings into the operations side. So we have made a number of key hires over the third quarter that position us to execute on the development side of the business. Of course, we're still adding talent there, but we have the talent that we need to proceed. And very recently, we have hired a sales position, our Senior Vice President of AI and Hyperscale Sales as now from the development side more into the sales side. So we have been, I'll say, very pleased with the level of talent that we have been able to attract to Riot. I think that's a testament to the quality of assets that we have, our power, our capital and all the other capabilities that we have at Riot. It made Riot a very attractive place for veteran data center talent to build their careers and have the opportunity to be a part of building something very big from the ground up. So I've been very pleased with the rapid pace that we've been able to add some incredible talent to our bench. And as that pendulum swings, you'll continue to see us bring in more of that talent to meet the cycle of the business that we're in. Brett Knoblauch: Awesome. And then maybe just as a follow-up, and I don't know if you guys said this or I might have missed it, the, call it, 400 megawatts being used for Bitcoin mining at Corsicana, is that maybe like the last source of power that you would draw as you kind of build up more on the AI side, like you'll keep mining Bitcoin until you need that power, I guess, is the question. Jason Les: Yes. So on Slide 11 on our earnings deck, we have a campus layout, and we're breaking it into 2 phases essentially. The first phase is building out on all the unused lands that we have at Corsicana. So that means we continue to benefit from the strong cash flow that comes from that site, which is one of the largest Bitcoin mining sites in the world right now. That site continues to be productive and generate meaningful cash flow for us while we are building out the other buildings on that site. Once the available land has been exhausted, and that would be on our plans, that would mean building out about 504 megawatts of critical IT load, then the Phase 2 option or part of the plan would be building over where those existing Bitcoin mining buildings are and adding the final three 56-megawatt build and all the critical IT capacity at the site. So that -- our plans call to eventually supplant that. And the pace of that will be driven by customer demand, driven by the dynamics that we're seeing in the marketplace and how our leasing is progressing. So it's all under the lens of maximizing the value of all of the megawatts that we have, trying to leave no unutilized power while we aggressively build out the data center business. And eventually, we aim to have the entire site be a 1 gigawatt utility load data center campus. Operator: Our next question comes from Mike Grondahl with Northland. Mike Grondahl: Just following up on the discussion you had on expanding the pipeline. Do you have any internal goals what you could expand that pipeline to by year-end 2026 or '27? And then secondly, just what are the key next steps you need to deliver in the next 90 to 120 days? Jason Les: We don't have any goals that we would be publicly disclosing at this point. But I would say is we recognize the value of power, and we also recognize our capabilities of securing power. Riot has a proven capability of securing power at scale, as demonstrated on one of the slides in our deck at a scale rivaling the biggest data center companies in the world. So -- when you have an advantage, you press it, and we are looking to press that advantage and utilize the tools at our disposal to add more power to our pipeline. So the story ultimately would not end at just Corsicana, Rockdale, but on additional sites that we bring into our pipeline. So not a specific I have for you outside of telling you that it is a strategic priority at Riot to build that pipeline. Key steps for the next 120 days, I think that will really center around the development progressing at the 2 Core & Shells that we're announcing today. We expect to break ground on construction in the first quarter of 2026 in order to meet the time lines that we've laid out here. I think internally that we will be continuing to be advancing on development and further detailed designs of our development. And what we will be doing internally is continuing the technical outreach that we've had, speaking with potential parties and potential tenants to ensure that we are progressing on a design that meets their specification. That isn't something externally looking in, you'd be able to see progress on. But internally, that is what we for the next 120 days. Mike Grondahl: And congrats on the progress towards HPC, guys. Operator: Our next question comes from Dillon Heslin with ROTH Capital Partners. Dillon Heslin: Congrats on the Corsicana progress. First, Jason, I know you mentioned that the design for Corsicana could be replicable beyond Corsicana. Does that mean you don't need a separate master site design for Rockdale? Or could you just sort of clarify what you mean by that? Jason Les: Thank you for that question. Yes. So our basis of design is a design that will ultimately work wherever we have a site where we have power. So we have the basis of design now and then the process of putting that on a site is what we call localizing that standard design to the specific site in question. The land profile wherever the site would be, that determines what the specific layout would be, but it's the same type of building that's being made. So the fact that we have a standard design means that we're able to be a lot more efficient in procuring equipment and scheduling with contractors and those contracting partners, development partners, construction partners knowing exactly what we're building. It's the same standard design that is tweaked at the endpoint for specific tenant specifications and then localized on whatever site that it's at. And then like I said, the campus layout where the buildings are actually placed will depend on the land profile of the site. But this is why this basis of design was so important to us. It's really the foundation of our whole development program at Riot for data centers. We're not just making a data center for Corsicana. We are making a design. We can continue to improve on and apply wherever we're able to get access to power. Dillon Heslin: Great. And as a follow-up, like when the first 2 power shell plus are done sometime in Q1 '27, like is that the next step that potential tenants need to see your progress on to advance sort of discussions on a lease? Or are you sort of talking with them throughout the process? Jason Les: We'd be talking with them throughout the process. I think that's the schedule. That's the time line of when those Core & Shells will be completed. But one of the purposes of initiating this Core & Shell development is it enables a more productive discussion with potential tenants. So we would expect to be further along in our sales and leasing process before those Core & Shells are even completed. Operator: And our final question comes from Nick Giles with B. Riley Securities. Nick Giles: My first question was you have $330 million on the balance sheet today and obviously, a lot of Bitcoin as well. $214 million for the Core & Shell. But my question is, are there any other major capital outlays we should think about in 2026, whether it be deposits for long lead time items or just any other moving pieces to keep in mind? I think you've pretty much wrapped up the land acquisitions you set out to make, but I appreciate any color there. Jason Les: We haven't released our full 2026 CapEx budget yet, but I think with the development plans that we announced today, the majority of it at this stage would be the $214 million for these first 2 Core & Shells. That doesn't mean though that we have -- we are not progressing all the long lead time equipment as well. Even without deposits, we have been able to secure most of that, that would be necessary for those first 2 buildings. And then, of course, we have our internal capabilities that we're using to secure supply chain as well. So we are being very capital efficient with how we secure this long lead time equipment and all around the strategy of [Technical Difficulty] our capital deployment and making sure that those 2 items are synced up closely. And with our development strategy, we are always positioned to rapidly move to the next step, depending on what the tenant is looking for. Nick Giles: I appreciate that, Jason. And one more, if I may. I think you mentioned that 672 megawatts of critical IT is kind of the minimum you could see at Corsicana. I think that implies a PUE just below 1.5. So my question is, is there any work ongoing today to improve that? Or what could be done to ultimately increase critical IT megawatts at Corsicana? Jason Les: Yes. So before we get the question, I just want to add one more thing to the previous question that you mentioned. In addition to the cash that we have on our balance sheet, we have -- including restricted cash, we have about $400 million today and our large Bitcoin balance. We also have a robust Bitcoin mining business that is generating strong cash flows, and that really is a very important and valuable tool to funding all the development that we have going on. And then your more recent question, -- on PUE, what we've laid out is like kind of our base case. That's the base case PUE of what we are setting out to achieve. Now of course, any improvement in PUE is improved economics for us. So approximately 1.49 is what our base case is. And now what we are setting out improved from that. And the better PUE we're able to achieve, the better ultimate economics we're getting from our projects. Operator: Thank you. I would now like to turn the call back over to Jason Les for any closing remarks. Jason Les: I want to thank everyone for listening in our earnings call today. We are incredibly excited about the progress we've made and the strategic milestones that we're announcing today. Look forward to sharing more progress as we accomplish it and getting together again with you all on our next earnings call. Thank you. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Good afternoon, and welcome to the Republic Services Third Quarter 2025 Investor Conference Call. Republic Services is traded on the New York Stock Exchange under the symbol RSG. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Aaron Evans, Vice President of Investor Relations. Please go ahead, sir. Aaron Evans: Good afternoon. I would like to welcome everyone to Republic Services Third Quarter 2025 Conference Call. Jon Vander Ark, our CEO; and Brian DelGhiaccio, our CFO, are on the call today to discuss our performance. I would like to take a moment to remind everyone that some information we discuss on today's call contains forward-looking statements, including forward-looking financial information, which involve risks and uncertainties and may be materially different from actual results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations. The material that we discuss today is time sensitive. If in the future, you listen to a rebroadcast or recording of this conference call, you should be sensitive to the date of the original call, which is October 30, 2025. Please note that this call is property of Republic Services, Inc. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Republic Services is strictly prohibited. Our SEC filings, our earnings press release, which includes GAAP reconciliation tables and a discussion of business activities, along with the recording of this call, are available on Republic's website at republicservices.com. In addition, Republic's management team routinely participates in investor conferences. When events are scheduled, the dates, times and presentations are posted on our investor website. With that, I'd like to turn the call over to Jon. Jon Vander Ark: Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. We delivered strong third quarter results, which highlight the consistency of our business model, disciplined operational execution and power of our portfolio. Even with persistent headwinds in construction and manufacturing end markets, we generated solid earnings growth and margin expansion. Continued investment in our differentiated capabilities positions us well to drive sustainable growth and enhance long-term shareholder value. During the quarter, we achieved revenue growth of 3.3%, generated adjusted EBITDA growth of 6.1%, expanded adjusted EBITDA margin by 80 basis points, delivered adjusted earnings per share of $1.90, and produced $2.19 billion of adjusted free cash flow on a year-to-date basis. Our commitment to delivering world-class service continues to support organic growth by reinforcing our position as a trusted partner for our 13 million customers. Our customer retention rate remained strong at 94%. We saw continued improvement in our Net Promoter Score. This reflects our team's commitment to delivering products and services that customers value. Organic revenue growth during the third quarter was driven by strong pricing across the business. Average yield on total revenue was 4% and average yield on related revenue was 4.9%. Organic volume decreased total revenue by 30 basis points and related revenue by 40 basis points in the quarter. Volume performance included outsized C&D and special waste landfill activity. The increase in C&D tons related to hurricane recovery efforts in the Carolinas. Special waste activity was driven by an increase in event-based volumes across many of our disposal assets primarily located in Sunbelt geographies. These volumes were offset by a decline in the collection business. The decrease in collection volumes related to continued softness in construction and manufacturing end markets and shedding underperforming contracts in the residential business. Organic revenue decline in the Environmental Solutions business created a 140 basis point headwind to total company revenue this quarter. Environmental Solutions performance was impacted by 3 primary factors: continued softness in manufacturing activity, lower event-driven volumes in our landfills, which includes E&P activity and fewer emergency response jobs. Given the relatively fixed cost structure of these assets and services, the impact on Environmental Solutions' EBITDA and margin was more pronounced. While the Environmental Solutions business was down both sequentially and year-over-year, demand stabilized exiting the third quarter. Our pipeline for new business is now expanding, and we remain well positioned to capture growth opportunities as market conditions improve. Importantly, despite these headwinds in Environmental Solutions, we delivered over 6% growth in adjusted EBITDA and expanded adjusted EBITDA margin by 80 basis points at the enterprise level. These results reflect disciplined pricing above cost inflation, strong operational execution and effective cost management. Moving on to sustainability. We are making progress on the development of our Polymer Centers and Blue Polymers joint venture facilities. In July, we commenced commercial production at our Indianapolis Polymer Center. This operation is co-located with a Blue Polymers production facility. We expect commercial production to begin at the Blue Polymers facility late in the fourth quarter. We are advancing renewable natural gas projects with our partners. One project came online during the third quarter. We have commenced operation at 6 RNG projects this year. We expect a total of 7 RNG projects to commence operations in 2025. We continue to advance our commitment to fleet electrification. We had 137 collection vehicles in operation at the end of the third quarter. We expect to have more than 150 EVs in our fleet by the end of the year. We currently have 32 facilities with commercial scale EV charging infrastructure. This infrastructure investment will support continued growth of this differentiated service offering. As part of our approach to sustainability, we strive to be the employer where the best people want to work. We continue to have high employee engagement scores, and our turnover rate continues to trend lower compared to the prior year. With respect to capital allocation, we have invested more than $1 billion in strategic acquisitions on a year-to-date basis. Our acquisition pipeline remains supportive of continued activity in both the Recycling and Waste and Environmental Solutions businesses. Year-to-date, we have returned $1.13 billion to shareholders through dividends and share repurchases. I will now turn the call over to Brian, who will provide additional details on the quarter. Brian Delghiaccio: Thanks, Jon. Core price on total revenue was 5.9%. Core price on related revenue was 7.2%, which included open market pricing of 8.6% and restricted pricing of 4.8%. The components of core price on related revenue included small container of 9.2%, large container of 7.1% and residential of 6.8%. Average yield on total revenue was 4% and average yield on related revenue was 4.9%. Third quarter volume decreased total revenue by 30 basis points and decreased related revenue by 40 basis points. Volume results on related revenue included a 45% increase in landfill construction and demolition or C&D volume, driven by $35 million of hurricane cleanup activity in the Carolinas, and an 18% increase in landfill special waste revenue, driven by volume growth across many of our disposal assets. Year-to-date, we recorded approximately $100 million of event-driven revenue associated with hurricane and wildfire cleanups. We estimate these volumes will result in a full year adjusted EBITDA margin benefit of 30 basis points. Large container volumes declined 3.9%, primarily due to continued softness in construction-related activity in most manufacturing end markets and residential volume declined 2.4% due to shedding underperforming contracts. Moving on to recycling. Commodity prices were $126 per ton during the quarter. This compared to $177 per ton in the prior year. Recycling processing and commodity sales decreased organic revenue growth by 20 basis points. Increased volumes at our Polymer Centers and reopening a recycling center on the West Coast partially offset the impact of lower recycled commodity prices. Current commodity prices are approximately $120 per ton. Total company adjusted EBITDA margin expanded 80 basis points to 32.8%. Margin performance during the quarter included a 40 basis point increase from previously noted event-driven landfill volumes and margin expansion in the underlying business of 90 basis points. This was partially offset by a 20 basis point decrease from net fuel, a 20 basis point decrease from recycled commodity prices and a 10 basis point decrease from acquisitions. Adjusted EBITDA margin in the Recycling & Waste business was 34.3%, which was up 150 basis points compared to the prior year. With respect to Environmental Solutions, third quarter revenue decreased $32 million compared to the prior year, driven by softness in manufacturing end markets, lower event activity and softer E&P volumes in the Gulf. Adjusted EBITDA margin in the Environmental Solutions business was 20.3%. Year-to-date adjusted free cash flow was $2.19 billion. Our strong performance reflects EBITDA growth in the business and the timing of capital expenditures. Year-to-date capital expenditures of $1.18 billion represents 62% of our projected full year spend. Total debt was $13.4 billion, and total liquidity was $2.7 billion. Our leverage ratio at the end of the quarter was approximately 2.5x. With respect to taxes, our combined tax rate and impact from equity investments in renewable energy resulted in an equivalent tax impact of 21.2% during the quarter. I will now hand the call back to Jon. Jon Vander Ark: Thanks, Brian. Through the cycle, we believe our business can consistently deliver mid-single-digit revenue growth and grow EBITDA, EPS and free cash flow even faster. This generally produces 30 to 50 basis points of EBITDA margin expansion per year. This growth assumption is supported by pricing ahead of underlying costs, selling our comprehensive set of products and services, and capitalizing on value-creating acquisition opportunities. We also expect financial contribution from investments made in sustainability innovation, including plastic circularity and our renewable natural gas projects. Our initial perspective, regarding 2026 is the long-term growth algorithm, is intact. As a reminder, we reported approximately $100 million of revenue at an 80% incremental margin related to landfill volumes, except in 2025, that will not repeat in 2026. This should be reflected in year-over-year growth assumptions. We plan to provide full year 2026 guidance on our earnings call in February. With that, we can now open the call to questions. Operator: [Operator Instructions] And today's first question will come from Tyler Brown with Raymond James. Patrick Brown: Jon, I just want to make sure I have it big picture. I appreciate the color right there at the end of the prepared remarks. So the long-term algorithm, mid-single-digit revenue hopefully, EBITDA free cash flow faster than that. So when you think about as we go into '26, and I think you kind of alluded to that, is that including the headwinds with the special, with the event-driven volumes? And then we also are going to have a fairly sizable commodity headwind if we snap the line today. So can you just talk a little bit about the puts and takes into '26. Jon Vander Ark: Yes. As you know, we're not giving guidance for '26, but I'll give you some markers in the spirit of your question. Look, the long-term growth algorithm of mid-single-digit growing EBITDA growth or EBITDA faster than revenue and free cash flow faster than EBITDA, we think, holds. We're coming over a tougher comp. So that probably just takes each of those down a click going into '26. And that's predicated on remaining pretty conservative on the macro, but also understanding what our pipeline looks like and how well performing we are in the fundamentals of the business, I think that shapes our perspective into 2026, and that certainly includes overcoming that commodity headwind as well. Patrick Brown: Okay. Helpful. And then, Brian, just on the event-driven volumes. I just want to make sure I have it kind of by quarter. Was it something like $10 million of revenue in Q1 and then $55 million in Q2 and $35 million in Q3? Is that roughly right? Brian Delghiaccio: Yes. So it's roughly -- it was $12 million of revenue in Q1, $53 million Q2, $36 million in Q3, total of $100 million. Patrick Brown: Okay. Perfect. And then just my last one. You guys have been very realistic around the volume environment. It does look like ES slowed down, it accelerated on the -- to the downside. Just kind of what are you seeing out there in the market? Is that largely related to project work? And then if I look at the EBITDA flow-through, I think it was almost a 1:1 revenue to EBITDA flow-through. I know haz waste landfills have very high flow-through. But was there something else driving that contribution margin? Jon Vander Ark: Yes. I think it's a confluence of events. Like the macro manufacturing continues to be very slow, and we see that in the Recycling & Waste business, too, when large container hauls, again, we're gaining share in that area, but volume is slowing down just because plant output is down in that space. So that's part of it. We're seeing delayed project-based work, a lot of reoccurring work like turnarounds or tank cleanouts. People are just pushing those. And the good news is those come back, those will get delayed forever. And then good news for the macro society, bad news for us, it's just been a very slow emergency response here across the board. Activities has been pretty low across the board. So all of those things are feeding into it. Brian Delghiaccio: Yes. And Tyler, to your question just on the margin, you're right, it is falling through almost at the amount of the revenue decline. That is not just due to the revenue itself, there were some unique costs. We called out last year that we had a bad debt recovery, about $4 million that was somewhat out of period. This year, we had a legal settlement, which added a couple of million dollars worth of cost. So that added $6 million spread between the 2 years, about a 140 basis point impact on margin year-over-year. Operator: The next question will come from Noah Kaye with Oppenheimer & Company. Noah Kaye: The open market pricing strength looked good again this quarter. Maybe just update us on how you see price cost spread heading into year-end here and kind of the runway for '26. Jon Vander Ark: Yes, positive. I mean we'll think about cost inflation kind of roughly in line with what you think about CPI. Broadly speaking, there's a few puts and takes underneath that. But at the aggregate, that's fair. And then we'll think about kind of a yield number that's 75, 100 basis points above that. Noah Kaye: That's a great place to model from. I guess switching gears, there was one competitor this week that took an impairment charge related to a plastics facility. I know it's different technology. But as you look at what's happened with commodity pricing, how do you think about return expectations for the Polymer Centers? Jon Vander Ark: Yes. We're excited. Listen, these projects typically have challenges on 2 ends. One is the supply end, and I'm sure we have an advantage because we get something up the ground 5 million times every day. And the other is on the demand then. And the demand then from both a