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Operator: Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. At this time, I would like to turn the call over to Lucas Sullivan, Director of Financial Planning and Analysis. Mr. Sullivan, you may proceed. Lucas Sullivan: Thank you, Chris. Good morning, everyone, and welcome to EMCOR's Third Quarter 2025 Earnings Conference Call. For those of you joining us by webcast, we are at the beginning of our slide presentation that will accompany our remarks today. This presentation will be archived in the Investor Relations section of our website at emcorgroup.com. With me today are Tony Guzzi, our Chairman, President and Chief Executive Officer; Jason Nalbandian, Senior Vice President and EMCOR's Chief Financial Officer; and Maxine Mauricio, Executive Vice President, Chief Administrative Officer and General Counsel. For today's call, Tony will provide comments on our third quarter and discuss our RPOs. Jason will then review the third quarter and numbers, then turn it back to Tony to discuss our guidance before we open it up for Q&A. Before we begin, a quick reminder that this presentation and discussion contains certain forward-looking statements and may contain certain non-GAAP financial information. Slide 2 of our presentation describes in detail these forward-looking statements and the non-GAAP financial information disclosures. I encourage everyone to review both disclosures in conjunction with our discussion and accompanying slides. And finally, as a reminder, all financial information discussed during this morning's call is included in our consolidated financial statements within both our earnings press release issued this morning and in our Form 10-Q filed with the Securities and Exchange Commission. And with that, let me turn the call over to Tony. Tony? Anthony Guzzi: Thanks, Lucas, and welcome to the call. And I'm going to be on Pages 4 through 5 of our presentation. Good morning, and welcome to our third quarter 2025 earnings call. I'm going to cover the financial highlights for the third quarter and then provide commentary on what has gone well through the first 3 quarters of this year, which has been a lot. Jason will cover the quarterly financial results in detail. We had another strong quarter at EMCOR. We earned $6.57 in diluted earnings per share and generated revenues of $4.3 billion, which represents a 16.4% increase from the prior year period. We achieved an exceptional operating margin of 9.4% and had strong operating cash flow of $475.5 million. For the third quarter, we had a book-to-bill of 1.16, with remaining performance obligations at a record $12.6 billion, which represents an increase of $2.8 billion year-over-year and $2.5 billion from December of 2004. We continue to allocate capital with discipline. For the first 9 months of 2025, we allocated just over $430 million on share repurchases and utilized $900 million for acquisitions. Our balance sheet remains strong and liquid, providing the fuel to support our growth and capital allocation strategy. So what's driving this outstanding performance in the first 3 quarters of 2025. Our Electrical and Mechanical Construction segments continue to earn impressive operating margins and generate growth in their base of business as demonstrated by increases in both revenue and RPOs across a number of key sectors. We execute well for our customers in these segments by using VDC, BIM and prefabrication coupled with strong planning, excellent labor sourcing and management and disciplined contract negotiation and oversight. We have managed our project mix well and continue to gain the confidence of our customers across geographies and diverse market sectors. With respect to data centers, we continue to improve our capabilities to serve an increasing number of data center sites with multiple trades and across a diverse set of customers. As I have said before, we are known for having the best field leadership in the business, and they operate with focus, discipline, humility and grit. Our Mechanical Services business in our U.S. Building Services segment continues to execute well with revenue growth of nearly 6% in the quarter and 7% year-to-date and an operating margin in the high single digits. The impact of the successful restructuring in our site-based businesses is reflected in this segment's third quarter operating margin expansion. Our Industrial Services segment had some demand headwinds during the year as some large turnarounds were moved into the fourth quarter or further into 2026. And lastly, we had a successful third quarter in our U.K. Building Services segment. In September, we announced the sale of our U.K. business and believe that we will complete this transaction by year-end as we await U.K. regulatory approval. EMCOR U.K. has a very talented management team, and they will serve their new owners well, and we will miss them. Overall, we had another strong quarter and a robust performance year-to-date in 2025. Now I'm going to turn to the RPO section. As I previously mentioned, we leave the quarter with a diverse and strong set of RPOs at $12.6 billion. Due to the growth in the majority of the sectors we serve, our RPOs have increased 29% year-over-year and 25% when compared to December of 2024. On a sequential basis, RPOs have increased 6% from June to September. Long-term secular trends across key sectors continue to support this growth. Driven by robust data center demand, RPOs within network and communications totaled a record $4.3 billion at the end of September, almost double that of the year ago period. While acquisitions have added to our data center capabilities and allow us to serve our customers in additional geographies, over 80% of our RPO growth we have seen in this space during 2025 has been organic. Healthcare RPOs totaled $1.3 billion. While the health care sector has always been core to EMCOR, the acquisition of Miller Electric has expanded our opportunities in this sector, contributing to the nearly 7% RPO growth we experienced year-over-year. Manufacturing and industrial RPOs totaled $1.1 billion. In addition to demand driven by customers' onshoring and reshoring initiatives, recent growth in this sector has also benefited from the award of certain food process projects within our Mechanical Construction segment as well as a renewable energy project within our Industrial Services segment. And led by our Mechanical Construction segment, water and wastewater RPOs increased by over $300 million during the quarter and now total $1 billion as we continue to win projects throughout Florida. Although RPOs within high-tech manufacturing have decreased from September of last year, we continue to believe in the long-term fundamentals of the sector, while acknowledging that award of these projects can be episodic in nature or impacted by our resource allocation decisions as we seek to deploy our workforce in a manner that achieves optimal outcomes for EMCOR and our shareholders. With that, I will gladly turn the presentation over to Jason to cover our financial results in detail. Jason Nalbandian: Thank you, Tony, and good morning, everyone. As Tony mentioned, over the next several slides, I will review the operating performance for each of our segments as well as some of the key financial data for the third quarter of 2025 as compared to the third quarter of 2024. I'll start on Slide 6, which is revenues. With growth of 16.4%, revenues of $4.3 billion set a new company record for a third quarter. Acquisitions contributed $306.6 million, with the largest incremental revenue coming from Miller Electric. On an organic basis, revenues grew by 8.1%. We experienced growth within all of our reportable segments and demand for our services continues to be strong across most of the sectors that we serve. If we look at each of our segments, revenues of U.S. Electrical Construction were $1.29 billion, increasing 52.1% due to a combination of strong organic growth and the acquisition of Miller. Consistent with our commentary over the last several quarters, while we continue to experience greater data center demand, growth within this segment remains broad-based as increased revenues were generated from nearly all market sectors. In addition to networking and Communications, where revenues grew by nearly 70% year-over-year, Electrical Construction saw notable growth in commercial, health care, institutional and transportation. This once again demonstrates the broad offerings of this segment. Revenues in Electrical Construction also benefited from higher levels of short duration projects and service work due in part to the capabilities we've added through the Miller acquisition. Revenues of U.S. mechanical construction were a record $1.78 billion, up 7%, almost entirely through organic growth. Due to greater demand for data center construction projects, this segment saw the largest increase from the network and communications market sector, where quarterly revenues nearly doubled year-over-year. Beyond data centers, greater revenues were generated from several other market sectors with the most notable increase within manufacturing and industrial, led by food processing construction projects. Partially offsetting the revenue growth within mechanical construction were decreases within high-tech manufacturing as we completed certain semiconductor construction projects and commercial due to less warehousing and distribution project revenue. While we are starting to see some resumption in demand from our e-commerce customers, we are just beginning to ramp up on these projects. On a combined basis, our Construction segment generated revenues of $3.1 billion, an increase of 22.2%. Looking next at U.S. Building Services, revenues of $813.9 million reflect a 2.1% increase year-over-year. This marks the second quarter of revenue growth since the loss of the site-based contracts that we've previously referenced. Similar to the second quarter, the growth in Mechanical Services exceeded the revenue decline within site-based and driven by each of its service lines, our Mechanical Services division generated revenue growth of 5.8% in the quarter, all of which was organic. Turning to our Industrial Services segment. Revenues of $286.9 million are in line with that of the year ago period. Decreased field services revenues as a result of the completion of a large renewable fuel project were offset by an increase in shop service revenues, primarily due to greater new build heat exchanger sales. And lastly, U.K. Building Services generated revenues of $136.2 million, which represents an increase of $29.8 million or 28.1%. While favorable exchange rate movements did positively impact the segment's revenues by $4.8 million, growth was largely driven by the award of recent facilities maintenance contracts by new customers and increased project activity with existing customers. If we turn to Slide 7 for operating income, we generated a record third quarter operating income of $405.7 million and earned a very impressive 9.4% operating margin. Looking at each of our segments, U.S. Electrical Construction had operating income of $145.2 million, which represents a nearly 22% increase. As a result of the revenue growth I referenced, this segment experienced greater gross profit across the majority of the market sectors in which we operate, resulting in the increase in operating income. While down from the unprecedented 14.1% earned in last year's third quarter, the segment's operating margin of 11.3% remains strong, reflecting the overall performance and execution by our companies. In addition to incremental intangible asset amortization, which reduced operating margin by 90 basis points, operating margin in the quarter was impacted by lower profitability on certain projects in new geographies where we encountered reduced labor productivity while investing in the development of our workforce. Operating income from U.S. Mechanical Construction of $229.3 million increased by 6.7%, in line with the growth in segment revenues, while operating margin of 12.9% is comparable year-over-year as we continue to execute well across our project portfolio. Together, our Construction segments grew operating income by 12.1% and earned a combined operating margin of 12.2%. U.S. Building Services generated operating income of $59.4 million, an increase of 6.9% and expanded operating margin by 30 basis points to 7.3%. In addition to the increase in revenue, the operating performance of the segment benefited from a reduction in SG&A margin as we are beginning to see the impact of the restructuring we recently completed within our site-based business. Moving to Industrial Services. Despite revenues which were relatively consistent year-over-year, operating income of this segment nearly doubled due in part to a more favorable mix given a greater percentage of higher-margin shop services work. And lastly, U.K. Building Services earned operating income of $7.6 million or 5.6% of revenues. The increased profitability of the U.K. business was due to greater gross profit stemming from increased revenues, a more favorable project mix and effective cost management, which resulted from the leveraging of their overhead during a period of growth. If we move to Slide 8, I'll cover a few highlights not included on the previous slides. Gross profit of $835.3 million has increased by 13.7%, and our gross profit margin for the quarter was 19.4% SG&A of $429.6 million increased by $58.4 million, while our SG&A margin remained consistent year-over-year at 10% of revenues. Accounting for nearly 2/3 of the increase in SG&A was $32.2 million of incremental expenses from acquired companies and $5.7 million of incremental intangible asset amortization expense. Excluding these items, SG&A grew by $20.5 million, largely due to employment costs as we continue to invest in headcount to support our organic growth, and we experienced some increased incentive compensation within certain of our segments given higher projected operating results. And finally, on this page, diluted earnings per share was $6.57 compared to $5.80, an increase of 13.3%. If we look briefly at Slide 9, this slide summarizes our results for the first 9 months of 2025. With year-to-date revenue growth of 15.5% and operating margin expansion of 20 basis points or 30 basis points when you exclude the impact of the transaction costs incurred earlier this year, our performance for the first 3 quarters set a number of new company records. In a later slide, Tony will outline our updated earnings guidance for 2025. As I've done in the past, I mentioned that now as this guidance reflects continued strength in our margins. Specifically, at the low end, we have assumed a full year operating margin, which is equal to what we have earned year-to-date, while the high end reflects what we could achieve if we produce an operating margin in the fourth quarter equivalent to the record margin we earned in Q4 of last year. Let's move to Slide 10, which is our balance sheet. With cash on hand of $655 million and working capital of $878 million, our balance sheet as of September 30 remains strong and liquid, positioning us well to continue to deliver for our customers and shareholders. Although not shown on the slide, during the quarter, we had operating cash flow of $475.5 million and have generated $778 million year-to-date. For the full year, we continue to estimate that operating cash flow will be at least equal to net income and approximately up to 80% of operating income. Given our strong operating cash flow during the quarter, we repaid the $250 million that was previously outstanding under our revolving credit facility. And before I turn the call back over to Tony, I just want to quickly look at Slide 11, which summarizes the pending divestiture of our U.K. business. As Tony mentioned and we previously announced, we have entered into an agreement to sell EMCOR U.K. for approximately $255 million. This transaction, which we anticipate will close prior to the end of the year, sharpens our focus on core end markets throughout the United States while supporting our balanced capital allocation strategy. Proceeds will be used to pursue further organic growth and strategic M&A with a focus on electrical and mechanical construction as well as mechanical services while also returning capital to our shareholders. Due to the size of the U.K. business, this transaction will not be treated as discontinued operations. And as a result, we will retain the revenue and earnings that have been generated by the business through the close of the transaction. Therefore, while EMCOR U.K. currently provides us with approximately $500 million of annual revenue and $0.45 of diluted EPS, the impact in the current year will be limited to the portion of 2025 that we no longer own the business. This has been reflected in the updated earnings guidance, which Tony will share with you. And when providing our Q4 results, we will adjust for transaction expenses and any gain from sale as those items are excluded from our guidance. With that, I will turn the call back over to Tony. Anthony Guzzi: Thanks, Jason. We've been executing very well. And as a result, we will tighten our 2025 revenue and earnings per share guidance. Specifically, we're updating our full year 2025 revenue guidance to a range of $16.7 billion to $16.8 billion from a previous range of $16.4 billion to $16.9 billion. This reflects the momentum we have seen in the business while adjusting for the anticipated sale of the U.K. segment. We are also narrowing our guidance for non-GAAP diluted earnings per share to a range of $25 to $25.75, reflecting an increase of $0.50 at the low end and $0.25 at the midpoint. In order to continue to earn strong operating margins, we will need to continue to execute with discipline and efficiency for our customers. I always remind our investors that this is not a quarter-to-quarter business with respect to operating margins and the past 4 to 8 quarters on average reflect the underlying margins in our business. There remains momentum and demand in key sectors, especially in data centers, traditional and high-tech manufacturing, health care, water and wastewater, HVAC service, building controls and retrofit projects. Macroeconomic uncertainty always exists, especially around tariffs, trade and now we have the government shutdown again. But we believe our guidance reflects the potential impact of such uncertainty as we view it today. We will remain disciplined capital and resource allocators. Our strong balance sheet bolsters our ability to execute a healthy pipeline of acquisitions and also robust opportunities to invest in our organic growth and return of cash to shareholders through dividends and share repurchases. When we talk about resource allocation, we work to maximize our opportunities across the right sectors, customers, contracts and geographies. Our resources, that is our supervision, our virtual design and construct or VDC capability, prefab and as important as anything, our subsidiary and segment leadership's time, attention and focus as they are ultimately the quarterbacks that direct this allocation. We think about that across all those sectors, customers, contracts and geographies. Last night, we signed an agreement to acquire the John W. Danforth Company based in Buffalo, New York, with operations across Upstate New York and Ohio. Danforth is a mechanical construction company with expertise in data centers, health care, industrial, manufacturing and commercial. They also have excellent VDC and prefab capabilities. Danforth should add about $350 million to $400 million in revenues with solid steady-state margins. However, in the first year, those margins will be reduced to backlog amortization. The transaction is expected to close in the fourth quarter, subject to customary closing conditions. They are a great team. They have a great cultural fit with us, and we have worked together successfully in the past. We do look forward to much success together, and we look forward to soon welcoming the Danforth team to our EMCOR team. And I'm going to close with what's probably the most important statement that I make at every call. I want to thank my EMCOR teammates. Thank you for your dedication to EMCOR and our customers. Thank you for living our values every day. Thank you for taking care of one another and keeping each other safe. And thank you for the outstanding results you continue to produce for our shareholders. And with that, I will take questions. Operator: [Operator Instructions] And today's first question comes from Brent Thielman with D.A. Davidson. Brent Thielman: Tony, maybe just to build upon some of your comments and the concluding statement there. Obviously, I think maybe somewhat -- folks somewhat surprised by the margin profile this quarter. I think to your point, this is -- it's a construction business. You have impacts from mix and other factors in any quarter. And maybe, Tony, can you build on the margins that you're seeing on new work? Are they attractive relative to what we see reported here? Just an opportunity to address those concerns here. Anthony Guzzi: This is some of the strongest overall operating margins we've had in a quarter. We knew we were going to have amortization headwind in the Electrical segment. And without the amortization headwind or the investment in new markets, reality is we're 14% plus in Electrical. Mechanical margins are very strong. Building Services margins are strong. Jason, I think year-to-date, these are the best margins we've ever had on a year-to-date basis. Jason Nalbandian: And I think the thing that I go back to, Tony, is we've said over time, right, a rolling 12- to 24-month average is where we expect our margins to be. Those margins would be somewhere between 9.1% and 9.4%. And on a consolidated basis, we delivered 9.4% in the quarter. And when you look at where we were as we exited Q2, we said for full year, our margins would be between 9% and 9.4%, and we delivered at 9.4% in the quarter. So I think we're delivering the margins that we anticipated. Anthony Guzzi: Yes. And what the business does. I mean, yes, it bounces around a little bit. But you don't buy something the size of Miller with the amount of backlog amortization we're going to go through RPO amortization we're going to go through and be able to keep margins at the levels they were. I mean it's just -- that's not we did that when we gave our guidance for the year. So I'm a little befuddled about some of the margin reaction to be straight with you. Brent Thielman: Yes. Understood. I guess a separate question, nearly a double, if not more, in data center RPOs. I think folks understand that's a pretty good market. Maybe if you could just touch on maybe some of the other sectors and maybe what areas are surprising you in terms of relative strength or maybe even getting stronger that you'd point out outside of data centers? Anthony Guzzi: Yes. I mean I think you hit on a really important question, Brent. I mean we have a broad base of business outside of data centers that's pretty successful. And I think a really good marker, and I always think about this in our business broadly, is what goes on in the mechanical service business, which grew mid-single digits, has strong operating margins and almost has no data center exposure. I think I have this right. 7 of our 10 mechanical segments had growth and 10 of our electrical market sectors and 10 of our 11 electrical market sectors had growth. We're seeing strong growth on the mechanical side in water and wastewater. We continue to see strong demand in health care in both sectors, really. And the addition of Miller really bolsters our health care exposure on the electrical side in some of the fastest-growing health care markets in the country of which they're exposed to. We continue to see good opportunities in traditional manufacturing, especially for us in food processing. It's one of the few things we do on a large-scale EPC, and we do it very well out of our Shambaugh subsidiary in Fort Wayne, Indiana. We continue to see pretty good demand in traditional retrofit commercial. It's a strong market for us, especially with an eye towards energy efficiency and the restacking of buildings that continues to go on. I think high-tech manufacturing, that's a choice. We have very strong demand in parts of the country, and we're executing very well. In other parts of the country, it's a little lumpier or we may rededicate those resources, quite frankly, to more data center work versus slog through another semiconductor plant in parts of the country. We did very well on it. It's just a very difficult customer set and application in one particular case. So when you put it all together, demand is broad-based. It's strong. We like having diverse demand. We're going to continue to pursue diverse demand. And I think that's good news for our shareholders for the long term, and we're not giving up anything on the data center side by doing that. As you said, with the size and... Operator: Next question from Adam Thalhimer with Thompson Davis. Adam Thalhimer: The organic expansions you talked about that impact of the Electrical segment, Tony, can you just talk about the investments you're making, how long that headwind might persist and what the benefit? Anthony Guzzi: I think typically, Adam, it's a 1- or 2-quarter headwind as we start up the job. And it's a margin investment is what it is. It's not really a capital investment upfront. It's a margin investment as we have to go through the learning curve of building a labor force. And sometimes that takes a little longer. Sometimes we get it right at the beginning of a new market. And sometimes it takes us further into the job to get it right. And we do that all the time. And we only call that out, I think, to make investors aware that it's not a linear line when you expand from what was 3 or 4 data center markets in 2019 serving to over 16 today electrically and from 1 or 2 mechanically to over 6 today mechanically. That's not a linear straight line. We have yet to not do it successfully. And it's just more of a pointing out that, hey, that's part of how we grow the business and it's part of what we almost look at it as R&D to go into a new market. Jason Nalbandian: Yes. And I think there's a combination of things that we expect to happen as we move forward, right? We'll build that labor force -- we'll get that efficiency. We'll inherently become more productive as we do the next phases of these contracts, and we'll learn some lessons here and we'll price our jobs to that market. So it's a number of things that we think kind of improve as you go from the first set of jobs to those next levels. Anthony Guzzi: It's an ongoing headwind always in the numbers. This was a little more if it was a little bigger site. Adam Thalhimer: Okay. Well, I think -- I mean you left the prospect of flat Q4 margins in the guidance, which I thought was interesting. Just curious how you might get to the high end of the Q4 margin guide. Anthony Guzzi: I think it's just project timing. I mean, at this point, I mean, there's really nothing new. And then we'll have -- depending on when Danforth close, it's not going to really add anything, but we'll have revenue coming in without a lot of margin because of the headwind of the backlog amortization. We're still running off the Miller backlog amortization. I think those are the kinds of things. Operating-wise, we expect to operate pretty well in the field. Operator: And the next question comes from Brian Brophy with Stifel. Brian Brophy: Just wanted to -- following up on the geographic investments. Just wanted to see if you could help us quantify, I guess, the impact. I think some of the numbers you gave, my back of the envelope math suggests 200, maybe 250 basis point impact to margin in the quarter. Am I in the ballpark there? Jason Nalbandian: Yes. I think I'll give you dollars and we can work that into margins. I mean if we look at the jobs that drove it, it's probably about $13 million or so. Brian Brophy: Okay. Okay. That's helpful. And then -- appreciate all the commentary on the U.K. business. Curious how you guys are feeling about the business portfolio after this transaction closes? Is there anything else you guys would consider noncore? Or how are you thinking about the portfolio at this point? Anthony Guzzi: We look at our portfolio all the time. And portfolio actions to the size of the U.K. Look, we're making portfolio adjustments all the time in our mechanical and electrical construction business and even mechanical services. One of those portfolio adjustments we just talked about. We invested in a series of projects in a geographic market or 2 to gain scale in that market as a $13 million investment. You all don't think about that as a portfolio action. It was a little larger in this quarter, but it major metro areas in this country, we have no interest participating on the electrical side in the traffic market anymore. And we've been slowly winding that down across a number of markets. So those kinds of things that we call routine course of business, the ins and outs, opening a new -- couple of new branch offices in the mechanical service business, either through a small asset purchase of some guys' tools and trucks or which there's one move in one way that we announced, and there's one moving the other way, right? The U.K. is out, John W. Danforth is in. The U.K., really, it's a success story. For people that have followed us over a long period of time, know that, wow, we turn something into something very successful with a great team. And it was the right time to exit for our shareholders really for that team and for that business. It wasn't going to be a place that we -- because of all the other opportunities we have, it wasn't going to be a place that we were going to allocate a lot of capital to grow. Like, for example, we weren't going to take the U.K. platform and grow through the rest of Europe to build a facility services business. That's not something we were going to do. And it's probably something that needed to happen to continue the growth in that business. John W. Danforth is another decision, right? Someone we knew, someone we've known very well in a market that's steady, in a market where they have a leadership position with a group of people that we have worked with before. They got some interesting capabilities in BIM, VDC, prefabrication. And those capabilities have -- they work in the data center space, they work in the heavy industrial space. They work in the health care space, and they execute those projects very well. So not a one-for-one as far as exchange, but it's the kind of thing, midsized mechanical construction acquisition in I think. And we have balance sheet capability to do both without selling the U.K., but it was the right time. If you look at other parts of our portfolio, we examined it all the time. And we're probably headed towards is how do we think about the rest of our site-based business, which is pretty integrated into our Building Services business. It's on the improvement trend. And then we have the Industrial Services business, which has had a tough couple of years. That being said, some of the things we do there, some of the prospects we have, we think we can improve it. And I always say these things this way. Deals happen both ways when they happen, and there's a timing that's right. And right now, we think we have a good portfolio that we're executing on. It still has upside across all the businesses that we're operating in. Operator: The next question is from Justin Hauke with Baird. Justin Hauke: Great. Yes, I guess maybe I was going to build on that last question just on capital allocation. And obviously, you did the Danforth after the quarter on a good cash flow quarter and you've got the proceeds coming in from the U.K. But should there be any read or do you want to make any comments about just the lack of buybacks in the quarter? Is that signaling that there's other kind of pending transactions that are out there that maybe are closer to coming than not or anything about just -- usually, your buybacks are pretty predictable quarter-to-quarter. Anthony Guzzi: Yes. We -- yes and no. We did a greater amount than we typically would do in the first part of the year, and most of that executed off of a 10b5-1 -- we're not really traders in our stock. There was a bit of a dislocation in the 10b5-1 picked it up in the second quarter. That being said, we're not capital constrained. We'll be balanced capital allocators over a long period of time. If you go to the end of my remarks, we look at all uses of capital from organic investment. And it's interesting. We were thinking about what we've added this year or we'll add by the end of the year. We'll add about 400,000 square feet, give or take of prefabrication space and our ability to prefabricate some call it modular construction, maybe it's the next step down, which for the most part, we do for our jobs. And we do that across our fire life safety business. We do that in our electrical business, and we do that in our mechanical business. And Danforth adds to that capability. They have a very well-run, very modern shop, and it's one of the attractions they had with us in a pretty good labor market. So we don't have capital constraints. There's not a lot of timing going on unless there's a big dislocation. And I wouldn't consider today a big dislocation. We ran up in a week and we came right back to where we were. And we think we're performing well. Our cash flow is good. We're going to keep a strong and liquid balance sheet. And I think what you see on the last page of our presentation, you take a 6-year trend, I think the next 6 years will look very similar to the last 6 years. Operator: The next question comes from Avi Jaroslawicz with UBS. Avinatan Jaroslawicz: So I noticed that organic growth has been running around mid- to upper single digits the last few quarters. Are you thinking that should be picking up at all in the near term just based on some of the backlog growth that you're seeing? Or does this seem like a more comfortable rate for the foreseeable future? Anthony Guzzi: Look, I think high single digits, low double digits is probably a comfortable rate. I mean, the reality, right, we're a big company and the law of large numbers start to take over. You think about what we have to add from an organic -- to say we're growing 10% organically and take our guidance, that means we added between $1.5 billion and $2 billion of revenue organically in a year. That's pretty darn good and still maintain the cash flow characteristics we have and the margin profile we have. And Jason, I think that's probably not a bad way to look at it. Jason Nalbandian: I agree with that, Tony. Especially when you look -- I would look at the RPO growth sequentially, right, we're growing 5%, 6% sequentially. I think that gives you a little bit more of a tell for the future. The other thing, too, is if you look at our RPO and you look at how much of it will burn in excess of 12 months, right now, I think it's about 20% or so will burn greater than a year. And if you look historically, that number was typically about 15%. So some of the work we're booking now is a little bit longer term, which I think impacts just the turn of that RPO. Anthony Guzzi: Yes. And if you think about it, we had some really good growth markets. I think if you look at our data center business, I think that's going to grow high teens to mid-20s for a while. And if you look at any forecast out there, right, cloud storage, data centers are going to grow high single digits to low teens. and AI growth, depending on who you look at, we've looked at many, and we've -- remember, we're actually connected all the way back through our customers and their capital spending plan. AI data centers are going to grow 20% plus. And that's going to become an increasing part of our business, and that will be by design, but we're not going to neglect our traditional business. And if you look long term, right, we've grown in excess of non-res in our construction businesses. 500 basis points. Jason Nalbandian: Over a 5-year period. Anthony Guzzi: Over a 5-year period. That's probably a pretty good marker. And it may go a little more than that because of the data center concentration, but maybe that picks up another 100 basis points. I mean these are long-term projections. But I think high single digits organic, maybe pick a couple of more points up through acquisition is how we think about the business over a long term and how we have thought about it over a long period of time in our planning. Avinatan Jaroslawicz: Okay. I appreciate that perspective. And then if I could just ask a follow-up in terms of some of the cost of growth that you've been seeing, just with growth having been relatively steady just on the organic side, can you share some more color as to what made this maybe more unique than past situations? You've been growing at a pretty nice clip over the last couple of years. And similarly, have we had any periods where there have been a similar type of level of these start-up inefficiencies in the Mechanical Construction segment? Anthony Guzzi: They show up, yes. And the only reason we called it out this quarter is a little more than usual. This happens just about every quarter, and you can see it in our [indiscernible] disclosure in the [indiscernible] . That's where most of that rests. This was a little more, a little tougher market, a little tougher job building the labor force. And really, it's still a profitable job. I mean I want everybody to think that we invested into a wash job. That's not what happened here. This is classic revenue recognition thing, right? The margin came down versus what we expected. And like Jason said, we probably were a little more optimistic than we needed to be as we entered that new market because, quite frankly, if you looked at the customer and what we thought we were going to be doing and the speed with which is going to happen, we'd work from other markets before, and we had a different experience, and we had a more experienced workforce. Operator: Our next question is from Sam Kusswurm with William Blair. Samuel Kusswurm: I guess to start, looking at your network and communications end market, it looked like revenue was flat sequentially for total U.S. construction. Just given the rapid sequential growth we've seen in the last few quarters, I think some investors may have found that surprising. Can you talk about what caused that pacing to slow? I think you just mentioned that you think we're going to market. Jason Nalbandian: Can you repeat that question for me because we're not seeing that same data point. I just want to make sure I understand the question. You're saying revenue in Network and Communications is flat for construction? Samuel Kusswurm: For total U.S. construction sequentially. Jason Nalbandian: Yes. Year-over-year was growing. Sequentially, I think it's just project timing. I mean, I think year-over-year, we're up tremendously, right? We're probably up almost 80%. I think electrical is up 70%. Mechanical is nearly double. I think it's up 90% or so. Sequentially, I wouldn't really look at this business one quarter to the next and look for... Anthony Guzzi: And RPOs are up almost double, right? Jason Nalbandian: In the quarter, at least 50% of our RPO growth came from network and Communications. Anthony Guzzi: Yes. So yes, we're not -- said simply, we're not seeing any slowing in the market. There's a lot of project timing. I mean you can tell by our surprise that we think it's an area of great strength for us, and it's going to continue to grow. Samuel Kusswurm: Got it. Okay. That's helpful. Maybe just sticking with the data center theme though. Maybe you could just update us on the footprint of your mechanical business. I think last we spoke, you had been in about 5 markets today, but you were thinking of maybe taking that up to kind of the electrical business, 15 markets. How should we think about that as you think about the next year? Anthony Guzzi: We will add 1 to 2 mechanical markets over the next year. The difference between mechanical and electrical is the mechanical, you're -- I would say it takes a little more to build the workforce that you're going to put into that market, and you really, really have to think about your prefab plan as you go into that mechanical market. So there's a level of investment you have to make on prefabrication and VDC that's a little more mechanical to support the next market you move into. So I think we'll grow by another 2 markets or so over the next year, maybe more than that with the acquisition of Danforth. And then I think we'll -- electrically, we'll probably add 1 or 2 markets also at least, maybe more. When you talk about markets, it's also important to think about once you get on some of these sites, that can be a 5-year build. And so we're doing the first building on some of these places, it would be a 5-year build. And a lot of times, you can have 1, 2 or 3 EMCOR companies on the site. And the thing that gets lost in this, I'm not -- I can't even count the number of fire protection sites we're on. In our fire life safety business, we're probably serving 70% of the data center sites in one way or another around the country. Operator: The next question is from Sangita Jain with KeyBanc Capital Markets. Sangita Jain: So I appreciate the color on the RPOs in Network and Communications. Can you just elaborate if you're seeing potentially larger individual bookings in this segment or if there's any change in terms of how these contracts are coming through? Anthony Guzzi: The answer is yes and yes with a caveat. Some of the contracts also will be larger, but they'll be in a contract type called GMP, where we only book a portion of that work over time because they let out the next phase, even though we know we have the whole thing, which may distinguish us from other people. Again, at EMCOR in RPOs is only contracted work. And that includes places where we may have $30 million in RPOs, but we know we're going to do $100 million of work. And so we've been relatively consistent with that. But in general, they're getting larger, I think, is a fair comment. The project size is getting larger, and that's a combination of larger call it storage sites and larger AI sites for sure, with more content, especially mechanically. Sangita Jain: And then are you booking further and further -- like earlier and earlier for projects that may not start, let's say, for a few quarters? Anthony Guzzi: No. We know we're probably going to get those projects. But again, which differentiates EMCOR from some other people in our sector, our space, is even though we're pretty sure we're going to get the next 5 buildings until that next data center is let, it's not in our RPOs, even though it's like an 80%, 90% probability we're going to get it. Jason Nalbandian: Yes. And if you're looking at the growth in RPOs greater than a year, it's not data centers that's driving that. It's some of the other work we do, particularly in the water and wastewater. Yes. Sangita Jain: Okay. That's helpful. And then is there anything in your guide '25 guide for the acquisition that you just referenced? Anthony Guzzi: No, that will be -- any impact they have for '25 will be immaterial, maybe a little bit on the revenue side, but we don't know exactly when we'll close. And then you have to offset that versus when the U.K. will close. We think we called it about right. if the U.K. closes later and this one closes earlier, maybe we go towards the higher -- the top end of that guide more comfortably. Jason Nalbandian: Yes. And on the bottom line, right, if you just think EPS, just because of the backlog amortization, and we typically say this, the impact is negligible in that first, let's say, 12 months or so just because of the backlog amortization. So certainly, for the fourth quarter, impact on EPS of the acquisition should be minimal. Anthony Guzzi: De minimis, yes. Operator: And the next question is from Adam Bubes with Goldman Sachs. Adam Bubes: I think your hours per employee has moved up steadily higher over the last few years. Can you just talk about how much more runway you have to increase utilization, both from an hour per employee basis and then in terms of just productivity? Anthony Guzzi: Well, I think we're going to continue to drive productivity. Again, because of project mix and like we do with more water and wastewater coming in, that is even more different because of some of the subcontractor work we do. I think in general, right, if you look at it, at a minimum, I think we're going to continue to drive at least 3% to 5% better because we got to a pretty good place of productivity. But I think it will be higher than that. Go back to that discussion we just had about our shop investments. We're doing -- our man hours are growing less than our revenues, and we expect that man hours to continue to grow 1/3 to half as much as revenues will grow. And in most of our revenues, this is what's interesting, right? At one time, -- and if you go back 5 or 6 years, we would have had much more equipment in those revenue numbers. And if you take most of this data center work or high-tech manufacturing work we're doing, even some health care work, we're not really buying the major components, and most of that was driven by supply chain. The difficulties around supply chain post-COVID and extended lead times, the owners or the owners through the CM's general contracts, but mainly the owners are buying that equipment now and then sending it to us for a handling fee. So the revenue growth would even be more. And so the productivity we're getting and the ability to grow hours at 1/3 to half the rate of revenues is even more impressive if you look over the last 3 to 5 years versus if you took a 10-year view. Jason, you have anything to add? Jason Nalbandian: Yes. We've talked about it before, right? If you look over a 5-year period, revenue is growing basically 3x what our headcount is growing. I think Tony touched on the productivity tools and the investments in prefab. I think the other thing impacting that, too, is project sizes, right? As project sizes scale up, you inherently get more utilization, and we're benefit. Anthony Guzzi: Well, especially if your indirect. Yes. Adam Bubes: Got it. And then your data center business has grown at a really impressive high double-digit rate. The backlog would support sort of continued double-digit growth. Can you just take us under the hood and help us think how you're able to allocate resources so efficiently and how quick, quickly you'll be able to move labor around from here? What's sort of the sustainable rate of growth that we should be underwriting in that business? Anthony Guzzi: Look, I think if you heard what I just said earlier, and I think you're probably, Adam, looking at the same market forecast we are and compiling them all and trying to get a view. Cloud storage is going to go 9%, 10% is what most people think over the next 5 years. And AI, depending on which ones you look at, are in excess of 20%, 25%. So if you blend that out, we're doing both. There's no reason for us not to believe it's not a quarter-to-quarter business. We continue to look annually year-over-year. I don't know, mid-teens to low 20s depending on the year or the quarter. Eventually, you get into the law of large numbers there, too. But sustainably, I think the good news is we're penetrated with the right customer. I'll share an anecdote with all of you because I think it's really constructive. We are a large data center builder that our customers value. And we just pulled together our 80 top people or so in the data center business. And we actually did it Don at Miller and they hosted it. And first of all, it's a really impressive group of people that really know the business and know the customers. And what we talked about on our side were means and methods on how to drive productivity and contract terms and the things we're seeing that can lead to better outcomes for not only EMCOR, our shareholders, but also the customer. But what was different about this meeting, and I've been doing this for a little while, is -- and I'm not going to get into names, 3 of the top 4 actual end use, the actual end result in capital and the other 2 wanted to come in, but the schedules wouldn't allow and they've since done conference calls on these, where the direct owners wanted to come in and make sure that we understood what they had planned and how much they wanted us to be part of those plans going forward. And so this is looking right through the general contractors and construction managers who are ultimately who write our checks and are very important customers for ours and partners. But the end user, the big hyperscalers and wanted us to know how important and share their plans with us on a proprietary basis. And I'm not going to share all those plans, obviously, because it was on a confidential proprietary basis. But to be able to pull our team together like that, to be able to talk about how we get better, to be able to talk very specifically around means and methods and labor productivity and couple that with our customers sharing their outlook of their capital spending, that led me obviously more positive than negative by log shot on what data center build looks like over the next 5 years. that data center build. Operator: And at this time, we are showing no further questioners in the queue, and this does conclude today's question-and-answer session. I would now like to turn the conference back over to Tony Guzzi for any closing remarks. Anthony Guzzi: So look, we'll see a couple of you and we'll see some of the more investors as we're out and about with conferences here in November and December. But for the rest of you, this will be the premature happy Thanksgiving and have a great end of the year and happy holidays and all those things. And for those of you that enjoy Halloween, enjoy Halloween tomorrow. Mostly, that should be people with little kids. After that, it's not that much fun. That's my view. But no, thank you all and to my EMCOR colleagues. Stay safe, and we look forward to seeing you all about. Operator: Today's conference has now concluded. Thank you for attending today's presentation, and you may now disconnect your lines.
Operator: Good day, everyone, and welcome to the PBF Energy Third Quarter 2025 Earnings Conference Call and webcast. [Operator Instructions] Please note, this conference is being recorded. It is now my pleasure to turn the floor over to Colin Murray of Investor Relations. Sir, you may begin. Colin Murray: Thank you, Lilly. Good morning, and welcome to today's call. With me today are Matt Lucey, our CEO; Mike Bukowski, our Head of Refining; Joe Marino, our CFO, and several other members of our management team. Copies of today's earnings release and our 10-Q filing, including supplemental information, are available on our website. Before getting started, I'd like to direct your attention to the Safe Harbor statement contained in today's press release. Statements that express the company's or management's expectations or predictions of the future are forward-looking statements intended to be covered by the Safe Harbor provisions under federal securities laws. Consistent with our prior periods, we'll discuss our results excluding special items, which are described in today's press release. Also included in the press release is forward-looking guidance information. For any questions on these items or other follow-up questions, please contact Investor Relations following the call. I'll now turn the call over to Matt Lucey. Matthew Lucey: Thanks, Colin. Good morning, everyone, and thank you for joining our call. First, I'd like to welcome and introduce Joe Marino as PBF's new Chief Financial Officer. Many on the call may be familiar with Joe, as he has been with PBF since before our 2012 IPO and has been our Treasurer for the last 5 years. In the same breath, I'd like to thank Karen Davis for her service, and I'm thrilled to welcome her back to the Board of Directors. I want to address three topics: one, the status of Martinez; two, our third quarter performance; and lastly, the near-term outlook. Regarding Martinez, consistent with our call in July, we are on schedule for a December restart. Maintenance teams are scheduled to be turning over the impacted units to operations in early December. As units get handed over, we will commence a deliberate and sequential restart of the affected units. Our plan is to have Martinez fully operational by the end of the year. The dedication of the Martinez team in this effort continues to be exemplary. While PBF's third quarter represented a sequential improvement over the prior few quarters, the real news is the sequential improvement that occurred during the quarter. Unquestionably, there was a shift in September, which represented a significant positive step in the right direction. While product cracks were relatively strong throughout the quarter, crude differentials only began to improve towards the end of the quarter. Now as we sit in what is typically the seasonally weaker period, product cracks are quite strong and crude differentials continue to widen. As we look past the fourth quarter into '26, refined product supply constraints, coupled with a well-supplied crude market should create a positive theme for domestic and global refining. Global demand continues to outstrip net refining capacity additions, and we expect to see additional capacity rationalizations that will be supportive of tight product balances as we saw this month with the shutdown of another refinery in California. PBF remains focused on controlling the aspects of our business that we can control. We expect to be well positioned to capture favorable market conditions as we move forward. To be successful and enhance value for our investors, we must operate safely, reliably and responsibly, and we must do it as efficiently as possible. To that end, we are on track with our commitment to our business improvement initiatives. We are working to improve our performance every day. So to summarize, strong product cracks with improving crude dynamics coupled with the full power of our refining system as Martinez should be up by the end of the year, operating with improved efficiency -- thanks to our RBI program, all of which should come together to create a dynamic environment for the company and our shareholders. With that, I'll turn it over to Mike. Michael A. Bukowski: Thank you, Matt. Good morning, everyone. Before discussing the progress of our Refining Business Improvement Program, or RBI for short, I'll provide a few comments on third quarter operations and our Martinez refinery status. On the West Coast, we continue to progress with the full repair and restart of Martinez. We plan to begin transitioning from maintenance to operations in early December. This time, we will execute a methodical sequence start-up plan with its primary focus being the safe and environmentally sound restart of the repaired processing units. Our Martinez team has completed a tremendous amount of work this year. To give you a little bit of an idea as to the scale of this effort, in addition to completing the FCC turnaround, we're installing 130 tons of new steel, laying over 20,000 feet of pipe and over 200,000 feet of electrical and instrument cabling. All major equipment components have arrived on site, and we have completed installation of the two major columns that had to be replaced. I commend our Martinez team for continuing to execute the repair work safely. While the team is focused on restoring operations, we will not let time be a constraint from executing the start-up safely. While there has been a lot of focus on Martinez, our team at Torrance successfully and safely completed the hydrocracker turnaround in the third quarter. At Toledo, a mid-summer hydrocracker unplanned outage and pipeline maintenance impacted third quarter throughput. Aside from a few minor issues, the rest of our system operated reasonably well in the quarter, and we have no major turnaround work for the remainder of the year. Shifting topics to RBI. We are on track to meet our previously announced goal to implement $230 million of annualized run rate savings by the end of 2025. This goal represents $0.50 per barrel or approximately $160 million reduction in operating expenses against our 2024 benchmark and will be fully realized in 2026. In addition, we expect to reduce sustaining capital and turnaround expenditures by $70 million. As you may recall, we started this program with centralized efforts in procurement, capital projects, organizational design, turnarounds and site efforts at our Torrance and Delaware Valley refineries. As of the third quarter, all refineries are engaged in RBI and are contributing to the savings goals. One of the recent successes achieved through the RBI program is a 5% cost reduction of our Torrance hydrocracker turnaround through our productivity improvement initiative. This program uses dedicated resources to identify and eliminate waste and remove barriers to job productivity. Additionally, we've achieved approximately $21 million in run rate savings by revamping our procurement model to leverage our spend across the refining circuit. System-wide, we are focusing on improving our maintenance efficiency and reinvesting some of the savings in energy reduction projects while also reducing our maintenance backlogs. The outcome will have the dual effect of improved energy efficiency and reliability. We are providing enhanced performance monitoring tools to our employees and incorporating them into our site work processes across the fleet. The new tools and processes will drive the organization to not only maintain our savings performance and efficiency but drive continuous improvement. Our main priority will always be to focus on safe, reliable and responsible operations across our system. RBI will help us improve across all areas and result in a sustainable culture of operational excellence and continuous improvement. With that, I'll now turn the call over to Joe Marino for our financial overview. Joseph Marino: Thanks, Mike. For the third quarter, we reported an adjusted net loss of $0.52 per share and an adjusted EBITDA of $144.4 million. Our discussion of third quarter results excludes the net effect of special items, including $14.6 million in incremental OpEx related to the Martinez refinery event, a $250 million gain on insurance recovery, a $94 million gain on the sale of terminal assets, an $8.5 million loss relating to PBF's 50% share of SBR's LCM inventory adjustment for the quarter and approximately $8 million of charges associated with the RBI initiative. The $250 million gain on insurance recoveries related to Martinez fire is a result of the second unallocated payment agreed to at the end of the third quarter, of which the majority has already been received in Q4. Going forward, we will continue to work with our insurance providers for potential additional interim payment. However, the timing and amount of any agreed upon future payment will be dependent on the amount of incurred covered expenditures plus calculated business interruption losses. Our Q3 P&L reflects incremental OpEx at Martinez of $14.6 million that we are reflecting as a special item because it relates to construction of temporary equipment to restart undamaged units and other fire-related non-capital expenses. While we anticipate recovering a portion of this amount through insurance, the specific amount will be determined as we progress further into the claims process. Generally speaking, any insurance proceeds we received in future periods will be reflected as gain on insurance recoveries on our income statement and reported as a special item. Shifting back to our normal quarterly results discussion. Also included in our results is a $19.7 million loss related to PBF's equity investment in St. Bernard renewables. SBR produced an average of 15,400 barrels per day of renewable diesel in the third quarter. SBR's production was somewhat below guidance, driven by broader market conditions in renewable fuel space. Throughout the year we've seen impacts from tariffs cascade through the market and the policy landscape continue to shift, adding uncertainty and volatility to the business. PBF cash flow from operations for the quarter was approximately $25 million, which includes a working capital draw of approximately $74 million, primarily related to the timing of cash interest payments, movements in inventory and falling commodity prices. Also included in our cash flow for the quarter are the previously announced tax refunds of $75 million, including interest, and a $175 million received through the sale of Knoxville and Philadelphia terminal asset, excluding commission and closing cost. Cash invested in consolidated CapEx for the third quarter was approximately $132 million, which includes refining, corporate, and logistics. This amount excludes third quarter capital expenses of approximately $128 million related to the Martinez incident. Year-to-date rebuild capital expenses through the end of the third quarter are approximately $260 million. Additionally, our Board of Directors approved a regular quarterly dividend of $0.275 per share. We ended the quarter with $482 million in cash and approximately $1.9 billion of net debt. Maintaining our financial -- our firm financial footing and a resilient balance sheet remain priorities. At quarter end, our net debt to cap was 32% and our current liquidity is approximately $2.1 billion based on current commodity prices, cash and borrowing capacity under our ABL. If you take into consideration the second installment of our insurance proceeds already received in Q4, our liquidity and net debt position has improved versus the prior quarter. As we look ahead, we expect to use periods of strength to focus on deleveraging and preserving the balance sheet. Operator, we've completed our opening remarks, and we'd be pleased to take any questions. Operator: [Operator Instructions] Your first question comes from Manav Gupta from UBS. Manav Gupta: Would like to first welcome Joe in his new role and wish him all the luck in his role. Matt, maybe for you or somebody else. But just -- I mean, you made some positive comments about Martinz restart. I think there's a lot of focus on that given the capacity closures that are happening. And yes, some new pipelines might get built, but that could take 2, 3 years. So the key here is to get that refinery up and running. And I'm just trying to understand your confidence level in getting this thing across the line. I understand sometimes there could be regulatory delays, but it looks like the government wants you to get this up and running. So help us understand where we are in the process and your confidence level in getting this asset up and running by year-end. Matthew Lucey: Thanks, Manav. I don't anticipate any regulatory issues, to be clear. We have all our permits, and we've had a good working relationship with the state. And as you said, I think they're very, very interested in getting the refinery back up and running. I have tremendous confidence in our team. They have done amazing work to get us to this point. It is a major lift. As Mike Mikowski can detail, any project that a refinery does usually has years of advanced work done. And when you have an unplanned incident like we had, it creates a much more difficult environment to execute because there is no preplanning. And so our team has just distinguished themselves. And indeed, we have -- that requires us doing everything as safely and reliably as we can. If there's a moment in time when we need to take a breath or introduce a bit more time, there's always time for safety. But I have complete confidence in the team. We have all our permits in place. And so I think we just need to let it play out over the next couple of months. Manav Gupta: Perfect, sir. All the best for that. And I have come back to one of the comments you made on the call earlier where you said, look, the dips really started to widen out towards the end of the quarter. So just trying to understand the outlook for the heavy light differentials. I think we all acknowledge PBF is one of the most levered to that trend. If that dip does widen, it will lead to material increase in your capture rates. So help us understand what you're seeing out there. Are there heavier discounted barrels now showing up on the Gulf Coast, which was -- or other parts of your system, which was not the case even 2 or 3 quarters ago? If you could help us talk through that. Matthew Lucey: Absolutely. I'm going to make a couple of comments and turn it over to Tom. Look, the market has been constrained if you go back starting over 4 years ago when barrels started getting pulled off the market. So when OPEC made its deliberate shift going back 6 months ago, there's simply a lag. And now obviously, they made their shift at a moment in time where you're going into peak runs and you're also going into crude burn in the Middle East. And so demand is sort of at its highest. In any scenario, there's going to be a lag. Considering the seasonal time that the tapering began, there was probably even more of a lag, one that was a bit frustrating to us. But indeed, we are now seeing crude loosen as a result of the OPEC moves. Tom? Thomas D. O'Malley: Yes. Thanks, Manav. I mean -- trying to just go in a little bit further, I mean I think Matt summarized that well in terms of the peak run environment and the crude burn and obviously OPEC is pivoting in terms of where they've been in terms of their policies. That certainly has shifted the dynamics. As we look at this year, right, I mean, this has been a year where crude stocks have been building, but they've been building in the non-OECD and the Western Basin or the Atlantic Basin has been tight in comparison, right? Stocks are low. But we now have seen at this juncture, right, there's enormous amounts of oil that have been pushed out on water. Freight is very expensive. A lot of the oil going on water is clearly something related around some of the sanctions. But inevitably, that oil then needs to come back onshore. And when that comes onshore, that sort of is a little bit more of the sustaining aspect of what we've been seeing in the near term in terms of the widening of differentials because you got cheap tanks available in the U.S. Cushing and PADD 3 are certainly available to be built at far more economic numbers than putting it on a ship at multiyear highs in terms of freight. And then I think the last kind of couple of comments in terms of barrels that were getting pulled out of the Atlantic Basin to the Pacific, particularly some LatAm barrels. I mean we are seeing the wells and we are buying barrels that we have not bought in several years. And that's coming into our system. I think one of the larger things also to kind of comment is if we were talking about the market a year ago, we would have been talking about, obviously, the taper and all the different effects, but we would have been talking about underperformance at Brazil. Guyana was just getting its sort of feet under itself. We've had prolific finds and gains in those areas that are certainly contributing to the dynamics where the crude market dynamics certainly look a little bit better or a lot better, excuse me, in terms of their availabilities, particularly to the coastal regions. Operator: Your next question comes from Ryan Todd from Piper Sandler. Ryan Todd: Maybe -- this might be hard to answer, but maybe it's great news on the approval of another $250 million installment of the insurance proceeds. Is there a way to think about this from a time line point of view in terms of what it covers or what is -- kind of what is included in the installments up to this point? Does it cover cost and losses implied through year-end under the current plan or through the end of third quarter? I guess as part of it, like how should we think about the possibility of further meaningful installments in the future? Matthew Lucey: Yes. Happy to address that to some degree, we don't want -- we're not going to get into the detailed accounting over the dissection of it. Here's how I would describe it. In the third quarter, we got a $250 million payment shortly after the quarter. So it wasn't in the results. So if you look at the third quarter and you take credit for that $250 million that came in just after September 30, we're a little bit in arrears. So if you pull out more broadly and look at the third quarter, -- and we had an asset sale of $175 million -- and you take that out, but then you solve for the insurance payment that came in right after the quarter and you account for us being in a bit of arrears in some insurance collections through the quarter, I look at our operations on a pro forma basis for Q3 as being cash flow positive to the tune of between $100 million and $200 million. In regards to going forward, all I can say is we've had a tremendous relationship with the insurance markets, with the underwriters. I don't know if that can always be said for other companies and other industries and other incidents. But we've had a long standing relationship with our insurance underwriters. I was along with our team over in London, meeting with the insurance markets over there. We hosted the group here in New Jersey for the U.S. underwriters, and we continue to really value the relationship we have with them. There will be some payments that are in arrears, but it's very, very manageable. Ryan Todd: Congratulations on the progress that you've made up to this point. Can you provide a little more color on maybe how much you've been able to capture to date on your OpEx per barrel reduction targets or CapEx run rate targets? What are the big buckets left to achieve as you work towards 2026 kind of target completion on that plan? Michael A. Bukowski: So thanks for the question, Ryan. This is Mike. So as I said, we're on target for the $230 million. I think as of today, we're close to about $210 million of implemented savings on a run rate basis throughout the course of the year. That's cash. So that's not just all OpEx. And so roughly think about that, as I said before, 70% on the OpEx, 30% CapEx. And so we look real good to finish up the year to hit our goal of $230 million. When we look across the system, remember, we just started this in two refineries back in January. And so there's kind of a time basis of this. But I think across the course of the year up to the third quarter, probably captured order of magnitude about $30 million to $40 million of OpEx and then another $10 million to $15 million of turnaround savings. One thing you may want to take a look at in our earnings release is the third quarter performance of the Delaware City refinery. You'll see that in an era where we had some headwinds on energy prices, utilization was about the same quarter-to-quarter, and we're showing a reduction in OpEx. So we're starting to see it get to the bottom line. Ryan Todd: Do you think that there's -- is there another leg to this process as you think beyond kind of the 2026 completion now that you've -- I mean, you're not that far into this process. Is there kind of a second leg in tranche that might be visible at this point that it's more upside in the future? Michael A. Bukowski: Yes, definitely. I tend not to think of this as legs or tranches. I tend to think of this as a continuous improvement journey that never really ends. But as I said in my prepared remarks, we added the other refineries in the third quarter to the program. And so initially, it was just Torrance in Delaware City, and then we're bringing on these other refineries. So a large impact in that $210 million has been through the central and just those two refineries. So additional savings will be coming online from the refineries that we added to the program. And then the way we're doing this, this is not just deferring expenses. This is finding waste, driving efficiency and eliminating costs. And so we will spend the time next year going through another what we call brainstorming or ideation process at all the facilities, one, to ensure we sustain what we have, but also to drive improvement going forward. So as I look towards the end of 2026, I see that run rate savings going up to over $350 million. Operator: Your next question comes from Doug Leggate from Wolfe Research. Douglas George Blyth Leggate: I wonder, Matt, if I could hit on the lower turnaround expenses. And I'm wondering, as part of your efficiency drive, do we basically get -- you referenced Delaware in your remarks just there in the last question. Do we think about higher utilization being a new normal, I guess, for PBF going forward? It seems to us that the whole industry has managed to shift up its utilization. Obviously, that resets our view of mid-cycle free cash flow. We're just wondering if that also applies to you guys. Michael A. Bukowski: We -- so our turnaround program is set up a couple of different ways. And in the past, we haven't been happy with our performance on cost and schedule. And then also, we have an opportunity to optimize our intervals. And so we think we'll see a lengthening of intervals for one thing. So that will allow more run time. We are working with a third-party benchmarking firm to really set our turnaround budgets and schedules going forward, and that's how we're going to drive the savings. And so we would expect to see somewhat shorter duration turnarounds and much more effective turnarounds, which ultimately will turn into higher utilization while the units are up. Matthew Lucey: In regards to utilization broadly, I sort of think of it maybe in a simplified manner. I think you have a confluence of a number of events. One is if you have a winterless winter or if you have a stormless summer, it certainly makes the operating environment easier to operate if you don't have disruptions. And then we've seen that over the last number of seasons where there's been minimal impact, whether it's from storms or from harsh winters. And then you have, obviously, some creep, whether it's capacity creep, debottlenecking, some increases in throughput. And so numerators may be a bit dated. And then you have this pursuit of operational excellence where everyone is trying to become more efficient and become the best operators they can. And in so doing, you're able to increase your reliability and increase your throughput. We are on that journey, and we expect it to pay dividends for sure. Douglas George Blyth Leggate: That's -- it seems to be applying. I observed that Phillips and Valero that between them, they replace Lyondell Houston basically with their better utilization. But anyway, I'm grateful for the input. My follow-up, I'll add my welcome to Joe and ask him maybe to earn his crust a little bit today. Joe, I don't know if this is something you can do. But if we try to simplify all the moving parts on the cost, the money going out the door for the repairs, the insurance proceeds coming in, -- obviously, you took out the short-term loan to navigate through this -- if we normalize the balance sheet, when all is said and done, where do you think your net debt would sit? I'm not talking about contributions from future quarters and so on. When you normalize for the money out and the money in, what would your net debt be if you hadn't had this event? Joseph Marino: That's an interesting question. Obviously, there will be a lot of different factors playing into the market and how our results would be if the event didn't happen. And part of the issuing of that additional notes earlier this year was in advance of the potential market that we were looking at, at that point. So some of that was outside of purely just Martinez related. So I think hard to specifically answer that question to down to a fine detail, but it would be less than it is today, but probably more than, from a net debt standpoint, than entering the year. Douglas George Blyth Leggate: I know it's a tough one to answer. Just to clarify what I'm asking. I'm not looking for the lost opportunity cost. I'm looking at for the extraordinary costs and the extraordinary cash inflows from insurance, if those were all taken out, is that a net debt lower number? Or can you put a magnitude on that or no? We're just trying to figure out how much did we deduct in our DCF with pure net debt on a normalized basis. Joseph Marino: Yes. I'd say again, it's hard to put a fine point on that. Obviously, the cost, as we've said before, of actual repair costs are going to be substantially covered by our insurance. So that really won't have a meaningful impact on our overall net debt whether you look at it on a pro forma or go-forward basis. There's impact to the business and our net debt profile from the downtime for sure. And we think a good deal of that will be offset by BI insurance when everything is all said and done. But we don't have an exact impact of what that would look like at this point. Operator: The next question comes from Neil Mehta from Goldman Sachs. Neil Mehta: There's been a lot of talk about moving product into the West Coast as some of your competitors retire capacity with 3 independent projects talked about either to the Southwest or even into California. Just your perspective on whether that can alleviate some of the pressure on PADD 5? And how do you think about timing and potential impacts of that? Matthew Lucey: Yes. Thanks, Neil. Good to hear from you. In regards to some of the announced projects, I'm not going to speculate in regards to which, if any, are going to get to the finish line. I would just say in the base case -- in the base case, we're going to be very, very expensive. In the base case, you're going to take a lot of time. And as an observer of the market and as a participant in the market, my guess is that the base case may be aspirational in regards to time and money in regard -- I probably tend to take the over on time as nothing is easy. As a result, it's costing us money, I'd probably take the over. Regardless of how long it takes, there will be substantial tariffs on any new pipes that are built. And so we continue to think our in-state manufacturing facilities will be the low-cost producer. The state is going to require imports, whether it comes from the water or from pipe, that will be higher-priced imports. And so I think with the sort of rebalancing that has happened within California refining, we're very, very well positioned from a product standpoint, but also from a crude standpoint. If you have one refinery just came down, one refinery is still scheduled to come down, but you then also have less demand on local crudes as a result. So I think our position in California is particularly attractive and interesting going forward regardless of the potential pipes when they come on, how they come on, they will be coming on because it's a product short market. Neil Mehta: All right. Good color. And then early thoughts on 2026 CapEx, recognizing we're going to get a little bit more color in Q4, and you guys have done a good job keeping a lid on spend this year. But how do you think about some of the moving pieces as you move into '26? And is there a soft number that we should be thinking about penciling and recognizing we're going to get a harder number on the Q4 call? Matthew Lucey: Yes. I would keep to our schedule on that. We do have a heavy turnaround season next year, but we'll get into that in normal course, Neil. Operator: The next question comes from Phillip Jungwirth from BMO. Phillip Jungwirth: I was hoping you could just talk to what you're seeing this month in the SoCal market, just given the moving pieces with Phillips L.A. closing down two weeks ago. Are you seeing any benefit here? And obviously, we had the unplanned downtime, which really helped get along with other product prices. Michael A. Bukowski: Well, I would say it's hard to tell what the impact of Phillips is this -- there's [ tensions ] because there is a tremendous amount of unplanned outages that are going on currently. So as you highlighted, the market is quite dynamic, there's tensions on everything, gasoline, jet fuels and distillates. So hard to judge these tensions as to what impact the overall markets have with just Phillips going down by itself. But there's a fair amount of planned and unplanned events going on, on the West Coast, this tension. So it is what we call an all-bid market. Matthew Lucey: Yes. In regards to just pulling yourself out of like the prompt screen, it is hugely impactful. There's going to be 100,000 barrels a day less of gasoline produced in the L.A. region. That now has to be imported from outside the state. And obviously, a significant amount of California crudes are no longer going to be procured by that refinery. And those crudes only home is with California refineries. So it will play out. The refinery is literally shut, I think, 2 weeks ago, and there's been lots of sort of activity in the marketplace, not related to the shutdown. So hard to unpack exactly. But over time, I think our position in California will prove out to be pretty compelling. Phillip Jungwirth: With California now at least trying to stem the decline of local crude production, issuing permits, how optimistic are you that this could be a benefit to PBF and in-state refiners or at least no longer a headwind with declining production? Matthew Lucey: Yes. My old joke is, as a refining business, we're all big boys and we -- generally, we don't ask for help. You simply ask to stop bashing us in the head with a shovel. And so systematically shutting in crude production was a significant headwind. I think with all that's going on in California, there's a recognition that that wasn't the single greatest policy to have in place and fixes have been put in place. So I think it's a removal of a headwind. It will allow certainly the valley in California to stem declines. And so my other thing as you find yourself in a hole, the first thing you do is stop digging. So hopefully, we can have declines arrested. Whether the valley grows, I can't comment on. But simply, it's a very, very positive step to get that legislation through. We work very, very closely with all the parties in Sacramento. It is hugely beneficial to have it in place because the alternative was very poor. And so our team has worked unbelievably and has worked in concert with a number of constituents in Sacramento, whether it's the CEC, the governor's office, with legislators. I think everyone appreciates the importance of supplying reliable, deliverable, affordable energy to the people of California, and they desperately need gasoline and diesel and jet fuel at affordable prices. Operator: The next question comes from Matthew Blair from TPH. Matthew Blair: Could you talk about your outlook for refining capture in the fourth quarter? It seems like it could take a big step up. I think you already mentioned that crude diffs are trending a little bit wider, but it seems like other factors might be moving in your favor, less maintenance, less turnaround expense, better market structure, better jet versus diesel spreads, lower RINs. I mean, pretty much everything across the board seems to be moving in your favor. I think you're in the mid-30% range on capture in Q3. Do you think something north of 40% is realistic for the fourth quarter? Matthew Lucey: We agree with everything you said -- bringing on staff. Look, I think it's very constructive to look ahead. Crude diffs is the single largest thing. There's no question about it. And I think they're set to continually improve over the quarter. RINs is a tough one in regards to -- they have been relatively stable in regards to RIN prices. RIN prices are eventually going to have to move up. But of course, that goes to the cost to import as well. And if you look at the marketplace at the moment, it's pretty interesting. European gasoline is pricing higher than the U.S., not only for today, but out on the strip. And that's true for Asia as well. And so it sets up a constructive environment whereas either European prices have to come down, and we don't see that in the short term, or North America, Atlantic Basin PADD 1 prices have to increase to attract those imports. But everything you said, we agree with in regards to an improved marketplace. Matthew Blair: Sounds good. And then earlier, you mentioned some of the challenges in the renewable diesel space. One of your competitors just threw in the towel on RD. Do you have any thoughts to shutting down your RD plant? Or what's the thinking there? Matthew Lucey: Our thinking is that it has been a challenging market. But unlike others, we view our asset as a top quartile asset. And I think there's a lot to juggle in regards to RD. And you've had an administration change where the whole focus of the program has shifted from a low carbon intensity incentive to reduce low-carbon fuels to the new administration, which is really focused on increasing soybean production and use. That change is more than a subtle one, and it's going to put a number of assets in the pickle. And you couple that with the new rules where imported feeds have a penalty, imported RD doesn't get the producer's tax credit, there's a lot to play out. Much of it points most likely to higher RIN prices. And by the way, higher RIN prices not only because you need to create an environment that makes it economic to manufacture renewable diesel, but also as supply comes off, you have an RVL that's going to -- that's not going to decline. And so I do think RIN prices -- there's a risk to higher RIN prices. And hopefully, the administration understands that they're taking comment now on reallocation and such. But where we sit, it's no doubt been a very difficult market, but our location and the capabilities that we have at our plant, I think, sets us apart from another -- a number of the other participants. Operator: Your final question comes from Connor Fitzpatrick from PBF (sic) [ Bank of America]. Connor Fitzpatrick: Might have been a mix up there. I apologize if some of this has been touched on before, but we're hearing that the vessels that need to be installed at Martinez have a 60-day time frame to install and construct. Have those been -- have those arrived at the Martinez site yet? We think they also need to be inspected and blessed by Bay Area Air Quality Management, EPA and OSHA. Can federal sign-off be done during the government shutdown? I know you mentioned permitting before, but should there be any further issues as it relates to shutdown and oversight? I guess, more broadly, can you break down the time line of equipment left to be received, authority to construct and shutdown impacts on that and time to place all the equipment into service? Matthew Lucey: All right. Look, I'm aware, maybe there was some fake news or stories. I would suggest everyone focus on what the company's official comments are. I'm not entirely sure where you're getting some of your information. But as I said, we have all of our permits to construct. We have a very good relationship with not only the state, but with the county in regards to get us to the finish line. And we have our plan, again, to commence restart in December, which takes into consideration everything that is required. We're certainly not going to get into explicit details despite you being in-house as a PBF person, you're not a PBF employee. We're not going to get into explicit details on exactly what equipment is being restarted when. But we have a very thoughtful and deliberate plan to restart the equipment, and we'll have all the approvals necessary to do that. Connor Fitzpatrick: That's very clear. I guess I should correct and say that I'm from Bank of America. I think there was a mix up, if you couldn't tell. I don't know. That's the only question I had. Matthew Lucey: Well, I appreciate the question. And hopefully, there shouldn't be any confusion in regards to it. And as Mike stated, we'll always make time for safety, but we've got a very, very good plan to get the plant up and running. With that -- I believe that concludes our questions. So I greatly appreciate everyone's time and attention and look forward to very constructive markets looking forward. Thank you. Operator: This concludes today's conference. You may now disconnect your lines at this time. Thank you for your participation.