pricing and a volume standpoint has been very strong. And the spread between the input and the output on this side has been really consistent. In fairness, it's taken us a little longer on the ramp-up of these projects to get to full capacity and full output. And that's just the normal learning curve of new facilities starting up plants is challenging, but feel really good about our long-term assumptions there and excited to see Indy come up the curve and Allentown open up next year. Operator: Your next question will come from Sabahat Khan with RBC Capital Markets. Sabahat Khan: Great. I guess just as you kind of think about 2026 and you called out acquisitions as one of the areas that generally contribute here. How is the pipeline looking relative to kind of this year, obviously a big year this year? Can you just talk about kind of the magnitude or how full that is and then mix across your different silos? Historically, you've talked about just keeping it more balanced, but just how is that looking right now? Jon Vander Ark: Yes, pipeline looks very strong. We expect to finish the year strong and start out next year strong. The exact balance of when things close end of the year or into the first half of next year, we'll see. And then the pipeline behind that, things that would be more likely to close in the second half is still very full. And that will be a balance across both recycling and waste and ES, tilted toward recycling and waste, but we'll look for opportunities on all ends. Sabahat Khan: Great. And then you provided some benchmarks around 2026. Is it really just going to be on the environmental services side, kind of the magnitude of the event-driven volumes that really swing how that segment performs? Or do you have any sort of visibility on how the next year could evolve relative to this year? Just some high-level perspective on what you're seeing. Jon Vander Ark: Yes. Listen, we'll forecast to grow that business next year even in what we -- again, we'll remain conservative on the macro, and that continuing to be sluggish. The pipeline, again, Brian mentioned, we mentioned in the prepared remarks that the pipeline is building. And listen, most of our challenges here have been macro. But we all -- we talked last quarter, we haven't always gotten quite right in terms of the price volume trade-off, and we've taken a lot of price over the last 3 years in this business, and we will continue to put upward pressure on price. That being said, for some of these opportunities, finding the market and the right balance, we try overshot that as the team is working hard, and that's why the pipeline is building to get that pricing right. Operator: Next question will come from Bryan Burgmeier with Citi. Bryan Burgmeier: Yes. I mean just following up on some of the questions on ES. Can you maybe give us a sense of your expectations for the fourth quarter for that business? Should we continue to expect kind of those mid-single-digit declines in the top line or just the pipeline that you're mentioning and building sort of start to come through? And then I guess on a sequential basis, margins kind of stepped down from 3Q to 4Q normally. I'm just not sure if that's generally how you're thinking about it. Jon Vander Ark: Yes. We think we've kind of found the bottom on this thing that we're coming over -- overcoming a pretty tough comp from the fourth quarter of last year. We had a major ER job that came in at pretty high incremental margin on that front. But I think about margin performance that kind of looks in the same ZIP code, and then we build up from that in 2026. Bryan Burgmeier: Got it. And then just one follow-up is you mentioned you acquired a recycling facility in California during the quarter. I think that's a little bit different than your Polymer Centers, is may be more of a reclaimer, I think does that kind of fit between your Polymer Centers and your MRF? I'm just sort of curious what the incremental opportunity is there? And is there more opportunities like that as Republic tries to build out their national kind of plastic cycling network, just overall thoughts on the M&A environment around plastics. Jon Vander Ark: Yes. That ended up being pretty opportunistic and unique. It's connected to the West Coast Polymer Center and gets us plugged into the -- really the bottling value chain there. Over time, we'll look for more M&A in the space. I think in the very near term, you're unlikely to see more opportunities there just because we'll be focused on executing the Polymer Center and getting any fully up the curve, getting Allentown on pace and then the Blue Palmer JVs. And then over time, there'll be an M&A opportunity, but I would think more about '27 and beyond there versus '26. Operator: Your next question will come from Kevin Chiang with CIBC. Kevin Chiang: Maybe just on some of the labor disruption you had in the second quarter, you -- or maybe the first half of the year, you called out about $56 million in costs. Just wondering if there's any residual impact as we think of Q4 into next year related to credits or any type of revenue adjustments you make as you kind of rebuild goodwill with some of these customers that face that disruption as we think of revenue trends in the next few quarters here? Brian Delghiaccio: Yes. Kevin, we think we mostly captured the impact of that, including the revenue credits themselves. So we think at this point, the $56 million that we recorded in the third quarter will be it at this point. So yes, we think we're done. Kevin Chiang: Oh, perfect. And just on the EV targets, you provide us with the update every quarter here. It does feel like OEMs are deprioritizing the production of their electrification strategy. Just I guess, how do you think that impacts these longer-term targets you have? It feels like you still feel pretty confident that you can get the vehicles you want despite maybe OEMs deprioritizing this propulsion system. Jon Vander Ark: Yes. No, we feel really good about our partners in the space and customer demand for it. And we think it provides really unique benefits of a zero-emission vehicle and cities and communities are excited about it. At the same time, we're going to do it in an economic fashion, right? This isn't just a sustainability investment. This is also a business investment. And so we lost a little bit of incentive here in the federal legislation. And that might slow our pace on the margin. But there's other state and local incentives and there's certainly customers who are willing to pay the most important part of the equation that will allow us to continue. So we're going to continue to march it out in communities where it makes sense. Operator: Your next question will come from Trevor Romeo with William Blair. Trevor Romeo: I had one kind of follow up on, I guess, the overall kind of manufacturing industrial volume activity as it relates to both solid waste and ES. Just kind of wondering, was the softness in this quarter kind of about what you expected last quarter when you lowered the guidance? Or you talked about demand stabilizing exiting the quarter. Maybe you could just walk us through kind of the monthly trends a little bit more? Or just any more color on that would be great. Jon Vander Ark: Yes. And probably since our last call, in the first couple of months after that, it was certainly more to the negative than our outlook was and we've mentioned, started to stabilize, and we think we found the bottom of rebounding from here. There's a ton of uncertainty out there for manufacturers and trade policy is top of the list. And I think you're just seeing the rebound effect of those tariffs and people prebuilding and prebuying to get ahead of the tariffs. And then we've seen a slowdown in economic activity in a lot of sectors, pretty dramatically in June, July, August and starting to see that pick back up. And so that's really what we're facing in both sides of the business. Trevor Romeo: Got it. And then I guess, on capital allocation, the buyback ramped up quite a bit in Q3. I think all the solid waste stocks have been trading kind of weaker since the quarter closed even. Should we think about buybacks continuing to be maybe a bigger driver with the stock at these levels? Or how are you thinking about that versus other uses of capital in the kind of near term? Brian Delghiaccio: Yes, I would say we've always been opportunistic, and we looked at it as a great opportunity to create value for our shareholders. So we were a buyer, and I would expect us to be a buyer going forward. Operator: Your next question will come from Tobey Sommer with Truist. Jasper Bibb: Jasper Bibb on for Tobey. I just wanted to ask about expense inflation trends. Any early indication on what you're anticipating for price/cost spread in '26. Noticed your labor COGS actually declined year-over-year this quarter, so maybe a favorable indicator there. Jon Vander Ark: Yes. As mentioned earlier, we think about pricing coming down relative but also cost coming down, but maintaining a price cost spread in the Recycling & Waste business of 75 to 100 basis points. And have pretty good outlook and confidence of that going into 2026. Jasper Bibb: Got it. And then maybe following up on ES, have you seen any retention impacts at your customers based on the pricing increases you've taken over the past couple of years? Jon Vander Ark: There's certainly been some churn, and we see that all the time in the Recycling & Waste business, too, as we've improved margin in that space. We've also seen the return of customers and that -- understanding that low price doesn't always mean the best value upfront. I'd say where we've gotten the price volume equation just slightly off is more of the event-based work that we've missed out on some opportunities. So it's not pricing recurring revenue customers out. It's event-based opportunities that we think we're going to be able to be more competitive going forward. Operator: The next question will come from Toni Kaplan with Morgan Stanley. Yehuda Silverman: This is Yehuda Silverman on the line for Toni Kaplan. Just had a quick question about some of the cost uptick, specifically for fuel and landfill operating costs in the quarter. I'm just wondering if this was tied to anything specific or if it's nothing really to focus too much on. Jon Vander Ark: Yes. Look, if you're looking just at a year-over-year basis, yes, some of that, again, it's a combination of both. You've got price, but you also have volume due to acquisitions. So I would say neither of which are going to be anything significant or out of the norm. Because if you look as a percent of revenue, for example, fuel is relatively flat. Yehuda Silverman: Got it. And just had a question on commodities in general. So were the commodity headwinds this quarter worse than expected? And is there any way to sort of hedge or counteract weaker price in commodities? Jon Vander Ark: Well, I mean, commodity prices ticked down, right, throughout the quarter. So when we were exiting Q2, they were in the $140 range -- $135, $140, and you can kind of see for the average for Q3, $126 exiting about $120, right? So they have been stepping down sequentially. That when you think about getting a third-party hedge, it's a pretty thin market, quite honestly. So more of what we've done is we've moved the model to charge the fee-for-service. So for the collection itself of those materials or the processing of the material at one of our third-party facilities, we're charging the fee. And then we split with our customers, the ultimate sale of the commodity. So again, we're earning a good return on the services we're providing. And you accept some level of volatility with the ultimate commodity sale, but that's just inherent to the business. Operator: The next question will come from Rob Wertheimer with Melius Research. Robert Wertheimer: You just touched on this a minute ago, but ex the labor one-offs, labor productivity actually looked pretty good in one of your better quarters. Is there anything to call out there? Or is that normal variability? Jon Vander Ark: Well, no, labor productivity, I would say, if you take a look at labor as a percent of revenue, just in the quarter, we've seen an improvement of 70 basis points, right, on that front. So that's going to be a continuation of the benefits that we're getting from a RISE platform where we're producing productivity benefits within our collection business. But also just as we've said, when you think of the margin expansion, a lot of that is the price in excess of your cost inflation. So with labor being one of your largest cost inputs, the place where you're going to see that the most is labor improving as a percent of revenue. Robert Wertheimer: Totally fair. And then just a small one. You touched on manufacturing and some of the -- we've seen that obviously in the industrial world. Any -- there's a lot of cross currents and construction, any trend line you saw through the quarter, you got interest rate cuts, you've got large projects, you got lots of crosscurrents. So just curious if there's any movement in one direction or the other. Jon Vander Ark: No, not yet. I haven't really seen signs of life. Again, we remain in the longer term, very bullish, medium to longer term on construction. In terms of single-family, multifamily, I feel that there's a lot of pent-up demand in most of the markets across our 1,000 dots on the map in the U.S. and Canada. I think we probably need just a little more time before we start to see that take off. Operator: Your next question will come from David Manthey with Baird. David Manthey: Back to Environmental Solutions. When you talk about stabilization, just trying to understand definitionally, are you saying that the decline should start lessening here? Or are you talking about absolute revenue sort of flattening sequentially from 3Q to 4Q? Brian Delghiaccio: Yes. I would say a little bit of both, right? So again, at the same time, we saw it just from an overall revenue perspective -- and look, one month doesn't make a trend, but September was better than August, and we're starting to see something look similar in October from an overall revenue perspective. And then you think about just the year-over-year that would just naturally lend itself to the year-over-year decline starting to modulate. Now Jon mentioned earlier, one of the things you have to remember is last year, we had almost $50 million of revenue in the quarter from a single emergency response job, right? So that's something that we have to anniversary. So that's going to create a tough comp, and about $15 million of that carried over into Q1. So you don't get that out of the numbers until -- from a year-over-year perspective until we get into Q2 of '26. David Manthey: Right. Okay. That's great color sequentially. And then looking back to the ECO data back in 2021, has the data changed much in terms of the top verticals in Environmental Solutions. So is it still chemicals, metals and general manufacturing making up, I don't know, 40%, 45% of the total? Jon Vander Ark: It's a very diversified set of end markets, and we don't -- probably don't cut it exactly the same way that the legacy company did. But very strong -- manufacturing will be the largest probably defined chemicals, oil and gas, general -- continuous slow, general production. But utilities, government, there's a broad mix of end markets that we serve. Operator: Your next question will come from Stephanie Moore with Jefferies. Stephanie Benjamin Moore: I wanted to ask maybe a high-level question on the solid waste business. As it relates to pricing, I think you guys as well as the industry continue to execute well on pricing and getting good pricing, obviously, in the open market as well. As you think about the success that you've had in the open market, what would you attribute the major drivers of that be? Do you think it just general rationality? I mean, obviously, inflationary, but we also hear a lot from general customers with price fatigue and inflation fatigue. So I'd love to get your updated thoughts. I mean, is it your ability to capture price because of your technology investments, but I think just can any updated thoughts on that would be helpful. Jon Vander Ark: Yes. I think there's a lot of elements to the equation. I'd say the most important one from a macro level, we're a very, very small percentage of most customers' cost structure. And in a macro sense, I think the industry is underpriced, right? You think about a resident, their bill is less than their Starbucks delivery month. And we're taking a $400,000 truck and driving it, taking it to a recycling center that costs $50 million, $60 million to build or a landfill where we're going to rent you piece of real estate forever and probably produce electricity or gas on the back end of that. So I think the value proposition across the industry is phenomenal, and we're, again, a very small portion of people's cost structure, so that creates a lot of pricing opportunity. I think if you kind of come down a level and look at our company, we focused really hard on customer mix. Some customers are very price sensitive, and we are underpenetrated in that part of the market, overpenetrated and customers who are willing to pay more for the value and then have a lot of tools and sophistication in terms of how we price customers to make sure that they not only take the price, but they stay forever. Stephanie Benjamin Moore: Got it. I appreciate it. And then just one follow-up on the M&A commentary. I appreciate the look into 2026. I wanted to also gauge your appetite and maybe doing a larger deal M&A at this time, whether in solid waste or within ES? Jon Vander Ark: Yes. We will maintain a perspective on everything, all right, as fiduciaries of the business on that front. And I wouldn't say anything is impossible. I'd also say our focus is on small- and medium-sized deals as we look into the rest of 2025, but even in the '26 and '27, and feel like we've got a very strong pipeline both in Recycling & Waste and ES. Operator: The next question will come from Shlomo Rosenbaum with Stifel. Shlomo Rosenbaum: I just want to get straight a little bit about the commentary about things getting better in ES towards the end of the quarter. How much of it is your figuring out the issues with the pricing in specific areas? And how much of it is finding kind of a bottom and starting to improve? And then I just wanted to ask you a little bit about the pricing just in general. Do you feel like you figure out where you're getting it not exactly on the mark, and is there a thought that we've kind of gotten to the point where we've -- the outsized pricing is kind of behind us? Or is it really just those emergency response type stuff is really the only place where you feel like you've pushed it too far? Brian Delghiaccio: Yes, maybe let me start at the end. I think we've taken up margins fairly dramatically since we closed the US Ecology acquisition. So tremendous progress, and that wasn't all priced, but a lot of that was price. And we think there's certainly more room to go. We're facing, obviously, a very challenging demand environment. And so getting that balance right get primarily on event-based work, but it's certainly an opportunity for us and the team. Part of this is just the -- this industry itself is at a different stage of evolution and maturity than the Recycling & Waste industry, where we've been in Recycling & Waste a long time in terms of the tools, sophistication, commercial capabilities of our sales team to get that balance just right to try to win the job of maximize price. And we're still climbing the ladder on the environmental solutions side of the business. And then if you work your way back into what kind of momentum we're seeing, I think we are seeing certainly a stabilization of the overall market, not strength and rapid recovery, but a stabilization. And then you layer on top of that, again, our level of speed. We're getting very, very dialed into specific opportunities. And those 2 things together give us a positive outlook. Shlomo Rosenbaum: Okay. And then just overall on the pricing, you said you've taken a lot over there. Would you say you're still in early innings, mid-innings, where do you feel you are in terms of that opportunity ex the area where you're kind of recalibrating right now? Jon Vander Ark: Yes. I'd say longer term, we still think these assets are under price, right? These assets -- on the post-collection side, these assets are impossible to replicate, right? And we sell things here rather than price by the ton oftentimes by the pound or sometimes by the ounce. And so we think there's plenty of room to go. We've also said this isn't going to be a straight line of progress. There's going to be ebbs and flows on our path. And so in any given quarter, like the one we just saw, there might be a little bit of pullback. And I think if you measure this thing very narrowly quarter-to-quarter, I think you're going to miss the picture. If you measure it year-over-year, I think you're going to get a much better view of where we think progress in this business goes. Operator: Next question will come from William Grippin with Barclays. William Grippin: Just wanted to come back to the union contract settlement here. Was there any impact, I guess, from the strikes on revenue in the quarter. I know you made the adjustment to EBITDA, but just wondering if there was any impact on the revenue side. And then any sort of outlook in terms of cost inflation in '26 related to that contract sort of relative to your expectations and your commentary? Brian Delghiaccio: Let me take the first part there. So there was an impact on revenue. There was a recognition of about $16 million worth of credits, which reduced the reported revenue. Now when you look at adjusted EBITDA, while we didn't adjust the revenue, we did include those credits in the adjusted EBITDA. So the add back of $56 million includes those $16 million worth of revenue credits in order to drive adjusted EBITDA. In terms of the longer-term impact on labor, we think the answer is no. We work very hard, whether our frontline people are represented by union contract or not that we're keeping them in line, and we want our people to be amongst the best paid in the local markets in which they operate. But it's very critical for us to make sure that they're not out of market. And when people get out of market, right, it hurts everybody. We lose work, and we ultimately have to let go of drivers and technicians. So getting that number right is important to us, and that's why we took the stand we did this past year on the set of contracts. But going forward, we feel like we're in a very good position to maintain our price cost spread, as we talked about before. William Grippin: Appreciate that. And then just coming to the ES business. You mentioned in your pipeline, possibly having some opportunities related to M&A for ES. Any additional color you could provide there on what types of assets or services that you might be looking at? Jon Vander Ark: Sure. I certainly look for certain verticals that we're in. We'd like to get in further to life sciences and biopharma and high-tech are certainly attractive to us, and we've got great positions regionally but not in every region. There's 20 field services locations geographically, where we have really strong footprints in Recycling & Waste but don't have a field services location. That creates an immediate cross-sell opportunity for us. And then we're always interested in any post-collection assets. Anything with infrastructure, we feel is very attractive to the network as well. Operator: The next question will come from Tony Bancroft with Gabelli Funds. George Bancroft: Great job on the quarter. I know I'm sort of beating a dead horse here. But with M&A game plan, maybe another way to look at it, it's obviously a huge draw of energy demand with data centers. Any thoughts maybe just a longer-term view or vision of M&A in sort of in that space with E&P or energy based? Or is it more the traditional stuff. Maybe you could talk about that a little bit. Jon Vander Ark: Yes. That will certainly help us on the margins. Those things get constructed. There's opportunities around earthmoving and soil and remediation opportunities. And then listen, our landfills, less than half of them have landfill energy projects on them. And could those projects be electric based kind of back to the future in the sense that that's where we serve those projects, and it's been all RNG over the last few years. We're certainly exploring some technologies around getting after lower flow sites, smaller landfills. And electricity projects might be part of that, and that might be feed into that grid. I'd say from a macro standpoint, we don't participate -- those facilities don't create a ton of ongoing waste and recycling or environmental solutions opportunities once they're up and constructed. But during the construction phase, we'll certainly participate. Operator: At this time, there are no further questions. I would like to turn the call back over to Mr. Vander Ark for closing remarks. Please go ahead, sir. Jon Vander Ark: Thank you, Chuck. Before we conclude today's call, I want to take a moment to recognize the great work of the entire Republic Services team. The team's commitment to safety, sustainability and providing outstanding service continues to drive our performance. We are confident in our strategy, our people and our ability to continue delivering value to our customers, communities and shareholders. Have a good evening and be safe. Operator: Ladies and gentlemen, this concludes the conference call. Thank you for attending. You may now disconnect.
Operator: " Phillip Yeager: " Kevin Beth: " Scott Group: " Wolfe Research Bascome Majors: " Susquehanna Financial Group Unknown Analyst: " J. Bruce Chan: " Stifel, Nicolaus & Company Jonathan Chappell: " Evercore ISI Institutional Equities Brian Ossenbeck: " JPMorgan Chase & Co Brady Lierz: " Stephens Inc. Daniel Moore: " Robert W. Baird & Co. Elliot Alper: " TD Cowen Michael Triano: " UBS Investment Bank Brandon Oglenski: " Barclays Bank PLC Operator: Hello, and welcome to the Hub Group Third Quarter 2025 Earnings Conference Call. Phil Yeager, Hub's President, Chief Executive Officer and Vice Chairman; and Kevin Beth, Chief Financial Officer and Treasurer, are joining the call. [Operator Instructions] Statements made on this call and in other reference documents on our website that are not historical facts are forward-looking statements. These forward-looking statements are not guarantees of future performance and involve risks, uncertainties and other factors that might cause the actual performance of Hub Group to differ materially from those expressed or implied by this discussion and therefore, should be viewed with caution. Further information on the risks that may affect Hub Group's business is included in the filings with the SEC, which are on our website. In addition, on today's call, non-GAAP financial measures will be used. Reconciliations between GAAP and non-GAAP financial measures are included in our earnings release and quarterly earnings presentation. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to your host, Phil Yeager. You may now begin. Phillip Yeager: Good afternoon, and thank you for joining Hub Group's third quarter earnings call. Joining me today is Kevin Beth, our Chief Financial Officer, and Garrett Holland, our Senior Vice President of Investor Relations. Before we begin our review of the current market and Hub Group's performance, I wanted to thank all of our team members across North America for their constant effort and focus on delivering for our customers and organizations in this evolving environment. I'd like to begin by discussing near-term market conditions and our current viewpoint on supply and demand dynamics. International shipping volume was pulled forward in the third quarter, but we did not see that inventory materially begin to impact domestic shipping until following the Labor Day holiday. This has led to a delayed West Coast peak season from what we originally anticipated. Strong West Coast shipping demand in September continued through October, and our customers are indicating that will be maintained into November, which is much closer to typical seasonality. We believe that the recently established regulatory requirements in our industry will be a positive catalyst to balance the supply of capacity and with active enforcement and demand strength should lead to improving market conditions over time. These factors, along with our investments in our intermodal business and the prospects of a Transcontinental Rail merger are creating a more positive framework for 2026 bid season and beyond. As we referenced in our call last quarter, we are excited about the opportunities that a potential merger between our primary rail partners presents to drive increased intermodal conversion in shorter-haul lanes while growing share gain opportunities due to reduced transit times and improved service performance. These improvements would enhance asset utilization and in aggregate, reduce overall costs, leading to significant opportunities for growth. In the current market, rail services remain strong, and we are excited about the new lanes we are offering our customers in conjunction with our rail partners. In particular, the launch of a new integrated service in Louisville has led to conversion of existing volumes running less efficiently over Chicago and new customer wins in a short time frame. We believe we are well-positioned to drive growth in the months ahead as bid season kicks off and over time, as the merger process progresses. We have remained focused on our strategic priorities and executed well in the third quarter. We closed on the acquisition of Marten Transport's Intermodal division, adding scale to a fast-growing and higher-margin segment of our Intermodal business. We also closed on the acquisition of SITH LLC, adding additional full-service locations and scale in Final Mile. We completed these while returning capital to shareholders, executing on our cost reduction program and maintaining excellent service for our customers. In ITS, we delivered strong results with revenue that was slightly up and operating margins that improved 20 basis points year-over-year due to strength in Intermodal, which was offset by declines in Dedicated. We performed well in Intermodal with slightly improving volumes following double-digit growth in the third quarter last year as we are providing an excellent value proposition with our rail partners. As mentioned, peak volumes were not recognized in the quarter until September and have continued into the fourth quarter despite a pull forward of inventory. Transcon volumes declined 1%, Local West declined 2%, Local East declined 12%, while we grew Mexico nearly 300% and our refrigerated business 55% in the quarter. Revenue per load increased 2% due to improved mix, peak season surcharges and more balanced pricing. We have also reduced costs in our network through lower linehaul costs, improving our in-sourced trade percentage by nearly 700 basis points and decreasing our maintenance and repair costs through higher in-sourcing levels. These improvements were offset by headwinds and repositioning costs to support peak demand at the end of the quarter and higher insurance costs. Overall, we are pleased with the momentum in our Intermodal business and the investments we are making to deliver growth. In Dedicated, higher volumes and revenue per tractor per day with core customers was not able to offset lost sites, impacting both revenue and profitability. We reduced equipment, maintenance, insurance and third-party carrier costs while onboarding new business in the quarter, which helped to balance revenue headwinds. We are actively reallocating assets in preparation for growth with new and existing customers and believe that our high-end service capabilities, geographic density and dynamic model position us well for growth in the current market and the shifts in capacity occur. In the logistics segment, revenue declined 13% year-over-year, but we were able to improve operating margins by 10 basis points as our cost containment initiatives and performance in Final Mile and managed transportation helped to offset headwinds in brokerage. Last quarter, we announced significant onboardings in our Final Mile business totaling $150 million in annual revenue. Those onboardings are taking place now, and we are ramping volumes consistent with our expectations. The timing of the start-ups was delayed, but we are excited with the growth we are having with our customers as well as the integration of our most recent acquisition. These onboardings are helping to offset softness in our legacy Final Mile customers and position us well for strong growth in 2026. In CFS, we are executing on in-sourcing space in our remaining third-party locations with a focus on maximizing our space utilization, which improved by 1,400 basis points year-over-year while delivering improved site productivity. The integration will be completed by the end of the first quarter of 2026 and along with new onboardings we brought on in September and have scheduled in the fourth quarter, will help drive further improvements in our margins. In brokerage, we continue to face headwinds with soft demand and limited spot market activity. We executed on a restructuring of the business during the quarter, which reduced costs and enhanced productivity by 7% year-over-year, while focusing our team on higher profitability areas to serve our clients. Volumes declined 13% and revenue per load was down 5% in the quarter. However, we believe the actions we are taking to right-size our business and focus on revenue quality will position us for success in the future. Managed Transportation has performed exceedingly well, and we have new onboardings we recently signed, which will help deliver further growth. Our productivity has improved over 50% year-over-year, enhancing our margins due to our investments in automation and technology. We are excited about the momentum we have in this business due to the savings and visibility enhancements we are delivering to our customers. We are focused on controlling what we can control in this dynamic environment. We are reducing costs while investing in our business to deliver results in the near and long-term through our scale and integrated product offering. We are excited about the performance that our team is delivering and believe we are well positioned as an organization to support our customers and deliver for our shareholders. With that, I will hand it over to Kevin to discuss our financial performance. Kevin Beth: Thank you, Phil. I will walk through our financial results before commenting on our outlook. Our reported revenue for the third quarter was $934 million. Revenue decreased by 5% compared to last year but increased 3% sequentially. ITS revenue was $561 million, which is slightly greater than prior year's revenue of $560 million as steady Intermodal volume and 2% growth in revenue per load was partially offset by lower Dedicated revenue in the quarter. Additionally, lower fuel revenue of approximately $8 million negatively impacted the top line. The logistics segment revenue was $402 million compared to $461 million in the prior year due to lower volume and revenue per load in our brokerage business, exiting of unprofitable business and select customer attrition in CSS and sub-seasonal demand in Managed Transportation and Final Mile businesses. Lower fuel revenue of $6 million in the quarter also contributed to the decrease. Moving down the P&L. For the quarter, purchase transportation and warehousing costs were $684 million, a decrease of $56 million from prior year due to strong cost controls as well as lower rail and warehouse expenses. This resulted in a 180-basis point improvement on a percent of revenue basis when compared to Q3 of 2024. Salaries and benefit expenses of $143 million were stable compared to the prior year as the impact from the EASO transaction offset expense initiatives. Total legacy headcount, which excludes acquisition employees, drivers and warehouse employees declined 5% from the prior year as we continue to manage headcount across the organization. Depreciation and amortization decreased $1 million over Q3 2024 due to our updated useful life assumptions. Insurance and claims expense were largely unchanged from prior year as we continue to realize benefits from our safety focus and training programs. Our general and administration expenses declined by $3 million or 9% year-over-year. Altogether, our adjusted operating income decreased 4% year-over-year, but our adjusted operating income margin was 4.4% for the quarter and increased 10 basis points over the prior year. The IPS quarterly adjusted operating margin was 2.9%, a 20-basis point improvement over prior year. The third quarter logistics adjusted operating margin increased 10 basis points year-over-year at 6.1% despite the challenging brokerage environment and demand headwinds. Adjusted EBITDA was $88 million in the third quarter. Overall, Hub earned adjusted EPS of $0.49 in the third quarter, down from adjusted EPS of $0.52 in Q3 2024. Now turning to our cash flow. Cash flow from operations for the first 9 months of 2025 was $160 million. Third quarter capital expenditures totaled $9 million, with spending weighted towards technology and warehouse equipment investments. Our balance sheet and financial position remains strong. Through the third quarter, we returned $36 million to shareholders through dividends and stock repurchases. We also closed on the acquisitions of Marten Intermodal assets and West Coast Final Mile provider, SIS LLC during the quarter. Net debt was $136 million, which is 0.4x adjusted EBITDA, below our stated net debt-to-EBITDA range of 0.75x to 1.25x and includes the Marten transaction. Adjusted EBITDA less CapEx was $79 million in the third quarter. We are pleased with our adjusted cash EPS of $0.60. The spread between adjusted EPS and adjusted cash EPS was $0.11 for the quarter, and we ended the quarter with $147 million of cash and restricted cash. Turning to our 2025 guidance. We expect full year EPS in the range of $1.80 to $1.90 and revenue of $3.6 billion to $3.7 billion for the full year. We project an effective tax rate for the year of approximately 24.5%. We also expect capital expenditures to be less than $50 million for the year. Recall, the upper end of our prior revenue and EPS guidance ranges reflected benefits from a healthy peak season and related surcharges, along with the onboarding of sizable Final Mile business awards. Outside of quarter end activity, peak season has been muted to date rather than a stronger return to seasonality. Execution for the Final Mile awards has also been solid but start dates for some markets have shifted into the fourth and first quarters. The team continues to realize targeted cost savings, but benefits have been offset to a degree by revenue pressure. Given muted demand and continued low visibility, we tempered expectations for the fourth quarter and narrowed our outlook accordingly. This outlook implies sequentially lower adjusted EPS during the fourth quarter at the midpoint. Realizing the upper end of our revenue and EPS guidance range would reflect a strong finish to peak season. The path to the lower end of the current guidance range would reflect further weakness in freight market activity. For the ICS segment, the Intermodal business continues to cycle challenging volume growth comparisons from a year ago, but revenue per load trends should continue to slowly improve in the stabilizing pricing environment. Lost sites and customer activity in the competitive one-way market are expected to continue to weigh on Dedicated's performance. For logistics, excluding our brokerage business, during the fourth quarter, we expect further progress onboarding new Final Mile awards, sustained stronger profitability in Managed Transportation and stable CSS results sequentially. For brokerage, we expect volume pressure continues in the near term and weighs on logistics segment profitability. Market optimism to start the third quarter around the stabilizing tariff backdrop and potentially stronger peak season gave way to sustained softer demand across end markets. Nevertheless, the team was able to deliver improving margin performance year-over-year and sequentially for both the ITS and logistics segments. Hub Group is not assuming market conditions quickly change and remains focused on execution. We remain confident in achieving the targeted $50 million of cost savings on a run rate basis by the end of the year and work to continuously improve profitability across business lines. Margin improvement and solid free cash flow through this challenging freight recession underscores the resilience of our operating model. The acquisition of Marten Intermodal also reflects our disciplined approach to capital deployment. Focused growth, cost controls and capital deployment should continue to support performance until the freight market conditions improve. We continue to manage the business for long-term growth, higher returns on capital and resilient free cash flow generation. With that, I'll turn it over to the operator to open the line to any questions. Operator: I would also like to remind participants that this call is being recorded, and a replay will be available on the Hub Group website for 30 days. [Operator Instructions] Our first question is from Scott Group of Wolfe Research. Scott Group: So I think your call last quarter was like right after the UP-Norfolk announcement. And so, 3 months later, I'm guessing you've had some time to talk with customers. We're seeing some share shifts; IMC is moving some stuff around from one rail to another. I'm curious what you're hearing from customers. Do you think as you approach 2026 bid season, is there an opportunity for you guys to take share ahead of the merger closing, just sort of getting on to this combined UP-Norfolk early? Just overall, what you're hearing from customers, how you think you're positioned? Phillip Yeager: Yes. Great. Thanks, Scott. This is Phil. Yes, I think you're exactly right. We do look at some of the shifts that are occurring as an opportunity. We already have a great service product that we're delivering with Norfolk in particular, as well as GP. But with that capacity shift, there's now capacity available for us to sell into. As we enter bid season first and second quarter, we're going to have in bid over 80% of our intermodal network, and we think we have a great value proposition to go out and compete and win. I've been out visiting with a lot of customers. There is an extremely high level of engagement around this merger process. I think our customers see it as an opportunity not only to engage on new service, but a more resilient service as well as the market is likely going to be tightening given hopefully a positive demand backdrop. So, I think the announcement of partnerships and the new lanes from Louisville are a great positive for us as well and things that we can engage with our customers on. But I would tell you, the feedback is overwhelmingly positive. We're excited about it and think it positions us well for this upcoming bid season. Scott Group: Can you give an update on sort of volume trends throughout Q3, what you're seeing so far in Q4? Phillip Yeager: Yes, sure. Yes. So, we did see a little bit of a later peak than we had originally anticipated just given that air pocket and then the surge of incoming international demand. We expected that to flow through to the domestic side a little bit sooner than it did. So, July was flat. August was down 5%. September was up 6% and then October month-to-date is up 3%. And I would tell you the last couple of weeks here in October have been really strong. We're excited to see that momentum in discussions with customers. We're anticipating some of that demand will likely continue through November, leading up to the Thanksgiving holiday. I think it gets a little unclear after that. Typical seasonality would tell you things start to slow down at that point. But given the diversification we've done in our business model as a whole, that's really when we start to see our Final Mile business and e-commerce businesses start to ramp up, which can offset some of those headwinds. Kevin Beth: And Scott, this is Kevin. I just like to point out, there is a business day difference where August had 1 less business day and September had one more. So those sort of canceled each other out. But we are excited and wanted to point out, we have had 6 consecutive quarters now of intermodal growth. Scott Group: And then just lastly before I pass it on. You guys talk a lot about the free cash flow the business is generating. We've got you doing over $150 million of free cash flow this year. You're well below your leverage target and you bought back like, I don't know, $30 million or so of stock this year. Like why aren't you doing more with the cash you're generating in the balance sheet? Kevin Beth: Yes. So good question, Scott. This is Kevin again. It's our capital allocation plan that we invest in our core business, we look at acquisitions and then we look at our capital allocation and how we get back to our shareholders. We feel that we've done all of those this year. We've had -- our CapEx has been a little muted compared to some prior years as we don't need to add additional containers. But we're still seeing our same $20 million to $25 million of IT enhancements, and our tractor replacement cycle has continued on as well. We spent over $50 million in acquisitions this past quarter with the Marten acquisition and the SITH LLC. And then we're still returning to our shareholders with our dividends, which we had another $7.5 million during this quarter. So, between all of those and the exciting pipeline that we feel we have on an M&A side, we think that we are allocating our cash effectively and think that we're doing the right things for the long-term of the business. Operator: Our next question comes from Bascome Majors of Susquehanna Financial Group. Bascome Majors: Maybe to follow up on Scott's opening question here. If you're successful in using your rail alignment to really grow share next year, what's the time line of when that could really show up in volumes, gross profit, bottom line? Just trying to understand when the opportunity and conversations happen and when the financial benefit, if you're successful, will really show up for us. Phillip Yeager: Sure. Yes. This is Phil. I think if you look at our bid schedule, it's actually gotten pulled forward the last several years. And our anticipation is that this year will be similar, just given some of the unknowns, our customers are trying to make sure they lock in capacity early. We are having really good dialogue with many of our customers as they're kicking off their RFP events. We do think about, call it, 48% or so, which is similar to this year will be bid and effective in the first quarter. And then we see bid and effective, call it, another 38% in the second quarter. So, you're talking about the vast majority of that business being in RFP and being effective in the first half of the year. And so that would be likely the timeline where you'd really start to see that take hold, I would say, call it, the second half of the year. Bascome Majors: And just when you say bid and effective in the quarter, you mean by the end of the quarter? Phillip Yeager: Yes, sir. Bascome Majors: It's actually moving. Phillip Yeager: Yes. The effect of the implementations typically will kind of move throughout a quarter, but the vast majority go in at the end of the quarter and then are effective starting that following quarter. Bascome Majors: And in shorter-term, I mean, the midpoint of your guidance, which you called out, looks for earnings decline in the fourth quarter. Can you walk us through how you feel about seasonality in the first half of next year before this business potentially starts to ramp? Just to kind of level set the starting point for next year or before second half that looks like it could be very strong. Kevin Beth: Sure, Bascome. This is Kevin. We think that we're going back to more of a normalized seasonality, which has been very hard the last couple of years between COVID and tariffs and the pull forward last year on -- related to the East Coast, West Coast port authorities and strikes. So, what we're anticipating is unlike what we saw in '25 with the pull forward in the first quarter is that we would see first quarter be sequentially down from fourth quarter and potentially the weakest quarter of the year. And then you'll see the ramp-up as we hit sort of that peak season in spring for the home improvement companies. And then you have a little lull there at around the holidays, Memorial and 4th of July and then a stronger third quarter leading into the peak season that we're in now. So, a little more normalized. But again, that is something that has been a couple of years since we've seen. Operator: Our next question comes from Richard Harnan with Deutsche Bank. Unknown Analyst: So, gentlemen, we recently heard from one of your key railroad partners discussing some more aggressive competitive dynamics in association with its pending Transcontinental Rail merger. So maybe you can talk specifically about that. Are you noticing more aggressive competition? Is that allowing you to take more opportunity as maybe your rail partners lean into trying to capture more growth? Or is it making it more challenging? That's my first question. Phillip Yeager: Sure. Yes. This is Phil. Yes, I'd say it's definitely an opportunity, right? And you see volume moving off of one of our rail partners. There's certainly a desire and alignment to make sure that we can get that business back moving on their network. And we think we have a very strong value proposition to go deliver on that, both on service and costs. And so, I would tell you there's a great deal of alignment as we enter bid season and feel we're in a good position to go out and compete. Unknown Analyst: And then just could you tell us where we are with respect to like the Marten acquisition? So I think you said Kevin, down earnings in Q4. But I would think that with the Marten acquisition, you're talking about bringing that on and being accretive. So curious how that factors in and if like the volume figures you shared were inclusive of Marten, just like level set where we are in that acquisition. Kevin Beth: Yes. Thanks for the question. Yes. So, Marten, we do expect to be slightly accretive this quarter. They just came on. We closed the deal the last day of the quarter. So, we're seeing that volume today. But right now, as we look ahead, we're still not sure exactly how long peak season is going to last. We do have some late year degradation of margins in both Dedicated and in Intermodal as you're using a lot of fixed cost and not the right amount of volume to utilize all that around the holidays. So that is sort of what standard happens in the ICS segment. And then on the logistics side, we do have -- while we have new business coming on in Final Mile, we do have some start-up costs that is going