Operator: Thank you for standing by. My name is Van and I will be your conference operator today. At this time, I would like to welcome everyone to the Ventas Third Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the call over to BJ Grant, Senior Vice President of Investor Relations. Please go ahead. Bill Grant: Thank you, Van. Good morning, everyone, and welcome to the Ventas Third Quarter 2025 Results Conference Call. Yesterday, we issued our third quarter 2025 earnings release, presentation materials and supplemental in formation package, which are available on the Ventas website at ir.ventasreit.com. As a reminder, remarks today may include forward-looking statements and other matters. Forward-looking statements are subject to risks and uncertainties, and a variety of topics may cause actual results to differ materially from those contemplated in such statements. For a more detailed discussion of those factors, please refer to our earnings release for this quarter and to our most recent SEC filings, all of which are available on the Ventas website. Certain non-GAAP financial measures will also be discussed on this call, and for a reconciliation of these measures to the most closely comparable GAAP measures, please refer to our supplemental information package posted on the Investor Relations website. And with that, I'll turn the call over to Debra A. Cafaro, Chairman and CEO of Ventas. Debra Cafaro: Thank you, BJ. I'd like to welcome all of our shareholders and other participants to the Ventas Third Quarter 2025 Earnings Call. Building on our momentum, Ventas delivered excellent performance and growth in the quarter as we continue to execute on our 1-2-3 strategy. Our strategy is based on the megatrend of longevity. As one of the world's largest owners and acquirers of private pay senior housing, we are positioned to capitalize on the sustained growth in demand from a large and expanding aging population. Our strategy emphasizes growing our private pay SHOP business organically and by investing in senior housing. We are doing both as we expect 2025 to be our fourth year of double-digit SHOP NOI growth, and we anticipate closing $2.5 billion of private pay U.S. senior housing investments during the year. Most importantly, we foresee at least another decade of accelerating demand for senior housing. The Ventas strategy, organization and team have been built to meet this moment and capitalize on the favorable external demand backdrop. Over the past several years, we have added expertise, acquired over $4 billion of senior housing communities, converted communities from Triple-Net to SHOP, expanded our SHOP operator base, made significant strategic dispositions, increased our scale and improved our financial profile. As a result, our enterprise is now delivering $2.5 billion of net operating income. Our SHOP percentage of NOI has increased nearly 2,000 basis points to represent half our business. We are working with over 40 SHOP operators. We have created significant occupancy and NOI upside potential in our 85% occupied U.S. SHOP portfolio through our deliberate portfolio composition, and our leverage has improved by 2 full turn. These actions and outcomes are designed to take advantage of powerful secular tailwinds in senior housing where supply and demand are tipped strongly in our favor, and we have this scale, platform and financial strength to win. Demographic demand is accelerating as baby boomers are starting to turn 80 this coming year and more people than ever are choosing senior housing for the valuable benefits it provides. The over-80 population is expected to surge into the coming decade and grow 28% just in the next 5 years. Yet senior housing supply is at record lows in both inventory growth and the number of new construction starts with just over 1,200 units started in the third quarter. Our strategy is producing strong results, increasing our enterprise growth rate and building financial strength. Let's now turn to the highlights of our quarterly results and latest 2025 guidance increase, our outsized organic growth in our senior housing operating portfolio and our active and increasing investment activities. Normalized FFO per share grew 10% year-over-year, and total company Same-Store Cash NOI increased 8%. SHOP once again powered our results, enjoying a strong key selling season. We saw broad-based demand for our communities and excellent RevPOR and revenue strength. Our U.S. communities led the way with 19% Same-Store Cash NOI growth and 340 basis points of occupancy growth. I want to extend a sincere thanks to our operators and the Ventas team to deliver this performance while helping seniors live longer, healthier and happier lives. We're pleased once again to increase our full year guidance, driven by our SHOP performance and increased senior housing investment activity. We now expect year-over-year growth of 9% in normalized FFO per share and 7.5% total company Same-Store Cash NOI at the midpoint of our improved guidance. These growth rates will put us in the top tier of companies across the REIT landscape, if achieved. On the investment front, we are seeing a strong upward trend in transaction activity and our pipeline continues to grow with quality investment opportunities in senior housing. We are accelerating our senior housing investment activities to expand the Ventas SHOP portfolio and increase our enterprise growth rate. Private pay U.S. senior housing is the company's #1 capital allocation priority. The environment is highly favorable, private to public arbitrage opportunities are increasing, our strong and broad-based industry relationships are generating significant deal flow, and our capabilities, track record and financial strength provide meaningful competitive advantages. We've already closed $2.2 billion of senior housing acquisitions in the U.S. year-to-date and we've increased our 2025 investment guidance to $2.5 billion. We intend to build on our momentum. Following our right market, right asset, right operator framework, we are prioritizing investment opportunities in private pay senior housing that have different combinations of growth and yield to produce attractive risk-adjusted returns for our shareholders. Next, I'd like to highlight a key SHOP growth initiative. The previously announced transactions relating to 121 Triple-Net lease senior housing communities are well underway. We've already converted from Triple-Net to SHOP, 27 of the 45 senior housing communities slated for management transitions by year-end. We continue to expect to achieve significant occupancy and NOI upside in these communities over time. For the 65 communities remaining under the lease, cash rent will increase 33% beginning in 2026, and the disposition of the remaining 11 assets is in progress, with sale proceeds to be retained by Ventas. A final note on our research portfolio, which is generating only 8% of our enterprise NOI. Our portfolio has been constructed in a unique way. Within this small portion of our business, about 3/4 of our base rents are from creditworthy institutional leaders in medicine, pharma and research with a weighted average lease term of over 9 years. Making this portion of our NOI relatively well insulated from current market challenges. Importantly, only about 10% of our research portfolio is leased to pre-revenue or co-working tenants. We have no ground-up development in progress. And we continue to see institutional demand in new and renewal leasing from university, medical and global pharma tenants. In conclusion, we have built Ventas to meet this moment and capitalize on the secular demand from a large and growing aging population. We are executing our strategy to grow senior housing and delivering outstanding results, and we are well positioned to increase our deal activity. The future is bright as we use our many competitive advantages, to deliver value for stakeholders and seize the unprecedented multiyear growth opportunity ahead. The entire Ventas team is in it to win it. And now I'm happy to turn the call over to Justin. J. Hutchens: Thank you, Debbie. I'm excited to share an update on how 2025 has been progressing as we continue to execute on our strategy to drive both organic and external growth in our senior housing business. Let's start with SHOP. Our SHOP Same-Store portfolio delivered 16% NOI growth year-over-year in the quarter, led by the U.S. with 19% growth. Margin grew 200 basis points to 28% driven by over 50% incremental margin. Revenue grew 8% due to strength in both occupancy and pricing. We saw broad-based contributions to SHOP performance across our operating partners, delivering exceptional care and services to our senior population and very strong financial results with Sunrise and Atria, leading the way. RevPOR grew 4.7% as our dynamic pricing continues to strike the balance between price and volume. Average occupancy grew 270 basis points year-over-year, led by the U.S. at 340 basis points with a particularly strong contribution from our independent living communities. We had industry-leading sequential occupancy growth of 160 basis points overall and 200 basis points in the U.S. Furthermore, we expect sequential average occupancy growth to continue into the fourth quarter. Moving on to SHOP guidance. I am pleased to raise SHOP guidance again with an NOI growth range of 14% to 16%. We continue to anticipate occupancy growth of 270 basis points in higher RevPOR driven by strong pricing as move-in rents and in-house rates are both increasing year-over-year. I'd like to turn your attention to Page 12 in the earnings presentation. On the left side of the page, you'll note, we have consistently outperformed the NIC Top 99 markets. The third quarter resulted in 120 basis points of outperformance versus NIC Top 99, both year-over-year and sequentially. On the right side of the page, you can see the key selling season was excellent with 230 basis points growth, representing our best key selling season performance in a number of years. Now I'll comment on portfolio strategy. Our portfolio strategy executed through our Ventas OI platform is centered on what we call the right market, right asset, right operator approach, is a disciplined framework that ensures every investment we make in every partnership that we pursue, enhances long-term value creation. We've spent years building a platform that's ready for this wave of demand in senior housing. We now have sophisticated data analytics and the ability to deliver those insights directly to our operators through our Ventas OI platform. We've enhanced our CapEx management, optimized dynamic pricing and developed a broader platform capabilities needed to effectively drive performance and support 40 operators managing our communities and that number continues to grow. Equally important, we have tremendous respect and appreciation for the critical role our operators play in delivering care and services to seniors and achieving market-leading performance. Having walked in their shoes, we understand the importance of what they do, and we place the quality of our relationships with our operators among our highest priorities. This level of readiness doesn't happen overnight. It's a result of a deliberate multiyear evolution of our platform that positions us to capture the significant opportunities ahead. We have taken numerous actions over the past 5 years to ensure success in our senior housing business. Those actions include 215 acquisitions, 116 dispositions, 295 transitions to new managers, 307 community refreshes and 157 conversions of low occupied communities from Triple-Net to SHOP. The net result is a much larger and well-positioned SHOP portfolio, fueling double-digit NOI growth with embedded occupancy upside. This framework drives our underlying decision-making in our senior housing business why our portfolio is well positioned to grow. It's a focused, data-driven approach and it's working. For example, I'd like to refer you to Page 9 of the earnings presentation where we lay out our Ventas OI performance management strategy. I want to make it clear that our SHOP portfolio is well positioned for occupancy growth as our U.S. portfolio is only 85% occupied due primarily to our deliberate actions converting underperforming communities from the Triple-Net structure to SHOP. Our U.S. portfolio is well positioned to achieve substantial upside in markets that offer significant net demand over the next several years and will benefit from operational enhancements driven through our Ventas OI platform. As we've been expanding our SHOP footprint to half of the company's NOI, our Ventas OI capabilities continue to evolve, and we have been deliberate in positioning the portfolio for significant occupancy and NOI upside. Our most recent example of the Triple-Net to SHOP conversion is the 45 communities which are 78% occupied converting from the Brookdale lease to SHOP and transitioning to 5 aligned, proven, high-performing local market-focused operators with significant transition experience and track records of delivering excellent results. This transition is well underway. We have completed 27 of the transitions through October, and we expect to be finished by the end of the year. The communities have performed well year-to-date with both occupancy and NOI growth. We have already made progress with the read-out plans with a significant number of the projects expected to complete by the key selling season of 2026. We continue to expect greater than $50 million of NOI upside over time as the new operators execute and reinvest NOI-generating CapEx of around $2 million per building. Senior housing is a high-touch business, and I'm pleased to report that in the communities they have already transitioned, there is a strong level of engagement between local management teams and the new operators along with a great deal of enthusiasm. I'd like to note that this transition is occurring with the full cooperation and support of Brookdale, which is greatly appreciated. Furthermore, we look forward to collaborating with Brookdale on the 65 assets where the lease has been renewed. Moving on to investments. We continue to build on our momentum and our relationship-driven capital allocation plan targeting private pay senior housing in the U.S., and we have now completed $4.1 billion of senior housing investments since the middle of last year, of which $3.5 billion closed during the past 4 quarters. We have closed $2.2 billion of senior housing acquisitions year-to-date. We have a robust pipeline that continues to expand, and our latest guidance for 2025 is now $2.5 billion. Our senior housing flow business is in full swing as our year-to-date senior housing investments totaled 20 transactions for 50 communities with approximately 6,200 units across 15 states. The average deal size is $110 million, including a range of singles, doubles, triples together with select larger portfolio deals. These properties improve our SHOP portfolio quality, increase the company's enterprise growth rate and are located in attractive markets that are poised for outperformance due to favorable supply and demand dynamics. We continue to have an advantaged position to source and close meaningful and attractive senior housing transactions and the opportunity set is growing at an accelerating rate. We look for a range of senior housing investment opportunities, each with its own balance of growth and yield, so we can deliver attractive returns that align with our targeted low to mid-teens unlevered IRRs. It has become clear that Ventas is a senior housing partner of choice across our many transactions. Our growing stable of strong operator relationships provides us with preferred access and the opportunity to win deals. Our transaction execution track record has also created opportunities for repeat business with sellers. In summary, we have conviction in our strategy, and we are intensifying our efforts to drive outperformance in our senior housing business, and the best is yet to come. I'm confident in our ability to execute and create value for our stakeholders in senior housing and investments execution, including a valuable living experience for residents, valuable workplace experience for the tens of thousands of dedicated community staff and ultimately leading to significant value creation for our shareholders. Now I'll hand the call to Bob. Robert Probst: Thank you, Justin. I'll start with our third quarter performance, highlight our balance sheet and conclude with our improved guidance for the year. Starting with our enterprise performance. Ventas delivered normalized FFO per share of $0.88 in the third quarter, which represents a 10% increase year-over-year, driving the strong year-over-year growth with total company Same-Store Cash NOI of 8% led by SHOP growth of 16%. Our Outpatient Medical And Research business, or OMAR reported Same-Store Cash NOI growth of 3.7% year-over-year, led by outpatient medical. Outpatient Medical third quarter occupancy improved 50 basis points year-over-year to 90.6%, a 20 basis point sequential increase versus the second quarter. TTM tenant retention was a strong 87% in the third quarter, an increase of 200 basis points year-over-year, reflecting tenant satisfaction scores in the 95th percentile. Our research business represents 8% of our NOI. In the third quarter, research Same-Store Cash NOI was $400,000 lower year-over-year driven by lower rents on certain innovation flex space tenants as previously discussed. Next, turning to our balance sheet and liquidity. Our net debt to EBITDA of 5.3x in the third quarter represents a full turn improvement from third quarter of 2024. This leverage reduction was driven by a combination of organic growth and equity funded senior housing investments consistent with our strategy. I would note that this significant improvement in leverage was achieved while delivering normalized FFO per share growth in the top echelon of REITs. We've already fully funded -- equity funded our $2.5 billion investment guidance for 2025 with $2.6 billion of equity raised, including $0.5 billion of unsettled equity forwards. We have over $4 billion of liquidity as of September 30, which supports Ventas' growth and financial flexibility. I'll close with our updated and improved 2025 guidance. We expect net income attributable to common stockholders to range from $0.49 per share to $0.52 per share. We are also improving our full year normalized FFO guidance midpoint by $0.03 to $3.47 per share. This improved 2025 guidance midpoint represents 9% year-over-year growth in normalized FFO per share. Approximately 2/3 of our $0.03 guidance increase at the normalized midpoint can be explained by our improved SHOP performance in senior housing investments completed year-to-date, with the final 1/3 representing improvements across the balance of the enterprise. We've also raised our total company Same-Store Cash NOI growth by 50 basis points to 7.5% year-over-year, led by the SHOP Same-Store NOI midpoint improving by 100 basis points to 15%. In our updated guidance with the 45 Brookdale conversions now underway, we are reflecting the shift in NOI from these conversions from our Triple-Net segment to our SHOP segment. Because cash rent on these 45 conversion assets approximates current NOI at the assets, the net impact on 25 FFO is de minimis. I would point you to our earnings presentation deck and supplemental for more detail on these and other assumptions underpinning our guidance. To close, we are pleased with the results both in the quarter and so far this year. The entire Ventas team is determined to build on our momentum and to continue delivering superior performance for our shareholders. And with that, I'll turn the call back to the operator. Operator: [Operator Instructions] Our first question comes from the line of Jonathan Hughes, Raymond James. Jonathan Hughes: Good morning. Thank you for the prepared remarks and commentary. I was hoping you could talk more about underwriting criteria. I know the acquisition volume guidance is $2.5 billion from $1 billion at the start of the year, and you've been very consistent on buying properties with 7% yields. But with the lower cost of capital today, it seems like you'd now be able to make the math work to buy some lower initial yielding properties that come with higher growth, but still low to mid-teens IRRs. I guess, are there any plans to lower those initial yield requirements, maybe get more aggressive to buy properties with more growth given the outlook for seniors housing supply demand is so strong over the next 5, 10 years? Debra Cafaro: Jonathan, it's Debbie. We are certainly going to be ambitious in our goal to grow our senior housing business as we have over the last couple of years and build on our momentum. J. Hutchens: It's Justin. Yes, and we -- like I said in my prepared remarks, $3.5 billion of $4 billion volumes have been over the past 4 quarters. So the volume has been accelerating. We have momentum in our pipeline and the execution on that pipeline. And we are really happy with the returns we've been getting. The primary metric we targeted are unlevered IRRs. Everything has been in the range of low to mid-teens. And there's a variety of way to getting there, and it's really yield and growth, and we've seen the opportunity to buy assets that are delivering significant growth potential. And that's where we're leaning in and we're using the market asset operator framework to help determine where to focus. And we've had plenty to do, and we look forward to doing as much more of it as we possibly can. Jonathan Hughes: Okay. I'll ask one more, if I can. On the leverage, it's great to see that improvement. Can you just remind us of the target leverage, how you weigh equity and debt to fund this external growth, especially given that cost of equity capital today is really attractive? Robert Probst: Yes, I'll take that, Jonathan. We're really pleased with the leverage improvement, 5.3x for the quarter. That's a full turn and the strategy that we set out quite a while ago now of organic growth plus equity funded investments given the returns has really been working. And so we're going to continue to run that play as long as the market gives us the opportunity. We are obviously trending favorably in terms of leverage, I would expect that to continue should the market conditions exist. And that just gives us more flywheel and more opportunity to continue to invest. So that's the strategy and that's the approach. We are clear eyed that equity is very precious and therefore, making sure that we're investing in the best assets as Justin described, but we're really pleased with the way the playbook is working. Operator: Our next question comes from the line of Michael Carroll, RBC Capital Markets. Michael Carroll: I wanted to quickly touch on the Brookdale SHOP transitions and the revenue-generating CapEx that Ventas plans to putting into these assets. And can you give us a few examples on what type of investments these will be? And how disruptive will that be the current results? I mean, is it just trying to get these done before the key selling season, and that's just the key to minimize this disruption? J. Hutchens: Yes. So I'm going to start with kind of the plans we have in place to help ensure smooth transitions. First thing, just to reiterate something I said and that is that the performance has been really good. So we're receiving the communities with -- in a place where they've had really good occupancy and NOI growth over the past year. There's been a very high-touch approach with my team, our team here at Ventas, but also the operators, the CEOs of the operators have been personally engaged in the communities on the ground right away, assessing the situation and the opportunity to improve on operations, and also help us to solidify our plans to invest the refresh CapEx. The types of projects that we're focused on are mainly kind of -- I call them like routine refreshes where we're repositioning through common area refresh, paint paper, furniture, fixture as we refresh all the lighting, first impression type investments. And we've become pretty expert at doing this with as little disruption as possible. There's a few projects that are much larger that we have. We have the Hallmark in Chicago, which will get a full readout, that's a really exciting, high-rise that has been a market leader for years, and we're going to take it to a new level with the new operations and the investments. But most of them are pretty routine projects that we have immense experience delivering. Michael Carroll: Okay. Great. And then just lastly for me. I know the SHOP portfolio, at least on the Same-Store side, has really delivered some good margin expansion of about 200 basis points year-over-year. I mean just given that occupancy now for the Same-Store portfolio is 89% and presumably next year, it's going to get above 90%, how much faster can that margin expand? Because I know, Justin, you've always talked about that you get more incremental margins as occupancy improves. So like where it's a good kind of ballpark of how much that could tick up? J. Hutchens: Yes. So it's one of our favorite topics, margin expansion and incremental margin. And we've experienced really over the past full 2 years, 50% incremental margin in our SHOP performance and that's a rule of thumb that we've articulated many times. And that rule of thumb really applies for that journey from 80% to 90% occupancy. But once you start getting over 90% on your way to 100%, you start to see a higher incremental margin, closer to 70% because that operating leverage is really kicked in. So that will be an opportunity just simply through operating leverage and growing occupancy to have margin expansion. The other opportunity is through price. And you've heard so far in our prepared remarks, we have good experience in terms of RevPOR growth. That's driven by underlying rent increases and move-in rents. And in both cases, the higher occupancy you get, the stronger that result is. We get 2x the RevPOR growth. We get 2x the move-in rents in communities that are over 90% occupied versus the rest of the portfolio. So that will create opportunities to help push margin as well. Operator: Our next question comes from the line of Farrell Granath from Bank of America. Farrell Granath: I first wanted to address the comment in the opening remarks about occupancy is expected to increase sequentially or at least quarter-over-quarter. I was just wondering if that has to do with anything coming into the Same-Store at a higher occupancy? Or if you're seeing things in market trends right now? J. Hutchens: So it is -- this is about just a strong end to the third quarter and that carrying into the fourth quarter. And we have good visibility into that, obviously, so far. So it's an organic outcome driven by strong demand and strong move-in volume that we're seeing. Farrell Granath: And I also wanted to ask about as your pipeline right now is all U.S. SHOP, what's your comfortability of potentially expanding that into the U.K. or in other areas as well? Debra Cafaro: Great question. I'm sitting here with Justin who -- I think he's the only REIT executive who actually ran a U.K. large senior living company. So I'll let him take that question. J. Hutchens: Yes. So I would say our first, second and third priorities are to invest in private pay senior housing in the U.S. We were -- we like the footprint we have in Canada, don't have meaningful plans to expand there. The U.K. is interesting. One thing we did do there is set up our SHOP platform earlier this year with a new operator, CCG who's been delivering excellent results so far. So we look forward to expanding our footprint in the U.K. over time, but the U.S. is where all the action is. Operator: Our next question comes from the line of Vikram Malhotra from Mizuho. Vikram Malhotra: Congrats on the strong results. Just 2 questions. I guess, one, a lot of your peers are engaging in, I guess, strategic portfolio shifts, whether it's selling MOBs or some MOBs or moving into the U.K. and our peers, I mean, just a broader health care set. I'm wondering sort of as you think of the portfolio today with the lifestyle university exposure, medical office, but then this outsized growth in SHOP, like is there thinking about like bigger picture change in the portfolio, number one? And then just going back to specifically on Canada, you've had really good results there. But what's the appetite to sort of monetize the investment and the returns maybe into a fund or just outright selling? Debra Cafaro: Thanks, Vikram. Of course, we're always willing to consider, and we're always evaluating different portfolio actions that we think will create long-term value for the company, and you've seen us do that over the years, and we'll continue to actively monitor our portfolio for those types of actions. Currently, our main focus, which I'm sure is coming across is really in aggressively growing our private pay shop business, which we've increased 2,000 basis points to have the company over the last couple of years, and we're going to continue to try to rapidly expand that business from internal and external investment activity. Operator: Our next question comes from the line of Michael Goldsmith from UBS. Michael Goldsmith: You raised your SHOP RevPOR growth guidance from 4.5% to greater than 4.5%. It seems like every quarter, we see less and less supply growth. Can you just talk about the change to greater than 4.5% and how much visibility you have into 2026, given pricing power should strengthen as occupancy increases and further do you think higher RevPOR growth can somewhat offset any slower occupancy growth in the future? J. Hutchens: Sure. So our -- we've been really pleased with our underlying pricing, both in terms of rent increases this year as well as the movement rent trends, which are up year-over-year. And they're working together through our dynamic pricing approach with our operators to deliver that result. And one of the things we're equally as pleased about is that we're striking a really good balance of also driving occupancy and price together, which is what this dynamic pricing as approach is designed to do. In terms of the opportunity moving forward, it's -- we're not going to really get into 2026 right now. But some of the things I mentioned earlier, I think are really relevant. And that is that in higher occupied communities, we've seen better price outcomes, both in-house and through move-in rents. Obviously, demand has been really good, and we have more scarcity of value across our portfolio. So over time, that should create an opportunity. And when it's time to get into 2026, we'll do that, but this isn't the time yet. Michael Goldsmith: I appreciate the response. And as a follow-up, you acquired $2.2 billion of stabilized senior housing year-to-date, added 10 new local focused operator relationships. It appears these are good operators because occupancy is already at 91%. But can you talk about what you look for when assessing whether a new operator fits the Ventas platform? And then the average price per unit on the year-to-date activity was $381,000. So is that still a discount to replacement cost? And if so, how much if you had to estimate? J. Hutchens: Yes. So we've consistently been buying below replacement costs, and it varies anywhere from 10% to 50%, depending on which particular investment we're talking about. One thing I want to clear up is you mentioned the word stabilized, and we really don't think of 90% occupancy as being stabilized. There's -- we're sitting in markets that have net absorption projection of 1,000 basis points plus over the next few years. So we have not only good operational opportunity, but a tailwind that is unprecedented that we're facing. We have -- and then we have the price opportunity I've reiterated that comes with that as well. So we see a lot of growth ahead in these assets. And just to reiterate another strategic point I made. On top of the acquisitions, we also have had the strategy of moving our triple-net communities over to SHOP. And those communities were lower occupied. The most recent example is Brookdale, 78% occupied. And what that's delivered for us is a U.S. occupancy that's 85%. So we're buying these high-performing communities through acquisitions. We transitioned the lower occupied communities from Triple-Net to SHOP and we have a long runway ahead of growth opportunity with tailwinds to support it and a platform designed to deliver on that. Michael Goldsmith: Thank you very much. Good luck in the fourth quarter. Operator: Our next question comes from the line of Seth Bergey from Citi. Nicholas Joseph: It's Joseph here with Seth. Debbie, I just want to go back to the question on diversification and kind of the benefits of being more diversified versus more of a pure play. Is it -- do you think there are synergies between the businesses? Is it just a matter of pricing? And if you had the right pricing, you'd look to get more pure play? What -- how do you think about kind of the portfolio composition, the company composition overall and ultimately, how that attracts equity capital relative to the other health care companies out there? Debra Cafaro: Yes. Overall, as I mentioned, the company's portfolio is unified by the megatrend of longevity. And of course, the senior housing business caters to the over 80 population, which is growing -- is large and growing and should be accelerating in growth over the next decade, as I mentioned, just 28% over the next 5 years. And so -- we are leaning heavily into our senior housing business, and that is our #1 priority to grow that. By doing so, both internally and through external investments, we are increasing the growth rate of the enterprise, which we believe increases our return to shareholders. And we're going to continue leaning into that strategy. We're always evaluating the merits of all of our businesses, all of our assets, and we're open-minded to considering portfolio changes, and we'll continue to be aggressive in looking for ways to create value for shareholders. Nicholas Joseph: And then just as you think about that growth, I think you said the first, second and third priority is in the U.S. Are you seeing different amount of competition for senior housing assets in the U.S. versus anything internationally that you do look at? J. Hutchens: Well, I mean, senior housing is obviously a strong performing asset class. There's new capital entering the market. We've seen more competition. We've seen a much bigger pipeline though. So we -- it's not surprising that I'd be more interested in the asset class given the fundamentals but we really like our ability to compete. As I mentioned, the platform is designed to manage a large number of operators. That's important because 75% of the sector is operated by operators that have 50 or fewer assets. So if you're going to grow at scale in this sector, you need to be -- you need a platform that can manage multiple operators. And we do that as well as anybody, and we're positioned through that, through OI platform as well as our transaction experience and track record and our financial strength and flexibility that has positioned us to continue to grow. So we like our ability to compete, whether it's the U.S. or in other markets. Operator: Our next question comes from the line of Richard Anderson, Cantor Fitzgerald. Richard Anderson: So not to bring up what was a source subject at the time. But back in March, you had this sort of surprise uptick in debts that caused some disruption in the sort of the transition to the following quarter. And I'm wondering if that has sort of smoothed out over the course of 2025, whereas it sort of slowed down, hopefully, where the full year 2025 might look like a lot of other years? And is that playing any role in your optimism in terms of sequential occupancy growth into '20 -- into the fourth quarter? Or is it sort of a normal pace now? Just wondering if that's playing a role at all. J. Hutchens: Richard, it's Justin. Yes, so the bottom line is that we never backed off our full year occupancy guidance. It was 270 the whole time. We alerted the market to kind of intermittent change in the occupancy run rate. We have the key selling season ahead of us. We've delivered on one of the best key selling seasons that we've had. You can see it on Page 12 in the deck. We had 230 basis points of growth within the key selling season, best in the past 4 years. The third quarter, it was a leader amongst the industry versus Nick and peers in terms of sequential occupancy growth. That was driven by higher than move-ins versus prior year. So the move-in strength has been very strong. The move-outs have moderated, and we're growing occupancies. So it's old news, and we've stuck with 270 and we're delivering on it. Richard Anderson: Okay. Fair enough. Second question, you talked about a growing investment pipeline, which is great to hear. But I'm wondering about the finiteness of the external growth story here. When I think about senior housing, I don't know, maybe there's 30 million apartment units in the United States, but is there 2 million senior housing, I don't know. And you're certainly buying as a group as the REITs faster than product is being developed. So do you -- what would you say is the time line where you've sort of getting to the point where you've seen and considered what you kind of want to have and that we'll start to see external growth start to sort of materially slow down but you've done a good job in terms of acquiring into that market. So it's such that the story transitions much more to an organic growth story, still sort of drafting off of all this aging of the population, but more of an internal growth story, maybe a couple of years from now and less of an external growth story. Debra Cafaro: Rich, we feel very confident about our ability to build on our investment momentum and to accelerate investment activity and quality U.S. senior housing for the foreseeable future. And we're very happy, as you mentioned, that we have a really outstanding internal growth story in this very large and growing senior housing business. J. Hutchens: Yes. And I would just say, really explicitly, we're not even close to seeing the slowdown from an external standpoint. The institutional ownership, long-term ownership is still in the mid-teens in the sector. And so you have a lot of private equity -- friends and family equity to own assets that trade assets routinely. And we anticipate participating in those trades. Operator: Our next question comes from the line of Omotayo Okusanya from Deutsche Bank. Samuel Ademola Ohiomah: This is Sam on for Tayo. I hope I didn't miss this, but can you guys provide an update on the performance update on the 27 assets that have been converted from Triple-Net to SHOP? J. Hutchens: Yes, sure. Yes. So you're referring to the transition -- the Triple-Net to SHOP transition from Brookdale. We've had -- there's 45 in total. And those communities have performed really well year-over-year, and they've -- their NOI really approximates the run rate now. So that was a good outcome, and there's 27 that have transitioned as of October. Everything is going really well. We've had boots on the ground from Ventas team members and most importantly, from the senior leadership amongst the operators to ensure that there's a smooth transition that's underway, and there's a lot of enthusiasm around the attention that the communities are getting, both from the new management, but also around the refresh capital that we're going to be putting in to help better position the communities and deliver occupancy growth over time. Samuel Ademola Ohiomah: And sorry, what was you said after -- since October, how many have been transitioned? I think I missed that. J. Hutchens: There's 27 that have transitioned so far. Debra Cafaro: And the remainder of the 45 should transition in the coming months. Operator: Our next question comes from the line of Juan Sanabria from BMO Capital Markets. Juan Sanabria: Just hoping you could talk a little bit about the independent living pool in the U.S. You kind of highlighted that as an outperformer. If you could just give us some color as to what's driving that? And maybe as a subset of that, how holiday -- the ex Holiday assets or the now Atria Holiday assets are performing as a part of that? J. Hutchens: Yes. So most of our independent living footprint in the U.S. is holiday or former holiday communities. We had 340 basis points of occupancy growth in the U.S. IL was stronger. So there -- that was 390 basis points. And so we've had really good growth in that IL product and pleased that it's outperforming. And as it has a long way to go, too. It's part of that U.S. opportunity for occupancy growth and it's delivering and has a long runway. So we're really pleased with the performance. Juan Sanabria: And how is the IL growth and the outperformance you've seen there impacted RevPOR growth? And is there any impact in terms of the mix there? And how should we think about that into '26 versus what you delivered year-to-date? J. Hutchens: Yes. So I'm not going to get into 2026, but the IL growth because it runs at a lower RevPOR and therefore, the outperformance in IL at a lower RevPOR does cause a mix impact on the RevPOR metric. So it does pull it down. And it's a high-class problem because it means you're growing more occupancy higher and faster, but it happens to be in a product that has slightly lower rent. So that's all in the numbers. And the goal will be to continue to grow with broad-based performance across the whole platform and both in terms of occupancy and rate. Operator: Our next question comes from the line of John kilichowski from Wells Fargo. William John Kilichowski: Justin, in last quarter, we discussed kind of the building blocks of your higher occupied assets and that margin profile. I know we talked about it earlier on the call. But if we look at your Canadian portfolio, you're at mid-90s occupancy, and we would kind of expect to see that sort of layout on margin or -- and RevPOR. I'm just curious why that Same-Store NOI number is maybe a little lower than we would expect given the building blocks that you walked us through? I think it would probably get us to mid-teens, and we're seeing 7.4% this quarter. Is there anything to point out there? J. Hutchens: Yes. So the Canadian portfolio has very, very high occupancy. I mean -- and it has -- there are some limitations around how much and where you can push pricing. There's also a mix issue that happens at times. We have a Sunrise product that has very high RevPOR. And if there's any volatility in those 12 communities, that can impact the operating metrics. But we would really kind of view Canada as a high single-digit grower. I mean that's what it's been for us. It's a reason why we're not looking to expand in Canada. You just don't have the same organic NOI growth opportunity in Canada. So it's solid, and it's a good opportunity. The U.S. opportunity is different. You have the opportunity to really deliver a better RevPOR OpEx per spread in the U.S. over time. You have less limitations on the top end in terms of where you can push rent. We're located in markets that have high income and wealth demographics and very strong supply and demand in the U.S. as well. So we do like that opportunity better and would expect better growth in the U.S. William John Kilichowski: Okay. That was very helpful. And then my second question is just on the acquisition pipeline. A couple of times on the call, you've said you have clear visibility on the ability to accelerate your acquisition cadence. Are there any near-term risks that you're monitoring that could possibly sort of uproot that thesis? Or is it pretty reasonable for investors to start expecting higher investment volumes in '26 and in '25? J. Hutchens: Well, I mean, structurally, we don't see anything limiting us now. We have the track record. We have the platform, we have the cost of capital, and we have momentum. So all of that's working together to have this accelerating investment pace that we've been delivering and we'll -- intention is to continue that. Operator: Our next question comes from the line of Ronald Kamdem from Morgan Stanley. Ronald Kamdem: Just 2 quick ones for me. Just going back to the operator conversation a little bit. You've added some more operators. Now you've had a lot of experience working with different operators. I was wondering if you could just talk through in terms of their ability to use data, use the platform as well as our capacity to take on more facilities, like where are all these operators in that journey, right? Is it early innings? Is it middle innings? Is it late innings? Just trying to get a sense of the potential efficiency an upside potential over the next 3 to 5 years. J. Hutchens: That's a great question. So let me start with this. Every single one of our operators in their communities have end-to-end tech. All of them do. It's an industry standard. And what that means is that they have tech in place for safety monitoring, care and compliance, med administration, managing their CRM, food services, maintenance delivery. All of that is managed through tech. And most of it is AI enhanced now. So that's the starting point. Believe it or not, technology is widely used in senior housing. And certainly, our operators are deploying that technology to help deliver more efficient and also most importantly, high quality in care and service delivery to their residents and to manage the business better. What's really powerful about the OI platform is that we designed it to plug into any system. It doesn't matter what they're using on the CRM side and from a financial side to get the operating metrics and the financial metrics we need, we designed our platform to be flexible. We pull the data in and then we can access and utilize the data in the OI platform. And the powerful aspect is that we then deliver that back to the operators. And what we're doing in doing so is articulating opportunities to improve across all the key metrics, revenue and expenses and in a very targeted way, and we get down literally to the unit level. And we have price strategies, sales strategies, expense efficiency opportunities that are identified in a granular detail in a way that the operators can really take it and deliver a plan and to improve performance. And so it's a very collaborative effort. It's data-rich, but in a very focused consumable way, and that's how the OI platform plugs in. And it's only going to get much better. One of the things that you hear me talk about the best is yet to come, and that's referring to a number of fronts. And one of those fronts is the ability to execute on performance through the OI platform will only get better over time. Ronald Kamdem: Really helpful. And then my second question was just I wanted to ask the competition question sort of a different way because we've been thinking a lot about that as well. Because when I look at sort of low to mid-teens unlevered IRR, I think the demographic trends are clear. I mean I think if you could be a little bit more specific in terms of why do you think private equity specifically has not come into the space, right? Is it that they're here and there's enough product to go out? Just like what are the reasons that this pool of capital is not coming for the sort of low to mid-ish teens unlevered IRR with a good supply-demand backdrop? Just what are you hearing? J. Hutchens: So I mean there is private equity in the space. I mean they -- quite frankly, they own much more of the sector than the public companies do. And so they're in the space. But in terms of -- and when I said I'm referring to private equity and friends and family equity, the reality is, though, if you're an institutional private equity player and you want to enter the space and scale, everything I've described that we do that you don't flip a switch and just make that happen. And the ideal -- it seems like the ideal private equity investment would be a lineup with a large-scale operator and help that operator to improve and expand and grow. But to grow in this space, you're usually not going to find many of those opportunities because it's a collection of smaller operators in senior housing, as I mentioned. And so our platform is designed to buy communities operated by multiple operators. It's 40 and growing. And I do think that creates a barrier to entry issue for some private equity. Having said that, I mean, we would expect that there'll be plenty of interest from a variety of capital sources in the sector given the strong fundamentals. Operator: Your next question comes from the line of Michael Stroyeck from Green Street. Michael Stroyeck: Thanks. Can you quantify what the potential opportunity for Triple-Net to SHOP transition looks like within the current portfolio? How many more assets do you expect to transition over the next, call it, 6 to 12 months or so outside of the Brookdale portfolio? And what's the rough range of NOI upside you typically underwrite on those? J. Hutchens: Yes. I mean we've had -- quite frankly, most of that plan has been executed. We had 150 already that we've -- plus that we've moved into SHOP from Triple-Net. That's created that awesome occupancy upside opportunity we're seeing in the U.S. We've had -- we do have some very high-performing leases that are left. One of those is with Brookdale. I mentioned that. We don't have any plans to do anything different with that portfolio. There's a couple of other smaller ones, one of which we just made an acquisition through one of our tenants out and bought some new really high-performing, high-quality assets as part of the pipeline and move those to SHOP. And so that was a way to leverage that relationship. But really, the plan at this point is to deliver on the organic growth opportunity that is embedded in our portfolio through all those efforts we've had in place over the past few years and continue to grow externally. Michael Stroyeck: Got it. And then maybe one on the research business. Can you just quantify the magnitude of bad debt during the quarter? And are these onetime rent deferrals or more permanent rent cuts to tenants? Just help us understand how long the credit issues during the quarter may actually weigh on NOI growth in that business. Peter Bulgarelli: Yes. This is Pete. Thanks for the question. The typical character of some of the restructurings we've done to give people additional runway is to initially reduce their rents, have a climb back up and they have some participation opportunities later as their business improves. And so that's the playbook we've been running. It's been working well, and it's hard to say when it's going to end, but we're pretty pleased with the results. Operator: Our next question comes from the line of Michael Mueller from JPMorgan. Michael Mueller: I'll just keep it to 1 here. As the 80-plus population surges, do you expect to see a widening of performance between AL memory care and the younger population IL portfolio? J. Hutchens: I want to make sure you understand... Debra Cafaro: Yes, I think I do. So the 80-plus population, the baby boomer starts turning 80 next year. That's really our customer base in senior housing. The truth is that both AL and IL ages are relatively consistent with each other. And so we would expect both to be benefited by this broad-based demand. It's really just a different type of resident with whatever type of needs that they have when they move into senior housing. And the age is relatively consistent between the two. You can get a little bit younger skewing in the independent living, which is one of the benefits of that asset class. But overall, both are going to be benefiting from this broad-based and growing demand. Operator: I will now turn the call back over to Debra Cafaro, Chairman and CEO of Ventas for closing remarks. Debra Cafaro: All right, Van. Thanks. And I want to thank everyone who joined us on a busy day for your interest in and support of Ventas. We wish you and yours a good holiday season, and we look forward to seeing you soon. Thank you. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to CommScope's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Massimo Disabato, VP, Investor Relations. Please go ahead. Massimo Disabato: Good morning, and thank you for joining us today to discuss CommScope's 2025 third quarter results. I'm Massimo Disabato, Vice President of Investor Relations for CommScope. And with me on today's call are Chuck Treadway, President and CEO; and Kyle Lorentzen, Executive Vice President and CFO. You can find the slides that accompany this report on our Investor Relations website. Please note that some of our comments today will contain forward-looking statements based on our current view of our business, and actual future results may differ materially. Please see our recent SEC filings, which identify the principal risks and uncertainties that could affect future performance. Before I turn the call over to Chuck, I have a few housekeeping items to review. Today, we will discuss certain adjusted or non-GAAP financial measures, which are described in more detail in this morning's earnings materials. Reconciliations of non-GAAP financial measures and other associated disclosures are contained in our earnings materials and posted on our website. All references during today's discussion will be on our adjusted results. All quarterly growth rates described during today's presentation are on a year-over-year basis, unless otherwise noted. I'll now turn the call over to our President and CEO, Chuck Treadway. Charles Treadway: Thank you, Massimo. Good morning, everyone. I'll begin on Slide 2. I'm pleased to announce in the third quarter, CommScope delivered net sales of $1.63 billion, a year-over-year increase of 51% and adjusted EBITDA of $402 million, a year-over-year increase of 97%. These very positive results were generated by strong performance in all of our segments. The third quarter also marked the sixth consecutive quarter that we sequentially improved adjusted EBITDA. The adjusted EBITDA as a percentage of revenue of 24.7% was a record for CommScope since the ARRIS acquisition, reaffirming our strategy of managing what we can control and maximizing on favorable market conditions. Our RemainCo business comprised of ANS and RUCKUS delivered net sales of $516 million in the third quarter, which was 49% above the prior year and delivered $91 million of adjusted EBITDA in the quarter, an increase of 95% versus the third quarter of 2024. RemainCo adjusted EBITDA as a percentage of sales was 17.5%, 400 basis points above the prior year. These businesses continue to benefit from the upgrade cycles as well as new product introductions. In addition to our strong EBITDA performance, we ended the quarter with $705 million of cash, an increase of $134 million in the quarter. This further strengthens our liquidity position, and we expect to generate incremental cash in the fourth quarter. With that, now I'd like to give you an update on each of our businesses, starting with the 2 businesses that will make up RemainCo, ANS and RUCKUS. Starting with ANS. Net sales of $338 million were up 77% in the third quarter compared to the prior year, and adjusted EBITDA was up 169%. These increases were primarily driven by our continued deployment of our new DOCSIS 4.0 amplifier and node products. Our FDX amplifier deployment with Comcast continues to go well, and this is reflected in our results. As stated before, we believe ANS is well positioned with decades of knowledge of our customers' ecosystems and our breadth of new products for service providers to take advantage of the latest DOCSIS upgrade cycle as well as evolving their legacy DOCSIS 3.1 networks. Our product range includes all areas of the HFC network, including DOCSIS 3.1, 3.1E and DOCSIS 4.0 solutions. During the third quarter, we announced that CommScope achieved record-breaking speeds at the CableLabs DOCSIS 4.0 at DAA Technology Interop event. Powered by CommScope's Evo virtual CCAP platform, the team achieved unprecedented speeds of 16.25 gigabits per second in the downstream across 2 load balance DOCSIS 4.0 modems for multiple manufacturers using various chipsets. In related test, the CommScope team also achieved downstream speeds of over 9.4 gigabits per second on a single DOCSIS 4.0 modem. These breakthroughs show that a DOCSIS 4.0 network can compete with the fiber-to-the-home speeds. Additionally, over the last quarter, we found traction with our newly released PON portfolio at a major North American service provider, which will deliver multi-gigabit bandwidth and scalable options for growth. We also deployed our virtual broadband network gateway solution with a major MSO. The vBNG solution is a software-based service that serves as a virtualized alternative to traditional gateways. vBNGs provide scalable, agile and cost-effective broadband services. They help manage subscriber sessions, advanced routing and flexible deployment in various architectures like cloud-native and container-based networks for HFC, PON and mobile networks. At the SCTE Tech Expo last month, we showcased our entire suite of products and solutions that help customers upgrade their networks in the most agile ways possible. On display were DOCSIS 4.0 and unified solutions, including the RPDs and smart amplifiers. Coming out of the show, there seems to be some resurgence of excitement for DOCSIS 4.0 and DOCSIS 3.1E. In addition, during the show, we jointly announced with Comcast that the CommScope DOCSIS 4.0 FDX amplifiers feature an AI-driven management core, which auto detects and corrects network events in real time to deliver superior intelligence, performance and reliability across Comcast's access network. CommScope has long been a world leader in network amplifiers with nearly 10 million shipped since the exception of DOCSIS 1.0 in 1997. In 2026, CommScope plans to introduce amplifiers and remote PHY devices that deliver DOCSIS 4.0 unified operation, supporting both the 1.8 gigahertz extended spectrum DOCSIS and FDX networks with a single device. As we have stated in the past, we are the only solution provider offering the full DOCSIS 4.0 access technology ecosystem, including nodes, DAA modules and amplifiers. CommScope is uniquely positioned to support any operator's path to 10G services. We continue to move forward with our new unified products that are now in the lab testing phase and expected to be available in the first half of 2026. We are pleased with the direction that ANS is headed. As the market shifts towards DOCSIS 4.0, we have positioned our product portfolio to take advantage of many upgrade paths. The new products position ANS to maintain performance as the market shifts away from some of our legacy products. Turning to RUCKUS. Revenue was up 15% in the third quarter compared to the prior year. RUCKUS adjusted EBITDA of $36 million was up $10 million or 38% versus Q3 of 2024. In the third quarter, we saw continued strong demand for RUCKUS driven by our Wi-Fi 7 products and subscription services as well as our go-to-market initiatives. During the quarter, we deployed our first T670 outdoor Wi-Fi access points for large private venues. It is a high-density AI-driven Wi-Fi 7 outdoor access point with a unique programmable directional antenna. We received U.S. federal government certification for our ICX 8200 as one of the first companies to achieve the new FIPS 140-3 certification across our ICX product line, enabling sales to U.S. federal customers. RUCKUS switches are designed to handle next-generation wireless and IoT networks, delivering exceptional and reliable performance. Also at the SCTE Tech Expo, we demonstrated our mobile data offload product. This provides MSOs and their mobile customers with higher data speeds, better reliability, seamless roaming and lower data cost to the operator. Enabled with our cloud-based RUCKUS AI, it delivers unmatched network visibility, analytics and troubleshooting to ensure exceptional customer experience. Utilizing our high-density T670 access point, we provide the required reliability and high throughput that is necessary for mobile data offload. This solution is focused on improving data flow, reducing latency and increased gross data offload tonnage. Customers have expressed interest in this technology, and we expect this to scale in 2026. With the strong year-over-year improvements in the pipeline of innovations, we feel that the challenges in 2024 with channel inventory are now well behind us. We continue to benefit from new products and our vertical market strategies. In addition, we are beginning to see the impact of adding incremental selling resources as indicated by our increase in sales funnel opportunities. We have also seen additional traction in North American service provider market as more customers are interested in our RUCKUS One MDU solutions. These solutions take advantage of our RUCKUS One platform and help managed service providers accelerate time to market and reduce operational costs. This fundamentally changes the deployment economics and delivers faster returns on investment. On top of the strong growth in 2025, RUCKUS is well positioned for strong growth in 2026, driven by our Wi-Fi 7 product offering, growing demand and our strategic go-to-market investments. Despite the announced transaction, I will give a brief update on CCS. In the third quarter, CCS revenue was $1.1 billion, an increase of 51% year-over-year. CCS adjusted EBITDA of $312 million or an increase of 79% as a result of revenue growth, mix and cost leverage. The CCS segment will continue to be a strong cash flow generator until the close of the transaction. Based on current views, we're raising our full year CommScope adjusted EBITDA guidance to $1.30 billion to $1.35 I want to give you an update on the divestiture of our CCS businesses to Amphenol. The sale of the CCS business was approved by our shareholders on October 16. Based on current progress, we now expect the sale to close in the first quarter of 2026. The transaction will allow us to return significant capital to our shareholders and immediately improves our leverage situation. The CCS business has found a great home with Amphenol, and we look forward to working with them to close the transaction. RemainCo will consist of the ANS and RUCKUS segments. Both of these businesses are recovering from challenging market conditions over the last 2 years. However, they have seen strong recovery in 2025. Based on the third quarter strength and Q4 visibility, we now expect RemainCo to deliver between $350 million and $375 million of adjusted EBITDA in 2025. As we service our customers, we have the right products, solutions and scale to win new business. We will continue to focus on what we can control with a strategic focus on supporting our customers, innovating for the demands of future advanced networks and increasing equity value. And with that, I'd like to turn things over to Kyle to talk more about our third quarter results. Kyle Lorentzen: Thank you, Chuck, and good morning, everyone. I'll start with an overview of our third quarter results on Slide 3. For CommScope, we reported adjusted EBITDA of $402 million for the third quarter of 2025, which increased 97% from prior year. Third quarter adjusted EBITDA results were up 19% sequentially versus the second quarter of 2025. Our adjusted EBITDA as a percentage of revenues was 24.7%, the best we have seen since the ARRIS acquisition and increased by 580 basis points year-over-year and 40 basis points versus the second quarter of 2025. For the third quarter, CommScope reported net sales of $1.63 billion, an increase of 51% from the prior year, driven by an increase in all segments. Adjusted EPS was $0.62 per share versus a loss of $0.06 per share in the third quarter of 2024. Order rates were down 8% sequentially in the third quarter of 2025, driven by seasonality and project timing. CommScope backlog ended the quarter at $1.32 billion, down $110 million or 8% versus the end of the second quarter 2025. With our CCS transaction announcement, I would like to separately discuss the strong performance of our 2 businesses that will make up RemainCo, ANS and RUCKUS. Third quarter revenue in these 2 businesses was $516 million, up 49% year-over-year. The stronger revenue resulted in adjusted EBITDA in the RemainCo businesses of $91 million, up 95% versus prior year. We are pleased with the RemainCo third quarter results as they came in above our forecast. Turning now to our third quarter segment highlights on Slide 4. Starting with our ANS segment. Net sales of $338 million increased 77% from the prior year as customer inventory levels stabilized and shipments of our DOCSIS 4.0 products have increased. ANS adjusted EBITDA of $54 million was up $34 million or 169% from the prior year, driven by higher revenue. ANS had a very challenging 2024 as customers continue to delay their upgrade cycle and the legacy business continued to decline. In the fourth quarter, we expect revenue to decrease due to project timing. However, we expect adjusted EBITDA to increase slightly. As we have discussed in the past, ANS is a project-driven business with timing of projects driving some volatility in results, both from a revenue and EBITDA perspective. We experienced a strong rebound in revenue and adjusted EBITDA year-to-date as our investments made over the last 3 years on product development have positioned us for the pending upgrade cycle. The business remains well positioned to take advantage of upgrade cycles while offsetting declines in the legacy business. RUCKUS net sales of $179 million increased by 15% versus the third quarter of 2024, driven by normalized inventory in the channel and stronger market demand as well as our go-to-market initiatives. RUCKUS adjusted EBITDA of $36 million increased 38% from the prior year, driven by the increases in revenue and favorable onetime items in the quarter of approximately $3 million, offset by investment in go-to-market. We continue to see strong market conditions driven by the Wi-Fi 7 upgrade cycle. We expect the strong market conditions to remain in 2026. As noted in previous calls, the overhang from channel inventory lasted through the first half of 2024. We are now seeing the benefits of normalized inventory in the channel as well as growing market demand. We continue to drive our go-to-market strategies and RUCKUS new product initiatives. In addition, we are beginning to see the impact of adding incremental selling resources. However, the net benefit of these new resources will not be realized until 2026. With the additional selling resources, new products and vertical market focus, we are well positioned to grow as we move into 2026. Fourth quarter adjusted EBITDA is expected to decline compared to third quarter results due to the elimination of onetime benefits in the third quarter and seasonality. Finishing with CCS, as Chuck mentioned, net sales of $1.1 billion increased 51% from the prior year. CCS adjusted EBITDA of $312 million increased 79% from the prior year. CCS adjusted EBITDA as a percentage of revenue for the quarter remained strong at 28%, driven by favorable mix and cost leverage. The business continues to perform well, and we look forward to continuing to generate strong cash flow ahead of the sale to Amphenol. Turning to Slide 5 for an update on cash flow. During the quarter, we generated cash flow from operations of $151 million and free cash flow of $135 million. Due to strong results and updated adjusted EBITDA guidepost, we now expect cash to be up approximately $250 million from where we started the year. In this guidance, we still project an investment in working capital and capital expenditures of over $200 million, driven by growth in the business. Turning to Slide 6 for an update on our liquidity and capital structure. During the quarter, our cash and liquidity remained strong. We ended the quarter with $705 million in global cash and total available cash and liquidity of $1.28 billion. During the quarter, our cash balance increased by $134 million. In the quarter, we purchased no debt or equity on the open market. However, going forward, we may continue to use cash opportunistically to buy back debt and equity. The company ended the quarter with net leverage ratio of 5.5x. I will conclude my prepared remarks with some commentary around our expectations for the fourth quarter of 2025. We will continue to focus on running the businesses and delivering results while preparing for the closing of the CCS transaction in the first quarter of 2026. As Chuck mentioned earlier, this is a transformational transaction that creates shareholder value by strengthening the balance sheet. With expected net proceeds of approximately $10 billion, we expect to repay all of our existing debt and redeem our preferred equity. With our excess cash and modest new leverage on the remaining company, we plan to distribute the excess cash to our shareholders as a special dividend within 60 to 90 days of the transaction closing. The exact amount of the special dividend will be determined after closing by the Board. On the performance side, we have seen 6 quarters of sequential quarterly adjusted EBITDA improvement. During the third quarter of 2025, we have continued to see strong performance in all of our business segments. The ANS and RUCKUS segments continue to perform well with third quarter adjusted EBITDA of $91 million, up 95% over prior year. As a result of the continued strong results, we are raising our 2025 RemainCo adjusted EBITDA guidepost from $325 million to $350 million, up to $350 million to $375 million. The midpoint of this RemainCo guidance indicates a sequential adjusted EBITDA decline in the fourth quarter, driven by seasonality, particularly in the RUCKUS business. As for CommScope, we are raising our 2025 CommScope adjusted EBITDA guidepost from $1.15 billion to $1.2 billion, up to $1.3 billion to $1.35 billion. And with that, I'd like to give the floor back to Chuck for some closing remarks. Charles Treadway: Thank you, Kyle. In closing, we have delivered another strong quarter driven by strong market conditions and our focus on internal initiatives. The CCS transaction is ahead of schedule and is now expected to close in the first quarter of 2026. This is a transformational transaction for CommScope that unlocks equity value, allows us to return significant cash to our shareholders and strengthens the businesses. Additionally, we are encouraged by both the performance and positioning of the RemainCo businesses, ANS and RUCKUS. Both businesses exceeded our projections in the quarter, and this performance demonstrates the strong positioning of RUCKUS and ANS. The deleveraging that comes with the CCS transactions positions these businesses for success, growth and value creation. Finally, I would like to thank our team for strong execution. The hard work and dedication of our team with strong support of our equity holders, debt holders, customers and suppliers has driven strong results and positioned all of our businesses for future success. And with that, we'll now open the line for questions. Operator: [Operator Instructions] Our first question comes from Simon Leopold with Raymond James. Simon Leopold: First, maybe hopefully, an easier one is, could you -- I understand you can't quantify the special dividend, but could you help us understand the criteria and how the Board may think about it? And then you did offer some, I think, encouraging comments on the RUCKUS outlook for '26. I was less clear how you're thinking about ANS trends specifically for '26. You did mention, I think, down sequentially on some seasonal patterns, but wondering about how that's setting up. Kyle Lorentzen: Yes, I'll take your first one, Simon. Relative to the dividend, as you can expect, when we closed the CCS transaction, which we now are indicating that, that will happen in the first quarter, the Board will take into account all the relevant factors that you would expect them to take into account. What's our cash position at the time, business performance. I don't think there's anything specific. I think it's a combination of things that they'll look at to determine what's the right level of dividend to do at the time. Charles Treadway: And to answer your second part of your question, Simon, is, look, we're seeing some resurgence in DOCSIS upgrade activity. Comcast, as you know, is moving forward with FDX, and they're doing that at expected, I'd say, better-than-expected levels. And I'd say, overall, we're seeing a general uptick in DOCSIS for 2026. And as you -- as we talked about in the call, 2025 was a strong rebound. And we -- moving forward, we see this business with modest growth and strong cash flow generation. We see the growth coming from new products. And as you mentioned, it's a decline in our legacy products. I think that would be the way I'd size it up. Operator: Our next question comes from Samik Chatterjee with JPMorgan. Samik Chatterjee: I have a couple. Maybe just on the DOCSIS upgrades and the record amplifier shipments that you're seeing. I know you talked about sort of customers coming in better than expected at this point. But how should we think about sort of where you are in the cycle? What visibility are customers giving you in terms of their upgrade plans into next year? Just trying to get sort of more bookends around like is this going to be a few quarters? Or do you see a longer cycle just because of also BEAD coming in to sort of support this in 2026? How should we think about that, if you can help? And I have a follow-up. Charles Treadway: Sure. I would say we're in the early innings of the DOCSIS upgrade. And I think this is a multiyear, several year process to put it in perspective, and we're in the very early innings. Samik Chatterjee: Okay. Okay. Great. And in relation to -- maybe just a follow-up on that, you did expect -- you had earlier outlined ANS to moderate a bit into the quarter. I mean the upside surprise that you saw was just overall amplifier shipments? Or was there a software pull-in as well along with it driving the upside? Kyle Lorentzen: Yes. I think in the quarter, there was no real software impact in the quarter. I think we had indicated on a sequential basis that the ANS business was going to be down on an EBITDA basis, driven by a really, really strong second quarter that we had that was impacted by the software. So as we went into Q3, it was more of a hardware mix for us, which drove the sequential decline, albeit still a pretty solid quarter for ANS. Samik Chatterjee: Okay. And maybe if you can let me squeeze one more in here. Just trying to think about the EBITDA for the RemainCo and how should we think about maybe a bit more of a walk between the EBITDA and what should be a more normalized cash flow for the RemainCo business? What would you sort of call out in terms of capital investments to support the business on an ongoing basis? And how should we think about sort of normalized cash flow? Kyle Lorentzen: Yes. I mean we -- obviously, we've provided some indication on what at least the '25 RemainCo EBITDA guidepost would be at the $350 million to $375 million. I think when we look at that -- look at the RemainCo businesses, I think working capital and sort of taxes are sort of -- would be sort of normal. I think the one place where we probably see a little bit of pickup from a cash flow basis versus the total CommScope would be in CapEx. These businesses tend to be less capital intensive than the CCS business. And then ultimately, to get to the actual cash flow number, as we've talked about in our prepared remarks and the proxy, whatever leverage we would put on the business would clearly have some impact on the cash flow, which will determine once we get to the CCS transaction and the leverage of that we'll put on the business. Operator: [Operator Instructions] Our next question comes from Kevin Niederpruem with Bank of America. Kevin Niederpruem: I got a few questions for you. My first question is similar to Samik's, but it's about the Wi-Fi business. Can you explain with us and share with us where you currently view the Wi-Fi 7 cycle? Charles Treadway: Sure, sure. I would say our inventory issues are behind us at this point. I mean, as you see that the Q3 revenue was up 15% year-over-year. What's really driving all this are our new products and solutions. I think we're gaining traction with our RUCKUS ONE product line. And I'd say that includes the subscriptions. We are seeing a Wi-Fi refresh, and I would say we're in the early innings of that. And I would say, in general, strong market conditions, specifically for access points. And the other thing that's going on in our business is we're investing approximately $20 million a year in incremental sales resources, and we started that this year. These resources, combined with our new products, our vertical market initiatives, focus on RUCKUS ONE subscriptions and I would say some channel initiatives are going to support revenue growth. And I believe it's going to be like a 2x market growth rate over the next several years. Kevin Niederpruem: Got it. My next question is more about the ANS segment. This quarter and a little bit of last quarter, you called out more of these FDX smart amplifiers driving growth. Are you able to give us some information on the CMTS, the nodes or any of the other stuff in between, how that performed throughout the quarter? Kyle Lorentzen: Yes. I think as we think about sort of a little bit of a different question. But on the node and RPD side, we see continued strength there as well, particularly the FDX side of the business. I think as Chuck mentioned in one of the earlier answers, on the legacy CMTS side, that is a declining business, and we'll see that slowly decline over time. And then I think on the virtual CMTS side, as we've talked about in the last couple of calls, we're gaining some traction there. We've had a couple of wins, particularly in Europe. Kevin Niederpruem: Got it. And then my last question is more broad based around competition. Can you parse out for us the competition and more of the players that you're seeing in both the ANS side and the RUCKUS side? Charles Treadway: Well, I'd say on the ANS side, I mean, there's a wide range of, let's say, smaller players or niche players. I think you think about like a Telista, you think about a Vecima, when you think about the larger players, more larger than those guys, you think about Harmonics and then you got ATX. Those would be the players in that space. And what was your other question? Kevin Niederpruem: Is the competition on RUCKUS. Charles Treadway: Yes. I mean that would be Cisco, HP, Juniper, Extreme. That would be the ones I'd call out Arista. Kyle Lorentzen: The only thing I would comment around competition is in the ANS business, it's very product specific. We are one of the few companies that supply into the DOCSIS space sort of all the products, and each product has a different set. So like your amplifiers would have different competitors than like your CMTS. And I also think when you look at the RUCKUS business, we are heavily weighted to enterprise. We're more heavily weighted to access points. So even when you get into the businesses, it's -- a lot of it has to do with being product-specific or market specific. But I think generally, on a broad basis, Chuck hit the sort of the major competitors that we're seeing. Operator: Our next question comes from George Notter with Wolfe Research. Brenden Rogers: This is Brenden on for George. I wanted to ask a question about the 2025 EBITDA guide. It looks like you guys raised the guidance for the core RemainCo business, but any color on what you expect for CCS to do next quarter? I think some of the guidance raised in the RemainCo was maybe offset by CCS possibly. Anything there would be awesome. Kyle Lorentzen: Yes. I think we mentioned in our prepared remarks that just based on some seasonality, albeit still a very strong quarter for CCS, the CCS EBITDA at this point in time, we'd call it down a little bit. But again, not necessarily from strength of market, more just from Q4 seasonally being a little bit of a softer quarter for us historically. Operator: I'm showing no further questions at this time. I would now like to turn it back to Chuck Treadway, President and Chief Executive Officer, for closing remarks. Charles Treadway: Yes. Thank you all for your time today. I appreciate your interest in CommScope, and I'd like to wish all of you a great rest of your week. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning, and thank you for standing by. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Allied Properties REIT Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Cecilia Williams, President and CEO. Please go ahead. Cecilia Williams: Thanks, John. Good morning, and welcome to our Q3 conference call. I'll highlight our progress towards 2025 goals and what we're focusing on going forward. Nan will do the same from a financial perspective. JP will outline the positive leasing momentum by urban market. We're then pleased to answer any questions. We may, in the course of this conference call, make forward-looking statements about future events or future performance. By their nature, these statements are subject to risks and uncertainties that may cause actual events or results to differ materially, including those described under the heading Risks and Uncertainties in our 2024 annual report. Material assumptions underpinning any forward-looking statements we make include those described under forward-looking statements in our most recent quarterly report. We're focused on delivering long-term value through leasing, development completions and strengthening our balance sheet. Market fundamentals continue to improve as evidenced by the higher level of leasing activity, including the highest number of square feet of expansions in our portfolio in the last 5 years, increasing large-format space mandates and improving conversion rates. Our capital structure, specifically the temporarily higher level of debt we took on to complete development projects, put downward pressure on results in the quarter. While our portfolio remains resilient and strategically positioned to benefit from improving market dynamics, it will take us beyond year-end to achieve 90% occupied in leased area and our targeted 10x debt to EBITDA. We remain focused on those as milestones toward continued improvement in our metrics. First, leasing and operational results. Our leased area held in the quarter. We leased 882,000 square feet across the rental and development portfolios. Conversion from tours to signed deals was high at 81%. JP will elaborate on these metrics. These signs of improving operating fundamentals give us confidence that while we're not getting to our ambitious target of 90% occupied and leased area by this year's end, we'll make progress going forward. Second, we advanced on our development and upgrade activities. M4 in Vancouver is now 90% leased, driven by Netflix's expansion in the quarter. Fixturing is underway and rent commences in early 2026. At KING Toronto, we're heading towards successful completion by the end of 2026. Securing Whole Foods as the anchor of the commercial component is facilitating the lease-up of the remaining space. We're currently in various stages of negotiation with 7 retailers. Glazing continues on the fourth level and glazing for the fifth level will begin to arrive next week. It's truly a distinctive project that will elevate the entire King West Village neighborhood when it's completed next year. All the development and upgrade projects currently underway are on track for completion by the end of 2026. Last but certainly not least, our balance sheet. While we want to achieve our target of getting to 10x debt-to-EBITDA by this year-end, we're increasing our steps to get there. We've added Toronto House and Calgary House to our disposition pipeline. Those dispositions, together with the repayment of the 150 West Georgia loan in the first half of 2026 will strengthen our balance sheet as we'll be able to pay off more debt and moderate interest expense, accelerating progress going forward. We're improving liquidity and positioning Allied for the next phase of growth with a stronger foundation. Nan will now elaborate on our financial results and balance sheet management. Nanthini Mahalingam: Thank you, Cecilia. Good morning, everyone. Thank you for joining us today. I'll take a few minutes to highlight our financial performance and the continued efforts we're making to strengthen our balance sheet. Operating fundamentals are improving. Our occupied and leased area didn't increase at the pace we expected in the quarter. Along with elevated interest expense, slower lease finalization put downward pressure on our results. We remain cautiously optimistic as market fundamentals continue to evolve in our favor. Occupancy was impacted by nonrenewals, including Entertainment One at 134 Peter Street in Toronto. They consolidated space following their acquisition by Lionsgate, a decision that was made in 2023. More importantly, we offset much of this with new leasing in our portfolio, which drove our lease area from 87.2% to 87.4%. This will translate into earnings as tenants take occupancy. Our same-asset NOI was 0.2% up for the quarter, supported by development completions, including 20 Breithaupt, 700 Saint-Hubert, and 1001 Robert-Bourassa. Our results included a onetime lease termination fee of $2.1 million related to a space that was on the sublease market. The termination was strategically aligned with an expansion of an existing tenant in the building, resulting in no downtime, higher rental rates and an incremental 3-year lease extension, thereby preserving future recurring revenue. Our interest expense was higher due to timing of our dispositions. We expect our interest expense will decrease upon the completion of our disposition program and the receipt of the 150 West Georgia loan receivable. Excluding the sale of our rental residential assets, we expect to generate approximately $500 million from dispositions and the 150 West Georgia loan monetization. This is expected to close between the remainder of 2025 and first half of 2026. All these proceeds will be used to retire debt. Overall, despite pressure from higher interest expense and longer lease-up time lines, we maintained stable operating fundamentals, solid liquidity and continued progress towards our long-term balance sheet targets. Turning to the balance sheet. Liquidity remained strong at $903 million, up $168 million from the prior quarter. About 89% of our portfolio is unencumbered, giving us exceptional flexibility. During the quarter, we completed the extension of our unsecured facility to September 2028 and expanded our syndicate to include 6 major Canadian financial institutions. This highlights the support we have from our financial partners. We also updated our green financing framework, which was initially released in 2021 to ensure alignment with best practices. Subsequently, we completed the issuance of our Series N debenture for $450 million, which was 5x oversubscribed with a 6-year term at a rate of 4.6%. This brings our total issuance for the year to $1.3 billion, of which $900 million was issued under the green financing framework, further highlighting the ongoing support that we have from the debt capital markets. Proceeds from this issuance were allocated to the retirement of variable rate construction debt and to pay down a portion of the $250 million term loan due in early 2026. At the same time, we extended the remaining $100 million of the term loan by 2 years to 2028 and retained the existing interest rate swap on the full $250 million at a favorable rate of 3.5%. In August, DBRS completed their annual review and maintained our credit rating. We remain committed to maintaining our investment-grade rating and our ongoing disposition initiatives will allow us to reduce leverage to our targeted levels over time. We have taken proactive steps to address most of our upcoming maturities for the end of 2026. We'll repay the upcoming $600 million debenture using proceeds from our dispositions and the monetization of 150 West Georgia loan receivable. Overall, this quarter was built on strong leasing momentum. strengthened liquidity and proactive management of upcoming debt maturities. All of this position us well for long-term value creation. Thank you. And with that, I'll pass it over to JP to discuss leasing. J.P. Mackay: Thanks, Nan. Over the past number of months, we've observed improving operating fundamentals throughout our portfolio, evidenced by 4 trends: one, an increase in leasing activity; 2, an increase in large-format space requirements; 3, an increase in expansion activity among existing users; and 4, an increase in our conversion rate. Our leased area remained stable in the quarter and outperformed each of the urban submarkets in which we operate, except for Vancouver, where we've made good progress in addressing acquired vacancy. In Q3, we completed 882,000 square feet of leasing activity, including 512,000 square feet of new leasing activity, the most since 2020, of which 426,000 was in our rental portfolio and 86,000 in our development portfolio. This represents an 81% conversion rate, the highest since 2020. The new leasing activity in the quarter included 187,000 square feet of expansions, a 150% increase compared to the previous quarter and the highest since 2020. The impact of our new leasing activity was partially offset by nonrenewals including a large known nonrenewal due to M&A activity that occurred in the prior year and not a reflection of current day space requirements. While the number of tours was lower compared to the prior quarter, the average tour size more than doubled and the number of tours with requirements greater than 25,000 square feet increased 83%, driven by touring activity in the modern segment of our Toronto and Montreal portfolios. Industries represented by touring organizations were technology, financial services, media, professional services, education and medical uses. We currently have 1.3 million square feet of leasing activity under negotiation or at the prospect stage, of which 970,000 square feet represents new leasing opportunities. Of the new leasing activity underway, 300,000 square feet is under negotiation and 670,000 square feet is at the prospect stage. Included in the leasing activity underway is 170,000 square feet of possible expansion activity as there are currently 17 existing users considering expansions. I'll now provide a brief overview of each market. In Montreal, we're currently working on 370,000 square feet of new leasing activity, of which 100,000 is under negotiation and 270,000 is at the prospect stage. Most of our vacancy in Montreal is concentrated at La Cité, a portfolio of assets located between Old Montreal and Griffintown, comprising 8 buildings totaling more than 1.2 million square feet. We've seen a material increase in leasing activity at La Cité in the second half of the year. In Q3, we completed 100,000 square feet of new leasing and currently have 100,000 at the prospect stage. The upgrade activity at 1001 Robert-Bourassa continues to attract large and sophisticated users. In Q3, we completed 150,000 square feet of new leasing and currently have 130,000 at the prospect stage. The new leasing completed in Q3 included the expansion of an existing user by 100,000 square feet to accommodate their utilization requirements by backfilling much of the National Bank sublease space. In Toronto and Kitchener, we're currently working on 550,000 square feet of new leasing activity, of which 165,000 is under negotiation and 385,000 is at the prospect stage. In Toronto, there are several large organizations looking to sublease the Shopify space at the Well. Shopify is currently finalizing a sublease for a large portion of their premises with the user that will be new to our portfolio. The remaining demand exceeds the balance of space available materially. In Kitchener, Google renewed its lease of 195,000 square feet in The Breithaupt Block, a large heritage complex in which we own 50%. Google represented our largest lease maturity in 2026. In Calgary, we're currently working on 30,000 square feet of new leasing activity, of which 20,000 is under negotiation and 10,000 is at the prospect stage. In Vancouver, we're currently working on 20,000 square feet of new leasing activity, of which 15,000 is under negotiation and 5,000 is at the prospect stage. At 400 West Georgia, we finalized the long-term lease of 49,000 square feet with a global educational institution, subject only to routine regulatory approvals expected before the end of November. The asset is now 96% leased. At M4, we finalized the lease expansion of 26,000 square feet with Netflix, bringing Netflix's footprint to 137,000 square feet. The asset is now 90% leased. Our leasing performance in Q3 reflects improving operating fundamentals, driven by higher physical utilization and diminishing supply of distinctive urban workspace, resulting in an increase in leasing activity, rising demand for large-format space requirements, increased expansion activity among existing users and improved conversion rates across our portfolio. I will now turn the call back to Cecilia. Cecilia Williams: Thanks, JP. Before we turn to questions, I want to reiterate my confidence in our portfolio and our team, especially as market dynamics are improving. We're staying focused on leasing, paying down debt and completing development projects. Our targets are in sight and are achievable. With our offering of both heritage and modern workspace, our urban portfolio is unique and strategically positioned for the growing demand and the lack of new supply will highlight this. I say this as Canadian cities are increasingly concentrating in centers of creativity, innovation and opportunity and urban workspace plays a critical role in that, making Allied well positioned to meet the growing demand. Our team is focused, patient and confident that our fundamentals will ultimately be recognized. We'd now be pleased to answer any questions. Operator: [Operator Instructions] Our first question comes from the line of Jonathan Kelcher with TD Cowen. Jonathan Kelcher: First, just one little clarification. When you talk about, JP, when you talk about a conversion rate, 81% conversion rate, is that off of leases that are in negotiation or the total sort of $1.3 million you talked about? J.P. Mackay: Jonathan, it's in relation to what we would have represented last quarter as new leasing opportunities that we were pursuing at the time. Jonathan Kelcher: Okay. So just to be sure, it includes like prospect and stuff under negotiation? J.P. Mackay: That's correct. That's correct. Jonathan Kelcher: Okay. And then I guess a couple of weeks ago, you guys took hitting 90% occupancy off the table for this year and I think you addressed it a little bit. Based on what you're seeing, and that was a pretty positive sort of update you gave, JP. Is that a target that you think you get to some point in '26? Cecilia Williams: Jonathan, yes, we do have line of sight to 90% in 2026. Jonathan Kelcher: Okay. That's helpful. And then lastly, just looking at where your leverage currently sits versus where you guys wanted, the slower pace of the occupancy recovery that we're seeing. How is management and the Board looking at the distribution level right now? Cecilia Williams: So, we are considering many options. And one of those options is a distribution cut in 2026, so as to strengthen the balance sheet. We haven't made a formal decision yet. We haven't made a formal recommendation, but it is one of the scenarios that is under consideration. Operator: Your next question comes from the line of Mario Saric from Scotiabank. Mario Saric: Just wanted to focus on the disposition pipeline a little bit. You've added Toronto and Calgary House to the list at $450 million. So that increases the total expected dispositions from about $500 million before to, call it, $675 million, give or take. That would imply that about $275 million on prior assets that were deemed for sale will remain in place going forward. So, can you walk through how you think about sizing the disposition pipeline? Like is it simply a matter of doing what you need to do to hit target leverage metrics? Or do other factors play a role in the decision process such as being able to get IFRS values for those assets and et cetera? Cecilia Williams: Mario, so we've outlined $270 million on Page 2 of the press release. On top of that, it's the proceeds from 150 West Georgia, and that's about $240 million roughly. And then on top of that, it would be the proceeds from the disposition from Toronto House and Calgary House, which we're not quantifying, but it would more than double the proceeds that we get from our sales, which would all be applied towards debt reduction. Mario Saric: Okay. But it seems like there were maybe some assets that you think you were considering selling previously that you're no longer considering selling. Is that a fair comment? And then I guess, if so, what are some of the factors that kind of drive those decisions? Cecilia Williams: It's just, it's based on what we rather than later. And the update, it's opportunistic based to some extent. We have our noncore assets identified. And as we get IFRS value or higher, we sell them. And the update is as we've outlined it in the press release, but there weren't material changes. Mario Saric: Okay. And then just on the $239 million West Bank loan receivable underpinned by 150 West Georgia, how would you characterize your confidence level today in terms of collecting on that receivable relative to 3 months ago? And what factors would you highlight that kind of underpin that confidence? Cecilia Williams: We remain very confident in collecting that, Mario, and it's based on the zoning that's in place and the parties that are interested in the opportunity. Operator: Your next question comes from the line of Roger Lafontaine with Nugget Capital Partners. Roger Lafontaine: I had a question whether you're seeing improved transaction liquidity within the office market, and that's really just my question, whether it pertains to smaller buildings or larger buildings. If you could touch base on that. Cecilia Williams: Sorry, are you asking about, I couldn't hear the first part of your question, sales volume? Roger Lafontaine: Yes. Are you seeing improved transaction liquidity as you seek to dispose of any assets or offices, whether you're still more buyers on the market? Cecilia Williams: Thank you. Yes, for the assets that we are looking to dispose of our smaller noncore assets, we certainly are. I think it's, our buyers are seeing this as an opportunity to get access to buying these types of assets, which aren't, isn't normally an opportunity for them. So yes, we are absolutely seeing higher levels of interest. Operator: Your next question comes from the line of Lorne Kalmar with Desjardins Securities Inc. Lorne Kalmar: Just on King Toronto, I think going back, the closings were initially set for, I think, 4Q '25 has kind of been pushed back. I was just wondering if you could give us some color as to what's really been driving those delays? Like is there issues with purchasers that are in default on their agreements? Or what's really happening there? Cecilia Williams: No, it's nothing to do with any defaults. We haven't had any to date. It's really the pace of construction activity, which was recently impacted by some rain, and it prevented us from getting some of the glazing up. But for the most part, things are progressing as expected. Lorne Kalmar: Okay. Okay. And then I might have missed this, so apologies if I did. But do you guys have a kind of a target yield on Toronto House and Calgary House based on the unsolicited inbounds you've gotten? Cecilia Williams: Not that we're disclosing, Lorne. Operator: Your next question comes from the line of Matt Kornack with National Bank Financial. Matt Kornack: Just back on Toronto, not Toronto, King Toronto. You revised the expected proceeds a bit lower there. Is that a function of what you think you'll get on the sale price? Or is that a thought around maybe some condos that closed not collecting on them? Or just what was behind that assumption at the end of the day? Cecilia Williams: It's just to reflect market value on the remaining 8% of units that have to be sold. So, as you know, we're 92% sold. So that pricing is locked in. And we just, we need to just adjust on the remaining 8%. Matt Kornack: Okay. Makes sense. And then, there was, I think, I'm not sure if it was in your same-property NOI number or not, but it sounds like you collected a prior bad debt provision of around $1.3 million on an asset in Calgary. Would that have been in same-property NOI? And was there an offsetting negative? Or should we view that as kind of onetime in nature? Nanthini Mahalingam: Matt, it's Nan. That was a reversal in Calgary, but there was the normal course bad debt that's in our results as usual, which offsets that. So that should not be something that should be backed out because if you're backing out the reversal, you got to back out the provisions. If you look at Note 10, it's very clear, the provisions actually in the quarter were higher than the reversal. Matt Kornack: Okay. That's fair. And then I guess on 1001 Robert-Bourassa, the lease termination income, I know it's $2.1 million, but was there anything that we should net against that in terms of the new lease that's going to be signed relative to the older? Kind of what would be the net impact if we wanted to get to a normalized number in the quarter for future quarters on a run rate? Nanthini Mahalingam: That is $3 per square foot higher than the current lease. Matt Kornack: Okay. And then lastly for me, I appreciate the disclosure in terms of the incremental NOI coming from the ground-up development. I think it was $1 million in Q4 and $10 million in 2026. Does that include anything from the redevelopment portfolio? Or would that be incremental on top of those figures? Cecilia Williams: There's a little bit from 1001 Robert-Bourassa and RCA in those numbers. Matt Kornack: In those numbers. Okay. So that's the total expected kind of incremental to just general same-property NOI growth in the portfolio. Cecilia Williams: Yes. Operator: Your next question comes from the line of Tal Woolley with CIBC Capital Markets. Tal Woolley: Just on King condos, so how much capital do you expect to be getting back in 2026 from, because it seems like the closings may bleed into 2027 as well. Cecilia Williams: So from the condo sales? Tal Woolley: Yes. Cecilia Williams: Yes. It's just a note, it's about $240 million at our share. Tal Woolley: Okay. And that's in '26 or that's total? Cecilia Williams: That's the total. So occupancy will be in place. The closing is based on city permits in place. So we are, right now, we're expecting late 2026 to early 2027, so cash proceeds. Tal Woolley: Okay. Got it. And just on leasing in general, I guess I feel like maybe I or the market getting a little surprised with just trying to reconcile the commentary you guys have around leasing with what's getting rendered in the quarters. And so, if you're seeing increasing leasing, increasing large-format tenant demand, improved existing user demand and the conversion rate, I wouldn't necessarily, it sounds like all good things and yet occupancy is down quarter-over-quarter and your revised outlook doesn't really have much of an occupancy lift baked in next quarter either. And so when are the wheels going to start to turn positively for occupancy despite all the sort of green shoots, I'll call it, commentary that we're getting? Cecilia Williams: Yes. There's a few quarters of a delay between getting the leasing locked down and then having occupancy and then having rent commencement. So, it unfortunately doesn't happen immediately. There is a lag effect. And so, we are seeing that. We are seeing the leasing momentum in the TAMI sector. The bank mandates are kind of the latest, but we started seeing things starting to pick up before the bank mandates. And unfortunately, it takes a few quarters for it to start being reflected in our numbers and then for the cash rent commencement to start hitting our statements. So there is a bit of a lag that has to be taken into account. Tal Woolley: Okay. So like middle of 2026, you would feel comfortable that occupancy should be above where it is right now? Cecilia Williams: I would expect 2026 to be improved over 2025, but I'm not going to start speaking to 2026 on this call, Tal, although I appreciate that you are asking from a good place. updating on what we expect for 2026 as we always do on our year-end call. But we certainly, as we sit here today, we have line of sight to improved metrics in 2026. Tal Woolley: Okay. And then just lastly on 150 West Georgia. So, do you have a data center partner prospected or in place already? Or does that, are you just saying basically you have a powered land site that could be used for that and that person will still need to go get site plan approval and all that stuff? J.P. Mackay: We have entitlements and there are prospective parties at advanced stages of their due diligence. Tal Woolley: Okay. So your, and then your goal here is just 100% monetize that loan and be out of this site forever. Cecilia Williams: Absolutely. Yes. Operator: Your next question comes from the line of Pammi Bir with RBC Capital Markets. Pammi Bir: Just with respect to dispositions, the $270 million that you mentioned plus, I guess, Toronto and Calgary House, would this collectively sort of mark the end of the disposition program for, I guess, if you think about 2026? Or would you consider just continuing to perhaps upsize that program? Cecilia Williams: No. As we sit here today, we see that as being the end of the disposition program, Pammi. Pammi Bir: And then I guess, tied to that with the, I guess, anticipated repayment of the Westbank loan, would that get you to effectively that 10x debt-to-EBITDA target? Is that enough? Cecilia Williams: We have line of sight to being in the 10x range by the end of 2026. Pammi Bir: Okay. Maybe just switching gears, coming back to the comments around the distribution. I don't think this was asked, but if it was, I apologize. But what are some of the parameters or goalposts that you're focused on, on whether to cut? Is it leverage, occupancy, the payout ratio, et cetera? Or just maybe some color around how you're approaching it at this point? Cecilia Williams: It's really looking at getting the balance sheet where we feel it needs to be at and accelerating the progress towards that goal. And certainly, payout ratios and debt to EBITDA and those kinds of metrics, but it's about strengthening the balance sheet. Pammi Bir: I guess the other way to think about it is, why not just cut now? I mean, how much could, I know there's a lot happening and a lot of stuff in the works from, with all this capital that you expect to repatriate. But why not just do it now and just drive on and the rest sort of strengthens the balance sheet further? Cecilia Williams: Yes. It's, we just, we have a process that has worked for us since we went public in 2003, and it's a decision that the Board makes annually for the following year at the end of every calendar year, and we don't see the need to go off process. And so we will be meeting with our Board at the end of November and making our decision within the usual time lines. Pammi Bir: Okay. And then just lastly, the, to clarify the comment that you made on getting to 90% occupancy next year. Is that in place? Or is that committed? Cecilia Williams: So I was speaking to lease area, and we will also stick with our usual process, Pammi, of talking about 2026 on our year-end call. My reference to having line of sight to lease area of 90% by the end of 2026 is based on the improving market fundamentals that we have in front of us today, and it's something that we'll reaffirm on our year-end call. Pammi Bir: Okay. Okay. And then just lastly here, okay, without commenting on 2026 growth, you see today is, do you see 2025 as the low watermark on FFO in this cycle for Allied? Cecilia Williams: I think that's something that I'll have to leave for part of our year-end call, Pammi. We're focused on the metrics, and we want to provide a comprehensive update in terms of our outlook for next year. So I just. I'm not trying to put you off. I just, I don't want to start giving piecemeal information on next year. All I can say is that with the improving fundamentals, we absolutely expect an improving set of operating metrics in 2026. Operator: The next question comes from the line of Shalabh Garg with Veritas Research. Shalabh Garg: I was just wondering, there's an expectation of maintaining the occupancy rate flat over Q3 and Q4. And I see you have net lease maturities of 390,000 with some offset by fixture commencements. So where is this roughly 100 basis points or 90 basis points of occupancy going to come from? Is it new leasing? Or is it renewals for whatever is maturing in this quarter? J.P. Mackay: So, it comes from term commencement as a result of contractual leasing activity achieved year-to-date that will commence in Q4. Shalabh Garg: And then thing on renewals out of that 391,000 square foot? J.P. Mackay: Of the 391,000 square feet, we expect that we will be successful in renewing approximately half, and we expect approximately half will mature for circumstances specific to each organization and exit the portfolio. Shalabh Garg: Okay. And the other question I have, and I think, Nan, you touched on it, of the $600 million maturity up in Feb 2026, do you expect it to fully repay through asset sales? Or is there going to be some refinancing through unsecured debt? Nanthini Mahalingam: It's expected to be fully repaid. Operator: The next question comes from the line of Brad Sturges with Raymond James. Bradley Sturges: Just a couple of quick questions for me. Just going back to King Toronto. I think you talked about total proceeds of $240 million. What kind of default rate would you assume as a base case scenario for condo closings as those progress over the balance of '26? Cecilia Williams: We understand that our regular default rate is between 7% to 10%, Brad. So I wouldn't expect it to be higher on that project. If anything, it might be modestly lower. Bradley Sturges: Okay. That's helpful. Second question, just on the remaining asset sales to complete. Can you just talk about maybe an average yield or expected exit cap rate on a blended basis of what that potentially could look like for remaining transactions? Cecilia Williams: We're not going to be doing that at this time. We'll disclose as we always do as the dispositions are completed. All I can say is that we've been, we've had our IFRS values being validated through the disposition program to date. Operator: And it seems that we have no further questions at this time. I will now turn the call back over to Cecilia Williams for closing remarks. Cecilia Williams: Thanks, John, and thanks, everyone, for attending our conference call. My final message is this. Market dynamics are shifting in our favor. And with the team staying focused on what we can control, we're successfully operating our way through the improving environment and remain on the path to our goals. We're leasing up space, executing a plan to reduce debt and completing developments that will strengthen our ability to serve knowledge-based organizations for years to come. Our portfolio is unique. It's deeply urban and deeply connected to the cities that are driving Canada's economic and creative future. As these cities get stronger, so does Allied. We'll keep you updated on our progress going forward. Thank you. Operator: Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines. We thank you for your participation. Have a great day.
Operator: Good day, ladies and gentlemen and thank you for standing by. Welcome to the Third Quarter 2025 Kite Realty Group Trust Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Bryan McCarthy. Sir, please begin. Bryan McCarthy: Thank you and good morning, everyone. Welcome to Kite Realty Group's Third Quarter Earnings Call. Some of today's comments contain forward-looking statements that are based on assumptions of future events and are subject to inherent risks and uncertainties. Actual results may differ materially from these statements. For more information about the factors that can adversely affect the company's results, please see our SEC filings, including our most recent Form 10-K. Today's remarks also include certain non-GAAP financial measures. Please refer to yesterday's earnings press release available on our website for a reconciliation of these non-GAAP performance measures to our GAAP financial results. On the call with me today from Kite Realty Group are Chairman and Chief Executive Officer, John Kite; President and Chief Operating Officer, Tom McGowan; Executive Vice President and Chief Financial Officer, Heath Fear; Senior Vice President and Chief Accounting Officer, Dave Buell; and Senior Vice President, Capital Markets and Investor Relations, Tyler Henshaw. [Operator Instructions] I'll now turn the call over to John. John Kite: Thanks, Bryan. Good morning, everyone. The KRG team is executing on all fronts, driving occupancy higher, leasing space at strong spreads, embedding higher rent bumps and optimizing the portfolio. Our outperformance underscores the strength of our operating platform and is allowing us to increase the midpoint of our NAREIT and core FFO per share guidance by $0.02 and our same-property NOI assumption by 50 basis points. Our efforts are positioning us for sustained value creation as we close out 2025. Our lease rate increased 60 basis points sequentially, driven by the continued demand for space across the portfolio. We believe the second quarter represented the low watermark in our leased rate. As we've discussed in the past, we view the recent wave of bankruptcy-driven vacancy as a value creation opportunity to embed better growth, upgrade the tenant mix and derisk our cash flow. Through the re-leasing process, we've maintained our focus on establishing the groundwork for higher organic growth that will continue to pay dividends long after the occupancy stabilizes. Over the last 2 years, we've moved our embedded rent bumps to 178 basis points for the portfolio, which is a 20 basis point increase from only 18 months ago. In the third quarter, we executed 7 new anchor leases with tenants, including Whole Foods, Crate & Barrel, Nordstrom Rack and HomeSense. We've been proactive in diversifying our merchandising mix as 19 of the anchor leases signed year-to-date have included 12 different retail concepts. On the small shop side, we are now within 70 basis points of our previous high watermark of 92.5% and have full confidence in surpassing prior levels. Activity this quarter included leases with CAVA, Kitchen Social, [ Fit Peak, Rockies ] and Free People. Our team's focus on curating a dynamic merchandising mix and driving traffic to our centers continues to elevate the portfolio. We're making meaningful progress on the transactional front, highlighted by the recent sale of Humblewood, a center anchored by Michaels and DSW. This transaction reflects our ongoing commitment to driving organic growth and derisking the portfolio by recycling capital out of noncore large-format assets. Our disposition pipeline totals approximately $500 million across various stages of execution. We aim to complete the majority of these transactions by the end of the year. While there can be no assurances that all sales will close, our capital allocation discipline remains unchanged. Depending on the timing and mix of the assets ultimately sold, we intend to deploy the proceeds into some combination of 1031 acquisitions, debt reduction, share repurchases and/or special dividends. In all instances, our objective will be to minimize any earnings dilution and maintain our leverage within our long-term range of low to mid-5x net debt to EBITDA. Since our last earnings release, we have repurchased 3.4 million shares at an average price of $22.35 for approximately $75 million. The midpoint of our updated core FFO per share guidance implies a 9.2% FFO yield and a 23% discount to our current consensus NAV on this activity, representing compelling arbitrage to recycle capital out of our lower growth assets into our own shares. Roughly half the funds for these buybacks were sourced from completed asset sales, including Humblewood and an outparcel disposition, with the remainder to be funded from future asset sales. Our third quarter performance reinforces the growing strength of our platform and the powerful tenant demand fueling our business. We're energized by the opportunities ahead to generate durable long-term growth. And as we finish the year, we will remain disciplined, leasing space that delivers strong returns, redeploying capital out of lower growth assets and elevating the overall quality of the portfolio. With a focused strategy and a deeply committed team, we are well positioned to deliver sustained value for all of our stakeholders. I'll now turn the call to Heath. Heath Fear: Thank you and good morning. Our third quarter results reflect the collective strength and focus of the entire KRG organization. We've built meaningful momentum, driven by compelling tenant demand, disciplined execution and a team that continues to deliver across every metric. As we turn toward year-end, our goal is simple, finish 2025 strong and carry that same drive and conviction into 2026, where we see tremendous opportunity to further elevate our platform. Turning to our results. KRG earned $0.53 of NAREIT FFO per share and $0.52 of core FFO per share. Both metrics benefited from a $0.03 contribution associated with the sale of an outlot to an apartment developer. As mentioned on our prior earnings call, this transaction was embedded in our original 2025 guidance and represents a strong example of unlocking value from an underutilized portion of one of our centers. Same-property NOI increased 2.1% year-over-year, driven primarily by a 2.6% increase in minimum rent. We recognized $39 million of impairments this quarter, $17 million at City Center and $22 million across the Carillon land and Carillon MOB. City Center is being remarketed and we're close to awarding the deal. The Carillon assets are under contract with different buyers, which shortened our hold period. Collectively, these charges reflect the gap between our carrying values and their respective estimated sale prices. As John mentioned, we are raising the midpoints of our 2025 NAREIT and core FFO per share guidance by $0.02 each. $0.01 of the increase reflects outperformance in same-property NOI, while the other $0.01 is driven by capital allocation activity, namely our recent stock repurchases. We're also increasing the midpoint of our same-property NOI growth assumption by 50 basis points. The outperformance in same-property NOI is primarily attributable to earlier-than-expected rent commencements and stronger specialty leasing income in the back half of 2025. Our general bad debt assumption remains unchanged at 95 basis points of total revenues, representing the blend of actual bad debt experienced year-to-date and a continuing 100 basis point reserve of total fourth quarter revenues. It's important to note that for our full year 2025 guidance contemplates the completion of approximately $500 million of noncore asset sales in the latter part of the fourth quarter. Conversely, our guidance does not assume any deployment of the related proceeds. Given the anticipated timing of these transactions, any earnings impact from either the potential sales or potential redeployment of proceeds would be negligible in 2025. We've consistently emphasized that the strength of our balance sheet provides us with tremendous flexibility in how we allocate capital. The recent share repurchase activity and the potential sale transactions that John mentioned are clear examples of that flexibility in action. Our balance sheet remains one of the strongest in the sector, giving us the capacity to pursue opportunities that enhance shareholder value while maintaining our financial discipline. We remain firmly committed to our long-term leverage target of low to mid 5x net debt-to-EBITDA which continues to position us well for both stability and growth. Lastly, our Board of Trustees has authorized an increase in our dividend to $0.29 per share, which represents a 7.4% increase year-over-year. For many of our long-term investors, the dividend is a critical aspect of REIT investing and we believe KRG's dividend is an extremely attractive risk-adjusted yield. Earlier in the year, we mentioned the possibility of a special dividend to occur in 2025. We still anticipate distributing a special dividend of up to $45 million but the size will ultimately be determined by our fourth quarter both taxable income and the outcome and timing of our current disposition pipeline. Thank you to our team for their relentless efforts to deliver strong results and create long-term value for all stakeholders. We look forward to seeing many of you over the next several weeks on the conference circuit. Operator, this concludes our prepared remarks. Please open the line for questions. Operator: [Operator Instructions] Our first question or comment comes from the line of Cooper Clark from Wells Fargo. Cooper Clark: Hoping you could expand more on your earlier comments on the dispositions. Is it fair to assume that most of the volume is power centers, given your comments on previous calls? Also curious on cap rates and then benefits to the same-store growth profile and underlying tenant credit moving forward. John Kite: Sure. Connor (sic) [ Cooper ], yes, I think it's fair to say that this is in line with the messaging that we've had in the past, which is that we're looking to kind of shrink that middle part of our portfolio, which would be those larger format centers and power centers. So yes, I think that's kind of the direction that we're heading and that is what this particular group of assets is. In terms of pricing, we haven't released that in the past and we've got to get to the closing. But suffice to say, the activity should be well inside of what our implied cap rate is right now, which is what's happened historically. Heath Fear: Does it work for you, Cooper? Cooper, this is Heath. I would also say on the same-store, listen, on a net-net basis, the entire pool would be accretive to same-store but it all depends on which mix of assets we end up closing. So TBD on what it does to the 2025 same-store. Operator: Our next question or comment comes from the line of Andrew Reale from Bank of America. Andrew Reale: I guess just sticking with the dispositions, I guess just curious if you could -- if we could dig a little deeper and you could give us an idea of just where occupancy is and what the exposure to watch list retailers is like within the assets that are in the pipeline? And then how much more volume beyond the $500 million right now could you potentially look to sell? John Kite: Well, let me just start with -- again, we're not -- it's -- the occupancy is probably going to reflect the occupancy in the portfolio and these are stabilized properties. That -- the -- and then you should assume that because we're telling you that it's that kind of middle part of the larger format centers that there is exposure, obviously, to watch list tenants but that's going to be the case in any of those type of assets if they're larger format power centers. So I think -- what was the second part of that question, I'm sorry? Andrew Reale: Just how much more volume beyond $500 million could you potentially look to sell? John Kite: Yes. Right now, I think we're very focused on just getting this closed. As we said, we anticipate a lot of this will happen by year-end. So we're quite busy on getting that done. And then we're going to go from there. We continue to want to improve the portfolio and continue to want to do a lot of work around this embedded rent growth. I mean the fact that we've been able to increase our embedded rents by 20 basis points in 18 months is pretty fabulous, And we're already ticking up towards the higher end of the peer group on embedded growth. So that's really the focus, is to reposition the portfolio to deliver a better growth profile in the years ahead. And that's -- a lot of that is because a lot of the growth that you've seen in this space since COVID is really just catch-up of occupancy. And what we're looking to do is build growth without having to do that. So we'll see how that plays out but we're very -- whatever, we're optimistic about that. Andrew Reale: Okay. That's helpful. And then if I could just ask a follow-up. As we start to really model out '26, could you just go back and remind us of what the onetime items are that have impacted this year and kind of what those are worth on a per share basis? Heath Fear: Yes. It's around -- today, it's around $17 million of what we call recurring but unpredictable items and that's a combination of term fees and land sale gains. Operator: Our next question or comment comes from the line of Todd Thomas from KeyBanc Capital Markets. Todd Thomas: I just wanted to ask about the guidance revision and maybe sort of an early look around '26. The revision this quarter, there was a $0.01 positive contribution from capital allocation activity. Heath, you said that's almost entirely due to stock buybacks, just given the timing of the transactions that you're talking about in the redeployment. But any considerations around 2026, I guess, vis-a-vis your comments around transacting in a manner that minimizes dilution, how we should maybe think about how all of this sort of plays out? Heath Fear: Yes. Todd, I think it's too early. In February, we're going to have a lot more visibility into what we actually do with the proceeds. As John said in his remarks, we have a menu of items. Obviously, one of the attractive ones now is the redeployment of capital into our share price based on where the implied yield is versus the implied yield of these assets that we're selling. So again, it's really going to be depending on, are we going to close these things, what do we do with the proceeds? So we'll have much more visibility in February. So thank you for your patience and we'll talk to you then about '26. John Kite: Yes. Only thing I would add to that, Todd, is you just got to remember that there's complexity in terms of the taxability associated with the sale, the gain or the loss. So I think we have to let that develop and focus on getting this current batch closed. And then as Heath said, we'll be in a much better position. But the real positive here is that there's a lot of opportunity for us to improve the portfolio, improve the growth and there's a real demand for the type of product that we're looking to sell. And again, with the discount to NAV and the implied cap rate where we're at, this has been quite a good time to be doing this. Todd Thomas: Okay. And then is this -- the $500 million number that you mentioned, is this intended to be a gross sales number? Or are you entertaining sort of a contribution to a joint venture vehicle where you might retain an interest in these assets at all? And can you sort of rank order today, sort of the redeployment opportunities that you discussed, whether acquisitions, more share buybacks, how you think about that today? John Kite: Well, for the first part of the question, these would -- this particular pool that we're talking about of approximately $500 million is all 100% sales. These are not any joint venture contributions in this. In terms of force ranking those multiple options, again, it all comes down to the timing, which assets, the taxability of those. And then so that will drive that first decision-making. But the entire objective is to do what we've already done, which is to place the money in something that is either accretive or very, very minimally dilutive as it represents the entire balance sheet. So I think we're going to have to see where that goes. But with the yields that we're able to sell at and redeploy at, that's kind of our focus is, the demand for the centers that we're selling is strong. And as we've said a couple of different times, in terms of redeploying into the stock, it was an easy decision. As we move down the road, that becomes more complex around taxes, et cetera. Operator: Our next question or comment comes from the line of Craig Mailman from Citi. Craig Mailman: Just want to go to the City Center. That one was impaired. And as we think about it, you had mentioned that is one of the assets that you were recycling as part of the Legacy West transaction. I mean, does that -- does the further write-down of that change any of the accretion math that you guys put out in that Legacy West deal? And maybe where should we think about the cap rate for that deal? Is that north of a 10% cap and kind of the Carillon MOB and development land as well? I mean, these prices are coming in below your expectations, it seems like. Can you just talk about where yields are? John Kite: Sure. First part of your question, no, it is not going to impact the yields. I mean, this is a fairly de minimis impact yields as regards to Legacy West. And if you remember, we kind of gave a range of what that sale might be. So this would be de minimis. And it's really a result of kind of pulling the asset off the market, stabilizing some tenants that needed to be stabilized and reput -- putting it out back out there. And so in that regard, not an issue. Heath, do you want to hit the second part of that? Oh, sorry. Can you get the second part of the question again? Todd Thomas: Just what the yields are now on the impaired values for those sales? John Kite: Oh, the cap rate on the asset itself. Heath Fear: I mean one of them is a piece of land, one of them is our MOB, which is lightly occupied and the other is City Center. I'd rather not give you an exact cap rate on City Center but -- needless to say, listen, the good news is on these Carillon sales, this is one of the ways that we're going to help minimize dilution. We're selling one asset potentially that has no NOI attributable at all to it, one which is NOI light. So again, we think these are all good developments and we'll keep you updated. John Kite: Yes. And just to be clear on City Center, it's really not like a going-in cap rate exercise. It's an IRR exercise for the buyer because there's a lot to do there. So it's not really relevant. Todd Thomas: Okay. And then, John, I know you kind of -- to Todd's point, you kind of rank the capital uses for the $500 million. I'm just kind of curious just on buybacks specifically. I know you said it's complicated but like how do you weigh that FFO yield or AFFO yield versus the potential kind of impact of reducing liquidity for the stock and those other kind of nonfinancial issues that can also impact multiple going forward? John Kite: Yes. I mean, obviously, everything we're doing here, we would anticipate that in the end, the multiple would be well above where it is today. And I'm extremely confident that 2 years from now, the stock is going to trade at a much higher both multiple and price than what we're buying the stock at today, Craig. So yes, I mean, there is complexity in the analysis and it's not all math. I mean the math gives you the direction. But yes, you have to look at the market cap, the size of the business. But we're -- these are -- even -- these are relatively small numbers, even if we were to deploy all of that into a buyback, which we're not going to. But I think the reality is, this is a point in time where we're taking advantage of an arbitrage that's very clear that in the future, we'll be -- we'll look back and say it was very smart, in my opinion. But it's also about the thematic around what the composition of our assets are going to be and what the embedded growth rate of our business will be because, again, a lot of companies have benefited in terms of short-term growth in the past 4 years. That's great but you got to think what's this business going to be in the next 10 years and we're going to be positioned to be one of the best companies for sure. And we're going to have one of the best growth profiles and we already have one of the best balance sheets, which will continue. So we will look at all of that and we will be very thoughtful around the impacts of these things. But against the backdrop of the business and the backdrop of the opportunity, this is the perfect time to be doing what we're doing. Todd Thomas: And I know it's a 2-question limit but maybe slip a third one here. I mean you guys are really trying to arb this, other REITs have tried this in the past, selling assets, buying back stock. I mean, at what point do you look to other ways to maximize value if the public markets don't want to recognize kind of the private market value of Kite and maybe even some of your peers? John Kite: Well, let me start with -- we're not doing this to -- it's a result of how we're changing the composition of the portfolio. So it's not as though we said, hey, let's go put a stake in the ground that we want to buy back stock at a certain price to prove a point. That has absolutely nothing to do with it. What's happening here is, we're changing the composition of the portfolio into a better longer-term growth profile asset composition. As part of that, we have proceeds that we have to distribute. This was the obvious thing to do at this point in time with those proceeds because of what we've talked about. The gap -- the difference in the core FFO yield versus the assets that we sold, which we think will continue in the short term. And then also just the extreme discount that happened to be there. But going forward, this is -- we'll see how that plays out. This is about real estate and the results of those sales have to be deployed. It's not vice versa, is the message I'm trying to get to you. So the idea that other people have tried to do this has nothing to do with it. This is a individual exercise for a company improving its portfolio that happens to have an extremely good balance sheet that allows flexibility. I've seen this done in the past with leveraged balance sheets, that does not work. So this is absolutely nothing like that. And again, we'll see where it goes. And because of the structure of a REIT, sometimes you do have to pay out a special dividend. We haven't talked much about that. But we are anticipating doing that and that's just part of being a REIT. That would be on the lower end of what you're really trying to prioritize because of the use of capital. But by the same token, you're looking at a total return to the shareholder on a annual basis. And in the end, we want that to be a model going forward where our total return is a high number that entices shareholders. Right now, there's a lot of money being invested in other areas of the world. But when you look back at what we're doing right now, I think people will come back to the steady cash flow growth of REITs. So I think, again, the timing of this is very good. Operator: Our next question or comment comes from the line of Michael Goldsmith from UBS. Michael Goldsmith: Probably a good sign that we've made it this far and we haven't touched on the watch list for the full portfolio. So it feels like things have gotten a little bit better out there. Just wanted to get your assessment, what you're seeing, what your watch list is and what you're paying attention and how that impacts the kind of the setup for 2026. John Kite: Yes, sure. We think that the watch list is in good shape. And I think most of what's happening now is becoming much more isolated into individual tenant names more so than in the past when you had multiple tenants in trouble. And obviously, the crescendo of that was last year when you had multiple bankruptcies within 60 days. So now we're down to a much more manageable probably situation where there are individual tenants that we're not going to name that we're focused on and we're focused on reducing exposure. And look, part of this entire conversation this morning has been about improving the quality of the portfolio and reducing exposure. And even if you're getting short-term lease-up right now but you're remaining overly exposed, that will eventually come back to be a problem most likely. So this is all one big exercise around improvement, self-improvement and better growth. So I think that's coming. But as it relates to the specifics around tenant credit watch list, we always have them. The industry always has them. It's a natural evolution. And we said, look, when we got all these bankruptcies, there was a lot of people putting out lists and I've leased this many spaces in this period of time, that's not the exercise. The exercise that we engage in is, how do we get the best tenants, the best merchandising mix with the best growth. If that takes 18 months instead of 9 months, fine. This business could be around a long time and it's going to be a very strong business for a long time. Michael Goldsmith: Got it. And so I'll follow that up with probably what you don't want to hear though. Last quarter, you talked about 80% of the boxes recaptured were either leased or in active negotiations. Is there an update on that? And can you just talk about the opportunities of those where you're kind of like holding back as you think about merchandising or finding better economics with a tenant? John Kite: Well, let me just give -- Tom will give you an update on where we are on the progress, even though we just said that, that's not our focus. But he'll give you the update and we can take the second part after that. Thomas McGowan: Yes. No problem. So we always marked up 29 bankruptcy tenants in terms of that original list that we talked about. At this point, we're at about 83% that are leased, assumed in LOI negotiations, et cetera. So we have 5 other properties that are out there. We are meeting on them constantly. They're probably the more challenging of the original list but we have confidence that we'll resolve those in due time and it gets a lot of attention. So no concern there. John Kite: The only thing I would add is, if you pay attention to the names that we're putting out there in terms of the anchor leases that we just -- even just in this quarter, shows you that our focus is on quality and growth as opposed to just filling the space. And I think the fact that we've done this year, 12 different retailers across -- or 12 different brands across 19 leases that we signed. Again, our focus is that diversity, quality and then look at the spreads and the returns on capital. That's why this takes a little more time, right? I mean if you're going to be getting north of 20% returns on capital and same thing on spreads and speaking of spreads, in case nobody asked, I mean, look at our nonoption renewal spreads. I mean, I know we're one of the few guys that gives the detail around that. But I think it was 13% or 12%, 13%. That is a fabulous number, which reflects the strength of our portfolio first and then secondarily, the business that we're in. So those things are important to that, too. Thomas McGowan: Speaker 9 So just to follow up on John, of the 7 boxes that we executed this quarter, our spreads were 37% and return on cost, 23%. So as we look at the remainder of this portfolio, we're setting a high bar and being very, very careful. Operator: Our next question or comment comes from the line of Floris Van Dijkum from Ladenburg Thalmann. Floris Gerbrand Van Dijkum: By the way, congrats on the share buybacks. That was, I think, astute. Just curious on the contemplated $500 million of sales later on this year. The $45 million special dividend, is that partly as a result of that or the $0.20 special dividend, is that a result of those sales? Or is that -- could that number increase based on the closing of those dispositions later on this year? Heath Fear: Yes, Floris, that's related to the prior transactional activity, mostly the GIC transaction. And actually, that number, I said up to $45 million, that's the maximum it could be. If anything, some of the assets that may sell this year may have embedded losses, which would reduce that. So just think about that $45 million being the top side and then potentially going lower depending on the mix of assets that we end up selling. John Kite: Yes. And those -- look, in terms of when Heath says embedded losses, that's on a tax basis, not a book basis, just to be clear. Floris Gerbrand Van Dijkum: Right. Yes. So it gives you potential significant more powder to -- for share buybacks, which is encouraging. One other thing, which I -- we haven't really talked about Legacy West. And I don't want to steal your thunder for the upcoming NAREIT. But as I look, the ABR in place seems to have increased by quite a bit since you first acquired it. Can you talk a little bit about what's happening at that asset in terms of rents and renewals and spreads? John Kite: Yes. It's kind of -- it's magical. It's a fabulous asset that had under market rents, particularly in the retail component. And it was the perfect timing to bring in a platform like ours that can drive those rents, drive value. We have a lot of great things going on there. But obviously, we said it when we bought it, the -- I think the average base rent was like $65, I believe, in the retail. And we are well above that in all the new deals that we're doing. And we had -- as we mentioned, Floris, we had the ability to access about 30% of that over the next 3 years since the acquisition to get to probably about a 20% mark-to-market, right? So it is playing out exactly as we anticipated. It was the perfect combination of us and a fabulous partner that has the same kind of mentality we do and has been extremely supportive and we, of course, look to do more with them. And the other thing, remember that we are a major player in the market, right? So we have things going on that are multi-tiered when we're talking to these tenants in the sense that we have other assets that we can cross lease against. And we have other properties there that tenants want to get into. And so there's this ability to have this virtuous cycle of repositioning and moving people around and different rent levels. So look, we're extremely bullish on the micro, which is the property itself and the macro, which is the market, one of the best in the country. Floris Gerbrand Van Dijkum: John -- just if I -- if you indulge me, one other little thing, maybe, Heath, if you could touch on the impact of those $500 million of sales, what's that going to do to your cruising speed of 178 basis points? How much should -- could that increase by as a result of selling some of these lower growth assets? John Kite: Well, first, I'm glad to hear you say cruising speed versus cruising altitude because that's been a debate in the company, so you just answered it. Go ahead, Heath. Heath Fear: So Floris, the embedded bumps in that pool of assets is around 140 basis points. So it's going to -- it's obviously going to improve our cruising speed but the denominator is so large. So it will be fairly modest. But again, it's all heading in the right direction. And as John said in his comments, I mean, to move our cruising speed by 20 basis points in 18 months is just incredible. And that's basically just being -- that's basically getting better bumps in the small shops to the extent we can get better escalators in the anchors, which we're starting to get a little bit more modest improvement on. We see 2% around the corner. When we hit 2% in embedded bumps, we're going to ask for 2.25%. So we're just going to keep pushing on this. And again, this occupancy-fueled growth that people are experiencing, it will come to an end. And at the end of the day, we'd rather be in a position where our cruising speed, to use your term, is higher than others. And that is part of this entire real estate exercise that we described on this call. John Kite: Yes. I mean that's the real message for us today is that this is a first step in a process of really focusing in on organic growth. And when you have a balance sheet like ours and you have organic growth that's near the top of the space and the balance sheet that we have, then we're able to do other things outside of the organic growth that can even add to that. So that's really the goal. And I think we have, frankly, we have absolutely been, I think, the market leader in focusing in on this embedded growth and fighting the fight that has to be fought in the trenches to get that. And perhaps that's why the occupancy trailed a little bit but then all of a sudden, you see us gain like 60 points, I think, or 60 basis points sequentially. And I think it shows you that the market is coming more to where we want to be. And if you look at the percentage of leases that we're signing in the small shop space at 3.5% and 4% annually, I mean, it's in the 60s percentage, like 60% of the deals we're doing. And then 3% is table stakes, right? So this is an indicator that this is a very good business to be in. There's not a lot of product and there's certainly not a lot of owners that have the ability to deploy all those different goals into what they're doing. Operator: Our next question or comment comes from the line of Alexander Goldfarb from Piper Sandler. Alexander Goldfarb: Two questions. First is on the $500 million of sales, just so I'm clear. I understand that there are different options that you're going to use the proceeds for buybacks, reinvestment, et cetera. But overall in -- over shopping centers' history, whenever we see large asset sales, it usually means that earnings inevitably takes a step back until all of the proceeds are processed and whatever it's reinvested into can start to grow again. So it does sound like this is an impact to '26. Is that a fair way to look at it? Or your view is that this should be flat to '26 and we shouldn't be thinking about the $500 million having an earnings impact? Heath Fear: I mean, Alex, there are so many moving pieces and it depends on where is our share price going to be to the extent we're buying back stock. We're able to actually shield gains or does it have to go out as a special dividend because we're not going to do irresponsible acquisitions if we have a gain to shield. So there are so many moving pieces, Alex. I'll just go back to what John said in his prepared remarks because we're going to do our best to minimize the earnings disruption. So again, we'll have much more information on that in February of next year. John Kite: And I think, Alex, I'd just add, in the past, when we've done things like this, we've been very, very thoughtful around that particular issue. And it really depends on -- everyone has different numbers. We have different numbers, you have different numbers. But in the end, whatever happens in '26 happens in '26. But from that point forward, there is no question that whatever we're doing is going to create much better growth. But in the meantime, we'll do everything we can to minimize that. And unfortunately, some of that is driven by the taxability, right? When you're paying out a special, that's just money going out the door. So the primary goal is to minimize that. But again, look, we're doing one right. We think we're going to do something towards the end of the year here because we just -- that was the optionality of it. But from an NAV and from a future growth perspective, it's absolutely going to be better. Alexander Goldfarb: Okay. And then just as another question along the portfolio lines, as -- it sounds like you've reviewed your portfolio heavily and obviously, we're seeing what's happening in the market in terms of supply/demand and improvement across the industry. Is your view that this is it and that going forward, dispositions will be more targeted in normal course? Or do you think there's a potential for another $0.5 billion plus type portfolio transaction that could occur next year? Meaning, is there more culling on a large scale that you guys think that you need to do? Or you think that this really addresses the assets that you no longer want to have in the Kite portfolio? John Kite: I mean I think it's early right now to give any kind of finality answer to that. We're always reviewing -- as you know, we're always deep diving and reviewing the portfolio. We're going through budgets right now. So there's a lot going on in terms of the idea of what assets do we want to hold long term. But we have been clear that the idea is to derisk our exposure to certain areas of retail and -- but then take that whatever proceeds that might create and have a better growth profile and have a better future growth profile. So too early to say that, Alex, but it's always possible that we would do other dispositions of size. But again, right now, we're just focused on getting this done and figuring out the deployment. Alexander Goldfarb: Okay. And then if I could sneak in a third, that seems to be a trend. Heath, on the -- on the bad debt, you guys have been, I think, around 85, 90 bps year-to-date but you still have that 185 bps, I think, full year. I'm assuming that's just a plug like you don't intend to suddenly have 100 bps of bad debt in the fourth quarter, right John Kite: Yes, that's what's in your numbers that we assume 100 bps in the fourth quarter. But no, it's not -- there's no special item there. It's just continuing the same -- whatever you want to call that. Heath Fear: Yes. It's consistent with the same assumption we have at the beginning of the year and throughout the course of the year. So it's 100 basis points. Alexander Goldfarb: Right. But you're not expecting like a bunch of tenants to suddenly go start. Heath Fear: No. That is just us being conservative and basing it on historical norms of 75 to 100 basis points of revenues. Operator: Our next question or comment comes from the line of Paulina Rojas from Green Street. Paulina Rojas Schmidt: It's great to see you're pursuing that arbitrage opportunity and trying to reshape the growth profile of the company. Looking at your same-property NOI over the last 10 years, it's been around 2% or low 2%. So I know this is a difficult question but painting with broad brushes, if you layer in the initiatives that you have shared in this call plus the strong backdrop, how material do you think the upside to that same-property NOI growth could be relative to that 2%, low 2% range that the company has experienced? Heath Fear: Yes. Paulina, I'm not sure if you attended our Four in '24 event in Naples, in February in Naples. And we have a slide in there where we thought what our sort of organic growth was. And holding occupancy aside, we said it was 2.5% to 3.5% based on bumps and spreads. Certainly, the bumps of the company obviously have improved as we suggested. So looking at it over a 10-year period, we had much lower embedded growth back then. So based on the current progress, we're seeing maybe that getting closer to 2.75% to 3.75% on a forward basis. So again, this is all about trying to improve that cruising speed, this real estate exercise, that's probably the #1 priority is getting better growth. And the 2 parts of the portfolio that we're really migrating towards, we told you, which is the lifestyle and mixed-use, the embedded escalators in that part of the business is anywhere between 2.25% and 2.5%. And then on the smaller format grocery side of the business, which we also really like, that growth is anywhere between 1.75% and 2% based on your composition of shops and anchors. So we're really pushing to sort of divest ourselves of the middle part of the portfolio. I just described to you that, that pool that we're looking at is 1.4%. So it's a great question and we appreciate you looking backward. I will tell you, over the last 3 years, it's been [Technical Difficulty]. But as we mentioned, that was -- some of that was occupancy fueled. So again, the whole point of this exercise is to improve that long-term cruising speed. John Kite: Yes. I mean I would just add, I think that it is important that we look at where we were and that's a real big part of why we want to kind of change the composition as to where we're going to go, which is more important than where we were. And obviously, over the last 4 years, I think it's 4 years where we averaged that kind of close to 4%. And we've had some up and downs in the occupancy over that period of time as well. And I think that, that was the point I was trying to make, Paulina, is that if you look at the entire sector and you look at this kind of short-term focus on same-store NOI growth -- and by the way, everybody -- it is not a ubiquitous equation in the sense that everyone defines it a little bit differently. So it makes it very difficult for you guys, which is why we're more focused on something that you can't [ massage ]. What is your embedded rent growth? And what is your core and NAREIT FFO growth going to stabilize at in the future? And what is your total return to your shareholder on an annual basis, which, by the way, part of that is the dividend yield. And we've continued to raise the dividend pretty healthy. And we've spent a lot of capital in the last 2 years in just TI and LC and continue to produce significant cash even after that fact. So I think we are basically saying that we feel very good about the future. But obviously, there's a few steps in between as we are positioning ourselves for that. Paulina Rojas Schmidt: My second question is, you have in your presentation, you highlight very active -- a very active quarter in terms of leasing activity with grocers. I believe based on your numbers, you're at 79% of ABR coming from grocery-anchored centers. Do you have a target in mind for this figure? Or you don't even think about a target at all? John Kite: No. I mean I don't think there's a target that's driving the decision-making around the leasing side of that. When we add a grocer to a shopping center that previously didn't have one, like many of those examples, it changes the composition of the shopper, right? And it creates more day-to-day activity at the property. One of the key things that we look at in the neighborhood grocery-anchored shopping center is what is the growth rate in that shopping center. And if you're too pivoted towards the grocer in terms of your NOI, it's tough to grow your -- it's tough to get embedded growth better than like less than 2%. It's tough. It's tough to get better than 1.5%. So the composition of the shops and the grocery are a factor. But I think the meaning of that slide is just to show the demand that's out there. And of course, there is a certain segment of the investment community that just only wants grocery. We're not -- that's not our goal because you don't ever want, in my personal opinion, overexpose yourself to one thing because there was a time where people only wanted Kmarts. Well, that didn't work out too good. So I think we're much more focused on this diversity of our portfolio that creates this embedded rent growth that is going to exceed the space, like that's our goal. So it's more meaningful than just trading to a grocer. But obviously, when you can put a Trader Joe's into what was a Bed Bath & Beyond or a Whole Foods into what was a big lots, that's a pretty good day. Operator: Our next question or comment comes from the line of Hongliang Zhang from JPMorgan. Hong Zhang: I think your non -- your -- sorry, your tenant-related capital expenditure spend trended down pretty significantly this quarter. Was that just related to timing? And how should we think about the spend going forward? John Kite: You're talking sequentially? Hong Zhang: Yes, sequentially. John Kite: Yes, yes, yes. It's just timing. It's a timing thing of signing a lease before you spend the money. Hong Zhang: Okay. And how should we think about -- so it sounds like the spend will basically revert back to what it's been earlier this year going forward. John Kite: Yes. I mean I think you should think about it on an annual basis. I would not look at it on a quarterly basis. That's -- there's too much timing factored into that. But if you look at it annually, we spent around $110 million or so on TI and LC in the last couple of years and that's going to probably be slightly higher next year and then go into 2027. And that was the point I was making is that total CapEx in 2025, we probably spent $165 million when you include maintenance CapEx and some development spend. And we're still producing -- we're still paying a dividend with a nice yield and producing free cash flow. And our balance sheet remains fabulous, right? So the combination of being able to produce this cash, self-fund the regrowth of the assets and then self-fund future growth from development is really, really strong. And we're seeing more opportunities on that development side, by the way. And I don't think there's anybody in the publicly traded space that has longer experience than us in the development business. So we know when to lean into that and when to lean out of that. And so we're feeling very good about the free cash flow that we're able to generate out of the business to then redeploy into that growth. Operator: Our next question or comment comes from the line of Alec Feygin from Baird. Alec Feygin: So the anchor opening was a big driver in the third quarter. Just kind of curious what percentage looking into next year and even 2027 of the total anchor leases coming due have renewal options? And what are the expectations for those anchor retentions in 2026? John Kite: Sure. I don't have that percentage in front of me right now. I mean, suffice to say, the great majority of our anchors have options. It comes down to the timing of are they out of options, right? That's generally what happens. There's almost no anchor that doesn't have options. I will say when you compare the nonoption renewal spread to the option renewal spread, it would indicate it'd be better if we gave less options. That's part of the push-pulls of our industry and another area that we lean into probably harder than others and are getting very good success with limiting that. But bottom line is the great -- almost no anchor does a flat term without an option. It just comes down to the percentage of anchors expiring in that particular year and whether or not you're at the end. And in the case of the grocers, frankly, often what happens is, they don't wait for that to happen. You're negotiating something with them prior to that. And a lot of times, you might be rebuilding the store as well, which we're doing in a couple of instances. Thomas McGowan: But we are finding many retailers inquiring with us about when do you have expirations with various boxes. So we're seeing a lot of activity on that front as well. Alec Feygin: Do you expect any change in the retention rate looking into next year? John Kite: Yes. I mean, as I said earlier, we're entering our budget process right now, which is an intense bottoms-up every single property, every single space. And we'll talk to you about that after that. But I think we intend to have a successful season with budgeting. Operator: Our next question or comment comes from the line of Kenneth Billingsley from Compass Point Research & Trading. Kenneth Billingsley: I wanted to follow up, when you talked about the anchors that you signed year-to-date that had new formats. And specifically, just looking at small shop occupancy, it seems like you have more upside opportunity than peers. Is the -- are the 12 new formats that you're looking at, is this a trend across the whole portfolio to help improve and drive better small shop occupancy? And is this a shift to upgrade retailers? Or are you modifying the retail mix at the properties due to shifting consumer demand? John Kite: I just want to be clear, you mentioned anchors but you're talking about small shops. Is there -- I just want to understand the question a little better. Kenneth Billingsley: Essentially, you talked about that 12 of the 19 anchors you signed had new formats. I believe that's what you said at the beginning of the call. Heath Fear: Yes, yes, from different brands. John Kite: Yes. Kenneth Billingsley: So, okay. I was just curious is -- I mean, obviously, you're always trying to upgrade the retailers that are coming in. But is this -- is some of this a reflection of shifting consumer demand of what they expect to see at the properties? And so essentially, are you doing that to help drive an improvement in small shop occupancy? John Kite: No. I think what we're trying to say is that I think this business went through a period of time and then certain people made their lives easier by saying, I'm going to go do -- I've got 15 empty spaces, I'm going to do 7 deals with 1 guy and another 8 deals with another guy just to make your life easier. What we're saying is, we're trying to diversify the anchor tenant mix to do what you said, which is to drive more interest in our shopping centers but also to decouple from any one anchor too much exposure. So -- and then the result of that is it makes a better shopping center, which, of course, does make -- it puts you in a better position to generate higher growth in the small shops because these things are symbiotic. They work together. There is a symmetry there. So it isn't really -- it's really not part and parcel. It's -- you want to have the strongest possible lineup you can have. But you also want to have diversity so that the consumer who we don't talk about enough because that's the ultimate customer, wants to go to our property over somebody else's. Thomas McGowan: Only thing I'd add is, some of this relates to the quality of our assets. And when you think about Southlake, you think about Legacy West, Loudoun and others, the diversity is really coming from a higher quality of tenancy, someone like a Crate & Barrel, a new deal with Adidas. So these are some of the names that we weren't necessarily doing in the past but this diversity is getting buoyed by this strength as well. John Kite: And just to carry on that, that's a great point. And not only does it happen at those individual properties that Tom mentioned but now we're able to spread this deeper pool of retailers across our whole portfolio. And frankly, these retailers want to work with strong landlords that have the ability to work with them in multiple locations, right? So it's kind of a virtuous cycle of tenant demand, if you will. Kenneth Billingsley: Speaker 15 And when you say the new formats, are these new to you or just new into the locations that [indiscernible] John Kite: No, no. These are -- it depends on how you're classifying new format. Just to be clear, what we're talking about are brands, not size of store or anything of that nature. These are just multiple different brands like the difference between a Crate & Barrel and a T.J. Maxx, for example. Those are different brands. And the formats aren't changing. The sizes aren't changing. The space is the space. And our objective is to diversify those brands. Kenneth Billingsley: Okay. Got it. So these are 12 new brands to your mix? John Kite: Correct. Operator: I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. John Kite for any closing remarks. John Kite: Well, I just want to take the time to thank everybody for joining. And as Heath said, we're really looking forward to seeing everybody quite soon, talking more about all the good things happening at KRG. Have a great day. Operator: Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.
Operator: Good day, and welcome to the Howmet Aerospace Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Paul Luther, Vice President of Investor Relations. Please go ahead. Paul Luther: Thank you, Drew. Good morning, and welcome to the Howmet Aerospace Third Quarter 2025 Results Conference Call. I'm joined by John Plant, Executive Chairman and Chief Executive Officer; and Ken Giacobbe, Executive Vice President and Chief Financial Officer. After comments by John and Ken, we will have a question-and-answer session. I would like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations. You can find factors that could cause the company's actual results to differ materially from these projections listed in today's presentation and earnings press release and in our most recent SEC filings. In today's presentation references to EBITDA, operating income and EPS mean adjusted EBITDA, excluding special items, adjusted operating income, excluding special items and adjusted EPS, excluding special items. These measures are among the non-GAAP financial measures that we've included in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release and in the appendix in today's presentation. In addition, unless otherwise stated, all comparisons are on a year-over-year basis. With that, I'd like to turn the call over to John. John Plant: Thank you, PT, and welcome to the Howmet Q3 call. Let's start with the company highlights on Slide 4. Q3 was a very strong quarter for Howmet. Revenue growth continues to accelerate and was up 14% compared to 8% in the first half. Within this revenue growth, Commercial Aerospace increased 15% and within this number, commercial aero part sales increased by 38% for a total spares increase of 31%. EBITDA was up 26% and operating income up 29%. Cash flow was also healthy at $423 million after capital expenditure of $108 million. Year-to-date capital expenditure is approximately $330 million. Regarding share buyback, $200 million of cash was deployed to buybacks in Q3 with an additional $100 million buyback in October. October year-to-date buyback is now $600 million, which is $100 million higher than the 2024 full year. We also paid off the balance of $63 million of the U.S. term loan early, which was due in November 2026 and with the resulting net leverage now stands at 1.1x net debt-to-EBITDA. Dividend payments were also increased in August by a further 20% versus the prior quarter and earnings per share increased by just over 34%. Other commentary, which may be helpful is that working capital days improved year-over-year, allowing for the increased capital expenditure for future growth and all within the free cash flow number previously referenced. Headcount did increase by a further 265 people, mainly within the engines business as we staff our new manufacturing plants. As planned, the increase in headcount has slowed as we go into the second half, although we envisage hiring again as we pick up in early 2026. Now let me turn the call over to Ken to cover the markets and segment performance. Ken Giacobbe: Okay. Thank you, John. Let's move to Slide 5. So end markets continue to be strong, with total revenue up 14%. Commercial Aerospace was up 15%, exceeding $1.1 billion in the quarter. Commercial Aerospace growth is driven by accelerating demand for engine spares and a record backlog for new, more fuel-efficient aircraft with reduced carbon emissions. Defense Aerospace growth continued to be robust at 24%. Growth was driven by engine spares, which increased 33% and new F-35 aircraft builds. As expected, commercial transportation was challenging, with revenue down 3% in the third quarter, including the pass-through of higher aluminum costs and tariffs. On a volume basis, wheels volume was down 16%. Finally, the industrial and other markets were up a healthy 18% driven by oil and gas, up 33% and IGT up 23%. In the future, it's likely that we will combine oil and gas and IGT when reporting revenue by market. The definition of oil and gas versus mid- to small IGT has become somewhat blurred since many turbines now have increasing end use for data centers. So in summary, continued strong performance in Commercial Aerospace, Defense Aerospace and Industrial, partially offset by commercial transportation. Within Howmet's markets, the combination of spares for Commercial Aero, Defense Aero, IGT and oil and gas was up 31% in the third quarter. Now let's move to Slide 6. So starting with the P&L. Q3 revenue, EBITDA, EBITDA margin and earnings per share were all records and exceeded the high end of guidance. Revenue was up 14%, EBITDA exceeded $600 million as it outpaced revenue growth and was up 26%. EBITDA margin increased 290 basis points to 29.4% while absorbing the cost of approximately 265 net headcount additions. Earnings per share was $0.95, which was up a solid 34%. Moving to the balance sheet and free cash flow. The balance sheet continues to strengthen. Free cash flow was excellent at $423 million. Free cash flow included the acceleration of capital expenditures with $108 million invested in the quarter and approximately $330 million year-to-date, which is higher than the full year 2024 capital expenditures. About 70% of the capital expenditures year-to-date is for our engines business as we continue to invest for growth in Commercial Aerospace and IGT. Investments are backed by customer contracts. Quarter-end cash was a healthy $660 million. Year-to-date, debt has been reduced by $140 million as we paid off at par the U.S. term loan, which was due in November of 2026. The early prepayments will reduce annualized interest expense drag by approximately $8 million. Net debt to trailing EBITDA continues to improve to a record low of 1.1x. All long-term debt is unsecured and at fixed rates. Howmet's improved financial leverage and strong cash generation were reflected in S&P's Q3 rating upgrade from BBB to BBB+, which is 3 notches into investment grade. Liquidity remains strong with a healthy cash balance and a $1 billion undrawn revolver, complemented by the flexibility of a $1 billion commercial paper program, both of which have not been utilized. Regarding capital deployment, we deployed approximately $770 million of cash, common stock repurchases, debt paydown and quarterly dividends year-to-date through September. In the quarter, we repurchased $200 million of common stock at an average price of approximately $182 per share. Q3 was the 18th consecutive quarter of common stock repurchases. The average diluted share count improved to a Q3 exit rate of 405 million shares. Additionally, in October, we repurchased $100 million of common stock at an average price of approximately $192 per share. October year-to-date common stock repurchases are $600 million at an average price of approximately $156 per share. Remaining authorization from the Board of Directors for share repurchases is approximately $1.6 billion as of the end of October. Finally, we continue to be confident in free cash flow. We increased the quarterly dividend by 20% in the third quarter to $0.12 per share, which is up 50% higher than Q3 of last year. Now let's move to Slide 7 to cover the segment results for the third quarter. The Engines products team delivered another record quarter for revenue, EBITDA and EBITDA margin. Quarterly revenue increased 17% to $1.1 billion. Commercial Aerospace was up 13%. Defense Aerospace was up 23%. Oil and gas was up 33% and IGT was up 23%. Demand continues to be strong across all of our engines markets with strong engine spares volume. EBITDA outpaced revenue growth with an increase of 20% to $368 million. EBITDA margin increased 80 basis points year-over-year to 33.3% while absorbing approximately 265 net new employees in the quarter. Year-to-date, engines have invested in approximately 1,125 incremental headcount, which has a near-term margin drag, but positions us well for future growth. Now let's move to Slide 8. The Fastening Systems team also delivered a record quarter for revenue, EBITDA and EBITDA margin. Revenue increased 14% to $448 million. Commercial Aerospace was up 27%, Defense Aerospace was up 2%, General Industrial was up 3% and Commercial Transportation, which represents approximately 12% of Faster's revenue was down 17%. EBITDA continues to outpace revenue growth with an increase of 35% to $138 million, despite the sluggish recovery of wide-body aircraft builds along with weakness in commercial transportation. EBITDA margin increased a robust 480 basis points year-over-year to 30.8% as the team has continued to expand margins through commercial and operational performance. Now let's move to Slide 9. Engineered Structures had a solid quarter. Revenue increased 14% to $289 million. Commercial Aero was up 7% and Defense Aerospace was up 42%, primarily driven by the end of the destocking of the F-35 program. EBITDA outpaced revenue growth with an increase of 53% to $58 million. EBITDA margin increased 510 basis points to 20.1% as we continue to optimize the structures manufacturing footprint and rationalize the product mix to maximize profitability. Finally, let's move to Slide 10. Forged Wheels revenue was essentially flat as a 16% decrease in volume was largely offset by higher aluminum costs, tariff pass-through and favorable foreign currency. EBITDA was strong at $73 million, an increase of 14% despite a challenging market. EBITDA margin increased 350 basis points to 29.6%. The unfavorable margin impact of lower volumes and higher pass-throughs were more than offset by flexing of costs, favorable product mix driven by our premium products and favorable foreign currency. The Wheels team has continued to expand margins despite market metal cost and tariff uncertainty. Now let me turn it back over to John. John Plant: Thank you, Ken. Let's move to Slide 11 to discuss the outlook. In summary, before I go into details, the outlook is solid. Air travel continues to grow year-over-year after a solid summer period. The backlog of commercial aircraft extends for many years, even after assuming increases in build rates throughout the next 5 years. The current aircraft fleet has aged. These factors combined to provide both healthy OE demand and the growing demand for aircraft aftermarket parts, especially in the engine for wearing parts, namely the turbine blades in the hot gas pass section of the engine. Defense sales continued to be strong with steady F-35 OE sales, plus some increase in legacy fighter jets, namely the F-15 and the F-16. This is also combined with growth in defense spare sales. In oil and gas, the demand is steady, while growth in IGT is extremely strong, again in both OE and aftermarket sectors. The part of the market, which I have not previously made much commentary on is the midsized turbines of up to 45 megawatts where growth of both aero-derivative engines and dedicated midsized turbines is expected to grow for many years. This is mainly the result of data center build-outs and the need to supply these data centers with either independent fundamental electricity supply or with very fast-acting turbine response to ensure uninterrupted supply from the grid and from utilities. It is increasingly difficult for us to separate the end market for these turbines between oil and gas compared to IGT. Commercial truck volumes continue to struggle with smaller fleets, in particular, not buying trucks due to the low freight rates and also combine this with a large price increases for Class 8 trucks, principally due to tariffs. The tariff changes continue to produce uncertainty for Howmet. However, the net tariff drag continues to be small at around $5 million plus or minus as discussed in the last earnings call. The revenue outlook for the balance of 2025 has increased compared to the prior guide, benefiting from the stronger Boeing 737 builds and also engine spares. The build-out of our footprint with the 5 new manufacturing plants or extensions continues. The most vital immediate part of our expansion going into 2026 is the new Michigan Aero Engine core and casting plant, which is on track with the machines now building some parts. There remains a lot more equipment to be installed during the next 6 months, but everything is currently as it should be. The new plant we've installed for tooling is now equipped and staffing well underway. Being a little bit more specific regarding the 2026 outlook, we see revenues of $9 billion plus or minus, which is an increase of about 10% year-on-year. This number will be further refined in our February 2026 earnings call, where we will also provide more detailed guidance. Moving to the fourth quarter of 2025. We see revenue to be $2.1 billion, plus or minus $10 million, EBITDA of $610 million, plus or minus $5 million, earnings per share, $0.95 plus or minus $0.01. And for the year, the numbers are -- revenue is $8.15 billion plus or minus $10 million, EBITDA at $2.375 billion, plus or minus $5 million; earnings per share of $3.67 plus or minus $0.01 and free cash flow of $1.3 billion, plus or minus $25 million. In summary, 2025 is another good year for Howmet with free cash flow guided substantially higher than the last earnings call, even after the higher capital expenditure, which is there for future growth in the company. Before moving to Q&A, I did want to thank Ken Giacobbe for his years of dedicated service. It's been quite the journey for Ken and him being my partner in all of this from his days at Alcoa to Howmet, which interestingly, as 1 of the 3 parts of former Alcoa is now worth more than the single Alcoa company ever was. All the very best to Ken in his well-earned retirement. Ken Giacobbe: Thank you, John. John Plant: I just want to offer you the opportunity of adding any comments. Ken Giacobbe: Yes John, appreciate the kind words and appreciate the partnership. It's been a privilege and a pleasure to work with you, the Board of Directors and the Howmet team. Results have been remarkable. I think a lot of that is driven by the positive culture that you had built over the years. That culture is one that we talk about quite a bit, one of focus, innovation in terms of everything we do, empowerment, accountability, shared purpose and winning, which is quite refreshing. As I look forward, I believe Howmet is well positioned for the future with a clear, clear path forward and an exceptional leadership team at the helm. So as I conclude my 20-year -- 21-year tenure with immense gratitude and also confidence in Howmet's future, I want to thank you for the opportunity to be part of such a remarkable organization. So wishing you and the team continued success. So I guess, Drew, we could move to Q&A. Operator: [Operator Instructions] The first question comes from Kristine Liwag with Morgan Stanley. Kristine Liwag: Ken, congratulations on your retirement. Thank you for all the thoughtful insights over the years and hope you've got something very fun planned. So maybe, John, the investments in technology you've made in Aerospace has yielded in Howmet being a clear leader in this area, especially for the hot section of the jet engine. Now pivoting to this data center build, we're starting to see this industry really gain a lot of traction. You've called out CapEx increases last quarter and also this quarter. Can you just take a step back and provide us more color on what the competitive landscape is like for turbines and IGT? How differentiated is your technology, the pricing environment? And what's your expected returns in this sector and how that compares with aerospace? John Plant: Okay. So that's a very broad question. It gives me the opportunity to talk now for at least an hour... Kristine Liwag: I'll keep it to that question though, John. John Plant: Yes. This is only one question. So first of all, clearly, this build-out of data centers and the requirement for electricity to not only, I'll say, drive the processing and the microchips that for these advanced microchips that are being installed, but also the electricity required to call them is producing an extraordinary level of demand, which I think we know that the utility companies themselves and the grid is struggling to cope with and how can that be satisfied. It did change again with the new incoming administration in the early part of this year when there's a greater emphasis on fossil fuels and really the natural gas being the technology of choice compared to renewables. And so that has caused us to think again regarding the investment profile for this business. So the back class of the fundamentals appear to be well set. Certainly, you look for the next few years, the build-out and the requirements are extraordinary and the question remains, of course, what would it look like at the turn of the decade in terms of each future growth. But having said that, I do think these data centers, which are there not just for the introduction and use of AI, but also just fundamental requirement from storage means that, that electricity demand will be there and so solid and gives us a lot of confidence to invest albeit we don't have the same clarity regarding backlog numbers that we have in the Commercial Aerospace market. So you don't quite have that same, I'll say, clarity and visibility into the back orders. So it's caused us to keep rethinking our investments, and we've picked it up again this year. And you've seen with our guided capital expenditure increases in investments that we are making. And we expect that CapEx in 2026 and indeed going into 2027 will be also at high levels while not disturbing what our fundamental aim is, which is to convert 90% of our net income into free cash flow. And so it's a tall order at the same time, we're excited to be part of this growth opportunity. When I think about sort of what's happening, there is growth in both the large industrial gas turbines that you see bought by utilities, which provide the electricity, which is transmitted over the grid. But now given the large demand is that there are gas turbines being installed at the data center sites or clusters of data center sites in a centralized facility to provide that underlying electricity. And then beyond that, is that there's backup to all this or in the case of where you just can't guess a large gas turbine at the moment because they're quite scarce and orders are now going out. If you place a new order, you're not going to get that big land-based gas turbine until probably into the 2030 or beyond is that as a case where a lot of midsized turbines are now being installed, not just for the fundamental production of electricity, but also because they are very fast reacting is that it ensures that the supply of electricity to the data center is uninterrupted. And therefore, it's providing a lot of stimulated demand for the aero derivatives. And in fact, if you look at the -- I think results this week of Caterpillar, they are seeing that, and they're one of our major customers in those midsized turbines. So it's quite exciting. And then in terms of technology, it's going very much along the same lines that we have in -- had done in aerospace where we have moved or are moving from turbine blades, which are solid to turbine blades, which are increasingly core. And what I mean my core is that you have air paths through those turbine blades to provide them with cooling air such that those turbines can be run at higher temperatures. So it's very much going along the evolution path that we've had in the aerospace world. And so as we move forward over the next, let's say, 2, 3, 4, 5 years, and is happening right now is that we're installing additional capabilities to be able to produce the sophisticated fine tolerance cores that enable that next level of technology to be achieved and that's both for the midsized turbines and indeed for the very large turbines that utilities tend to buy. If you look at the most recent development, without giving you specific market numbers or customers, some of those now initial turbine blades are as sophisticated as they possibly most sophisticated commercial, not necessarily military but commercial aerospace use in terms of the numbers of, I'll say, certain time air pathways through those turbine blades. So -- and of course, with that goes content and value because it again is producing the level of capability and electricity generation well above what you could have achieved with turbines in, let's say, 5 years ago or 10 years ago. So it's a pretty exciting landscape in terms of playing to our strength of the more sophisticated technology. It's causing us to expand. And you've heard me talk about the new manufacturing plant that we have or are building, in fact, at the end of this year, the structure will be complete to enable us to put new capabilities and, for example, new casting machines into that plant in the early part of 2026 to bring capacity on, not just for our customers in Japan, like Mitsubishi Heavy but also other customers like Siemens and GE and Ansaldo, et cetera. So -- and we're doing that, plus we're also expanding our plant in Europe significantly and also placing new capital in the existing footprint of our U.S. facility. So we're expanding in each of our 3 major sites where we produce gas turbine parts and really excited to be part of this journey which really is evolving very much in the same way as aerospace business, not only for those midsized turbines but also now for the very large gas turbines. And so it's a pretty exciting time for us. to be able to build out this business to be a very significant contributor for the company. So I'll stop there just in case I'm now getting too carried away with it. But I just want to make sure it hit the point of your question, Kristine. Operator: The next question comes from Myles Walton with Wolfe Research. Myles Walton: John, I'll try to ask a question that won't let you go on too long. But the end market implied growth in your $9 billion, could you share that as well as perhaps you've been running, obviously, well ahead of long-term incrementals the 30% to 40% that you had previously spoken of long been blown past. Is '26 another year of very high incrementals as we've seen in the last couple of years? John Plant: Let me deal with your latter point first, regarding margins and incrementals. I think as you know, I don't really give color on that at this time of the year, that's more for the February call. So I'll certainly reserve any profit guidance for February. I note that in Q3, our incrementals were, again, quite healthy at 50%. Obviously, we've given you a guide already for Q4. So I think it's a similar number for Q4, but Ken could always correct me on that. So it's pretty strong for this year. Next year, I guess, when we come up with a number, I mean it will probably underwhelm you because it always does. We don't seem to be able to satisfy your expectations. At the same time, I think that whatever we come up with will be a very satisfactory in 2026. So it's a long way of talking about the subject for a minute or 2 without actually saying much at all. In terms of the first part of your question, which was where did we see end market growth. So my sense is that getting too deep into the guide at this point it's an approximation. I think Commercial Aerospace will be stronger in 2026. So I think the build-out of narrow bodies, both for Airbus and for Boeing will be stronger in 2026 than it has been in 2025. And also the likelihood of the widebodies, particularly the Airbus A350 and the Boeing 787. I think both of those are going to be at a higher build rate than this year. So I'm pretty optimistic about Commercial Aero. So I see that being a few percentage points as an absolute higher than in 2025. In defense, coming off this year, which is pretty strong at plus 20%, I can see us having a mid-single digits increase again on top of that into 2026. I'm pretty confident about our positioning on the defense side. And on the -- I was going to call it the industrial segment, which will wrap up 3 segments, which is the gas turbine one, which I think you can sense is going to be at the high end, the oil and gas which would be in the middle and then general industrial, which should be at the lower end. I'll combine all of that and say, basically just getting into double digits as an increase. So that will be the sense I have for the underlying big segment commentary for next year. But while I'm on a role, I'll just talk about inside Commercial Aero because I know you've got a follow-up with the question like what's the underlying assumptions. So I think Boeing 737 will be higher. So, I'll say, I use 40 or getting into the 40s as an approximation, the A320 into the early 60s or maybe, I don't know, 62, 63, 787, I'll use 7.5 and the A350, maybe 6.5, could be 7. So it's in those sort of areas. So it's giving you directionally what I think you want without getting too specific because, again, I'd like to see how people close out, our customers close out this year, what the stated inventory is, as you know, certain of our airframe customers have been taking the inventory down. And I have to think about the robustness of their build while they've been taking inventory down and the consistency. And hopefully, we're going to see improved consistency into 2026 in the same way we've seen it for the last 2 or 3 quarters, where it's become somewhat -- a little bit more predictable. Operator: The next question comes from Ronald Epstein with Bank of America. Mariana Perez Mora: This is Mariana Perez Mora for Ron today. First of all, congratulations, Ken, on the retirement, and congratulations on your contribution to the company and the industry in general. I'd like to follow up on -- try to dive deeper as we think about next year into 2 things. Number one, how we think about, I'll say, on the commercial aero part, destocking trends and aftermarket trends or spare engine trends despite like this ramp that we are all expecting on OE. And the second one is when you think about IGT, how dependent the guidance is on the capacity that will be coming online end of this year and mid next year? How sensitive is guidance to the timing of that like incremental capacity? John Plant: Okay. Let's deal with the IGT part first and then go back to commercial aero. This year, we've seen the benefits of both small increases in gas turbine build at the large land-based turbines, probably a slightly higher build in terms of those midsized turbines in percentage of increase. But this year has also featured an increase in spares as the existing fleet of both types of turbines and maybe the midsized turbines being very strong in terms of their space requirements because those fleets are working harder. So that gives you a picture there for this year. When we move into 2026 and into '26 and '27, again, we're going to be -- we're going to see fundamental demand and this demand in turbine builds are expected to increase again into '27 beyond '26. On the OE side, it's going to be obviously a factor of are all the turbines going to be actually be built that are planned and how we are able to step up to those builds. And so I see that as -- whereas this year, I'd say, been slightly stronger on the spares and -- but still solid on the OE side. And next year, I think we're probably going to see a higher vector compared to this year on the OE demand but still strong spares demand. So again, I'm feeling pretty positive about those segments. It's difficult to judge exactly yet which one we will win in terms of those 2, if there was a race between them. Moving back to the commercial aero question. I've already given you a commentary regarding what I think build rates are, I think destocking essentially is finished this quarter, and I don't really see much evidence of that remaining if anything, it could only be a little bit left in the titanium area where people build up stocks because of either lack of build or trying to provide security stocks in the case of what happened after the Russian invasion on Ukraine and the supply issues out of BSMPO. In terms of spares and engine spares, I think the 2026 is going to be another very strong year for that. If you deal with CFM first, then I envisage that it's going to be strong on the CFM56 because the existing fleets continue to work hard. There's still a backlog of parts and the engines are going to be put back on wing and into the air. And similarly -- and maybe even a higher area for those B2500 and the GTF engine. So spares demand is going to be very strong. And as these jet engines transition to the new, I'll say, versions of them, so the new parts, which have got into the LEAP-1A and the ones which should go into the 1B next year and then into the GTFA then there'll be not only the OE demand but also the retrofit requirements for improving the robustness of those engines and to get a lot of engines back on wing. So I think I covered it. Mariana Perez Mora: Yes. And if I may squeeze another one. It looks like Asian history now because of how hectic the year is, but it wasn't long ago that you guys have to call for force majeure on the tariffs and raw materials. Could you mind like giving us some color around like how is that today? And how you think about risks on raw materials and pricing and pass-throughs going into next year? John Plant: Well, I think we're pretty solid in terms of pass-through capabilities, either under existing contracts or with new agreements that we've made with our customers for each of our end markets. And so what was the gross effect that we could see, I think, originally, it was up to $100 million that with the delayed implementation and certain exemptions that have been provided maybe that number came down. And then recently, we've seen some of the tariffs increase again, thinking now on the Class 8 area. So it's been moving around and still continues to move around even as recently as yesterday. But the net effect is still sub $5 million for the year, and that essentially is the drag that's just in terms of timing of recovery. So as an issue for Howmet, it really is, I'll call it a nonissue, sub-$5 million, and therefore, hopefully, it disappears into the woodwork in 2026. Operator: The next question comes from Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Congrats, John, on great results and Ken, on your retirement, although I'd argue with Kristine that working with John is plenty of fun. So I don't know what you'll do in retirement, that's even better. Can I... Ken Giacobbe: I can agree with that, because you say stop there and Ken what are you thinking. Sheila Kahyaoglu: Ken, I'm going to actually put this one on you. Just given, I thought the comments on Howmet being more valuable then the 3 pieces was very interesting. So over the next few years, where do you see Howmet's end state just given where the balance sheet is, leverage is at record lows, margins in each segment are terrific. So lots of areas of expansion. How do you think about Howmet over the next few years? Ken Giacobbe: Yes, Sheila, I think I'm going to have to let John answer that one. I don't want to get fired this late, right? John Plant: So I think the -- if you look at the journey that we've made over the recent years, from trying to install a performance culture through, I'll say, more difficult times of COVID. It came upon us fairly quickly and then trying to really invest in our technology and then really address growing the company. And I think the growth trajectory is very encouraging. And so while we've been like what I call -- walking on chewing gum or doing the -- and it's not at all, we've been growing and improving our margin. And my thought is that we'll continue to do that. But of the value equation, then I think maybe the growth will be a more significant factor over the next 5 years than the margin factor, and that's not to say that the margin won't improve, that's what we come to work for every day to try to achieve that. I think there's lots of things yet to further expand in terms of whether it's increased automation capacities that we have or capabilities that we have in the company. There's the thing which we've been talking a lot about recently about how we can use the artificial intelligence and machine learning in our manufacturing plants. So it isn't just basic automation, it is data collection at extremes that we've never seen before. And when we have the opportunity next March, where we're planning on an Investor Day or Investor Technology Day, but basing it at [indiscernible] plant again and we'll showcase the new manufacturing plants that we have there. And beyond just the fundamental increase in robotics, which I think people have seen. it's also at a high level. It's another stage beyond that. But for me, probably even more important than that is that the what we've termed the digital thread that we've been building throughout the manufacturing process from the chemical compounding right the way through core prep and then into shell and casting and being able to provide data and individual traceability right back to which fundamental elements for each of our parts that we're manufacturing. And then with that huge amount of data that we deal, we are positioning ourselves to collect, is that using various techniques to be able to use artificial intelligence because the sheer scale of data we have or we've got to have available to us takes us something beyond any human being could possibly analyze data crunch and do. So I think that's going to lend towards a further improvement in our ability to improve yields and an improved yield, of course, goes with economics. And then with the improvement in the yields, we can take the design tolerances to yet a further level, which will provide again for the next generation of content improvement and fuel efficiency for both, not only our aerospace segment but also the gas turbine segment. So I think all of that coming together and using a combination of automation and AI and all the things we're trying to position for is going to be good for, Sheila. Operator: The next question comes from Noah Poponak with Goldman Sachs. Noah Poponak: Congrats, Ken, on the retirement and the evolution of this financial model. I wanted to come back to incremental margins. Guys, you had this historical framework a few years ago of 30% to 35% on the incremental and you've now created this kind of wall of tough compares, but you've now had 2 quarters in a row where you've had a well above the 30% to 35% despite comparing to well above that. And so I was hoping to better understand is price or productivity, the bigger driver at the moment. And then as you move into 2026, can you stay above that historical targeted range despite the tougher compares? John Plant: Yes. I mean, again, I'm going to try to steer away from 2026, Noah, at this time. And any number is always going to be a combination of things. And in our incrementals, we've got obviously some leverage for volume. We've got the benefits of automation. We've got the benefits of yield. We've got the benefits of content and also, we have the benefits of price as well. So we have many individual threads going into that. And the only, I'll say, parts which are currently negative would be the fairly high ingestation of labor, which takes, I think, as you know, a fairly significant trading time, never mind just the cost of recruitment. And there's a slight degradation initially from those employees in terms of yield. And so what do I expect going forward is that hopefully, the drag of that labor becomes a little bit less because the denominator gets higher. But my guess is that we're probably going to have to hire a net higher number of people ultimately as we move through 2026 both for priming the pump again at the start of the year as some of the equipment I talked about comes in, plus the fact that we also envisage having to step up again into 2027. And so if you would ask me to call it today, I'd say we'll probably end up with a higher net number. And so you've got that which will weigh upon us while still hopefully achieving all of the productivity improvements from the threads of automation and the new equipment coming in with a much higher level of, I'll say, again, automation that we had in the past. So there's such a lot of moving parts. It's difficult to pass all of that out. And then the only thing I haven't mentioned is the content on average will improve again as we move into next year because we'll be moving from one generation of technology to the new generation technology at some point during 2026 for the LEAP 1B program as an example. And then, of course, we have the GTF advantage, which is also being made today in fairly small lots. But with that significantly increasing as we go into 2026, we need to get to a much fuller run rate in 2027. So there's so much going on. And with the buildout, it's really difficult to give you. I just feel at this point, we've managed our way through fairly well with really healthy incrementals. And I mean anything above -- I mean, if our EBITDA is at 29%, anything above that is incremental beneficial to the company. So I'm feeling as though we're going to be above that for next year. But without -- I'm not willing to comment yet about whether we're going to be on par with our incrementals this year or not or whether inevitably, there has to be some flattening of that. That it's just -- I don't -- wait till February to comment about that. Operator: The next question comes from Scott Deutsche with Deutsche Bank. Scott Deuschle: John, I think you said CapEx will remain at high levels into 2026 as well as into 2027. So just to put a finer point on that, should we be thinking about flattish CapEx in those years relative to 2025? Or could that increase? And then does the mix of that CapEx shift more toward IGT and midsized turbines? Or is the majority of it still focused on aerospace? John Plant: In terms of absolute numbers, the majority is absolute dollars will still be higher for aerospace. But I think there'll be a percentage as a mix of a total. I think that the investments we're making in both the large and midsized turbines will possibly be a higher relative percentage than it is this year. I think the one question I forgot to answer on the way through the Q&A section was what do the economics look like for these turbines? And essentially, it's the same as for aero. So if you were to pick up both our absolute and our incrementals for either the IGT part of our business, both large and midsize or aero, and they're pretty much the same. So it doesn't really matter what, let's say, the color of CapEx, which segment it goes into because they're both very good. And for me, it's more the fact that we have the opportunities. And it is just -- as I look forward, we, I'll say, more or less framed out, well, I think we're going to do in 2026. But every time we sort of examine or have new conversations with our customers, in fact, I was in Europe for the first part of this week. And thank goodness, I got back last night to be able to do our earnings call is again, is only a conversation about improvement in opportunities which are there before us. And so what causes me to believe that 2027 is also going to be significant number for CapEx. And so I -- this year as we've moved up from what we thought was going to be, I don't know, 350 to 370 or something like that, maybe a bit lower on that side. We're now probably going to burst 400. But as you see in 400 but with actually improving cash flow is that I think the greatest pleasure that I'm going to have next year is being able to deploy that amount of capital or more. And we don't deploy capital just because it's fun to do, it's hard work, but it's going to be backed by clear-eye thinking about customer utilization, customer commitment and economic return. And I think you know we have pretty high hurdle rates for that to deploy that fresh capital. So my view is it's a good thing. If we can spend 2025, I think 2026 and more in 2027 and more, then that's going to be a good thing. And we just see increasing opportunities to build out the business. There's no further questions or Drew [indiscernible]. PT, I think we should close given the fact that less than a minute to get -- we can't ask a question. Operator: Mike, did you have a question, Mr. Ciarmoli? Michael Ciarmoli: Yes. John, not to belabor the point, and I'll try and be quick here with the call closing out. But back to these incrementals I mean you're clearly benefiting from spares demand, a combination of legacy utilization, combination of durability issues. I mean, are you overearning on the aerospace spares now? And is that driving the strong incrementals? Does that normalize at some point as maybe some of these light work scopes or different kind of work scopes kind of trend back to normal? John Plant: Well, first of all, in the year, in the short term, pricing into the spares part and that OE part are exactly the same. Over a long-term basis, that are differentiated because of, let's say, parts going to pass model. So no, there's no case of the over-earning in the immediacy. If you go back to previous calls, I have said that what we see is our spares business in total increasing every year for the next 5 years, didn't really want to go beyond 5. We may discuss whether it's always going to be the same angle of increase, but there's no case that I can see where spares don't increase every year through the end of the decade. So that's pretty positive. Thanks, Mike. So it's 11:01. So Drew close the call. Operator: Yes, sir. This concludes our question-and-answer session and the Howmet Aerospace third quarter 2025 Earnings Conference Call. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Real Brokerage Third Quarter Earnings Call. I will now turn the call over to Ms. Alix Lumpkin, Chief Legal Officer at the Real Brokerage. Alix, the floor is yours. Alix Lumpkin: Thanks, and good morning. Thank you for standing by, and welcome to the Real Brokerage Conference Call and Webcast for the third quarter ended September 30, 2025. We appreciate everyone for joining us today. With me on the call today are Tamir Poleg, our Chairman and Chief Executive Officer; Jenna Rozenblat, our Chief Operating Officer; and Ravi Jani, our Chief Financial Officer. This morning, Real published an earnings press release, including results for the third quarter ended September 30, 2025. The press release, along with the unaudited consolidated financial statements and related management's discussion and analysis for the quarter have been filed with the U.S. Securities and Exchange Commission on EDGAR and with the Canadian securities regulators on SEDAR. Before we get started, I'd like to remind everyone that statements made on this conference call that are not historical facts, including statements about future time periods, may be deemed to constitute forward-looking statements. Our actual results may differ materially from these forward-looking statements, and the risk factors that could cause these differences are detailed in our Canadian continuous disclosure documents and SEC reports. Real disclaims any intent or obligation to update these forward-looking statements, except as expressly required by law. With that, I'd like to turn the call over to Chairman and Chief Executive Officer, Tamir Poleg. Tamir, please proceed. Tamir Poleg: Thank you, Alix, and good morning, everyone. Real is a real estate technology company that is differentiated in our industry. Unlike traditional real estate brokerage firms, we provide real estate agents with a compelling combination of financial incentives, a proprietary software-based platform that eliminates the need for an agent's physical office space and a collaborative culture that we believe is unique in our industry. Our vision is to simplify life's most complex transaction, the purchase or sale of a home by providing agents with the tools, technology and resources they need to grow both their businesses and themselves while delivering a seamless experience for clients. In the short term, this vision includes the rollout of a consumer-facing product designed to streamline the client experience and enhance attachment of our higher-margin ancillary services. Over the long term, we see Real evolving into a holistic financial ecosystem for agents, providing them with an avenue to build long-term wealth within a single platform. Our goal is to redefine the role of a real estate brokerage in the lives of our agents and in the broader housing industry. That's why we will remain relentless in our focus on delivering long-term value for our agents, for their clients and for our shareholders. Turning to our results. Q3 was another quarter of exceptional organic growth for Real. We continue to materially outperform the broader housing market, gaining share, expanding our agent base and scaling our platform in a disciplined way. While industry transaction volumes grew modestly, Real's closed transactions increased nearly 50% year-over-year, and we surpassed 30,000 agents on our platform for the first time. A few financial highlights. Revenue in the third quarter grew 53% to $569 million. Gross profit increased 40% to $45 million and outpaced a 31% increase in operating expenses, which also totaled $45 million. Net loss was approximately breakeven at negative $0.3 million. Meanwhile, adjusted EBITDA was positive $20.4 million, a 54% improvement from last year and contributed to operating cash flow from operations of approximately $9 million. Let me spend a moment on how each of our businesses performed. Brokerage revenue grew 53% to $565 million, driven by both agent growth and higher productivity. We ended the quarter with over 30,100 agents, up 39% from a year ago, and as of today, our agent count stands at approximately 30,700. Real agents closed more than 53,500 transactions totaling over $21 billion, up 49%. That performance speaks to the strength of our attraction flywheel and the quality of the agents who continue to choose Real. Our brokerage business was once again profitable on a net income basis, and we continue to reinvest these earnings back into our ancillary businesses, which typically generate gross margins that are 5x to 8x higher than brokerage. In One Real Title, revenue was $1.3 million as we continued transitioning from team-based to state-based joint ventures, a shift designed to enhance scalability and long-term profitability. Under our new title leadership, we expect this structure to begin contributing more meaningfully in the quarters ahead, and we are encouraged that attach rates among our JV partners exceeded 35% in the quarter. One Real Mortgage delivered another strong quarter with revenue up 47% year-over-year to $1.8 million. Growth was driven by the addition of productive loan officers and the launch of our inside sales team earlier this year. As of now, the business included approximately 100 loan officers, more than 60 of whom are participating in our Real originate program. Lastly, Real Wallet, our financial technology platform continues to scale quickly and is deepening engagement with our agents. Quarterly revenue reflects the launch of our Real Wallet Rewards program, a new benefit that we believe will further accelerate adoption. As of today, more than 4,600 agents now use Real Wallet business checking accounts with total deposits exceeding $20 million, up from approximately $40 million at the time of our last earnings call. Earlier this month, we launched Real Wallet Capital across 28 U.S. states, providing agents with fast access to liquidity, allowing them to invest in their business and help manage cash flow between transactions. For agents, income can often be highly variable. In some cases, months can pass between closings and traditional lenders simply aren't equipped to underwrite that type of earnings profile. With Real Wallet Capital, we can extend credit based on an agent's production history and projected income with Real, offering financing that many banks could not. We believe Real is the only major brokerage offering agents this kind of embedded access to capital and doing so often same day. Beyond the financial opportunity, we view Real Wallet Capital as both a differentiated attraction and retention mechanism, a solution that helps agents remain engaged on our platform. While we're still in the early innings, we see this as a meaningful differentiator for agents choosing where to build their business. Today, Real Wallet is currently operating at an annualized revenue run rate of over $1.2 million, and we remain encouraged by the momentum. Now for more detail on our operational performance, I'll turn it over to our COO, Jenna Rozenblat. Jenna Rozenblat: Thanks, Tamir, and good morning. During the third quarter, our operations organization made meaningful progress in leveraging AI and automation to streamline workflows, enhance service metrics and improve our ability and overall cost to serve. I'll give a few examples. In September, we launched Real's dedicated AI automation team focused on using AI and workflow automation to reduce manual or low-value processes across the organization. In just the first few weeks, the team delivered more than a dozen live automations, collectively saving the business more than 10,000 hours annually, equivalent to multiple full-time roles. Those hours represent capacity we've been able to reallocate toward higher-value activities, improving agent support, quality assurance and product development without adding additional headcount. For example, an automation of our pro team migration process allowed us to complete the migration of all of our existing teams into our pro team infrastructure months ahead of schedule. At the same time, we're continuing to scale our agent-facing AI tools through Leo CoPilot, our proprietary intelligent assistant integrated within the reZEN app. As a reminder, in Q2, we rolled out Leo as the first line of agent support for phone calls in reZEN, answering questions instantly, routing requests and resolving issues before they reach our human support team. In Q3, we expanded Leo's reach to also be the first line of support for agent e-mails. In the second quarter, Leo handled about 28% of all calls initiated through reZEN. By the end of the third quarter, that figure had grown to approximately 47%, handling more than 10,000 agent phone and e-mail interactions autonomously. Overall, even as our agent base grew nearly 40% year-over-year, response and resolution times declined and agent satisfaction remained above 90%. Importantly, these improvements are translating into stronger agent retention, evidenced by our revenue churn, which declined to 1.4% in the third quarter, the lowest level in more than 2 years. Each of these initiatives, while small individually, compound to create significant productivity gains over time. They enable us to handle higher transaction volume and agent growth with limited incremental cost, directly contributing to Real's improving operating expense per transaction and overall operating leverage. Now before I hand it over to Ravi, I want to highlight 2 additional developments impacting our agent community. First, next week, we'll host our annual RISE Agent Conference in Orlando, where 2,000 agents and industry partners will gather to share best practices, collaborate in person and celebrate the culture that makes Real so unique. We'll also showcase several new initiatives designed to further power our agents' businesses and enhance their ability to win in today's market, so stay tuned. Second, this month, we officially expanded our operations into Saskatchewan, our fifth Canadian province. Canada continues to be a meaningful growth opportunity for Real, and we expect this expansion to unlock additional agent and transaction growth as we strengthen our presence across the country. In short, we're executing on the operational foundation that enables Real to grow faster than the market, while continuously improving efficiency, scalability and engagement. Now I'll turn it over to Ravi to walk through the financial impact in more detail. Ravi Jani: Thank you, Jenna, and good morning, everyone. Our third quarter results demonstrate the continued strength of Real's model, high organic growth, disciplined expense management and improving operating margin. Total revenue for the third quarter rose 53% to $568.5 million compared to $372.5 million in the same period last year. Growth was driven primarily by our North American Brokerage segment, which saw a 49% increase in closed transactions to more than 53,000 in the quarter. Our ancillary businesses generated $3.2 million in revenue, up 25% year-over-year, led by One Real Mortgage and Real Wallet, while One Real Title was impacted by the shift from team-based to state-based joint ventures. Gross profit increased 40% to $44.9 million compared to $32.1 million a year ago, with gross margin of 7.9% versus 8.6% in the prior year period. The year-over-year change primarily reflects a higher proportion of transactions completed by agents who have reached their annual cap. For reference, the percentage of total transactions closed that were post cap increased by approximately 500 basis points relative to last year. As a reminder, once an agent caps, they stop paying Real the standard 15% split and instead pay a $285 per transaction fee, which results in lower gross margin on those post-cap transactions. While this mix shift creates near-term pressure, it also reflects the maturity and productivity of our agent base. We do expect this to normalize as market activity improves and transaction growth becomes more evenly distributed between cap and non-cap agents. Of course, over time, continued growth in our ancillary businesses should support overall gross margin expansion. Operating expenses, including G&A, marketing and R&D, totaled $45.3 million, up 31% from $34.6 million last year. The largest driver was revenue share expense, which rose 35% to $15.6 million, up from $11.7 million in the prior year, consistent with our strong agent production. The remainder reflects investments to support growth, including expanding our operations and R&D teams and further enhancing our technology platform. Operating expenses represented 8% of revenue in the third quarter, an improvement of 130 basis points from 9.3% a year ago, reflecting strong cost discipline. Adjusted operating expense, what we view as our fixed cash cost was $21.7 million or 3.8% of revenue, down from 4.5% in the third quarter of 2024. On a per transaction basis, adjusted operating expense declined 13% year-over-year to $405 compared to $468 in the third quarter of 2024. For the third quarter, we reported an operating loss of negative $0.5 million compared with a $2.5 million loss in the third quarter of 2024. Operating margin improved to negative 0.1% from negative 0.7% in the prior year period. Our core brokerage segment remained profitable, generating $0.8 million of operating income, while we continue to reinvest in One Real Mortgage, One Real Title and Real Wallet, which collectively generated an operating loss of $1.3 million as they scale. On a non-GAAP basis, adjusted EBITDA rose 54% to $20.4 million, up from $13.3 million last year, reflecting growth in gross profit outpacing growth in operating expenses. Total stock-based compensation was $19.9 million, with $12.6 million related to the agent stock purchase program recorded in cost of sales, $3.9 million in agent equity awards recorded in marketing and $3.4 million in employee-related stock compensation. We generated cash flow from operating activities of $8.8 million in the quarter and returned capital to shareholders by repurchasing 3.2 million shares for $15.5 million under our existing buyback authorization. We ended the quarter with nearly $56 million in unrestricted cash and short-term investments, an all-time high and continue to carry no debt, giving us ample flexibility to fund growth and future share repurchases. To close, a few key operating metrics. Our median sale price was $390,000, a 2% year-over-year increase and our headcount efficiency ratio, which reflects the number of full-time employees, excluding Title and Mortgage employees divided by the number of agents on our platform was 1:89, compared to 1: 87 last quarter, still among the most efficient in the industry. While we don't provide formal guidance, consistent with typical industry seasonality, we expect fourth quarter revenue to decline compared to the third quarter and for lower gross margin year-over-year, in line with trends we've seen throughout 2025. From an OpEx standpoint, we expect an increase in our non-variable OpEx in the fourth quarter. This reflects both planned headcount additions to support future growth as we prepare for an even stronger 2026 as well as costs associated with our annual RISE Agent Conference, which takes place in the fourth quarter each year. More details on our results and key operating metrics can be found in the earnings press release and investor presentation that accompany this call. I will now turn it back to Tamir. Tamir Poleg: Thank you, Ravi, and thank you, Jenna. In closing, our continued outperformance is not the result of any one initiative, but of a system working together at scale. A differentiated business model, a powerful technology platform and a culture that attracts productive agents who want to build their businesses at Real, not just hang their license. From my perspective, 3 key themes defined our performance this quarter. First, our model continues to win in any market environment. Our growth has been broad-based and entirely organic, driven by word-of-mouth, productive agent networks and the strength of our value proposition. Agents come to Real because our economics are aligned with theirs, our platform simplifies their workflows and our culture enables collaboration over competition. Second, we are scaling with discipline. Once again, we grew revenue and gross profit faster than our operating expense base. That operational discipline paired with automation, AI adoption and a culture that thrives on doing more with less, continues to strengthen our path towards sustained profitability and margin expansion. Third, we are transforming what a modern real estate platform can be. Our vision extends beyond brokerage. Instead, we're building an integrated ecosystem that simplifies the transaction, better serves consumers and increases agent productivity while expanding new higher-margin revenue streams. Mortgage, Title and financial products like Real Wallet are still early, but advancing meaningfully and strategically every quarter. We remain deeply confident in our strategy, our people and our opportunity, and we're just getting started. We look forward to updating you on our continued progress in the quarters ahead. Now let's move to the Q&A session. Operator: [Operator Instructions]. The first question today is coming from Stephen Sheldon from William Blair. Stephen Sheldon: Nice results here. First, I wanted to start on the reduction in agent churn. Great to see that kind of pull back sequentially. Can you just talk about some of the factors that drove that so much lower 2Q to 3Q? Then I know it can be a little volatile quarter-to-quarter, but how should investors be thinking about that kind of metric trending as we look forward? Should we expect some stabilization there and/or potentially that continuing to trend a little bit lower? I guess, just generally, how are you thinking about agent churn trends? Tamir Poleg: Yes, as you said, there's volatility in agent churn. Having said that, I do think that the platform delivers more-and-more value as we continue to progress. I think that the lower numbers reflect the value and the fact that the platform just becomes more-and-more sticky. I also think that if agents think about some alternatives out there, I don't think that there's any better alternative in terms of a brokerage. That's probably what those numbers signal. I think that we will continue to work hard on improving the service. I think that everything that Jenna mentioned on the AI front and the fact that we're putting AI to work provides a better level of service to our agents and everything that we're doing with the wallet just makes the platform itself more sticky. I think that as long as we continue to be under 2% revenue churn per quarter as we have been for quite a long time. We'll continue to see those numbers. We're happy with what we're seeing. It's just about execution, delivering great service, great products, great features and just continuing to lead the market and the numbers speak for themselves. Stephen Sheldon: Then on Title, I guess, what have been some of the early takeaways as you've shifted to state-based JVs? Takeaways, I guess, both in terms of the attach rates you're getting and the eventual profitability. I think you mentioned, 35% attach rates for JV partners this quarter. I guess, just generally, how has that been trending throughout the quarter? How long do you think it could take for Title to really start to ramp monetization and gross profit overall? Tamir Poleg: It's a great question because we're putting a lot of emphasis and focus on ancillary services and title primarily, I would say. I actually looked at the data a couple of hours ago, and at the beginning of the year, our attach rates were in the range of 2.4% to 3% overall. Then we transitioned from the team-based JVs to state-based JVs, and that transition created headwinds of about minus 50% for us as a business. September, we had -- in September, we had attach rates of 3.7%. I think that we're doing -- we're making some progress in terms of attach rates. As Ravi mentioned, the attach rates on the new JVs are at around 35%. I think that we can get much higher, but we're seeing great momentum in some states and just to remind everybody, this is still early on in this new strategy of state-based JVs. I think that just in order to put things in perspective overall, on the brokerage side, we started the company back in 2014. During the first 6 years of the company, we added about 800 agents. Between 2014 and 2020, we ended -- we had about 800 agents in 2020. The following 5 years, we added 30,000 agents. I think that we were able to do that through a lot of trial and error and tech innovation and listening to our agents. I think that the same will happen with Title. I think that we are approaching a point where we have a critical mass of features and incentives and alignment with our agents in order to drive massive adoption to our ancillary services. One more thing. Next week, we have our annual RISE Conference, where we will be announcing what I believe is the biggest tech innovation that we have announced since starting the company, and that innovation will have massive impact on our ability to attach Title, Mortgage, Wallet and Insurance later on. I think that we're very close to seeing a meaningful change in the adoption of our ancillary services. Stephen Sheldon: Good to hear. I look forward to hearing more about that next week. Maybe just one last one. There have been some large M&A announced that will drive some brokerage consolidation. Just generally, when something like that happens, does it usually drive opportunities to pick up churn from agents that aren't happy at those firms that aren't happy about the change? Have you started to see any of that following recent announcements? Tamir Poleg: If we look at our numbers over the past few years, we're seeing that we are taking market share from everybody else. I'm not sure that those recent announcement about M&A intentions are really making a big impact on the market as we speak. I think that once that transaction closes, we will likely see a little bit more interest from people who are kind of searching for a new path, but we're not counting on that. We're counting on our organic growth and our ability to attract agents based on our value proposition, and we're not capitalizing on anybody else's troubles or discomfort in order to fuel our growth. For us, it will be just a cherry on top of the cake, but we continue to grow regardless. Operator: The next question will be from Naved Khan from B. Riley Securities. Naved Khan: Maybe just to touch on this Leo CoPilot. It looks like usage is up, but just talk about adoption in terms of the percentage of agents that have -- that are using it more versus those who might not have or might be early on in that? Where are you in terms of training and onboarding people to just kind of be more effective with the use of CoPilot? Then I have a follow-up. Jenna Rozenblat: Actually, when we think about the usage of Leo, it's 100% usage because all of our support goes through those channels. Whenever an agent actually reaches out to our support team, that's all done through Leo. Naturally, they are going to be using Leo when they get support. It's something that we go over with them when they come on to the company. We have training sessions to go through how to utilize Leo. From an adoption standpoint, there's 100% adoption from agents needing support. Naved Khan: Then when it comes to Mortgage, I guess you talked about having 100 loan officers, around 60% of those are unreal. What are some of the levers you can pull to kind of drive the attach for Mortgage higher from here? How many states are you in currently? How do you plan to expand that offering? Tamir Poleg: Yes. We're trying to go deeper into the states we're already operating in, and we operate in about 15 states. I think that the biggest lever that we can pull is on the technology integration side, and it goes back to what I said about this announcement that we're going to make next week. I think that making the entire process easier, both for our agents and for their clients and having everything on the app and everything integrated so that they can receive real-time updates, they have full visibility into the process. The agent is fully aware of what's going on, on the mortgage side. The buyer is fully aware. I think that, that could drive meaningful adoption, and we will talk about it a little bit more on the RISE conference. Naved Khan: If I have to think about -- and this is last question, but if I have to think about capped versus uncapped mix of agents, how does -- how did it compare in the last quarter versus prior periods, prior third quarter periods? Is that going higher? It seems like the mix of transactions through the more people who are uncapped is higher, and that's why your gross margins are lower. How should we think about that stabilizing at certain levels around here? Just give us your thoughts on the mix. Ravi Jani: Yes. Naved, thanks for the question. The agent mix, it's typically anywhere between 10% and 12% of agents hit their cap at any moment in time. That's the percentage of agents who are capped. I think the more operative stat, though, is this quarter, approximately 500 basis points of our total revenue mix increase relative to last year that was driven by post-cap transactions. Rough order of magnitude, if 40% of our transactions were post cap last Q3, this year, it was closer to 45%, and so that's really what drove that margin mix shift that we discussed. Operator: [Operator Instructions]. The next question is coming from Matthew Erdner from Jones Trading. Matthew Erdner: Congrats on another solid quarter. Most of the questions that I had have been taken, but I kind of want to follow-up on what you touched on earlier as it relates to non-variable operating expenses. It looks like there was a pretty good sequential increase in R&D expenses. Should we treat 3Q as kind of a go-forward run rate as it relates to R&D? Ravi Jani: Yes. Matt, good question. I would say, if you look at the R&D line over time, it has been increasing, and that's really a function of the investments we're making in technology across the business. This quarter, in particular, though, does reflect the addition of the folks from Flyhomes' and the Flyhomes' assets we acquired at the beginning of the quarter. You will continue to see R&D grow year-over-year. It's the fastest growing portion of our fixed OpEx base, but we do view that as a good and necessary investment. That's one of the things that will also tick up sequentially, particularly as we launch some of these AI features. As you know, there are costs associated with investing in AI, both on the personnel side as well as just the cost to serve. Yes. I mean, as always, if you look across our fixed cost base, in general, our OpEx base grew 31% versus the 40% increase in gross profit. We will continue to be disciplined and focus on growing overall OpEx at a slower pace than gross profit, but R&D will continue to be a focus area for us to continue to invest for the future. Matthew Erdner: Then in prior quarters, you guys have kind of talked a little bit on the M&A front. Then you just mentioned Flyhomes' there. Do you guys kind of expect to do anything or still looking in the market? Or at this point, is it just investing in your own businesses, the ancillary services and building from within rather than acquiring a piece and adding it on? Ravi Jani: Sure. Tamir, do you want to take that one? Tamir Poleg: Yes, I'll take it. Matt, we believe we have all of the components and the technology that we need in order to build what we plan to build in the coming years and just accomplish our vision. Having said that, we are looking at several M&A opportunities. I don't think that it will be on the technology front. We also -- as you know, we have grown organically, and we haven't really ever made any brokerage-related acquisition. I think that it could be interesting for us to look at some small acquisitions when it comes to title companies just to create some local presence, strengthen our local presence, and this is something that we're looking at, at the moment, but even if this will not materialize, I think that we have everything we need from an M&A perspective. Operator: The next question is coming from Nick McAndrew from Zelman & Associates. Nick McAndrew: Congrats on another strong quarter. I think the 2,000-plus agent additions is pretty encouraging to see. Maybe just as we think about the sustainability of agent growth into 2026, anything to call out and just the levers that are driving that continued momentum? Maybe if you could also just expand on what gives you the confidence that this pace of net additions can be maintained as the agent base just grows beyond 30,000? Tamir Poleg: Nick, so yes, we're currently at a little bit over 30,800 agents, and we have a very strong pipeline, hopefully, to finish the year with. We have some large opportunities, larger than ever before. I feel very confident about our growth in coming months and actually coming years. I think that the confidence is coming out of the understanding that we have built a platform that is extremely compelling for agents. We have to remember that all of the growth is organic and about 85% of the growth is coming from our agents attracting other agents. We have a very small growth team consisting of 4 people. We're not doing too much of an outbound even though we started now kind of implementing some outbound strategy. I think that just the market potential is there. As we look into the next 5 to 10 years and everything that is changing within the traditional brokerage world, I think that more-and-more agents, more-and-more teams and more-and-more independent brokerages will be looking for alternatives that are similar to what we offer, and we are very well positioned to capture a meaningful part of that churn that will be happening on the traditional model side. We feel confident. We have what it takes, and we rely on our efforts and on our agents' efforts in order to attract other agents. As I said, we have a strong pipeline that supports that. Nick McAndrew: Jenna, apologies if you touched on any of this already, but I think adjusted OpEx per transaction was down 13% year-over-year. I'm just wondering if there's anything to call out and just what's driving that leverage? Because I think last quarter, you mentioned that roughly half of transactions could be processed automatically through reZEN with pretty limited human oversight. I'm just wondering where does that figure stand today? Are there still remaining workflows that you see as kind of the next opportunity for automation? Jenna Rozenblat: Yes, absolutely. As I mentioned in my section, we've really been investing in this AI and automation team and really just getting started. Even things that maybe we didn't think possible before, we're diving head first into. There's a lot of great updates that I'll be providing most likely on our next call, recapping Q4, but yes, you're correct. We're working on automating those 50% of the transactions and also a number of other areas for reviewing contracts automatically through our automated broker review. There's a number of different initiatives that we're working on that are just going to continue to push the needle there and make us even more efficient month-over-month. Operator: There were no further questions from analysts in the queue. I will now hand the floor over to CFO, Ravi Jani, for questions from retail investors. Ravi Jani: Great. Thank you, Paul. Now that we conclude the analyst portion, we wanted to address some of the questions received from shareholders on the Say Technologies Q&A portal. We received a number of excellent questions. Thank you to all who participated. I think some of them were actually addressed in the analyst portion. I'll just address 2 that haven't been. First one for Tamir. How has the Real Wallet growth progressed? What revenue numbers can we expect from the Real Wallet? Tamir Poleg: Sure. First of all, the Real Wallet is a very exciting product, and we're really proud of how quickly the wallet has scaled. In less than a year since launching it, we now have over 4,600 agents using Real Wallet business checking accounts with deposits totaling around $20 million, and those deposits number are growing. As you remember, last call, it was around $14 million. The product is already generating over $1 million in annualized high-margin revenue, and that does not include the incremental opportunity from Real Wallet Capital, which we launched in the U.S. this month. The early adoption and engagement rates are very, very strong. It deepens the relationship we have with our agents and provides meaningful day-to-day value beyond just brokerage economics. I think that looking at the numbers of Real Wallet Capital, that makes me extremely optimistic as to the opportunity of Real Wallet and how well it was received by our agent community in the U.S. since launch. Ravi Jani: Thanks, Tamir. The last question was, how is the company planning to expand profit margins? What are expected margins in 3 to 5 years? I'll take this question. It's a great question. Obviously, we are focused on margin expansion that will come from both gross margin improvement and OpEx leverage. It's obviously difficult to have a crystal ball and predict 5 years out. I think directionally, we see the path to adding a few hundred basis points of margin expansion over that time through that combination of higher mix shift and better expense leverage. I think with that, -- if you have any additional questions on today's earnings release, please feel free to contact me directly. Otherwise, Paul, would you please give the conference call replay instructions again? Operator: Certainly. Thank you, everyone. This does conclude today's conference call. Today's conference will be available for replay from 11:00 a.m. today. The replay phone number is (877) 481-4010 and the replay code is 52933. Once again, the replay phone number is (877) 481-4010 and the replay code is 52933. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.