to pressure that -- those margins as well. So, between those things, right now, that's our best estimate of what we're going to see here in fourth quarter. Operator: Our next question comes from Bruce Chan of Stifel. J. Bruce Chan: Maybe just to start, I want to make sure that I understand the peak comments correctly because you said that it's been stronger in September and you expect some of the strength you've been seeing through October to continue into November, but you're also tempering the midpoint of your guidance on lower peak volumes. So maybe just help me to synthesize that, if you could. Phillip Yeager: Sure. Yes. I think the main thing is follow typical seasonality would tell you around or after the Thanksgiving holiday, intermodal volumes just start to slow down. And I would anticipate a sequential slowdown from October into November leading up to that point. So, it's really just the conclusion of peak that impacts the ITS margins on a sequential basis. From a logistics perspective, the new volume and business wins that we're bringing on both in CFS as well as in the Final Mile business are helping to keep us in a more stable footprint Q3 to Q4, where we are anticipating a similar sort of impact for brokerage, which would soften in the December time frame. Now if we see things continue and November is more robust, that's certainly upside. If it continues like it did last year into December, that's certainly upside, but we were trying to build in what typical seasonality would tell you and obviously, dialogue with our customers around their expectations. But demand has been great in September. I think we did a really nice job. October was also very strong. And so, it's good to see a peak. And I would just also highlight that sets up a more positive framework for discussions as we enter this season as well. Kevin Beth: I would like to just point out, though, last year, fourth quarter, we had $4.5 million of peak season surcharges, and we're not expecting to be anywhere close to that this year. On to the point, that it went all the way through the end of the year and well into January. And really, I think that was the pull forward of the port strike. So, I don't -- we don't see that phenomenon this year. J. Bruce Chan: That's helpful. Maybe just a follow-up on that point. I guess, how are you feeling about your ability to cover any peak repositioning costs here with your surcharges just given that the volume expectations are maybe a little bit in sharper focus. And then if we do see that stronger peak materialize, are you going to have an offsetting impact on the margins? Phillip Yeager: No, no. I think we've done a really good job on our empty repositioning plan. We had some elevated costs in the third quarter, which were more than offset by surcharges, and it would be the same outcome here. And we're pretty diligent on setting those plans, making sure we have clarity with our customers on their expectations and then being in a position to support. So, I wouldn't anticipate repositioning costs have a material impact in a negative way at all. Operator: Our next question comes from Jonathan Chappell of Evercore ISI. Jonathan Chappell: Still, I want to tie a couple of things together here because it may be the most important thing, I think, as we try to transition to '26. You said 48% bid effective 1Q, 38% in 2Q. We have the potential positive tailwinds from the merger and maybe there's some clarity on it by that point, but still probably doesn't close until '27. And then on the other hand, you're kind of talking about potential slowing around the holidays, typical seasonality would have 1Q down on 4Q. So, are you expecting kind of a favorable demand backdrop that could help you with that 48% in 1Q and really kind of set the pace for yields for the rest of the year? Or is there a chance that by the time we have line of sight on a merger, it's kind of the second half of '26, and you really don't see that benefit you until bid season '27? Kevin Beth: Yes. No, I think it's a good question. I think it's obviously a little early for us to be getting into 2026. But I would tell you the level of engagement I'm getting from customers and their desire to really start to take advantage of the service opportunities that could exist now is real. To your point, yes, I think as the integration process takes place is when you're really going to see that take hold. That's going to be when you start to be able to get some of the pricing that is probably more aggressive and takes advantage of those transits as well into place. So yes, do I think it will be much more material as the merger is closed and progresses? Absolutely. But I also think we're having those discussions now and customers are certainly highly engaged. And so, there is upside opportunity in '26. I think you frame that with as well the tightening capacity backdrop likely through the regulatory requirements as well as just lower capital expenditures being below replacement levels. I think consumers getting some help with rate cuts and tax benefits. And then as I look at us more broadly, we've got a great balance sheet, great free cash flow, a ton of new business we're bringing on in Final Mile and managed trans and then the great backdrop that we have of a fantastic intermodal service product and additional cost outs. I think it's a good framework for 2026. Jonathan Chappell: And a super quick follow-up, and I think this was kind of danced around a little bit, but maybe just to speak to it directly. East down 12% you would have thought the East maybe had a little bit of a better comp because of the threat of the East Coast port strikes last year at the end of the third quarter. Is that associated with what's been happening with Norfolk and CSX? Norfolk is your partner. They've directly called out the share shift there. Is that that? Or is it something completely outside of the potential rail merger? Phillip Yeager: No. Yes, I think it's a good question. We do not believe it's associated with anything going on there. I think if you look at our volumes last year, we were up 39%, I believe, in the third quarter in local East last year. We've seen opportunities to generate really strong returns off the West Coast and been allocating capacity there. I think that Eastern market did get more competitive. But if you look at it on a 2-year stack basis, we're still far exceeding market performance. And so, I think our view is we're still doing very well, but had such significant growth last year that we couldn't quite overlap it. Yes. If you look at the 2-year growth in the East, it's 23%. So still very healthy. Operator: Our next question comes from Brian Ossenbeck of JPMorgan. Brian Ossenbeck: Maybe just to be a little more specific on the opportunities. I don't know if you would call the Louisville Lane, an example of something that might be done with the potential merger, but it did sound like that was at least worthy enough to merit the comment here on the call. Is that truckload conversion? Is that related to some of the new services? Can you get a little more detail on that? Kevin Beth: Yes, yes. I mean on Louisville, in particular, there was a business -- we were actually able to dray over Chicago, which is highly inefficient and not that competitive. So, we're able to improve service, improve the cost structure to our customers, and it's led to us converting business that was ramping Chicago, but also get some new business with customers that we weren't accessing before. So that's exciting. As we think about this watershed opportunity where we've really been at a disadvantage historically, just given transit as well as long-haul dray that isn't matched. We think the opportunity in those lanes is somewhere around 2.5 million loads. So, we're pretty excited about that opportunity as we start to structure those services and think we'll have a differentiated service to go to market with. Brian Ossenbeck: So, you would this is like an example of some potential watershed opportunities in the future. I guess, what stops from doing more of these in the near-term before you even get to the potential transaction because it looks like that wasn't a critical factor here, still put this out there? Kevin Beth: Yes, absolutely. I think it's about setting up the single line service, right? And I know there's a focus on creating those partnerships now, but at the same time, being cognizant of the process. So, I think there's certainly opportunities. We're actually in advance of this building out our local drayage network around a lot of those watershed areas. And so that's -- we're trying to make sure we're in a position where as those services are established, we're able to take advantage of them right away. Brian Ossenbeck: Just one other quick one. Can you just talk about the brokerage restructuring? I think you mentioned earlier, Phil, like what was the cost for that? How long is that going to take? And what's the end result or the metrics you're targeting coming out of that? Phillip Yeager: Yes. So, we went through the restructuring in the quarter, really didn't take effect until probably near the end. We really didn't really see -- realize much of the benefits until the end of the quarter. And that's what drove the 7% productivity. It was improvement. So, it was really about focusing our team on higher-value services, making sure that we're productive and focused and putting ourselves in a structure where we can make sure we're going after the highest return revenue quality load. And now that we're in that structure, we're very focused on automating everything we can. We've done a really nice job there, but at the same time, going after these more high-value products to help us differentiate and win. So, I think the productivity enhancement that we highlighted is just the start, and the fourth quarter should be a nice improvement on top of that. Operator: Our next question comes from Brady Lierz of Stephens. Brady Lierz: I wanted to kind of follow up on a question from earlier about uses of cash from here. You have this potential merger between your 2-rail partners that could be approved sometime in the next 18 months or so. Is there any increased investment in containers or the network that you would need to do in '26 or '27 to kind of support that potential growth? Or will that not come until after the merger is approved, if it is? Just how should we think -- or we expect you to balance investing to support that potential for increased growth versus additional M&A or share repurchases over the next 18 months? Kevin Beth: Yes. Great. Thanks for the question, Brady. This is Kevin. So, a couple of things. I'll start with the network and a couple of things that we already have underway that was happening before this. We've been upgrading our actual transportation system on the intermodal side all year, and we expect to be on the new platform full bore all of our transactions by the end of the first quarter here in '26. So that investment has been going on regardless of this. The other thing you may recall, we do have staff containers today. So, with the stack containers, and we believe that we can improve our utilization of those stack containers even before the rail merger, we think that we have 30% to 35% additional capacity already in-house. So, there's no additional container requirements for that. And then in the longer-term, as we see some of this quicker service, that will even enhance our ability to use our current fleet to handle more loads. We are seeing, as Phil mentioned, and are thinking about setting our CapEx for next year regarding tractors and replacements and exactly what our drayage network would look like. So, there are some possibilities there. And then last, like we just did with the Marten transaction, we're certainly open to other potential M&As on any intermodal opportunities that are out there if it makes sense for us. Phillip Yeager: Yes. The only other thing I'd add, I think is the drayage investments are certainly something we're going to be cognizant of and potential buildout of the network, but I don't think that's going to be overly material. But I think our strategy of diversification has certainly benefited the organization and our margins over this prolonged cyclical downturn. And so, as we look at acquisition opportunities at the bottom of that cycle, we think there are good opportunities to keep investing and while making sure that we're positioned to put capital towards the intermodal business as well. Operator: Our next question comes from Daniel Moore of Baird. Daniel Moore: Real quick question. I'm curious, from a capacity standpoint, how much excess capacity in intermodal would you say you have today? It strikes me that UPNS, assuming the proposed transaction is approved and goes through, has a very, very healthy appetite for domestic intermodal growth based on the selling points to the STB. I'm just curious how you think about that opportunity set relative to the capacity you have today? And as you explore M&A opportunities, I'm also curious, as a follow-up, what sort of leverage would you feel comfortable taking on? Phillip Yeager: Thank you. Great questions. Yes. So, I think on the capacity side, if you look at just our stacked containers as they say, it's about 25% of the total fleet. If you then go to -- with just slight utilization improvements that are in line with where we should be operating, that's about another 10% incremental, so 35% capacity. And if we then get reduced transit times, in particular on some of these transcontinental lanes, we think that could be potentially an additional 10% capacity availability. So, you're looking at some significant capacity available for us to absorb growth without having to put additional capital into containers. And I think we're excited about what that could mean for us and the operational leverage that we would have through that. On the acquisition side, I think we've trying to be very targeted, and we try to be very thoughtful in our approach and make sure that it's a good cultural fit, that it aligns with our strategy and that the business is complementary to the organization and is going to be able to be integrated effectively. I think we're currently obviously below our leverage target and -- which is, call it, 1x our net debt-to-EBITDA range. And I think we'd be willing to go up to 2 if we found the right transaction and then be -- make sure that we're in a place where we could delever very quickly once we got to that point. Kevin Beth: Yes. I'd just like to add, so right now, we have net debt of $136 million. As Phil said, we are willing to leverage up. We did in the second quarter, renewed our revolver and increased that by $100 million as we want to be agile. And if a good opportunity comes that we could act fast. I think we're known in the market as a good M&A partner. And so, we want to be able to take advantage of deals that come up. Operator: Our next question comes from Jason Seidl of TD Cowen. Elliot Alper: This is Elliot Alper on for Jason Seidl. Maybe just one question on Final Mile. Can you talk about the new business wins ramping up, why some of those are shifted maybe into the fourth quarter or into next year as well as some more detail on sub seasonality you're seeing in your legacy business? And ultimately, is housing the real kicker for this segment to materially gain traction into 2026? Phillip Yeager: Well, yes, the housing segment coming back to life would be a huge benefit to this business. And we have gotten some really good builder wins with customers. So that's great, and it's good to see the positive signs there. On the ramp, we were displacing existing providers. And I think with customers, they want to be cautious in making sure there's no disruption to their business as those transitions take place. And so really no more complicated than we had aligned on a schedule and just in being cautious and making sure that the transitions go well. They were moved out slightly. As we have onboarded the business and the vast majority has been coming in, in October, we have seen it ramp to what we thought, which is great. Oftentimes, you think that spend -- the award might be much higher than reality. But in these instances, it's really met our expectations, and some exceeded them as we head into Black Friday. So yes, so we're pleased with how that business is performing. We need to go out and execute for our customers, and it will definitely offset some of that softness, as you mentioned, just with the broader housing market. Operator: Our next question comes from the line of Tom Wadewitz of UBS. Michael Triano: This is Mike Triano on for Tom. So, revenue per load in intermodal was up year-over-year in 3Q for, I think, the first time since 1Q of '23. It sounds like mix and surcharges played a factor. But do you have any early thoughts on '26 and where conversations could be starting the year from an intermodal pricing perspective? Kevin Beth: Yes. I think as we're starting bid season, I don't think a ton has changed, right? It's still a competitive environment. Head haul rates, you're able to take rates up. Backhaul rates are still quite competitive. We have a really good service product and value proposition. And I think we're being really targeted with our rail partners on what we want to go after and being explicit with our customers on that. Only other thing I'd just highlight again is that our customers are really engaged in this merger process. And as they're looking at the potential for capacity tightening, they want to think about how can they build resiliency into their supply chain. And we think that working with us and converting business to intermodal is a great way to do that. And at this point, there's still a very good value proposition that's on the table. So yes, so I would say, generally feeling pretty good about where this season is kicking off. Michael Triano: Are customers bringing up the non-domiciled CDL and ELP issue? Like do you think that there's interest to potentially convert more volume to intermodal next year in case truck capacity does tighten. Kevin Beth: Yes, absolutely. I mean I think if you look at it, it's not that it's going to happen overnight, but there is organic exits that are already taking place. You see the CapEx Numbers and Class 8 orders being under replacement levels is something to watch as well. And then you throw the language proficiency, the non-domiciled CDL regulations on top of that, it's incremental and continues to move things along. So once again, it's not overnight, but if demand holds up and the consumer stays resilient and you see this capacity continue to attrit at a faster pace, you could be into more of a tightening cycle, and I think it's certainly in the mind of our customers. Operator: Our next question comes from the line of Ravi Shanker of Morgan Stanley. Unknown Analyst: This is Madison on for Ravi. Just first off, I know there's been a lot of focus on tech and AI, particularly in the logistics business, but also kind of just across the industry. I was wondering if you can speak a little bit about the initiatives you have underway and how they differentiate you versus peers. Phillip Yeager: Yes, sure. So, this is Phil. We have a really good ROI focus and process when we look at investments in technology. Last several years, it's been a focus on establishing the right foundational technologies. And as we've gotten those in place with our businesses, we're then really able to layer in automation. I think this quarter, one that really stands out is our managed transportation business, where you see a 50% improvement in year-over-year productivity. And that's because we enable that team with technology, and they're able to automate tasks and be closer to our customers and take on more through that process. So that's one, I think, great example. Our Final Mile business where we have our call centers is highly automated within our brokerage, we're really focused on our pricing and capacity generation as well as track and trace functions, appointing functions. All those are highly automated processes. And then the last one that I think has really been beneficial to our team here at Hub and just our general productivity is in the communications with our drivers and going in identifying where a lot of those communications and touch points are happening and automating those to put the data and utilize all of our devices to make the right decisions and then having our teams then focus on the exceptions versus touching every single one of those points. So, we believe we have a great road map. It's about getting those foundations in place first and then really attacking those automation opportunities as we can identify them. Unknown Analyst: And then maybe this isn't as much of a dynamic for you guys, but just wondering if you're seeing at all any kind of impact from the government shutdown? Phillip Yeager: No, not at this time, no. I mean we have such a consumer-oriented business. We haven't seen an impact. Operator: Our last question comes from Brandon Oglenski of Barclays. Brandon Oglenski: And Phil, I know you said it's not going to happen overnight, but I think there's a certain Twitter Ranger out there that might disagree every other night. I'm not sure. But I guess maybe along those lines, it looks like -- I mean, your commentary sounded better on the bid season in the next year, and maybe you want to clarify that, but maybe we can finally get traction on pricing and get margins higher for the industry, too, not just your business. But if we roll into next year and it's like another year of very low-rate increases, do we have to start thinking, hey, this is the fourth year and GDP is up? Like what do we do differently as a business to try to secure better profitability, better returns? Phillip Yeager: Yes. No, I completely agree. And I think that's what our mantra here has been focused on controlling what we can control. Let's not worry about the cycle, and that's why we're utilizing our balance sheet to invest in growth. We're focusing on taking costs out and driving productivity. We're focused on growing with our rail partners, bringing on new wins across all of our offerings. I think we are really just going out and executing with the mindset that, yes, we aren't going to get cyclical help. And if we do, then that is upside, and we're ready to take advantage of that. But we're certainly not going to be sitting around hoping that, that is the thing, the catalyst that helps improve earnings. We're taking the actions right now, in my view, to position Hub to perform regardless of what the cycle does next year. Brandon Oglenski: And maybe I'll push this a little bit harder, though, but you did sound maybe a little bit more upbeat on the bid process into next year. Should we take that as maybe potentially better pricing? Phillip Yeager: Yes. Yes, absolutely. I think there's definitely that opportunity. I think we want to see that capacity tighten. We certainly want to get our foundational network established at the front end of bid season. That's important to make sure we keep winning in balanced lanes, and we do see great opportunities in the head haul right now. So yes, I mean, there's certainly that opportunity. We want to make sure we're driving growth but also making sure we're repairing our margins. So as the pricing opportunity is there, we will certainly be attacking it as well. Operator: I would now like to turn the conference back to Phil Yeager for closing remarks. Phillip Yeager: Great. Well, thank you so much for joining our call this evening. We appreciate your time. And as always, Kevin, Garrett and I are available for any questions. Thank you so much, and have a good evening. Operator: Ladies and gentlemen, this concludes today's conference call with Hub Group. Thank you for joining, and you may now disconnect.