Operator: Thank you, and welcome to the ConnectOne Bancorp, Inc. Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Siya Vansia, our Chief Brand and Innovation Officer. Ma'am, please go ahead. Siya Vansia: Good morning, and welcome to today's conference call to review ConnectOne's results for the third quarter of 2025 and to update you on recent developments. On today's conference call will be Frank Sorrentino, Chairman and Chief Executive Officer; and Bill Burns, Senior Executive Vice President and Chief Financial Officer. I'd also like to caution you that we may make forward-looking statements during today's conference call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings. The forward-looking statements included in this conference call are only made as of the date of this call. The company is not obligated to publicly update or revise them. In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company's earnings release and accompanying tables or schedules, which have been filed today on Form 8-K with the SEC and may also be accessed through the company's website. I will now turn the call over to Frank Sorrentino. Frank, please go ahead. Frank Sorrentino: Thank you, Siya, and good morning, everyone. Pleased to report that during the third quarter, we continued to build upon our strategic objectives, a clear reflection of our team's focus, client dedication and discipline. As a result, the integration of our merger is complete, credit quality remains solid and our margin continues to expand, all while organically growing our balance sheet. And so our systems merger, as we just talked about, systems merger integration, which took place only 2 weeks after the legal close, went exceptionally well, driven by outstanding collaboration across our team. In our first full quarter post-merger, we're operating seamlessly. One organization, consolidated systems, strong cultural alignment and unified client-first mindset. We have since built meaningful momentum across our markets, leading to accelerating performance metrics. We're seeing strong engagement, ongoing new client onboarding, healthy growth in loans and deposits. This progress is especially evident on Long Island, where we're leveraging our strategy to drive growth and strengthen our business. An attractive market we entered several years ago, the merger has accelerated our goals. Importantly, the positive financial aspects of the transaction are beginning to take hold, and Bill will discuss a little bit more about that in a little more in a minute. Operationally, ConnectOne's ability to attract and retain deposits remains a strength. During the third quarter, our core deposits continued to grow across both established and newly acquired client relationships. Loan originations this quarter remained healthy with over $465 million in new funding. Our team is energized to leverage our expertise and attract growth opportunities across our expanded. Looking ahead, we're well positioned for the balance of 2025 and into 2026 with a healthy and diversified pipeline for C&I, CRE, construction, SBA lending, demonstrating the strength and the reach of our franchise. Credit remains strong, supported by prudent and consistent underwriting standards and portfolio oversight. Our nonperforming assets were just 0.28% at the end of the quarter. Annualized net charge-offs remained below 0.20% and 30-day delinquencies were just 0.08% of total loans. Additionally, ConnectOne's capital and tangible book value grew meaningfully. Overall, our third quarter operating performance clearly demonstrates the strength and the potential of this organization. And with that overview, I'll turn it over to Bill to walk through some of the performance... William Burns: All right. Thank you, Frank. Good morning to everyone on the call. It was a great quarter, and our outlook remains very positive with strong performance anticipated across all of our operations. As Frank mentioned, the merger, which was finalized 5 months ago on June 1, now fully integrated, and that was due to a swift seamless brand and back-office systems conversion completed within the very first month. That rapid integration has allowed our performance metrics to excel with an acceleration of improvements expected in the fourth quarter and into 2026. Operating performance metrics already show significant year-over-year improvement. In the current quarter, operating return on assets increased by over 30 basis points to 1.05%, while PPNR as a percentage of assets rose by approximately 50 basis points over the past year to 1.61%. our earnings performance is being driven by the merger and a widening net interest margin, which grew to 3.11% from 3.06% in the sequential quarter and from 2.67% a year ago. And the spot margin at quarter end was already higher than 3.20%. We expect the fourth quarter margin at 3.25% or even above. Now the current quarter's margin of 3.11% reflected 2 temporary factors. One was the $75 million of high rate subordinated debt that was still outstanding but redeemed on September 15. And we also had higher than typical average cash balances due to the large deposit growth that we've had, which exceeded $600 million. We anticipate average cash balances to be below $400 million in quarter 4 as that cash rotates into loan fundings. So without those 2 items, which work to compress the reported margin, the third quarter NIM would have been in excess of 3.50%. In terms of the balance sheet, we continue to observe robust deposit growth following exceptional organic growth in the second quarter. On a sequential basis, our client deposit growth was approximately 4% annualized, and that was building on the second quarter's annualized growth of 17%. Annualized sequential loan growth for the quarter matched deposit growth, and that maintained our loan-to-deposit ratio below 100%. Now the loan pipeline is strong, and we expect loan growth to accelerate in the fourth quarter, average loans increasing by more than 2%, not annualized, 2% from quarter-to-quarter versus the sequential third quarter. And please keep in mind for your models that average cash is likely to decrease and that will slow the increase in total interest-earning assets. In 2026, we could easily see loan growth in the 5% plus range, that will be dependent, of course, on the economy and loan demand. Now adding to the strong performance of ConnectOne this quarter were 2 nonrecurring items that boosted pretax income by more than $10 million. Let me explain those to you. First was a $6.6 million of cash received this quarter, the employee retention tax credit that was conceived during the pandemic. Now initially, it was for companies with less than 100 employees, and that was for the years 2019 and '20. That employee threshold was raised for 2021 to include businesses with up to 500 employees, that allowed ConnectOne to qualify. At the time, ConnectOne had 450 employees, reflecting our efficient operating model given our asset size. Now today, our staff size has grown to about 750 employees due to organic growth and acquisitions, yet we remain a peer-leading efficient organization, about $19 million in assets per employee. Now the second onetime benefit recognized during the quarter $3.5 million pension curtailment gain relating to the freezing of First of Long Island's pension plan effective September 30, with the shifting of those benefit values to our 401(k) match program. The realignment of the benefit plans will result in merger net cost savings of $1 million annually, and that's in addition to this onetime $3.5 million present value benefit recorded this quarter. Now in terms of noninterest income, very, very strong quarter because of those nonrecurring items, it exceeded $19 million. The recurring level of noninterest income right now remains at about $7 million per quarter. We expect growth, especially in gains on sales as we continue to build out SBA, BoeFly and residential mortgage. We expect SBA to add significantly to our noninterest income in 2026. Keep in mind, with the government shutdown, we could see a backlog building in the fourth quarter, and that will be made up after the government reopens. Operating expenses, net of merger and restructuring charges were $55.8 million and our recurring run rate guidance remains approximately $55 million to $56 million for the fourth quarter and $56 million to $57 million per quarter during the first half of '26. And the latter part of '26 could drift to slightly higher. I'll keep you updated on our targets as we move forward. These amounts reflect normal expense growth, net of additional merger savings, which have not yet been realized. Turning to taxes. Our tax expense line for the full year has been a little tricky that reflected the merger and we had a second quarter charge related to intercompany dividends. I also want to mention that our actual marginal tax rate has trended upwards, but our growth and geographic reach have impacted our traditional tax strategies. Now for '26, we plan to utilize new strategies. Those are expected to result in an effective tax rate in the range of 28%, maybe a little higher, maybe -- let me turn now to credit. As Frank mentioned, I'm going to repeat some of these numbers, credit quality remains sound by all measures. Nonperforming asset ratio is at historical lows at 0.28%. Charge-offs for the quarter were just 18 basis points. Delinquencies more than 30 days were only 0.08% of total loans, very, very low in terms of. The CRE concentration continued its downward trend, falling to 4.34% at September 30. Our capital ratios continue to strengthen. Holding company tangible common equity ratio rose pretty significantly to 8.4%. And while our goal is to reach 9%, there's no immediate need to achieve this. Additionally, tangible book value growth has resumed its upward trend, a 5% increase we've calculated in tangible book value per share since the merger's completion. And with a higher level of projected retained earnings, we expect to have enough room in '26 for a common dividend increase and opportunistic share repurchase. That's it for my introductory remarks, and back to you, Frank. Frank Sorrentino: Okay. Thank you, Bill. Simply put, we've built a premier commercial bank with the scale and talent to serve the largest and one of the best markets in the country. ConnectOne's franchise value is in its strongest position ever, driven by accelerating financial performance, prudent organic growth opportunities, a strong technological focus and solid credit quality. Based on where our stock is trading today, we believe there's never been a more compelling time to invest in ConnectOne. As always, we appreciate your interest in ConnectOne Bancorp. Thanks again for joining us today. And with that, I'd like to turn it over for your questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Daniel Tamayo from Raymond James. Daniel Tamayo: Maybe starting on your profitability targets. I think last quarter, you talked about, Frank, hoping to hit 1.2% ROA and 15% ROTCE in 2026. Just interested in your current thoughts around profitability targets for next year. William Burns: I think those targets are in line -- still in line with where we said before, easily see 120 by the second quarter. And my model at least is showing us getting close to 130 by the end. Daniel Tamayo: Okay. Great. And then a follow-up kind of unrelated, but we saw yesterday the announced end of quantitative tightening. I'm just curious maybe you guys' thoughts on how that could impact deposit growth and/or pricing in your markets. Frank Sorrentino: Well, I think it will bode well for us going forward. Certainly, it appears the Fed believes the economy is going to continue to be somewhat robust and that more liquidity is needed in the marketplace, and that liquidity generally turns into deposits at banks. So I think across the spectrum of banks, you'll see deposits continue to grow, which I think will be good. It will reduce some of the competitive pressures out there. I think everyone has seen over the last quarter or 2, some of the -- while short-term rates have gone down, there's been increased competition for deposits. So a steepening yield curve, more liquidity and a robust economy that's pretty stable. I think certainly for ConnectOne bodes well, and I think it bodes well for our industry... William Burns: I agree with what Frank said. And also the margin continues to expand for all the reasons we've talked about before. It's still going to be -- we don't know exactly how many Fed cuts at the end of next year, but there are going to be a few. And our loans are repricing faster. Even in a down rate environment, our loans are repricing upward. So still looking at margins. I'll be bold enough to say approaching in the 3.40% to 3.50% range by the end of next year. Daniel Tamayo: That's great. Yes, let's hope all of that works out in your favor. It seems like it's trending certainly positively. So anyway appreciate all that color guys. Operator: Our next question comes from the line of Tim Switzer from KBW. Timothy Switzer: The first question I have is now that you guys have closed the merger full quarter in, how do you guys think about the capital allocation and deployment going further? Frank, you mentioned you think your stock is a value. Are share repurchases on the table here? And I would just like to get some color on that. Frank Sorrentino: Well, from my perspective, I know Bill made some comments relative to our ability to build capital. Capital is building quite quickly at the company, as you know, from a variety of areas, including profitable growth that we have. So I do think we'll have a lot of flexibility in 2026 to make some determinations as to what we should do with that capital. Obviously, if we see higher growth rates and we're opportunistic to engage in organic growth at the higher end of the spectrum, that will leave a little bit less for other opportunities. But overall, I think we can pretty much do anything we want to do in '26. Bill, I know you had some strong... William Burns: Yes. No, I agree with that. Our growth is going to be prudent and disciplined in terms of spreads. I'd like to see the capital ratios trend upwards. But I think I said on the call, even with all that because of the low dividend payout ratio we have today and the high level of earnings, we'll have room for opportunistic share repurchase. Timothy Switzer: Okay. Great. That's good to hear. And then I was also looking to get an update on BoeFly and maybe the growth outlook there, putting aside the government shutdown, the impact on SBA it's more near, but I'd love to get an update on that. And then also maybe some color on the recent changes to rules governing kind of like the smaller dollar million dollar or less loans in SBA that in terms of like underwriting and the new fees that came back in over the summer. Frank Sorrentino: So we'll start with BoeFly. Bill will talk a little bit more about the specifics of the various programs. But BoeFly since inception here at ConnectOne has continued its upward trend. We now represent some over 250 national franchise brands across the nation, which is an all-time high. When we purchased the company, I think they represented that. So this trajectory upward, and we put a lot of effort into sort of being the predominant company that can validate franchisee applications in that space. And so that's led to this growth in that portfolio. We've really focused over the last year or so to drive the opportunities that come out of that business to our growing SBA platform. And we're really beginning to start to see on a -- from a financial perspective, the fruits of all of that labor. And you will continue to see that in the future by the SBA revenue line continuing to expand. So we're very happy about where we are. We're very happy about where we're headed with that, and we're very happy about how it's translating into quality revenue here at ConnectOne. Bill, maybe you want to add. William Burns: Just to repeat a little bit of what you said and that we spent the past couple of years really building and perfecting platform for BoeFly led to significant increase in the number of franchisors that participate. And we're now starting to translate that into more income through SBA sales. So it already was reflected this quarter. And the increase is expected to accelerate. There's a little bit more of a -- when it comes to franchise loans, there's a little bit more of a period that it takes from inception to gain. So the pipeline is building heavily for next year, and I'm very optimistic we'll have a lot of gain on sale there. In the meantime, we've been building our boots on the ground SBA lending and everything is working in our favor there. So look, we started off from 0, and it's going to be a big portion of our noninterest income going forward. Operator: Our next question comes from the line of Matthew Breese from Stephens Inc. Matthew Breese: First one for me. It was really nice to see those noninterest-bearing deposits up, I think, 3.7% quarter-over-quarter and then CDs down 2.8%. Maybe just talk to us about what's going on, a few of the wins there? Are they acquisition related? Meaning is the FLIC deal and the brand starting to bear some fruit? And then looking ahead, can we see deposit growth match or exceed loan growth for next year, maintaining that sub 100% loan-to-deposit ratio? Frank Sorrentino: Yes. Well, I'll take your questions in reverse order. So the goal would be to match the deposits with the loans. And that actually answers the first part of your question. There's been a focus here at ConnectOne over the last couple of years to really redefine and make certain that the business we're in is to be a relationship bank that takes in deposits and make loans. And we like taking in deposits from the same folks that we make loans to. So we've had an effort ongoing here through all of our lending teams to really focus on making sure we're going after the types of clients that bring us substantial depository relationships. And we've been weeding out part of the slowdown in the overall growth is weeding out of clients who maybe promised us depository relationships and never delivered or just folks that wound up here with a transaction. We really don't want to be just a transaction-oriented bank. So I think with that focus and that focus continues going forward, I think actually, the merger that we just completed, the group of clients that we onboarded there, actually, they have had the sort of a reverse issue there where they were very deposit-rich and didn't take advantage of all the lending opportunities for those clients. So I think rounding out the folks that we're getting in front of on Long Island, this continued focus on high-quality relationship-type clients is really what's driving the profitable and as Bill said, spread-dependent business that we have. And also, it's allowing us to bring on high-quality type clients that should ensure that we keep a loan-to-deposit ratio in and around the range today. Matthew Breese: Great. And then, Bill, maybe you could help me out with a couple of things. What proportion of loans are now pure floating rate? And this quarter, what did you see for roll-on versus roll-off dynamics on fixed rate or adjustable rate loans? I guess where I'm going with this is, are you starting to see any spread compression as some of your competitors have indicated? William Burns: First off, to answer your first question, it's only about 15% of pure floating. So we're in good shape there. In terms of the roll on and roll off of fixed versus floating, I'm not sure whether -- how much has changed the dynamics of the balance sheet. I know you usually ask about what rates loans are going on versus coming off. When you add drawdowns to it and pay downs, it's like in the high 6s going on, the low 6s going off. Matthew Breese: Great. And then just 2 others for me. First one is just on the reserve. You have a 1.35% reserve to loans ratio. Historically, ConnectOne has been a lot lower, maybe 1% to 1.05%. Credit remains solid. Over some period of time, should we expect that reserve to kind of trend back to where you were as kind of FLIC loans reprice? It just seems high relative to the credit quality. William Burns: Yes. I think that -- yes, that's how it will work. Okay. It will gravitate back towards the 1 level or maybe a little bit higher. We'll see where the economy is and how the CECL works at the time. Matthew Breese: Okay. All right. And then last one is just, Bill, you had mentioned elevated cash, cash could come down next quarter. What should we be thinking of in terms of normalized cash to assets? That's all I had. William Burns: For now, I would say $350 million to $400 million would be normalized. It could go lower than that. But for this quarter coming up, that's what I would say. Okay. So if you look at our loan growth on an average basis, you're going to see pretty flat interest-earning assets. And that's fine by me in terms of capital ratios, in terms of margin. Operator: [Operator Instructions] our next question comes from the line of Feddie Strickland from Hovde. Feddie Strickland: Just wanted to stick on the loan repricing opportunity piece there. Bill, can you help us quantify just on the amount of fixed rate loan repricing we could see over the next several quarters? What -- just trying to figure out the size of the opportunity there. William Burns: The opportunity is quite large, probably have about $1 billion repricing in '26 and another $1 billion in '27. Feddie Strickland: And then wanted to follow-up on credit. Obviously, good to see NPA stable, net charge-offs step down a bit. Do we expect charge-offs to kind of remain in the high teens to low 20s range just in terms of basis points of average loans? Or does that step down? Just trying to get a sense for what we should see... William Burns: Yes. I mean it's hard to predict, but we've been pretty steady with that. So I'm running my own model, that's what I would have going forward for the next 4 quarters. Operator: Our last question comes from the line of Daniel Tamayo from Raymond James. Daniel Tamayo: Just a follow-up here for me. So maybe first, you can just remind us what your balances of rent-regulated loans are at the end of the quarter. And then the follow-up to that is just curious kind of if you could update us on your thoughts if we do get a Mamdani win next week in the mayoral election, what that means for the whole rent-regulated kind of industry in your opinion? William Burns: All right. Let me start with the numbers, and I think we're positioned well. The total aggregate exposure to majority-owned rent-regulated $700 million. 60% of it or $400 million came from First of Long Island, where we have a 20% mark against it. So in my view, that's completely ring-fenced -- rest of it, ConnectOne portfolio is about $275 million, less than 2.5% of our total loan portfolio, conservatively underwritten, no value-add projects, continue to perform well, moderate, I would say, not super significant stress in the portfolio. And Frank, do you want to comment on. Frank Sorrentino: Sure. As you can well imagine, we get this question a lot, certainly being centered in the New York Metro market. And my answer has been fairly consistent. There are so many variables as to what will happen from today forward, whether he wins, he doesn't win. Let's not forget the other alternative to Mamdani is Cuomo, who is the one who signed the actual 2019 rent regulation law that's causing a lot of the consternation in the portfolio anyway. So it's not like we're going from one side of the spectrum to the other. Rent regulated is here to -- rent stabilized rather, is here to stay. It's a constant struggle within that marketplace relative to the expense base versus the revenue stream. On the positive side of the equation, we saw this year a 3% increase that came on the back of a 2.7% increase the year before. It looks like for the next couple of years, we're still going to have a rent-regulated board that's fairly reasonable and is taking into account inflation, other costs that are being pushed through the system. There are those who would argue that potentially a Mamdani administration might actually be good for the rent-regulated portfolio in that he's looking to work to reduce the expense side by reorganizing the tax basis and tax base for real estate taxes and other potential solutions to allow landlords to be able to invest in the property to get more units back on the market. As you know, there's some 50,000 rent stabilized units that are vacant today because of the change in the 2019 law. So there's just too many variables to put your finger on, here's what's going to happen. All I know is this has been something that's been in existence for a very long time. It's ebbed and flowed. And for the most part, I'm pretty optimistic that one way or another, people need places to live. I think there's going to be programs put in place to make certain that, that product continues to be available to residents in New York City. It will change over time, how that change occurs. Hard for me to say right now. We're pretty -- we're not pretty, we're very comfortable with the loans that we underwrote. We were never part of the whole value-add story to get rent stabilized tenants out and replace them with market tenants. So we really don't have that risk on our balance sheet in those lending opportunities. And I think over time, it's just going to get figured out what to do with that product set. So we're comfortable with the operators that run the assets that we have. And we have very strong LTVs and debt service coverage ratios at properties that are in our portfolio. Of course, we're going to watch very, very closely what happens over time. But I do think this is a very, very slow-moving process. I don't think anything is going to happen with any immediacy in the short term. Operator: There are no further questions at this time. I'd now like to turn the call over back to the management for closing remarks. Frank Sorrentino: Well, I want to thank you, everyone, for joining us today and for some really great questions. And we look forward to speaking with everyone during our year-end and fourth quarter conference call. Everybody, have a great day. Operator: Thank you. You may now disconnect.
Operator: Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2025 L3Harris Technologies Earnings Call. [Operator Instructions] I would now like to turn the call over to Dan Gittsovich, Vice President, Investor Relations and Corporate Development. Dan, please go ahead. Daniel Gittsovich: Thank you, Tiffany, and good morning, everyone. Joining me are Chris and Ken. Earlier this morning, we issued our third quarter earnings release outlining our results and our increased 2025 guidance, along with a detailed presentation available on our website. We'll also be filing our 10-Q later today. Before we begin, please note that today's discussion will include forward-looking statements subject to risks, assumptions and uncertainties that could cause actual results to differ materially. For more information, please refer to our earnings release and the SEC filings. We will also discuss non-GAAP financial measures, which are reconciled to GAAP measures in the earnings release. With that, let me turn it over to Chris. Christopher Kubasik: Thank you, Dan, and good morning. Our position as a leading defense innovator has never been stronger. The pace of change across the ecosystem is accelerating, and we're transforming to respond with speed and agility. Our purpose-built portfolio sits at the center of a mission-critical modernization efforts, supporting war fighters across every domain for the U.S. and its allies. As the Department of War has made clear, the nation needs to transform its acquisition processes to enable an innovative, fast-moving industrial base. The goal is to shorten decision cycles, eliminate bureaucracy, deepen collaboration and deliver more resilient, rapidly deployable solutions to meet increasing demand. These dynamics underscore the essential role of a trusted, disruptive defense partner, and L3Harris is delivering innovation when and where it matters most. We are the company that has the scale and the speed of relevance, and the right mix between established primes and new technology entrants. We continue to execute well, staying tightly aligned with customer priorities and delivering solutions rapidly. That focus is translating into results. This quarter, we delivered double-digit organic growth, 15.9% margins, and a book-to-bill of 1.2, proof that our strategy is working. Our business growth is accelerating, and we are confident in achieving our increased 2025 guidance, exceeding our original 2026 financial framework and positioning L3Harris for durable, profitable growth well beyond 2026. We are fully aligned with the administration's priorities for developing a next-generation missile defense architecture. Our actions to date advancing our missile warning and tracking franchise, and investing ahead of demand, demonstrate that L3Harris is ready to lead. With satellites in orbit, in production and in backlog, we are building on our proven record of designing and delivering missile warning and tracking systems across multiple FDA tranches. As new contracts are awarded, we're positioned to accelerate production and integration with work on additional satellites expected to begin soon. This progress reinforces our role as a trusted proven partner in advancing the nation's layered next-generation homeland defense network. These efforts are the product of deliberate forward-looking investments when we have conviction and customer demand. We've expanded capacity across our space portfolio from Palm Bay, Florida to Fort Wayne, Indiana, strengthening our ability to execute as new missions are awarded. The foundation is in place. The teams are ready and when called upon, L3Harris will deliver with speed, precision and the resilience our nation demands. Equally important in our strength is the missile and propulsion domain. Our Aerojet Rocketdyne business continues to see exceptional demand, a reflection of both near-term restocking requirements and longer-term investments in deterrence. In particular, the demand for interceptors is exceedingly strong. We are on every major interceptor program. Standard Missile, PAC-3, FAD, as well as next-gen interceptor and glide phase interceptor. We are looking forward to continuing to work with the Department of War to address this need. We are also on critical strategic missile program such as Sentinel, as well as certain classified programs and see those growing for decades to come. This quarter, AR reached a record financial backlog of $8.3 billion, the majority of which is to support the increased demand for solid rocket motors. An example of expanded production in response to growing demand is for the PAC-3 missile, where we are increasing capacity. As the sole manufacturer of solid rocket motors for PAC-3, we understand our critical role in scaling capacity across our facilities to meet the heightened and sustained demand for both U.S. and allied customers. This is a positive first step as the nation looks to significantly increase missile production in the years ahead. Reconciliation spending is pending and awards are expected soon. Against the backdrop of the continuing government shutdown, ongoing budget challenges, and the potential for a prolonged continuing resolution, we're staying focused on what we can control. Execution and readiness. We have the right portfolio, the right leadership and the right investments in place. When funding is released, we're prepared to continue to invest and move swiftly to deliver for our customers and our nation. We agree with Treasury Secretary Bessent's push for a new wave of industrial investment. We're already executing our plan aligned with that vision. Over the past year, we've expanded our domestic manufacturing footprint in Alabama, Arkansas, Virginia, Indiana and Florida, investing in new space and solid rocket motor manufacturing capacity to meet national defense demand. We've increased capital expenditures and continue to direct a substantial portion of free cash flow towards IRAD, expansion and modernization. But to fully realize this national reindustrialization effort, what's needed now is to convert clear demand signals into multiyear contracts that give industry the confidence to invest in scale. Our facilities, workforce and supply chain are ready. And when these demand signals are formalized, we'll move immediately to the next tier of investment and capacity expansion. At the same time, we share Army Secretary Driscoll's sense of urgency around modernization. This call to win with silicon and software perfectly captures the transformation already underway across L3Harris. We're moving faster than ever, partnering with emerging technology companies, codeveloping AI-enabled mission systems, and fielding software-defined resilient communication equipment that can be updated as threats evolve. This is not a theoretical capability, or one that we need to validate in technology demos. It is proven and happening real-time in Ukraine, by our allies in the face of advanced Russian EW threats. This technology is integral to soldiers' survival and mission success. Our advantage is speed and adaptability. We combine deep mission understanding with a network of agile partners from Silicon Valley to the defense tech ecosystem. As the services modernize their acquisition process, we see that as an opportunity to expand our role as a trusted integrator of choice, delivering open, software-defined, resilient capabilities at the pace of relevance. Our approach remains balanced and disciplined. Returning capital responsibly, while reinvesting in growth infrastructure that directly supports national security. We're fully aligned with the country's reindustrialization and modernization agenda, and we're ready to deliver once that demand is formalized. With that, I'll turn it over to Ken. Kenneth Bedingfield: Thanks, Chris, and good morning, everybody. As we continue to execute on critical national security priorities, it's clear that our investments, manufacturing capacity and disciplined execution are enabling us to deliver real impact for our customers. With that momentum as our foundation, let's talk about consolidated results for the quarter. We had $6.6 billion in orders this quarter, resulting in a book-to-bill of 1.2. Revenue was $5.7 billion, reflecting strong organic growth of 10%. This growth was across all 4 segments with 2 growing double digits, and driven by higher volume on existing programs, new programs ramping, and increased international demand. Segment operating margin was 15.9%, up 20 bps. This marks our eighth consecutive quarter of sequential margin expansion, underscoring our consistent execution. Margin expansion this quarter was driven by LHX NeXt cost savings, across all 4 segments, and improved program performance. Margin was slightly offset by the impacts from the higher margin cash divestiture in Q1 '25. Non-GAAP EPS was $2.70, up 10% year-over-year. On a pension-adjusted basis, EPS was up 15%. Free cash flow was about $450 million, reflecting temporary customer-related delays in payment. We remain confident in achieving our 2025 cash flow guidance. Q4 reflects anticipated milestone-based payments and the timing of a tax refund now expected in the fourth quarter. Consistent with prior years, cash generation will be back-end weighted as we manage performance on a full year basis. Turning to our segment's third quarter results. CS delivered revenue of $1.5 billion, up 6% and driven by increased international deliveries for a resilient software-defined communication equipment and Next Generation Jammer program ramp. Operating margin increased to 26.1%. CS margin benefited from international deliveries and LHX NeXt driven cost savings. IMS revenue was $1.7 billion, up 17%, organically due to multiple ISR classified programs ramping. Operating margin was 12%, a pro forma increase of 40 bps, excluding the CAS divestiture. SAS revenue was $1.8 billion, up 7%, primarily driven by increased FAA volume in Mission Networks and higher volume in Airborne Combat Systems and space. Operating margin increased to 12.1%, reflecting improved program performance on classified development programs in space, a $20 million gain recognized in connection with monetization of legacy end-of-life assets, and LHX NeXt driven cost savings. Aerojet Rocketdyne delivered another strong quarter with organic growth of 15%, marking its second consecutive quarter of double-digit growth and record revenue. Performance was driven by higher production volumes across key missile and munitions programs and the continued ramp of new awards. This progress reflects meaningful increases in capacity and deliveries, highlighted by the Mark 72 motor, where quarterly deliveries have increased more than 400% since acquisition. Operating margin expanded 130 basis points to 12.7%, driven by improved program performance and cost efficiencies from LHX NeXt initiatives. Now let me turn it back to Chris. Christopher Kubasik: Thanks, Ken. We are continuing to gain momentum, and this quarter underscores the strength of our long-term strategy and portfolio. A prime example is the $2.2 billion award from South Korea secured shortly after the quarter close. It delivered a fleet of next-generation airborne early warning business jets using the Bombardier Global 6500 airplane. This landmark international award is significant not only for its scale, but also because it reinforces our position as the world's premier integrator of missionized business jets with more than 100 aircraft delivered across multiple platforms. L3Harris is platform-agnostic, having successfully partnered with multiple OEMs, including Gulfstream, Bombardier and Dassault. We are the world's leading mission system integrator with the ability to combine advanced radar, secured communications and electronic warfare, coupled with our deep civil and military aviation certification pedigree. More than a single contract, this win lays the foundation for a long-term franchise with opportunities for sustainment, upgrade missionized variants worldwide. While it will be reflected in our fourth quarter bookings, it also signals the strong and sustained global demand for our capabilities. Furthering our missionization franchise in August, L3Harris and Joby Aviation announced an agreement to explore a new aircraft class for defense applications. We are rapidly evolving from concepts to physical hardware in direct support of the U.S. Army's acquisition strategy, with ground testing of the prototype hybrid aircraft already underway in preparation for a 2026 demonstration. We also secured award to provide Poland with our Viper Shield electronic warfare system for the country's F-16 aircraft upgrade program. This selection demonstrates the growing international demand for our advanced EW capabilities and strengthens our position across European defense market where this product suite has been selected by 8 countries. It's another clear example of how our innovation and ability to scale continue to differentiate L3Harris as a trusted partner to U.S. allies. Earlier this month, we announced our award supporting NGC2, the NGC2 Manpack, the latest evolution of the Army's software-defined radio platform, delivers high data throughput and multiple transport options, ensuring resilience and interoperability across NATO and Homeland Security Networks. Our expertise is critical to this effort. By winning this award, we have an important stake in shaping the communication systems architecture. Together, these and other recent wins, both domestic and international, demonstrate the breadth and competitiveness of our portfolio. They validate the strength of our strategy, the discipline of our execution, and our ability to convert technology leadership into high-value programs that deliver profitable growth. Of course, winning new business is only part of the equation. Execution is what ultimately drives value for our customers. A great example is the successful launch of the Navigation Technology Satellite 3. NTS-3 is an experimental navigation satellite designed to test advancements beyond today's GPS system. This milestone underscores our ability to deliver complex high-stake systems on time and on budget. Programs like NTS-3 reinforce the confidence our customers place in us and the pride our employees take in delivering for them. One of the key enablers of that execution excellence is our Program Digital Cockpit, a one-of-the-kind innovative, integrated enterprise-wide program management platform built on Palantir's foundry infrastructure. The Program Digital Cockpit aggregates data from hundreds of sources across L3Harris' complex enterprise, providing program teams with real-time access to their most critical metrics. By leveraging automation and artificial intelligence, the platform accelerates decision-making, strengthens program execution and drives favorable program performance. Launched in March of this year, we have completed the pilot phase and are now onboarding our first tranche of programs across all segments through the end of 2025. Our strategic partnership with Palantir continues to deliver value and the Program Digital Cockpit is a clear example of how we're investing in tools that improve execution and outcomes for our customers. Back to you, Ken. Kenneth Bedingfield: Thanks, Chris. Turning to guidance updates for 2025. For the total company, we are increasing revenue guidance to $22 billion, representing full year organic growth of 6%. Just a quick comment on 2026. We'll update guidance in January, but we do expect sales for '26 to exceed our current financial framework. We are increasing segment operating margin guidance to high 15%, driven by ongoing LHX NeXt cost savings and continued confidence in strong program execution. We now expect non-GAAP EPS in the range of $10.50 to $10.70 per share. We are reiterating our free cash flow guidance of $2.65 billion. While cash generation through the third quarter was softer than expected, we remain confident in the government reopening and delivering our full year cash flow commitments. We expect strong fourth quarter cash performance above prior years. At the segment level, we are increasing our CS revenue guidance to $5.7 billion driven by continued strong international demand, while reaffirming our operating margin of about 25%. IMS revenue is now expected to be approximately $6.5 billion, driven by strong demand and performance in ISR. We are increasing operating margin to the low to mid-12% range. We are increasing our Aerojet Rocketdyne revenue guidance to $2.8 billion to $2.9 billion, supported by higher production volumes with operating margins expected to remain in the mid-12% range. And we are reaffirming SAS prior guidance. With that, I'll turn it back to Chris. Christopher Kubasik: At the start of the year, there were understandable questions about what success would look like for the defense industry and for L3Harris, especially in such a dynamic environment. As we close the third quarter, that conversation has shifted. The focus is now on potential upside and a trajectory that extends well past our 2026 financial framework. That change in tone reflects our disciplined execution and the strength of our strategy. We are turning opportunity into tangible results, both domestically and internationally, and we expect more to come as reconciliation and missile defense-related funding begins to flow. Across the company, our leaders and employees understand the high stakes as we are transforming and acting with urgency. Our strategy is deliberate, well calibrated and delivering measurable results. It strengthens our position in the global defense market, and drives the kind of sustained growth and value creation that underpins our long-term vision for L3Harris. Tiffany, let's open up the line for questions. Operator: [Operator Instructions] Our first question today comes from the line of Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Congrats guys on a good quarter. Maybe just I could start off on ISR, Chris, because I think that's the segment that's been improving the most. If you could just talk about some of your recent wins in South Korea being put in, ramp on multiple classified ISR programs you saw in the quarter. How do we think about the outlook for that segment and just runway for the business given capacity? Christopher Kubasik: Thanks, Sheila. Yes, ISR, which is part of our IMS segment, historically, was having some challenges. We made significant changes at the leadership level and we redoubled our focus on execution, and we're finally seeing it pay off. The backlog has doubled in 12 months, and the outlook is very positive. You mentioned the classified growth on multiple programs. We see that for the foreseeable future, especially as the threats continue to grow. Armed Overwatch a program that we've had for several years, we're starting to see some interest for that program internationally. We recently announced the C-130 up award in Morocco. So that line of business is gaining momentum. In Canada, there's a Strategic Tanker award that's competitive that's coming out here in the near future. We feel confident about our position there. Our business in Canada has also been selected for the F-35 depot support. And we're excited about the opportunity with Joby. We are platform-agnostic. We've historically focused on manned aircraft, but I think there could be some pretty interesting opportunities in the short term with the Army partnering with another new entrants. So I feel really good about the business. The future looks bright and the team is executing, and that leads to more business. Operator: Our next question comes from the line of Ron Epstein with Bank of America. Please go ahead. Ronald Epstein: So just -- maybe a bigger picture kind of management question. So when you have an organization that's kind of the size of yours and the scope of yours, big company, and you're working with smaller companies that tend to be -- have the advantages are just being small, right? They can kind of move fast, make decisions quickly, that sort of thing. How do you manage that, that when you're working with them, A, your organization can maybe benefit from their nimbleness, but your organization isn't stifling their nimbleness because by the nature of just being a big organization? That makes sense? Christopher Kubasik: Yes, it does make sense, and it's a great question. And I think we're unique in what we've been focusing on over the last several years is empowering the leadership team, eliminating bureaucracy, streamlining the layers and levels, and really getting that sense of entrepreneurship. I think it goes back several years with the Shield Capital where we currently own 10s -- I think, in excess of 40 different companies, or parts of those companies. And that really helped with the culture change because we usually have 24 or 48 hours to turn it around. So we feel we're pretty agile. I interact and my segment presidents interact with the founders, CEOs, Chairman. We put teams together and we work rather quickly. So we've been pretty successful. And the interesting part is a fair amount of these new entrants and technology companies actually reach out to us to initiate the conversation. So I feel like we're the company of choice. And the list goes on from Shield AI to Anduril to Amazon Kuiper, Palantir, the 40 or 50 Shield capital companies. And it's working. It's part of the DNA. And I would admit it was a cultural change years ago, but people get excited and like to go fast and see the results. So far so good and maybe even better than I would have expected. Operator: Our next question comes from the line of Myles Walton with Wolfe Research. Myles Walton: Chris, I was wondering if you could touch on your outlook for the Golden Dome space-based competitions that you're looking at from HBTSS to space-based Interceptor to Tranche 2 Tracking Layer, and sort of maybe cadence those over the course of the year? And then the second part of it is on the SAS business itself and the underlying margin performance. I know you've struggled a bit with some of the earlier programs. Are we through the woods on those programs? And should we take the fourth quarter margin rate as an exit rate into next year? Christopher Kubasik: Yes. Let me start with your first question, and then I'll ask Ken to comment, specifically on the margins. As we've said for several years, we feel very confident in our capabilities for, what was formerly known as Golden Dome, the missile defense architecture. HBTSS as we said, was a success, and we're waiting for the government to reopen. And I'm confident that there's a scenario where maybe we could get an award, or a competition here in the fourth quarter. SDA Tranche 3. In that particular one, we submitted -- the RFP came out in April. There have been many back and forth modifications. We turned in again, the best and final in early October. And there's another example where I think we need the government to open up and get back to work and make an award. You've heard us say before, we've been on all 3 tranches. We're performing well. We think our past performance puts us in a position to win that program. I was just at our new factory yesterday. We've already moved the Tranche 1 and Tranche 2 satellites in state-of-the-art factory of the future. We have the room, we have the equipment and the tools, and we're ready to go. So we feel really good about the space business. We've kind of held that out as the symbol of our trusted disruptor strategy, opening new markets, clearly some growing pains as we've grown from a supplier, or a subcontractor, to a prime. But we have the tools, the team and feel really good about what we've done so far and what we're going to do in the future. Ken? Kenneth Bedingfield: Sure. Yes. On the second part of the question with respect to SAS margin performance. I would just say, as we've talked about the couple of the programs that we've seen some performance challenges on through the year. Those programs are maturing. I think as we've mentioned, nearing completion on some of those legacy programs. Importantly, they are opening up new continued award opportunities for us. So from an SAS margin performance perspective, I think we expect some stability looking into 2026. I don't know that I would want to give segment guidance on what SAS margin would be for '26 at this point. But I do feel good that I think the performance is really starting to settle down, obviously, until we get some of the final integration stages behind us on a few of these programs. You don't want to declare victory, but I think we're making good progress and I look forward to continued solid performance in '26. Operator: Our next question comes from the line of Seth Seifman with JPMorgan. Seth Seifman: I wanted to ask, Ken, when we think about next year and kind of the margin expansion that you're expecting, and some of the gains that have happened this year, is that a difficult headwind to overcome for 2026? Kenneth Bedingfield: Thanks for the question, Seth. No, I don't think so. Feeling good about our program performance opportunity in '26. I think that -- look, we make sure we find ways to deliver on our commitments. First half of '25. We had a little bit of negative EACs. I think our negative EAC performance was negative in the first half of the year. We've turned that positive here in the third quarter. And I think just good solid performance on our programs, getting our net EACs turning back to positive. I think that should more than offset, which I wouldn't say it's noise in the system, but I don't think they're difficult to outgrow the gains here and there from nonstrategic product line or IP sales. Again, we're focused on what we're focused on. Really trying to grow the core areas of the business. And if there's a few things here and there, we can monetize, we do it. But I think that's, to your point, mostly going to be behind us, and now it's just going to be about performing on our programs, kind of left foot, right foot, just get it done, and I think we're in a good position to do that. Operator: Our next question comes from the line of Scott Mikus with Melius Research. Scott Mikus: Just a quick question. The administration seems to want contractors to have more skin in the game. From 2022 at least through 2024, your IRAD spend as a percentage of sales, I think, declined from 3.5% to 2.4%. So next year, should we expect that IRAD spend to step up? Christopher Kubasik: Yes. The way I look at it is we have various buckets of IRAD and -- or R&D. IRAD would be one. We have contracts, known as CRAD contractor R&D. We have our Shield capital and other strategic investments that all fuel R&D. And we focus at the -- we focus on the portfolio, where we think the market is going and we double down and invest in those areas. So I don't really look at it as a percent of revenue. We look at what the opportunities are, where we want to invest. And we've had significant investments in the past. We've opened new markets and new portfolios. And once you get that situation, you don't need to continue to invest in R&D. You moved into production, and you rely on the production contracts to deliver the product to customer needs. So it's a dialogue. We think when I look back over the last couple of years, what we've made in investments broadly, IRAD, CapEx, acquisitions, we are clearly spending the money to position this company for future growth. And I think today's results and the results year-to-date and even last year prove that it's working. Operator: Our next question comes from the line of Michael Ciarmoli with Truist Securities. Michael Ciarmoli: Chris, maybe just thinking about Golden Dome and space-based interceptors. Is this going to be your first foray into potentially competing as a prime for missiles? I know way back at the Investor Day after the Aerojet acquisition, you've got a lot of that in-house capability. But should we start thinking about you guys going after some of these newer programs as a prime, just given the amount of missile demand, new low-cost missiles and capacity that's needed out there? Christopher Kubasik: Yes, I'll just make a few comments and ask Ken to fill in the gaps here. But we stick with our approach of looking at the opportunity and seeing where the best value is for our customers and shareholders, whether that's priming, subbing or being a merchant supplier. The demand that we have at Aerojet Rocketdyne is significant, as I mentioned, record financial backlog, huge opportunities that you hear about every day to increase production. So we have to maybe to the earlier question, keep the company focused, where can we move the needle, where our capabilities best aligned? But we spend a lot of time talking about SBI. So Ken, do you want to update? Kenneth Bedingfield: Yes. I would just add that from a kind of market perspective at Aerojet Rocketdyne, we have significant opportunity in front of us to Chris' point. Not only in the solid rocket motor portfolio, but we've got significant backlog in the space propulsion area as well. And we're currently significantly focused on delivering the capacity that is needed by our customers. And right now, kind of that's job #1 and #2, we will certainly be evaluating how we best, to Chris' point, are positioned across space-based interceptors, and where we partner, and who we partner with and how we look at that opportunity. But at the current time, there is significant demand for our product. We've got -- we've probably seen a number of groundbreakings, ribbon cuttings, factories, production lines accelerating opening. And that's what we're focused on at the moment. But as we look forward, we'll certainly be continuing to firm up those partnerships around space-based interceptors. Operator: Our next question comes from the line of Noah Poponak with Goldman Sachs. Noah Poponak: I wondered if you guys could talk more about growth at Aerojet Rocketdyne over the medium term. Chris, you mentioned where the backlog is now, I'm curious how many years of backlog you want to keep? And I guess the guidance for this year, midpoint would land you around 10% growth for the year. Can that actually -- can you actually grow faster than that over the medium term, just when we speak to your customers, the types of change in production rates that they're talking about are pretty significant? And then last piece of that, Chris, what are you expecting for new competition in solid rocket motors? Christopher Kubasik: Yes. Maybe I'll go first. Look, the opportunities at Aerojet Rocketdyne and the revenue growth that we're seeing is significantly more than the business case that we evaluated a couple of years ago when we made the acquisition. There's clearly a huge demand for these existing programs in solid rocket motors. It's all about capacity. That's always been the challenge. Ken will give you a little more detail. We are opening facilities. I was just in Camden last week. We're building new buildings. We're getting new equipment. The lead time on this sometimes is 12 to 18 months. We're investing. We're talking to the customer to formalize, as I said, the demand signal into actual multiyear contracts, but we feel really good about our portfolio. As I said, we're on every major interceptor program. And the advancements we've made with some of the tools and the technology is going to allow us to significantly increase production in the years ahead. We're going as fast as we can. I think in many programs, we're ahead of contractual commitments. So we're going to get as many orders as we can. And we're going to deliver as quick as we can to keep that financial backlog wherever it happens to fall. But I think the next couple of years are critical as we continue to invest, working closely with the OEMs and the Department of War to prioritize which programs they want, which investments they want? I think in Camden, we have over 150 buildings. We could probably build another 50. We have more than enough land and we just need to formalize the actual contractual arrangements to accelerate. Ken. Kenneth Bedingfield: Yes. I'll just add. I think, Noah, it's important to remember that Aerojet Rocketdyne is not just solid rocket motors for missiles. It's also got the space propulsion business, as well as a very well-positioned in-space propulsion business that I think is poised for growth also as we look '26 and forward. So confident that we can grow Aerojet Rocketdyne for the foreseeable future at double digits. I think that, that is absolutely something that we can do. I think if you look at Missile solutions, so the solid rocket motor business today, I think we said 17% growth in the second quarter, and it's a solid mid-teens this quarter as well. And again, if you look at the entire portfolio, I think it's a solid double-digit grower. We've certainly been leaning on, I would say, maybe a little bit of ingenuity and kind of student body left in terms of how we've been driving the capacity expansion at the moment. But to Chris' point, as some of the new production lines, and new facilities come online, it'll be a much kind of smoother delivery of that continued capacity. So we're very satisfied with the acquisition, very, very satisfied with how it's going at the moment and look forward to continued growing business. And then importantly, delivering product to our customers so that they can get it into the war fighters' hands. Operator: Our next question comes from the line of Peter Arment with Baird. Peter Arment: Nice results. Chris, you gave some comments about the international business, continue to see strong NATO support. Wonder if you could just give us an update on kind of whether you're seeing more teaming operations. I know that there's a lot of talk around they want countries in Europe want their own indigenous capabilities. Just how are you able to kind of execute that and still expand your share internationally? Christopher Kubasik: Yes. Thanks, Peter. Clearly, the international budgets have increased significantly. So those countries are working on getting the best capability they can for their war fighters, resilient interoperability are critical where a lot of our portfolio aligns with that demand, and then also supporting their indigenous industrial base. We've been partnering around the globe for decades. We have local production capabilities in all of the key countries where it makes business sense. And again, going back to our philosophy, of being indifferent as to whether it's a prime sub merchant supply relationship, we haven't seen this to be a challenge at all. It's being open to the dialogue and creativity, and the leadership team has been traveling the globe pretty much every week for the last several months. So huge opportunities we see in Europe. We have a segment President going over there Saturday for a week or so. I just came back from the Mid-East and another one is in Korea as we speak. So we're all over the globe. I think we're the partner of choice because of our receptivity in either technology transfer, expanding the footprint, executing and delivering on our offset obligation. So we're about 22% international and we're headed towards 25% of our base. So a good opportunity. Operator: Our next question comes from the line of Gavin Parsons with UBS. Gavin Parsons: What's a good baseline for the Aerojet margin? I mean, do you still have legacy contracts that are dragging on that and better capacity utilization as you go forward? Or is that strong growth outlook that you talked about are going to kind of weigh on the margin? Kenneth Bedingfield: Yes. I don't necessarily expect that strong growth outlook will weigh on the margin. We're still working through some of the legacy contracts. It is a long-cycle business, takes, sometimes 18, 24 months to deliver on a contract. So yes, we are absolutely working through some of the legacy production. But we are transitioning into the kind of the newer signed contracts. But I'll remind you, Aerojet is a portfolio not unlike L3Harris overall. And we have important development programs that are in the mix as well. And that's, I think, the biggest piece that kind of keeps that margin in the mid-12s, hopefully ramping as we look forward, '26 and beyond. But it's got important development cost type programs like a Next Generation Interceptor, like Sentinel Glide Phase Interceptor, really that seed corn for the future production and the future growth. And I think that portfolio kind of keeps it, I think, a very solid margin rate. And importantly, as we get these new lease signed contracts in, really starting to deliver kind of the economic margins that are important for us to be able to fund and support the investments that are needed to drive this capacity expansion that we see in order to be able to address the significant demand for the product. So I think that's the way to think about it. But Aerojet Rocketdyne is really performing very well on the programs. I think across the board between deliveries for our customers between delivering financial results, and not just capacity delivery, but also quality product safely, that's critically important as well. Operator: Our next question comes from the line of Kristine Liwag with Morgan Stanley. Kristine Liwag: I guess, Chris, you had called out in your prepared remarks that there's very strong demand signals and your strong book-to-bill actually reflects some of this. But it seems like there's still a schism between what these signals actually indicate, and what should have been a much higher contract award environment. Can you talk more about what you're seeing in that gap? What would need to happen for that to close? Is this more on the government shutdown? Is it clarity regarding government priorities? Is it visibility into the supply chain? It would just be really helpful to understand where we could see another acceleration of what's already a strong book-to-bill environment? Christopher Kubasik: Yes, Kristine, good to hear from you. We missed that quarter end point with Korea, that would have got us a 1.6 book-to-bill. We're really doing a great job on the front end of the business over the last year or 2. So I'm more than satisfied with our win rates and our results in head-to-head competition. But the government shutdown is clearly the challenge. I mean, it's disappointing where we are. And we need Congress to get together and resolve this situation. As I look at it, there's clearly incongruency within the government. The DOW wants to go fast. They meet with us all the time. We got to go quicker, and then Congress can't fund the DOW. So we're kind of stuck between those 2 situations. So it's always baffling to me that these issues are unique to the U.S. because we all know our adversaries don't have this same challenge. Anyway, notwithstanding that, I like our portfolio. The team is performing. We're ready to move with speed. But in the meantime, the shutdown is definitely impacting the timing of awards, and we have a handful that we just need the government to open up and have the decisions made. I think some of our export licenses for international are being slowed down and the cash collections are impacted. People are working with DFAST, but I think with all the headcount reductions and such, there's just more work than there is people to execute. So the government needs to open. We're a government contractor. 80% of our customer isn't coming to work. It's a challenge. And we're assuming they open in November, and then we'll have a busy December to catch up on everything. Operator: Our next question comes from the line of Richard Safran with Seaport Research. Richard Safran: First, Chris, it went quickly, but I think you mentioned something about the need for multiyear contracts in your opening remarks. And I have a 2-part question on that. First, if you consider the contracting environment and because you've been talking about like you're constantly meeting with the customers and stuff. Is this something that the government seems amenable to? Because it seems it's been reluctant to execute multiyears in the past. And second part is multiyears typically allow you to get better pricing from suppliers. And then at least at the very least share that savings with the government. So is this change in the contracting environment might impact margins? If so, how do you think that might impact? Christopher Kubasik: No, great question. It was a sentence that I slid in there. And this deals with capacity and the need to significantly ramp up, and in some cases double, triple, quadruple production. I think I have been consistent for years that the challenge in the defense industrial base, which is why we need to reinvigorate manufacturing in America is there just is not enough manufacturing capability in the U.S. for defense products. We need more buildings, we need more equipment, and these are substantial investments, which we are willing to make. But it's a simple business case. Ken and I are not going to spend significant amount of capital without a commitment in the form of a multiyear contract from the government. So you're right. It does give the supply chain more visibility and even allows them the potential to make investments. But if we're going to double, triple or quadruple production on certain programs, let's sign up to a 5-year, 7-year multiyear contract. And I think the entire ecosystem will look at making the investments and amortizing the cost of those investments in the form of depreciation into the products, getting the benefit of increased production and kind of see where the money lies out. But I think we're getting close. And to your first question, I think the customers absolutely 110% behind this concept. What happened in the past in all these prior administrations and decisions are really irrelevant. And I like the new administration. They bring in a fresh -- breath of fresh air, and they kind of say, what do we need to do? They're business people, we're business people. We're in regular conversations, and we just need to get pencil to paper here and move to the next step. So I'm optimistic about the future, but that's clearly what needs to happen. And I don't see why we wouldn't get to that point. But Ken, you've been in those meetings with me. What do you think? Kenneth Bedingfield: Yes. I'll just add that, Rich, to your question about multiyears, I think this is a little different than what kind of traditional multiyears. This isn't for nuclear submarines or aircraft carriers. We're talking about largely missile production for which we produce the solid rocket motors and other components. And in that business, there's a pretty dynamic portfolio of products. And unfortunately, you can't just one morning produce PAC-3 motors and then flip a switch and produce standard missile motors in the afternoon. There's pretty specific production line, and we are working to kind of build some amount of common production and common capacity early in the process. But it takes some time. And so as we invest, as we work with the suppliers, as we work to modernize and open new facilities and production lines, we really need to know what are we producing. Which products, at which rate and to what delivery schedule? And that's really what we're trying to firm up to is really aligning our investments, aligning our suppliers and their investments to our customers' needs and delivery dates so that we're all on the same page. Kind of hand in glove so to speak, in delivering what needs to occur. And so that's what we're really trying to get down to is firming up the investments rather than kind of a more traditional platform multiyear award. Daniel Gittsovich: Tiffany, let's take the last question. Operator: Our last question comes from the line of Ron Epstein with Bank of America. Ronald Epstein: I just wanted to follow up on some of the NASA work you're doing. There's talk of kind of restructuring some of the civil NASA work. And what kind of opportunity does that present for you? Kenneth Bedingfield: Thanks, Ron. Yes. From our perspective, NASA certainly is an important customer for us, in particular, at Aerojet Rocketdyne. The RS-25 engines for the SLS system is the biggest component of our space propulsion business. We're excited that the government has provided some additional funding for SLS as a part of reconciliation and firmed up through Flight 5. We're producing engines through, I think, it's through 9 systems there. And I think supporting not only NASA, but the government in terms of not just defense but also space exploration, and importantly, getting back to the moon and ultimately to Mars, I think, has not just exploration value but also strategic value. And we're proud to be a partner on that. And we expect it to be a solid part of that space propulsion business for a number of years to come. I think we've got multiple years of backlog in there for production of RS-25 engines, as well as other parts of the SLS program portfolio. Christopher Kubasik: All right. Let me wrap it up. As we close today's call, I want to thank all of our L3Harris employees for their commitment, resilience and passion for excellence. In today's environment, changing dynamics and challenges contest even the strongest organizations. Our teams aren't just adapting, they are embracing change while anticipating planning and executing with a focus on controlling what they can control, while I and my senior team engage with the customers globally as the evolving budgetary and threat dynamics continue. As a direct result of their dedication and readiness, we're delivering for our customers when and how it matters most. Thank you all for joining us today. We appreciate your continued interest in L3Harris, and we look forward to future discussions. Have a great rest of the day. Thank you.