Operator: " Daniel Sampieri: " Cashel Meagher: " James Whittaker: " Raman Randhawa: " Wendy King: " Peter Amelunxen: " Ralph Profiti: " Stifel Nicolaus Canada Inc., Research Division Orest Wowkodaw: " Scotiabank Global Banking and Markets, Research Division Dalton Baretto: " Canaccord Genuity Corp., Research Division Fahad Tariq: " Jefferies LLC, Research Division Daniel Morgan: " Barrenjoey Markets Pty Limited, Research Division Craig Hutchison: " TD Cowen, Research Division Adam Baker: " Macquarie Research Anita Soni: " CIBC Capital Markets, Research Division Marcio Farid Filho: " Goldman Sachs Group, Inc., Research Division Operator: Good afternoon, and welcome to Capstone Copper's Q3 2025 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, October 30, 2025. I would now like to turn the conference over to Daniel Sampieri. Please go ahead. Daniel Sampieri: Thank you, operator, and thank you, everyone, for joining us today to discuss our third quarter results. Please note that the news release and regulatory filings are available on our website and on SEDAR+. If you are logged into the webcast, we will advance the slides of today's presentation, which are also available in the Investors section of our website. I am joined today by our President and CEO, Cashel Meagher; our SVP and Chief Operating Officer, Jim Whittaker; and our SVP and Chief Financial Officer, Raman Randhawa. During the Q&A session at the end of the call, we will also be joined by our SVP, Risk, ESG, and General Counsel, Wendy King; and our Head of Technical Services, Peter Amelunxen, who are available for questions. Please note that comments made today on the call will contain forward-looking information within the meaning of applicable securities laws. This information, by its nature, is subject to risks and uncertainties, and actual results may differ materially from the views expressed today. For further information, please see Capstone's most recent filings, which are available on our website at www.capstonecopper.com. And finally, I'll just note that all amounts we will discuss today are in U.S. dollars unless otherwise specified. It is now my pleasure to turn the call over to our President and CEO, Cashel Meagher. Cashel Meagher: Thank you, Daniel, and hello to all of you dialing in from the Americas, Europe, Australia, around the globe. Today, we are pleased to present our third quarter 2025 results and achievements. Q3 was marked by several key catalysts on our path towards transformational growth. This included sanctioning and beginning construction on our Mantoverde optimized project, which will deliver near-term production growth at our flagship asset through a capital-efficient brownfield expansion. This also included announcing a minority joint venture agreement with Orion Resources Partners at our Santo Domingo project, representing a major milestone towards unlocking the value of the Mantoverde Santo Domingo district. At the same time, we continue to strengthen our pipeline through exploration in support of our commitment to building a world-class long-life copper district in the Atacama. We achieved encouraging results from Phase 1 of a 2-year drill program at Mantoverde and announced a new exploration program at Santo Domingo and Sierra Norte. While we increased production to meet the growing global demand for copper, we remain committed to doing so responsibly. Earlier this month, we were pleased to publish our 2024 sustainability report, which demonstrated steady progress on our sustainable development strategy. We also received the Copper Mark award at our Pinto Valley site in recognition of responsible production practices in one of the oldest mining districts in the United States. As we execute our strategy in a responsible and safe manner, we continue to focus on operational excellence at our existing operations, as highlighted on Slide 5. In Q3, our operations delivered consolidated copper production of 55,300 tonnes at a consolidated C1 cash cost of $2.42 per pound. This is the third quarter in a row that our team has delivered lower cash costs, especially during times of strong commodity prices. Cost control across the business ensures that margins are protected and incremental value is returned to our shareholders. Our Mantoverde site experienced higher-than-normal downtime this quarter, primarily due to motor failures in the ball mill, in addition to 5 days of planned maintenance. Our team worked collaboratively with third-party experts to return Mantoverde to full operating rates sooner than initially anticipated and continues to advance a remediation strategy to mitigate the potential for future impacts. The lower throughput during the quarter was partially offset by record recoveries as we continue to progress towards design levels. We look forward to demonstrating the full potential of Mantoverde over the remainder of '25 and into 2026 as we enhance the consistency of operation, execute on Mantoverde optimize, and progress our exploration strategy. At Mantos Blancos, we achieved another quarter of strong production and cash costs despite slightly lower throughput due to maintenance completed during the quarter. Arizona continued to experience severe drought conditions in Q3, which resulted in constrained throughput at our Pinto Valley mine. In the near term, we are focused on the implementation of our asset management framework to achieve stable operations at Pinto Valley. Longer term, we remain committed to unlocking the significant value of Pinto Valley and assets strategically positioned in the United States with over 1 billion tonnes of resources. At Cozamin, we saw another steady quarter with strong production and low unit costs. Based on our operating performance over the first 3 quarters, we have reiterated our production and cost guidance. We expect total copper production to finish within the lower half of the range and cash costs to finish within the upper half of the range for 2025. We are positioned well for a strong finish to the year. Amidst strong commodity markets, we look forward to demonstrating reliable copper production, lower costs, and strong cash flow generation while continuing to advance our production growth opportunities in preparation for a strong 2026. And with that, I'll pass over to Raman for our financial results. Raman Randhawa: Thank you, Cashel. We are now on Slide 6. In Q3, strong copper production and commodity prices drove record quarterly revenue of $598.4 million. We note that copper sales were around 2,600 tonnes above payable production levels, primarily due to timing of sales at Mantos Blancos. LME copper prices averaged $4.44 per pound in the quarter, up 3% compared to $4.32 per pound in Q2, and we realized a slightly higher copper price of $4.49 per pound. LME copper prices are even stronger today at just above $5 per pound. With over 90% of our revenue derived from copper, we stand to benefit significantly from higher copper prices. C1 cash cost of $2.42 per pound decreased by $0.03 from last quarter and by $0.42 compared to Q3 last year, marking the third quarter in a row our team has achieved lower cash costs. Solid production and cost control allowed us to realize strong gross margins of $2.07 per pound or 46% in Q3, which represents a 7% increase over Q2. By protecting margins, we can ensure that benefits from strong commodity prices flow through to our bottom line. Record adjusted EBITDA in Q3 of $249.2 million increased 106% year-over-year, driven by higher copper production, lower cost, and stronger copper prices. This is the fourth quarter in a row we've generated record EBITDA as we continue to realize the benefits of our recently ramped-up mines in Chile. We also reported strong operating cash flow of $231.2 million before working capital changes. Net operating cash flow of $153.4 million was impacted by adjustments of $77.8 million, largely due to a buildup of accounts receivables at Mantoverde and Mantos Blancos. We also reported adjusted net income attributable to shareholders of $49.4 million or $0.06 per share in Q3. As you can see from our financial highlights, we achieved record results in a number of areas, representative of a commitment to operational excellence across our organization. Moving on to Slide 7. On the bottom left-hand side, we summarize our available liquidity, which as at September 30 was greater than $1 billion, including $310 million of cash and short-term investments and $761 million of undrawn amounts on our corporate revolving credit facility. We finished this quarter with a consolidated net debt of $726 million. In Q3, we continue to see our net leverage decline with our net debt-to-EBITDA ratio of 0.9x at the end of Q3. This is the seventh quarter in a row we have seen improvements to this metric as we deleverage our balance sheet ahead of Santo Domingo. The chart on the right-hand side of the page illustrates our EBITDA sensitivity of various copper prices based on our 2025 forecast, as well as upside related to MVL and Santo Domingo at run-rate production. The level of EBITDA generation will enable us to continue to generate cash to delever our balance sheet, further enhancing our financial position. For the balance of the year, a 10% change in copper prices impacts our EBITDA by approximately $50 million. And at these production levels, a 10% change impacts EBITDA by close to $200 million over a full-year basis. Now I'll hand it over to Jim Whittaker for the operations review. James Whittaker: Thanks, Ryan. We are now on Slide 9, where we will first run through our Mantoverde operation. Total production yielded 23,769 tonnes of copper at a record low combined C1 cash cost of $2.27 per payable pound. In Q3, plant throughput averaged 27,500 tonnes per day, which, of course, was impacted by the ball mill molded failures we had previously disclosed and 5 days of planned maintenance. As a result of an investigation with third-party experts and the manufacturer, we now understand that the failures were caused by an issue with a part within the motors called the exciter. We have been focused on repairing the failed motors and remediating the remaining motors while also implementing further protections to avoid potential future failures. This has resulted in a bit of additional downtime in October. But now as we sit here today, we have completed the required repairs on all 5 motors, including 2 in the ball mill, 2 in the SAG mill, and 1 spare, and with another spare ordered and on the way as additional contingency. We are eager to get back above design throughput levels consistently, especially now that we are not constrained to 32,000 tonnes per day from a permitting perspective. Copper grades averaged 0.7% in Q3, with the highest grades of 0.81% occurring in September. Importantly, during Q3, we achieved record recoveries of 85.8%. July had lower recoveries as we finished mining through the transition zone, similar to what we experienced in Q2. In August and September, recoveries significantly improved as we progressed to predominantly sulfide ore zones. It is also worth noting that recoveries starting from late August were impacted by the processing configuration where we bypassed the ball mill because of the motor failures. Using only the SAG mill resulted in a coarser grind and overall lower recoveries. So we are quite pleased with the performance on the recoveries this quarter and believe we are well-positioned heading into Q4 and 2026. Mantoverde is trending towards the lower end of its asset level production guidance range and the upper end of the cost guidance range for 2026. This is primarily due to downtime associated with the motors and impacts from mining through the transition zone earlier this year. In Q4 specifically, we are expecting throughput just below 30,000 tonnes per day average. Moving now to Slide 10. We wanted to provide a status update on the Mantoverde optimized project. After receiving the permit approval from the Chilean authorities in July, we announced project sanctioning in August and began construction. MV Optimize is an extremely attractive project for us, adding 20,000 tonnes per year of copper production at a low capital intensity of around $9,000 per tonne. Our capital cost of $176 million, and our scheduling expectation for the project remains unchanged. In 2026, we are expecting an additional 10 days of maintenance currently planned for Q3 in order to complete the final tie-in of infrastructure required for MVO. We then plan to ramp up through and during Q4 with a goal to achieve consistent 45,000 tonnes per day throughput rate in early 2027. We look forward to progressing construction to unlock near-term production growth at our flagship asset. Now moving north to Chile. Mantos Blancos continued to deliver strong results in Q3, as highlighted now on Slide 11. Total sulfide and cathode production yielded 15,417 tonnes of copper at C1 cash cost of $2.24 per payable pound. Throughput averaged 18,100 tonnes in Q3, slightly below design levels as a result of maintenance. As we continue to work through our Mantos Blancos Phase 2 study, the team on site was able to continue to push the plant, reaching an individual maximum daily throughput over 28,000 tonnes per day in September. As a result of strong throughputs and recoveries year-to-date, which we expect to continue through Q4, Mantos Blancos is trending towards the upper end of its production guidance range and the lower end of its cost guidance range for 2025. Turning to Pinto Valley on Slide 12. We produced 9,949000 tonnes of copper during Q3, lower than we had expected as the severe drought in Central Arizona continued for longer than we had anticipated. The lower production level is based on operating at only 2/3 availability with only 4 of 6 mills online for the majority of the quarter, driven by these water constraints. The lower throughput was partially offset by stronger grades and recoveries compared to Q1 and Q2. I am very pleased to report that throughout October, water levels were high enough to support a ramp-up to full availability with all 6 mills now operational. We are committed to mitigating the impacts of drought at Pinto Valley through a number of initiatives that are ongoing. This includes improving on-site water infrastructure, evaluating potential agreements with other closed mines in the area that have impacted water, which could be used in our operations, and also leadership changes to improve the tactical focus. For Q4, we are expecting throughput to average around 50,000 tonnes per day after accounting for the performance in October. When combined with the performance through the first 3 quarters, Pinto Valley is trending below the lower end of its production guidance range and above the higher end of its cost guidance range. The focus of the current U.S. administration on growing domestic copper production has provided further endorsement for the strategic value of Pinto Valley. We remain committed to unlocking the value of the significant resource at Pinto Valley through the evaluation of the upside opportunities on our land package and within our broader district. In the meantime, we will continue to improve the reliability of the plant to drive higher production and lower costs through our asset management framework. Moving to Slide 13. Building on the success of the first half, Cosmin delivered another quarter of solid results in Q3, producing 6,145 tonnes of copper at C1 cash cost of $1.51 per payable pound. Cosmin is tracking towards the upper end of its production guidance range and the lower end of its cost guidance range for 2025. We continue to conduct exploration at Cosmin to evaluate the potential for mine life extensions or for potential improvements to the production profile. And with that, I'd like to pass it back to Cashel. Cashel Meagher: Thanks, Jim. Turning to Slide 15. We recently announced a joint venture agreement with Orion Resource Partners at Santo Domingo. This transaction represents the culmination of a competitive process to select the premier partner that will assist Capstone in unlocking the considerable value at Santo Domingo. Through this next phase of a long-standing partnership with Capstone, Orion will contribute up to $360 million for 25% of the Santo Domingo project. They will also contribute their pro rata share of project CapEx. Included in the total consideration is a base purchase price of $225 million at FID, a further $75 million 6 months later, and a $60 million in contingent payments based on certain milestones. We believe the established contingent milestone thresholds are very achievable and endorse the value we expect to continue to create by increasing the copper production profile and bringing on byproduct cobalt production. In our view, an extremely valuable part of this transaction is the buyback option, which allows us to reconsolidate 25% of Santo Domingo for a predetermined price based on a return threshold applied to Orion's contributions. We view this as a call option for Capstone and one that is likely to be accretive for our shareholders, especially in a rising copper price environment. Orion has also subscribed for $10 million in equity, which will be used to fund new exploration program targeted at the areas eligible for contingent payments. I'm proud of our team for reaching an agreement that realizes significant value and derisks our project funding requirements while also retaining future optionality through a buyback option. Turning to Slide 16. We have outlined the path towards sanctioning Santo Domingo with the required permits in hand, the feasibility study published last year, and a joint venture agreement reached. We will continue to progress the remaining work streams in parallel towards a sanctioning decision in the second half of 2026. Next steps include securing project financing, which has already kicked off and is expected to take 12 months. We also plan to continue to progress detailed engineering, targeting closer to 60% ahead of sanctioning, while also advancing the upside opportunities and potential district optimizations. From a Capstone corporate perspective, we will continue to strengthen our balance sheet through internally generated cash flows and reduce our net debt leverage further prior to a sanctioning decision. Having recently completed the Mantoverde development project, 35 kilometers away, we are extremely well-positioned to execute on the Santo Domingo project. In pursuit of our vision to build a world-class long-life copper district in Chile's Tier 1 Atacama region, we are unlocking value through the drill bit as shown on Slide 17. Supported by an expanded budget for 2025 of $40 million, we continue to advance the initial 2-year exploration program at Mantoverde as well as our recently announced program focused on Santo Domingo and Sierra Norte. Related to this, we are pleased to announce we have signed an exploration option agreement with ENAMI for more than 18,000 hectares of concessions surrounding Sierra Norte, further consolidating our position in the region. We've already received some encouraging results from Phase 1 of the exploration program at Mantoverde, as highlighted on Slide 18. This includes the potential to improve our grade profile in the near to medium term via Brecha Flores sector. Additionally, the results from step-out drilling at Animas and the Santa Clara Corridor, pictured on the slide, have provided us with increased confidence in our future expansion plans. We look forward to advancing Phase 2 of the exploration program, which is underway. It follows up on the results from Phase 1, such as at Animas and the Santa Clara Corridor, and will also include targets on the highly prospective northern corridor of our Mantoverde concession identified through an IP survey completed earlier this year. There are 7 drill rigs turning on site at Mantoverde, and this program will continue to inform further opportunities for growth within the district. Turning to Slide 19. During Q3, we achieved a number of milestones, a testament to the executable nature of our organic growth opportunities. At Capstone, we are proud to have created a strong pipeline supported by a solid diversified foundation of operating assets. As we enter the final quarter of 2025, we will continue to focus on operational execution, strengthening our balance sheet, and prudently advancing our projects to position us well for 2026. With sanctioning of Mantoverde Optimize behind us, we are hard at work upgrading the operation to sustain 45,000 tonnes per day, funded by internally generated cash flows. At Santo Domingo, signing of a joint venture agreement, arrangement marked a significant milestone. We are now working on securing optimal financing for the project while advancing the remaining work streams in parallel towards sanctioning. Beyond MVO and Santo Domingo, we have a strong pipeline of low-risk, high-return projects in top-tier jurisdictions. This includes an expansion at Mantos Blancos to unlock incremental copper production, optionality to realize synergies in the MVSD district, and the potential development of another major copper district around our Pinto Valley mine in Arizona. A strong copper price environment and growing consensus of increasing future demand supports our growth strategy, reinforcing the importance of remaining agile to execute responsibly. With that, I'll turn to Slide 20 to conclude today's presentation. In the third quarter, our current operations performed well, allowing us to realize the benefit of strong commodity prices by delivering solid production and improving our cash costs, resulting in record adjusted EBITDA. We also took tangible steps on our path towards transformative growth. We are well-positioned to become a leading long-life, low-cost copper producer, playing an important role in providing the copper the world needs now and into the future. And with that, we are ready to take questions. Operator: [Operator Instructions] First question comes from Ralph Profiti from Stifel. Ralph Profiti: Cashel, what's the earliest we may start to see some of these Brecha Flores and MVS intercept material into the mine plan? You talked about sort of short-term and medium-term. I'm just wondering if that means sort of '26 or '27? Or will you wait until a more comprehensive block model is established? Cashel Meagher: Yes, Ralph, thanks. I think what we've done is with that exploration release is what we've done is we've developed a platform by which we can communicate in the future ongoing exploration results. It's a rather large program. So for us to be able to incorporate and interpolate the results into a mine plan, we kind of want to have much of the program complete. So I would suspect that that would be a '27, sometime first half of '27 to be able to really show what effect it has on, number one, Mantoverde Optimize, because some of this drilling will affect the stripping and hopefully, a little bit of the grade a bit. And then the Phase 2 will be an ongoing process because we have ambitions that, that district and that fault will yield higher grades that are more accessible than the immediate pit. We're just expanding the size of it, such that we can optimize what we call Mantoverde 2 and determine where that center of gravity of future resources to properly locate the expanded and the additional production facility that Mantoverde 2 would provide for. Ralph Profiti: I wanted a follow-up question on Santo Domingo. And I'm just wondering about the relationship between the $60 million contingent cash consideration that comes upon those 3 milestones and the potential exercise of that buyback right. And I'm just wondering whether or not some of those conditions would happen before or after or in concert with each other. Some help with that would be appreciated. Cashel Meagher: Yes. That's a very good question. The sort of the way we look at it, certainly, the upgrade of the Serra Norte and the oxides. To us, that's something we're getting underway right away. We suspect that, in the fullness of the development of Santo Domingo that we will be able to realize 2 of the 3 payments during the development process. So we look to enhancing the NAV by that drilling. And basically, number one, it's to improve the grades beyond year 7 in the current production profile as published in September of 2024 for the grades or for the copper grades and production of copper from years 8 through 15. And so too, to establish an oxide leaching facility at Santo Domingo, whereby we can utilize the capacity available in the SXEW at Mantoverde to complement that copper production. Probably those, we would meet those thresholds before commercial development or commercial production, I should say. So the threshold for our buyback is post-commercial production. It will be hit or miss if we're ready with the cobalt, but we might be. It's a cobalt study during that process also, which is the remaining $20 million. I think what's important about those 3 items is there are enhancers to the NAV of Santo Domingo, which is distinct and different to what the buyback is based on, which is the a multiple to the contributions that Orion makes during the construction and the buy-in to Santo Domingo. So all that NAV created by those $60 million in payment are to our account and hopefully increase the NAV of the asset and therefore, make our buyback of that 25% more attractive and accretive to Capstone. Ralph Profiti: Clearer now. Congratulations on a well-executed deal with optionality. Operator: Next question comes from Orest Wowkodaw from Scotiabank. Orest Wowkodaw: Wondering if we can get some more color on the progress at Matoverde sulfides. Specifically, obviously, you had the issues in September, but can you give us a sense of where throughput and recoveries were in October? And did I hear correctly that you were earlier guided to average throughput for the quarter of, I think, just below 30,000 tonnes a day. Did I hear that right? Cashel Meagher: Yes. Thanks, Orest. Yes, you did hear what the throughput ended up being due to the interruptions in production. Fortunately, Jim and his team were able to run the SAG mill independent of the issues we had, such that we could continue producing sort of at a half clip. So we're able to maintain sort of production. With that being said, there's some detailed questions in there. I'll hand it over to Jim to answer sort of more fully your question around October and some of the issues around what we experienced in Q3. James Whittaker: Yes, it was a pretty tough quarter in general. And as Cashel said, we managed to get through it kind of limping through because we did have a design option in the MVDP design that allowed us to run the SAG mill direct to flotation. So although there was a moderate impact on recovery, we were able to partially operate. So all in all, I think we had a pretty good month considering that during the same time, we were basically switching motor for motor and replacing the exciter, which is basically the part that controls the power into the main shell and frame of the motor in each of the 5 units that we have, which was quite complex. This is all done off-site. There was a lot of logistics involved, a lot of cranes involved, and we were working very closely with our partner, Ingot team to be able to perform all that work, which was quite complicated actually. So right now, when we're looking at the plant, we've got 4 motors in place operating. We have rebuilt spare that's on the deck. We do have a crane and everything at