Operator: Hello, and welcome to the X-FAB Third Quarter 2025 Results Conference Call. My name is George. I'll be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions]. I'd like to hand the call over to your host, Mr. Rudi De Winter, CEO, to begin this conference. Please go ahead, sir. Rudi De Winter: Thank you. Welcome, everyone. In the conference call today, we also have Alba Morganti, CFO. In the third quarter of 2025, we recorded revenues of $229 million, up 11% year-on-year and 6% quarter-on-quarter, which is well above the guidance of $215 million to $225 million. We also progressed well in our core markets: automotive, industrial, medical with a revenue of $216 million, up 14% year-on-year and 5% quarter-on-quarter. Our core business now represents a share of 94% of the total revenue. Now breaking it down by end markets. In the third quarter, the automotive revenue was $147 million, up 1% year-on-year and 2% quarter-on-quarter. The third quarter industrial revenue was $48 million, up 51% year-on-year and 1% sequentially, reflecting the overall recovery of our industrial end markets. The gradual recovery of the silicon carbide business contributed to this positive evolution. Now for the medical business, the revenue in the third quarter hit a record high of $21 million, up 74% year-on-year and 40% quarter-on-quarter. The growth was mainly driven by contactless temperature sensor, DNA sequencing and echography applications that altogether did very well in the past quarter. Now looking at it by technology. In the third quarter, the CMOS revenue recorded a growth of 10% year-on-year and 4% quarter-on-quarter, mainly due to the extra capacity that came online for the 180-nanometer BCD-on-SOI and 35-nanometer CMOS node demand was weaker. Microsystems revenue was up 27% year-on-year and 9% sequentially. This is based on a broad set of customer-specific microsystem technologies that we co-created with our customers. Also, demand for new developments in the micro systems remain strong, and this is an area where we will continue to see above-average growth. Our silicon carbide business continued to recover and revenue grew strongly by 30% year-on-year and 20% -- 21% quarter-on-quarter. The number of wafers produced in the third quarter more than doubled compared to a year ago. The revenue did not follow the same way due to the product mix and also the ratio of consigned substrates that was much, much higher last quarter than a year ago. The positive trend in the evolution of our silicon carbide business is underpinned by increasing bookings attributed to sustained demand from data center, electric vehicles and renewable energy applications. We also see good traction on our new technology platforms that we released at the end of 2024. Many customers are developing their new generation products based on this platform that will give improved performance and lower system cost. The fact that we offer full supply chain for silicon carbide in the U.S. is well perceived by our U.S. customers that are designing in products for high value-added assets such as data centers, industrial equipment and electric energy systems. Quarterly prototyping for the past quarter was $20 million, down 16% year-on-year and 6% down quarter-on-quarter. The order intake for the third quarter amounted to $163 million, down 25% year-on-year and down 21% compared to the previous quarter. The booking in the industrial segment was good. The weakness is primarily due to inventory corrections by automotive customers as well as broader macroeconomic uncertainties resulting from geopolitical tensions and trade disputes. These factors have led to a more cautious ordering patterns while customers also take advantage of shorter cycle times, placing orders later than usual and with reduced lead time. As a result, feasibility is still restricted. The backlog for the third quarter came in at $347 million compared to $413 million at the end of the previous quarter. Let's now move to the operations update. In September, we had the inauguration of the new cleanroom in Malaysia, which will increase the site's manufacturing capacity from 30,000 to 40,000 wafer starts per month. Production at the new facility is being scaled up progressively with the full increase in capacity anticipated by the fourth quarter of 2026. The expansion will effectively double our capacity for the popular 180-nanometer BCD-on-SOI technology, which is particularly suited for applications such as smart motor drivers various drivers such as piezo actuators, LED drivers and battery management systems. The recovery of the silicon carbide business is supported by the existing capacity at our Texas facility. The current installed capacity will enable us to do more than double the wafer starts. The capital expenditure for the third quarter was $23 million, bringing total year-to-date CapEx to $179 million, and the full year capital expenditure is projected to be less than $250 million. Let me now pass the word to Alba for the financials. Alba Morganti: Thank you, Rudi. Good evening, ladies and gentlemen. We will now go through the financial update. I would like to start this section by highlighting that the third quarter, we succeeded in increasing our sales by 6% quarter-on-quarter, which were the highest since almost 2 years, totalizing USD 228.6 million and which is well above the guided $215 million to $225 million. Our EBITDA grew by 4% quarter-on-quarter and 7% year-on-year, being the highest this year. Our EBIT was almost $24 million, down 5% year-on-year, but increasing by 10% if we compare it to Q3 last year. Third quarter EBITDA was almost $354 million with an EBITDA margin of 23.6%. If we exclude the impact from revenues recognized over time, the EBITDA margin would have been 24.2%, within the guided range of 22.5% to 25.5%. Our profitability remains unaffected by exchange rate fluctuations as we continue to be naturally hedged. At a constant U.S. dollar euro exchange rate of 1.10 as experienced in the previous year's quarter, the EBITDA margin would have been unchanged at 23.6%. In the third quarter, we reported a financial result of minus $5.6 million, mainly due to interest result of $4.3 million and realized foreign exchange losses arising from the reevaluation of the euro-denominated debt amounted to $800,000, but of course, it's a noncash item. Cash and cash equivalents at the end of the third quarter amounted to $174.2 million, which means an increase of $16.5 million compared to the previous quarter while net debt decreased by $21.1 million quarter-on-quarter. Despite the peak of CapEx expenditures payments in the first half of '25, our financial situations remain solid. As anticipated and now visible, our CapEx are now significantly decreasing which translates into an improvement of our net debt position, which trend is inversely for the first time since a while. Especially in the current context of uncertainties and geopolitical tensions, it's important to keep our financials strong. And to conclude this financial section, I would like to share our next quarter's guidance. Our revenue is expected to come in within the range of $215 million to $225 million with an EBITDA margin in the range of 22.5% and 25.5%. This corresponds to a full year revenue in the range of $863 million to $873 million for the full year 2025. This guidance is based on an average exchange rate of USD 117 to euro, and does not take into account the impact of the IFRS 15. And now I would like to give the back -- the word back to Rudi. Rudi De Winter: Thank you, Alba. I'm glad about the solid increase in revenue for the third consecutive quarter amid a challenging macroeconomic environment. This is a significant interest or there is significant interest in our specialty technologies. Our silicon carbide business has made measurable progress with growing design activity on our latest silicon carbide technology platform. Additionally, our microsystems division continues to advance with collaborative co-creation projects enhancing our growth pipeline, while visibly continues to be limited, I'm confident in X-FAB position that supports sustained long-term business expense. Besides the third quarter results, I announced today that I will be passing on the CEO role to Damien Macq, today, COO; on the 6th of February 2026 after the full year results call. Damian is very well prepared and the Board of Directors and myself have full trust. He is the right person to lead X-FAB. I will make sure there is a smooth transition. I will be supporting him in my role as a member of the Board and of course, further future. Operator, we are now ready for taking questions. Operator: [Operator Instructions]. Our first question this afternoon or this evening, will be coming from Mr. Michael Roeg of Degroof Petercam. Michael Roeg: Yes, Well, first of all, congratulations on taking the next step and well, spending a bit more time in the Board of Directors, looking down on your successor and guiding him. But of course, I will leave you with a couple of tough questions. So the first one, bookings have come down strongly, and prototyping sales has also come down based on the chart in your PowerPoint presentation. So should we expect a slow start in 2026? Rudi De Winter: Well, first of all, the prototyping is something that fluctuates. There are milestones on projects and so forth that -- so I think the prototyping is at a good level. Remember, this is discussed from 0 every quarter, and it's all about new contracts and new activities. So it's still a substantial business development activity ongoing, so on. Quite happy about that. The production bookings, they indeed are weak, that we still have quite a good backlog. That represents roughly almost to our 2 quarters. So it's a bit less -- it is, of course, too early to say, but it's a sign of weakness in the market. So our guidance for the Q4 is still good. It's in the range of where we were now Beyond that, visibility is low. And yes, so we could see maybe a weaker start from next year. Michael Roeg: Okay. And is there a decent amount of backlog for way deep into 2026? Or is most of it typically scheduled for Q1, Q2? Rudi De Winter: This backlog is -- so customers, they order now typically, when they need the goods. So typically, all this backlog is mostly to execute on deliveries in the quarters to come. Michael Roeg: Okay. That's reassuring at least. Then I have a question. If I compare your sales in Q3 with those of Q2, then they've grown by $13 million, yet the sequential trend in gross profit is minus $2 million. And this is not explained by depreciation and amortization because that was the same in the 2 quarters. So something was in your cost of sales, something strange. Can you explain that? Rudi De Winter: Yes, there is an effect that -- of inventory. So the work in progress, I mentioned we have shorter cycle times because we have improved capacity. The cycle times come down in the -- in the fab that is very much appreciated by our customers, so we can deliver faster. But as a result, the work in progress is lower and that has -- in the quarters where we decreased this WIP as a negative effect on the profitability. Michael Roeg: Is that something that only hits your P&L wants to the lower work in progress level and then if it remains at that level in Q4, and then you will not have that cushion? Rudi De Winter: Yes. yes. So this is -- this is an effect that we have when the WIP -- so this is a typical effect when the activity in the factory decreases or the cycle times as short and the valuation of the WIP decreases when the valuation is -- when we come back to a steady state, then this effect is not there. But you can also have the opposite effect if bookings go up, loading in the fab goes up, you have the opposite effect where the revenue is not yet there, but the WIP increases and the WIP is valued and therefore, it has a positive effect -- could have a positive effect on the margins. Michael Roeg: And if I do the calculations, it's around $4.5 million to $5 million impact in the quarter. This is above average, I guess, normal trends, correct? Rudi De Winter: Yes. So this is -- if we look at the full year, it's even bigger. So we also have inventory or WIP corrections in the previous quarter. I think it is coming to a stabilization in -- by the end of the year. Michael Roeg: Okay. Then my next question is about Texas. You mentioned in the press release that there will be capacity expansion in 2026 towards the end of the year. How much CapEx is there involved with this particular expansion program? Rudi De Winter: There is no CapEx involved. What is mentioned there that these equipments that are already delivered and paid for that will be qualified and will be added to the operating and the production lines. Michael Roeg: Okay. So this is part of the existing program that has just been completed. So there is no additional expansion program currently planned? Rudi De Winter: For now, there is no expansion with additional cash out planned. Michael Roeg: Okay. And during the Capital Markets Day, you mentioned that there would be discussions about further automation of 4 of the 6 fabs. Is there anything that came out of that or a midterm plan for that? Rudi De Winter: Well, this is an ongoing process that we're working on more automation. This is mostly labor and IT and that kind of thanks to a lesser extent, related to CapEx. There might be some CapEx that is minus compared to the equipment investments. Michael Roeg: Okay. Then my final question, a very quick one. There was $2 million of other income in the OpEx. Can you explain what that was for? Rudi De Winter: There was a sale of $2 million. Operator: Next question coming from Emmanuel Matot of ODDO BHF. Emmanuel Matot: I have 3 questions. First, already, could you comment about your decision to step down from your role of CEO, what are the motivation behind that very important decision for you? Second, too early to guide for next year, for sure. But with the churn you have and the ramp-up of significant production capacities, are you confident at this stage for further sales growth next year? And third, I wanted to know if you compete in some spaces with GlobalFoundries because it has just announced a significant capacity expansion in Germany, and I wanted to have your view on that. Rudi De Winter: Yes. So first of all, with respect to the organizational change and me stepping down as CEO. So as we as a manager or as the founders of the company, we always, yes, have in mind that, yes, it's important to grow succession and then move on. I think while the team is very well prepared and Damien Macq is ready to take that role in my view. And therefore, I decided or started thinking about this a while ago. And I think now it's the right moment to for him to take over. And I think this is very well placed to do it. Second question, so I didn't -- now the question was GlobalFoundries. It was a question on GlobalFoundries Dresden. So GlobalFoundries Dresden, they're in different -- I don't see this as a competition to X-FAB. They're maybe also doing automotive first, but that's more into ECU type processors and FD SOI for further applications. It's a different type of SOI. So X-FAB is also doing a lot of SOI and we are very successful in SOI, but it's high voltage SOI. That's different characteristics and FD SOI is more used for lower voltage systems and lower power applications. And the third question was? Emmanuel Matot: It's about the visibility you have now, which seems to be limited, but also we can expect significant production capacity next year on products, you are fully loaded. So growth next year or Gary, you don't want to comment at all. Rudi De Winter: Well, today, the capacity, we are not in allocation anymore as compared to a year ago. So the revenue, the output is mainly driven by the demand in the market that we are following 1:1 now. And so if demand is there, we'll be growing if -- so we will follow the demand. So we're able to -- if demand is there, we're able to anticipate only take advantage and grow. If it's not there, of course. So we are now dependent on the market and, of course, all the new projects that we are in the pipeline, and we gradually rolling out. Operator: We'll now move to Robert Sanders of Deutsche Bank. Robert Sanders: Best of luck with your next role and welcome to Damian. I just had a question about Nexperia. So you're in the European automotive supply chain. There's been a lot of warnings around line stoppages from both European and non-European OEMs talking about significant risk weeks of inventory. Can you just give us your take on how severe and serious the situation is based on what you can pick up? And then I have a few follow-up questions. Rudi De Winter: Yes. I'll following this, of course, also closely, but I also -- most of it is what I also pick up in the press. So what I know is that Nexperia is indeed in it's more -- seems like low tech components, but they're very good at it, and they're producing that in very high quantities. And so they're having some areas of significant market share. And I think for most of those components, there are replacements, but ask the question whether these -- if there are shortages, whether the replacements can be ramped up quickly enough. I have no to my knowledge, it is not yet line stops, but I cannot tell how far it is of. Robert Sanders: Yes. I mean, based on your experience, I mean, what they do is they do small signal logic components like diodes and BJTs and stuff like that, but they are used in like body, comfort, lighting, BMS, interfaces, sensors, safety, just a lot of low-value components. As you say, they have very high market share. I mean based on what you've seen in your previous job, I assume you would be looking at 6 to 9 months to requalify on a competitor. Is that the sort of time line? Rudi De Winter: Well, I think that also, if you look back at the COVID situation, normal -- the market is normal, then all these things take time. However, if there is a threatening line stop things can -- things can change quickly, and there is a lot of agility and creativity. So I think it is more -- I think it's not so much a matter of qualifying it. I think there is -- most of the cases, people are very agile and flexible to move if it's really needed. But it's more a matter of the components in sufficient quantity there from alternative sources. Now I also typically see there have been cases in the past also when Sumitomo plant was blown up years ago. That was producing 50% of these particular chemicals that were absolutely needed everywhere in the semiconductor industry. We had 50% market share. But -- also there, the dynamics, the agility of the whole market, then that came in motion. And finally, it's sourced it out. So let's see how this will turn out. Robert Sanders: Right. And then just a question about China. Obviously, since we last spoke China has turned downwards. There's been production cuts at BYD and Li Auto and all these other guys, too much unsold inventory. How have you seen that manifest in your business, whether it's direct with Chinese customers or indirect through Melexis? Rudi De Winter: I think that's too early, too early to say with somewhat further in the supply chain. It's difficult. We don't have a good visibility, except that we see our bookings in the third quarter that were lower than the previous quarter, in particularly in the automotive segment a bit across the board. As I mentioned, the bookings in industrial, they were good. Yes. So it seems to be more on the automotive side, as I see the weakness. Robert Sanders: And just one last one on OpEx. How should we think about the impact on OpEx of all these various different expansions, whether it's on G&A or just on your cost base more generally? Rudi De Winter: That we do not expect an effect except to the fact that once these expansions are active and producing, then they come into the depreciation. So it will have an effect on our depreciation. Operator: [Operator Instructions]. We will now go to Guy Sips of KBC Securities. Guy Sips: Most of my questions were already answered. There were also experience-related. I have one question on the data center. Do you see there the positive trend, you see that accelerating? Or is it just on a continuous pace as it was over the last quarters? Or do you see a real improvement since, let's say, the Capital Market Day? Rudi De Winter: Well, I think it's -- in the revenues, we see a gradual progress. So in the beginning of the year, we saw strong activity in data center that continues, but it is complemented now also with better demand for industrial and renewable so inverters for renewables and also a bit of automotive. So it's the silicon carbide activity is broadening. And I think that a lot of the data center -- yes, growth still has to come. So it's not yet -- so first of all, the architectures architectural change that uses more silicon carbide in data centers still is coming. And I think also all the announcements on CapEx and so forth start to build buildings and they're not yet installing the infrastructure yet. Guy Sips: And can you put a kind of a time frame on this? Rudi De Winter: No, I cannot answer. It's -- I think some of the customers of us who have announced activities with the data center companies on 800-volt architectures and so are rather talking about 20 -- real ramps in '27. Operator: Next question will be coming from Mr. [indiscernible] who is a private investor. Unknown Attendee: My question is actually the following. If AI is applied, let's say, on the development of prototypes, is it possible to substantially reduce the throughput time for the development and the prototyping. Rudi De Winter: It's a good question. I don't -- not really -- that's not really the case. So there is -- in digital -- in the digital world, there is more activity on automating design environments and so forth. So I think there, it could have an effect on the analog mixed signal design that we're doing so far, there are people looking at it at research institutes, but nothing that is practically usable to my knowledge. Unknown Attendee: Okay. And then I've got a second question. Is it the automotive business part of it? Is it coming to end of life, and that has to be replaced by new products, new components or in which stage are we? Rudi De Winter: Not particularly. So we -- there is, of course, a continuous flow of innovation, but we have existing products that are -- that exist already a couple of years that will -- that are also being designed in, in electric vehicles in certain functions. So that continues. But -- it's not that there is an abrupt end of life of certain components. Of course, if combustion engines are used to a lesser extent, if you have like applications like lambda sonda or pressure sensors that go into an exhaust system of a combustion car, that will gradually phase out. But yes, as you hear, there is push in Germany to extend lifetime of combustion engines and so forth. So I do not see an abrupt change in the next cities rather as a gradual change over the next 10 years. Unknown Attendee: Okay. And could you elaborate a little bit more on the Chinese market for our business? Rudi De Winter: Yes. So as X-FAB, we have direct Chinese business. It's around 10% of our business. But indirectly, we have also customers are selling into China. So I think the direct and indirect business of X-FAB, it's maybe closer to 35% or so of our revenue that goes into China. Now what our customers do have less that's a bit further away, as I would have to refer to the conference call of our customers. What we sell directly in China are predominantly technologies that are, to a lesser extent, available in China. So that's typically our BCD on SOI for high-voltage smart systems, like motor drivers, battery monitoring systems and so forth. And there, we see continued interest also for new designs with our customers because this technologies are not immediately available in foundries in China. Operator: [Operator Instructions] We'll now move to Trion Reid of Berenberg. Trion Reid: Trion Reid from Berenberg. Just also wanted to add to my best wishes really for whatever you're going to do in the future. I had 2 questions on the results. The first was just around the fact that you talked about the results being strong, but the order intake weak. I'd be interested if you have any comments around the pattern of orders through Q3. You saw a sort of any trend or you're just seeing more lumpiness or short-term ordering? Just be interested to get any more color on that. And then my second question was just on the CapEx, which was pretty low in Q3, but your Q4 guidance seems to suggest it will actually ramp up quite significantly in Q4, just to understand why that is and what that sort of implies for next year as well. Rudi De Winter: Yes. So your first question with respect to the bookings yes. So the -- yes, that is what it was in the third quarter. So far, if you ask what happened in October, yes, that's somewhat a continuation of the Q3. The peak or the low amount of CapEx in Q3 is indeed less than what we forecasted. This has to do rather with -- we're not pushing the throttle on our expansions in Malaysia. So the -- this is just a delay. So the cap -- we have not canceled anything. It's just that there is a slower rollout and therefore, also the invoices come in slower and so the cash out is also somewhat less. So the -- in Q4, we expect that it will increase. This is not new CapEx, but it's just a shift of things from Q3 and Q4, we'll have to see maybe there will be some shift from Q4 into Q1 next year. But the increase that you -- that we can expect in Q4 is not a sign for next year. It is just the balance from Q3 that shifted in Q4. Trion Reid: Okay. Great. And just to follow up on the order intake. You're suggesting that there was not a decline through the quarter that the quarter was weak for order intake in all 3 months. Rudi De Winter: No, it was somewhat flat over the quarter. It's not that there was a sudden effect at the end or so. It was somewhat flat over the 3 months. Operator: We have a follow-up question. This one coming from Mr. Robert Sanders of Deutsche Bank. Robert Sanders: Just on the Kuching ramp and the EUR 1 billion expansion that you've done. Is the idea to continue to push that ramp, even though the demand is not really there just to sort of get the economics going because of -- right now, it's a lot of tools but not a lot of revenue? Or is the idea to basically free that plan until the demand is there? Rudi De Winter: The plan is to continue with the rollout of the equipment and to install it, qualify it to be ready for demand that can come. So the -- the equipment is mainly for our 180-nanometer BCD-on-SOI and there, we have good design wins. We have a unique position in the market. So we have -- we feel confident that this will pick up, and we want to be ready. Robert Sanders: Got it. And is there any plan to reduce or exit any legacy facilities? I think you've already said you're going to end-of-life effort by the end of '26. So I'm just trying to understand how much of your capacity that's quite old now is sort of going to get wound down as part of this upgrade. Rudi De Winter: Well, this is an effort we're making the transition from already for many years, we're transitioning to more micro systems business. and gradually exiting the CMOS there. The end of life that we announced there was for 0.6 micron CMOS signal. CMOS is also a in there and that will run until end '26, a little bit in '27 and then there will be one cleanroom there that we -- there are 3 cleanrooms on the site there, and there will be one cleanroom that will be closed. Robert Sanders: Got it. And maybe a question for Alba. What is the France run rate annualized at the moment for revenue in just Corbeil? Alba Morganti: So yes, Corbeil is currently at $54 million per quarter at the moment. So yes, it was the highest quarter that we recorded now in Q3. So it's ramping up significantly. We also invested there in additional tools, as you know, and we are now running only X-FAB technologies since a while. So the efforts start to pay off. Robert Sanders: Got it. And what's the EBITDA of that facility? Alba Morganti: We don't give EBITDA breakdown, as you know, because we don't produce everything on one side. Some of the products are shifted from one side to the other. And -- so it's quite difficult to -- it's misleading to give EBITDA breakdown by site. You know that we start -- some products we start in one factory, then we continue in other factories and so on and so forth. So yes, as I said, it's misleading. Robert Sanders: Got it. And just last question. If Melexis is able to get BCD-on-SOI processes from 8-inch Grays in China. What does that mean for you? Does that mean that you will lose 30% of Melexis business? Or is that something you don't think is a likelihood? Rudi De Winter: Yes. I don't know if grays has BCD-on-SOI, I think definitely not in the quality and the features that we are offering. Anyhow, it's this -- if a customer designed a new product in another fab, it takes a lot of time to qualify and transition. In the meantime, all the existing business typically stays until the products are really end of life. So I don't see an immediate effect. Operator: As we have no further questions at this time. Mr. De Winter, I'd like to turn the call back over to you for any additional or closing remarks. Thank you. Rudi De Winter: Yes. Thank you very much, everyone. So I'm looking forward to hearing you again on the 6th of February for the Q4 results. That will then be together with Damien and I will be then handing over to Damien. Yes. Thank you very much, and have a nice evening. Alba Morganti: Thank you. Goodbye. Operator: Thank you. Ladies and gentlemen, that will conclude today's conference. Thank you for your attendance. You may now disconnect. Have a good day and a good night.
Operator: Greetings, and welcome to Haverty's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tiffany Hinkle, Assistant Vice President, Financial Reporting and Investor Relations. Thank you. You may begin. Tiffany Hinkle: Thank you, operator. Good morning, and thank you for joining us for our third quarter earnings call. I'm here today with our President and CEO, Steven Burdette; and Executive Vice President and CFO, Richard Hare. Before we begin, I'd like to remind everyone that today's conference call may contain forward-looking statements, which are subject to risks and uncertainties. Actual results may differ materially from those made or implied in such statements, which speak only as of the date they are made and which we undertake no obligation to publicly update or revise. Factors that could cause actual results to differ include economic and competitive conditions and other uncertainties detailed in the company's reports filed with the SEC. A replay of this call will be available on our Investor Relations website this afternoon. For commentary about our business, I will now turn the call over to Steve. Steven Burdette: Good morning. Thank you for joining our 2025 third quarter conference call. We are excited to report an increase in both written and delivered comp sales for Q3. Our sales for Q3 were $194.5 million, which was up 10.6% with comps up 7.1%. Total written sales were up 10% with comps up 8%. Our steady growth in written and delivered sales over the past 4 quarters reflects improvements across marketing, merchandise assortments, promotions, supply chain, distribution, home delivery, service and store execution. While this quarter's results are positive, we remain focused on the significant opportunities in front of us that will allow our return to a $1 billion-plus company with no additional investments needed in our distribution infrastructure. Gross margins continue to be strong, coming in at 60.3% compared to 60.2% in Q3 2024. Our pretax profits for the quarter were $6.4 million or 3.3% operating margin compared with $6.9 million or 3.9% operating margin in Q3 2024. Our EPS for the quarter came in at $0.28 compared to $0.29. Richard will provide additional details regarding the increase in SG&A expenses and LIFO impact for the quarter. During the quarter, our Labor Day event was the company's largest event of the year and was key to our success in the quarter. We had a terrific written 4-day increase of 13.6% over last year with strong metrics. Traffic was positive in the mid-single digits. Average ticket grew to over $4,000 with design average ticket over $8,000. And conversion rates showed a slight -- although conversion rates did slow a slight decrease compared to last year. The industry faces ongoing challenges. High interest rates and rising home prices continue hurting the housing market. Tariffs remain an issue, geopolitical tensions persist, consumer confidence is falling and the government shutdown is now heading into week 5. Recent and planned interest rate cuts have yet to lower mortgage rates or boost the housing sector. Despite these pressures, our customers with household incomes over $150,000 are still spending, giving us confidence for the rest of 2025 and into 2026. Traffic for the quarter stayed positive with growth in the mid-single digits compared to last year. The average ticket increased 6.1%, reaching $3,668 and the designers average ticket rose 11.9% to $7,986. Our design business remained robust, accounting for 34.2% of sales, driven by a 7.1% increase in upholstery special orders. Conversion rates for the quarter showed continued improvement over Q2, finishing the quarter down slightly in the low single digits. Our merchandising and supply chain teams have done a great job moving much of our production out of China during the quarter, so we could resume our special order business. The announcements of potential new tariffs on furniture by the administration in late August was disappointing. Ultimately, these new tariffs were finalized at 25% on all upholstered wood products out of Mexico, along with Vietnam, Cambodia, Thailand and Indonesia beginning October 14, but will be moving to 30% beginning January 1, 2026. Our merchandising and supply chain teams have worked with our vendors to secure pricing to not disrupt any shipments. As with previous price increases, we will adjust retail prices strategically to maintain our values and margins. We appreciate our vendors' collaboration in helping us deliver strong values to our customers. The positive out of these new tariffs is that they are not stackable on the existing reciprocal tariffs put in place back in the summer. We are monitoring the administration's current trip to Asia and the upcoming Supreme Court decision to see what the impact will be on tariffs going forward. The new merchandising team has now been in place for a full year, and we are starting to see their impact on our product assortments. We just brought our store management team from the field to Atlanta for a 3-day leadership event at the end of September to celebrate our 140th anniversary and to show them in person the new products arriving over the next 6 to 9 months. The merchandising team did a fabulous job presenting the new products, creating lots of excitement for our store management to take back to their teams. From a category performance, all categories showed nice increases during the quarter. Bedroom and bedding outperformed all categories with increases in the low to mid-double digits, followed by upholstery and occasional in the high single digits and dining room and decor in the mid-single digits. Our inventories have remained basically flat in Q3 compared to Q2 this year. We anticipate that inventories will increase slightly in Q4 due to the additional tariffs implemented in October. Our marketing creative and media plans continue to resonate with our customers through broadcast, connected TV and digital marketing channels. Our expanded use of AI and data has improved our targeting and personalization, making our marketing investments more efficient. And we saw web traffic, including organic and site engagement increased by double digits as our written e-commerce sales grew 13.6% for the quarter. We invested an additional $2.8 million this quarter in marketing, including our first direct mail campaign in several years. The direct mail piece proved to be very successful in attracting new customers to Haverty with a 12-page layout that showcased our product offerings and design capabilities. We continue offering 60-month no interest financing to remain competitive, and our credit costs continue to remain in line with last year. We completed the closing of the Waco store at the end of September. However, we are pleased to announce the opening of our third store in the Houston market in mid-October. The new store is in New Caney, which is in the northeast part of Houston. This will bring our store count back to 129, which is where we will end the year. We will return to our store growth goals of 5 per year in 2026. As stated on our last call, we have finalized 4 additional leases for 2026 openings in St. Louis, Nashville and 2 more in Houston. We have 1 new market and 1 relocation in the LOI process now, but are unable to announce. We will make investments in our stores throughout 2026 in the bedding departments and design centers to maintain our focus on improving the customer experience. Our distribution, home delivery and customer service teams continue to do a fantastic job controlling expenses while furnishing happiness to our customers. The management teams are great at balancing the number of team members with the workflow demand needed due to natural turnover. We continue to believe that due to Haverty's controlling the final mile delivery with Haverty team members, it is a huge advantage to our success in providing our customers with unwavering service. Thank you to all our Haverty team members for your dedication to our customers and the company's success. Our people define us, and I am proud to be a part of this great team. With a debt-free balance sheet, operational consistency, integrity, consumer focus, in-home design services and our regret-free experience, Haverty's offers confidence to our customers to furnish their homes with the Haverty brand. I will now turn the call over to Richard. Richard Hare: Thank you, Steve, and good morning. In the third quarter of 2025, net sales were $194.5 million, a 10.6% increase over the prior year quarter. Comparable store sales were up 7.1% over the prior year period. Our gross profit margin increased 10 basis points to 60.3% from 60.2%. Excluding the impact of the $624,000 LIFO expense in the third quarter of 2025, our gross profit margin would have been $0.606. The overall increase in margins was due to product selection and merchandising, pricing and mix. Selling, general and administrative expenses increased $11.4 million or 11.3% to $112.3 million. As a percentage of sales, these costs approximated 57.8% of sales, up from 57.4% in the prior year's quarter. We experienced increased advertising, selling, occupancy and administrative costs during the quarter. Other income expense in the third quarter of 2025 was $348,000 and interest income was approximately $1.1 million during the third quarter of 2025. Income before income taxes decreased $400,000 to $6.4 million. Our tax expense was $1.7 million for the third quarter of 2025, which resulted in an effective tax rate of 26.4% compared to an effective tax rate of 28.3% in the prior year period. Net income for the third quarter of 2025 was $4.7 million or $0.28 per diluted share of our common stock compared to net income of $4.9 million or $0.29 per share in the comparable quarter last year. Now turning to our balance sheet. At the end of the third quarter, our inventories were $92.4 million, which was up $9 million from the December 31, 2024 balance and up $3.7 million versus the Q3 2024 balance. At the end of the third quarter, our customer deposits were $43.9 million, which was up $3.1 million from the December 31, 2024 balance and flat with Q3 of 2024. We ended the quarter with $130.5 million of cash and cash equivalents, and we had no funded debt on the balance sheet at the end of the third quarter of 2025. Looking at some of our cash flow usage. CapEx was $3.6 million for Q3 2025, and we also paid out $5.2 million of our regular dividend in the quarter. We did not purchase any common shares of stock of our share repurchase program during the third quarter of 2025, and we have approximately $6.1 million of existing authorization in our buyback program. Our earnings release list out several additional forward-looking statements indicating our future expectations of certain financial metrics. I'll highlight a few, but please refer to our press release for additional commentary. Our 2025 guidance includes tariffs currently in effect as of October 29, 2025, and does not include the effect of additional proposed tariffs that have not been finalized by the Trump administration. We expect our gross margins for 2025 to be between 60.4% and 60.7%. We anticipate gross profit margins will be impacted by our current estimates of product, freight and LIFO expenses. Our fixed and discretionary type SG&A expenses for 2025 are expected to be in the $296 million to $298 million range, an increase from our previous guidance due to higher anticipated advertising and admin costs. The variable type costs within SG&A for 2025 are expected to be in the range of 18.6% to 18.8% based on our expected level of selling costs for the remainder of the year. Our planned CapEx for 2025 remains at $24 million. Anticipated new or replacement stores, remodels and expansions account for $19.6 million. Investments in our distribution network are expected to be $1.8 million and investments in our information technology are expected to be approximately $2.6 million. Our anticipated effective tax rate in 2025 is expected to be 26.5%. This projection excludes the impact from vesting of stock awards and any potential new tax legislation. This completes my financial commentary on the third quarter financial results. Operator, we would like to open the call up for any questions. Operator: [Operator Instructions] Our first question comes from Anthony Lebiedzinski with Sidoti & Co. Anthony Lebiedzinski: So very nice to see the return to positive same-store sales here in the quarter. I know you highlighted the strong Labor Day. Just -- can you comment also just on the monthly trends that you saw in the third quarter and whether or not you saw any notable regional differences in your markets? Richard Hare: Sure, Anthony. This is Richard. Our written business trends in the third quarter in July, we were up on a same-day week basis, a little -- about 10.6% in July, 10.9% in August and a little over 8% in September. Deliveries were fairly consistent, 11.6% in July, 7% in August and 13.1% in September. I don't believe there are much, if any, regional differences. But Steve, I don't know if you got anything else you want to add. Steven Burdette: No. Anthony, there was not much difference there. We certainly had probably more strength in the Midwest, Georgia, Central and Florida were -- and Texas were really good. The East was a little lighter, but everybody was positive. All districts were positive across the board. Anthony Lebiedzinski: That's good to hear, certainly. And then as far as tariffs, is there any way you guys could quantify or like give a sense as to the impact of tariffs that had on the quarter? Steven Burdette: Anthony, we don't -- a dollar impact, no, because we adjusted in our pricing. I mean, we've been very clear from the beginning. We make strategic price changes immediately once we know the tariffs. And we feel like our positioning on that, even going back to COVID when we were doing all price increases, we know how to handle this and know how to move forward with it. So I don't think we had it. But the impact would come on LIFO, and I'll let Richard talk to that specifically. Richard Hare: Yes. Thanks. I did mention in my remarks about the impact of LIFO expense on our gross margins. So we are seeing as the tariffs -- as that material comes in, in the third quarter, and it will continue to come in the fourth quarter, you'll see our LIFO expense go up. So I believe last year, we had a LIFO benefit of around $800,000 for the year. So far this year, we have LIFO expense for the first 3 quarters of about $750,000. So I would expect to continue to see some more LIFO expense roll through the P&L throughout this year and probably into next year. Steven Burdette: But Anthony, I don't -- we don't see that as an impact. We've been able to grow sales, and we've changed the prices and maintain our margin. So we feel good about where we're going in the direction we're taking with it, how we're handling it. Anthony Lebiedzinski: Understood. Okay. Got you. Okay. And then just in terms of your expense guidance, I know you talked about higher advertising and administrative costs. How should we think about those for next year? Do you think that trend will continue? Or just overall, just wondering if you could comment on what you're seeing in terms of cost of running the business? Richard Hare: Yes. I'd say for this year, we went up maybe about $5 million band on our non-variable costs from the last quarter to this quarter for the year. About 3/5 of that was advertising cost. The rest is on the administrative cost is more incentive compensation. This year, we are hitting our annual targets in our incentive plans. Last year, we were not. So it's kind of a tough comparison. We have not developed our full budget for next year, but I would expect basically normal inflationary type increases, nothing significant to note in the non-variable side of the business. Steven Burdette: Anthony, let me speak to the marketing specifically. In '24, we basically pulled back too hard. We were experiencing some double-digit decreases in written. We're trying to manage the business. We had an election going on. And we basically -- if you remember from Q2, we increased our marketing expense. I think it was about $1 million. We upped that -- in the third quarter as well. We felt to levels that it needed to be. And I might want to remind you of that $2.8 million. About half of it is due to the Houston market is now new to us, and we're investing more advertising as we led to that -- our third store opening there. And then obviously, we also returned to direct mail, which we think is a key part of our direction going forward. So we have one event now that's out in the fourth quarter as well right now. So -- but I don't see marketing. I think we've gotten it back to levels that we can sustain. And I think for 2026, we'll be fairly flat with where we are in '25. Operator: Our next question comes from Cristina Fernández with Telsey Advisory Group. Cristina Fernandez: Congratulations also on the positive comp. I wanted to see if you can talk more about the composition of that comp. It definitely seemed like ticket was the bigger driver. So I wanted to understand, is that mostly due to the price increases? Or are you seeing consumers kind of trade up on the price points or navigate to some of those bigger ticket items? Steven Burdette: Certainly, average ticket is driving that. One thing that we do look at is we have been able to drive our design tickets up by selling -- we're selling basically more pieces to the consumer. We measure that. And so that's helped drive it. But obviously, price increases are having an impact on that as well. I don't have a direct breakdown between the two, Cristina, but there's certainly both of those. And I will also add conversion rates, while we're not above last year, we are getting, as I commented in my notes, we're basically low single digits, and we were running mid-single digits at Q2 when I reported. So we're seeing continual improvement there, and that's obviously still a focus for us and where we think we still have significant opportunities moving forward. Cristina Fernandez: And then on the price increases to offset the newer Section 232 tariffs, what's the timing of that? Have you already taken some or that's something that's going to take place here in the fourth quarter? Steven Burdette: It has already taken place in early October. We got -- as soon as we knew and got to it, as I said, our merchandising and supply chain teams were working with our factories to get everything solidified and price changes were made early to mid-October. So they are already in place now as we go forward. Cristina Fernandez: And then I also -- my last question is on the, I guess, bigger picture, how should we think about the level of sales where you can leverage SG&A expenses? I mean you had a great growth rate this quarter, 10%, but expenses grew faster than that. So should we think about a growth rate or more an absolute number of sales that will allow you to leverage those expenses and start to see operating margin expansion year-over-year as your sales grow? Richard Hare: Yes, Cristina, if you look historically, when we get particularly above $800 million and -- $800 million to mid-$800 millions, you really start seeing some expansion there. And then as you saw during the COVID years when we blew $1 billion, you really saw it fall. So I would definitely, in my mind, over $800 million, you really see it falling significantly to the bottom line. Steven Burdette: Yes. And as I commented on the marketing, Cristina, we're going to keep that. We think it will be fairly flat in '26 to '25. So that will be an opportunity to leverage as well. We can continue to get the growth. Operator: There are no further questions at this time. And I would now like to turn the floor back over to Tiffany for closing comments. Tiffany Hinkle: Thank you for your participation in today's call. We look forward to talking with you in the future when we release our fourth quarter results. Have a great day. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and welcome to Cogeco Inc. and Cogeco Communications Inc. Q4 2025 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Patrice Ouimet, Chief Financial Officer of Cogeco Inc. and Cogeco Communications Inc. Please go ahead, Mr. Ouimet. Patrice Ouimet: Thank you, operator. So good morning, everyone. Welcome to our fourth quarter conference call. So as usual, before we begin the call, I'd like to remind listeners that today's discussion will include estimates and other forward-looking information. We ask that you review the cautionary language in the press releases and annual report issued yesterday regarding the various risks, assumptions and uncertainties that could cause our actual results to differ. So with that, I'll pass the line to Fred Perron for opening remarks. Frederic Perron: Thank you, Patrice. Good morning, everyone. For Cogeco Communications, the fourth quarter marked the end of year 1 of our 3-year transformation program focused on synergies, digital, analytics, network expansion and wireless, and we're pleased to report that we're on track. Year 1 was part of mainly focused on OpEx and CapEx synergies, and we delivered on those targets, as you can see by our 110 basis points year-on-year improvement in adjusted EBITDA margin and our $38 million year-on-year increase in free cash flow in constant currency. It's worth mentioning that the CapEx efficiency enabling our growth in free cash flow comes mainly from maintenance synergies as we're continuing to make important investments in growing and enhancing our networks. A recent report by Ookla, for example, noted a significant increase in our Canadian upload speeds as a result of our ongoing network upgrade initiative. And in the U.S., we've upgraded over 35,000 of our cable doors to fiber during the fiscal year, in addition to adding nearly 50,000 new homes passed across our North American footprint. Years 2 and 3 of our transformation will now add more emphasis on our top line performance as per our original plan. This will include additional investments in growing previously underdeveloped sales and marketing channels in the U.S. in the context of the evolving competitive environment as well as scaling wireless in Canada. When we met last quarter, we said that we were expecting strong continued Canadian customer growth, combined with some improvements in our U.S. subscriber metrics, and we're pleased to be delivering on that expectation. We just had our best Canadian Internet customer growth in 13 years. This growth was driven mostly by market share gains in our legacy footprint on our own network. The completion of new rural expansion programs in Ontario has yet to accelerate through fiscal '26 and '27, providing a new additional lever for us in the future. We've seen a reduction in competitor promotional activity in the quarter, which has more than offset some minor noise around FWA and wholesale, including our own deployment as a reseller under the Cogeco brand across Quebec. So it's fair to say that on balance, our Canadian competitive environment is evolving in a constructive manner at present time. Our launch of the Canadian wireless service is going ahead of plan, and October marked the deployment of this new service across most of our wireline operating footprint. Our positive early sales results on wireless have already enabled us to start pulling back on some of our initial introductory offers. On the U.S. side, our year-on-year financials were impacted by ARPU pressures, the cumulative impact of customer losses in the prior quarters, a difficult comparative period last year and a smaller rate increase this year than in the previous year. This resulted in a year-on-year decline in adjusted EBITDA, which was in line with what we had indicated to you last quarter. That being said, our additional sales and marketing activities are working. Our subscriber trends are now improving, and we're delivering on our long-stated goal of growing the Ohio customer base during the quarter. In fact, it's the first time since we acquired the Ohio business 4 years ago that we achieved customer growth in that state. We expect continued improvements in our U.S. subscriber metrics over the coming quarters. On October 8, we launched a completely revamped pricing strategy for the U.S. This new approach gives more value, predictability and transparency to our customers, including full price protection for the first 2 years. This is just one of many tactics that we're deploying to be more aggressive and more innovative in our U.S. go-to-market. Today, we're also publishing our consolidated guidance for the new fiscal year for CCA and CGO more broadly, which offers a continued growth in free cash flow in constant currency despite competition-driven top line pressures. Our adjusted EBITDA guidance of 0% to minus 2% year-on-year reflects additional investments in scaling previously underdeveloped sales and marketing channels in the U.S. and growing our Canadian wireless business, as previously explained. We believe these investments present attractive upside for us and are confident that investors will get disproportionate returns from them over time. We're still planning to grow our free cash flow to $600 million next year in fiscal 2027, which is a good base for further dividend growth as we're announcing today as well as further deleveraging. Finally, turning over to Cogeco Media. While competitive dynamics in the radio advertising market remain, Q4 revenue increased year-on-year, lifted by strength in our digital advertising solutions and continued listener engagement. On that, I'll turn it over to Patrice for more details on our results and guidance. Patrice? Patrice Ouimet: Thank you, Fred. So in Canada, Cogeco Connections revenue declined by 1.5% in the fourth quarter, mainly due to lower revenue per customer from fewer video and wireline phone service subscribers, partly offset by growth in our Internet subscriber base, which added 17,000 new customers during the quarter. Adjusted EBITDA declined by 1.4% in constant currency due to the lower revenue being partially offset by lower operating expenses resulting from our cost reduction initiatives and operating efficiencies. We added 10,800 homes passed during the quarter, mainly through fiber-to-the-home under our network expansion program, including those related to the Ontario subsidized program. In the U.S., Breezeline's revenue declined by 9.2% in constant currency due to the cumulative decline in the subscriber base over the prior year, a smaller rate increase in -- versus the prior year, along with a competitive pricing environment. The 6,300 decline in Internet subscribers was an improvement over the previous quarter, while Internet subscriber additions in Ohio recorded their first ever positive growth of 1,300 new subscribers. Adjusted EBITDA declined by 7.9% in constant currency due to lower revenue, offset in part by lower operating expenses driven by cost reduction initiatives and operating efficiencies. Note that last year's comparative Q4 period was the highest EBITDA level of all quarters for that year, largely due to the reorganization of our operating entities. Now turning to our consolidated numbers for Cogeco Communications. At the consolidated level, revenue in constant currency declined by 5.3% and adjusted EBITDA declined by 3.3%. This result is mainly due to the revenue pressure in the U.S., partially offset by strong execution on operating efficiencies as well as customer growth in Canada. Diluted earnings per share declined by 6.2% in reported currency, mainly due to lower EBITDA and higher financial and restructuring costs. Capital intensity was up at 21.8% versus 20.4% last year. Free cash flow in constant currency decreased by 27.4% in the quarter, but was up by 7.9% for the full year. Our net debt to adjusted EBITDA ratio was 3.1 turn at the end of the quarter, unchanged from the level reported in Q3. We have increased our dividend by 7%, having declared a quarterly dividend of $0.987 per share. And as Frank mentioned, with anticipated strong free cash flow in fiscal '26 and '27, we expect to continue to increase dividends meaningfully in the future. At Cogeco Inc., our revenue in constant currency decreased by 5% and adjusted EBITDA declined by 3.9%, with growth in radio, partially offsetting revenue declines at Cogeco Communications. Media operations revenue increased by 8.5%, driven by growth in digital advertising revenue. We have also increased the dividend at Cogeco Inc. by 7% in lockstep with that at Cogeco Communications. Let's now discuss our fiscal '26 guidance, which we are introducing today. On a constant currency and consolidated basis, Cogeco Communications expects revenue to decrease between 1% and 3% compared to the prior year. As growth in Canada is offset by competitive pressures in the U.S. Adjusted EBITDA is anticipated to decrease between 0% and 2% versus last year as we continue to face revenue pressures in the U.S. and are investing in new sales and marketing capabilities, especially in the U.S. as part of our 3-year transformation program, all while generating additional operational efficiencies. We will also incur some costs related to our Canadian wireless operations, including some IT costs recognized in adjusted EBITDA starting in fiscal '26, and I'll get back to this in a second. Turning to our capital expenditures. We are expecting to spend between $560 million and $600 million, including $100 million to $140 million in growth-oriented network expansion, resulting in a capital intensity of between 19% and 21% or 15% and 17%, excluding those network expansion projects. Free cash flow and free cash flow, excluding network expansions are expected to increase between 0% and 10% compared to fiscal '25. Our full year current tax rate is forecast to be 11.5%. In terms of segments, an important item to note is that beginning in Q1 of fiscal '26, Canadian Mobility, which had been included in our corporate segment during the start-up phase will not be recorded in our Canadian segment given the recent full-scale launch of the product. This reclassification will have no impact on the consolidated level and comparative segments for the prior year, and we will also adjust basically the results for the prior year for that. In addition, our IT costs related to Canadian Mobility, which were recognized below the EBITDA line as cloud computing costs in fiscal '25 during the implementation period will be recognized as OpEx within the Canadian segment starting in Q1 as those systems are now in operation. So overall, we expect the fiscal '26 Canadian segment's adjusted EBITDA to be impacted by about $20 million versus what we reported in fiscal '25. Of that, $11 million is simply the reclassification from corporate OpEx to the Canadian business and the balance is moving from below the EBITDA line to OpEx. That's basically the IT systems I was relating to. We nevertheless expect the Canadian operations growth to largely absorb those additional costs in fiscal '26 through customer growth and operational efficiencies. As it relates to Q1, we expect consolidated revenue and adjusted EBITDA to decline in the mid-single-digit range in constant currency. We then expect a material sequential improvement in our year-over-year adjusted EBITDA trends starting in the second quarter as we benefit from already quantified cost savings, rate increases and improving U.S. customer trends. More specifically in the U.S., we expect the Q1 year-on-year adjusted EBITDA variation to be slightly better than the Q4 variation that we just reported, followed by solid gradual improvements as we benefit from easier year-on-year comps in addition to the aforementioned factors. At the consolidated level in Q1, with our restructuring program largely completed, we do not expect material acquisition, integration and restructuring costs in the quarter. And we expect our financial expense to be about $10 million less than in the prior quarter in Q4. while our depreciation and amortization expense should be about $4 million lower than in Q4. Finally, at Cogeco Inc., we have issued the same financial guidelines as Cogeco Communications with the exception of net capital expenditures. And now Fred and I will be happy to take your questions. Operator: [Operator Instructions] Your first question comes from Aravinda Galappatthige with Canaccord Genuity. Aravinda Galappatthige: I just wanted to pick up on the sort of the comments around the IT spend in wireless. A bit more broadly, given that you've launched now and it's deployed across the footprint, are you able to sort of update us on sort of the total impact on Canadian EBITDA or the expectation that's built into fiscal 2026? I know about that you talked about the $9 million incremental piece from IT. But more broadly, given sort of the pricing changes you've done, I just wanted to see how much of a drag it could create in the first half or even for the full year. Maybe stop there. Patrice Ouimet: Sure. So yes, so just the reclassification of some OpEx from corporate to our Canadian business, and moving some IT costs from below the line to above the EBITDA line will create pressure of about $20 million on our Canadian numbers. Obviously, it doesn't change anything at the -- especially for free cash flow, if you look at the full company, it's 2 reclassifications. One will basically show the comparative values that will be adjusted in the prior year. That's basically what's moving from corporate to our Canadian business. The other one will not be reclassified in the past basically as this is moving forward. That's the IT cost. That being said, as I was saying earlier, we are expecting growth in our Canadian business otherwise at the EBITDA line. So we should normally be able to absorb this. To your wider question on -- if I got your question right, on what mobility does for us. Obviously, we're starting from basically a very small number. So I wouldn't say that the numbers will be meaningful in terms of the benefits in year because obviously, we're starting from a small base. But we do see benefits, and we've been very successful with the launch so far, and we see a lot of interest from our customers. And again, to remind you, the goal with mobility, it's primarily to bundle services for our customers or noncustomers that are neighbors of our customers in the regions that we serve. It can be used in acquisition. It can be used in retention as well. Aravinda Galappatthige: And then just sort of maybe just turning to the U.S., the wireless sort of experience so far. Is there anything -- any feedback you can provide or share in terms of how the churn profiles have been impacted by your wireless launch? I realize it's early, so perhaps it's not much, but anything you can share would be interesting. Frederic Perron: Aravinda, it's Fred. Yes, we've analyzed it, and we see a materially lower churn in the U.S. from customers also taking wireless from us. Now we have to be cautious because some of that is simply self-selection. So customers who like us better, less likely to churn are more likely to buy wireless anyways. But the churn difference is so pronounced that we believe at present time that there's a benefit above and beyond self-selection as it relates to churn benefit from wireless. Aravinda Galappatthige: Okay. And then lastly, just a bigger picture question on the fiscal '26 guide. I know, Patrice, you’ve talked about what Q1 would be like. Is it fair to suggest that the guide still assumes a close to mid-single-digit decline in the U.S. as far as EBITDA is concerned and then a little bit of catch-up in Canada? Or is it low single digits, both geographies? Patrice Ouimet: Yes. So we've -- yes, I haven't commented really on what we expect for the full year, but I could say for what we're assuming in the U.S. for the full year at the EBITDA level, obviously, in constant currency, we should do better than your assumption of mid-single digit, given that we see a better -- a good improvement in the customer situation because we did lose a lot of customers in the prior year, and we're expecting to do a lot better there. We've implemented a lot of tactics as well to achieve this and also to manage how we price our products, how we handle it in retention. And our program, our 3-year transformation program is continuing, and we have further cost improvements that we are planning to bank on. We talked about the chatbots before. We've changed our phone systems as well, automated phone systems that now have AI components. These are just examples, but there's other elements as well in our programs that will kick in, in the year. Frederic Perron: The other thing I would say about the U.S., Aravinda, is we've done a lower rate increase over the past year than we had in prior year in an effort to derisk the ARPU. That obviously, you can see in our Q4 results in the U.S., and you'll see in our Q1 results a little bit as well. But as we go into the next year, we have an opportunity to do rate increases in some segments that were not captured before. So it doesn't mean we'll do very large rate increases, but there are some segments that were previously not fully exploited. And therefore, we do see a bit of revenue upside from that starting in the second and third quarter. Operator: Your next question comes from Vince Valentini with TD Bank. Vince Valentini: Thanks for the extra detail on the wireless Canadian impact. But can I ask one other item on that is you've seen like you had a very strong start out of the gates. As you even say, you slowed down your marketing and pricing efforts as a result of that. Given all the customers you had out of the gates taking a free line for a year, you still have to pay the wholesale fees on that. Is that not a potential incremental drag on your EBITDA in the Canadian segment in 2026 as well? Patrice Ouimet: Yes. It's -- well, by the way, we have different types of products. So we do have paying customers as well. But -- and again, this is linked also with them being customers with Internet and maybe other products as well. But the numbers are still small, right? We're starting -- when you compare it to the size of our business in Canada, it's factored in our guidance, but I wouldn't say it's a lot. We have a bit more marketing costs we're doing, obviously, as we launch, but not that material. Frederic Perron: Yes, Vince, the launch promotion was something that was budgeted and is in our forecast. We thought it was an efficient way of getting started. So we consider it almost a marketing investment. But as you've said, we've already pulled back. And at this time, the free line for a year is only available on our talk and text plan without data, which very few customers take. Vince Valentini: Okay. Sticking with Canada and the more disciplined pricing environment you're seeing, does that not open up some opportunities for rate increases on your platform? And I know you don't like to talk about them before they're announced to your customers, but is there any broad sense you can give us as to what you've baked into your guidance for ARPU growth in Canada? Patrice Ouimet: Yes. So I think we'll stick with our policy of not talking about it in advance. But I would say, generally, we do have some price increases that we -- that are reasonable in our different products, especially for video and Internet. So normally, we put out guidance like this. We do have an expectation when they -- obviously, they don't cover the full year, and they're put through during the year. We did have some in recently that will impact the full year, but it varies by product. Frederic Perron: And I'll just add beyond the rate increases that we do, obviously, a reality of our business for the past many years is that new customers come in at a lower ARPU than existing customers, but with a more rational pricing environment is we're seeing the ARPU of new customers ticking up a bit in recent months. There's also the stickiness at the end of promotions, which has the possibility to increase as customers are not presented with as aggressive offers from competition. Vince Valentini: Okay. I'm going to switch to the U.S. You added -- correct me if I heard this right, you added 35,000 new fiber-to-the-home passings in just in fiscal 2025. Frederic Perron: The comment that I made in my section of the introduction is that we have upgraded 35,000 doors from cable to fiber. Vince Valentini: Right. So -- but that was -- that's not a total. That's the incremental in the fiscal year. Frederic Perron: Correct. Vince Valentini: So 2 questions on that. Can you give us any sense as to what the total fiber passings are now? And secondly, to get that extra 35,000, was that using the new technology that you sort of talked to us about last November? Frederic Perron: The second part of the question, the answer is yes, and that's why you still see a good CapEx from us. Patrice Ouimet: Yes. And we'll continue this in fiscal '26. So our program to selectively upgrade certain areas in the U.S. with fiber-to-the-home as it is a good cost benefit to us with this new technology. It doesn't apply everywhere, but there are some areas where it does a lot of sense. This will continue this year and probably a little bit in fiscal '27. Again, we can absorb this in our CapEx envelope. Overall, to your question, we don't disclose specifically our fiber component. As you know, most of our network is fiber, but the last mile, obviously, is -- we're still predominantly on coax. And it's generally more efficient to upgrade the coax than do an overbuild as we're doing selectively in the U.S. So I would say, overall, between the network expansions that we're doing, those are generally in fiber-to-the-home. We've been doing this for more than 10 years and the selective upgrades. It's still a small portion of our network that is fully fiber-to-the-home. But again, as we upgrade coax, we're able to deliver in many regions, actually 2 gigs even on coax by doing minor -- we're not even on DOCSIS 4 yet. And so we offer 2 gigs in several regions in Canada. So this -- I would say the future will be a mix of fiber-to-the-home, upgrades of coax and there's different ways of upgrading that. Eventually, we'll have DOCSIS 4 as well, but we did not rush it as we're able to generally have much faster speeds than what customers want. So the cost benefit is better for us to do it this way. Vince Valentini: Sorry, I'm going to ask one more on this because I don't think it's well understood by people. The cost per home passed when you did those $35,000, because of that new more efficient technology, can you give us an update on what the average cost was per home in terms of the CapEx? Patrice Ouimet: Yes. It varies by region, but I would say it's generally -- it's probably around $400 or so. But really, there's some that are less expensive than this and some more. So there's -- it's not just a one number. And the more dense it is and depending on how the structure of the network is, it is -- yes, so it is fairly effective when you look at this versus doing the traditional fiber-to-the-home with the traditional method. You know the numbers for competitors. So generally, this is a lot higher. This is what we do in network expansion as well. And when you look also at going through the coax route all the way to DOCSIS 4 with high splits, you can get to these numbers easily as well over time with the CPE changes. So yes, so that, I would say, is probably a good average to use. Vince Valentini: Sorry, Patrice, when we're talking about the U.S. segment. So when you say $400, are you talking $400? Patrice Ouimet: Yes, it is U.S. dollars? Vince Valentini: Okay. And last, just free cash flow, I'm sure others are asked about this, too, but just in general sense, I want to make sure I'm clear. Excluding rural projects, you're guiding to like $625 million to $690 million of free cash flow this fiscal year, and you're saying you can only do $600 million in fiscal 2027. Is that because you found new expansion projects so that, that bucket of CapEx doesn't go to 0? Or are you deliberately telegraphing that other items within free cash flow are going to go negative, like whether it's EBITDA or cash taxes or interest or something else? Patrice Ouimet: No. Or the other question you could have asked is whether the $600 million is actually too low a number. But I would say $600 million, we think is a good number to use. Obviously, we'll see where we are a year from now when we provide guidance for fiscal '27, but that's still our plan right now. Within our expansion numbers, we have these bigger projects that are generally subsidized. So there's still a lot going on in Ontario this year, which will finish in '27. There shouldn't be that much CapEx in fiscal '27 related to that. That being said, we are generally building in territory as well. So there's always new construction, new neighborhoods, new streets. So this will continue. Eventually, we will not break it down as we're going to be done with the bigger projects. So you'll just see one number. It will not be meaningful to split it out. But I would say these will continue. And also the other component is as we've built in many areas and we're loading customers, we are adding CPEs for these customers. So we have to obviously invest there. And sometimes depending on how we built the network, sometimes we had to install service lines as well, basically the drops we put from the street to the house. For some of the projects, it's pre-installed. And for some of them, it's not, it's really when customers want to connect, we pass this drop. So I would say these CapEx will continue in the future. Vince Valentini: So it's not telegraphing an EBITDA pressure or any other pressure? Patrice Ouimet: No Operator: Your next question comes from Jerome Dubreuil with Desjardins Bank. Jerome Dubreuil: First one for me. I'd like you, if possible, to give a little bit more detail on the turnaround you expect on the top line. We're at mid-single-digit declines in the quarter, but you're expecting an improvement if I look at the guidance. So maybe more granularity on this? Is it from wireless? Was there a tough comp or maybe an assumption of improvement in competition? Patrice Ouimet: Yes. Jerome. So you're talking at a consolidated level, right? Jerome Dubreuil: Yes. Patrice Ouimet: Okay. Great. Yes. So I would say, if we look at our Canadian business, we've been adding a lot of customers. As you know, we are still planning to continue to grow the Canadian business. So this translates into additional revenue. We have visibility on -- basically on our current client base -- customer base. We also know when we have new customers often on promotions, some that roll off promotions as well. So this is all factored in. And based on this, we'll eventually have some price increases as well. But I would say the key driver in Canada is really the additional subscribers we're able to load down that we were not doing as much of, let's say, 2 years ago. And that should produce better numbers on the top line in Canada than what we've seen in the past year. And in the U.S., I would say, similar story on the subscribers. It's just that we're starting from a negative number. We do see some improvements from what we reported on in Q4, but we're already well into Q1 right now. So we are seeing benefits. And we've put a lot of new tactics to play in go-to-market, and many of them are working well. So I would say this is the key element we're seeing for next year. We're still planning to see a negative number in the U.S. in terms of year-on-year. We still have video cord cutting and home phone cord cutting like the whole industry, but still an improvement overall. Frederic Perron: Yes. I'll only add, Jerome, First, on the Canadian side, we've been adding subs at a good pace for many quarters now, but the pressure in the past was ARPU. And what we're seeing now with a slightly better pricing environment is we're seeing a bit of upside on ARPU as we were talking about before with Vince, the ARPU of new customers, the ARPU at promo expiry and the possibility for rate increases. And it doesn't take much of an ARPU improvement given the strong sub loadings to benefit the revenue overall. And then in the U.S., we've touched on it earlier, but we've done -- we had done a materially lower rate increase over the past year. And now the elephant is going through the stake, and we expect better progression in the U.S., especially going to the second quarter. Jerome Dubreuil: Okay. Great. Second one for me. just continuing on Vincent's line of question on the DOCSIS to fiber-to-the-home upgrade, the coax, I should say, to fiber-to-the-home. Is this something you plan to do across your whole footprint? You kind of alluded to the fact that it could be more efficient to do that than taking the DOCSIS road map? Or is this something you really use as a tactic to maybe counter the fiber deployments? Frederic Perron: Thanks for the question, Jerome. And maybe starting at a higher level. When you look at our total CapEx envelope, so much of it is maintenance. The majority is -- business as usual maintenance. So when you see us reducing our CapEx, that is where the reduction in the efficiency is coming from. Our growth-related CapEx, which is everything you're talking about now continues, whether it's expanding our network to new rural areas or upgrading our network in the various ways that you're mentioning. So as it relates to network upgrades, we're doing a lot of mid-splits in Canada, in particular. We're really improving. It's now over 90% of our doors have a download speed of 1 gig and sometimes 2 gig. And we're also really improving the upload speeds as noted by Ookla, for example. And then in the U.S., we have this capital-efficient way of upgrading our coax network to fiber. For example, the 35,000 doors that we've done last year and our forecast for the coming year also implies that we will continue with both sets of programs that I was talking about for the U.S. and Canada. So it's a mix depending on the region, mid-splits, even sometimes some high splits in some regions, plus this capital-efficient upgrade of coax to fiber. Patrice Ouimet: Yes. And yes, definitely, that's the plan. And as you know, us, we've always, over the years, trying to be very capital efficient and always provide a lot more than what customers are requiring from us in terms of speeds and capacity and doing it in a capital-efficient way rather than overinvesting in the network that would not necessarily be used. So it is -- in the U.S., more specifically to your question on competition, for sure, in some regions, it does help to upgrade to fiber. But obviously, we only do it if it makes sense financially when you take a multiyear view of the otherwise upgrades we would need to do in these particular regions. Frederic Perron: Yes. Our U.S. competitive dynamics are getting predictable, much more predictable by state, by market in terms of who's likely to do some upgrades and our competitors who may be tempted to overbuild. So we have pretty granular projections at a market-by-market level, and we're using that to inform where we will upgrade that market to fiber, for example, as a protective measure, for instance. Operator: Your next question comes from Matthew Griffiths with Bank of America. Matthew Griffiths: So in the second year of your transformation program, I think you mentioned that you're going to see some more investments to sustain or to move you towards a path to sustainable growth. And not to be too nitpicky or anything, but is that growth like at the revenue level? Or are you talking growth on the free cash flow level? And maybe you can elaborate on like the investments, like what are you spending money on that you think is going to generate the sustainable growth going forward? And when will that -- kind of when do you expect that to materialize if it's top line, if it's obviously free cash flow, it's somewhat baked in already? Frederic Perron: Yes. Matt, it's Fred. I'll start with the last part of the question. Whatever investments we're making are fully baked into our guidance. There are many things we do that are not so material at the EBITDA or CapEx level. Well, we've already talked a lot about our CapEx investments anyways in upgrading our networks. So I'm not going to repeat that. But at the EBITDA level, a lot of what we're doing is not material investments in AI, analytics, pricing are not that expensive. The two that are material are growing certain sales channels in the U.S., which were underdeveloped. You do need to make an investment in staff and commissions on things like that as well as wireless in Canada. But again, that's baked into the guidance for the coming year. As it relates to which growth we want, certainly, we've already been delivering a growth in subs in Canada. We think ARPU has better upside than in the past. So therefore, I think revenue growth in Canada, and I'm not going to give a super precise time period here, but revenue growth in Canada is certainly within reach. In the U.S., it's about continuing our stabilization of our sub losses. We think that continued sub growth in Ohio is realistic. As it relates to the rest of the footprint, we're on track to diminishing those losses, and we expect lower losses in the next quarter as well. Overall, in terms of top line for the U.S., we'll have to see. It remains a challenging market, but we certainly don't expect the same challenging top line performance as what we've seen in the past year. Matthew Griffiths: Okay. That's helpful. And then on margins, obviously, the business is benefiting from the natural mix shift away from video and so on and towards Internet. But can you help us understand like how much your cost reduction program is contributing to the margin improvement in addition to the natural mix shift that you're seeing? Patrice Ouimet: Yes, it's a good question. I'm not sure I have the exact answer for you right now on this call, but I would say it's a mix of two. You're right. There is a mix shift towards more Internet, which does increase the percentage. As we look at the competitive nature of the industry, there's also the ARPU that plays into it. And so I would say the best way to look at it is to look at our OpEx. That does include some video costs in what we report publicly. But you can see that it's been shrinking. We can perhaps take it offline and try to give you a little more information on this. But I would say it's really a mix of the two because our cost reductions are quite material actually in what we've been doing in the past year. Matthew Griffiths: Okay. That would be helpful. And then maybe just one quick one, if I could sneak it in. In the past, you've talked about evaluating whether or not it makes sense to kind of divest some small systems throughout your U.S. footprint. Has that filed and closed at this stage? Or is that still something that is potentially out there? Frederic Perron: Yes, Matt, at present time, it's closed. We've looked at a few options. There were interesting possibilities, but not interesting enough, we judged at the time to strip out an asset because carve-outs are always challenging and could be a distraction for the organization in the midst of a big transformation. But who knows, we always keep options open in the future. Operator: Your next question comes from Maher Yaghi with Scotia Bank. Maher Yaghi: So I just wanted to maybe just dial on the homes passed increase in Canada. I mean, in the last 2 years, you've added approximately 70,000, 75,000 new homes passed. So -- and a lot of it is fiber, as I understand it. So can you just give us a perspective on the strength that you're seeing in your Internet subscriber gains in Canada? How much they're coming from these fiber edge-outs and new homes passed versus Oxio versus Cogeco out of territory? Just to understand maybe the return characteristics of these fiber rollouts that you're doing? Frederic Perron: Maher, it's Fred. A few things here. First off, yes, all -- most expansions that we do in both Canada and the U.S. are on fiber. As it relates to the return on those investments, they're quite good, in line with what Patrice has quoted in the past, and we do exceed 50% penetration of those new builds because they're rural areas with high demand. As it relates to contribution to our net growth, it varies quarter-by-quarter between network expansion, Oxio and the legacy business. All I can say is that for this past Q4, it was mostly -- first of all, it was mostly on our own network and less as a reseller that the growth came from. And it was actually mostly from legacy areas. So in the fourth quarter, network expansion was not the largest contributor to the growth. Now as we continue to build in Ontario in fiscal '26 and going into fiscal '27 as well, we do expect that network expansion will be a more material contributor to our sub growth. Maher Yaghi: Okay. And just a follow-up. The launch of Cogeco service under the Cogeco brand outside of your home territory, Oxio was -- as you've indicated in the past, has been a good success to capture out-of-market Internet subscribers. So maybe can you talk a little bit about the objective of launching Cogeco-branded service outside of your home territory in addition to Oxio that was already there? Frederic Perron: Sure. First, at a higher level, Internet resale in Canada between the different players is a fact of life, and it's been a fact of life for quite some time. The 2 of the big 3 that we don't already compete with on an infrastructure basis are already reselling our network in Quebec and Ontario and have been doing so for quite some time. I would say it doesn't appear to be material neither for our growth as a reseller nor for our churn at present time. So there seems to be more noise than anything else around all this. On your question more specifically, our strategic intent by opening up Cogeco as a reseller across Quebec is purely optionality. In a world where the resale dynamics continue to evolve. As I said, they're not material at present time, but we have nothing to lose from opening up another few million doors on the Cogeco brand. We -- as a smaller company, we benefit from asymmetry in this whole game, whereby we just covered 2 million homes in Canada and there are 15 million homes. So we get an asymmetric advantage. But so far, it's not much more than optionality. However, if for whatever reason we decide to push harder on this, now the systems are activated and it's pretty quick for us to push harder. Maher Yaghi: Okay. Can you disclose, how many -- you mentioned that you saw some good success with the wireless launch in Canada. Can you share some KPIs on that? Patrice Ouimet: Yes. So Meyer, we are not disclosing it at this point. As you know, we're starting from nothing. So it's still a small base. Very happy with so far, but I mean, it takes time to have critical mass. So over time, we do expect at one point to disclose the mobile subs, but it's not something we're planning to do for sure this year, and we'll see in the future. It's obviously important to make sure we don't release nonmaterial information that can have -- can be used by competition. So that's where we are at this point. Frederic Perron: Yes. I'll only say that the strong demand that we're getting, even though it's still going to take time to scale to Patrice's point, at least it's indicating to us that there's a way for us to run that business without it being a drag at an individual customer level. For example, we could always already pull back on some of our intro promotions. So I think at a unitary customer level, it's a good news. Maher Yaghi: Okay. And maybe just to double down on this, the pullback on the promotion. It kind of came at the same time as Rogers launched fixed wireless in your territory. Were the 2 related why you pulled back on wireless promotion? Frederic Perron: No. Absolutely not. We achieved the sub objectives that we wanted to achieve, and that's how we run the business. Maher Yaghi: So I'm trying to square the decision to pull back from offering 1-year service on wireless as a promotion to existing customers in Canada with the U.S. strategy where it's still going on, and it's been a year or so, less than maybe a year that you launched it, you're still offering free lines. So can you maybe just compare for us why it's still going on in the U.S. and not in Canada? Frederic Perron: It's purely a function of competitive dynamics and pricing dynamics in the market, Maher. The other players are doing it too in the U.S., the other cable players in particular. So that's what we have to do to be in the game at of time south of the border. Operator: Your next question comes from Stephanie Price with CIBC. Unknown Analyst: It's Sam Schmidt on for Stephanie Price. I wanted to ask a question around Ohio. The net additions turned positive in the quarter and U.S. subscriber losses also improved sequentially. Can you help unpack what changed there in terms of your strategy as well as in the competitive environment, both for Ohio and the U.S. more broadly? Frederic Perron: Sure. Good to meet you. I'll start with Ohio, and then I'll talk about the U.S. competitive dynamics more broadly. In Ohio, Ohio is -- and I think we've disclosed this percentage of our doors coming from Ohio. It's roughly 40% of our total U.S. doors that are in Ohio, and our penetration is quite low. So it's been some time where we see a lot of upside for us in that market, and we're starting to execute against that upside. So there were some sales channels, which were not as developed in the state. So we're starting to develop the channels. We keep optimizing our pricing as well. And over time, we think there are several quarters of growth in Ohio for us as we get closer over the years to what we believe is our fair share. U.S. competitive dynamics in general. Last quarter, we said that we saw an uptick in competitive dynamics or competitive intensity in the U.S. in 3 of our states. I would say at present time, it's more 2 of those states. One of them -- 1 of the 3 has eased back down. Of the 2 that remain, we have room to believe that will ease back down of those 2 as well over the coming months. We also see interestingly that FWA is not impacting us as a company as much as it was 2, 3 years ago. We rigorously track churn destination of our customers leaving us by state. And FWA is actually relatively low down the list at this time. You can only speculate why that is. We do know that some of the FWA players are now focusing more on the B2B segment where we're not as present. So even though 2 of the 3 FWA players are reaccelerating their sales, sometimes it's in the B2B segment. Otherwise, maybe they've tapped out in their relevant customer segments in our markets. Not exactly sure, but the bottom line is FWA is not impacting us as much as before. We still see intense promotions more generally from some of the national wireline players. So you net all of that out, you would -- I'd say the U.S. competitive environment remains intense, but has not worsened from the previous quarter, and there may be some slight improvement coming over the next couple of quarters, yet to be seen. Unknown Analyst: That's helpful. And then maybe just one on the Canadian competitive market outside of your network expansion. Are you seeing increased competition from competitors as they look to build out a footprint through TPIA or fixed wireless? And then I'll pass the line. Frederic Perron: It's really not very material for us, neither TPIA nor FWA in Canada. As I mentioned in an earlier question, TPIA competition has been happening for a long time, and it's not really impacting us. FWA is more recent, but it tends to be focused in Quebec, which is 1/3 of our Canadian footprint, and we're not really feeling it, as you can see in our strong sub results in Canada. And then on the positive side, there's been a real material pullback in promotional activity in the core wireline business that more than offsets in a positive way, the minor noise that we see in TPI and FWA. Operator: [Operator Instructions] Your next question comes from Drew McReynolds with RBC. Drew McReynolds: Two for me. Maybe for you, Patrice. In terms of the reinvestment levels that you make in the business as part of the transformation program, embedded into fiscal 2026 guidance, do your reinvestments in the business stay stable? Are you absorbing a sequential increase? Or likewise, does the reinvestment level begin to ease as part of the transformation program going forward? And then secondly, I think there's some language about $100 million in CapEx spent on longer-term growth opportunities over 5 years. Just wondering at a high level, what kind of growth opportunities you'd be looking to take advantage of with that level of investment. Patrice Ouimet: So on the transformation program, I would say when we look at better utilizing different go-to-market tactics and optimizing our sales channels, we are increasing and that's embedded in our guidance. We are increasing the use of those channels. Obviously, there's costs related to that. And obviously, that translates into new customers and new revenue. We'll see going forward as we're successful with it, obviously, the payback on these investments is very good. You have to look at the lifetime of the customer. But so far from what we're seeing, they're good. But I would say we've allocated some dollars in our guidance for this. Frederic Perron: Yes. Andrew, an example would be what we were talking about earlier in the previous question in Ohio, where we can really grow share to get closer to our fair share. So we're making the investment in achieving that, and it's starting to yield some benefit. So there's -- so that investment is increasing, but will pay back. The other example is wireless, as Patrice explained earlier. Patrice Ouimet: Yes. And on the second question on the $100 million, actually, it's something we've had -- we put it in the annual report, but we've had it for a few years. Basically, we have mentioned a few years ago that we might invest, and it's not CapEx actually, those would be investments in smaller companies to produce growth later on, so more in start-up mode. It's not something we've done so far, but it's not new disclosure actually if you go back to last year. So we'll see. If we do some, I do not expect it to be CapEx and no impact on free cash flow or anything. It would be more an investment on the balance sheet. Drew McReynolds: Okay. And then maybe one last one, and I may have missed this. In terms of the rate of network or footprint expansion you expect in fiscal 2026 relative to the 50,000 in fiscal 2025, do you have that for us? Patrice Ouimet: Yes. It would probably be similar. So I would say Canada because we're going to be -- it's a mix of what we're doing in Ontario and also, as I said earlier, what we're doing in footprint, so new neighborhoods and new streets. We will probably be around 40,000 addition in Canada. U.S. will be lower. We have less of these bigger programs, so probably closer to 10,000 new homes in the U.S. Operator: There are no further questions at this time. I will now turn the call over to Patrice Ouimet for closing remarks. Patrice Ouimet: All right. So we're right on time. So thank you, everyone, for these questions. I'm happy to take additional questions if you want to talk to us in -- before our next scheduled call for the Q1 results. Thank you. Have a good 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.
Operator: Good day, everyone, and welcome to the Third Quarter 2025 Transocean Earnings Call. [Operator Instructions] Please keep in mind, today's call will be recorded and we will be standing by if you should need any assistance. It is now my pleasure to turn today's conference over to Director of Investor Relations, Alison Johnson. Alison Johnson: Thank you, David. Good morning, and welcome to Transocean's Third Quarter 2025 Earnings Conference Call. A copy of our press release covering financial results, along with supporting statements and schedules, including reconciliations and disclosures regarding non-GAAP financial measures are posted on our website at deepwater.com. Joining me on this morning's call are Keelan Adamson, President and Chief Executive Officer; Thad Vayda, Executive Vice President and Chief Financial Officer; and Roddie Mackenzie, Executive Vice President and Chief Commercial Officer. During the course of this call, Transocean management may make certain forward-looking statements regarding various matters related to our business and company that are not historical facts. Such statements are based upon current expectations and certain assumptions and therefore, are subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our SEC filings for our forward-looking statements and for more information regarding certain risks and uncertainties that could impact our future results. Also, please note that the company undertakes no duty to update or revise forward-looking statements. Following Keelan and Thad's prepared comments, we will conduct a question-and-answer session with our team. During this time to get more participants and opportunities to speak, please limit yourself to one initial question and one follow-up. Thank you very much. I'll now turn the call over to Keelan. Keelan Adamson: Thanks, Alison, and welcome, everyone, to our third quarter conference call. We posted a strong third quarter, demonstrating our collective focus on delivering superior operational performance to our customers. And I extend my sincere thanks to all of our crews offshore and our operation teams onshore without whom these excellent results would not be possible. Additionally, we have made notable progress in recent months, reducing our operating costs as evidenced by our strong free cash flow generation in the period and our simplified and improved capital structure. We completed several important capital markets transactions that advanced our deleveraging efforts and further reduced interest expense to better position the company for the long-term benefit of our shareholders. Thad will provide more detail, but as the result of our ongoing cost control initiatives and these transactions, we have achieved several important results. First, by the end of 2025, we will have reduced our debt by approximately $1.2 billion versus our scheduled maturities of $714 million. We believe that a stronger and more flexible balance sheet is essential to improving total shareholder return, making accelerating -- accelerated deleveraging one of our key objectives. Second, these transactions allowed us to convert one tranche of secured debt to unsecured debt, reducing restricted cash balances that are now being used more efficiently and releasing the Deepwater Poseidon, which is among our highest specification and most capable rigs from the collateral pool. Third, our annualized interest expense will now be reduced by approximately $87 million versus 2025 with these savings expected to be used for further opportunistic debt reduction. And lastly, we have significantly improved our debt maturity profile and materially reduced our 2027 obligations. Today, we currently expect to meet our remaining scheduled maturities with cash flow from operations. We will include a slide in our corporate presentation that illustrates this improvement. We are pleased with the significant progress we have made on our balance sheet so far this year and there is more work to be done. I will remind our listeners that in addition to the providing industry-leading offshore drilling services to our customers, these actions and outcomes are consistent with our previously articulated objectives of reducing debt, reducing interest expense and simplifying our capital structure. Turning to asset strategy. We continue to refine the composition of our fleet. After a fulsome analysis of the option value of our cold stacked assets, we announced our intention to dispose of 4 drillships and 1 harsh environment semisubmersible from our stacked fleet. Overall, we will retire 9 rigs, including the 4 announced last quarter, a process that should be complete by mid-2026. Our fleet now consists of 24 contracted ultra-deepwater drillships and high-specification harsh environment semisubmersibles as well as 3 higher specification, seventh gen ultra-deepwater drillships currently cold stacked in Greece. We have been deliberate in the rationalization of our fleet to maintain a portfolio of the highest specification, most marketable and competitive assets in the industry. The decision to retire these older assets better aligns the company with evolving customer needs while supporting a more balanced industry supply-demand dynamic. With respect to rig contracting and as we expected, our customers exercised some priced options. In the U.S. Gulf, following the announcement of its final investment decision on the Tiber-Guadalupe development, BP exercised its 1-year $635,000 per day priced option for the Deepwater Atlas. The program is expected to contribute approximately $232 million in backlog and will keep the rig operating with BP through the second quarter of 2030. We are grateful for the continued confidence BP places in us to execute its payload [ gene ] programs. In Brazil, Petrobras exercised the first of its 2 options for the Deepwater Mykonos. The program extends the rig's firm term into early 2026. Moving now to the broader market environment. Given global macro uncertainties and its impact on commodity prices, our customers continue to exhibit capital discipline, prioritizing free cash flow for debt reduction, returning capital to shareholders and taking a measured approach to the amount of capital that they commit to exploration and development activities. They have also been reducing costs by restructuring their organizations and have largely been sustaining reserves and production levels through acquisitions and consolidation. This has resulted in deferred near-term demand for drilling services and as expected, a slower pace of contracting. However, industry projections continue to suggest that upstream investment in offshore will increase, particularly in the deepwater segment. Indeed, a number of independent organizations recently observed that the significant decline in operators' reserve to production ratios resulting from their capital discipline is not sustainable, a view with which we agree. We believe that their efforts to improve this metric will lead to meaningful increases in offshore drilling activity. Notably, and perhaps to the greatest extent we have heard over the past decade, many customers are now indicating a necessity to increase their exploration activity to address this emerging supply imbalance. Multiple third parties project that demand for deepwater rigs will significantly increase in the coming years and we are encouraged by recent conversations with customers and anticipate contract awards for more programs later this quarter and into 2026. Based upon known tenders, programs and contract options, we expect the number of contracted floaters to grow by approximately 10% in the next 18 months. Looking regionally, in the U.S. Gulf, activity is stable as operators continue to extend utilization of rigs they already have on contract. Additionally, 3 short-term programs with independent operators are expected to be awarded in the fourth quarter with one more tender to be released before year-end. In Brazil, we anticipate the Petrobras Buzios and Mero tenders and Shell's Gato do Mato tender will be publicly awarded in the coming weeks for a total of 23 years of firm work requiring 6 rigs. We believe that these programs will mostly be satisfied with rigs currently in country. In Africa, we still anticipate demand could increase the working rig count by at least 3 rigs through 2027. In Nigeria, the Exxon and Chevron tenders for multiyear development are well underway and Total's new tender is expected to be released in the coming months. In the Ivory Coast, we believe Eni's release of its tender for the multiyear Baleine Phase 3 development commencing early 2027 is imminent. In Angola, the rig count is expected to remain relatively stable. Azule Energy recently released an expression of interest for 2 rigs commencing late 2026 and Shell will go back to the country after many years out by starting a new exploration campaign in 2027. We now expect there will be 5 drillships and 1 semisubmersible working in country by 2027. In Namibia, most of the operators that are currently active will continue to drill exploration and appraisal wells in 2026 through 2027. We expect the first major development program will be tendered for 2 rigs to begin in 2028. And finally, in Mozambique, Eni's tender is progressing with Exxon and Total's tenders anticipated to be released soon. I also note that Total recently lifted force majeure from their $20 billion LNG project there, a decidedly positive development for Mozambique's economic development and for investor confidence as the country continues to develop its energy resources. In the Mediterranean, current opportunities could require up to 2 incremental rigs in the next 2 years with programs from a number of the major operators as well as local independent energy. Moving further east to India. The ONGC tender for 1 drillship with a mid-2026 commencement is in progress. And elsewhere in Asia, there are a number of market inquiries, including 2 in Indonesia for multiyear programs starting in 2027. In Australia, Chevron's Gorgon Phase 3 tender is progressing toward award, which we currently expect in the first quarter of next year. We anticipate there will be 1 drillship and 2 semisubmersibles working in country in 2027. In Norway, utilization of the high-specification harsh environment semisubmersible fleet is expected to remain robust through 2027 as the award for Equinor's rig tender is expected imminently. This and other projects have commencements in 2027, many of which will utilize contract extensions of the current fleet. Based upon current planned programs in 2027, the drillship and harsh environment semisubmersible markets are projected to reach active utilization of above 95% and close to 100% respectively. Operationally, we continue to deliver strong safety and reliability performance for our customers. Indeed, in September, we posted revenue efficiency of 100% and delivered 97.5% for the entire third quarter. Responsible for these achievements is a uniquely qualified and high-performing team that is focused on delivering the professional and disciplined experience to which our customers have grown accustomed. Through rigorous procedural discipline, we've built an operational framework that enables us to deliver the same standard of performance on every Transocean rig regardless of where it is operating. I am also very proud that we continue to set industry firsts. We recently ran the heaviest casing string on record at a hook load of approximately 2.85 million pounds using our eighth generation drillship, the Deepwater Titan. This achievement showcases what can be delivered with this highly capable generation of asset, unlocking significant well construction and production efficiencies for our customer. In conclusion, we remain focused on optimizing the value of our assets and services while maintaining a disciplined approach to deploying our high-specification fleet. Our priority is to best serve our customers and continue to generate strong cash flow, supporting our ongoing efforts to strengthen the balance sheet and increase the value of our equity. We will continue to take steps to optimize our capital structure and financial flexibility. I'll now turn it over to Thad for further discussion on our transactions, our results and guidance. Thad? R. Vayda: Thank you, Keelan, and good day to everyone. During today's call, I will briefly recap our third quarter results, provide guidance for the fourth quarter and conclude with our preliminary expectations for full year 2026. As is our practice, we'll provide updated guidance for 2026 when we report our full year 2025 results in February. During the third quarter, we delivered contract drilling revenues of $1.03 billion with an average daily revenue of approximately $462,000. Contract drilling revenues are slightly above our guidance range due primarily to the Deepwater Skyros, which continued to operate throughout the quarter. Operating and maintenance expense in the third quarter was $584 million. This is below our guidance range, primarily due to deferred maintenance costs across the fleet and the release of a $10 million provision resulting from the anticipated favorable outcome of a legal dispute, partially offset by severance costs associated with the company's shore-based support reorganization undertaken in August. Capital expenditures for the quarter were $11 million, also below our guidance range of $25 million to $30 million, primarily due to the timing of payments. G&A expense was $46 million, below expectations due also to timing, but with respect to professional and legal services. We ended the third quarter with total liquidity of approximately $1.8 billion. This includes unrestricted cash and cash equivalents of $833 million, about $417 million of restricted cash, the majority of which is reserved for debt service and $510 million of capacity from our undrawn revolving credit facility. All of the proceeds from the recent equity and debt capital markets transactions have since been deployed to reduce and refinance certain debt obligations. Adjusting for these proceeds, our quarter end liquidity would have been approximately $1.2 billion. I will now provide guidance for the fourth quarter of 2025 and preliminary guidance for the full year of 2026. For the fourth quarter, we expect contract drilling revenues to be between $1.03 billion and $1.05 billion based upon an average fleet-wide midpoint revenue efficiency of 96.5%, which, as you know, can vary based upon uptime performance, weather and other factors. This guidance includes between $60 million and $70 million of additional services and reimbursable expenses. The slight sequential increase in revenue is mainly due to higher activity on the Deepwater Conqueror, which started its new contract on the 1st of October, partially offset by lower activity on the Deepwater Skyros as it has concluded its work in Angola and is mobilizing to Ivory Coast for its next contract, which starts in December. We expect fourth quarter O&M expense to be within a range of approximately $595 million to $615 million. This quarter-over-quarter increase is primarily due to the release of the previously mentioned anticipated favorable resolution of a legal dispute, which is not repeated in the fourth quarter and higher in-service and out-of-service maintenance across the fleet, partially offset from the shore-based reorganization implemented in August. We expect G&A expense for the fourth quarter to fall within a range of approximately $45 million to $50 million. Net cash interest expense is projected to be approximately $122 million for the fourth quarter, comprising interest expense and interest income of about $131 million and $9 million, respectively. Capital expenditures and cash taxes are expected to be approximately $25 million to $30 million and $18 million, respectively. Finally, we currently estimate that we should end the year with total liquidity of slightly more than $1.4 billion, including the $510 million capacity of our undrawn credit facility. Versus our prior guidance of $1.45 billion to $1.55 billion, our year-end liquidity reflects the use of approximately $106 million of cash in excess of that provided by the recent transaction to reduce our debt balances. We expect that at year-end, the remaining debt and capital lease balance will be approximately $5.9 billion, which is net of $80 million of remaining scheduled payments and maturities to be settled with cash. For 2026, we currently forecast contract drilling revenue to be between $3.8 billion and $3.95 billion. Approximately 89% of our forecasted revenue is associated with firm contracts and the range assumes revenue efficiency of approximately 96.5% at the midpoint. Our guidance includes between $230 million and $270 million of additional services and reimbursable expenses. We expect our full year O&M expense to be between $2.275 billion and $2.4 billion and we currently anticipate G&A costs to be between $170 million and $180 million. We forecast 2026 cash interest expense to be about $480 million. Our preliminary projected liquidity at year-end 2026 is between $1.6 billion and $1.7 billion, reflecting our revenue and cost guidance, which incorporates the net effect of our ongoing cost savings initiative and includes our $510 million revolving credit facility, which we expect to remain undrawn and anticipated restricted cash of approximately $380 million. This liquidity forecast also includes CapEx expectations of approximately $125 million to $135 million. I reemphasize our continued focus on strengthening the company's financial position through disciplined management of our capital structure. In utilizing a combination of equity and debt in our recent capital markets transactions, we were able to reduce our gross debt by approximately $1.2 billion versus scheduled maturities of $714 million, an incremental debt retirement of over $0.5 billion. This is accompanied by a substantial reduction in annualized interest expense of about $87 million. The sequence of the capital market transactions also allowed us to achieve the best possible rate, 7.875% on the new 5-year $500 million senior priority guaranteed notes due 2029, below that of the now retired 8% notes that matured in 2027. Additionally, with the retirement of the 2027 notes secured by the Deepwater Poseidon, we were able to utilize cash that would otherwise have been held in our restricted cash accounts in a more productive manner. Finally, the tender offer for our discounted 2041 and certain 2028 maturities contributed about $105 million of debt reduction to the total $1.2 billion with associated annual interest expense savings of about $9 million. In conclusion, we remain committed to a thoughtful, measured approach to liability management. With strong backlog conversion generating incremental free cash flow, we anticipate being able to continue accelerating debt reduction in excess of scheduled maturities. I'll now turn the call back to Alison to launch the Q&A session. Alison Johnson: Thanks, Thad. David, we're now ready to take questions. [Operator Instructions] Operator: [Operator Instructions] We'll take our first question from Eddie Kim with Barclays. Edward Kim: Just a bigger picture question on your confidence level in the increase in deepwater utilization. I think you mentioned 95% or even 100%. I believe that's exiting '26 and into 2027, if you could clarify the timing there. We've seen a few day rates now below $400,000 a day and there's some investor concern around some more negative day rate prints here in the next couple of months. First, do you think those are coming? And second, how does that impact your view on this activity inflection higher in the back part of next year? Keelan Adamson: Yes. Good question. And I think the way I would probably approach I think the 2-part question was one on utilization and the second part was more on rates and how that pressure will exert itself. I would say our view remains the same, Eddie. We believe that as we turn from the end of '26 into '27, the utilization of the ultra-deepwater fleet will bridge over 90%. And based on the conversations we're having with our customers, the programs, the tenders that we know are out there, with the long-term fundamentals with respect to the upstream CapEx, we expect to start moving towards offshore. The 2025 was a low FID year and so we expect the number of FIDs to increase as we go forward here into next year. And the need for oil companies to start exploring to a greater extent. And from my conversations with the heads of wells and indeed some CEOs in the last quarter, that sort of period looks like '27, '28, they're going to start releasing some capital to address those supply concerns. So we're very constructive on the longer term, certainly from 2027 out. Yes, there is some utilization available in 2026. But those rigs that are on the water, there's quite a few opportunities for those to capture some work. The question on rate, obviously, as the utilization builds from where we are at the moment, which we would consider to be at the bottom of the trough and I'm sure Roddie will add a few more thoughts on this after I'm finished, we certainly believe that as that capacity is absorbed into the awards that are coming, the rates will be competitive. It's a competitive environment right now as the drilling sector starts trying to build their utilization. But for the timing of our assets rolling towards the second half of next year, we expect a lot of that activity to be absorbed. And so we consider it a really good opportunity for us to roll some of our rigs that are coming available at the end of the second half of next year and going into '27 and '28 prospects. And so as you know, utilization when it bridges 90%, that's when the upward pressure starts exerting on rate. So we're very constructive on both utilization and our ability to create value from our assets as we move from '27 out. And with that, perhaps Roddie has a few more comments to make. Roddie Mackenzie: Yes, sure. Sure. Eddie, let me add just a couple of notes to that. So as we think about where we are in the cycle, essentially we were kind of at a low point of contract awards in the first quarter of this year with only about 12 rig years awarded. The second quarter was a bit better at 14 rig years. The third quarter was 18 rig years. So we see the steady increase. And as Keelan has alluded to, in the fourth quarter, like in Brazil alone, we expect to get 23 rig years awarded. If we think about the other regions, we think Q4 is going to be a very strong contracting quarter and that continues into '26. So if you think about that in terms of actual utilization, we've already gone through the dip in contracting. Therefore, the increase in utilization is already booked. So this utilization is going to happen. It's kind of in the books at the moment and we think it basically accelerates from there. There was one other thing I was just going to mention real quickly on utilization. So as we entered the year 2025, we did have some white space on certain assets. And it's just a phenomenon of our business that on the active rigs, typically, the programs will run longer rather than run shorter and that's for a variety of reasons, whether they're well-related or more often, once an operator has an active rig working, it's very cost-effective to add additional wells to that program. So we saw that kind of several times for us and it's one of the reasons why our results in the third quarter are so good that we contracted beyond the time line that we had stated in the fleet status report. So I think on that side, utilization is looking only on the way up from this point forward, which is great. And to Keelan's point again about the rates, certainly, for near-term stuff, we're seeing more competitive numbers. But I think what's interesting is the time frame in which we are rolling over the rigs is going to allow us to continue our very disciplined approach and making sure that we get value for those rigs. And to be honest, having the highest specification rigs available at a moment when we're transitioning into the busiest time, I think, is a really good position to be in. If I look at the [ Farley ] charts and other charts, '27 looks -- if all of the probable items come through, then we're pretty close to 100% utilization and potentially above it if there's a big release of budget capital, but we have to wait and see how that pans out. But certainly, utilization and day rates are looking pretty solid from this point forward. Keelan Adamson: Yes. Maybe one more comment, Eddie. I think when we talk about rates and we look at what's been fixed and what's been announced, I think the seventh gen units, there's been a lot of resilience at around $400,000 a day. And the competitive environment that's available that's present right now is going to also attract some of the lower spec sixth gen units, which is where you will see some more competitive pricing as the drillers start building more utilization on those assets. But we've been pleased with the resilience of the seventh generation assets have shown when it comes to day rate. And maybe another follow-up on '26. We're still looking to see what our customers are going to release from a budget point of view for next year. I'll be interested to see what that looks like and how that can be transferred over to the drilling market in '26. Edward Kim: Great. Great. That's great to hear and all very helpful color. Just my follow-up is on your rigs coming off contract soon. You have 4 drillships set to come off contract around kind of early to mid next year, the Skyros, Mikonos, KG2 and the Proteus. Just based on conversations you're having now for these rigs, would it be prudent at this point to assume maybe 1 quarter of idle time after coming off contract? How should we think about the follow-on opportunity for these rigs and the timing around when that next contract is likely to commence? R. Vayda: Yes, I'll take that one. So we are in discussions on all those rigs in various different manners at the moment. So we don't want to tip our hat to that. But yes, we think -- certainly, there's not going to be idle time in all of those rigs. There's possibility that there could be on 1 or 2. But as I said before, a lot of these programs, especially around finishing up wells going a little bit longer, but we do have active prospects on every one of them. So that's pretty promising. And I think something that is obviously not readily apparent to everybody in the industry, except for those that are actually bidding for the work is the number of conversations for work is kind of -- it hasn't been this active and busy for our marketing team for a couple of years. So yes, we're pretty confident we'll be putting on some backlog on a number of those rigs. Keelan Adamson: Yes. Maybe a little bit more color from my side, Eddie. You mentioned a few rig names. Rigs have reputations and the rigs that we have rolling have very strong reputation. So the Skyros, for example, Transocean and Total's multiple year winner of Rig of the Year. I mean the rig has performed outstanding on that Total contract for 10 years, even performed 10 years without an LTI in its safety performance. The reputation of that rig is outstanding and there are several inbounds that we get concerning its availability. If you think about the Proteus you mentioned in the Gulf of America, the Proteus is one of the highest spec units in the world, has performed outstanding as well for its Shell campaign. So we have a variety of rigs that are rolling. Some are more sixth gen nature and some are much more higher spec. So what you'll see from us is certainly looking to build utilization on our lower spec units. And when it comes to the higher spec units like Proteus, that's an opportunity for us to remain disciplined. I think we've demonstrated that in the past as the market ran up before this particular mid-cycle lull. And I would say we will be very disciplined in how we approach the Proteus and the sort of work and the term that we put on her, obviously, we want to keep her busy. But if we don't like particularly the economics that are associated at that time, we'll take shorter stint work. And then, of course, that provides opportunity for small amounts of white space. But that is the consequence of a commercially strategic bidding discipline that we employ, especially with our harsh environment -- with our high-spec units. Operator: We'll take our next question from Doug Becker with Capital One. Doug Becker: Some industry reports suggest Petrobras recently had one-on-one meetings with drilling contractors just to discuss ways to reduce costs. Just wanted to get confirmation, did Transocean have such a meeting? And if so what was the outcome? Keelan Adamson: I'll offer some commentary, and I'm sure Roddie will add his -- some color as well. Yes, we've been engaged with Petrobras on this topic for a while. I would reiterate our belief that we do not believe that this cost reduction exercise on Petrobras' part is going to materially change the activity that they have in country. We have a lot of experience across our operations of driving cost efficiencies into the operation on behalf of our customers. And with respect to Petrobras, we are engaged with the lessons we've learned across our fleet and with various different customers on how to reduce that cost structure. And typically, it's built around things like the number of people on board the rig and simple things like that. So Petrobras are keen to engage with the drillers on this matter. There are efficiencies to be gained and it's very encouraging to see Petrobras open to having these discussions, looking for more efficiencies and allowing drilling contractors to bring their experience to bear in this environment. So Roddie, do you want to add anything? Roddie Mackenzie: Yes. I'd just add, that's exactly the point. This is actually a welcome effort. So yes, to recap on that, basically, they're looking to take about 7% or 8% out of their cost basis. And they're doing that in a manner, as Keelan said, there are certain things in the Petrobras contracts that have expense to the contractors that are perhaps nice to have, maybe not essential to the contract. So if we're able to take some of those out and pass on those savings to Petrobras, that makes their wells more competitive, that stimulates more work. So we think that's a positive effort. And of course, we're very interested in that. And I think it's off the back of news like Ibama give the approval for the drilling exploration campaign in Foz do Amazonas, which is the North Coast of Brazil. So that's very encouraging for future activity. But yes, I think their statement is they very much are looking to keep all the rigs they have on contract and just seeing where they can be more cost-effective on certain demands that they have. And of course, we're all over that. I think that's quite positive. Doug Becker: Is it fair to say that discussions were much more about those cost reduction efforts outside of rate? Or is there a desire for some type of concession on price or blend and extend? Roddie Mackenzie: Yes. I mean, obviously, we can't talk about specific negotiations that we have with them. But the first focus is on the existing contracted rigs and what they can do to reduce the cost basis. If there is opportunity to add term to some of those, then that's an avenue that I'm sure many will be happy to explore. Doug Becker: That makes sense. And then, Thad, maybe one for you. A lot of steps to reduce debt during the third quarter. What would you highlight as the next few steps going forward and maybe in particular, just the potential for another equity raise down the road? R. Vayda: The short answer is, as Keelan had indicated, we anticipate that we're going to meet all of our obligations out of cash flow from operations. A couple of things I'd like to say on the equity raise. Clearly, it is never an easy decision for management to go to the market. And frankly, there's probably never a particularly good price at which one should issue equity. That said, I think that the company has had a pretty good track record of treating shareholders as well as it can, particularly with respect to those things that are within our control. We didn't restructure, but with that comes this survivor's curse. When you look at the things that are encumbrances to our share price, it's 2. It's, frankly, the market and the pace and day rates of contracts. And second, depending upon the day of the week, it's the leverage. It's sort of the survivor's curse. So we took this exercise to heart. We did a lot of analysis and we did our best to ensure that this is something that we really wouldn't have to do in the future. So our expectation now is with our liquidity profile, our debt maturity schedule, the market conditions that we'll be able to meet our obligations at cash flow. You should expect to see us deploy any excess cash generated by the cash flow savings that we've talked about, the $250-so million that we anticipate in aggregate achieving in 2026 to reduce our debt balance. Operator: And we'll take our last question today from Noel Parks with Tuohy Brothers. Noel Parks: I was wondering, you were talking about there -- just from discussions that you could see exploratory drilling maybe picking up in that 2027, 2028 time frame. I just wonder if you sort of think about lead time and customers' internal capital discussions, do you have any sense as to when they might -- how far in advance they might start looking at trying to commit to rigs on some of those? Keelan Adamson: Yes. No, it's a good question. As you know, a lot of the activity that we perform on contracted rigs is largely focused on development, but our customers also squeeze in exploration wells that they have approved in their budgets into the program should the time lines align. I think the difference that we're seeing now is a real conversation in the world about the need to increase the supply of hydrocarbons. And if I cite the IEA report that was recently published, they speak about over $500 billion of the upstream investment, 90% of that is used every year to just simply replace the reserves that are being produced, right? And that's not taking into account any of the growth that is anticipated for the world. So as our customers are noticing that the decline rates in their conventional and also in their nonconventional, which is an accelerated decline rate, there isn't more conversation now about how do we produce that supply that's going to be required. So as we think about the commodity prices, the macro environment, I think our customers are going to continue to find opportunities in their programs of contracted rigs in '26 to put a few exploration wells in. But the conversations are now changing to a major customer talking about building an entire rig line around exploration in '27 and '28. And there's more and more of those major customers starting to talk about that. And that's what's giving us an awful lot of encouragement with respect to what we think that will transfer to in rig activity in the out years from '27 on. And that's kind of the subtle difference that we're hearing in the conversations I'm having certainly with our customers. Roddie, do you have anything to add on that? Roddie Mackenzie: No, I think that nails it, exactly that it's been a while since we've had this exploration discussion and I think the broader macro commentary really helps that. And of course, we are seeing that directly with the discussions that we're having with some of our customers. Operator: And there are no further questions at this time. I'll turn the program back to Alison Johnson for any additional or closing remarks. Alison Johnson: Thank you, David, and thank you, everyone, for your participation on today's call. We look forward to speaking with you again when we report our fourth quarter 2025 results. Have a good day. Operator: This does conclude the Transocean earnings call. Thank you for your participation and you may now disconnect.
Operator: Hello, and welcome to the Scorpio Tankers Inc. Third Quarter 2025 Conference Call. I would now like to turn the call over to James Doyle, Head of Corporate Development and IR. Please go ahead, sir. James Doyle: Thank you for joining us today. Welcome to the Scorpio Tankers Third Quarter 2025 Earnings Conference Call. On the call with me today are Emanuele Lauro, Chief Executive Officer; Robert Bugbee, President; Cameron Mackey, Chief Operating Officer; Chris Avella, Chief Financial Officer; Lars Dencker Nielsen, Chief Commercial Officer. Earlier today, we issued our third quarter earnings press release, which is available on our website, scorpiotankers.com. The information discussed on this call is based on information as of today, October 30th, 2025, and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release, as well as Scorpio Tankers' SEC filings, which are available at scorpiotankers.com and sec.gov. Call participants are advised that the audio of this conference call is being broadcasted live on the Internet and is also being recorded for playback purposes. An archive of the webcast will be made available on the Investor Relations page of our website for approximately 14 days. We will be giving a short presentation today. The presentation is available at scorpiotankers.com on the Investor Relations page under Reports and Presentations. The slides will also be available on the webcast. After the presentation, we will go to Q&A. [Operator Instructions] Now I'd like to introduce our Chief Executive Officer, Emanuele Lauro. Emanuele Lauro: Thank you, James, and good morning, everyone, and thanks for joining us today. We are pleased to report another quarter of strong financial results. In the third quarter, the company generated $87.7 million in adjusted EBITDA and $72.7 million in adjusted net income. The product tanker market continues to benefit from enduring structural trends like strong demand for refined products, evolving trade patterns and long-term shift in global refining that are lengthening voyages and increasing ton miles. Those dynamics have been reflected in freight rates, which have strengthened over the past quarters. The company is financially, operationally and commercially strong. Our focus is clear, building a shipping company that is investable through the cycle. Today, our liquidity stands at approximately $1.4 billion, including cash, undrawn revolving credit and our investment in DHT. Over the past 4 years, we've reduced our daily breakeven from roughly $17,500 per day to $12,500 per day. And with our recent decision to repay amortizing debt, we expect that figure to fall further to around $11,000 per day. Today, we also announced a 5% increase in the quarterly dividend. And going forward, we'll continue to review the dividend at least annually. Our goal, as mentioned, is to make the dividend sustainable, durable and steadily growing over time, rewarding shareholders while building a company that remains investable through the cycle. Shipping will always be volatile, that's its nature. But through our efforts of strengthening the balance sheet, lower our breakeven and increase charter coverage, we've meaningfully reduced that volatility. Looking ahead, we remain optimistic as our outlook for both crude and refined products remains constructive. With a modern fleet, robust liquidity and a conservative balance sheet, Scorpio Tankers is well positioned to navigate uncertainty and continue creating long-term value for shareholders. With that, I'll turn the call to James for a brief presentation. James? James Doyle: Thanks, Emanuele. Slide 7, please. Product tanker rates remain firm and have increased over the last week with MRs earning around $28,000 per day and LR2s about $35,000 per day, levels that continue to generate substantial free cash flow for the company. Refining margins have strengthened, inventories remain low and fourth quarter demand, excluding fuel oil is expected to be nearly 900,000 barrels per day higher than last year. With seasonality turning in our favor, a strong crude market and several near-term catalysts emerging, the backdrop for product tankers looks increasingly constructive as we move through year-end. Slide 8, please. Despite significant refinery maintenance, over 8 million barrels per day offline in September and 10 million in October, seaborne exports have continued to rise. In September, excluding Russian volumes, product exports averaged 20 million barrels per day, approximately 600,000 barrels per day higher than the same month last year. Slide 9, please. A rise in drone attacks on Russian refinery capacity has reduced refined product exports from 1.5 million barrels per day to about 1 million, a decline of 30%. At the same time, OFAC's new sanctions on Rosneft and LUKOIL are expected to further disrupt Russian exports. Even before these measures took effect, Brazil's imports of Russian barrels had fallen sharply from 250,000 barrels per day to just 50,000 with much of the shortfall replaced by U.S. supply, a shift that lifted MR rates across the Atlantic Basin. In addition, importers of Russian products begin seeking alternative sources, product tanker rates could tighten further. Slide 10, please. Increasing sanctions from OFAC, the EU and U.K. have made exports more challenging. The rise in crude on the water has been driven primarily by sanctioned countries, Iran, Venezuela and Russia, which together accounted for roughly 70% of the increase. The number of sanctioned vessels continues to grow, now representing nearly 8% of the MR fleet, 14% of the LR2 fleet and 34% of the Aframax fleet. These vessels are, on average, almost 20 years old and are unlikely to return to non-sanctioned trades. As sanctions expand and enforcement tightens, additional vessels will likely be absorbed into these trades, further limiting available tonnage for legitimate cargoes. In short, the sanctioned fleet is large, old and increasingly isolated, effectively shrinking the number of ships competing in the mainstream market. Slide 11, please. We continue to see closures in global refining capacity. Over the past 5 years, net capacity growth has been only 300,000 barrels per day, driven by additions in the Middle East and offset by closures in Europe and North America. In California alone, 250,000 barrels per day of capacity is scheduled to close this year and in Q2 next year, which could effectively double U.S. West Coast product imports largely coming from Asia. These refinery closures and changes have been a key driver in ton-mile demand growth for product tankers. Slide 12, please. In October, China announced new fees on vessels calling at U.S. ports. As of this morning, it appears that President Trump and Xi have agreed to postpone both the USTR tariffs and the Chinese port fees for up to a year. If these measures were to return, China accounts for only about 3% to 4% of the global seaborne refined product market, and we would not expect any material impact on the overall market. We will continue to monitor the situation closely. Slide 13, please. The product tanker order book currently stands at 18% of the existing fleet, a figure that may appear elevated at first glance, but context matters. Newbuilding activity has slowed considerably. Year-to-date, only 44 product tankers have been ordered. LR2s now make up almost half the current order book. However, 49% of LR2s currently on the water are trading crude oil, a trend we expect to continue. In short, effective fleet growth in clean products looks far more modest than headline numbers suggest. Slide 14, please. As shown in the left-hand chart, a 20-year-old vessel generates 50% fewer ton miles than a modern one, reflecting limitations in trading opportunities, efficiency and regulatory access. The drop-off is even steeper, over 75% if the vessel was not involved in Russian trade. This isn't a short-term story. Between 2003 and 2010, we saw a significant expansion of the product tanker fleet. The result, a large cohort of vessels now approaching or surpassing 20 years of age. The chart on the right makes this clear. Including the order book, 17.8% of the fleet is over 20 years old. By 2028, that figure climbs to 31%. The implications are structural. The fleet is aging, utilization is falling and effective supply is tightening even without a dramatic increase in scrapping. Slide 15, please. Given the age profile of the fleet and the high share of LR2s trading crude, actual fleet growth could be -- could prove lower than headline expectations. Assuming no decline in utilization for vessels older than 20 years and a portion of LR2 newbuilds trading crude, effective fleet growth could average around 3.5% a year. However, adjusting for lower utilization on older ships, effective fleet growth could fall closer to 1% per year. In contrast, ton-mile demand has increased more than 20% since 2019, driven by refinery rationalization, shifting trade routes and ongoing dislocation of global energy flows. We expect ton miles to continue to outpace supply. In both the short and long term, the market fundamentals remain strong, driven by structural shifts in global refining, longer trade routes and an aging fleet. With that, I'd like to turn it over to Chris. Chris Avella: Thank you, James, and good morning or good afternoon, everyone. Slide 17, please. This quarter, we generated $148.1 million in adjusted EBITDA and $72.7 million or $1.49 per diluted share in adjusted net income. Our operating cash flow, excluding changes in working capital was over $135 million this quarter and approximately $375 million on a year-to-date basis. We are pleased to announce both an increase in our quarterly dividend in addition to new agreements with our lenders to prepay the principal amortization on certain of our loans for $154.6 million in aggregate. This prepayment is expected to take place in the fourth quarter of 2025 and represents all of our scheduled loan amortization for 2026 and 2027. The principal and interest savings resulting from this prepayment will further reduce our cash breakeven levels, which include vessel operating cost, cash G&A, interest payments and commitment fees and regularly scheduled loan amortization to approximately $11,000 per day over this period. In addition to this, we continue to be opportunistic with our investment in DHT, having sold 5.3 million shares in September and October at over $12.50 per share. This is an almost 20% return on investment when factoring in dividends received. The chart on the right shows our liquidity profile. As you can see, we have access to over $1.4 billion in liquidity as of today. Our liquidity consists of cash of $627 million, along with $788 million of drawdown availability under 3 revolving credit facilities. Slide 18, please. The chart on the left shows the progression of our net debt since December 31, 2021, which has declined to $2.7 billion to a net debt balance of $255 million. On a pro forma basis, our net debt position is $34 million, which takes into account the expected receipt of the October higher payment from the Scorpio Pools, which are expected within the next 2 weeks and the net proceeds from the sales of 3 vessels, which are expected to close in the fourth quarter. Chart on the right breaks down our outstanding debt by type. Starting at the bottom is our $69 million of legacy lease financing obligations on 3 vessels with Ocean Yield. These leases are the most expensive financing in our debt structure with margins of over 400 basis points. In June and July, we submitted notice to exercise the purchase options on these vessels. Two of the purchases are scheduled for December for $23.4 million each and 1 purchase is scheduled for February for $18.9 million. In the middle is our secured bank debt with a lending group dominated by experienced European shipping lenders whom we have strong relationships with. As I mentioned, we expect to prepay $154.6 million of this debt in the fourth quarter of 2025. As a result of this prepayment, we will have no scheduled principal amortization on our existing debt for all of 2026 and 2027. Further to this, $290 million of our $615 million of secured borrowings is drawn revolving debt, an important tool that we can use if we want to repay the debt yet maintain access to the liquidity in the future. At the top is our $200 million 5-year senior unsecured notes, which were issued in an oversubscribed offering in the Nordic bond market in January of this year at a 7.5% coupon rate. Slide 19, please. By the end of the first quarter of 2026, we expect to make a total of $234 million in unscheduled prepayments on our debt. $14 million of this amount has already been paid in advance of the pending sales of 2 vessels. And as I mentioned, we have committed to repay $65.7 million to exercise the purchase options on 3 lease finance vessels, along with $154.6 million across 4 different credit facilities to cover our scheduled loan amortization for 2026 and 2027. The chart on the right is our dry dock estimates through the end of 2026. Our forward dry dock schedule is light after having undergone the special surveys on over 70% of our fleet in the last 2 years. Slide 20, please. Once we complete our unscheduled debt prepayments, our cash breakeven rates are expected to be at the lowest levels in the company's history. The chart on the left shows that these expected cash breakeven rates are lower than the company's achieved daily TCE rates dating all the way back to 2013, with the closest point being the aftermath of the COVID-19 pandemic when oil consumption was at lows not seen in decades. To illustrate our cash generation potential at these cash breakeven levels, at $20,000 per day, the company can generate up to $315 million in cash flow per year. At $30,000 per day, the company can generate up to $666 million in cash flow per year. And at $40,000 per day, the company can generate up to $1 billion in cash flow per year. This concludes our presentation for today. And now I'd like to turn the call over to Q&A. Operator: [Operator Instructions] First question comes from Omar Nokta with Jefferies. Omar Nokta: Thanks for the update. Obviously, very good detail. And clearly, Scorpio is in a very strong financial position as kind of outlined throughout the call here and with Chris here on the breakeven. And just as we kind of think about Scorpio here, you've been building cash, paying down the debt, breakeven is obviously coming down. You're putting Scorpio in the strongest financial position in its history and preparing for, say, the unknown given the geopolitical environment. Just maybe kind of thinking about the platform and how it is at the moment, do you feel like you're building towards something here, something more significant for this balance sheet to be put to use at some point down the line? Or do you think this is a bit more of a new normal for Scorpio to be in a net cash position long term with an eye on keeping that dividend sustainable throughout the cycles? Robert Bugbee: It's a great question, Omar. So, I think that can answer the last bit first, that's the easy one. We're very convinced that the right thing we should do is to maintain a regular dividend and have a dividend that is clearly sustainable. And so to do that, we [Technical Difficulty] a strong balance sheet, and we have to be able to show like we can do and as Chris has gone through, that we can clearly go through the absolute bottom of the cycle and still maintain that dividend. The second aspect as to whether we are building things for long term, et cetera, et cetera, is the honest answer is that we've been focused on getting the debt down, getting the cash breakeven down, getting our self into the position that we're in right now. Chris is indicating that very soon we'll start to move to net debt negative or building of cash. And that simply by definition, gives you -- why you maintain overall discipline gives you tremendous options. It allows you to go into -- at any different point in the market, it allows you to properly -- if you wanted to renew your fleet, for example, without changing your leverage very much. As Chris was pointing out that even at very low rates, we'd still be generating tremendous cash flow. But -- so I think that's the best way to answer it. Omar Nokta: Clearly, that's helpful. And I guess maybe just a follow-up, and I'll pass it on is a question that's come up in the past. And when does it make sense, do you think, to start buying ships to offset perhaps some of the sales of the older ones? You clearly got critical mass, but are you content to keep kind of scaling back a bit, selling some more of the older ones without replacing? Robert Bugbee: I think we have a different situation right now. We're very soon. We're getting to that primary objective where we get, we're able to create that balance sheet, take the debt right down. And Vick and Chris are showing outlines whereby we can pre-bet principal, et cetera, lowering that cash down. So that part is kind of finished. So now you're really left to mathematics. Mathematics would be -- I'll give you an example is we don't need to renew for renewal sake. There's no point in that. We also have consistently said that we are confident in the product market. Our last call was we are confident that the latter half of the year will be very strong and that the fundamentals are there and that's playing out. And Lars will probably go into later, the market is, as we expected, strengthening and strengthening quite significantly now across the tanker space. So, we have no necessity. So, it's a question of choice. So unless the easiest position one could look at is, let's say, you could get a great -- it's where the curve is, you might be able to get a great price for older vessels in your fleet, for example, and then maybe you get a place in line with somebody, you're not necessarily you ordering yourself, but you may be able to get a prompt new vessel or a delivery or something like that, where mathematically, the curve is such that your newer vessel has far greater value, both in its operational specification and age compared to the older vessel, which older vessels as they start to move towards 15, we haven't got many of those left. But as they do, they start to depreciate like options do much more rapidly. But that's a mathematical example. So, I think now that I don't think you -- but at the same time, we -- if someone offered us a great price for our older vessels, sure, we would sell them because that's the smart thing to do to maintain the optionality. I think the optionality for a company in shipping, anybody, whether it's investors or its companies is the value of that optionality is underrated strategically. Operator: The next question comes from Ken Hoexter with Bank of America. Tim Chang: This is Tim Chang on for Ken Hoexter. Obviously, been a very constructive market for product tankers fundamentally recently with record levels of seaborne exports. How do you see rates progress -- is there a way you see rates progressing higher than levels with little under half of the days booked quarter-to-date? And maybe just a little bit more color on what pushes them there over the next 40 to 60 days. I know you've spoken to the OPEC production cut unwind, increased sanctions, the seasonally stronger period. Maybe some more detail on how importers of Russian product would be seeking alternative products. Robert Bugbee: Lars, do you want to take that? Lars Nielsen: Yes, sure. I mean just take a step back first. Q3 has kind of surprised to the upside. We haven't seen as much of a seasonal summer lull as you normally would do. There were a lot of refineries that were kind of in turnarounds, and we anticipated a drop in rates across the board. We did see that drop in rates, and we're at the tail end of those refinery turnarounds now. And I think we have another 5 million barrels of capacity that's coming on stream in November. That's going to supercharge the clean market. But there's a combination of factors to why I'm quite constructive the product tanker market. First of all, OPEC has played a role in terms of starting to come to market with opening up the taps the whole issue around Russia has become a really important thing as you look at how now the Americans have also come in to sanction the barrels. And those sanctioning barrels have certainly had a market follow-through on the crude markets. If you look at the crude markets first before going to products, the VLCC markets today have ramped up to a very high level, so has the Suezmaxes and the Aframaxes as well. We have also seen a sudden change in interest from LR2 owners to move into Aframaxes count from September, probably around 18 ships have already dirtied up. It wouldn't surprise me that there's going to be another 5 or 10 ships in a short order that's going to start moving into the Atlantic Basin into dirty. This obviously will kind of tighten the product market as well. So you've got more product coming into the market. You've got a tightening of supply. And the market that where the product is coming is primarily the AG and also the U.S. Gulf, where we're going to start seeing a lot of ton mile movements because of the sanctioning of barrels that people are now going to start securing supply from further afield. I mean Brazil is now taking more product out of U.S. Gulf rather than the Russian barrel and so on. It is clear to me that we are just on the cusp of the bottom of that market. The LR2 market has moved up tremendously and will continue to do so. I envisage over the next couple of weeks. The -- and that's both from the Middle East going West, and that's Middle East going East TC1, but it's also certainly the West moving to the East, which has also moved up progressively over the last week. The same thing goes also with a very strong but volatile market in the U.S. Gulf, and we can see underlying strength as the utilization level of the refineries are starting to creep up after their turnarounds in the U.S. Gulf and then underpinned by this longer-haul business. So there is all the ingredients for the market as we move properly into Q4 to see a certain rebound. And it's now firing on all cylinders. It's not only on the crude, which has been the headline over the last 48 hours, but it's certainly -- I can see on the product market as well, we're going to see a strong ramp-up into Q4 proper. At the same time, I would also just add, this is an interesting combination because what we have seen in years gone by as we move into January and February, people talk about cannibalization of newbuilding with virgin tanks from Via Suezmaxes, Aframaxes that are not coated, which I have to be honest, it's very few today because everybody is building Aframaxes with coated tanks due to the price. But those vessels probably with the market trading TD 3 at worldscale 125 will probably think twice to take on a clean cargo at a discount at a lower demurrage rate than trading $140,000, $130,000, $130,000 on pure round voyage. So, I also envisage a lesser degree of cannibalization, which will also underpin a very strong follow-through as we move into Q1. Robert Bugbee: If I could just add to that. So, I think what Lars on behalf of the company is saying, so we now -- he's now moving or we are moving as a group from the last, let's say, public discussion that we were confident that the market would strengthen into the end of the year. Lars is now creating a position where we see that there's a strong chance now of the market being very strong into the first quarter as well and through that first quarter because of the dynamics he's outlaid. Operator: The next question comes from Chris Robertson with Deutsche Bank. Christopher Robertson: I just wanted to turn towards -- you guys mentioned you had extensive number of dry docks completed during 2025. I wanted to touch on that just in terms of asking what types of uplifts and efficiency that you've realized from those dry docks this year? And is that translating into slightly higher rate premiums? Or can you speak to the details around that? Emanuele Lauro: Sure. I'm happy to take that. The dry docks and themselves did not -- did not involve a great deal of CapEx because we already think the designs for our vessels are sufficiently economical, fuel efficient, et cetera. Really, it's much more about general maintenance, the coatings of the vessels, the friction, not only exogenous but endogenous to the hull and getting that back to a place where you're really resetting the vessel back to something similar to what it was 5 years before. The effect and the bottom-line impact is immediate, like I said, because you're basically resetting the ship to a condition it was 5 years before. But until we have line of sight on the return of a host of additional CapEx possibilities and what the returns actually mean, there's a lot of hyperbole smoke and mirrors about uplifts and other efficiency steps one could undertake. But until we really have line of sight and the benefit of more data in that area, we're not going to be spending shareholders' money on those types of gambles. Christopher Robertson: Got it. Interesting. Okay. My next question is just related to Chinese export quotas for next year, if you guys have a view around the increasing amount of refining capacity in China, it doesn't seem to have kept pace with kind of the quotas being kept flattish this year, slightly down. Do you have a view around next year and what they might do? And do you think there's a possibility that we'll see increased quotas from China next year? Robert Bugbee: I'll start and then maybe go ahead, James. James Doyle: Thanks, Lars. Maybe, Lars, you can add. So, we saw the last quota increase in September, which is, as you highlighted, Chris, pretty consistent with what's been announced in the past. I think the interesting part is if you look at -- when you look at the Chinese data, total crude imports and domestic production were around 15.9 million barrels in September and runs were 15.4 million. So, the crude build was only about 400,000 to 500,000 barrels per day. So, to answer your question, I think we would need to see it in the crude volumes first. But a lot of this production and quota system is really determined by the government. And in previous periods where crack spreads 2 years ago were very, very high, they didn't export. So it's a tough one for us to kind of predict. Operator: The next question comes from Liam Burke with B. Riley FBR. Liam Burke: You've been very clear about the benefits of deleveraging and your plans to do so and the reasons why. But where do buybacks come into the capital allocation equation as we move forward here? Robert Bugbee: I don't think we'd ever say when the buybacks come into the equation. We have the ability to act whenever we want to. And we're not going to wave a flag and say, "hey, guys, this is when we're going to buy back. And let me remind you, we're $2 away for that or we're $100 million of cash away from that. That's not material. I think we'll pass on that question, if you don't mind. Liam Burke: Okay. That's fair. And then as we go into the stronger period, sometime we have 30 tankers trading clean. Is that going to be just part of the everyday business? Or do you anticipate strength in the crude market to keep those -- that part of the fleet dirty? Robert Bugbee: Lars? Lars Nielsen: Yes, the short answer to that, Liam, is yes. We anticipate that. It's quite expensive for a VLCC to clean up to trade clean. The last time we saw that was, of course, when the LR2 market suddenly spiked to about $8 million for an AG West run and the VLCC market was languishing at around $20,000 a day, where the spread was so wide that it was beneficial for a VLCC owner to clean up. That margin certainly has flipped. There is no VLCC owner or Aframax owner that's going to go and think about cleaning up at this point in time. It certainly is going to be the other way around. And we will start seeing, as I said earlier, probably a number of more ships going into the dirty market, further restricting supply on LR2s. Operator: The last question comes from [ Jonas Shum ] with Clarkson. Unknown Analyst: So looking at the broader shipping space, there's been quite a bit of deleveraging across most segments, I would say. But you have been really kind of leading the way. You've been cutting net debt from around $3 billion in 2021 to less than $300 million today. And if you include the transactions that are set to close, I guess, this quarter, it looks like you could kind of be in a net cash position already by this year's end. And at the same time, you also have kind of a relatively young fleet compared to the sector average. So my question, as you now reach this kind of very conservative leverage profile with still a young fleet, is there any kind of limit to how low leverage you would like leverage to go? And -- and I guess that is also kind of related to Omar's first question. How should we think about kind of your considerations around fleet renewal versus growth and the shareholder returns? How will you balance this going forward? Robert Bugbee: I think that -- I think, first of all, to sort of echo what I said to -- first, by the way, thank you very much for your credit report. It was -- we thought it was very constructive and very well done. So, I'd like to echo what I said to Omar earlier that or somebody earlier that I think people underestimate the value of optionality and a strong balance sheet, an increasingly strong balance sheet provides great optionality in different circumstances. You can always buy ships. You can always buy stock. But sometimes people very rarely as the public side of the shipping industry had the ability to take opportunities of geopolitical crisis, almost never. And many times, those crisis themselves have resulted in bankruptcy of public shipping companies or severe stress. And right now, we have indicated over and over again that we consider that there is a high degree of geopolitical and economic uncertainty out there. Only yesterday, I mean, the Fed itself in the United States doesn't know whether it's coming or going. It goes from, oh, we're going to have 2 more interest cuts before the end of the first quarter to, well, we have to warn you, we may not even have one in December. And they can't -- they're still trying to balance between inflation and potential recession. And that's not to mention all the other things in the world that are worrying and you've got countries in Europe and a lot of crises. We are extremely confident in the actual product market itself. And we are uncertain in the geopolitical position. So at this particular point, theoretically, there isn't much of a limit at the moment. You could just pile on cash every single day. There's no urgency to buy stock. There's no requirement to as you pointed out to buy other assets. But you have the ability to do both depending on what situations there are and how your whole view looks at the moment. There's no rush. I mean it's not the bad. We've only just achieved this position that's pretty special. So, I don't think there's any -- I don't think I've ever seen a public shipping company that's had too much cash. I really haven't. Unknown Analyst: That's a good point. Yes. And then in terms of -- just more of a housekeeping question, I guess. You have agreed with your banks to prepay $155 million of debt. Is that -- could you kind of break that down in the different facilities? And how much will then be available for free liquidity? Chris Avella: Sure. I'm happy to do that in terms of the facilities. It's -- we have our $94 million credit facility, that's $19 million, our $1 billion credit facility, that's $92 million, our $117 million credit facility, that's $34 million and our $49 million credit facility, that's $9 million. Of that amount, $7 million is going to be revolving. So, it will be paid into part of the revolving facilities. The rest is term debt that we cannot redraw. I hope that answers your question? Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Emanuele Lauro for any closing remarks. Emanuele Lauro: Thank you. I don't have any closing remarks apart from thanking everybody for the time dedicated to us today and look forward to catching up soon. Thanks very much. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you.
Operator: At this time, I'd like to welcome everyone to the Talkspace Third Quarter 2025 Earnings Call. [Operator Instructions] The press release and presentation of earnings results can be accessed on Talkspace's IR website. The presentation will be used to walk you through today's remarks. Leading today's call are CEO, Dr. Jon Cohen; and CFO, Ian Harris. Management will offer their prepared remarks and then take your questions. Chief Technology Officer, Gil Margolin, will join for the question-and-answer section of the call. Certain measures that will be discussed on today's call are expressed on a non-GAAP financial basis and have been adjusted to exclude the impact of one-off items. Reconciliations of these non-GAAP measures are included in the earnings release and on the website, talkspace.com. As a reminder, the company will be discussing forward-looking information today, which may include forecasts, targets and other statements regarding plans, goals, strategic priorities and anticipated financial results. While these statements represent the company's best current judgment about future results and performance as of today, actual results are subject to many risks and uncertainties that could cause actual results to differ materially from expectations. Important factors that may affect future results are described on Talkspace's most recent SEC reports and today's earnings press release. For more information, please review the safe harbour disclaimer on Slide 2. Now I will turn the call over to Dr. Jon Cohen. Jon Cohen: Good morning, and thank you for joining the call today to review our third quarter results. We delivered record revenue of $59.4 million and adjusted EBITDA of $5 million. I am pleased to report that active payer members grew 8% sequentially and 29% year-over-year and payer sessions increased 12% sequentially and 37% year-over-year. This acceleration in the quarter is a reflection of the focused approach we initiated this year on all aspects of the patient journey. As I look back at the quarter, I'll call out a few specific areas where we've seen this strategy have a significant impact. The number of clients activating and attending their third session in the first 30 days on the platform is up over 50%, driven mostly by improvements to our matching algorithm, ease of scheduling and improved provider capacity. In addition, we continue to see strong results and improve the efficiency on our marketing spend by targeting specific new audiences such as military and their dependents. We are also utilizing AI-driven tactics to further optimize media and test new marketing investments. In the third quarter, we became in network with several new Blues plans, including Illinois and Massachusetts, and we won a competitive takeaway of one of the largest national EAPs, which we launched earlier this month. We have also made meaningful progress embedding Talkspace into our payer partner ecosystems by focusing on the areas that matter most to them. We continuously manage and curate our network of around 6,000 clinicians to make sure that top quality providers are available to our members and to ensure that each clinician is highly engaged and motivated. This is a key differentiator for Talkspace and has helped drive deeper integration with our payer partners, including directory integrations to facilitate patient sign-on as a seamless experience. Our brand awareness has also improved as we are now the most recognized insurance coverage focused brand for mental health with over 35% of people recognizing the Talkspace name according to third-party surveys. This makes our integration into payer directories even more effective as people are more likely to recognize Talkspace and seek care from us. Payer revenue in this quarter also benefited from strength in our psychiatry business, which we relaunched earlier this year to address the needs of our high acuity users and those that need medication. As a result of these initiatives, psychiatry initial session volume increased 46% in the quarter. Further, we grew our psychiatry network of providers by nearly 50% from Q2, and we'll continue growing that part of the network given the demand trends we are seeing. We continue to focus on optimizing the internal referral funnel between therapy and psychiatry services, and we expect continued growth in the coming quarters. To round out our comprehensive mental health services, earlier this month, we announced our acquisition of Wisdo Health, a clinically proven AI-powered social health platform specializing in peer-to-peer community and coaching support. Wizzo has supported over 500,000 adults to date on their platform and utilizes AI to match this population with appropriately trained peers and group coaching for emotional support, companionship and shared experiences that improve health outcomes, increase adherence and engagement rates and reduce total cost of care for its health plan clients. Wiz is particularly applicable to many Medicare patients who have recorded a 21% decrease in loneliness and exhibited reductions of up to 10% in emergency room, urgent care and inpatient visits after joining Wisdo. We anticipate that many of the Wisdo users may also benefit from referrals to therapy, just one of the many avenues where we see the synergies of being able to provide patients with a more complete set of behavioral health solutions. I am also excited to announce that next month, Wisdo will begin supporting Novo Nordisk's new WeGo Together app for patients on Wegovy for obesity or overweight. Within the app, Wisdo powers the group coaching experience that helps participants build sustainable habits, share encouragement and stay emotionally supported as they work toward their health goals. Our direct-to-enterprise or DTE business remains solid, particularly with organizations serving youth and young adults. Specifically, our 2-year deal with the North Carolina Department of Health and Human Services to provide Talkspace to 20,000 teenagers impacted by the justice system first launched in July and corespaces, which provides student housing options to on college campuses to 36,000 students at 32 different universities launched in late August. While both of these launched a bit later in the quarter than anticipated, they are now up and running and progressing nicely. Additionally, this was a strong quarter for contract renewals, including Baltimore County Public Schools and Colby College, which has renewed its contract 3 times now for its 8 years with Talkspace. We also celebrated 2 years of our New York City Teen Space program. Looking at the results over that time period, we have over 40,000 youth enrolled in the program. Notably, 93% of the participants use messaging, highlighting that our approach to accessibility allows us to meet teams where they are. Our suicide risk algorithm identified over 500 potential elevated risk incidents, which is incredibly important in a population experiencing anxiety and depression as their most prominent mental health challenges. Switching to AI. We continue to make significant progress integrating our work on AI into all aspects of our business with multiple initiatives to improve the customer member journey. This includes LLM search engine optimization, AI assistance in improving eligibility determination for insurance, smart insights for providers in preparation of their sessions, comprehensive smart evaluation that provides the providers with a HIPAA-compliant AI draft of a biopsychosocial evaluation after intake sessions, Smart notes providing post-session summaries for the clinicians, our talkcast individualized podcast that I've talked about in the past and now our AI that helps review the medical records, which has been extraordinarily helpful to the compliance and clinical quality teams. We have data demonstrating the value of our AI innovations. When providers use smart insights ahead of their second session with a member, those members are more than 30% more likely to book a third session within 30 days and 31% more likely to complete their third session within 30 days of registration. Recent results from our data on talkcast indicate that 21% of people are more likely to book and complete a third session after listening to their podcast. We've also launched 3 additional proprietary risk algorithms to add to our suicide risk algorithm. These include risk for violence or homicidal ideation, homicidal intent or homicidal plan, risk for substance use disorder and mouth treatment risk determination, which identifies behavior or circumstances that may lead to harm, neglect or ongoing abuse. Finally, I'm very excited to announce that the Talkspace developed behavioral health-specific large language model I alluded to on our Q2 earnings call has proven to outperform current AI chatbot agents in our alpha testing. Our proprietary LLM has been trained on hundreds of millions of anonymized therapy transcripts and rigorously tested for safety and therapeutic quality, and we envision it will serve as a therapy companion and clinical support tool. With that in mind, I want to address the issue of AI and mental health and the crisis that has emerged generating the recent headlines of high-profile cases in the press of significant injury and fatalities as a result of people interacting with general purpose LLMs to address mental health issues. Many have noted that the chatbot can be dangerous as they provide instant unrestricted validation and reassurance to users are too empathetic or sycophantic are constantly affirming bad behavior and are always cheerfully adaptive during conversation that flatters rather than challenges ongoing issues. This has resulted in social deskilling and an erosion of real-world interactive skills. They fail to challenge delusions or reinforce reality, lack real-time risk identification, lack clinical oversight and there is no HIPAA protection. We would note that even as companies work to address some of these issues, they do not have all of the necessary capabilities or experience to more fully protect users. We recognize that these inadequacies of others is a unique opportunity for us. Our significant investment in an AI model, combined with our other capabilities will offer individuals a significantly better and safer experience. This new model that we have developed sets a new standard for both therapeutic efficacy and user safety unlike general purpose LLMs available today. Utilizing our database, the model was trained on hundreds of millions of tokens from anonymized and graded tox-based therapy transcripts. In testing, the model consistently outperforms both open source baselines and state-of-the-art models in responding to high-risk mental health situations, including self-harm, hallucinations, OCD, mania and delusion. In fact, in a recent test, our model when compared to general purpose models without this specialized fine-tuning delivered a 50% improvement in identifying and responding to high-risk behaviors, a 47% higher therapeutic quality score on the cognitive therapy rating scale and a 3x higher user satisfaction than the base model. We expect that these early results will get even better over time as we refine the model and further testing cycles. More importantly, our product is being built with significant clinical oversight, real-time risk determination, immediate referral to a live therapist, human in the loop and with HIPAA protection to protect patients' personal information. These are unique and core skills that are already available to our Talkspace members through their personal interactions with their therapists. Additionally, our model can be used as an engagement tool for intake screening for multiple different types of patients and as an engagement tool in between sessions. We see the development of our Safe Talkspace AI agent proprietary LLM as a large new opportunity with significant potential upside for our existing business and significant opportunity for new products. We expect to launch a full product offering in the first half of 2026, but believe there are a number of unique and significant commercial opportunities in the near term. We expect to focus initially on several of these near-term opportunities that take advantage of our existing commercial infrastructure and brand presence, including as an affordable alternative for consumers and an attractive alternative for employers to provide a low-cost alternative to their employees. Over time, we anticipate being able to work with our existing payer partners to offer to their network members a reimbursable alternative. Importantly, all of these early products will remain HIPAA compliant and provide real-time clinical oversight with the availability for immediate referral to a live therapist in our existing network. We look forward to providing updates on this important initiative over the coming months. I'm proud of all our team has accomplished so far this year and know we are set up for even greater success ahead. Now I'll turn the call over to Ian to review the financials in more detail. Ian Harris: Thanks, Jon, and good morning, everyone. In the third quarter, we continued to execute on our growth and profitability objectives while maintaining strong operational discipline. First, I'll review our quarterly financial performance and then provide an update on our outlook for the remainder of the year. Starting with the third quarter results. Total net revenue was $59.4 million, an increase of 25% year-over-year and 9% sequentially. The accelerating momentum in our payer business is a result of our strategic product investments over the last several quarters as well as our efficient marketing approach throughout the year. Payer revenue grew 42% year-on-year and 12% sequentially to $45.5 million. This performance reflects the continued adoption and our collaboration with payer partners, resulting in higher member engagement within our payer populations. During the quarter, we completed more than 432,000 payer sessions, up 12% sequentially and up 37% year-over-year. The strong session growth was driven by a 29% increase in unique active payer members to over 120,000, which represents our highest quarterly figure since the company's inception and reflects one of the benefits of the payer business line where past cohorts compound over time as members exhibit longer retention rates than out-of-pocket members. Direct-to-enterprise revenue was $9.3 million, down 1% year-on-year and 2% sequentially. Similar to last quarter, our renewal rates were strong, but as John mentioned, we experienced slight delays in a couple of material launches that were moved from Q3 to Q4. We have high visibility into sequential growth for Q4, thanks in part to the Q4 launches of those third quarter new client wins. Consumer revenue from people paying out of pocket totaled $4.6 million in the quarter, up from $4.4 million last quarter, but a decline versus $6 million a year ago as we now cover more Americans via in-network benefits and we optimize our checkout funnel to direct members to use their covered benefits. Adjusted gross profit was $24.6 million, up 13% year-over-year and up 5% sequentially, representing a 41.5% gross margin compared to 43.1% in the prior quarter. The sequential decline in gross margin was driven in part by the continued overall mix shift towards payer revenue as well as the timing of selective network hiring in certain areas in anticipation of increased demand, which we expect to normalize in Q4. Total operating expenses were $22.4 million, down 11% sequentially and up 4% year-over-year. As a percentage of revenue, OpEx, excluding stock-based comp and nonrecurring expenses, declined to 34% versus 40% in Q2 and 41% a year ago, driven by disciplined expense management and continued operating leverage as revenue growth outpaces a relatively fixed cost base. Adjusted EBITDA grew 111% year-over-year to $5.0 million compared to $2.3 million in Q2 and $2.4 million a year ago. Adjusted EBITDA margin expanded to 8.4% versus 5% a year ago, again, demonstrating the operating leverage inherent in the business. Turning to the balance sheet. We ended the quarter with $96 million in cash and equivalents, including available-for-sale securities and restricted cash. This was down $7 million sequentially, primarily due to our share repurchase activity. We bought back nearly $9 million of stock in the quarter, bringing our year-to-date share repurchases to $17.2 million. Finally, turning to our outlook. We are narrowing our full year guidance ranges for 2025 as follows. We now expect revenue to be between $226 million and $230 million, which represents year-over-year growth of 20% to 23%. This compares to the prior range of $220 million to $235 million. We now expect adjusted EBITDA to be between $14 million and $16 million versus the prior range of $14 million to $20 million. As we've shared today and is evident in our improving KPIs and accelerating revenue growth, especially in our payer business, the strategic investments we've made in both marketing and to improve our technology and product platforms over the course of 2025 are paying off. While these investments impact our near-term profitability as reflected in the updated guidance, they also lay the groundwork for sustainable growth for both our top and bottom lines in the near term as well as into 2026. We've made meaningful progress across the company so far this year, both from a clinical and operational standpoint. I believe we're ending the year on a very solid foundation. With that, operator, we can open the call for questions. Operator: [Operator Instructions] Your first question comes from the line of Steven Dechert with KeyBanc. Steven Dechert: Just want to ask around the large language models. How will those be integrated into the Talkspace app? And how do you plan to monetize that? Will that be like a subscription? Or is this something that will be included if you're an existing patient for free? Jon Cohen: So thanks for the question. It will be integrated into our network. We also have -- we're also building this clinical oversight piece of it. So we'll be able to watch for anybody that needs off-ramping. So that's part of the new patient journey that will be part of this, depending on which population uses it. We have multiple areas you may have seen that we can monetize this, whether it's large populations, consumers, employers. So the model and the patient journey for each of those will be different. So my answer to your question is really stay tuned until we're ready to really bring it to market, which will be early 2026. But each one of those will have actually a different impact on us relative to the -- how we commercialize that particular entity. Steven Dechert: Okay. And then maybe as a follow-up, could you talk about some of the changes you've made to the matching algorithms driving the strong retention that you're seeing? Jon Cohen: I think the most important part there is that we get people in and we actually tell them that we're going to make an appointment for them. Subsequently, we then, in some circumstances, find an appropriate match for them as opposed to matching them right off the bat. So that's one initiative. The second is our ability to schedule people for multiple sessions or into time slots of what they're looking for has significantly improved to help drive that part of the registration process. Ian Harris: Yes, Steve, it's Ian. I wouldn't say there's really one or even a handful of things we can point to directly that impact it. It's really a multitude of small tweaks that all have a really positive compounding effect when stacked together. So it's dramatically simplifying our registration flow. It's network management, where we're dynamically looking at supply/demand and sort of having that supply management outlook, where we're looking both in the near term, 1, 2 weeks ahead, but also from a broader network planning quarters ahead. Even we're getting at specific like days of the week, times of the day, which states and making sure that we're engaging our network to open up schedules and availability such that when people come in, we know in addition to costs, which we've talked about in the past, we know that scheduling is a huge criteria in terms of that consumer choice to go through with their decision to proceed or not. Operator: Your next question comes from the line of Charles Rhyee with TD Cowen. Charles Rhyee: This is Ethan on for Charles. So it looks like payer KPIs are doing pretty well. And are you guys comfortable, do you think, with the number of credential therapists you have right now in your network? Or do you think you might have to potentially grow that number in the near or medium term? Ian Harris: Yes, we're definitely comfortable with where we stand today. I mean every -- again, we're meeting even at the senior executive level weekly on this exact issue for capacity planning because obviously, it's core to what we do. I'd say, in general, we feel good about where we are. We're constantly pruning, adding. It's hard to talk about it sort of in the aggregate because we're getting down very specific to what are they credential for realms of expertise, are they at $10.99 versus a W-2? What's their ultimate capacity and what geographies are they in? Just to name a few of the variables we have to plan around. But I touched on that actually in my prepared remarks around our gross margin, the sequential change from Q2 to Q3. Some of that was actually -- we did some hiring in our network sort of to get out in front of anticipated demand, which we saw in Q3. And candidly, what we're seeing in Q4, more of the same of that very strong payer demand. So that was a little bit of a drag on gross margins in Q3 as we hired sort of ahead of that demand. But where we stand today, we feel very good about the health of the network overall. Charles Rhyee: Okay. That's super helpful. If you don't mind me taking a quick follow-up. So it looks like S&M ramped down in the quarter, and this is pretty consistent with what you guys have been messaging. But just how should we think about the run rate of marketing spend going forward? Ian Harris: Yes. So it was down a little bit sequentially, obviously, up, I think, about $1 million year-on-year. And what I would reiterate is we're very -- I say this like it's a very high bar for marketing. We don't spend it lightly. And so we were comfortable adding versus a year ago because of the efficiency and the very strong ROI we're seeing. And I think that came through in the KPIs for payer last quarter and again, this quarter, just looking at the new user growth, which is a very good forward indicator of sessions that are going to come and obviously, in a fee-for-service model, therefore, payer revenue that's to come. So going forward, I think kind of where we are in Q3 is an okay proxy for Q4. We'll obviously come back to you all on sort of '26 guidance next quarter. What I would say is the sort of -- in our narrow guidance for '25, that 20% to 23% growth range, I would expect for next year another 20% plus top line growth, which obviously requires some marketing to support it, but it wouldn't be too dramatically different from this year. Operator: Your next question comes from the line of Ryan MacDonald with Needham. Ryan MacDonald: On the continued success in the payer channel. If we kind of break down sort of the growth in active members utilization, can you just talk about sort of how much you attribute to sort of the core commercial population versus obviously, the continued growth in lives in the Medicare population thus far? Jon Cohen: Yes. I think as you can imagine, the significant growth continues to be on the commercial side of the business. We are seeing continued growth in Medicare. We are seeing, I would say, significant uptake on the military initiatives that we're doing right now. So all of it is moving at the same almost the same pace. But there's no question that the commercial payer orbit is significantly contributing to the increase in both registration and sessions. Ryan MacDonald: That's helpful. And then as you think about the Wisdo Health acquisition and starting to integrate that, how can you -- what can that do to help sort of open up more of the Medicare opportunity for you or drive more sort of active engagement there? And then is there anything from a marketing perspective you're doing during open enrollment here to really try to ramp up those efforts this year? Jon Cohen: Yes, it's a great question. So -- so there's no question that the Wisdo integration into our Medicare strategy, we think will provide some significant uptick because of the group coaching that they offer. We are finding that a significant number of seniors like the idea of group coaching and peer-to-peer and people who have experienced what they have, particularly around the loneliness issue. So we do think that as a significant uptick relative to the Medicare population. I'm not -- I understand your question relative to open enrollment. I'm not sure what the impact of that would be. It's certainly unknown relative to the Medicare Advantage population. So I don't -- I can't answer that. It's to be seen about what happens in open enrollment. But remember, our core issue is pitching directly to patients once they've signed up. I would also -- I just want to reiterate a little bit on the Wisdo. The Novo Nordisk announcement that we made as part of it is really a significant positive issue relative to the Wisdo go-to-market strategy. It was very clear that the people who are taking GLPs relative to weight management are really looking for a group coaching solution to help them get through it by seeing and interacting with other people who are going through the journey. Ian Harris: Ryan, a quick modeling on that point. So the Wizz revenue will show up for something like the GLP-1 program with Novo and their Wego app, that will show up in DTE revenue. And then to your earlier question, signing up our existing payers, which I would say to date, the receptivity and interest from Talkspace's existing payer partners has really pleasantly surprised us. Their interest in potentially adding on Wisdo as another benefit. That will obviously show up in payer revenue. So it won't be broken out separately per se. Operator: The next question comes from the line of Richard Close with Canaccord Genuity. Richard Close: Congratulations on the results and all the update here. Just maybe to pull a thread on Wisdo and the pharma opportunity. Can you just talk a little bit about how you see that playing out? Is this just a one-off with Novo? Or how are you thinking about really penetrating that market? Jon Cohen: Yes. I won't discuss the specifics of the relationship with Novo. I would tell you that, as you can imagine, the number of people that are getting Wegovy and what percentage of them are going to -- are really looking for this kind of application to help them get through their journey. What it does is it really helps people develop the habits to continue to stay on the drug. We are -- we will look at other similar opportunities in the pharma space in a general sense, but we need to get this one, honestly, right the first time around. So I would say more to come on that. Richard Close: Okay. And then just maybe on the AI front, I appreciate the comments there and calling out, I guess, some of the downfall of other LLM models and dealing with mental health. Are there -- do you see opportunities for Talkspace as maybe partnering with some of those other companies in terms of providing the clinical oversight that's associated with your offering? Just any thoughts there in terms of partnership opportunities? Jon Cohen: Yes. So the answer is absolutely yes. We do have significant -- you've heard me talk about it. I think we have a significant differential advantage relative to the other LLMs, specifically that we have the provider network. we actually know how to deal with mental health journeys. And I think what's nuanced a little bit is if you're in another LLM and you need therapy and you need to see a therapist, we're a network. So what that means is if we have a continued seamless journey relative to the others, patients who need therapy essentially are going to be probably covered. So they don't have to pay more. If you're on one of the other LLMs and you need therapy or need to go outside the network, the question is who's going to pay for that. So it's a long-winded answer to -- I do think there are licensing and other potential opportunities with other players out there. Operator: Your next question comes from the line of Bobby Brooks with Northland Capital Markets. Robert Brooks: It was great to see a second straight quarter where all the year-over-year growth KPIs on utilization for payer accelerated. And I was just curious if we could dive a little bit deeper of the factors that were driving that. I know over the last 2 quarters, you had mentioned new monthly record sign-ups for new users, and that was sort of the key. Is that still occurring? Just hoping to get a little more color on that. Ian Harris: Bobby, thanks for the question. The short answer is yes. So I think what you're referring to last quarter, sequentially, in terms of quarterly unique active payer members, we saw about a 10,000 user step-up from Q1 to Q2 and saw pretty much the same step-up Q2 to Q3. And as I mentioned earlier, that's a really good leading indicator for payer revenue. We have very high visibility into sort of the retention of a new group adding on to the platform in a month and sort of what those cohort curves look like. So from a supply capacity planning standpoint, that's very helpful. And yes, I mean, you saw it again this quarter, which obviously putting 2 and 2 together there, bodes very well for our visibility into payer revenue for Q4, where, again, we grew 29% the users this quarter versus a year ago. The sessions also grew 37%. And then you can do the math. You saw a little bit of a benefit year-on-year sort of mid-single digits in terms of sessions per member. And again, some of that is around the product changes we're doing to engage folks. Some of that is actually, in Jon's remarks, he talked about a relaunch of psych. And as part of that, we're doing a much better job, much more concerted effort in sort of that cross referral between therapy and psych that a year ago, we were candidly not very focused on. So sessions per member also going up, price going up, users going up, and that's why you're getting that really -- that 42% growth in payer is sort of a function of all that. Just to double-click on the new user piece, marketing for us gets -- we've touched on and again, the efficiency metrics and ROIs we're seeing there are still very good. We're very pleased with it, and that's why we had sales and marketing up about $1 million from a year ago. We've talked in the past, less so this quarter, but the level of collaboration and candidly the sort of effort and resources from our payer partners that they're dedicating to making it a more seamless integration to get to Talkspace has been also a very big benefit in terms of new users. So when we talk about the directory integrations and getting more embedded into their payer portals to make it a more seamless transition, that's been, I mean, years and years in the making to get to the point where all the clinical quality, all the safety, all the outcomes data that we're sharing with them and they've been pleased with for multiple years. You can imagine these managed care or it's a very long list of priorities to be able to get that dedicated resource and attention from them to go through these sort of technological integrations, it's a very high hurdle, and I think it's a testament to the job we're performing for them. So that leads to significant user growth as well. Robert Brooks: Got it. That's super helpful. And then just maybe double responding to the directory integration. I know in the past, you had talked -- I think it was like you were integrated with one payer system. It seems like maybe that's now expanded to some others. Just any thoughts on that? Jon Cohen: Yes. We -- so the answer is yes. We will be in several other national players, most likely probably in Q4 and rolling into 2026. But those are really close, I'll tell you to the finish line, which will, as I said, probably happen in Q4, which will continually have a significantly positive impact on the ability of people to book sessions without having to leave the payer platform. Ian Harris: I think what you're asking is that those new additions are only come. Those are not reflected in the Q3 results. Robert Brooks: That's helpful color. And then I'm sorry if I missed this if you discussed it earlier, but could you maybe just discuss the factors underpinning the guidance range tightening, specifically on EBITDA? Is it -- are you just spending a little bit more in anticipation of more -- I know your gross margins are lower on some selective hiring, anticipating more demand. Is that Okay. So that's kind of the driver for the EBITDA change. Ian Harris: Yes, exactly. So on the revenue tightening, we just -- as you can see, tighten around the midpoint. I guess the new midpoint is a little bit higher than prior. And then a couple of million down on the EBITDA range, which is a couple of factors. One is actually a function of the sort of DT commentary Jon laid out where some of our Q3 launches got delayed to October. So they're live now, and we'll see it in Q4, but you lose up to a quarter of revenue and EBITDA from that. And then it's also in assessing sort of our classic sort of growth versus profitability, given the returns we're seeing and the acceleration in our KPIs, right, payer going from low 30s at beginning of the year annualized growth to low 40s and wanting to continue that given the opportunity set is there, we decided a couple of million bucks on EBITDA to ensure that we're growing at least 20% in 2026 is a trade-off that makes a ton of sense. Robert Brooks: I would agree with that logic. Operator: Your next question comes from the line of Stephen Valiquette with Mizuho. Steven Valiquette: Let me offer my congrats on the results as well. I guess my question is just kind of thinking ahead of next year, 2026 is the third year of your 3-year guidance you gave at the beginning of 2024. Just wondering if there's any plans right now to provide any sort of new long-term guidance sometime next year or if that's still kind of TBD? Or are you going to just revert back to annual guidance? Just curious as you think about visibility on the business, how you're going to tackle the kind of the forward look. Just any preliminary thoughts around that might be helpful. Ian Harris: Yes. Thanks, Steve. I think TBD for now. But yes, to your point, the 3-year outlook we put out early '24 was for '24, '25, '26 we've largely delivered across that 3-year plan, right? So just to remind folks, it was a 20% to 25% top line CAGR, which we grew 25% in '24 year 1. The narrow guidance is for low 20s in this year '25. And so even to hit that outlook, we could have much lower growth in '26, but I want to make sure you hear, we think '26 will look a lot like '25 or potentially better, so at least 20% growth again in 2026 and then getting to that sort of low double-digit 12.5% to 15% EBITDA margin. So that's also very much the plan for '26. Obviously, we will give more detailed annual guidance next quarter or potentially at JPMorgan in January. But in terms of the longer-term outlook, I will not make any promises, but I know that's always helpful for you guys, so duly noted. Operator: Your last question comes from the line of Ryan Daniels with William Blair. Ryan Daniels: This is Matthew Mardula on for Ryan Daniels. So regarding Medicare, there have been many different subsectors and just the overall larger market of Medicare. But since you've had a couple of quarters under your belt, when do you believe Medicare will start to meaningfully impact results? Do you think it could be 2026 or later on? I'm just trying to understand the ramp that could come from adding patients in Medicare. Jon Cohen: Yes. So as I talked before, it continues to be a work in progress. We see increasing sessions, registrations each quarter. We are continuing to refine the strategy around reaching seniors. I think the unknown right now will be the impact of Wisdo, which we think will have an impact in addressing that population. So the short answer is it's still a work in progress as we work through state by state and subpopulation by subpopulation. I think you've heard me talk about before the over 75 engagement is very different than the 65- to 75-year-old, which is very different than the actual 55- to 65-year-old that may or may not be on, let's say, dialysis, et cetera. So we continue to work through it. So I would just say it's stay tuned for the Q4 and 2026 as we refine the strategy each quarter. Ryan Daniels: Got it. And I understand that over the past couple of quarters, you've been using AI applications on the administrative side. And in your prepared remarks, you mentioned some. Now regarding the benefits of AI, have you seen any financial impact on an administrative level? And if so, if you can kind of give us some color into that. And I'm just trying to understand if there will be a certain time where you believe you will see a meaningful lift financially in terms of either productivity or savings regarding usage of AI applications on the administrative side. Jon Cohen: So as we reported in the remarks, we've already seen significant impact of AI. We've integrated it to almost every part of the patient journey from the top of the funnel through first session, second session, third session. So the impact has actually been significant. We've talked about 30% more people looking now to book a third session within 30 days, 31% more likely to complete the third session. The talkcast have had a positive impact of 20%, 21% of people more likely to book a third session. All of those are just examples of how AI actually is integrated into the patient journey with whether it's the risk algorithms, smart notes, summary notes that I talked about on the comments, all of that already has had a very, very remarkable impact on the number of sessions that we're seeing and people rebooking. Ian Harris: And on the corporate side for G&A, I'd say we are already using AI a ton to ensure that operating leverage comes through. So we grew 25% this quarter. I think this is probably in the adjusted EBITDA bridge when you look at the OpEx that impacts -- excluding SBC that impacts EBITDA, it's effectively flat year-on-year. So the benefits of a lot of what we're doing on a corporate level are definitely embedded in that minimizing OpEx.