site in case we have any further work to do. And we continue to work on the control systems and protections around those motors to make sure we have some consistent operation. As we mentioned in the text, October is going to be a bit of a difficult month. We haven't closed out finally on the month and the data yet, but we're looking forward to a much stronger end of Q4 and bring up the throughput to be able to push us into the line of our guidance, what we expected from Mantoverde, but we'll just be on the lower edge. So we have a lot of work left in front of us. With respect to recovery, yes, I can make a couple of comments. Obviously, with the tonnage changes and the configuration changes, it's been up and down a bit. But during Q3, we did achieve recoveries above 90% during August early in the quarter, which was very good for the group as we managed to get some confidence around running the flotation circuit and those configurations to push that recovery up. So really, except for Q2, remember, when we discussed, we had a lot of altered material coming in or all of, I guess, you would call it semi-oxidized material coming in. But except for Q2, on a quarterly basis, we really saw the recoveries coming up and increasing. We were really looking at 82% in the early year. We were roughly 86% in Q3 of this year. So we're really, really happy with the way that's going. It's running pretty steadily now. And we're almost at the design recovery levels of, say, 87% and above. We expect to continue to achieve these recoveries in the mid- to upper 80s in Q4 and then consistently look for these design recovery rates in 2026. So as I said, a difficult quarter, very, very complicated trying to maintain consistent flotation recovery when we're having these plant stoppages because of the motor issues, I think we were able to get ourselves through it. Still some work to do, a lot of people on site, a lot of technical people, and the support from Aussie, Asinko, and FLS and Inga team to help us through this issue. So yes, I think we're in really good shape to finish off the year and still some work to do. Orest Wowkodaw: Just a follow-up. How much time did you guys lose in October with this issue? I thought this was largely behind you at the end of September. James Whittaker: No, we were still working on to that. I was just going to say a lot of the big impact was through Q3. But during -- obviously, during this month of October, we were starting off full, but there was still, obviously, within our program maintenance, still continuing to work on the motors. As we disclosed during the Q3, we did have that impact. And we also took time down for maintenance, which was planned. But we're still -- during the month of October, even though we're looking very, very positive about the quarter, yes, there's still some work to do on that, but we're able to manage that within our normal maintenance downs that we're working through with the motors. Operator: Next question is from Dalton Baretto from Canaccord. Dalton Baretto: I'd like to swing the conversation back to the Santo Domingo JV. Cashel, can you comment on how you guys made the decision on going with Orion? Like what sort of criteria? Was it the buyback option? Was it the fact that they're already a shareholder? Just any thoughts around that? Cashel Meagher: Yes. All of the above. Thanks, Dalton. So number one, obviously, we have a very good relationship with Orion. They were with John McKenzie, our Chairman, founder at Mantos Copper, and founder in the new Capstone Copper. They were obviously 1/3 shareholders at one period of time and have worked with us quite cooperatively through the last number of years. So obviously, they had insight into our project delivery, our project management, and our operating teams. But that being said, we had classical interest in this process, whereby there were traders, smelters, sovereign wealth funds, and obviously, private equity involved. And we weighed the various benefits relative to one another. And there's one familiarity, knowing a partner and trusting them. But one of the things that became very important to us, besides maybe the classically seeking advantageous rates in financing for our ambitions to finance Santo Domingo, was recently, Orion also has announced that they have partnerships with the U.S. government and the United Arab Emirates on various funds and access to funds. And we feel that they can bring some of that to bear in the financing of Santo Domingo. So that sort of leveled them out with some of the more classical players that would have that type of opportunity available to the funding of Santo Domingo. And then obviously, the other one is the buyback option. And it sort of came to our attention during this TCRC process that when you have a partner in an asset, the copper you value the most is the copper you produce yourself. And having a partner, while it's very important to derisk the project, value the project, and finance the project, at some point, you covet the copper you produce that somebody else gets to sell. And that's the original deal. So we sort of inspected with the various parties that were participating, whether or not there was a possibility to buy back that asset. And lo and behold, that sort of suited the model of a private equity, and certainly with Orion. And we were able to come to an arrangement that we think is advantageous and is to our call as an option shortly after commercial production when the assets at its most valuable. And so that became very attractive to us. And really, I think that's what put it over the edge besides the familiarity that we have with Orion as a financing entity. Dalton Baretto: And that sort of preempted my next question around project financing and the cost. So maybe I'll ask a different one. Thinking broadly across the Mantoverde, Santo Domingo complex now, you've got 2 different partners at either asset, plus the DL600 at Santo Domingo. How does that play into your thinking around some of these synergies and the net returns to each asset? I'm just wondering if that opens certain doors and closes others. Cashel Meagher: I think it keeps all doors open. Like one way or other, like you mentioned the DL 600, which is our tax stability agreement, and that will keep the 2 entities separate irrespective for accounting purposes and tax calculation out of Santo Domingo and Mantoverde, but it doesn't preclude us from establishing transfer pricing for any of the shared infrastructure or materials between the 2 areas. And so we'll just work through what those are and how they work out. I think what's important is in our process, we did identify some strategic possible partnerships whereby we could optimize the future design by sharing infrastructure within the region. And to us, that's a very appealing improvement that we can execute on beyond what appeared in the 2024 technical report, and that revolves around pipelines, desalination plants, and principally the port. And so we'll pursue those in parallel with our financing efforts and our detailed engineering over the next year to derisk the project and the project delivery further. So we still think there's more upside to come out of Santo Domingo by that sort of negotiation. In addition, as I was speaking before, the opportunity to leach material at Santo Domingo and enhance the copper profile beyond year 7 with the oxide and the Sierra Norte sulfides will be enhanced opportunities, just utilizing the SXEW at Mantoverde, of course, will also enhance the NAV at Santo Domingo in the future and so too, reduce the unit costs at Mantoverde. So it's a very virtuous optimization where both assets benefit. And that's the advantage of operating in a district. Operator: Next question is from Fahad Tariq from Jefferies. Fahad Tariq: On Slide 11, on Mantos Blancos, what was the unplanned maintenance that happened in the quarter? Cashel Meagher: Yes, Fahad, thanks. I'll pass that over to Jim to answer. James Whittaker: At Mantos Blancos, we had some issues through the quarter with a final concentrate thickener. As you know, the Mantos Blancos site is very old. It started in 1957. And when we were doing a routine planned maintenance, we encountered some issues around the base of our Falcon thickener, where basically 100% of the production passes through that thickener. What we found, we had some, I guess, you would call some weaknesses in the structure below the thickener, and we had to take a look at that, and that included draining the thickener, drilling through the base, investigating, and then refilling those void spaces that we found. There was a lot of very specific work done on that to make sure that it's not going to be an issue in future. But then again, it may be something that we'll have to revisit in our 5-year planning to see if it looks at -- if we look at any further replacement of that equipment. But it was done very, very efficiently by the team on site. We had some external specialist contractors helping us with that work, and we were able to bring the thickener back on with actually -- without any harm to anybody working on the job. So there was a lot of movement and -- but a good focus on that. Mantos Blancos was able to come up back up online and actually now positioning to be at the high end of its guidance for the full year. Fahad Tariq: Okay. And then maybe just switching gears, a question for Raman. On the balance sheet targets before sanctioning Santo Domingo, is it fair to say that those have been achieved? Or I'm just trying to square the -- because the net debt-to-EBITDA target has been met, so it's been so is the liquidity target. But is there further deleveraging that needs to happen? I'm just trying to understand those 2 points. Raman Randhawa: Yes, it's a good question. So it's a good position to be in. We have met our targets. Our target was 1x, and we're at 0.9. We're at 1x last quarter. But that doesn't mean, obviously, this price environment, we're going to continue to delever ahead of Sano Domingo sanctioning. So we're just putting us in a better position pre-FID. So I'm looking forward to seeing that number go down even further. Fahad Tariq: And maybe if I can ask a different way, is there another target that you're thinking of post-project financing? In other words, once you have the project financing in place, is there a higher leverage that you kind of wouldn't want to exceed? Raman Randhawa: Yes. So look, during construction, I think we said we always want to be at least below 2x is kind of when we run our numbers. So if you look at floor versus cap, I think we were getting below 1 and then no higher than 2x during construction because our EBITDA will be strong when we're constructing Santo Domingo will be north of $1 billion. Operator: Next question is from Daniel Morgan from Barrenjoey. Daniel Morgan: Can we just talk a little bit about momentum at Pinto Valley? So it looks like you were mining at reasonable rates. Obviously, despite the drought, you're mining at a good clip. Does that mean you have the mine in a good place to provide good grades into 2026? Do you have the water to continue to sustainably run these mills? Or is that still something that you're a little nervous about? And are there any upgrades that you've done to the mills during this downtime that you could improve operational stability for 2026? So basically, just how is the asset looking? Cashel Meagher: Yes. Jim, why don't you take that? James Whittaker: Sure, Cashel. Thanks, and great question. It's good that you're noticing the mining uptick as we are, too. We actually had a really good quarter on the mining side of the business. We hit a 1-day record of about 190,000 tonnes moved through the last month. So we've been taking a lot of steps to invest correctly at Pinto Valley. We have some new trucks that are coming online, and we're really starting to see the benefit of that. Between that, the work that we're doing on asset management, the work that we're doing on the operating system, we've seen consistent and steady increases in mining output at Pinto Valley, which is promising and sets us up for the future. On a grade basis, to tell you the truth, we're right on target where we expected to be through this year. Remember, it is a porphyry deposit. It's kind of a lot of the same grade. There is small variances, but we're right on our target where we expect to be with that site. The big thing was really the water through the summer months, these 1 and 100-year droughts seem to be happening more frequently. It was really tough through the summer months, and we obviously had to back off in the milling operation just because we didn't have water in our reservoirs to be able to run it. There's 3 main sources, I think you could say, of water that feeds into that plant. And we have 3 different groupings of action plans that are focused on those sources. So one, you just have transport from well fields to the plant. The focus there is making sure that our older pipeline systems are in good condition, and we're investing in them correctly to make sure that that doesn't become an issue for us in the future just from the availability point of view of the equipment. There's also the evaporation aspect of it, which is about storage facilities and deposit reclaim. The reclaim water that we take back off of the tailings area is very important to us. But when the water levels are so low, it makes it very, very difficult to receive filtered water. So some of it is about making sure now that we're into the winter months and we're receiving water that we're not losing that water, and we're taking care of those reclaim facilities. And the other issue is seepage. Our oldest reservoir has some seepage through it, which basically is a loss for us. We're currently running some projects right now to look how we can mitigate that and minimize that in the future by different methods of kind of covering off, I guess, you could say that reservoir or the areas that we lose water into the base of the reservoir. So a lot of work going on now. to set up for the next year. We do think the data that we have tells us that next summer is going to be a tough summer, and it's dependent on us right now to be able to store water to be in better shape for the 2026 summer months. Daniel Morgan: And with regard to just mill availability and stability, any works on that, that -- I mean, that you could improve the reliability of the mill throughput for next year versus what we've experienced in recent-- Cashel Meagher: Yes, absolutely. Our focus is really on asset management and maintenance. I think the biggest upside that we're going to see at Pinto Valley is being able to run the mine and the plant consistently. And that means that the maintenance side of the business is going to have to give that uptime that we need. We're looking, obviously, right now into budgeting for the next year. We're looking at our position on the 5-year plan. We're looking at higher values of that, that obviously will come out with our guidance in the future. But we're a bit bullish on what we think we can do with our maintenance processes and actually bringing stability to that site. Operator: Next question comes from Craig Hutchinson from TD Bank. Craig Hutchison: Just one follow-up question, just on Pinto Valley. Can you talk to some of the strategic initiatives you guys are looking at around Pinto Valley with Copper City? There seems to be obviously a huge focus from the U.S. administration to produce domestic copper, but any updates on that front or timing around future milestones would be appreciated. Cashel Meagher: Yes. Certainly, Craig, certainly, the focus on -- by the U.S. administration on copper produced in the U.S. has been timely for us. We still anticipate the end of this year sort of being in a position whereby we can talk to our neighbors around what is the future and what does -- how is Pinto Valley involved as the only operator within the district. And so we're sort of still on time. We expect internally to be executing on that option agreement before the end of this year, and then sort of in next year, discussing what is the art of the possible within the area. So simply put, I think the industry understands that quite often cooperation with adjacent sites can produce more value for multiple companies or both companies, and that's what we're focused on. So we hope in sort of the first or second quarter of next year to have more news on what we can expect out of the future of Pinto Valley. Operator: Next question is from Adam Baker from Macquarie. Adam Baker: Just maybe a quick follow-up to that question before. Just wondering if you've had any engagement with BHP, or is that something that you're working through internally with relation to copper cities. This is just on the back of Mike Henry being in the United States recently, meeting Donald Trump. It appears that BHP is turning a lot more positive on some of the legacy assets in Arizona. Cashel Meagher: Yes. Adam, thanks. Certainly, again, there's a lot of focus on U.S. copper. There's a lot of focus on domestic refinement. There's a lot of focus on the endowment of resources that exists in the American Southwest. And what I would say is within our district of Globe Miami, we're the principal producer. We're the only ones with a sulfide plant. We do have a large resource. We have 1 billion tonnes at Pinto Valley. So we do have right now in our technical report, a mine life out to 2039 or 2038, and we do have opportunity to expand that out beyond 2050. But we're working with our neighbors to understand if there's more value to be had there. And so what I'll say is a few years ago, we did announce that we went into an option agreement on Copper Cities to be able to evaluate how the 2 assets might work together to create more copper. And that remains sort of on target, and that work remains in progress. And what I can say is if something materializes from that work, we think we'd be in a position to talk about that maybe in the first half of next year. Adam Baker: And congrats on getting the deal done at Santo Domingo. Just wondering now that you've done the deal, you mentioned the pathway through the project financing route. Is there any room to bring in a third partner into the JV now that the sell-down has been complete? Just trying to think of this in context of some of the preexisting infrastructure, which is in the region, ports, et cetera. Cashel Meagher: Yes. I think most avenues are on the table. Certainly, there is a possibility of that to bring in a third partner to be able to access maybe infrastructure that can enhance the value overall of the project. So we really haven't taken any sort of avenue of engagement off the table. Operator: Next question is from Anita Soni from CIBC World Market. Anita Soni: So just one quick follow-up on Mantoverde. I just wanted to close the loop on the expectations for Q4. 30,000 tonnes of copper -- sorry, 35,000 tonnes of throughput on -- for the quarter. And then in terms of the grade, I think you guys had mentioned 0.81% in October. Is that kind of the expectation for the remainder of the quarter as well? And then 91% recovery rates. Is that also the expectation? Or is it somewhat lower than that? Cashel Meagher: Anita, like Jim sort of was explaining, we're probably in October, what our target was -- originally, our target before these interruptions with the motors was we would push beyond 32,000 tonnes a day because we had the permit to do so. And what we're really hoping for was a good run rate through Q4, such that we could establish a good guidance while we perform the necessary works at Mantoverde Optimize to take us to the end of the year where we would ramp up to 45,000 tonnes a day exiting 2026. So the way I sort of characterize it is we're somewhere between 3/4 and 2/3 of that 30,000 tonnes a day through October, but with the ambition to be up around 34,000, 35,000 through November and December is the way we look at it. As far as the grade goes, I think we trend -- I think the 0.81 isn't sustainable through the whole area, but high 0.7, low 0.8 is sort of where we'll average out most likely for Q4. Operator: Next question is from Marcio Farid from Goldman Sachs. Marcio Farid Filho: Just a quick follow-up, maybe on Mantoverde's cost expectations into the fourth quarter. I think the guidance is to be on the high end of the cost. So far this year, I think performance has been better than expected, and maybe mostly on stronger byproducts as well. So just wondering it's -- how should we think about costs going into the fourth quarter? I know the ramp-up in terms of throughput might not be as strong as otherwise expected because of the month of February. But just it seems like the guidance is conservative at this point. Just wondering if there's anything else to be considered into fourth quarter. Cashel Meagher: Marcio, yes, basically, I think the way we look at it, consolidated-wise as a company, we're sort of mid- to high on the cost guidance where we see ourselves by the end of the year. And certainly, Q3, obviously, was a little higher cost, but we expect Q4 to improve on that throughout the balance of Q4. So as I sort of stated, probably because of the denominator being a little lower in October. But with things trending the right way now for November and December, we can do a little better in Q4 than we did in Q3 with respect to Mantoverde's costs. Marcio Farid Filho: And just a quick follow-up on Pinto Valley. Obviously, Mark Scott has been appointed as General Manager recently. It seems like the water issues are or can be expected to be resolved. Anything else in terms of operational turnaround that can be expected at Pinto Valley to improve the overall cost position there? What are -- what is Mark's kind of target going forward now? Cashel Meagher: Yes. I think the way we sort of look at Pinto Valley, it's very much denominator-driven. Our ambition this year was to run the asset at 52,000 tonnes a day, and we sort of ran into that sort of drought situation. And the way I always look at the asset is the asset on an instantaneous basis, can process ore at 62,000 tonnes a day. We have 6 mills. And if we're running all 6 mills pull out, that's what it is. Due to the age of the asset, what would be suggested best-in-class is 90% utilization. So the best that asset can do when operating sustainably is about 56,000 tonnes a day. So Mark's ambition is over the next year to 1.5 years, move it from what we're currently doing 50,000 tonnes a day to 56,000 tonnes a day. So that's with the asset as it is. There are other improvement projects and items we're reviewing from our mines technical services group to enhance the opportunity for future production or production increases. But right now, the focus is on, as Jim mentioned, the asset management framework, which will allow the availability of the plant such that the ore can be delivered. And the other is a management operating system that Mark is bringing to the platform to be able to get more efficient work out of his maintenance group, out of his operating group and therefore, just be more operationally efficient and deliver on that operational excellence such that we can use that capacity that exists between the 50,000, 56,000, and it's not all maintenance. Some of it is the water, as Jim discussed. And the combination of the 2, we believe, will allow us to deliver the full potential out of Pinto Valley over the balance of the next year or so. Operator: I'd now like to turn the call back over to Cashel Meagher for final closing comments. Cashel Meagher: Thank you, operator. We look forward to updating you in February with our Q4 results. Until then, stay safe and feel free to reach out to Daniel, Michael or Claire, if you have further questions. Thank you for your continued support, and have a great day. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.
Operator: Good afternoon, and thank you for holding. Welcome to the Motorola Solutions Third Quarter 2025 Earnings Conference Call. Today's call is being recorded. If you have any objections, please disconnect at this time. The presentation material and additional financial tables are posted on the Motorola Solutions Investor Relations website. In addition, a webcast replay for this call will be available on our website within 3 hours after the conclusion of this call. The website address is www.motorolasolutions.com/investor. [Operator Instructions] I would now like to introduce Mr. Tim Yocum, Vice President of Investor Relations. Mr. Yocum, you may begin your conference. Tim Yocum: Good afternoon. Welcome to our 2025 third quarter earnings call. With me today are Greg Brown, Chairman and CEO; Jason Winkler, Executive Vice President and CFO; Jack Molloy, Executive Vice President and COO; and Mahesh Saptharishi, Executive Vice President and CTO. Greg and Jason will review our results along with commentary, and Jack and Mahesh will join for Q&A. We've posted an earnings presentation and news release at motorolasolutions.com/investors. These materials include GAAP to non-GAAP reconciliations for your reference. During the call, we reference non-GAAP financial results, including those in our outlook, unless otherwise noted. A number of forward-looking statements will be made during this presentation and during the Q&A portion of the call. These statements are based on current expectations and assumptions that are subject to a variety of risks and uncertainties. Actual results could differ materially from these forward-looking statements. Information about factors that could cause such differences can be found in today's earnings news release and the comments made during this conference call in the Risk Factors section of our 2024 Annual report on Form 10-K or any quarterly report on Form 10-Q and in our other reports and filings with the SEC. We do not undertake any duty to update any forward-looking statements. And now I'll turn it over to Greg. Gregory Brown: Thanks, Tim, and good afternoon, and thanks for joining us today. First, Q3 was another really strong quarter with revenue and earnings per share exceeding our guidance, highlighted by robust growth in software and services across all 3 technologies as well as a strong start for Silvus. Revenue was up 8% in the quarter with 11% growth in software and services and 6% growth in Products in SI. We also expanded operating margins by 80 basis points, led to record Q3 operating earnings in both segments and just under $800 million of record Q3 operating cash flow. Second, demand for our safety and security solutions across public safety and defense remains strong and led to record Q3 orders with double-digit orders growth in both segments. We also ended the quarter with our highest Q3 ending backlog ever of $14.6 billion, up $467 million versus last year, which included a record $11 billion of S&S backlog that is increasingly driven by our Command Center and video solutions. And finally, following our strong Q3 results, we're again raising our guidance for full year earnings per share. I'll now turn the call over to Jason to take you through results and outlook before returning for some final thoughts. Jason Winkler: Thank you, Greg. Revenue for the quarter grew 8% and was above our guidance with growth in all 3 technologies. Foreign currency tailwinds during the quarter were $21 million, while acquisitions added $123 million. GAAP operating earnings were $770 million or 25.6% of sales, up from 25.5% in the year ago quarter. Non-GAAP operating earnings were $918 million, up 11% from the year ago quarter, and non-GAAP operating margin was 30.5% of sales, up 80 basis points, driven by higher sales and improved operating leverage, partially offset by higher tariffs. GAAP earnings per share was $3.33, up from $3.29 in the year ago quarter. Non-GAAP EPS was $4.06, up 9% from $3.74 last year. The growth in EPS was driven by higher sales and margins and a lower diluted share count, offset by higher interest expense in the current year. OpEx in Q3 was $652 million, up $35 million versus last year, primarily due to acquisitions. Turning next to cash flow. We achieved record Q3 operating cash flow of $799 million, up $40 million versus last year and free cash flow of $733 million, up $31 million. The increase in year-over-year cash flow was primarily driven by higher earnings, net of noncash charges. Capital allocation during Q3 included $182 million in cash dividends, $121 million in share repurchases and $66 million of CapEx. Additionally, the company closed the acquisition of Silvus for $4.4 billion and settled $70 million of 6.5% senior notes that were due within the quarter. Moving on to our segment results. In the Products and SI segment, sales were up 6% versus last year, driven by growth in MCN and Video. Revenue from acquisitions in the quarter was $111 million, while FX tailwinds were $11 million. Operating earnings were $555 million or 29.3% of sales, flat compared to the prior year, primarily driven by higher sales and improved operating leverage, offset by higher tariffs. Some notable Q3 wins and achievements in this segment include a $40 million P25 device order for a U.S. federal customer, a $14 million P25 device and mobile video order for Arlington, Texas and a $10 million Silvus order for NATO country. In addition, we received 3 large orders during the quarter for P25 system upgrades to our new D-Series infrastructure, a $110 million order from the State of Colorado, an $84 million order from the Tennessee Department of Safety and an $82 million order for the U.S. state and local customer. These large multiyear orders are a further testament to our customers' commitment to investing in our next-generation LMR infrastructure, and we have a large funnel of opportunities over the next several years. In Software and Services, revenue was up 11% compared to last year, driven by strong growth across all 3 technologies. Revenue from acquisitions was $12 million in the quarter, and FX tailwinds were $10 million. Operating earnings in the segment were $363 million or 32.6% of sales, up 200 basis points from last year, driven by higher sales, improved operating leverage, partially offset by acquisitions. Some notable Q3 highlights in the segment include a $57 million P25 services order for the State of Louisiana, a $25 million command center order for the State of Idaho, a $20 million P25 services order for a U.S. state and local customer, a $14 million mobile video order for the New York State Park Police, a $13 million P25 services order for the Buenos Ares Police and a $10 million mobile video order for the Bulgarian MOI, yet another win in Europe, where we've had good success in mobile video. In fact, Bulgaria represents the 18th European country where we will be deploying our mobile video solutions. Moving next to regional results. North America Q3 revenue was $2.1 billion, up 6% versus last year. International Q3 revenue was $888 million, up 13% versus last year. Growth in each region was across both segments and all 3 technologies. Moving to backlog. Ending backlog for Q3 was $14.6 billion, up $467 million or 3% versus last year, driven by strong demand in multiyear software and services agreements and favorable FX, partially offset by strong MCM shipments and revenue recognition from the U.K. home office. Sequentially, backlog was up $452 million or 3%. The sequential increase was driven by strong demand in multiyear software and services agreements, partially offset by revenue recognition for the U.K. Home Office. In Products and SI, the segment ended backlog with an increase of $148 million sequentially driven by MCN. Year-over-year ending backlog was down $604 million due to strong MCN shipments. In Software and Services, backlog increased $1.1 billion from the prior year to $11 billion, an all-time record for the segment and $304 million sequentially up, driven by strong demand for multiyear contracts across all 3 technologies and favorable FX, partially offset by revenue recognition for the U.K. Home Office. Turning to our outlook. For Q4, we expect revenue growth of approximately 11% and non-GAAP EPS between $4.30 and $4.36 per share. This assumes an effective tax rate of 24% and a weighted average share count of 169 million shares. And for the full year, we continue to expect revenue of approximately $11.65 billion or 7.7% growth and based on our year-to-date performance informed by a strong Q3, we are increasing our non-GAAP EPS guidance to between $15.09 and $15.15 per share, up from our prior guidance of $14.88 to $14.98 per share. This outlook assumes a weighted average diluted share count of approximately 169 million shares and now assumes an effective tax rate of approximately 22.5%. Before I turn the call back to Greg, I'd like to provide some perspective on 2 areas. First, as it relates to the ongoing government shutdown, while the vast majority of our public safety business serves state and local customers who are unaffected by the federal shutdown, we do serve certain federal government agencies, including both DoD and DHS. As the extended shutdown continues, we will monitor the potential revenue timing impact to this part of the business closely as it relates to Q4. Secondly, a couple of highlights on the strength of our balance sheet. We ended the quarter with approximately $900 million in cash and are on track to generate $2.75 billion in operating cash flow this year, which will mark the third consecutive year of double-digit growth. We maintain significant balance sheet flexibility, inclusive of the debt issued for Silvus. We have no senior debt maturities until 2028, and the payment schedule of our $1.5 billion term loans gives us continued flexibility to enable our M&A priorities. I would now like to turn the call back to Greg. Gregory Brown: Thanks, Jason. Let me end with a few thoughts. First, I'm very pleased with our Q3 results. highlight the strength of our portfolio. Revenue was up 8%, highlighted by 11% growth in software and services. Additionally, we achieved Q3 operating earnings -- record Q3 operating earnings in both segments, record Q3 operating cash flow of just under $800 million, record Q3 orders that included double-digit growth in both segments and record Q3 backlog of $14.6 billion that puts us in a strong position as we move into next year. Second, earlier this month, our teams met with hundreds of customers at 2 of the largest trade shows in our industry, the Army's USA AUSA Conference in D.C. and the International Association of Chief of Police in Denver. And what was clear from these discussions, we have the right solutions at the right time to address the evolving challenges that our customers are facing. In defense, countries around the world are significantly increasing investments in drones and unmanned systems, seeking advanced autonomous capabilities to enhance mission effectiveness and operational resilience in complex environments. Our acquisition of Silvus positions us well to support our customers across these areas, and I'm really pleased with the momentum we're seeing since closing the acquisition in August. And in public safety agencies, harnessing the power of new technologies and artificial intelligence to improve first responder safety, dramatically reduce incident response times and automate routine tasks, thereby freeing up critical time for public safety personnel to focus on high-impact priorities. We've made significant investments to integrate these new technologies and AI into our solutions, and I anticipate this being a growth driver for the company for years to come. And finally, as we look to close out another exceptional year, we're extremely well positioned for continued growth. We got the right set of solutions that are highly critical for our safety and security customers, both in the U.S. and abroad. Customer funding environment globally for safety and security remains strong. Our deep customer relationships and continued innovation is driving increased scope across customer workflows and our solid balance sheet and cash flow continues to provide us with the flexibility in allocating capital, both organically and inorganically. All of this is informing our expectations for another year of strong revenue growth and earnings growth in 2026. And with that, I'll turn it back over to Tim. Tim Yocum: Thanks, Greg. Before we begin taking questions, I'd like to remind callers to limit themselves to one question and one follow-up to accommodate as many participants as possible. Operator, would you please remind our callers on the line how to ask a question. Operator: [Operator Instructions] The first question is from Tim Long from Barclays. Timothy Long: Yes. Two, if I could. Greg, you talked about kind of sustainability of growth into 2026. Curious if you can dig into that a little bit more. Maintaining this last few years has been kind of high single-digit growth rate. Obviously, you're adding Silvus to it, so it's a little inorganic. But can you just give us a sense of what you're seeing as the real puts and takes and what could keep this growth rate above where it had been historically and kind of in line with the last few years, that would be helpful. And then the second one, SPX has been out for a little while. If you could just maybe give us a little sense on how that's doing? And related to it, if you can kind of update us on what you're seeing from software and applications on the APX NEXT side, so kind of a little bit on the newer products and technologies that are out and how they're doing. Gregory Brown: Sure, Tim, thanks. I feel good with where we are. I like the setup. We're not going to guide '26, but this is usually a time I give some color about it. As we think about next year, we think about spot revenue, we think about revenue in the area of $12.6 billion from an expectation standpoint. I say that because we've had strong orders growth in Q2, strong orders growth in Q3, expected strong double-digit orders growth in Q4 and double-digit product orders in Q4 and exiting Q3 with a record backlog. So Jason talked about the timing of the shutdown. It looks like it's going to be the longest shutdown we've ever had. But whatever impact, even if there was an impact is timing, the underlying demand is strong. I think we also think about in '26, Tim, continuing to grow operating margin, and that's inclusive of tariffs that would hit as headwinds in the first half that were not there this year, and we expect to continue to grow operating cash flow growth. But I think the overall demand drivers are strong. That's our view for '26. John Molloy: Sure, Tim. I think the second half of that was really a dual question, SPX and APX NEXT app. So first of all, as you know, we started shipping the SPX in July. We've always contended that the market wants an alternative. We're really pleased, really pleased with the early traction. Our orders are outpacing expectations. In fact, we've doubled the number of agencies that have actually purchased. We've now got 70 different police departments. We view every one of those, and that number will continue to grow is an opportunity to flip those customers to DEMS as well. just last night. And I think what we talked about in the August call was there's really a dual benefit, meaning upgrading and refreshing the APX NEXT family in tandem with the SPX device. Last night, we secured an award that we went head-to-head with our primary competitor. We were awarded the business. That's great that we secured the SPX, the AI-driven assistant, but also they refreshed and upgraded the APX NEXT family of radios. And we think that's the strength of our story. As it relates to APX NEXT applications, we had said we would have 200,000 devices by the end of this year online. We'd now like to update you that we'll have 300,000 APX NEXT devices by the end of '26. So I think good momentum, good traction on both ends there. Mahesh Saptharishi: Yes, Jack already mentioned this, but we do look at the SVX as a body-worn assistant. And what we are also seeing is incredibly good traction on real-time translation capabilities. We announced SVX integrated with our assist chat capabilities recently as well. And also at IACP, we announced the ability to be able to summon a BRINC drone for DFR based upon the SVX and the APX NEXT integration as well. So across the board, we see traction in applications for APX NEXT and SVX as well. Operator: The next question is from Tomer Zilberman from Bank of America. Tomer Zilberman: If I do some back of the envelope calculations using your commentary from last quarter that Silvus would be about $185 million this year and the reported acquisition-related revenues from this quarter, I get that the core business grew about 5% this quarter, and I think guiding to 8% next quarter. I guess the question is a 2-parter. One, how is Silvus faring versus the 20% growth outline you gave us? And is there anything embedded in the core growth maybe in terms that gives you pause as it relates to the government shutdown as we look into next quarter and 2026? Jason Winkler: I'll answer the Silvus part first. So Silvus is off to a strong start. We talked about on the last call, our expectations for it on a calendar basis to achieve $475 million in revenue. That's now looking more like $500 million, in part based on a $25 million order that was pulled in from Q4 to Q3 that's going to benefit Ukraine. So our expectations of $500 million have increased. And as we think about next year, given that strong start, continue to expect 20% revenue growth on that bit higher base for '25. And together with the strong start in sales, we would expect earnings contribution from Silvus next year more like $0.30 to $0.40. We had formally given an output of about $0.20. But given its performance, given our debt paydown plans, Silvus itself next year, we view as accretive to $0.30 to $0.40. So we're really pleased with early engagement with that team, working with Jack Molloy, our COO, and how they're executing. Tomer Zilberman: And maybe just following up on is there anything that might give you pause in any of your segments as it relates to the government shutdown? Jason Winkler: Well, I mentioned it on the script that we do serve the federal government and select agencies there. The bulk of our business serves state and local. And we're watching carefully the timing impact. If there were to be an impact, it would likely increase our expectations for next year in the 12, 6. But we've lost 5 weeks. The government needs to reopen. Budgets need to be approved and the queue and the backlog needs to be worked in an efficient way. Those are our expectations in the guide that we've given for 11650. Gregory Brown: Yes. And I think that Tomer that point that Jason made is really important. I talked about in answer to Tim's question expected revenue of $12.6 billion. If there is any impact, we expect that to be additive to our $12.6 billion. So the demand is there. and we look to capture if not in Q4 in early next year, but the demand is strong. Operator: The next question is from Joseph Cardoso from JPMorgan. Joseph Cardoso: Maybe just for the first one, pretty big product order or backlog number this quarter. Is there any way you can contextualize or give us a little bit of color on the contribution from Silvus and whether you're actually starting to see any of the [indiscernible] funding tailwinds there just yet? And then maybe just as a second part to that, given we're already at the mid-3s that you provided last quarter, any updated thoughts on how you're thinking about product backlog exiting the year? And then I have a follow-up. Jason Winkler: Yes. So Greg mentioned earlier that our orders within the product segment in Q2 grew double digits. They grew in Q3 double digits, and we expect them to grow solid double digits in Q4. That growth is largely ex Silvus. We did have the addition of backlog to Silvus of about $200 million. That's a onetime, but the growth vector of the products in SI is driven by the core. We talked about some large deals on D-Series. Devices continue to be a strong driver. The core is what's driving that product orders. And Greg, on backlog? Gregory Brown: Yes. And therefore, while I talked about ending the year in product backlog in the ZIP code of mid-3s, given the strength of the product orders as Jason referenced, we now expect it to be mid- to high 3s product ending backlog by the end of the year. But we're pretty pleased. John Molloy: Joe, specifically to Silvus and [indiscernible] for Q3 performance, no. In fact, the overperformance Silvus in Q3 was related to a Ukrainian order that was pulled forward. If you think about the growth drivers for Q4 and beyond, it's really the unmanned, the autonomous unmanned system market. I was at AUSA last week and the store was unmanned. That's a growth driver as well as defense and borders, both in the U.S. and internationally as we kind of move into 2026. Joseph Cardoso: Got it. Super helpful color there. And then maybe as a follow-up, as we think about the various growth drivers that you're highlighting, particularly on the product side of the portfolio. It seems like there's a lot of irons in the fire here. Many parts of the portfolio are doing well and are expected to do well going into next year. As we think about that evolving product mix, how should we think about the implications to product margins from a high level? Not asking you to guide next year, but just trying to think about as we think of try to contemplate all these different moving parts across the portfolio, how should we be thinking about the gross margin trajectory here, particularly as it relates to the product portion of the portfolio? Jason Winkler: Well, within LMR, we talked Jack did about APX NEXT and how that's trending and trending well. Those are more feature-rich devices and our customers increasingly are choosing those. That helps. At the same time, we have faced some margin challenges related to tariffs. Those are largely in the second half of this year. somewhere between $70 million and $80 million in the second half of this year. But despite those tariffs, the product mix favorability has led to increased margins. And as we look forward in the developments that we have, we have a strong product portfolio. Gregory Brown: The other thing to think about, we talk about product, and we typically talk infrastructure devices. But with the success of APX NEXT, we talked earlier, I think a quarter ago, where we thought there would be about 200,000 users subscribed to APX NEXT applications by year-end. And that shows up in the S&S bucket, not necessarily in Product. We now expect that to be about 300,000 or slightly over exiting next year. That's a good trend. And even though Joe, you talked about product, we're also -- we love the fact that Software and Services this year, we now expect to be growing low double digits, up from our earlier guide of 10%, and that's a friendly fact. Operator: The next question is from Andrew Spinola from UBS. Andrew Spinola: I wanted to follow up on the comments you just made about the tariffs in the second half and the ability to still raise margins. I think this is going to be about your third year in a row with incremental margins at the operating line of over 40%. And you made the comment that mix is helping. And I don't know, is that -- are you making the comment that it's a temporary shift in mix? Because I'm getting a sense that there's a longer-term shift, obviously, to more software and APX NEXT apps, a number of things you've highlighted. So I'm trying to understand, it seems like there's something fundamentally changing in the business. You're outperforming the tariffs and still raising margins. So I'm just wondering if we can think about the 40% incremental margin as where the business can deliver going forward from here. Jason Winkler: Well, we see opportunity. And you're right, we've continued to expand margins. Some of that's driven by the strong growth within software and the applications as well as services. It's also in part driven by the product portfolio. And keep in mind, we continue to sell, while APX NEXT is a very compelling device, it has its predecessor, Jack's team still sells today. So as we mix, there are customers that will into the future, continue to buy APX NEXT. The penetration is still low. And so as customers choose devices every 6 to 8 years, they'll increasingly still choose an APX NEXT device. And Jack and his team, do you want to talk about some of the road map items and what you're thinking about for APEX into the future, too? John Molloy: Yes, there's a lot. I mean I think that first of all, one of the things we focused on is tiering, right? We continue to verticalize and there's more places that we can take the APX family. I think about places like critical infrastructure. There's also more that we can do from an application services. Mahesh and his team are developing Assist applications that ride over the top of the standard APX application services. So there's a lot we're going to -- I think a lot of work to do. I think if I could capture the APX family in a word, it's 2 words, continued momentum, and I expect that into '26 and beyond. Gregory Brown: Andrew, the only other thing I'd add, and maybe it's just we do have a strong commitment. We've got a good P&L that yields well to operating leverage, which is the margin expansion we've talked about multiple years in a row, which is why we also believe we can continue with operating margin expansion for the firm next year. And we're pretty judicious and thoughtful around budgets and managing expenses and thoughtfully and surgically deploying AI for some commensurate benefit. I think we've rolled it out in certain cases around customer service or whether it's Copilot or Cursor and engineering teams. And I think we'll increase the penetration of AI as well, which will yield some operating expense benefits. But yes, it's the portfolio. Yes, it's the tiering. It's all the things that Jason and Jack talked about, but it's also the continued expectation by management that you got to not just grow top line, you got to expand operating margins and you got to grow cash flow, and that's our expectation into next year. Andrew Spinola: Got it. And just one follow-up. You've talked about the new introduction on the infrastructure side of the -- into the ASTRO platform. I was just wondering, if I'm not wrong, the upgrade cycle there is very long, possibly 10, 20 years. And I'm just wondering if with your client base knowing that, that upgrade was coming, did that create somewhat of a pause on the infrastructure side prior to the release? And are we going to see a little bit of pent-up demand on infrastructure with that new product in the market? John Molloy: Yes. I think the thing -- so as you said, we typically think about infrastructure. I mean, one of the things is we have a very large footprint of statewide networks. So I think we have a great baseline to draw within. We're in regular contact with those customers. In fact, I think one of the really great stories as you think about infrastructure, the days of infrastructure as a stand-alone investment no longer exists. It's infrastructure and managed services because the care and feeding that need to be done on -- when networks became digitized, you have to think about your cyber threat surface. And we've seen our