Patricia Bueno: Good morning, and thank you for joining us for BBVA's third quarter results presentation. As every quarter, I'm pleased to be joined by our CEO, Onur Genc and our Group CFO, Luisa Gomez Bravo. We will start with a review of the key figures for the quarter, and then we will open the floor for your questions. So without further delay, let me hand it over to Onur. Onur Genç: Thank you, Patricia. Good morning to everyone. Welcome, and thank you for joining BBVA's Third Quarter 2025 Earnings Webcast. As always, let's jump into the slides, starting with Slide #3. And as always, starting with the value creation numbers on the left-hand side of the page, you can see the strong evolution of tangible book value per share plus dividends, which increased by 17% year-over-year and 4.5% in the quarter, in my view, excellent figures. On the right-hand side, you see the profitability ratios. They are sustained at very high levels with an industry-leading return on tangible equity of 19.7% and ROE of 18.8% in the first 9 months of 2025. On Page #4, on the left-hand side, we delivered another strong quarter in terms of net attributable profit once again exceeding the EUR 2.5 billion mark even in the context of a much lower rate environment, obviously. The net attributable profit decreased compared to the previous quarter, mainly to 2 things: higher inflation in Turkey, which impacts obviously the other income line item. And mostly due to the one-off positive impacts registered in the second quarter. If you remember more specifically, the release of some fiscal provisions affecting the tax rate and the review of value-added tax, VAT, the payment calculations around this and an effect which then affected the operating expenses. The net attributable profit is also slightly below last year's figure for a good reason, we think, because Mexican peso has been appreciating lately versus a depreciation in the same period last year. This had a negative effect on the FX hedges of the net trading income line of the Corporate Center this quarter, but we will benefit from this from an appreciated Mexican peso in the coming quarters. We take this any day. On the right-hand side of the page, you can see our CET1 capital ratio, which improved by 8 basis points during the quarter reaching 13.42%. This solid capital position, obviously provides us with the capacity to increase our shareholder remuneration, which I will explain later. Page #5 on the left-hand side, our cumulative profits for the first 9 months. They continued their upward trend to a record level, reaching almost EUR 8 billion in the first 9 months of 2025, a 4.7% increase year-over-year in current euros. And on the right-hand side of the page are profitability metrics compared to European peers. Once again, our 19.7% return on tangible equity, it remains unmatched, and we are clearly one of the most profitable banks in the industry. Moving to Page #6. This page is summary of the pages to follow. So allow me to directly move to the next slide, Slide #7. As always, the summarized P&L of the quarter. I would highlight the outstanding evolution of the core revenues, especially in the last quarter with net interest income and fees growing 18% and 15% year-over-year, respectively. And in my view, an impressive 7% and 6% quarter-over-quarter, respectively, again, in constant euros. Slide #8, the summarized P&L over the first 9 months of the year. I would once again highlight the very positive core revenues evolution leading to an increase in gross income of 16% in constant euros year-over-year. The strong gross income growth, coupled with the positive jaws and the contained growth in impairments, which we will discuss later, it led again to the record, as I mentioned, net attributable profit of almost EUR 8 billion. Moving to Slide #9, which puts more light into the revenue breakdown evolution. Once again, we continue to deliver quarter-on-quarter on revenue growth, driven mainly by net interest income and net fees and commissions, as you can see on the page. This has been the story of BBVA in my view in the past few years. And as you can see on the page, this quarter, the performance is even more pronounced with NII growing 7.1% in the quarter and fees growing 5.8% in the quarter, leading to a quarterly growth rate of 4.4% in gross income despite an uncertain macro environment, despite declining interest rates, we keep delivering on core revenues. Regarding on the page, the annual decline in the net trading income, I already mentioned it, but an important part of it is, again, due to the strong gains from the FX hedges linked to Mexican peso depreciation last year versus a negative FX hedge impact this quarter due to Mexican peso appreciation. But again, as I said, we can take this any time because it will help us in the coming quarters. Moving to Slide #10. Let me focus a bit more on activity and loan growth, which has maintained its pace at an excellent 16% growth year-over-year, then leading to an excellent NII performance. As we claim, this is also very good news for the coming quarters since we delivered this loan growth in a very profitable manner. In Spain, in the middle of the page, loan growth further accelerated to 7.8% year-over-year, while Mexico continues in line with our ambitious guidance at 9.8% year-over-year. In the case of Mexico, let me remark that if we exclude the U.S. dollar currency impact, the loan growth figure as of September 2025 would have been 10.9%. Now on the right-hand side of the page, thanks to the strong loan growth figures and obviously, our proactive price management. We continued expanding on our core revenues, some of NII and fee income in both Spain and Mexico, in both year-over-year and quarter-over-quarter comparisons. And again, gaining pace in the last quarter, if you annualize the quarterly figures, of the core revenues, they are really good numbers in our view. And this is one of the most important messages of the presentation. Banks are generally rate sensitive as we also are in Spain and Mexico. But despite the rate compression, thanks to our unmatched loan growth, leading to in every single country, market share gains, and our proactive price management, we continue to grow our core revenues. Now on Page #11, you see another reason for our optimism looking into the future. As I mentioned, we are quite rate sensitive in Spain and Mexico. The last 2 years, and especially the last year, we have seen interest rates decrease significantly in these markets. And the good news in our view is that we believe interest rates are already at or near the expected terminal rates in both Europe, Spain and also Mexico. In the case of Europe, we expect the terminal rate to be around 2%, where interest rates already are compared to the 4% at the beginning of 2024. And in the case of Mexico, the policy rate was at 11.25% at the beginning of 2024, and is now at 7.5%, as you know, we estimate the terminal rate to be around 6.5%. So we are almost there as well in Mexico. We have proactively managed the impact of these rate declines, which by the way, happens quite fast in Mexico, the reset frequency is much faster in Mexico and with some months delay in Spain. Our customer spreads on the right-hand side of the page already reflect those impacts. And with limited room for further rate cuts, we expect relative stability in customer spreads going forward. In short, let's not take too much time on the page. But if spreads stay around these levels and with continued dynamism in activity and loan growth, we believe our revenues and profits will further strengthen in our core markets in the coming quarters and years. Moving to Slide #12. On the left-hand side of the slide, we continue to show positive jaws at the group level, supported by the solid performance of the gross income, which grew 16.2% year-over-year while operating expenses increased by 11%, remaining below the average inflation across our footprint. And on the right-hand side of the slide, you can see our efficiency ratio, again, improving reaching 38.2% below last year's level, obviously. Slide #13. This page shows the solid evolution of our asset quality metrics, which are performing better than expectations, better than our guidance at the beginning of the year in a context of strong activity growth, especially in the most profitable and typically higher cost of risk segments. On the left-hand side of the page at the bottom, our cost of risk stands at 135 basis points, again, better than guidance, slightly above last quarter's figure with the numbers already incorporating the negative impact coming from the annual risk model calibration process, partially compensated by the positive impact from the quarterly macro adjustment. Meanwhile, on the right bottom, you see that our NPL and coverage ratios, they continue improving. Slide #14 on capital and shareholder remuneration. On the left-hand side of the slide, our capital waterfall for the quarter-over-quarter evolution, our CET1 ratio once again has increased 8 basis points to 13.42%. And following the waterfall, results 65 basis points, dividend accrual and AT1 coupons, minus 35 basis points, then 37 basis points due to the RWAs growth. This figure reflects, again, our ability to reinvest part of our capital generation into profitable growth. And as in other recent quarters, it also reflects the result of several risk transfer transactions, SRTs which positively contributed 5 basis points to the ratio this quarter, a bit lower than the previous quarters because of the summer seasonality. Then we have a bucket of others of 15 basis points, which comprises, among others, the market-related impacts, slightly positive. And then the credit in OC (sic)[ OCI ] for hyperinflationary countries. Lastly, regarding the CET1 ratio. And as we announced last quarter, we expect a positive regulatory impact in the fourth quarter in the range of 40 to 50 basis points reinforcing our already very strong capital position. Then moving to the right side of the page, as the process of the Sabadell transaction has ended, we will resume our shareholder remuneration programs. First, we will begin our EUR 1 billion -- nearly EUR 1 billion share buyback program starting tomorrow. Second, we will distribute on November 7, a record interim dividend of EUR 0.32 per share. Then, and most importantly, as soon as we get the required ECB authorization for which the process has already been initiated, we will start another round of a significant share buyback. The details of this last piece will be announced, obviously, once we receive the authorization from ECB. Moving to Page #15, with a quick review of our strategic progress and specifically on new customer acquisition. During the first 9 months of 2025, we have acquired a record 8.7 million new customers with 66% joining us through digital channels, a clear competitive advantage for BBVA. Then on Slide 16, another pillar of our growth strategy, sustainability. We continue to deliver quarter after quarter, even above our own expectations. In the first 9 months of 2025, we have channeled a record EUR 97 billion in sustainable business with a significant increase in all segments. And finally, moving to Page #17. As you know, last quarter, we set our ambitious financial goals for the 2025-2028 period. We will report back to you on the progress versus the established goals every quarter. In short, we are at the early innings, but as compared to the numbers we have in the plan for the first 9 months of 2025, we are performing better than our original expectations in all the metrics. And now for the business areas update, I turn it to Luisa. Luisa? Maria Gomez Bravo: Thank you very much, Onur, and good morning, everyone. In Slide #19, let's start with Spain, which has shown a strong momentum throughout the year and once again has delivered excellent results in the third quarter. Net profit reached EUR 3.1 billion in the first 9 months of 2025 with around EUR 1 billion generated in the third quarter alone. These results, in line with previous quarters, reflect solid business performance and outstanding NII evolution despite lower rates, robust fee income, strict cost discipline and continued strength in asset quality. Starting with net interest income, it has continued to perform exceptionally well this quarter, up 3.2% quarter-on-quarter, driven by strong loan growth in our most profitable segments. As you can see, consumer lending and midsized company loans both grew by around 10% year-on-year, well above the overall loan growth of 7.8%. We also continue to benefit from the positive contribution of the ALCO portfolio fully aligned with our strategy to lock in higher rates. Based on this solid performance, we are raising our NII guidance for Spain to low single-digit growth in 2025, up from slightly positive previously. Fee income this quarter was affected by the usual summer seasonality. Year-on-year, performance remains very solid, up 4.2%, mainly driven by strong growth in asset management fees, nearly 10% year-on-year higher together with increasing contributions from insurance and credit cards. On the cost side, the quarterly increase mainly reflects a one-off related to VAT payment calculations recorded last quarter, which you may remember. Excluding this impact, expenses were very well contained up only 1.3%, clearly showing our continued focus on cost control. Finally, asset quality remains very solid with both the NPL ratio and coverage ratio improving, cost of risk remained contained at 34 basis points in line with our guidance. Overall, a remarkable quarter in Spain with solid activity driving robust core revenue growth even in a low rate environment. Moving now to Mexico on Slide 20. For another quarter and despite a challenging environment, BBVA Mexico delivered a very strong set of results with net profit of EUR 1.3 billion in the quarter, driven by core revenues growth. Net interest income grew by 3.3% quarter-on-quarter, supported by robust lending activity, especially in retail, where we continue to focus on the most profitable portfolios, consumer and SMEs, both growing 4% quarter-on-quarter. Corporate lending also remained strong, increasing by 9.1% year-on-year, excluding the FX derived from the Mexican peso appreciation. Fee income performed very well, up 2.6% quarter-on-quarter with growth across the board, mainly driven by credit card payments and asset management fees. Moving to cost. The increase in expenses mainly reflects higher IT investments as we continue investing for future growth while personnel costs remained stable in the quarter. Overall, efficiency stands at close to 30% in the first 9 months. Turning to asset quality. Impairments decreased in the quarter, driven by both a net positive impact from the IFRS macro adjustments and solid underlying asset quality trends. As you may know, BBVA Research has reviewed upwards its GDP growth forecast for Mexico now expecting positive growth of 0.7% in 2025 compared with a contraction of minus 0.4% in the previous GDP forecast. This revision reflects the resilience of Mexican economy even in a highly uncertain global environment. All in all, the cumulative cost of risk stands at 327 basis points as of September, better than expected, leading us to also improve our guidance for the full year, we now expect the cost of risk in Mexico to remain below 340 basis points. Finally, net profit reached EUR 3.8 billion in the first 9 months of the year. That's a 4.5% increase in constant euros, confirming the strength, resilience and superior profitability of our Mexican franchise. Moving now to Turkey on Slide 21. Turkey delivered net attributable profit of EUR 648 million in the first 9 months, a strong increase, close to 50% compared to the same period last year. This solid performance was driven by higher core revenues and lower impact from the hyperinflationary adjustment, supported by disinflation trend observed in the country. If we briefly look at the income statement in the first 9 months of the year, a few key points to highlight, first, we've seen a solid performance in NII, supported by strong activity growth, mainly driven by retail, significant year-on-year increase in the TL customer spread, but also an improved liquidity management during the quarter. In a context of declining rates, we have benefited from lower cost of deposits, while also improving loan yields, supported both by our disciplined price management and our targeted loan growth strategy focused on the most profitable segments. As you know, in Turkey, our balance sheet shows a positive sensitivity to lower rates as deposits reprice faster than loans. This means we will continue to benefit from the current easing cycle. Second, fees continued to show a positive trend, underpinned by robust performance in payment systems and asset management fees as in previous quarters. Finally, the cost of risk slightly increased to 176 basis points in the first 9 months in line with our expectations. Impairments increased this quarter is mainly explained by the higher provision releases related to big ticket exposures recorded last quarter, which you also may remember, provisioning needs remain high in retail, although we are starting to see stabilization in NPL inflows in this part of the portfolio. Now let's turn to South America on Slide 22. The region continued to make strong contribution to the group's results, posting a net profit of EUR 585 million in the first 9 months, a 24% increase year-on-year in current terms. During the quarter, NII remained solid, supported by healthy loan growth across the region and customer spread expansion, particularly in Peru and Colombia. This positive evolution of margins was partly offset by Argentina where ahead of the legislative elections, we saw a sharp compression in spreads amid a highly volatile rate and currency environment. Fee income, on the other hand, showed a remarkable increase in this quarter with growth across all geographies, reflecting our continued effort and renewed focus on strengthening this revenue stream. Turning to asset quality. We continue to see positive trends in Peru and Colombia, supported by a more favorable macroeconomic outlook and rate environment. Meanwhile, Argentina continues to show some deterioration in the context of strong loan growth and sharp increase in real rates. Overall, the stock of NPLs remained flattish this quarter, while the NPL ratio improved to 4.08% and the coverage level increased to 93%. The cumulative cost of risk stands at 243 basis points as of September, in line with our full year guidance. And finally, let's move to the rest of business on Slide 23. It's an area that we haven't usually covered on these calls, but given the strategic plan focus on CIB business and commercial banking business, we have decided to also give you some indications of how this P&L is moving on because it's strong performance and growing contribution to group's overall results are already very worthwhile. Just as a reminder, this unit mainly includes our CIB business conducted through our BBVA branches outside our core geographies. This activity accounts for more than 90% of the area's total loans and net profit. In addition, the digital banking operations in Italy and Germany are also reported under this business unit. This unit is already delivering around EUR 480 million in profits. This solid performance reflects robust business momentum across the board, supported by cross-border activity and sustainability. Higher activity levels have led to revenue growth of close to 25% year-on-year in the first 9 months, driven by a strong increase in NII, up 15% year-on-year, thanks to greater business volumes and disciplined price management and outstanding contribution from fee income showing very positive dynamics across all key geographies supported by both investment banking and global transactional banking fees. On costs, the increase reflects the rollout of our strategic growth plans, building the capabilities that will enable future growth. Finally, risk metrics remain very solid in this segment. The NPL ratio improved to 18 basis points, and the cost of risk for the first 9 months stands at just 10 basis points. Overall, we see this as a very promising business area where we are leveraging our diversified footprint to support clients wherever they operate not only in our core markets, but also in other strategic geographies for them, such as the U.S., the U.K., continental Europe and Asia. And now back to Onur for the key takeaways. Onur Genç: For the main takeaways, it's on Page 24. Let me not take time because they are quite obvious on the page. But let me once again repeat the very high-level overall message, which is we are, once again, very happy with the performance in the quarter, especially the quarterly core revenue evolution, and we are very focused, very focused on creating organic capital and resuming our distributions to shareholders, which will be starting tomorrow morning. And with that, we go to Q&A. Patricia? Patricia Bueno: Yes. Thank you very much, Onur, and Luisa. So we are ready now to start with the Q&A session. Operator, please? Operator: [Operator Instructions] Our first question comes from Maks Mishyn from JB Capital. Maksym Mishyn: I have 2 questions. The first one is on loan book growth in Spain. Can you please talk more about the type of demand you are seeing in corporate loans? And also why growth in mortgages is below the average for the sector? And the second one is on cost of risk in Mexico, even though you improved guidance, the new guidance implies a pickup in the fourth quarter, and I was wondering why. Onur Genç: Very good. Loan growth in Spain, the corporate loan growth, and you see it in the documentation, but the midsized companies, as we call them, the middle part of the corporate area, it is growing 11% and the corporate and CIB is growing 18%. Where is this coming from? It's coming across the board in all the sectors, actually, there is some investment drive. As you know, the Spanish economy is doing really well. We upgraded our GDP growth rate forecast in Spain to 3% this year and 2.3% -- we also upgraded next year 2026 to 2.3%. So the economy does well for a few reasons. Number one, immigration, basically, there is a new flow of population into the geography. Number two, Spain is a very service-based economy, relatively speaking, obviously, and services sectors, in general, are doing really well. For Spain, tourism is very important, under that chapter, doing really well. Number three, next-generation EU funds, it is affecting in a positive way, the growth in Spain. And number four, there is an investment pickup in the country. In multiple dimensions, we see 2 very clear strong areas. Number one, the energy and renewables, they continue to attract investment. And number two, the housing, there is a big demand in the market. You might know these numbers already Maks. But in Spain every year, basically around 300,000 new households are being formed -- 300,000 versus the new supply of homes is around 150,000. So there's a mismatch in terms of demand and supply. This 150,000 new houses being constructed every year used to be 100,000 2 years ago. So there is also some vibrant activity in the construction and the housing sector as well. All combined is leading to the numbers that you see on the corporate segment. Why loan growth is not so good in mortgages? You know the answer. The pricing, we just don't see value in growing the mortgage book at these prices. Even if you incorporate the cross-sell additional income to those loans, we just don't see the value. That's why we are staying out. This is not new for us. From the beginning of this year, actually, we have been losing market share in mortgages, and we are completely fine with it if there is no return on the cartera, on the book. Cost of risk in Mexico, we are actually upgrading our guidance to less than 340 basis points. Less than 340 basis points does that mean 340. The dynamics are very good. And as I mentioned in my part of the presentation, in the third quarter, in Mexico and in general, there was the impact -- positive impact from macro adjustment because we have upgraded the macro expectation for Mexico, but there was a larger negative impact coming from annual recalibration of the IFRS 9 modeling. That was the reason why it slightly went up versus the first 6 months of the year. It's lower than the second quarter. But the average of the first 6 months, it went up slightly. And the reason was that, basically. So we are quite positive, actually, what we are seeing in Mexico in terms of the growth dynamics and in terms of the cost of risk dynamics. Luisa, do you want to add anything? Maria Gomez Bravo: I would just only add to your point just in case we -- just be fully transparent the IFRS annual recalibration update that we do this year has taken place in the third quarter. Last year, it took place in the fourth quarter. This is done throughout the whole of our geographies, and it coincided also this quarter with a positive macro IFRS update in the geographies as well across the board. Onur Genç: Very good. Patricia Bueno: Thank you, Maks. Next question, please. Operator: The next question comes from Antonio Reale from Bank of America. Antonio Reale: It's Antonio from Bank of America. A couple of questions from my side, please. The first one, you forgive me if I go back to the Sabadell bid, but as a management team, you've put a lot of energy and resources into the project, which, for one reason or the other didn't work out. So looking back, is there anything you think you would have done differently or maybe just your takeaway, what do you walk away with? I mean we've seen 2 failed bids in Europe and not something we've seen very frequently in the past. So that's my first question. My second question is more forward-looking and relates to sort of capital and your distribution outlook. Your 13.4% today and you flagged some additional capital tailwinds of 40 to 50 basis points coming through. And that's in Q4. Now you've confirmed also that your go-to capital target is at 11.5% to 12%. How quickly do you think you can go to that level. The market seems to be a bit skeptical about you running your business with that capital buffer. So maybe you can touch on that as well. Onur Genç: Very good. Thank you, Antonio. As always good questions. On the Sabadell topic, as you can see in the presentation today as well and as we have been operating since that day of Friday, we closed that chapter. We closed that chapter. We do think it's a missed opportunity, it's a missed opportunity for our shareholders, our clients, our employees, but definitely for Sabadell shareholders as well, Sabadell clients and Sabadell employees as well. For Spain, for Europe, for Catalunya, we do think it's a missed opportunity, but we closed that chapter. We closed the chapter for one very good reason because we always care about our own stakeholders, our shareholders, our clients, our employees and for the benefit of our own shareholders, our stakeholders, it's much better to move forward, to look into the future and to focus on what we do best, which is running our business. And in that sense, again, we closed that chapter. The learnings, obviously, we are reflecting on the learnings, but the chapter is clearly closed for us. On the capital, 13.42%, as you mentioned, we are expecting another 40 basis points to 50 basis points in the fourth quarter only from a positive regulatory impacts. If you add that and if you also add the organic capital generation that we would be creating in the fourth quarter, fourth quarter is typically a better quarter in terms of SRT activity also. You would see that we have a lot of excess capital. And as we said many times before, we are fully committed to the target, 11.5% to 12%. If you take the upper end of that range 12%, we are going to be basically distributing that capital back to our shareholders to get to that 12% level. That's why we said that we are waiting for ECB approval for this extraordinary significant share buyback. And we'll go from there. Now coming back to the question of, you said, I don't know what word you used, but the 12% is that the right target and so on. I repeat the same thing every quarter, but I will do the repetition once again. We have to look not at the absolute level of that number, but we have to look into the difference versus the requirement because that requirement that is set by the ECB, by the supervisor is basically set based on many things, based on the results of the stress test. Once again, we come as one of the best in the stress test results. Based on return on tangible equity and the organic capital generation capacity, based on the volatility of your organic capital generation, based on multiple, multiple metrics. In all these metrics, not only we create much better levels of organic capital, if you take 5 years, 10 years, 15 years, you also see that the volatility around the trend line is one of the lowest in the European banking sector for us because we have these wonderful franchises in our view, in the different markets that we operate, one of the best franchises in every single country that we operate. In short, as a result, our requirement is 9.13%. If you take the upper end of our capital target range, 12%, it's 287 basis points difference, okay? So the buffer that we have versus our requirement is 287 basis points. We have a peer group. We keep reporting our numbers against the peer group, 15 largest banks of Europe. If you take out the non-EU banks from that list because the list is European geography, which includes some U.K. banks and Swiss banks. If you take out those, the EU banks, for which the requirements are set by the same supervisor, ECB, the average of the buffer of the rest, which is the 10 other banks in our peer group is 240 basis points. So our buffer is actually one of the best and clearly above the average of our peers. And we feel very comfortable operating with 12%, and we are going to be distributing our excess capital back to our shareholders to get to that level. Patricia Bueno: Thank you very much, Antonio. Next question, please. Operator: The next question comes from Francisco Riquel from Alantra. Francisco Riquel: I want to ask about margins. First in Spain, the customer spread has fallen below 2.9%. And I thought 3% was the trough of this interest rate cycle. So I wonder if you can share guidance on customer spread going forward. I have seen the loan yield falling 21 basis points Q-on-Q. So how much of the fall is mix related? You have mentioned fast growth in CIB and public sector. Price competition, already some banks have flagged about this, Euribor resets pending and then the cost of deposits falls very slowly, just 3 basis points and I see fast growth in time deposits. So you can explain the trends on the liability side as well. And then my second question, margins on Mexico. They are proving, on the contrary, very resilient despite the sharp fall in interest rates that you have mentioned. So I wonder if this is just a timing issue, given the speed of the repricing between the assets and liability? And where do you see the 11% customer spread once the balance sheet is fully repriced to lower interest rates and how fast is the repricing? Onur Genç: Thank you, Paco, for the questions. I think for both, there is a common theme that I would put on the table first, and then I go into each one of the countries that you mentioned. The theme is, given the rate cycle is coming, again, as we have also put into the presentation, the rate cut cycle is coming to an end. There's some more to be done in Mexico. But in general, we are very closely in our view, to the marginal rate. We do think the spread that you see -- the customer spreads that you see in the pages that you indicated are relatively the levels that you would be seeing going forward. What does this mean? Let's go then country by country to be more specific. For Spain, you mentioned 3% as the floor. I'm not sure whether we quoted that number at all, but I don't think so, the 2.88% that you see in the quarterly average, actually, the monthly figure, monthly average for September, if I'm not mistaken, it's 2.83%, we were basically expecting margins to stabilize around these levels. And we do think they are going to be stabilizing around these levels if ECB doesn't again start cutting rates. So the stability is already kicking in. You asked about the lending yields why it came down too much. It's a bit mixed, but more than the mix, it's because of the repricing. I'm sure you are aware, you know our book really well. But the reset frequency for corporate lending book is typically 1 month or 3 months and the reset frequency for the mortgage book is for 2/3 of the mortgage book is basically 6 months, but you take the Euribor 12 months or 2 months ago, so it's effectively 8 months and 1/3 is basically more than a year. So there is some delay in the reflection of the rate cuts into the lending yield. The lending yield coming down is partially driven by mix, but more importantly, it was driven by the reflection of the rate declines that we have seen in the market in the last 2 years, in the last year. But we are quite positive on what we are seeing for a few reasons. Number one, the customer spread decline is as such, but the NIM in basically in Spain was basically flat in the quarter because we do have this more than EUR 50 billion ALCO book that we do think we did fix at the right time. So the average yield of that book is at 3%, that is helping obviously in the NIM overall. But on the customer spread, specifically and on the lending specifically, what you see is that the front book yields are now better than the back book yields, which is also a signal that the curve is coming now to the end. And we are growing in some areas, especially consumer and SME, which typically will help us in terms of mix going forward and in terms of spread. In short, we do think we are basically very close to the bottom of the customer spreads in Spain. Now going back to Mexico, as you said, slight increase. You also asked about deposits, sorry, in Spain in deposits because there was a large growth of wholesale deposits in the quarter and that has basically created a mix effect on the deposit costs. And as you know, our deposit prices as compared to other Spanish peers is much lower. So the decline versus a starting point much lower is going to be much less. That's the reason. But the key reason in the quarter was the mix. Mexico, again, the overall message is that we should be seeing some stabilization, slightly below around these levels. The reason that it has increased a bit in the quarter is, again, a bit mix because we have grown much more in the retail lending book versus the corporate lending book. But these levels, in our view, are relatively close to the levels that you would be seeing going forward as well. Luisa? Maria Gomez Bravo: Yes. I would add to that on the Mexican front, Onur that, as you know and everybody knows, we maintain NII sensitivity in Mexico of around 2.5% to 100 basis points movement. That 2.5% is actually around 1.9% on the Mexican peso side. And as you know, rates in Mexico have come down very significantly since the rate peak at 11.25%. Now we're expecting rates to come down to 7% this year, moving on to what we think are going to be more terminal rates of 6.5% next year. With downward bias depending on how the strength of the peso and the macroeconomic policies go. But in general, we see those rates stabilizing. And with -- I think the positive news is that, that significant rate decline with that sensitivity that I just mentioned of 1.9% to 100 basis point movement have been very much absorbed by the -- on the NII side by excellent, I think, price management, also on the cost of deposits, which keep on being quite resilient. And very much below our peers, which now have a cost of deposits of around 4.7%, more or less. Onur Genç: And maybe on Mexico, one final thing to remind, we mentioned it, I think in the past. In the 2020-2021 period, the interest rates in Mexico was around 4.25%, if I don't remember incorrectly. 4.25% was the Central Bank rate. Even in that environment, we had basically 10% margin. Since then, we have improved the mix of the loan book in such a way that you would see these double-digit more than 10% margins are quite resilient and quite expected in Mexico going forward. Patricia Bueno: Thank you very much Paco. Next question, please. Operator: The next question comes from Benjamin Toms of RBC. Benjamin Toms: The first one is on group costs, which are running up about 11% year-over-year. That's broadly in line with your inflation footprint. But do you have any additional levers you can pull going into 2026. I appreciate your footprint is different, but your largest peer is guiding to flat to slightly down cost that just seems quite a large step in aspirations here, but maybe you feel the cost growth is a natural consequence of higher balance sheet growth. And then secondly, you've broken out today some more details on the rest of the business division. Can you remind us what your ambitions are for your global CIB business? How fast do you think that business can grow by over the next 3 years? Onur Genç: Maybe you do costs, Luisa, and I do CIB. Maria Gomez Bravo: Yes. Well, I think the group costs were also affected quarter-on-quarter by the impact that we had of the one-offs in the second -- in the second quarter. What I think is very important with regards to the cost is that we are containing the cost increase in the different geographies. I think it's important to highlight the Mexican efficiency plans that were carried out at the beginning of the year in terms of headcount reviews and revisions. Also in Colombia. Spain is containing costs, I think, very well with that 1.9% increase year-on-year. I think what we need to really look at is with our strategic business plan going forward is that cost-to-income level. We are very much focusing on cost-to-income ensuring that we have the right operational level leverage, sorry, as long as we continue to invest in the franchises, which I think is very important for us. In this regard, we do think that the cost to income target of 35% at the end of our period, the 2028 number is very much our focus. We have, as you know, the low 30s in Spain, low 30s in Mexico, low 30s in Turkey, cost-to-income ratios, and that's the way we are managing our cost side investing, but at the same time, being disciplined and ensuring that those investments generate revenues and allow us to achieve best-in-class efficiency ratios. Onur Genç: Very good. On costs, I would just add, Benjamin, the topic of 2 principles that we -- it's really important for BBVA management. Number one, the concept of jaws, our costs should not be growing higher than our revenues. And the second thing is we should grow in general because of the efficiencies that we are baking into the business every single day, we should not grow higher than inflation. The numbers that you mentioned and also you compare with the competitors, I can judge who the competitor that you are comparing to is. You should look into the hyperinflationary countries and the customer -- the country mix in that growth rate. But we stick with our 2 very important principles, positive jaws, less than inflation. On the CIB business, we already basically carved it out and then talked about it in the second quarter call. But if you remember in the second quarter call, we put some numbers, goals for this division as well. I would highlight only the 2 of them, which is revenue growth, we said would be around 20%. If you take -- if you compound this 20%, the real goal that we have is that in the 4-year period that we are looking into, we are going to double this business, that's the aspiration. And then we are going to have an RoRWA. And as you might have seen in the country pages that Luisa went through, we are now reporting RoRWA and RoRWA will improve to more than 2% for that division, which then would yield, in our view, also very decent return on capital numbers. How are we going to do that? Basically, 2 things, 2 very important strategic levers. We will talk more about this maybe in the following calls. But number one, cross-border trade finance focused, basically plain vanilla corporate banking, corporate banking, transaction banking focused and basically entailing going with our clients into these geographies that they also operate. We did realize that there are many clients of us in Mexico, in Spain, in South America, Turkey, many clients of us who do business outside of their home geographies, and we are not fairly represented. We have amazing relationships with them in their domestic business. But beyond their core geography, we don't basically serve them as well as we would like it to be. As such, we are going to be focusing on this multinational cross-border-related business that we can tap into, and that's going to be a differential point for us. The second topic is, again, a bit -- we have asked as we were planning and as we were creating that plan -- strategic plan on the CIB business, where we are different from others. And the second topic is the institutional business. There are many institutional clients, funds, asset managers, insurance companies and so on, which we believe can benefit from our presence once again across the globe. We are the market maker of Mexican peso securities, for example. If any institutional investor wants to buy a Mexican peso security, we are the bank and we have seen that many institutional clients were using our competitors. We are going to leverage our positioning and again, our footprint being in multiple geographies would lead us to do better in the CIB business and the observation or the aspiration is doubling in 4 years. Patricia Bueno: Thank you very much, Benjamin. Next question, please. Operator: The next question comes from Sofie Peterzens from Goldman Sachs. Sofie Caroline Peterzens: This is Sofie from Goldman Sachs. So my first question would be going back to Mexico. We have seen some press headlines that Revolut wants to be quite aggressive in Mexico. Nubank is already quite aggressive in terms of competition. How do you think about the competitive landscape? And do you feel competition has increased? And if you could just remind us BBVA's competitive strengths in Mexico? And then the second question is on inorganic growth opportunities and maybe also organic growth opportunities. Given that your capital position is quite solid and you have 40 to 50 basis points of capital tailwinds coming in the fourth quarter, do you think it would make sense to consider growing or looking at something outside of Spain? And how do you think about kind of inorganic growth opportunities across Europe? Would you consider that? And also, if you could remind us how the Italian and German kind of digital banks are going? Onur Genç: Thank you, Sofie. Maybe I'll start with the second one. We are purely focused on organic growth from now on. I see what you're asking. But after the experience that we have had, I do think it's very fair that we will only focus on organic growth. We will always look into things. Obviously, that's our job as well. But our plan, our numbers, our commitments that you see in the second quarter when we announced them and today is purely based on organic growth. You mentioned about Germany and Italy. Again, our plan there is to grow through our digital banks. This is the first time that we are now putting numbers into that business. It is covered in the page that Luisa disclosed on rest of business, which is, again, mainly CIB business. But in that page, you do see under the customer funds, there is a breakdown now which says digital banks. At the end of September, basically, we had EUR 10 billion of deposits in that unit, which is again, Italy and Germany. And we will continue to grow in those geographies. We are going much better than our original business plan. We are going faster than what we thought we would be doing at this point in time in both geographies. Germany even better actually as compared to Italy. Italy was an amazing experience, and Germany is doing even better. So we will continue to grow through that business model, which is pure digital banking, leveraging the infrastructure and leveraging the application and the technology base of Spain to grow in Italy and Germany with the digital banking proposition. That's going to be the plan there. Regarding Mexico, and Luisa, please jump in as well. The only thing I would say is that I said it many times in the past, I keep repeating it, I do know, but I do think it is important. What we have in Mexico in my view, is just amazing. It's an amazing bank. And if you have not been to Mexico, you cover us very nicely, please do go there and then meet our management, meet our team there. It's an amazing bank. And I mentioned this every quarter, but it is important to highlight once again, we have 44% market share in payrolls, all the cash flow-related products, transactionality-related products, which is the bedrock of our business. We have amazing positioning in the country. We have the best talent. We have the best brand power. We have the best client franchise in the country. So let me not go more into it, but it's an amazing bank for multiple dimensions and not hard to replicate with -- not easy to replicate assets and infrastructure. In that context, we take the newcomers, the neobanks very seriously. really very seriously in Mexico. They are amazing companies in our view, but we are going to compete, and we are going to compete hard. So what you see with these neobanks is that they are basically attacking 2 different markets. One is credit cards, typically. And on credit cards, again, the brand power and the scale benefit that we have is very tough to beat because we come up with campaigns, rewards and points for our customers because of our size, that's not very easy to be replicated by others. So we are going to be fighting really hard in credit cards. You might have seen it in the figure you can come up with that also in the numbers that we provide, but also the markets authority in Mexico publishes it. We have been gaining market share. Even in this environment, we have been gaining market share, even including all these neobanks, we have been gaining market share in credit cards in Mexico. So we are going to compete hard and we have a scale benefit, and we have a program, which is very powerful that we think we will continue to gain market share independent of the newcomers. And then the second thing is the deposit market that they are competing. On deposits, they are offering really very high rates. You might have seen it, but last a year ago, they were offering 15% to deposits when the interest rate in the market, the Central Bank rate was 11.25%. And what we have defended then when there was such a big difference is going to be, in our view, easier for us going forward because now all of them basically reduced their rates because they cannot sustain those rates anymore. The latest that we see, most of these neobanks, now they are offering 7%, 8%, which we can compete even more easily. And on that one, again, hard to replicate asset. Basically, 1/3 of our deposits are within this band of less than EUR 30,000, 1/3. And 1/3, that bucket, the average deposit size is EUR 790. It's a very small ticket, transactionality driven, payroll account-driven, small ticket deposits. We will maintain that strength in our view going forward. But anything you want to add on the Mexican? Maria Gomez Bravo: No, I would just end up saying that, as you know, the profitability of our Mexican franchise is well beyond the peers. We have a 28% ROE in Mexico versus the peers at 15%, and it's highlighting those strengths that Onur was mentioning. It's a universal bank with a #1 NPS score of 70, above also all their competitors, including the neobanks. And I think it's a very focused bank and doing exceptionally well. So nothing else to add. Onur Genç: Very good. We are going to pick up some speed. Otherwise, you're not going to be done. Patricia Bueno: Yes, next question, please. Operator: The next question comes from Alvaro Serrano from Morgan Stanley. Alvaro de Tejada: Good to be back. On Mexico, maybe a follow-up on this latest question on Mexico. And look, I completely agree that you've got the best franchise in Mexico and very difficult to replicate anywhere in the world. My question is more to try to pick your brains on the medium term. Because if I look at -- is there a level of market share where some of the incumbents -- sort of the challengers, sorry, could get to where they start to be more of a scale competitor? Maybe not for you, but for others, sort of the second layer of competitors after you, I'm thinking Santander and some of the others, which could start to put more competition. Is there a level of market share, which we should be looking out for? Because when I look at your deposits, it's true that you very successfully reduced the deposit yield, but the mix is slightly sort of increasing to more savings and time. And I wonder if that's reflective of competition. The second question is on delinquencies on Turkey and Argentina, in particular Turkey, they're ticking up as it was expected and you had guided for. Should we expect this for a few more quarters? Any color you can give on that as to when -- how many more quarters would you expect NPLs to continue to tick up there? Or any handholding there? Onur Genç: Very good. There was a noise. So if you don't capture all the questions that you asked, Alvaro, please let us know. But what strength do we have? We discussed about Mexico, but you're asking whether the second layer of competitors can come along and so on. I go back to the same thing. I mean, the strength that we have in Mexico is so unmatched in our view, the scale benefit, but also more the client franchise and the underlying business franchise. Of course, many others will come along, but we will maintain our position. And you see that in the last 5 years, in the last 3 years, we have been gaining market share. In this last year, only in the last year, we have gained 49 basis points market share in the lending market share with the profitabilities that Luisa just mentioned. Once again, we think it's a unique franchise, and we'll continue to build upon that. And when others where they can go, I don't know. If you're asking about the neobanks, one of the competitors there in Mexico, obviously, is Nubank, which is originally from Brazil. And in Brazil, they do have a market share. But when you look into their market share evolution, what you would see is that they started well. They are now at 3.5% market share in credit cards. Again, a very credible competitor. We take them really seriously. But relatively speaking, their curve is now going lower than Brazil. So where they can get to? We don't know. We are going to fight hard and we are going to compete hard. But I don't think we will be the ones who would be losing market share. You asked about deposit savings and time. You said that the time has gone up slightly more in the quarter, true. I mentioned this very clearly in the previous calls as well. Nacho kept asking me about this many times. But when the rates were much higher, 11.25% and the Central Bank rate was 11.25%, we decided to be a bit out of the deposit market. We wanted to fund ourselves through wholesale funding because when rates are very high, heating up, the competition doesn't help us, doesn't help doesn't help. When rates come down, and as you know, again, the latest Central Bank rate now is 7.5%, we now want to go back to the deposit market a bit. That's what we did, especially in the corporate segment, in the wholesale segment, company segment. We have acquired some deposits, and that's why you have seen the time deposits going up. But that in our view, and you have seen that our loan-to-deposit ratio versus the changes that we have seen in a year ago and so on is now going to be not there. We're going to grow in deposits going forward in this context of a lower interest rate environment. That's the reason. It's not -- it was very purposeful, very clear part of the strategy that we have employed and now we are coming back a bit to the deposit market. That's the reason for the mix change. About asset quality in Turkey and Argentina, Luisa? Maria Gomez Bravo: Yes. Well, in Turkey, I think that the numbers that we're seeing are very much within the guidance that we've given to the market at the beginning of the year, the 180 basis points. It's true that quarter-on-quarter, the comparisons are affected obviously by macro adjustments, but also by big ticket releases, especially that we had in the second quarter. What I would say with regards to underlying asset quality is that we are seeing the NPL ratios and the asset quality of the retail portfolio stabilizing at the current levels. So I think that, that is good news in the sense that we had an increase in rates at the beginning of the year and rates now should be coming down going forward into the next year. Having said that, I think 180 basis points is a cost of risk that is not a normalized cost of risk within a country like Turkey. We've had higher cost of risk in the past. So I think that the positive news is that those retail portfolios are stabilizing in terms of cost of risk. And going forward, I think that the numbers we will see what they look like. But in general, when we guided, I think we guided for around 200 basis points to our midterm, long-term plan. And in Turkey, or should we move to Argentina? Argentina. Onur Genç: Yes, Argentina. Maria Gomez Bravo: So Argentina is a little bit of a different story. So Argentina, we had been seeing already in the second quarter, I would say, a sharp increase in Stage 3 and defaults in especially the retail portfolios. This is obviously due to inflation coming down quickly, but also very high real interest rates, which moved sharply in the third quarter, as you all know, we had rates touching the 60% in October versus inflation of around 31%. This has created a significant increase in deterioration in the asset quality, again, especially in the retail portfolios. We are already deciding and taking decisions regarding the origination. You've seen in the third quarter that the quarter-on-quarter growth in Argentina slowed down significantly. We grew 10% versus the 21% in the second quarter. And specifically, we are curtailing our growth in credit cards and consumers, where loan production in the quarter fell 9%, focusing our growth towards more of the commercial segment, which we feel is better. But we'll see how the macro develops. We think that the continued focus on the macro policies and decreasing inflation and decreasing rates should be supportive for a better environment. But we still need to see, I think, there quarter-on-quarter, how things develop, again, especially on the retail portfolios. Onur Genç: On asset quality, Alvaro, I would finalize by saying that as compared to what we were thinking at the beginning of the year, in Spain, in Mexico, for sure, Colombia, Peru, we have done much better than what we thought we would do in asset quality. Turkey is completely in line. Argentina is worse than what we expected because the real rates in Mexico -- in Argentina, sorry, is so high now that it is creating a load on the Argentinian lending book. But overall, this has been, in my view, a positive highlight of the year, and we are quite positive going forward as well. Patricia Bueno: Very good. Thank you, Alvaro. Next question please. Operator: The next question comes from Ignacio Ulargui from BNP Paribas Exane. Ignacio Ulargui: So I just have one question. When I just look to the capital, you have covered organic and inorganic growth, I just wanted to ask on the cost side, I mean, could be any chance that you do or launch another restructuring plan in any of your geographies, thinking probably about Spain or Mexico in terms of trying to control further cost growth or that will be ruled out at this stage? Onur Genç: Very good. Again, let's pick up some pace, Nacho. The plan that we have put forward that we are executing and that we will deliver on, does not incorporate any restructuring plan as they call it [indiscernible] in Spain, into the plan at all. But we always look for productivity. Luisa mentioned it in the second quarter call and also partially today. We are always looking for productivity improvements. You might remember this in the first quarter of this year, we actually -- it wasn't a very official program, but we have reduced our employee base in Mexico, for example. So we will always look for the productivity enhancement initiatives. And I wouldn't call them a program, but the restructuring program in the sense that you mean it is not incorporated into the plan. Patricia Bueno: Thank you, Nacho. Next question, please. Operator: The next question comes from Carlos Peixoto from Caixa Bank. Carlos Peixoto: The first one would actually be on the 20% ROE target that you had before -- that you had announced previously for 2025. Do you see that as still achievable? I reckon that the capital base is quite wide, given the current capital excess. But should we still see that as something doable? Or should we focus more on the actual bottom line number around EUR 12 billion? Then on the second question regarding Turkey. In light of the ongoing evolution, I mean the previous target or the previous quarters, you had guided towards slightly below EUR 1 billion net profit target for Turkey. And do you see that still achievable? Or should we be thinking more of something below EUR 900 million as the 9-month annualized figure seem to suggest? Onur Genç: Very good. Thank you, Carlos. As always, 20% for the year. As you said, the excess capital has built up in the denominator of the ratio. Now that we are starting the share buybacks tomorrow morning, it will help as well, but we are still committing to that number, yes. About Turkey, we are not giving guidance for the coming year yet. The only thing I would tell you is that for this year, we said first EUR 1 billion, but it was very clear. I remember it very, very clearly because there was even a footnote in that presentation in the first quarter presentation saying that, that EUR 1 billion was under the scenario, so I don't remember it incorrectly, but 26.5% inflation and 31% interest rate. And there was also an FX depreciation assumption. Under this scenario, it will be EUR 1 billion. And then once we realize in the second quarter that those assumptions would be very tough to achieve for the macro, we said somewhat below EUR 1 billion. And this year, we still stick with it. For next year, we will do it in the next quarterly call. Patricia Bueno: Very good. Thank you, Carlos. Next question, please. Operator: The next question comes from gnacio Cerezo from UBS. Ignacio Cerezo Olmos: There's 2 quick ones, hopefully. First one is on the approval of the buyback process by the ECB. If you can give us some indication about the timing? And if it can be announced actually in the middle of the quarter when the approval is given or we need to wait for the full year results? And then the second one on Turkey. If you can give us a bit of a sense actually of how far are we from the customer spread you think you can achieve and the rates actually in the 20%, 25% region you're targeting? I mean, how quickly actually can we get there? And how far are we from the normalized customer spread in Turkey? Onur Genç: Very good. On the approval of the share buyback, we cannot -- as you have seen, we cannot disclose the specific amount that we ask for approval for and so on because there's a clear regulation or clear guidance on this from ECB saying that unless it's fully approved, it doesn't -- it cannot be announced and the amount cannot be known. But again, we initiated the process last week. It's in the process now. The legal maximum that they would use is 4 months actually. But as you might -- as you can imagine, given the excess capital that we have, given all the dialogue that we have with them, we do expect it to be much earlier than that time frame. But again, we are dependent on ECB for their approval to be done. And once we receive the approval, it can be tomorrow, it can be 2 months, it can be less. Once we receive the approval, we will announce it, yes. Then on the Turkey customer spread, not sure, it goes back to, again, how fast the interest rates are going to come down. You might know this already, obviously, but 39.5% is the latest Central Bank rate, 39.5%. We were expecting it to be, as I said, at the beginning of the year at 31%. So it's coming down much slower than what everyone anticipated because inflation has turned out to be much more sticky than otherwise. But this country is still on, in our view, a very positive path. It is on a path of normalization. They stick with the clear aspiration to reduce inflation and as a result, also reduced interest rates. So once interest rates come down, and we will be giving you in the next call all the expectations for the coming year. But obviously, our expectation is that interest rates will continue to come down. Once that happens, the spread will normalize as well. But until that happens, it's going to be very challenged. One other thing that I should mention is that the customer spread and NIM, the difference between the 2 is actually larger in Turkey than in all the other markets because in Turkey, there is a repo facility, again, at 39.5% for the Central Bank. You can fund yourself a bit with the repo and then also through swaps, 39.5%, but our cost of funding is higher because there are -- beyond the availability of funding mechanisms, there are certain regulatory ratios, one being very specific, the Turkish lira deposits divided by the total deposits. There are certain ratios that we have to satisfy every month, which is basically creating a deposit market at a higher price than other cheaper available funding opportunities. So NIM, as much as we can use those other, and we cannot use them all the time and -- but the NIM would be better than the customer spread going forward because when you use the repo facility, we would be optimizing the cost of funding a bit for the whole bank. So in the quarter, for example, you haven't seen the spread in Turkey to improve too much, the customer spread, but you would realize that the NIM has improved by 65 basis points more or less, mainly because we tapped into a cheaper funding resource, which is the repo market as much as we can in the context of those regulatory restrictions that I talked to you about, and that has helped us improve NII in a very good way. Patricia Bueno: Next question, please. Operator: Next question comes from Borja Ramirez from Citi. Borja Ramirez Segura: I have 2. Firstly, on capital. You're showing a very strong capital position. And also, I think you mentioned there may be SRTs coming in Q4. So I would like to ask if you could provide some details. And linked to this, I see some upside to the EUR 13 billion of capital available for distribution in the short term. So this would be my first question. And my second question would be in Spain, you are gaining market share quite nicely. I would like to ask if there are any -- on this point, any learnings from when you're analyzing the Sabadell transaction in the Spanish market, maybe you've learned about new ways to gain share? Onur Genç: OK. The first one, SRTs, Luisa? Maria Gomez Bravo: As Onur mentioned in the quarter, we did 5 basis points of SRTs. We've done a total of around EUR 8.2 billion RWA SRT transactions, SRT-able transactions. We also do and have engaged also this quarter on asset sales that you've also seen in the NPL ratios in Spain. I would say that the target that we had this year and going forward, by the way, is to generate around between 30 to 40 basis points of capital through SRTs. And obviously, in the first 9 months of the year, we're already at 28 basis points, and we'll be within that range comfortably in the fourth quarter. Again, it depends on the deal flows and the approvals process. The quarter will be obviously higher than the third quarter. And will be above, obviously, very much above the 30 basis points in general in that context of the fourth quarter being better than the third quarter. But in general, I would say 30 basis points to 40 basis points is what we can expect from SRT's capital generation going forward. Onur Genç: Perfect. And then second question was on market share, any learnings from Sabadell and so on. I'll go to the market share directly. Borja, we are gaining market share everywhere except Peru actually because of the CIB, the large corporate lending book because of the pricing, we are a bit out of that market. And because of mortgages in Spain, because of the pricing there, we are a bit out. We are losing market share. But beyond that, basically, we are gaining market share everywhere. It goes back to the strength really of our people. I keep saying that in the bank also. We are a people-based business. Our people -- we have amazing people in the bank, and we will go for profitable growth, gaining market share. In the case of Spain, we don't -- I mean, you might not see it fully in the breakdown, but we are gaining market share 21 basis points in the year in total loans. But it is basically negatively affected from mortgages, as I just mentioned, since the beginning of this year, given the lack of profitability in that market, we are out. So we lost 30 basis points in mortgages, but we are gaining market share, public sector, consumer. We gained 58 basis points in the company's segment in Spain, 58 basis points in a year. And we will keep doing what we know well, go after clients and provide our service because we have amazing people. In short, we already have our own medicine, and we will replicate what we have been doing in the past 5 years -- in the past 5 years, by the way, in the company segment, we gained 200 basis points. We will do what we know well, and you'll continue to gain market share. Patricia Bueno: Thank you very much, Borja. Next question, please. Operator: Next question comes from Britta Schmidt from Autonomous Research. Britta Schmidt: A couple of clarifications, please. With regard to Turkey and the net interest income development, the repo financing that you mentioned, is that what Garanti talked about when you mentioned opportunistic liquidity management? And is that something that is quite sticky. So I'm kind of trying to figure out what the outlook here is for the net interest income going forward. Then secondly, could you just help us quantifying the net impact of the IFRS 9 calibration and the macro updates on the EUR 1.6 billion loan losses this quarter, i.e., what would have been the underlying cost of risk in the quarter? And would that underlying run rate be a good steer for not just Q4, but also the next couple of quarters? And then 2 questions related to capital and distributions very quickly. Can you give us any expected impact on operational risk RWA changes in Q4? And maybe also clarify what you mean with the pending approval from governing bodies for the significant new share buyback program? Onur Genç: Very good. Let me start with the last one, Britta, very quickly. I mean we only wait for the ECB approval. But then once we receive the approval, the specifics of how much, whether it's externalized and so on, it is also subject to obviously to the Board approval. But the real -- the only requirement that we have is ECB. On the first one, on the Turkish situation, it is in the context that I just explained, I gave some details. I don't want to go into too much detail, but you are now asking it again. So maybe I do a bit more. But as I mentioned, the customer spread didn't improve too much in Turkey, but NIM has increased by 67 basis points. Why? Because in Turkey, we now have a situation where interest rate declines are not immediately being reflected in the customer spread. Rates come down, but the deposit rates do not come down as much. Why? Because of some of the restrictions that I mentioned to you. In Turkish lira deposits, the supervisor, Central Bank in this case, they have a certain ratio of TL deposits over total that needs to be satisfied. Otherwise, you are penalized. As a result, there is a big competition in the deposit market to deliver those restrictions -- the requirements. And as a result, deposit prices are higher than wholesale funding opportunities. As long as those restrictions are as such, you might see that the customer spread doesn't improve as much, but you would see that the NII and NIM improves. So the rate declines would be converted into real value generation, value creation, maybe not completely through customer spread improvement, but through the NIM improvement, because we can be tapping into those. Obviously, we have our own restrictions and our risk management metrics and so on, but we can tap into those cheaper funding resources as long as the situation as such, okay? But you're asking more the sustainability of this or can you expect more of this going forward? The answer is yes. If rates come down and that rate decline is not very much converted in the customer spread, you would see that NIM decline would be there. Not maybe as much, but would be there, but the customer spread would not be moving ahead too much. I hope I'm clear. And if not, we have many details on this, you can call the IR team to get more on this one. On the provisions, the macro and so on, we don't disclose that. As you know, Britta. The only thing I would say to you is that the business as usual, if you incorporate all the 2 things, actually, the macro impact and also the annual recalibration impact, if you isolate for those, the business as usual would have been better, slightly better, not too much, but slightly better would have been. And there was another question, Luisa. The tough ones, you get them, so. Maria Gomez Bravo: On the operational RWAs, we have adjusted a little bit the number already in the third quarter. And in the fourth quarter, we will update the operational RWAs with the actual related number, but we don't expect a significant impact from operational RWAs in the fourth quarter. Patricia Bueno: Thank you, Britta. Next question, please. Operator: The next question comes from [ Marina Correa ] from Jefferies. Unknown Analyst: I just had 1 on your return on tangible equity guidance for this -- Hello? Onur Genç: Yes, we can hear you, [ Marina ], go ahead. Unknown Analyst: Can you hear me? Onur Genç: Yes, please, go ahead. Unknown Analyst: Perfect. Sorry. My question was around your 20 -- about your 20% return on tangible equity guidance for this year. Obviously, that implies quite a strong performance in Q4 versus Q3. So could you please just walk us through the moving parts in the increase in return on tangible equity quarter-on-quarter in Q4 that you're expecting to see hit the guidance? Onur Genç: I partially mentioned it in one of the previous questions, but you should also look into the denominator because we would be doing share buybacks. So the equity base would be coming down. So it's not just the numerator, which is the profit, but also the denominator that would be affected in the quarter. And then that number is for the full year. When we look into the numbers, we are at those levels, basically. Patricia Bueno: Thank you, [ Marina ]. Next question, please. Operator: [Operator Instructions] The next question comes from Fernando Gil de Santiva es from Intesa Sanpaolo. Fernando Gil de Santivañes d´Ornellas: Two quick ones. One, regarding Spain, I see loan growth in the quarter being flat, mainly explained by public sector. Can you comment on these trends on the public sector, if there's anything I should be looking at? Second, regarding Spain and the litigation and the appeal that you guys presented against the Supreme Court and against the government measures due to the merger. Is the bank going to proceed with that? And finally, a short one, have you done any update on the hedging strategy regarding Argentina and the latest events after the elections and the intervention in FX markets? Onur Genç: Very good. Let me do it very quickly, if that's okay, Luisa. On the public sector, there are some one-offs in there. So you cannot expect 20% growth year-over-year every quarter. But you should see that the public sector is going to be quite positively reflected in the growth rate of Spain lending book going forward for one reason. The local governments in Spain for many years did not use bank financing because there was a central scheme that they could have been financing themselves from the central government. Now the bank financing is coming into the play. So you would see decent growth going forward, not maybe at these levels because there were some one-offs here, but you would see good decent growth. Then the Supreme Court, we don't comment on the legal proceedings of the bank. Then the hedging strategy of Argentina, given the costs of hedging in Argentina, we have not been hedging and we will continue to be not hedging Argentina. It's so small also for the whole account that we can live with it without hedging. Patricia Bueno: Thank you very much, Fernando. Next question please. Operator: We have no further questions at this time. So I'll hand the call back to you. Patricia Bueno: Okay. Thank you very much, everyone, for joining this call, and thank you for participating with your questions. So if you have any further questions or clarifications, please reach out the IR team. Thank you very much.
Operator: Welcome to the Invitation Homes Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would like to turn the conference over to Scott McLaughlin, Senior Vice President of Investor Relations. Please go ahead. Scott McLaughlin: Thank you, operator, and good morning. Joining me today from Invitation Homes are Dallas Tanner, our President and Chief Executive Officer; Tim Lobner, our Chief Operating Officer; Jon Olsen, our Chief Financial Officer; and Scott Eisen, our Chief Investment Officer. Following our prepared remarks, we'll open the line for questions from our covering sell-side analysts. During today's call, we may reference our third quarter 2025 earnings release and supplemental information. We issued this document yesterday afternoon after the market closed, and it is available on the Investor Relations section of our website at www.invh.com. Certain statements we make during our call may include forward-looking statements relating to the future performance of our business, financial results, liquidity and capital resources and other nonhistorical statements that are subject to risks and uncertainties that could cause actual outcomes or results to differ materially from those indicated. We describe some of these risks and uncertainties in our 2024 Annual Report on Form 10-K and other filings we make with the SEC from time to time. Except to the extent otherwise required by law, we do not update forward-looking statements and expressly disclaim any obligation to do so. We may also discuss certain non-GAAP financial measures during the call. You can find additional information regarding these non-GAAP measures, including reconciliations to the most comparable GAAP measures in yesterday's earnings release. With that, I'll now turn the call over to Dallas Tanner. Go ahead, Dallas. Dallas Tanner: Thank you, Scott, and good morning, everyone. I'll start by recognizing our exceptional teams across the country. Their dedication to our residents and to operational excellence continues to drive performance and reinforces our leadership in single-family rental housing. Stepping back, our business is built on a simple but powerful value proposition: choice, flexibility and high-quality single-family living without the long-term financial and maintenance commitment of homeownership. That value proposition is resonating broadly from families seeking space and schools to professionals who value mobility. Today's housing dynamics continue to support steady demand for SFR. Even as mortgage rates move around, overall affordability remains stretched and transaction activity has been muted, partly because 70% of homeowners are still locked in at mortgage rates below 5%. For many households, the all-in monthly cost of owning a home, including mortgage, tax, insurance and maintenance remain more expensive than leasing a comparable home. Based on the latest John Burns data weighted to our markets, those who choose to lease, save an average of almost $900 per month compared to owning. Against that backdrop, our third quarter results reflect the strength and the resilience of our platform. Demand remains consistent. And while new lease growth continues to be an opportunity, our renewal performance is outstanding. During the third quarter, we delivered same-store renewal rate growth of 4.5% or 30 basis points higher than our third quarter result last year. At the same time, our average resident tenure further increased to 41 months, among the best in the industry. These outcomes speak to the stability, quality and location of our portfolio, the professional service we provide and the value our customers place on staying with Invitation Homes. That stability gives us the confidence and flexibility to invest for the future, and it underpins our disciplined approach to growth. Today, we're pursuing channel-agnostic, location-specific growth focused on long-term total returns, primarily through the following 4 channels: First, our homebuilder partnerships that cultivate reliable and predictable forward purchases of full and partial new communities. Second, homebuilder month-end inventory or a list of homes shared by regional and national builders that we've carefully screened to identify those that meet our location and pricing criteria. Third, our construction lending program, which is gaining traction as a strategic way for us to deepen our relationships with smaller developers and facilitate delivery of much needed new housing supply. And fourth, our third-party management business, which represents a capital-light way to leverage our platform and grow our scale and earnings. In the meantime, our capital allocation framework remains unchanged to fund organic growth, invest where long-term total returns are most compelling and maintain a strong balance sheet, so we're able to capitalize on opportunities when they arise. Naturally, we'll weigh the relative attractiveness of external growth, internal investment and now share repurchases with a clear focus on long-term value creation. In summary, we remain confident in the durability of demand for well-located single-family rentals in our ability to operate efficiently at scale and in our capacity to grow prudently. Our markets continue to benefit from strong long-term fundamentals supported by healthy demographics and sustained desirability. Even if lower mortgage rates become more prevalent, we believe that will be a strong positive for our business as greater liquidity and transaction volumes should benefit the housing market broadly, and we're well positioned to perform and capture opportunity across these cycles. Before I hand it over to Tim, one last note. We'll be hosting our Investor Day and Analyst Day on November 17. This event will provide a deeper look into our strategy, growth initiatives and our long-term outlook. Look for the live stream webcast details to be shared on our website about a week or so prior to the event. With that, I'll pass the call over to Tim Lobner, our Chief Operating Officer. Tim Lobner: Thank you, Dallas, and good morning, everyone. I'm pleased to walk through our third quarter operating results, including our same-store renewal and leasing performance as well as our controllable expense management. But before I do that, I want to recognize the strength of our portfolio, the exceptional execution of our associates across every market we serve and most importantly, the trust and loyalty of our residents. Their confidence in Invitation Homes is what allows us to deliver on our mission every day. Together, these relationships and efforts form the foundation of our success. Since this is my first earnings call speaking with you directly, I'd also like to share a few thoughts on the road ahead. The current landscape brings both opportunities and challenges, which I see as a proving ground for our team and the vision I have for leading it. That vision is rooted in relentless execution, operational excellence and a customer-centric mindset. We will pursue every opportunity, engage every prospect and deliver service that sets the standard in our industry. Through disciplined oversight, accountability and a culture of hard work, we'll continue to drive strong results, and I look forward to sharing more on that at our Investor Day on November 17. The commitment I just mentioned is already beginning to show in our performance. In a dynamic operating environment, our teams continue to deliver solid same-store results. This included third quarter average occupancy of 96.5%, consistent with our expectations. In addition, our renewal business, which accounts for over 75% of our book, continue to be a reliable source of strength, demonstrating both the durability of our model and the value residents place on the product and service we provide. We achieved renewal rent growth of 4.5% in the third quarter, underscoring our pricing power with existing residents and reinforcing the quality and appeal of our homes. Shifting to the new lease side of our business. As expected, third quarter new lease rent growth was slightly negative, driven by elevated supply in select markets that is amplifying typical seasonal patterns. Taken together, blended rent growth for the quarter was 3%. Looking more broadly at the components of same-store core revenue growth, we saw solid contributions across key areas. Other property income grew 7.7%, driven by continued adoption of value-add services that our residents desire, such as our Internet bundle, our Smart Home features and other resident offerings. In addition, bad debt improved by 20 basis points year-over-year, reflecting the quality of our resident base and the sustained rigor of our screening and collection processes. Together, these factors contributed to core revenue growth of 2.3% for the quarter. On the expense side, our teams continue to manage cost effectively, while maintaining high service standards. Same-store core expenses increased 4.9% year-over-year, with fixed expense growth showing some welcome moderation this year compared to recent years. The overall result was same-store NOI growth of 1.1% for the third quarter, which is typically our most modest growth period due to elevated seasonal turnover and other transitory factors. Turning to October. Our preliminary same-store results were generally in line with expectations. New lease rates were down 2.9% year-over-year, reflecting the impact of targeted specials we ran to drive traffic and strengthen occupancy, which averaged approximately 96% in October. Importantly, October renewal spreads remained strong at 4.3%, supporting blended rent growth of 2.3% for the month. That represents a notable acceleration in blended lease spreads of 20 basis points compared to this time last year. To close, I want to once again thank our associates for their continued focus and commitment. Their efforts have helped to enable our growth while ensuring that our residents feel safe, supported and at home. We have the right team in place to finish the year strong and continue executing on our strategic priorities. With that, I'll turn the call over to Jon Olsen, our Chief Financial Officer. Jonathan Olsen: Thanks, Tim. Today, I'll provide an update on our strong balance sheet position, recent capital markets activities and third quarter financial performance. I'll then wrap up with an update on our full year guidance revisions outlined in yesterday's earnings release. We ended the quarter with total available liquidity of $1.9 billion, which combines unrestricted cash on hand with the undrawn capacity on our revolving credit facility. This substantial liquidity position provides us with the financial capacity and flexibility to pursue growth opportunities, manage operations and navigate market volatility with confidence. In addition, our debt structure continues to reflect the high-quality investment-grade profile we've worked diligently to build. As we've discussed in the past, over 83% of our debt is unsecured, over 95% of our debt is either fixed rate or swapped to fixed rate and approximately 90% of our wholly owned homes are unencumbered. We have a well-laddered maturity profile with no debt reaching final maturity prior to 2027, and our net debt-to-EBITDA ratio was 5.2x at quarter end. Combined, these attributes provide meaningful cushion for both operational flexibility and future growth investments. A highlight of our third quarter capital markets activity was the successful completion of a $600 million bond offering in August. The unsecured notes mature in January 2033 and have a coupon of 4.95%, which represents an attractive long-term cost of funds. The deal also extends our maturity profile and frees up capacity on our revolving credit facility. The offering received a strong reception from investors, reflecting the market's confidence in our credit quality and business fundamentals. Also included in yesterday's earnings release was our announcement that our Board of Directors has authorized a share repurchase program of up to $500 million. We view this as a tool that is part of our disciplined capital allocation plan and an ordinary course approach to enhancing shareholder value. Turning now to our third quarter financial results. For the third quarter of 2025, we delivered core FFO per share of $0.47 and AFFO per share of $0.38. Tim already covered our third quarter same-store results, but I want to provide a bit more detail on 2 items. First, property taxes were up 6.3% year-over-year in the quarter, largely due to the benefit we realized this time last year from favorable developments in Florida and Georgia. This year, bills from those 2 states, which together represent more than half of our property tax expense, have so far come in slightly better than expected. Second, we received a favorable premium adjustment related to what is effectively a rebate structure built into our insurance program. This contributed to a 21.1% decrease in insurance expense year-over-year. As a result of our year-to-date performance, we are raising our full year 2025 guidance. We have increased the midpoints for core FFO and AFFO by $0.01 each to $1.92 per share and $1.62 per share, respectively. Additionally, we have raised our same-store NOI growth expectations by 25 basis points at the midpoint, now 2.25%. This was comprised of narrowed core revenue growth guidance in the range of 2% to 3% and improved core expense growth guidance in the range of 2% to 3.5%. Further details of our revised guidance are included in yesterday's earnings release. As we near the end of the year, I want to acknowledge the great progress we've made in the first 10 months. These achievements are a testament to the hard work and discipline of our associates, and I'm thankful for what we've accomplished in a dynamic operating environment. That said, we know we need to remain focused and agile as we approach the remainder of the year, and I have every confidence we'll deliver on that front. This concludes our prepared remarks. Operator, please open the line for questions. Operator: [Operator Instructions] Your first question comes from Jana Galan with Bank of America. Jana Galan: Congrats on a great quarter. I was wondering if you could spend a little time talking about your supply outlook for 2026 with both kind of the BTR deliveries that are expected to deliver next year relative to this year? And then also how you kind of think about that more shadow supply of whether it's an owner-occupied household or becomes a renter household. Dallas Tanner: Thanks, Jana, for the question. This is Dallas. It's been interesting. As we sort of looked at the supply backdrop, it sort of fits into a few categories, right? First is, and we called this out sort of last fall in our third quarter call, this BTR delivery that we were starting to see show up in our markets create a little bit of noise on the supply side. The second piece of it is also -- and it's a fairly small percentage, but some of the for-sale product that maybe isn't moving in the market that may convert to single-family rental from a listing perspective. And then lastly, as we kind of follow and cover some of the professional operators, it's the amount of supply and scale that we see even in those books of businesses that compete in some of our similar markets. Generally speaking, it's nuanced by market. What we've seen so far is that through the most of this year, it's gone pretty much as we expected and what we laid out at the beginning part of the year. We expected new lease to sort of tick up and get a bit better as we kind of went through peak leasing season and into the summer. But we expected that towards the end of summer, things would likely be a little softer just given the lack of homeowner velocity buying and selling and also just some of that shadow supply that we had called out last year. The good news is there are certainly markets like Florida and Atlanta, where we're seeing some of that supply and delivery schedule now kind of get over the hump and come into our favor. The unknowns are still what's going to happen sort of in the one-off kind of single-family rental market. And so we'll continue to monitor supply as it comes through. We're actually pretty encouraged by some of the signs we've seen both in the starts that we're hearing from some of the builder partners and things like that. But ultimately, we've probably got a couple more quarters of supply, specifically in some of these Sunbelt markets where there will be a bit more supply as we've called out for the last couple of quarters. Operator: Your next question comes from Eric Wolfe with Citi Group. Eric Wolfe: I think you said in your remarks that October was like 96% occupancy, which I think is kind of like down sort of 50 basis points from the third quarter. And then you gave the new lease down, I think, 2.9% and renewals 4.3%. I guess what I'm sort of putting that all together, I guess it's a little bit tough for me to get to that sort of fourth quarter number that you need to hit guidance. And so I didn't know if there's something in the fourth quarter like lower bad debt or improving fees or something that gets you to that sort of positive sequential growth to hit the midpoint. And apologies if I'm just missing something on those numbers. Those are just what I've heard from the remarks. Tim Lobner: This is Tim. Thanks for the question. Look, the occupancy dip that you referenced down in the 96.5% range, that was expected. If you recall, going back to the beginning of the year, we talked about that we'd be taking a more measured approach. We anticipated that occupancy would come in a bit as the year progressed, get to a healthy level in the mid-96% range, which it has. We also anticipated that the new supply would create some pressure on new lease growth, which it also has. The good news is, as you look at the fourth quarter, our renewal book of business, which accounts for about 75% of the book is super healthy. Our Q3 renewal rates grew to 4.5% year-over-year, about 30 basis points higher than the same period in 2024. October, as you pointed out, renewal rate was 4.3%. That's an important part of the Invitation Homes story. Our customer is very healthy from a financial standpoint, pleased with the Invitation Homes leasing experience. They're staying for 41 months. I think that's the most important thing to point out as we head into Q4. Remember, Q4, you don't see a lot of people leaving. Turnover tends to be low. And so we feel like we're in a really healthy spot, and the year is progressing as expected. Operator: Your next question comes from Michael Goldsmith with UBS. Ami Probandt: This is Ami, on with Michael. I was wondering, do tenants tend to look to negotiate more on renewals and assets in BTR communities where they can see competitive pricing on units and really have a market comparison? Tim Lobner: Look, I think -- this is Tim. Thanks for the question. Look, the consumer does negotiate on renewal. They do see the open market. And we do negotiate as needed to maintain the occupancy targets that we're looking for. So yes, we don't see a difference between build-to-rent and our same-store scattered site portfolio. Consumers tend to behave similarly across asset types within the portfolio. Operator: Your next question comes from Steve Sakwa with Evercore. Steve Sakwa: Dallas, there's been a lot of rhetoric out of Washington between the Trump administration, Bill Pulte, just about trying to bring down house prices and make things more affordable. I'm just curious, what are you hearing in your discussions with the homebuilders? How do you think this might impact your business, either good or bad? Dallas Tanner: Interesting question, Steve, and it's one that we've had in kind of a couple of different ways. Let me just take a step back. Speaking broadly to the homebuilders, and we've obviously paid attention to some of their calls over the last week or 2, they're certainly seeing a little bit of softening demand, it sounds like. Now it sounds like they're managing inventory a little bit better as well. Yet some of these guys have done a really nice job of leaning out and trying to put more production into the market in 2025 specifically. And they've talked about that as they put that production out, they've actually had a lower pricing because the bid-ask spread had been a little wide. In our one-on-ones, which I always want to protect and be careful about talking about what anybody says, it feels like they're hearing the message that from a federal perspective, they'd like to see a bit more production. I think that being said, if we're being fair, there's plenty of supply in the marketplace right now. I think for-sale listings are up over 1 million units this year. The challenge is on an annualized basis, we're only seeing something like 4 million to 4.5 million sales nationally. And that just doesn't work. Like we need to get back to a place where we're seeing 5 million to 5.5 million sales a year in this country. And I think a lot of that has to do more with the liquidity around mortgage and mortgage rate. There's still something like 70% of mortgage holders in the U.S. are at 5% or better. 80% are at 6% or better. So that spread back to our earlier comments around the total cost to own versus the total cost to lease is still really wide. I think that's why we're seeing the pickup in our renewals business is one example of why in a year where maybe there is actually more product on the market, we're actually renewing at a higher rental rate than we were at the same time last year. And I think it's indicative of the fact that if you have location already solved, you're not looking to absorb future costs right now. And so I think I would expect that the builders are probably weighing that out as well. And we've certainly seen that, and Scott can talk more about this later in some of the opportunities we've seen over the last couple of quarters. There's been some really good opportunities on newer product because inventory is sitting. Operator: Your next question comes from Haendel St. Juste with Mizuho. Haendel St. Juste: Dallas, I wanted to ask a question on capital allocation. I guess, first, maybe can you talk about the increase in the acquisition guide? I'm assuming that's coming from your builder relationships and some of the dynamics you're talking about earlier. But I'm also curious on the yields you're seeing there and how that compares to stock buybacks. I think a lot of us were hoping or maybe expecting to see you act on buying back the stock a bit sooner. Dallas Tanner: Thanks, Haendel, for the question. First and foremost, on our capital allocation through, call it, the first half of this year, we've had many things in flight from a delivery perspective that were part of our BTR programming that are just ordinary course and they're kind of built into our thinking. There's been a little bit of more opportunistic buying. Scott can give some color on this when I finish here around things that we've seen in the last 1.5 quarters or so in some of these end of month, end of quarter, end-of-cycle opportunities with some of our both regional and national builders. In terms of stock buyback, look, this is something we started to think about this summer going into our fall Board meeting, and it was one of the items that we put together to talk about with our Board that we wanted to be in a position that if the volatility was going to exist in the stock price that if or when appropriate and on a measured kind of basis, as we think about how to use our capital, capital allocation, disposition proceeds, we certainly want to have this be one of the tools in our tool belt if stock price is going to kind of stay in these ranges for some period of time. So we'll obviously look for opportunities to use it. We just hadn't had the plan in place. We never set one up. So we're in a good spot now. We feel like it's an added tool to the tool belt, and we'll use it appropriately and in discussion with our Board. Scott Eisen: Scott, anything to add on deliveries? No. I think the only other thing I would address, Haendel, is that when you look at our acquisitions for the quarter, probably about 70% of it was, as Dallas said, forward purchase deliveries where we're sort of on the back half of community deliveries that we started in last year, and we're getting towards the tail end of that. And about 30% or so of what we did this quarter was really opportunistically buying homes on a one-off basis from the homebuilders off their tapes. I think it's been widely reported that the homebuilders have had a lot of inventory, and they've been trying to sell homes, have deliveries in 30 days. And so I think for us, it's been a great opportunistic way for us not only to pick up homes at 20-plus percent discounts to market value, but also get a home for almost immediate delivery that we can put into the market and hopefully get leased within 60, 90 days. So I think we feel good about what we've done, and we've been smart and opportunistic, I think, about where we've allocated. Operator: Your next question comes from Austin Wurschmidt with KeyBanc Capital Markets. Austin Wurschmidt: Just going back to an earlier question, you guys affirmed the same-store revenue guidance, but you did keep a wider range late in the year. So I guess despite kind of, Tim, your comments on trends being largely as expected, why not tighten the range this late in the year? And then also curious, are you continuing to offer similar concessions that you referenced in October to hold that occupancy at 96%? Jonathan Olsen: Thanks for the question. It's Jon. I'll chat briefly about the revenue range. Just to be clear, we did tighten that range. I think if it strikes you as particularly wide late in the year, I would just point out that this is sort of a dynamic environment, and we want to be mindful of that. We continue to feel good about the way the year is shaping up. And I would remind folks that really from the first part of the year, we've been talking about rate and occupancy in terms of our overall expectations for 2025. In the first part of the year, I think repeatedly, we said we were running a little bit ahead of where we expected to be. And I think what we're seeing is that results are sort of aligning around what our full year expectations were. And so still feel very good about our full year occupancy guide. I think with respect to some of the other items, time will tell. We feel good about where we're coming in from a tax perspective. Recall, our original range was 5% to 6%. We expect we'll be around the bottom end of that range and hopefully do a little bit better than we anticipated with respect to insurance expense and some of the controllables. But I think from a revenue perspective, we want to be mindful of the fact that this is an environment where we have to be nimble, and we have to really pursue every lead, every opportunity because it's just a little bit softer than it's been. Dallas Tanner: Anything you want to... Tim Lobner: Yes. Thanks, Jon. Yes, I can touch on the specials. Look, on the specials that we're offering, we typically run targeted specials in October and November. It's a great tool in the toolbox. Our goal when we present these to the market is to boost traffic and generate leasing momentum ahead of the holiday season when the market tends to slow down a little bit. We're pleased with the results we're seeing, and we'll continue to evaluate the need to keep those in place. Operator: Your next question comes from Brad Heffern with RBC Capital Markets. Brad Heffern: Another one on the repurchase. Do you see that as an attractive use of capital as we sit here today? And then can you talk through what the governor on that activity is? I would think using dispositions to fund it might get complicated just because homes have appreciated so much, but is that an issue? And is there anything else you would call out on the philosophy there? Dallas Tanner: Look, the one governor, just to remind everyone is that we're subject to the same blackout periods that we traditionally have. In terms of it being an interesting price in the spot, there certainly are times where if we have excess capital or an ability to deploy accretively and a share buyback could fit into that category, it's something we consider. I hate to say what we are going to do or not going to do. And just remember, there's always sort of a spread between where -- what the market thinks you can do at any given time as you balance out sort of deliveries and cost of capital and things that are going on in the business. So we'll use it judiciously. We'll be smart about it. We'll do it in concert with our Board investments and Finance Committee. And that's how we're going to approach it going into the end of the year. Operator: Your next question comes from Jamie Feldman with Wells Fargo. James Feldman: Great. I guess kind of sticking with some policy questions here. What do you think the impacts have been on immigration policy changes in your markets, whether it's on construction costs with labor or overall demand? And are you seeing any difference across different regions or markets? Dallas Tanner: Look, I'll handle the first part on the immigration. We've asked the same question of homebuilders, and we paid attention to some of the commentary. I mean look, it has to have some effect, right? I mean we're not seeing anything from an occupancy perspective. We're sort of in the sweet spot of our range, as Jon and Tim mentioned. Our expectations going into the year were that we had run kind of in the low to mid-97s as an average occupancy in '24. We just knew that wasn't sustainable. It was going to kind of come into the kind of the mid-96s. We're not seeing anything in terms of lead volume or customer profile. In fact, our FICO scores are basically in the same range they've been for several quarters in a row. As far as what we're seeing with labor costs and land costs and input costs, Scott, do you want to provide a little color there? Scott Eisen: Yes. I mean for a broader question, Jamie, I think as it relates to what we're seeing on construction costs with the homebuilders, I think so far, so good. I think finished lot prices have kind of slowed down their rising pricing. And I think there's been a decline in lot buying by the builders. I think construction costs have moderated and are generally under control. I think the data we've seen says that maybe there's a little bit of a labor cost rising in terms of the total production for homes. But I think in general, like in terms of the purchase prices that we're seeing and the construction costs that the homebuilders are passing on us, I think we're seeing it kind of in line with what we expected and in a pretty decent place. Operator: Your next question comes from Jesse Lederman with Zelman & Associates. Jesse Lederman: Curious what you're seeing from a front-end demand perspective that gives you confidence that the headwind from a pricing power perspective is supply related and not demand related. Maybe some commentary surrounding the reception to the new move-in specials or any other way that you quantify demand would be great. Tim Lobner: Yes. Great question. This is Tim here. Look, on the demand side, we are continuing to see a healthy demand for single-family homes. Our website traffic remains very consistent. Obviously, there's more product out on the market, as Dallas talked about earlier, the couple of different channels that has produced that supply. So that demand is being spread across more homes on the market. But look, we like our position. The Invitation Homes promise is a good one. We try to differentiate our brand through our ProCare, through our value-add services. So we think we're going to still capture our fair share of the marketplace. So obviously, heading into the fourth quarter, demand does go down a little bit, but that's a seasonal component, but we like our position as we head into the end of the year. Operator: Your next question comes from Juan Sanabria with BMO Capital Markets. Juan Sanabria: Just a question on the loss to lease. Where do you see that presently? And then kind of a Part B turnover, it seems to finally be kind of inching up. Do you think we've kind of bottomed out there? And do you expect to see more turnover going forward given some of the competing factors both on the supply and demand side? Jonathan Olsen: Juan, it's Jon. Thanks for the question. With respect to loss to lease, I would say that's kind of low to mid-single digits. I think it's important to remember with respect to loss to lease that, that is not consistent across every home and every market, right? You can create cohorts of homes that have varying degrees of loss to lease. And so over time and distance as our expectation would be that 70%, 75% of those are going to renew, you're going to extract what you can, but recognize that, that loss to lease number relative to what we actually achieve sort of depends on a number of variables. I think overall -- sorry, remind me the second part of your question, Juan? Juan Sanabria: Turnover and how you guys think about that going forward? Jonathan Olsen: Yes. Thank you. I mean, I think turnover obviously, is certainly seasonal. We expect to see turnover pick up in the second and third quarters and then moderate in the first and fourth. Do expect that turnover will return to something closer to a long-term average, kind of closer to 25% than the 22% that we were seeing. But we continue to see a high propensity to renew. We continue to see the affordability gap really drive demand for single-family rental product. and feel good that even at a somewhat higher level of turnover going forward, this is a really, really sticky customer. They appreciate the product and the service that we deliver, and they continue to stay with us longer and longer. So we feel really good about the setup and think that single-family rentals, in particular, are well positioned in the residential market. Operator: Your next question comes from Adam Kramer with Morgan Stanley. Adam Kramer: Maybe a little bit of a higher level, bigger picture one. I think our view has been that the apartments have underperformed of late. I think a lot of that has been driven by sort of slowing job growth and concerns around the job growth from here. I think our view has been that SFR should be a little bit more insulated from that, right, given, I think, some demographic reasons. Wondering sort of when you guys think about your own business, how you sort of think about the demand drivers? Obviously, there's the housing market and sort of what's happening there on the for-sale side. But when you think about job growth and sort of the path forward there, how much do you think that sort of matters or doesn't matter for your business? And as we look to next year, I guess, sort of how would you think about demand next year maybe versus what you've had this year? Dallas Tanner: It's hard to tell the weather perfectly when it's that far out. But I would just say our setup coming into this year, we felt very confident that we could renew sort of in that 75% to 77% of the time with our current customer that we don't see anything that suggests that changes going into next year. So it feels like the renewals from that perspective have kind of done what we thought. I want to be careful on any guide. Jon will get frustrated with me if I say anything prior to our February call. But look, we're not seeing any degradation of our customer. Tim talked about leads and leads coming in. It's still pretty healthy. Our actual conversion efforts on leads is a bit higher than what we've typically seen, and our collections have been actually quite better than what we've seen historically. So there's nothing in the customer profile in our current customer base that suggests big changes are on the horizon. I think it has more to do -- the only kind of variable that we keep working through is this new lease supply issue. It's really the only thing in our business that we feel like is something that is sort of hard to forecast perfectly. And a lot of that has to do with what the housing market does generally, to your point. We'd like to see more -- candidly, we'd like to see more homes selling on the market. That transaction volume is a good proxy for home price appreciation, obviously, but also a good proxy for rent growth going forward. And so we'll continue to just keep our back door as efficiently close as we have. Jon talked about that. We're not seeing anything there. Our FICO scores look great from our customers coming in, our collections and our bad debt are exactly where we wanted to be. So just keep grinding on the opportunity set that's in front of us from a new lease and a supply perspective. Outside of that, the business is doing pretty much what we thought it would do. Operator: Your next question comes from John Pawlowski with Green Street. John Pawlowski: Just a quick question on -- essentially, I'm trying to get around or get at the performance in the non-same-store pool. So can you help frame like the '23 vintages of acquisitions and '24 vintages of acquisitions, how NOI has performed relative to your underwriting to date? Dallas Tanner: Yes, Jon, I'm probably going to have to come back to you with more of that detail as a follow-up. But I would say that homes that we bought in kind of the '22, '23 time frame were basically sort of when the market had the most froth and when underwriting was arguably more likely to anticipate continued strong rent growth. So I think that vintage of homes probably has a little more wood to chop to get itself in line from a margin perspective. But we feel really good about the product we have bought. We feel really good about the way we are approaching investing in this marketplace. I think right now, it's just a function, as Dallas said, of getting this new supply absorbed and hopefully seeing the resale market get to a healthier, more liquid place. Operator: Your next question comes from Julien Blouin With Goldman Sachs. Julien Blouin: Dallas, I wonder what you make of the current public versus private market valuation disconnect reflected in your stock today? And maybe to an earlier question on capital allocation. Do you feel like just executing your strategy and starting to be aggressive on the share repurchase front can sort of help narrow that? Or at some point, are there sort of additional strategic options you and the Board sort of start to look at to drive shareholder value? Dallas Tanner: Thanks for the question. On the strategic side of it, obviously, we're going to sort of keep that in-house in terms of the things we think about. But I would -- I feel comfortable saying that our disposition strategy where we can continue to sell homes between a 4% and a 4.5% cap and accretively reinvest either in share buyback or new acquisitions that are in the, call it, 6 cap range with really good revenue growth profiles in front of them will continue to be accretive way to create shareholder value. We've been obviously as frustrated as probably most of our residential peers have been in terms of the dislocation between public values and private values. It's hard when REIT outflows are moving in the way that they have and where 80% of the S&P has sort of been lifted by AI or anything tech-induced. It's just an interesting environment for real estate businesses at the moment in the public sector. We're certainly seeing private transactions trade at much lower implied cap rates. than where public market valuations sit today. But we're also -- we've been in this business long enough and in and around real estate long enough to know that there are cycles to it. And sometimes at times, things don't make sense, specifically in the public space. And so we just keep our heads down, and we'll keep recycling capital in a way that's meaningful. And we'll certainly look for some of those other opportunities in our tool belt when they present themselves. Operator: Your next question comes from Rich Hightower with Barclays. Richard Hightower: Just a quick clarifying question. Dallas, I want to go back to the sort of the different buckets of potential competitive supply you referenced earlier on the call. And I think last quarter, the forecast is for BTR specifically to drop pretty significantly in 2026. And so I'm just kind of piecing that together with what you said earlier. So does that imply that those other buckets that are sort of the non-BTR would be maybe bigger question marks or growing at a more rapid rate? Just help us understand maybe some of the dynamics there. Dallas Tanner: Yes. No, it's a fair question. On the latter point, there isn't anything that's suggesting we're seeing like an acceleration in terms of supply. In fact, as I mentioned before, there are some markets where we're actually cautiously optimistic. I don't want to call a bottom yet, but we're seeing some good signs in Florida. And there's markets like Phoenix where it's still pretty tough from a new lease perspective. There's just more inventory on the market. And those are the markets where we obviously have the biggest exposure. And so we spend a lot of time looking at these markets and sort of dissecting those 3 different buckets, which is what are we seeing in BTR. And actually, we've seen better velocity in our own book of business on the BTR leasing side. There seems to be like a pickup in demand there, which has been pretty helpful. We've spent a lot of times with our partners and data out there to try to understand what's going on in the listing universe and how much of that is maybe Joe Homeowner converting to a lease. You see more of that in the summer. We'd expect some of that to wane here as we get into Q4 and Q1 to John's point. So no, it feels like it's sort of flattened out. It's kind of right where we expected it would have been, albeit there's just -- it's just a pear more competitive if you're vacant in those markets right now and you're competing for the customer. You got to be on your game. You have to be priced appropriate. And as Tim mentioned before, there are times and we've done this in normal markets, October, November, where you got to be a little bit more aggressive. And so our philosophy right now is versus having something sit on the market for an extra 3 or 4 weeks, we might be a little bit more aggressive and fill it up here in Q4. Operator: Your last question comes from Jade Rahmani with KBW. Jade Rahmani: Just to touch on geographies. It'd be helpful to hear if there are any markets that you were surprised with either their outperformance or underperformance relative to your expectations. Dallas Tanner: It's an interesting question, and we probably all have different views on different things in our business. I would just say generally, and this -- I really should say this, kudos to our team, like Costa maintains -- they've done a wonderful job in terms of managing the turnover and costs and the way that we're managing sort of some of those expenses. I think on the renewal side of the house, we've been very pleased with the things that we've even seen in markets like Miami. Some of the Florida markets are still really, really strong on the renewals, while maybe it's a different story on the new lease side of things. And Atlanta has been a generally pretty strong market. I think what we've sort of acknowledged over the last couple of calls is that Chicago and Minneapolis have both been outperforming now for 4 to 6 quarters. I'm not sure that, that can go on forever in terms of what the Midwest does, but that has been a very good bright spot for us over the last year, 1.5 years, where those markets have basically had no new supply over the last 10 years, and you're seeing it in some of the data. Operator: That completes our question-and-answer session. I would now like to turn the conference back over to Dallas Tanner for any closing remarks. Dallas Tanner: Thank you, guys, for joining us today. We're looking forward to seeing many of you at our upcoming Investor Day and looking forward to sharing more of our story broadly through the webcast. Thanks for all your support and for listening. We'll see you soon. . Operator: The conference has now concluded. You may now disconnect.