cybersecurity services up 22%. We manage a lot of these networks, and we've seen a pretty substantial growth in terms of the amount of scope that our customers expect to us to take on. So I think the infrastructure footprint that was out there fueled a lot of our services growth. And now we look at it and we're looking, our customers are asking for things like, hey, we want to improve coverage. We want more capacity. We want better energy efficiency and more resiliency within the network. And that's really what the D Series ushered in. But if you think about it, it's a really good question. Our 2 biggest statewide networks being Colorado and Michigan, Michigan upgraded, we got our first upgrade order from Michigan in Q2. Colorado gave us an upgrade order in Q3 and then the state of Tennessee, which has been the highest growth network, also gave us a D series. So I think it makes us feel good that, number one, they trust us to support their networks and manage them. But number two, that they continue to see reasons to upgrade, and we continue the R&D dollars we spend, I think they realize from an investment standpoint. And they look at it and say, "Hey, this is the network we're going to look at and care and feed for the next 10 to 15 years. Gregory Brown: And Andrew, as Jack mentioned a quarter ago, this new infrastructure upgrade is really the first time we've done that in like 12 years. And these orders of Colorado and Tennessee and Michigan that Molloy is referencing are large multiyear deployment orders as well. So yes, we are excited, and we think that this next-generation infrastructure upgrade is a multiyear journey with multiyear orders with multiyear deployments. That's a good thing. It speaks to the durability of LMR. That's what we think about. John Molloy: yes, It speaks to the durability of LMR. That's what we think about. Operator: The next question is from George Notter from Wolfe Research. George Notter: I want to just dig into the SVX a bit more. Any anecdotes or data that you can give us in terms of just traction with customers turning on the body camera functionality or AI assist or the reporting pieces. I know you have, I think you said 70 or 80 customers. But I'm just curious how many of those are kind of moving beyond just SVX as a [indiscernible]. Mahesh Saptharishi: So a couple of things that I think are worth noting. We've had over -- since we launched Assist for digital evidence management last year, we have over 1,000 customers who have actively adopted and are using Assist for DEMS. And by the way, that includes reduction, reduction allowing us to effectively reduce the amount of time it takes for someone to share critical information by over 80%. We've added assisted narrative quite recently to it and assisted narrative allows you to reduce not just the report writing time, but the cycle time that it takes to revise narrative by over 50% as well. And I think that's quite powerful for us. You asked about an anecdote. We launched translation along with SVX. And we have a handful of customers who are now actively using it. And quite recently, there was a domestic disturbance that an officer responded to. And it was critical that they were able to actually leverage real-time translation to mitigate that situation. So we're hearing a lot of good powerful anecdotes of how translation as a key capability of this body worn assistant in SVX is starting to have an impact along with the APX NEXT application portfolio. Operator: The next question comes from Adam Tindle from Raymond James. Adam Tindle: Okay. I'm going to start off with a little bit more of a challenging question for you, Greg. I know you're up for the challenge and then a more big picture question. But just near term, if I look at Q3 here from an operational standpoint, obviously, I see EPS upside, but it's mainly below the line items on interest and expense. If I look at the operating income line, it was kind of more in line, let's call it. So I wonder if you just kind of assess the quarter and the moving parts on the operating line for this quarter. And I ask that in light of your comments on expecting to improve margins from here next year. I guess what gives you the confidence based on what you're seeing here in Q3? Gregory Brown: I think the operating performance and the leverage we had was part operating leverage of the core business, part Silvus, part tax benefits, that's good. But I think that given what we see with customer engagement, the continued movement toward software and services, I'll give you an anecdote on video. Video grew 7% this year in Q3, yet we're sticking to the 10% to 12% annual guide. Why? Because Avigilon Alta, the cloud video solution, is growing over 4x faster in Q3 than the 7%. When you look at the orders growth of cloud video, it's even higher than that. So I think, Adam, when we look at where we exited Q3, the backlog, the composition of it, the increased software and services component, the strong demand across the portfolio, up leveling Silvus to now $500 million of this year and 20% next year. Maybe it's a little stronger than 20%. We also will have leverage perhaps on when to pay down some of the short-term debt associated with Silvus, which will give us EPS flexibility from that standpoint. And I think we've done a good job mitigating tariffs. And the incremental tariffs for next year is Q1 and Q2 because we'll be lapping the back half. And I think we know how to manage expenses. So the high-level answer is top level growth and the confidence of that, the existing mix and the composition we see and the expected operating leverage that we think we can continue. Jason Winkler: And Adam, you mentioned Q3. If I expand to the year, included in our guide for the year is over 100 bps of operating earnings expansion. And that's despite $70 million to $80 million of tariffs that we have absorbed in the P&L in the second half. As we look forward to next year, of course, we'll face some headwinds in Q1 and Q2 because tariffs weren't in place last year at that time, but they'll be more moderated than that $70 million to $80 million. So I think there's opportunity for us to continue to, as Greg mentioned, expand operating margins. Adam Tindle: Got it. Super helpful. And helpful color on Q1, Q2 as we shape our models. I think we'll try to keep that in mind. Just as a follow-up, Greg, I would love it if you could maybe just take a little bit of time to reflect on early learnings from Silvus now that you have the deal closed and kind of gotten to look further under the covers. A lot of us compare this to the potential for Avigilon and a lot of similarities there. But I wonder if you could maybe just talk about early learnings and similarities and differences maybe to prior acquisitions like Avigilon and biggest areas that could surprise us when we look back at this. Gregory Brown: Yes. High level thematically, Adam, more bullish and more enthusiastic than at the time of the close. That's not a victory lap or a raw speech. That's a fact. Why? in part, raising the full year expectation from $475 million to $500 million in addition to the commentary Jack provided with the real high-level engagement just in the last few months since we've owned the asset around defense, borders, high bandwidth and all things unmanned. I think Silvus, the other nice thing is the growth is primarily international that we see with Silvus, not necessarily Fed. We think it's super highly complementary. Look, the reason we renamed LMR to mission-critical networks is we're the market leader in mission-critical voice. We're the leader in mission-critical voice through TETRA and P25. Now we're the leader in mission-critical data as defined by high-speed, low latency mobile ad hoc networking. That's a great complement as we envision and these are new markets we're going after because Silvus gives us new market, new market in defense, new market in autonomous, new market in drone infrastructure, new market in manned. And they're the market leader. And I think, Adam, the other thing I'd say is since owning the asset, we have seen validation of the lead we thought they had technically validated in the engagement with the customers. I think the learning also is Molloy has a first-class sales engine. We will be -- and Jason mentioned $0.30 to $0.40 of EPS accretive with Silvus anticipated or expected for next year with additional investment in Silvus. We can expand their outreach on international go-to-market. Jack and Bhavik are looking to fund headcount, and we're adding it as we speak. We will put more holes on the fire around their R&D, which is top-class engineering and research. So the learnings are great asset. We took a long time, and we're patient and measured with the due diligence. It's a new market. I think it's complementary. It's defense oriented. I think it's the right market, right technology, right place, not going to take anything for granted. We'll invest go-to-market, invest sales, invest North America strategic projects and invest in engineering. And I think there's a lot of room to run. John Molloy: Yes. Greg, the only thing I'd add is the thing that I've been just so uniquely impressed with is Bhavik and his team, no question. Cultural fit within Motorola, everything they do, everything when they wake up early and go to work and they leave late at night as they think about the customer and how do we co-create and do something and distance ourselves from the competition with our customers. They do that first class. He's built a great team. All they want to do is continue to grow and take care of their customers. I'd tell you, it's just a completely refreshing group of people to work with. Gregory Brown: And by the way, one other Adam, what learning validated to Jack's last point, Culture matters. You can look at all these assets on paper. You can justify anything. You can do an ROI, an IRR, you can have the model sing to whatever answer you want. But one of the most important things that's a difference, and it was true with Avigilon, and I think it's true with Silvus, is there has to be a cultural chemistry and a mission orientation around innovation. And the cultural compatibility with the engineering and sales team is very complementary with the core LMR mission-critical people we have here. We felt that way. We sense that. That's been proven to be true so far. Operator: The next question comes from Keith Housum from Northcoast Research. Keith Housum: Sticking along the lines of the Silvus acquisition, Jack, can you remind us like what's the breakout between like your international versus domestic business? And what's military versus like state and local? And is the opportunity -- I'm sure the opportunity is in both, but how much is Silvus products used in the state and local market today? John Molloy: Yes. So I think right. The majority of their business today, as we stand today, and remember, it is international. Do not, and this is 1 of the things we want to make sure we get across. When you think about Silvus, the opportunities are international defense U.S. DoD orders, federal police. Those are the opportunities. State and local, there's -- listen in a perfect world, would the FCC authorized [indiscernible] spectrum but they haven't. We're focused on what we have. We've got the team focused on. There's a lot of markets to go after an unmanned international DoD, U.S. DoD and border security that's enough for us to say grace over, and that's really where we're focused right. Gregory Brown: And by the way, that doesn't mean domestically here in North America, Super Bowl, Presidential inauguration, FIFA World Cup, where there's FCC exemptions on bandwidth, yes, Silvus technology can be used in a multiagency interoperable environment for high speed. John Molloy: Exactly Olympic -- and by the way, really proud. I mean, one of the things -- a number of us were out -- we sponsored the Ryder Cup. It was so cool to see Streamcaster Radios, which is the brand -- that's the Silvus brand named Radios to be piping video back from live video feeds, security feeds back to the joint operation center in NASA County, so cool, made us all really proud. Keith Housum: Great. I appreciate that. Switching gears a little bit over the command center side, great growth of 16%. Perhaps could you unpack a little bit there about where was the success greatest which is a command center where are you guys getting the best traction right now? Jason Winkler: You're right, Keith, it was 16% growth. Drivers for that, as we talked about earlier, continue to be APX NEXT applications. They are exceeding our expectations. That's why we now outlooked already a next year ending number of 300,000 devices connected and subscribed to that package. And additionally, we saw some strength -- additional strength in the control room or 911 international parts of our business. And of course, the continued cloud adoption and subscription is also helping in that business as well. Gregory Brown: And obviously, we're not going to guide any specifics until the February call. But I think the Q3 command center performance reinforces our confidence in the overall 12% expectation for the year and sets us up well for another strong demand center performance next year. Stay tuned. Operator: The next question comes from James Fish from Piper Sandler. James Fish: Nice to be covering you guys. Just going back on SVX, understand the penetration that you're seeing already. But can you just talk to the competitive nature now that you've got that in the market for a full quarter? Are you seeing any change in aggressiveness from competitors on the pricing side given some of the technology that you guys have embedded with SVX? John Molloy: Yes. Maybe I'll start, James. First of all, I want to -- SVX is a North America, ultimately, Australia. It's a P25 device. I want to make sure, internationally, you heard Jason talk about we're the market leader internationally in body worn. And I would just break the 2 apart. If you look at the success we've had, the largest deals in Europe, and we continue to pick up countries in Europe. And so North America, the market leader, everybody is aware who the market leader is. We've always felt that the market wants an alternative. Now ultimately, even with the 70 customers we've already secured post announcement over the course of the last few months, even the ones that aren't video using video today, they have a decision to make. It comes down to a total cost of ownership, how many devices does a police officer want to wear. It's our contention that they like to wear 1 device as opposed to 2. It's ours that they would like a swappable battery that elongates the useful life. We also think they don't want to pay for 2 different coverage plans. They can take advantage of the coverage plan that they get inherently with the APX NEXT radio. And we think that's the discussion that a lot of our customers are going to be navigating. They're going to navigate them today, and we'll continue to be navigating those over the future. And we love the device. More importantly, what Mahesh and his team have continued to drive in this device, it's not a body-worn camera, I think, as he very eloquently said, it's an AI assistant, and we'll continue to make sure that we do more and more for our customers in that capacity. So we'll see more to follow. Mahesh Saptharishi: One more thing that I'd add to that is we have a long history of building mission-critical audio quality capabilities. when you think about a body-one assistant, this is not like using your iPhone or your Android device and talking to a voice assistant where there are sirens blazing, there's lots of ambient noise. This is an area that we have historically excelled in, the ability to isolate voice, enhance voice and now have it feed to an AI capability. That is something that we are uniquely capable of. We have expertise in, and that is paying off in the context of SVX and competitively as well. Operator: The next question comes from Amit Daryanani from Evercore ISI. Jyhhaw Liu: This is Irvin Liu on for Amit. I have 1 and a follow-up. I realize that it's been less than a quarter since you have closed on Silvus, but can you talk about your long-term potential as it relates to developing Silvus specific software and solutions. And does your 20% Silvus growth outlook for next year embed any S&S revenue? Jason Winkler: As it begins with us today, Silvus is largely recorded in products and SI. That's the nature of what they have today, although we see significant opportunity and much like we did with LMR a decade ago, offering more and more software and services around a strong platform of very, very differentiated hardware and software-enabled devices. So we see opportunity to grow the SMS contribution, but from the beginning or where we're starting from, it's largely products in SI. Mahesh Saptharishi: Maybe 1 important thing to note is within the Silvus Streamcaster Radios, we do introduce things like low probability of detection capabilities, anti-jam capabilities, almost as features or software upgrades. It's important to remember that Silvus is a software-defined radio built on COTS hardware. And I think this allows us very rapidly to include new capabilities into the existing installed base. Jyhhaw Liu: Got it. And then for my follow-up, you mentioned that your expectations for APX NEXT installed base is reaching 300,000 by next year. But can you confirm whether or not this uptick is an acceleration relative to what you have seen historically in prior LMR product cycles? And just given that a lot of your expanded capabilities related to SVX, AI and VFR are relying on the connectivity provided by APX NEXT. Do you see potential for the percentage of your installed base using flagship devices expanding over time? Jason Winkler: Well, the installed base that we've talked about is about 2 million first responders in the U.S. So even at next year's year-end we'll have 300,000, there's a long opportunity ahead of us in terms of eventually penetrating that entire base. Operator: The next question comes from the line of Meta Marshall from Morgan Stanley. Meta Marshall: Great. Appreciate the question. I guess just 2 quick questions for me. On the OBAAA or OBBA impact. Just any impact that you guys are foreseeing to your tax rate just as you guys have looked at it. And then second, just as you look to mitigate some of the tariffs, is that largely being done through pricing? Or just kind of how are you rejiggering manufacturing to accommodate tariffs? Jason Winkler: Thanks, Meta. We've done the analysis around what the tax rate is. There's some small puts and takes at the effective tax rate and the cash tax rate, but nothing meaningful. It does afford us with some -- a little bit more flexibility. As I think about what the OBBA means for us, it's really more what it means for our customers and the sources of funds that they have, whether it's governments and the focus on borders and security or even whether it's enterprises and some of the availability around accelerated depreciation and the like, we view it as favorable to our overall selling environment. John Molloy: And in terms of mitigating actions, we've done for tariff mitigation inventory acceleration, dual sourcing with 2 EMSs, there is some load balancing we can do with some lead time. A lot of the manufacturing is USMCA compliant, which is a friendly fact in a way to mitigate tariffs. But the team has done and our supply chain team has done a great job kind of proactively in anticipating what could be in different scenarios and feeding that to the operational improvements of the firm and what actions we need to take. Operator: [Operator Instructions] Our next question comes from Ben Bollin from Cleveland Research Company. Benjamin Bollin: Jack, could you talk a little bit about the sales motion with Silvus. How does that look versus other technologies in the portfolio? Specifically, I'm trying to understand the duration, just how similar or different the process is and your overall visibility? And then I had a follow-up as it ties into backlog and how that develops over time. John Molloy: Sure. So there's really -- think of it in terms of where we're going, where we're making it. Greg alluded to the fact that we're making investments into the selling motion. There's really a couple -- there's -- number one, what I would call longer-cycle sales efforts, which is getting on the program of records. We're going to be increasing our sales coverage on all levels as it relates to that. The second piece of it, I think it's been well documented, if you're reading up on what's happening, particularly within the U.S. DoD right now, the DoD is going through, under the current administration going to what I would kind of call some nontraditional procurement. So there's a lot of trialing of new technologies, particularly around products, particularly in around the space, as I talked about earlier on unmanned systems. Silvus has mandate technology for all levels, including down to Class 1 drones right now with the StreamCaster 5200, which is the newest, smallest form factor. so we can play in all of those areas. Internationally, they have grown -- I mean, this is an incredible company that's grown from a technical pedigree. They had kind of limited international coverage. A lot of that was brought to them through partners. We're investing more people, particularly at some of the leading NATO countries to go help shepherd our long-term benefits there. And then there's just the unmanned systems. So I think we mentioned last quarter, there's around 120 domestic drone manufacturers right now, and we're on almost all of those platforms. So there's just the work to do to continue to go and trial and make sure that our technology is validated and being used on all those platforms as well. So there's really -- those are really 3 different facets that we're focused on right now. Some Silvus was resourced. Some will be incremental investments. And then the last piece of it is all the relationships that we have in the 120 countries that we do business in, the relationships we have in defense and border security, federal policing in those places and to make sure that we're providing some synergies across the Motorola and Silvus sales teams as well. Benjamin Bollin: That's great. And can you -- I think I heard it earlier, but how much is still this contributing to backlog? Or how does that develop as a backlog contributor over time? Jason Winkler: So this came with about $200 million of backlog. Operator: Our final question today is from the line of Louie DiPalma from William Blair. Louie Dipalma: Great. We picked up that AeroVironment is using the Silvus StreamCaster radio for their new Switchblade 400 loitering missile. You guys discussed Silvus in terms of how it's well positioned for 20% growth next year. I was wondering how do you view Silvus as positioned for more like longer-term like major Army programs such as the next-generation command and control and the Soldier Borne Command Center that Anderol is prototyping right now. John Molloy: Yes. So Louie, yes, it's good to see. We're very pleased with the relationship we have with AeroVironment. But specific to the next-generation command and control, we will be a key part of the architecture in both the Anderol and the [Lockheed solutions]. So we're really pleased there. We think -- by the way, we think we think there's more that we can do within NGC 2 as well. So stay tuned there, but really good relationships on both fronts there. And then the soldier borne mission Command as you know, that's really been the transition from IVAS to soldier borne mission Command. We're working with both Anderol and Rivet in the Soldier Borne Mission Command architecture. But I would say with, particularly with SPMC, it's early days. So I think there's still a lot to do on those fronts. But yes, rest assured, we're involved there. There's also -- there's also a big project going on with the Bundeswehr in Germany, the DLBL project. And we're piloting with integrators there. And if you remember, we're a long-standing partner with the GMOD, that we're doing their work both with the Army and Navy, big long-tenured projects, and so we're leveraging our relationships there within Germany there. In fact, some of our team is over in Germany as we speak. So a lot of really interesting projects going on around the globe right now. Louie Dipalma: Fantastic. It seems as though you're involved in all of these big projects. Operator: This concludes our question-and-answer session. I will now turn the floor over to Mr. Greg Brown, Chairman and Chief Executive Officer for any additional comments or closing remarks. Gregory Brown: Yes. I simply want to say thank you to all the Motorola people, Motorola Solutions people. All of our partners that work closely with us. Again, welcome Silvus. We couldn't be more proud to have you on our team. We feel good about where we are, like the fact that we had a record Q3 orders and all the other records that we referenced in the underlying demand and momentum of the business. Silvus is exceeding our expectations. I think the portfolio investments that we've made are resonating with our customers, and we're planning for another year of strong revenue and earnings and cash flow growth next year, and we'll talk to you on the next call. Appreciate the questions. Appreciate your engagement. Operator: This does conclude today's teleconference. A replay of this call will be available over the Internet within 3 hours. The website address is www.motorolasolutions.com/investor. We thank you for your participation and ask that you please disconnect your lines at this time.