Operator: Welcome to Timbercreek Financial's Third Quarter Earnings Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the meeting over to Blair Tamblyn. Please go ahead. Robert Tamblyn: Thank you, operator. Good afternoon, everyone. Thanks for joining us to discuss the third quarter financial results today. I'm joined as usual by Scott Rowland, CIO, Tracy Johnston, CFO; and Geoff McTait, Head of Canadian Originations and Global Syndications. With respect to portfolio growth, which we've been communicating on regularly, we're up by approximately $50 million year-to-date with an expectation that will increase by year-end. Looking at Q3 specifically, transaction activity, while solid, was mildly behind our expected pace as the residual effects of the macro uncertainty we discussed in recent quarters continues to play out. As Geoff will elaborate on, we are pleased with the pipeline in general, although a few material commitments expected to fund in Q3 did push into Q4. Combined with the large unexpected repayment that's brought the overall portfolio down modestly from Q2. The Q3 spillover volume in conjunction with strong Q4 commitments and additional pipeline volume should still generate the portfolio growth we anticipated for the full year and result in higher revenue. To put a finer point on this, we've had more than $200 million of funded and committed deals so far in Q4. Our overall optimism continues to reflect improved market conditions as recalibrated commercial real estate valuations and a reduced interest rate environment have set the foundation for a new real estate cycle. In short, the conditions are favorable for a period of sustained strong transaction activity. We upsized the credit facility with this outlook in mind. Given these factors, the third quarter financial performance was mixed. Net investment income was steady at $25.4 million. DI was modestly below last quarter at $0.17 per share, partly reflecting the constraints on new investment activity in the quarter, as mentioned. This drove a higher payout ratio in this quarter. As we've said before, the payout ratio will move around during the year and then settle in our targeted range for the full year. We expect to deliver full year results in this range based on a higher activity levels in Q4. Lastly, we continue to demonstrate progress with the remaining stage loans as we return this balance back to historical levels. On the remaining stage loans, the revaluation of 2 investments drove a higher ECL in this quarter, which lowered our reporting earnings in the period. Scott will expand on this in his remarks. In summary, I would reiterate our confidence in the continued ability to deliver stable monthly income through a conservative strategy grounded in income-producing assets. Our core objective is to deliver strong risk-adjusted returns primarily comprised of distributions for our investors, the goal we've consistently met over the long term. One key indicator of this performance is our 10-year IRR, which today stands around 7.8%. This track record reflects our disciplined approach and ability to navigate evolving market dynamics. I will now ask Scott to cover the portfolio review. Scott? Scott Rowland: Thanks, Blair, and good afternoon. I'll quickly cover the portfolio metrics and provide a brief update on key developments with the stage loans, and Geoff will comment on the originations activity and lending environment. Looking at portfolio KPIs. Most were consistent with recent periods and historical performance. At quarter end, 82% of our investments were in cash flowing properties. Multi-residential real estate assets continue to comprise the largest portion of the portfolio at roughly 57%. First mortgages represented 94% of the portfolio. The weighted average LTV for Q3 was 67.9%, which is up a bit from recent quarters. We've previously communicated that we expect LTV to tick higher in 2025 as we lean into the market with reset asset valuations, and we are seeing that. We continue to be very comfortable in this range in this economic environment. The portfolio's weighted average interest rate was 8.3% in Q3 versus 8.6% in Q2 and 9.3% in Q3 last year. The decrease reflects the Bank of Canada's policy rate cuts bringing the WAIR closer to a long-term average of roughly 8%. The rates coming down, we're seeing a corresponding decrease in interest expense on the credit facility, supporting a healthy net interest margin. The portfolio WAIR is also protected by the high percentage of floating rate loans with rate floors above 85% of the portfolio at quarter end. Roughly 93% of the loans with floors are currently at their rate floors. In terms of asset allocation by region, there were no major shifts to highlight with approximately 92% of the capital invested in Ontario, B.C., Quebec and Alberta and focused on urban markets. From an asset management perspective, we resolved close to $19 million in Stage 2 loans since our last earnings call. More recently, we provided an update on the Stephen Avenue Place office asset in Calgary. As we disclosed, we applied for the court appointment of a receiver on behalf of the syndicate of secured creditors. Following the termination of forbearance period with the borrower. This is the next step on the path to realization and to protect the interest of all stakeholders in the property. As a reminder, Timbercreek holds approximately 11% interest in this loan on a pari passu basis with other lenders. Revaluation of this asset was the largest contributor to an ECL increase of $5.9 million in the quarter. The $3 million related to this exposure and $2.1 million related to the Vancouver retail portfolio slated for redevelopment into multifamily. Both revaluations were driven by current market appraisals and reflect the overall challenges in their respective markets. We are actively working towards the resolution and monetization of the outstanding stage loans and continue to advance the remaining files. While a few challenges remain, we expect to see further progress over the coming quarters with the expectation of ultimately returning this portion of the portfolio to historical norms. Ultimately, the redeployment of this capital into more profitable loans will be a significant tailwind for revenue growth. I'll now ask Geoff to comment on the transaction activity in the portfolio. Geoff McTait: Thanks, Scott. As Blair highlighted, new investments in the quarter were solid, although transaction delays pushed some meaningful Q3 committed volume into Q4. During the quarter, we advanced over $131.1 million new net mortgage investments and advances, all targeting low LTV multifamily assets. These were offset by total mortgage portfolio repayments of $191 million, including a large $83 million repayment in September as also outlined in our press release, resulting in a turnover ratio of 18.2% and a portfolio balance a bit over $1.05 billion down $60 million from Q2 levels. The short-term variations aside, we are seeing continued opportunity in the conventional multifamily bridge and construction space, in addition to the multi-tenant industrial lending space. The market also continues to respond well to Timbercreek Capital CMHC approved lender status which is leading to more opportunities with existing clients and interest from new prospects. Looking forward, our Q4 transaction pipeline is strong, including approximately $200 million already funded or committed at this point in the quarter, with continued momentum anticipated through year-end. Our position in the market with strong client relationships continue to support our ability to deploy capital into high-quality loans and return to growth mode. I will now pass the call over to Tracy to review the financial highlights. Tracy? Tracy Johnston: Thanks, Geoff, and good afternoon, everyone. As we look at the main drivers of income, the average portfolio size has grown year-over-year, offset by the WAIR returning to a more typical range following BOC rate cuts. Q3 net investment income on financial assets measured at amortized costs was $25.4 million, consistent with Q2 of this year and Q3 of last year. We reported distributable income of $14.1 million or $0.17 per share versus $15 million and $0.18 per share in Q3 last year. Payout ratio on DI was elevated this quarter as a result of market conditions that have been discussed. We recorded a reserve of $5.9 million this quarter, as Scott highlighted, driven primarily by the revaluation of 2 loans. Net income was $8.5 million this quarter and net income before ECL was $14.3 million, the same level as Q3 2024. Looking at quarterly earnings per share over the past 3 years with and without ECL, you will see it's been quite stable as has DI per share. Over the medium term, the quarterly DI per share has been between $0.17 and $0.21 per share, averaging just over $0.19 over this time period. Looking quickly at the balance sheet. The value of the net mortgage portfolio, excluding syndications, was just over $1.05 billion at the end of the quarter, an increase of about $37 million year-over-year. The balance on the credit facility was $283 million at the end of Q3 down from $345 million at the end of Q2. The credit utilization rate at the end of the quarter was 75%. We expect to utilize the facility more significantly in Q4 given the volume Geoff highlighted. As Blair highlighted with the upsizing of the credit facility and repayments, we have ample capacity to deploy new capital against the pipeline Geoff and team are building. I will now turn the call back to Scott for closing comments. Scott Rowland: Thanks, Tracy. We're encouraged by the overall outlook. Despite some short-term transaction delays given current macro conditions, we believe that the combination of interest rate cuts and strengthening fundamentals will lead to the next upswing in the real estate cycle. This bodes well for future transaction activity at an attractive risk-return basis. Q4 investment activity is expected to be robust, allowing us to grow the portfolio in 2025. We are delivering a stable monthly dividend, currently yielding over 9.5%. And we continue to make progress on resolving the majority of the stage loans, and we look forward to freeing up this capital for new investments. That completes our prepared remarks. With that, we will open the call for questions. Operator: [Operator Instructions] The first question will come from Michael McHugh. Michael, please go ahead. Unknown Analyst: I just want to check that you can hear me first. Just wanted to start on the Calgary and Vancouver properties against which the ECLs were taking. Just wondering about sort of the outlook and exit strategy for the Calgary property? And then maybe just a little bit of color on progress with Vancouver, it looked like that was the first specific update since it was initially placed into Q3. So maybe just update on strategy and potentially a time line for both of those if you have any visibility? Scott Rowland: Yes, that's a good question. So let's start with the Calgary office. That is a specific asset, right? It was a loan that we originated in 2018 actually so it was a pre-Covid loan, which has been part of the challenge. At this point, the lending syndicate, we have decided to sort of take control of the asset, and we are looking to likely test the market for sale. That will take a bit of time. But I would say we will likely be launching a process in early Q1 to test the market. It's not to say we're necessarily going to sell but I think we're at the point we'd like to have that visibility into the market. And as part of that process, we did an updated valuation, which is what drove the ECL. So it is -- look, we look at Calgary office. While there's a couple of green shoots, it remains challenging. And so that revaluation was just reflective of what we think is the current market conditions. When it comes to Vancouver so the second part of your question, we do have -- it's kind of a similar story. If I look at Vancouver and Toronto. Both of those markets on the development basis remains challenged. There is -- it's just part of the supply and demand in those markets right now. And so from time to time, we do continue to do asset valuations and so this basically reflecting an updated view what we think is the current market for those assets. As far as time line goes, these are going through approval processes with the city. We are definitely in the final innings of those. The borrower is in the final innings of getting those approvals. And I would say somewhere between Q4 and Q1, we expect that to be complete. And then going to market, the borrowers like us getting off those loans, like there's obviously a few different ways that can happen. But we sort of expect to sort of see resolution to those sometime in the sort of middle quarters of 2026. That would be my sort of assessment to date. Unknown Analyst: Okay. Great. That's very helpful. And then just as a follow-up, again, relating to both of those loans. Potential for further ECLs in the coming quarters, obviously, depending on these time lines, but just sort of an outlook on the provisioning front for both of those. Scott Rowland: Yes. Look, the view is the current market value of these things. And I would sit there and say for development in these markets are pretty much near the bottom, if you want to look at historical time lines, it's been a pretty aggressive markdown of what you would say sort of land values are in sort of the Vancouver, Toronto markets, and certainly, office values in Calgary. It is fairly low, pretty much of a trough. So I'd say where these valuations are fairly reflective. I can't predict what's going to happen to the market in the future. But certainly, the current outlook of value is nowhere near a high point. Operator: The next call comes from Stephen Boland. Steve, go ahead. Stephen Boland: Maybe a general question. I'm just wondering about -- you talked about growth at the end of the presentation. I'm just -- I'm trying to see if your outlook has changed for 2026 in terms of what you can grow, what rate -- is the balance sheet a little bit constrained at this point? You mentioned your additional debt capacity. How are you navigating that? And is there any -- what can you do here besides -- so if you're getting robust kind of growth and commitments, are you going to have to syndicate more? I'm just trying to get an idea for 2026, what your outlook is? Scott Rowland: Yes. That's a great question. I think I'm going back to -- thinking back to those comments we made on the last call, I'd say it's just very consistent. A key driver for growth for us, right, is capacity. As we mentioned in the MD&A, we're able to upsize our primary credit facility up to $600 million. That produced -- that gives us a fair amount of powder to continue to grow the book. So if we look at Q4 sort of the commitments that we have and with the line where it is, I think it is sort of consistent. I don't know exactly what we said from last quarter. I'm just... Stephen Boland: For 2026, I mean are you comfortable like in terms of -- I know you've got the extension or the increase in the line. I'm just -- do you feel the balance sheet constrained at all, I'm just trying to... Scott Rowland: I think that -- listen, I think that existing capacity gets us to -- I'm sort of looking at Tracy here too, but I think it gets us to sort of the $1.2 billion, $1.3 billion level. We feel very confident we can hit those numbers. And then growth beyond that, right, then we're looking at are you raising equity and debt together to continue to grow. And I think as we resolve the staging loans, the book has that much more flexibility, right, to continue to grow. With interest rate cuts resolving the stage loans, I think that sets the stage or positive action on the stock, which I think then -- obviously, that would allow you to go in and raise equity and then match that with that to continue to grow. So if I look at this in stages, we are where we are today, I think the existing debt capacity gets us to that $1.2 billion, $1.3 billion. And then future growth from that, right, that's an equity matching with, I think, with an improved stock price, right? But that's a story we'll tell through 2026. Robert Tamblyn: Yes, I agree. Steve, it's Blair. The only thing I'd add sort of as a parallel swim lane to growth of the balance sheet is obviously the growth of revenue. So as we've talked about a few times, I mean, as the portfolio turns over and the pace of transaction picks up as -- which is a result of commercial real estate fundamental stabilizing, we'll generate more revenue, right? And that ties in with a loan that's -- you pick Calgary office. I mean, a loan that is in forbearance obviously is generating less interest income than a loan that is freshly originated generating, call it, like roughly on 11. So drive revenue as sort of -- both are important, of course, but we expect revenue to grow as in addition to what you would correlate with the balance sheet, if that makes sense. Stephen Boland: Yes. Okay. That's great. And then second question is the Stage 2 and 3, I believe, increased quarter-over-quarter. I mean should we start -- and you're talking about resolving those loans. Should we start to see that number sequentially come down like quarter after quarter? I know it can be lumpy, but -- is there going to be improvement in those starting even in Q4? Scott Rowland: It's hard to pick the exact quarter, Steve, I'd like to spell it out, but I think we actually had -- we've had ongoing improvement and reductions over time. But yes, it is lumpy. And the loans we've been talked about on this call today is the majority of what's left, dollar wise and so it is unusual and these are in these aren't like popping up new stage 1, stage 2 loans. These are pretty much the ones that have been around for a while that have longer time lines to resolve. But we do plan to get rid of them and sort of go back to historic norms. Robert Tamblyn: Steve, if you think about it going back, there's -- and I don't have the number at hand, but we've worked through quite a few of them. And I think arguably, 1 every quarter. I mean we announced the one that was resolved in this quarter earlier. And so to answer your question directly, like we do expect there to be resolutions in Q4. It's just -- like it's super active, right? As we talked about, like they're negotiated. And to the extent you try to force things it generally reduces the validity or isn't helpful to the outcome. Stephen Boland: Okay. And I'll sneak 1 more in. Just in terms of the credit facility. I know you got the increase of size. Was there any other changes, rate, covenants, anything like that you can mention? Or it's just -- you just got more money. Tracy Johnston: Yes. Well, we got more money, increased 2 new banks into the syndicate, which is great, but more importantly, improved economics. So our spread has come in back to kind of where we were historically, which is great and then no changes on covenants. Stephen Boland: Okay. And can you mention spread? Maybe it's in the disclosure, I apologize if it is? Robert Tamblyn: I don't think it is. It's -- why don't we say that it's come in by 25 basis points. Operator: The next call comes from [ Jaeme ]. Jaeme Gloyn: Curious on the $200 million funded or committed. How does that look from a geographic and asset class perspective? Scott Rowland: Jaeme, I think we missed the first part of your question, but I think you were asking just what is sort of the makeup of the Q4 outlook? Jaeme Gloyn: You got it. Yes. Thank you. Geoff McTait: Yes. I mean I would say -- it's Geoff here. Pretty consistent with the portfolio overall. It's a combination of, I'd say, primarily Ontario and Quebec. And it is -- the vast majority is residential income with the balance being industrial. Jaeme Gloyn: And would these be some like new customer borrowers or existing former clients, just a little bit more -- just curious on how that portfolio is shaping up for Q4 and then... Geoff McTait: Yes. So listen, I mean I think there's some very strong repeat business within that new volume in addition to some new prospects, but it's predominantly repeat business with existing clients that we've seen good churn with, right? So we're focused on and managing total exposure with individual groups, but are seeing good churn. They're executing on their plan, they're refinancing our existing exposures and then taking on new opportunities. And that existing relationship is enabling us to facilitate execution on good time lines and win good deals even with some incremental spread. Jaeme Gloyn: Yes. Understood. Just in terms of the yield, new loans came in at, I believe, 7.3% weighted average interest rate, loans going out the door was 8.3% that was much lower than I think it was in the mid-9s in Q2 going out the door. I'm just curious, I guess, like where -- what is the range of rates right now in the portfolio? Are there still loans that are well above 9% that are still there that are expected to roll off at some point, too? I'm just trying to really kind of understand I guess, the stability of the weighted average interest rate and yields in general here over the next several quarters? Scott Rowland: Yes. I mean it's always a bit of a mix, right? So we do have some of those loans that exist to have some pretty high floors that over time, to your point, will roll off. Generally speaking, like I think of new originations, if I look at it over prime, this is maybe a helpful context like a credit spread over prime. We typically are in that kind of 2.75% to 3.25% range. And then what happens with credit spreads, right? It's an interesting thing. As interest rates go up, credit spreads compress so there's only sort of so much whole loan coupon that necessarily a book can absorb, like a borrower can absorb. So when we saw like rates go high, it is good for income, but your credit spread is compressing. As rates come down, though, sort of the inverse is true. So as if time was to continue to fall, we start to be able to expand credit spreads. And the credit spread is ultimately what we are interested in because our cost of funds is also floating so as long as you maintain the sort of that difference that allows us to achieve the equity yield we're looking to achieve. So it's kind of a -- it's an interesting model. So as rates go down, our credit spread expands, you also tend to get more velocity of churn in the book, which generates more fees. So the headline WAIR may fall, but more fees to more velocity and higher credit spreads through expansion in a lower rate environment. We've seen this happen through -- we now operate through a few interest rate cycles, and it seems to be a consistent case. So in a higher interest rate environment, you have less velocity, less fees, the higher WAIR and in a lower interest rate environment, you have more fees and reduced WAIR. What helps us right now in the sort of short to medium term is the floors to your point, like that does provide some positive impact into the book. And as those roll off, it's true, but then we continue to grow the book in that lower rate environment where you're getting more fees, and we have a bigger book, right? So it is sort of an ever-changing model that we do manage quite closely, ensuring that we sort of end up in that kind of mid-90s payout ratio that we're targeting. Robert Tamblyn: The only thing to add there, perhaps and we all hear a lot about the cost of debt generally. And generally speaking, when we're reading that in the media, it's by and large, you're talking about term debt, right? So 5- and 10-year money, which can get super cheap. But as you, of course, know, like our business is to provide flexible sort of debt with features that are valuable. So that kind of is another way of explaining what Scott was saying, like a borrower is willing to -- there's sort of a floor that is willing to be paid to be able to be flexible and creative as they go and execute on their value-add opportunities where they're generating equity returns that are obviously well in excess of what they're paying us if that's helpful. Jaeme Gloyn: Yes. Yes. And the follow-up on that is like obviously, we're going into an environment where you should see expanding profitability given the interest rates set up. But still in the near term, those higher floor loans rolling off will have a bit of a negative impact. And so I guess I'm just trying to like if you had any visibility on potentially when that inflection point happens. Is it still several quarters away? Or is it something that's much more visible as those higher rate floor loans are no longer in the portfolio. Scott Rowland: No, listen, it is -- we can't predict necessarily when those loans will roll off. They could roll off at different times, right? We have a fairly consistent rollover of the portfolio, right? Somewhere in that 40%, 50% per year. And it tends to be pretty evenly distributed through the book. It could be some higher-yielding loans, there could be some lower yield. Again, to Blair's point before the shorter-term bridge loans are not necessarily driven by just the high rate. It's more around the strategy of the asset. So if the borrower is looking to reposition itself, regardless of their underlying rates, they probably stay until they've executed their plan. And so that does change the impact of when loans will roll off. But when we look at the book again as it rolls off, we're originating at a yield based for the current market environment and the current interest rate to make sure that we're in a decent position. Robert Tamblyn: You don't underestimate that fee income, right? Like it's meaningful when the portfolio is turning over regularly. Jaeme Gloyn: Yes. No, understood. Operator: Our next call comes from Zach. Zachary Weisbrod: Good afternoon. Can you guys hear me? Yes, yes. It appears you guys have high confidence that the payout ratio will stabilize in the mid-90s. What are some of the factors driving that? Scott Rowland: Just overall, like if I look at like year-to-date, that's where we're at. Again, Q3 was a little high, given, again, as Geoff was describing just the timing of some transactions. But it's just really managing the pipeline and where we're seeing investment activity is when you just running through the yield map, it's sort of generates the sort of mid-90s type math. Just running the business normally, Zach. Robert Tamblyn: If the pipeline was not where it is, we wouldn't have the confidence that we do. I think it really comes down I guess at the end of the day. Geoff McTait: Yes. I mean the pipeline, just further Blair's point, I mean we look at the pipeline, it obviously was looked at in stages, right? So there's early stage deal identified, we're working through it. We don't really have a good view as to do we want to bid, where it's going to land? Are we going to win it. And then obviously, as you go down the path given that we've been working through deals we've issued term sheets, deals, we just have commitment letters, acquisitions with firm time lines, any combination of these things is that sort of increased probability of execution within that pipeline view aligned with the time line that, in our view, again, goes back into our forecast and expectations along with year-to-date gets us to a point where we're comfortable in that range. Zachary Weisbrod: Okay. Understood. Appreciate that. And with softer fundamentals for most property types right now, we're seeing higher vacancy, lower rental rates. Are you seeing that translate into slower origination activity at all? I know that you mentioned in your prepared remarks that there were some transaction delays. Geoff McTait: Yes. So I mean the transaction delays we're talking about, like these are sort of more normal course. Like there's a real deal, there's a signed up and it's targeted to fund on a certain date. And as they're going through their due diligence process and/or negotiating final conditions to waive maybe an extra week, maybe an extra couple of weeks, any combination of things that -- this is more specific to real transactions than necessarily an indication of the broader environment, right? I think to your point, certainly, the fundamentals have softened across and again varies dependent on asset class. Again, for us, in general, we are still seeing strong fundamentals underlying the multifamily business and the industrial business, which has been the core of what we're doing, and we are still seeing transaction activity continue. Again, we benefit from refinancing opportunities as well as mortgages continue to mature and needs to be refinanced even if there is no actual trade occurring, as you get into other asset classes, again, office is one that's been really inactive for the last number of years given the unknowns in that space. We're starting to see tenancy demand increase. You're starting to see the fundamentals underlying that reality improve. Again, that's something that we're not looking at a ton of. We've seen opportunities. We haven't found a ton that are overly compelling. And at the same time, the fundamentals in that space, which has been very uncertain for a period are starting to increase or improve, and that should drive increased activity. Scott Rowland: Look, and I'll just add to that is I think it is true, though, right? Like I think we said the softening fundamentals if I go back to -- you go back to '23 as you got sort of heavily into that rate uptick cycle like we started in 2022. For sure, those weakening fundamentals and the higher cost of debt that cause price mismatches in the market, right, between buyer and seller. And so that is -- this is what's really been driving sort of this more challenging transaction activity, right, because the sellers are trying to hang on and they were trying to believe their 2021 pricing, right? Their 2021 valuations. As vendors, sellers get more realistic in their price targets, what happens is all of a sudden, okay, so prices come down a bit and then you have that market transaction can occur, right? The buyer and seller have a median divide and the transaction occurs. So that's what we're talking about. When we talk about like on the face of this weakens or fundamentals that you mentioned, now you put in the rate cut environment and you have a little more realistic view from the sellers, that's what drives those transaction activities. And then for us, on the lending side, what we like about it is you have a little bit more realistic view of value, values are kind of lower than we would have been lending into 2020, 2021. If you look at today's environment, you feel pretty good that this is a reset value. More transactions are happening, and we feel pretty good at where we're lending and where our advance rates are. Operator: There are no other calls at this time. So I'll turn the meeting back to Blair for closing remarks. Robert Tamblyn: Thanks. Thanks, everyone, for your time. Obviously, if you have any further questions, feel free to reach out, we're happy to chat. Have a good afternoon.
Operator: Good morning, and welcome to the Restaurant Brands International Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Kendall Peck, RBI's Head of Investor Relations. Please go ahead. Kendall Peck: Thank you, operator. Good morning, everyone, and welcome to Restaurant Brands International's earnings call for the third quarter ended September 30, 2025. Joining me on the call today are Restaurant Brands International's Executive Chairman, Patrick Doyle; CEO, Josh Kobza; and CFO, Sami Siddiqui. Following remarks from Josh, Sami and Patrick, we will open the call to questions. Today's discussion may include forward-looking statements, which are subject to risks detailed in the press release issued this morning and in our SEC filings. We will also reference non-GAAP financial measures, reconciliations of which can be found in the press release and trending schedules available on our Investor Relations website. As a reminder, organic adjusted operating income growth excludes results from the Restaurant Holdings segment. In addition, on February 14, 2025, we acquired substantially all the remaining equity interest in Burger King China from our joint venture partners. BK China has been classified as held for sale and reported as discontinued operations in our financial statements, as we are actively working to identify a new controlling shareholder. That said, BK China's KPIs continue to be included in our International segment KPIs. A breakdown of BK China's KPIs and its impact on our 2024 financial statements can be found in the trending schedules available on our website. For calendar planning purposes, our preliminary Q4 earnings call is scheduled for the morning of February 12, 2026. And now I'll turn the call over to Josh. Joshua Kobza: Thanks, Kendall, and good morning, everyone. Thank you for joining us. Q3 was a strong quarter for us. In a tougher consumer environment, our teams and franchisees once again delivered results that set us apart. Comparable sales were up 4%. Net restaurant growth was 2.8% and system-wide sales grew 6.9%. Combined with disciplined cost management across the business, this top line performance drove 8.8% organic adjusted operating income growth and double-digit nominal EPS growth. These results demonstrate that our strategy is working, fueling continued momentum through the strength of our brands, the dedication of our teams and franchisees and the value we're delivering to guests every day. Across our largest segments, we continue to see strong execution. Tim Hortons Canada and our international business, which together represent roughly 70% of our adjusted operating income, delivered another quarter of impressive results. Both are performing at a high level and have delivered 18 consecutive quarters of positive same-store sales, underpinned by great food and beverages, strong operations and engage franchisees. I'm also encouraged by the continued progress at Burger King in the U.S. The team is making meaningful strides strengthening the brand's value proposition through delicious menu innovation, better operations and impactful remodels. The benefits of this work are showing up in solid absolute results and sales outperformance versus the Burger QSR segment. Even in a challenging macro backdrop, we continue to deliver great results the right way. Providing guests quality products, exceptional service and unmatched convenience. With that focus and with disciplined execution across our teams, we remain confident in our path to delivering at least 8% organic AOI growth in 2025. Now let's turn to our results, starting with Tim Hortons, which represents roughly 44% of our operating profit and stands out as a consistent performer and contributor to RBI's growth. Tim Hortons in Canada continues to exemplify what happens when you get the fundamentals right and keep innovating. It's a business built on strong brand love, great restaurant level execution, affordable everyday value and a steady stream of menu innovation that keeps our guests coming back. Comparable sales grew 4.2% in Q3, outperforming the broader Canadian QSR industry by roughly 3 points. We continue to build on our breakfast leadership and saw a 6.5% growth in breakfast foods, driven by our 100% Canadian freshly cracked Scrambled Egg platform and the launch of our Loaded Croissant breakfast sandwich. Guests also responded enthusiastically to our fall baked goods like the Spice vanilla filled donut and Halloween Timbits bucket. In the PM daypart, the team is thoughtfully expanding our menu. The Thanksgiving stack, a seasonal in addition to our premium hot sandwich platform performed well. And our $8.99 dinner deals after 5:00 p.m. are attracting new guests and strengthening our position in dinner meal occasions. Total beverage sales grew 4%, reaching record highs in both cold and espresso-based beverages. Our improved iced lattes were a particular standout and helped to drive 10% growth in cold beverages. Our fall beverage lineup is also performing well, featuring Chai Lattes, the return of Pumpkin Spice and new protein lattes that are resonating with health-conscious guests. We also expanded the rollout of our new espresso machines, an important investment from our franchisees that will further enhance espresso beverage consistency and quality as this category continues to grow. Operationally, our restaurant owners and team members continue to deliver excellent guest experiences. Guest satisfaction remains at record highs, and speed of service has improved across every daypart, now reaching our fastest Q3 levels since 2019. Importantly, PM execution and guest satisfaction scores keep improving, a key focus area as we work to capture share and is historically underutilized daypart. We're also advancing our digital initiatives. Kiosk installations are on track to reach about 800 restaurants by year-end, and are driving higher average checks and strong adoption among younger guests. And we recently announced an exciting new loyalty partnership with Canadian Tire, one of Canada's largest and most trusted retailers launching in late 2026. This partnership is together two of Canada's most iconic brands, allowing guests to link their rewards accounts and unlock even more benefits. It's one of several initiatives designed to expand our loyalty base and deepen guest engagement. With over 7 million active Tims reward members already spending about 50% more on average than they did before joining, we see significant potential ahead. Finally, we remain on track to return to modest net restaurant growth in Canada in 2025. In August, I joined Axel and his team in Nova Scotia and Prince Edward Island, where we saw firsthand that even in some of our most established markets, there is still room to grow given the strength of demand for Tims. I'm proud of the results the team delivered in Q3 from strengthening our leadership in breakfast and beverages to unlocking growth in PM food. With a continued focus on innovation, operational excellence and digital engagement, I'm confident in the long-term growth trajectory for Tim Hortons. Now our international business. which drives 26% of our operating profit and accelerated meaningfully this quarter. Same-store sales increased 6.5% and net restaurant growth of 5.1% drove system-wide sales growth of more than 12%. These results reflect the strength of our global franchise network and the effectiveness of our balanced playbook across menu innovation, marketing, digital and operations. Our same-store sales outperformed the industry in several key markets. including France, the U.K., Spain and Germany. In France, performance strengthened with the successful launch of our Baby burger boxes in July, a shareable snacking platform that's been a big hit with our guests. In September, we expanded our chef collaboration platform to the U.K. with the launch of the Gordon Ramsay Wagyu burger made with 100% British Wagyu beef, which drove strong engagement and sales. This quarter, we also leveraged our global scale with a cross-market promotion of Naruto, the popular anime series, which performed well across countries like Germany, Brazil and China. I visited several international markets this quarter, including the U.K. and China and was impressed to see the consistency of execution and enthusiasm across the system. In the U.K., Burger King is now our fifth international business to surpass $1 billion in system-wide sales and continues to deliver strong top line growth, adding more than $115 million in sales over just the last 12 months. Meanwhile, Popeyes in the U.K. is set to open its 100th restaurant in November, just 4 years after its debut in East London. Popeyes is seeing strong traction across EMEA, where the brand now has more than 1,000 restaurants. In Turkey, the team will open 100 restaurants this year, reaching nearly 500 locations by year-end. Both markets are great examples of the brand's international potential. Popeyes now ranks among the world's top 10 Western QSR brands outside the U.S. and stands out as the only one that's been growing system-wide sales by over 35%. In China, we're making significant progress at Burger King with results again exceeding our expectations. Comparable sales grew 10.5% in Q3, with momentum building throughout the quarter, and unit economics once again improved quarter-over-quarter. Performance was driven by elevated marketing, including the launch of our new Crisper chicken burger, strong guest response to the Naruto campaign and continued growth in delivery. Under the leadership of our new local team, we've also continued to strengthen operations to build a stronger foundation for long-term growth. The results we're seeing at Burger King China reinforce our conviction that is a high potential business. supported by strong brand awareness, favorable category dynamics and improving unit economics. Sami, Tiago and I spent time in Shanghai in September, meeting with several of our prospective partners, and we left encouraged by both the level of interest in the brand and the alignment around our vision for the business. We see a clear path to reigniting growth in this important market and remain confident we'll find the right partner to continue driving it forward. While in Shanghai, we also spent time with the team at Popeyes China, which continues to perform well and remains on track to open around 50 restaurants this year. Looking ahead, we believe we have a clear runway to accelerate development and capture share of the growing Chicken QSR segment in China. Taken together, our results highlight the strength and diversity of our international portfolio with strong execution, great local partners and a shared commitment to the guest experience, fueling double-digit system-wide sales growth. Turning now to Burger King, which represents roughly 17% of our operating profits. In September, I joined the team in Phoenix for their convention. The energy was amazing with franchisee confidence in the plan and team near all-time highs. That confidence has been earned over the past 3 years, as Tom and the team, together with our franchisees, execute reclaim the plan with focus and consistency, raising the bar on food and service quality, elevating our marketing and modernizing the restaurant experience. This focus continues to translate into results with our U.S. comparable sales growing 3.2%. We've outperformed the Burger QSR category for many quarters by staying true to our balanced marketing strategy. We're leaning into the Whopper, providing everyday value that guests can trust and reigniting Burger King's connection with families through innovation and fun partnerships. Our Whopper By You platform is delivering strong results, engaging our guests through personalized takes on their favorite flame grilled burger. The Barbecue Brisket and Crispy Onion Whoppers exceeded expectations, reinforcing the power of our flagship product, and the platform's extension to Whopper Junior is broadening our reach with women and Gen-Z guests. Our $5 Duos and $7 Trio value platforms are also performing well, and the launch of our You Rule Value campaign builds on that success. Celebrating guest choice and personalization while further strengthening our You Rule positioning. In an environment where peers are leaning into short-term deals or headline price cuts, our disciplined value strategy continues to resonate. Looking ahead, we'll maintain this measured approach while keeping our flame-grilled burgers at the center of our story. And we'll support our efforts with innovative family promotions like our recent Monster menu. Our marketing and menu innovation are being matched by steady improvements in operations, which are equally as important to delivering guests great everyday value. Since launching Reclaim the Flame in 2022, Burger King consistently improved in guest-driven operational surveys and revisit intent now ranks among the top 3 out of 12 QSR brands. These gains reflect a sharper focus on the fundamentals, quality, accuracy, friendliness and consistency and close collaboration with our franchisees to sustain that momentum. We're also making good progress modernizing the system. With remodeled restaurants having strong uplifts in the team's net of control and average restaurant sales post remodel of around $2 million, with beef costs elevated, we're mindful of the near-term impact on franchisees. While we still expect roughly 400 remodels in 2025, we're mindful of the commodity cycle and impactson profitability as we manage future remodel schedules with our franchisees. At Carrols, performance again outpaced the system, underscoring the importance of strong operations and the impact of modern image. Comparable sales at Carrols were 4.8%, and remodels are delivering updates -- uplifts ahead of the system average, reflecting the success of our new image, which is now featured in nearly 2/3 of Carrols remodels completed since 2023. We're also advancing the refranchising of Burger King restaurants through a Crown Your Career program as well as with experienced restaurant operators. Overall, Burger King's results show that our plan is working. Operational improvements, creative marketing and strong franchisee alignment are driving sustained outperformance versus the broader Burger QSR category. Finally, turning to Popeyes and Firehouse Subs. At Popeyes, results were softer this quarter, with U.S. comparable sales down 2% and net restaurant growth of 1.9%, resulting in system-wide sales growth of 0.9%. We are not satisfied with our performance and know there's more work to do. While our limited time offers like dipipelineers, drove solid trial from new guests, repeat visitation fell short. And while our wings revamp in August delivered improved guest satisfaction, it proved to be only modestly incremental. It's clear that we need to do a better job focusing on our core offerings, especially our bone-in chicken, tenders and sandwich platforms, and we need to deliver consistent value for everyday guests. We also know that price is just one piece of the value equation. And Jeff and his team are stepping up efforts to improve the overall experience at Popeyes by reprioritizing resources to support our franchisees, focusing investments on restaurant and equipment upgrades that have the biggest impact ensuring that new units are opened exclusively with our top operators. It may take some time for these operational improvements to flow through to sales, but we remain very confident that Popeyes has every right to win and take share in an increasingly competitive Chicken QSR environment. Popeyes has the best chicken in QSR. It's slowly marinated, hand battered and fried in-house and is rooted in the authentic Louisiana heritage. On top of this, we have a relatively modern asset base. with roughly half of the Popeyes system having been opened in the last decade, good unit economics and strong franchisee alignment. Finally, Firehouse Subs delivered a solid quarter with comparable sales up 2.6% and net restaurant growth of 7.7%, which drove 10.7% system-wide sales growth. Performance reflects continued progress in expanding our footprint across North America with great engaged operators and a standout result in Canada. Mike and his team have already opened 100 net new restaurants over the past 12 months, which is 5x the pace of growth from when we acquired the business. This strong result keeps us on track for another year of accelerating development in 2025, supported by enthusiastic franchisees, solid paybacks and growing brand awareness. With that, I'll hand it over to Sami. Sami Siddiqui: Thanks, Josh, and good morning, everyone. I'm excited about the momentum we're seeing in our business, and I'm proud that we were able to accelerate both top line and bottom line results in Q3. Our focus on balanced marketing and great guest experiences is driving that performance. And I feel confident that the groundwork we're laying today positions us well for consistent long-term growth. At the RBI level, we're complementing strong brand execution with financial discipline and thoughtful capital allocation, setting us up to deliver another year of 8% plus organic AOI growth, while continuing to invest in areas of the business that will drive sustainable returns over time. Today, I'd like to discuss our Q3 financial results, capital allocation and guidance for the remainder of the year. Starting with our financials. For the third quarter, system-wide sales grew 6.9%. Organic AOI grew 8.8% and nominal adjusted EPS increased 10.7%. Organic AOI grew faster than system-wide sales this quarter with operating leverage driven by disciplined cost management, including an $8 million reduction in segment G&A and an $8 million tailwind from lapping last year's fuel to flame ad fund contribution at BK U.S. These benefits were partially offset by an $8 million year-over-year AOI headwind from BK China. As a reminder, consistent with prior quarters in 2025, we are recording results from BK China in discontinued operations as we work to find a new local partner. Adjusted EPS increased $1.03 -- increased to $1.03 per share this quarter from $0.93 last year, representing nominal growth of 10.7%. This was driven by our AOI growth as well as a $14 million year-over-year decrease in adjusted net interest expense from $142 million last year to $128 million, reflecting the benefits of our 2024 refinancing activities and cross currency swaps. Our adjusted effective tax rate this quarter was 17.8%, bringing our year-to-date rate to 18.1%. For the full year in 2025, we continue to expect our adjusted effective tax rate to be in the 18% to 19% range. Now turning to cash flow and capital allocation. We generated $566 million of free cash flow, including the impact of $110 million of CapEx and cash inducements and a $35 million benefit from our swaps and hedges. We also returned $282 million of capital to shareholders through our dividend and we fully repaid the approximately $100 million remaining on our Tim Hortons facility that was maturing in October, consistent with our plan to prioritize deleveraging. As a result, we ended Q3 with total liquidity of approximately $2.5 billion, including $1.2 billion of cash and a net leverage ratio of 4.4x. Looking ahead, our capital allocation priorities remain unchanged. We'll continue investing in our business, maintaining an attractive dividend and reducing leverage. As I said before, one of our key priorities is to return to a more simplified business model. As part of this, we're refranchising Burger King restaurants, and we remain on track to refranchise between 50 and 100 restaurants in 2025. About half of these will be through our Crown Your Career program, which means the actual deconsolidation of those restaurants will take place over time as candidates graduate from the program. In addition, we're actively engaged with Morgan Stanley to sell Burger King China, and we feel confident in the progress the team is making to find a new local partner. Together, these initiatives are key steps towards simplifying our structure, strengthening our franchise model and creating a more capital-light platform for long-term free cash flow generation. Before shifting to our 2025 financial guidance, I'd like to touch on beef costs. As Josh mentioned earlier, our Burger King U.S. business is seeing elevated beef costs, which are creating some short-term margin pressures. Beef represents roughly 1/4 of the Burger King U.S. commodity basket and year-to-date prices are up high teens versus last year. This equates to a mid- to high single-digit increase in the overall commodity basket for Burger King U.S. in 2025. We expect this to be temporary as the increase is largely tied to the cyclical nature of U.S. herd rebuilding and we're optimistic prices will normalize over time. In fact, you've already seen cattle futures come down in the last week or so, and we continue to monitor movements in that market. In the meantime, we're working closely with our franchisees to identify efficiencies and margin opportunities across the P&L. Now I'd like to discuss four updates to our 2025 guidance. First, we continue to expect Tim Hortons supply chain margins to average around 19% for the full year, with Q4 as the softest quarter in the mid-17% range, reflecting the typical seasonality of the business, and the impact of higher average cost of inventory, including within our CPG business. Second, we now expect segment G&A, excluding restaurant holdings, to come in at the low end of our guidance of $600 million to $620 million. Third, we expect 2025 CapEx and cash inducements, including capital expenditures, tenant inducements and incentives to be around $400 million, down from our prior guidance of $400 million to $450 million. And fourth, within Restaurant Holdings, BK Carrols restaurant level margins will continue to be impacted by the 50 basis point ad-fund contribution step-up year-over-year and commodity inflation, primarily related to elevated beef costs. In addition, our early-stage investments at Popeyes China and Firehouse Brazil resulted in a net AOI drag of $7 million in Q3, and we will expect a similar impact in restaurant holdings in Q4. We anticipate these expenses will continue until we transition ownership to new local partners. Finally, we continue to expect 2025 interest expense, NRG and organic AOI growth to remain consistent with our prior guidance. This includes adjusted net interest expense of around $520 million, net restaurant growth of around 3% and organic AOI growth of 8% plus. As a reminder, organic AOI growth in the fourth quarter will see a $52 million net benefit from lapping 3 items: $41 million of BK Fuel to Flame ad fund expense and $20 million of net bad debt expenses in Q4 of '24, partially offset by $9 million of BK China revenues also recognized in Q4 of '24. Stepping back, I'm confident we're making good progress towards our goal of returning to a more simplified and highly franchised business. We're ahead of schedule on refranchising the Carrols restaurants and continue to make great progress on the Burger King China sale process. And even as we execute on these strategic initiatives, we remain firmly on track to deliver another year of 8% plus organic AOI growth in 2025. And with that, I'll turn it over to Patrick. J. Doyle: Thanks, Sami. This team is driving strong results. And importantly, they're doing it the right way. Quarter after quarter, our teams and franchisees are delivering for guests and staying focused on what matters most, creating value for guests by improving their experiences in our restaurants while maintaining discipline around our pricing. That's what sets RBI apart right now, and it's working. We've got 5 amazing businesses that are each at a different point in their journey. Tim Hortons and our international business continue to set the standard with steady high-quality growth built on strong fundamentals. At Tims, Axel and team keep raising the bar with exciting menu innovation and outstanding execution in the restaurants. You can feel that momentum from the strength that we're seeing in cold beverages to continued leadership in breakfast. The brand is connecting with guests in a way that feels fresh and relevant every day. Tim's is firing on all cylinders, and our runway for consistent growth is long. Internationally, Thiago and team are delivering another year of great results. growing system-wide sales double digits and outperforming our peers in many of our largest markets. What I love about our international business is how consistent the playbook is, great food, engaged local operators and an unwavering focus on the guest experience. That model scales. We've proved it with Burger King, and now we're proving it with Popeyes which is generating the best system-wide sales growth in international amongst our scaled global peers. Burger King U.S. is showing what focus, patience and follow-through can deliver. Franchisee confidence is near all-time highs. Operations are improving, and the brand is clearly earning its way back. After nearly 2 years of outperforming the broader QSR burger category, you can feel the turnaround taking hold. These things don't happen overnight. But you know when a brand starts to click again, and that's exactly what we're seeing at Burger King. I'm proud of our franchisees, and I'm proud of Tom and the team leading BK. Popeyes on the other hand, has some work to do. We know it's not performing where it should be, and Jeff and team are leaning in by simplifying and improving operations, sharpening the value proposition and getting back to what makes Popeyes so special. It's incredible food and Louisiana heritage. As we increase the pace of operational improvements in our restaurants, Popeyes food is too good and the brand is too strong for us to not be growing faster. And Firehouse continues to build momentum with strong development and a lot of enthusiasm from franchisees who see the long runway ahead. Mike and his team are moving the brand in the right direction and starting to accelerate the pace of scaling this business. What makes RBI stand out is our bias for action. When something isn't working, we move aggressively to make it right. We run this business like true owners and take a long-term view, investing in the areas that strengthen both our business and our franchisees. From investing in Back to Basics at Tim's to supporting Reclaim the Flame at Burger King U.S., to stepping in to stabilize BK China. We're not afraid to do the hard work to make every one of our business is great. There is no kicking the can here. Long-term success means creating an ever-improving guest experience, compelling franchisee economics that attract and grow great restaurant operators and efficient use of RBI's resources to achieve that growth in order to generate consistent and compelling returns for our shareholders. We also know that we need to simplify our business back to being nearly 100% franchised. So we're taking steps to get that done, refranchising our Carrols restaurants and finding a new partner for Burger King China. We are going to be a much simpler story. We've got engaged franchisees, motivated teams and a culture that values doing things the right way for our guests, our operators and our shareholders. That combination of long-term investment, operational discipline and accountability gives me a lot of confidence in where we're headed. I'll close by saying thank you to everyone across our system. These results don't happen without incredible teamwork and passion from our restaurant operators, managers, crew members and corporate teams around the world. You're building something that lasts and it's a lot of fun to be a part of it. And with that, I'll turn it over to the operator to take questions. Operator: [Operator Instructions] Our first question comes from Dennis Geiger from UBS. Dennis Geiger: Great. Congrats on the solid results. I wanted to ask a little bit more on Burger King U.S. given the continued industry outperformance, the continued execution against plan despite the difficult environment. I think, Patrick, you and Josh both spoke to like feeling the turn. But could you speak a little more to that turnaround trajectory that the brand is on and maybe if it's possible to draw some parallels to the Tim's turn in previous years. And I know you guys spoke to the ops, the marketing, the franchise, the alignment, but just maybe highlighting some of the biggest opportunities still from here to get to where you want the brand to be. Joshua Kobza: Yes, thank you for the question. I'll start, and Patrick feel free to add on. I think we're really pleased with the work that Tom and the team have done now over a number of years. When we set out on this plan, we sort of -- we listen to our guests and our franchisees and understood what they wanted from the brand. And I think they wanted things like more modern assets. We're working on that. They wanted more consistent operations. We've made tremendous progress on that over the last few years. Our franchisees wanted to see a better focus on profitability. We brought that and saw a lot of progress. And we wanted to see the outcome of all of that being outperformance versus the segment, which we've been lagging behind in the prior periods. And we've now seen that pretty consistently over the last couple of years. So I think that combination of sort of listening to guests, understanding what they wanted from the brand and making sure that we were really well coordinated and working together with our franchisees, I think, is what's driven progress. As I look forward over the rest of this year, we're going to stick to the same things that we talked about at the beginning of the year. I think I laid out a couple of different focus areas, we said that we wanted to focus on the Whopper in flame grilling. We want to bring families back in the restaurants, and we wanted to have consistency in our value offerings through the year. And throughout all the macro ups and downs of various quarters, we stuck with that plan. And I think that really has paid off. And I think you kind of see that in the results and especially in the Q3 results. And the things that we talked about doing will be basically what you see from us in Q4. As I look forward from there into next year, I think that gives us a great foundation to build off of. And Tom and Joel and the team shared some of that plan with our franchisees recently at our convention. I think there was tremendous excitement and enthusiasm from those plans. And I think kind of what we've done gives us the base to then further elevate the brand and to keep focusing and elevating the focus on flame grilling the Whopper, I think we'll take it kind of into its next chapter next year. We'll have more to share probably in the next few months or on our Q4 call to give you a little bit more specifics around that, but that's basically the plan going forward. Patrick, anything you want to add to that? J. Doyle: Yes, Dennis, I think that the parallel though is exactly right. I mean what we did at Tims in Canada is exactly the same thing we're doing at Burger King. The needs may have been different. The restaurants -- at Burger King, we're in more need of updating and remodeling than they were at Tims. The food was great and is great at Burger King, but we're going to continue to do work on that. One of the interesting things is as you know, in Canada, you have contractually more control around pricing. And so our pricing in Canada was very consistent. We were very careful about making sure we were delivering value across the menu. And I think Burger King and our franchisees have done a very nice job of making sure that we're not getting ahead of ourselves on pricing, and that's created consistent value. But the improvement in value that you're seeing for consumers at Burger King is not because we are doing deep discounting or anything like that, it's because we're improving the consistency of execution, the attractiveness of the restaurants that they're going to the service levels, the food quality, all of those things are what are improving the value for consumers. And we aspire to the 18 straight quarters of positive comps that we've gotten at Tims now, and by the way, 18 straight quarters of growth in our international business, which is from doing the exact same thing, terrific execution in the stores, on average, great compelling franchisee economics, which allow them to reinvest into the stores, keep them looking great and that delivers very consistent results. And so it's still -- we've got a lot of innings to work through on Burger King, but we're very comfortable that we're seeing the results starting to play through. Operator: Our next question comes from David Palmer from Evercore ISI. David Palmer: Thanks for those comments on Burger King. Just as a follow-up, and you were talking about beef costs and the impact that that's having on cash flow, no doubt, you also talked about the fact that you're having some pretty good sales momentum. And so I would imagine that there is optimism in the system, but you're dealing with a cash flow hit from some of the stuff on the inflation side. Is there any impact from that even if temporary in terms of the plan to get the restaurant counts reversed, reimaging, invested on pace, refranchising of Carrols ad fund contribution. Is there any impact from that even if it's temporary. And then separately, on Burger King U.S., there's always this concern that a major competitor is going to hurt the brand with their recovery, and we're now a week -- a year away from a food safety incident and a major burger player that rocked their results. Do you see that as something that will -- as we begin to lap that, that will impact Burger King indirectly through the rest of this quarter? Or any comments on that would be helpful. Sami Siddiqui: Dave, it's Sami. I'll take the first part of your question, and then I'll pass it over to Josh to comment on the second part. With respect to Burger King U.S., we are pleased with the sales progress, particularly in Q3 and really the pretty consistent outperformance to industry. With respect to beef costs, in particular, those have been a clear headwind. I mean beef costs this year have been at all-time highs. And as we think about that and we think about sort of the dynamics there, being up high teens percentages year-over-year being about 25% of the commodity basket that does impact us. I think it is impacted by sort of two dynamics. One is sort of this herd rebuilding cycle in the U.S. But it's also impacted by some of the trade agreement dynamics for markets where beef is sourced from. I think we view these kind of impacts as temporary and our franchisees view it that way as well, although they are a significant impact. We've actually been monitoring the market. And even if you look at the last week, as there's been optimism around some trade deals, whether it's been with Argentina, whether it's been with Mexico, whether it's been with Brazil, we're sensing our optimism that there could be some relief on beef costs. And with respect to the impact on the plans, I don't think that changes our plans. We're still on track to do around 400 remodels this year. on the margin, that may shift things from 1 year to the next, but franchisees are confident they view kind of this as a temporary sort of headwind and that it will reverse, and we're going to continue to out-execute the competition. Joshua Kobza: Thanks Sami. Dave, just on the strategy and type of impact of competitors, I don't think anything that the competitors are going to -- are doing is impacting Tom and the team's plan. I think that's one of the strengths of what we've done all year long is we haven't deviated from the plan. We've kept consistent even as you've had some macro ups and downs and you've had some shifts in focus from different competitors. I think sticking to our playbook, focusing on our strength and being consistent, things like value, one of the best things that we can do is making sure that we have consistent value propositions. Guests who are focused on their budgets. They want to know when they go to Burger King or anywhere else. They want to know what they're going to get. And we've stuck with our $5 Duos and $7 Trios and made sure that they know when they come to Burger King, that's what's going to be available over a long period of time. We give guests options. We let them have it their way a little bit and pick what they want to have as a part of that -- those bundles, but we're trying to have a bit more consistency in some of those constructs. And I think that seems like it's been working well for the business. Operator: Our next question comes from Danilo Gargiulo from AB Bernstein. Danilo Gargiulo: Just I was wondering if you can comment on your satisfaction about the launch of the protein latte in Canada, specifically whether you think you've got the right level of advertising behind? Or if you think it was overshadowed by some incremental menu offering over there. And given that you don't have major competitors that are necessarily focusing -- overly focusing on the protein platforms over there. What do you think the comp uplift could be as you're expanding the platform and potentially think through innovation for the coming quarters and years? Joshua Kobza: I would frame the protein lattes as one part of our broader push to innovate in cold beverages. And I think Axel and Hope and the team here have done a fantastic job on that. I think we've been talking about it for at least 3 years now that our strategy was going to be cold bev and PM food. And I think we've made consistent progress there, bring exciting new innovations to market. Within the cold beverage push, we've been focused on iced lattes a lot, and that overall platform has been a huge success for us. We saw growth well into the double digits of iced lattes in this quarter. So I think that's great. Protein lattes are just -- they're one more iteration of that idea. I think it's been working pretty well so far. We've seen high incrementality of that new product. So I think it's great, but I think we'll have to see where it goes in the future. We'll probably bring some new innovations around it. We're happy with it so far. But I think we've got to give it time and see what new things we bring over the next couple of quarters there. Operator: Our next question comes from Brian Bittner from Oppenheimer. Brian Bittner: And congrats on the impressive results. Sticking with Tims, obviously, the results continue to be solid, hitting on all cylinders as Patrick highlighted, can you talk about the share trends for the brand in Canada? Are you seeing those share trends accelerate? And just secondly, can you paint a picture of what type of macro environment you're operating in, in Canada. Everyone is obviously talking about a much softer and softening environment in the United States. So curious what you guys are seeing in the Canadian macro maybe relative to the U.S. macro? Joshua Kobza: Brian, what I would point to in terms of share trends is one of the comments I made in our prepared remarks we're outperforming by a pretty consistent margin, and we have over the last couple of quarters. I think I mentioned a little bit ago. Our same-store sales are about 3 points higher than the other large QSRs. So I think we're taking share on a pretty consistent basis by a healthy margin, and that's a result of all of the great work that the team is doing up here and the strength of the brand. In terms of the macro here in Canada, there are some softer stats on things like unemployment or consumer confidence, but I wouldn't say it's been changing so much sequentially. I think that's sort of been the case for a few quarters now. And I think the results this quarter with over a 4% comp show you our ability to deliver even in some of those tougher macro environments, and I think that comes down to doing the fundamentals right and having a great everyday value proposition. If you look at -- I think Patrick sort of mentioned it a little bit earlier, we were really disciplined about price over the last few years. Tims has always been known for delivering great everyday value with compelling price points, and we kept disciplined in that. People know they can come to Tims for a really good quality product at a very fair price. And that's the kind of thing that I think allows you to perform well even in some of the tougher macroeconomic environments, which I think we observed over the past quarter or 2. Operator: Our next question comes from Gregory Francfort from Guggenheim Securities. Gregory Francfort: My question is actually on the international business. I mean, pretty impressive comp from Burger King and also, I guess, across the brands. Some of the major markets there that are driving that, are you guys seeing your share gains accelerate or do you see kind of uplift in the macro in those markets that may be you have the biggest overlap. And I'm just curious what you're seeing on the ground and how much of it was share gains versus the overall market for QSR improving. Joshua Kobza: Greg, it's Josh. Thanks for the question. I think we've seen pretty broad-based improvement across the international business, especially in our European markets and some of our Asia markets. There are some places where I think the macro has gotten a little bit easier, but there are an awful lot of cases of improvements in relative share. I'll give you just a couple of examples. There are quite a number underpinning the overall results. I'd say probably the biggest one is in France. That's our largest market within the International segment. And we had a -- we had been seeing a bit of softer comps prior to Q3. And Alex Simon and the team there at Burger King in France did a fantastic job with some really great new product launches. The baby burgers that I mentioned was a huge success and we really shifted the trend in terms of relative market share there in Q3. So that was a big win and definitely a departure from trend. We've also seen improvement in some other markets. China is, for sure, one of those, where it has been a tough market for us over the last couple of years. And I would say the thesis that we went into China with this year has played out even better than we expected. We made some changes to the teams, put in place some really talented and experienced local leaders, we improved some of the marketing, launched some new products, brought back some media focus and have really turned the corner in a meaningful way on the same-store sales. I mentioned we were plus 10% in the quarter, which is a terrific result and shows you the kind of the potential of the brand there. So that -- I think that was a big shift in relative market performance. And then we had another one that's top of mind for me is Japan. I've talked about it for a while. It's been doing really well. But the comps there have been great. The restaurant growth is terrific because the paybacks are good. So I think we're -- we have a huge opportunity in Japan. It's always been one of our biggest opportunities in the world. And the team there is really doing a great job going after that and growing our market share in the market. So not exhaustive, but gives you a few examples of some of the places where on top of some macro that maybe is a little bit better, I think we're doing a better job in each of those markets, too. Operator: Our next question comes from John Ivankoe from JPMorgan. John Ivankoe: Two-parter, if I may. Firstly, Josh, in your prepared remarks, you mentioned the 400 Reclaim the Flame remodels in '25 and then mentioned beef prices. And it did seem like that you may have been talking down the number of Reclaim the Flames expected in '26. So tell me if I kind of caught that inflection or not? And if it's appropriate, how many remodels we should expect in '26 just to kind of level set everyone? And then secondly, also in prepared remarks, I heard that it would take a while to deconsolidate the units that were part of Reclaim the Flame, I just want to understand what that means. So it will be a refranchising transaction that the store fully remains on balance sheet. So I just want to understand that. And how long of a transition period are we talking about until those units can be fully refranchised from a practical perspective as part of your career. Joshua Kobza: John, I'll take the first part on the remodels, and then I'll let Sami talk about some of the Crown Your Career refranchising. So in terms of the remodels, as we said, we expect to do about 400 this year. We're really pleased with the uplift, and I think there are even better uplifts in some of our company stores and the sizzles that Carrols are doing. I think the intention of the comment is just to be mindful of the fact that beef prices have been elevated and that does have some impact on our franchisees' profitability. It's not going to change our long-term plan. Our vision and plan continues to be very much the same that we want to get to around 85% of the system on modern image. We're obviously just keeping an eye on those beef prices and any impacts that, that can have on our franchisees' profitability. The good news, as Sami mentioned, is that we've already started to see those beef prices come down, which will be helpful to franchise profitability and provides more cash flow for our franchisees to fund those remodels. And I think in terms of 2026 remodel numbers, I don't think we're ready to put a number out there quite yet, something we'll probably look at doing once we get into the beginning of the year, maybe the Q4 earnings call. Sami Siddiqui: And just quickly on your deconsolidation of refranchised restaurants via Crown Your Career. I think a couple of things, and we've talked about this in the past. When we think about refranchising the Carrols restaurants, there's sort of 3 categories of folks we're refranchising to. Number one is existing operators who have capacity for more or strong operators in our system. Number two is kind of traditional refranchisings to new operators, new franchisees who are entering our system. And then the third bucket is this Crown Your Career bucket, which are typically smaller restaurant managers above restaurant leaders, folks who may have a little bit less capital but are focused on running very small portfolios of restaurants, call it, anywhere from 1 to 5 or 10 restaurants and really growing with the brand. And those Crown Your Career restaurants and as part of that program, what we do is someone enters the program and they stay in the program from anywhere from 1 to 3 years as we monitor kind of their progress, how our sales, how are operations performing and then they graduate from the program. And we don't have set graduation dates. It's really around how quickly are the restaurants turning around and how ready is the operator to be a full-fledged franchisee. And so those may vary over time. The good news is, as you think about it, we're already ahead of schedule in our refranchising. We want to do between 50 and 100 refranchisings this year. Of those, about half will be in the Crown Your Career program. And then those folks will graduate over the next 1 to 3 years. and those restaurants will come off our books in that appropriate time. So we're really pleased. We also think the Crown Your Career program is an excellent pathway to ownership for small operators, and that's ultimately what powers the Burger King brand. Operator: Our next question comes from Christine Cho from Goldman Sachs. Hyun Jin Cho: Great to hear that you're on track with your Burger King remodel this year. And I think you mentioned the mid-teens average sales lift for these stores and with even higher performance for the Sizzle images. I was wondering if you had any insights you can share on the year 2 and 3 sales trajectory post the remodel? Do these stores continue to outperform? Or do they eventually kind of return to a similar comp trajectory with the broader fleet? And additionally, how should we think about kind of the impact on Burger King's comps and returns over the next few years as the mix of Sizzle image continues to increase within the portfolio? Sami Siddiqui: Christine, like Josh mentioned, we're really pleased with the remodel uplifts that we're seeing in the teens and particularly with the Carrols remodels where we're seeing with the Sizzle images even better than that. I think as we look into kind of year 2 uplifts, it's about 100 basis point continued uplift from the remodels. That sort of evolves over time as new restaurants kind of enter our data set, but we've kind of been consistent around this 100 basis point uplift, and you can kind of flow that through the comp impact. We expect to end this year around high 50 percentages in terms of the percentage of the portfolio that's modern image and continue to kind of be on track for around 85% modern image by the end of 2028. Operator: Our next question comes from Andrew Charles from TD Cowen. Andrew Charles: Okay. Great. I know we'll get an update on the 4Q call for 2025 store level cash flows by brand, but it's no secret that U.S. industry cash flows are hurting this year just given elevated beef prices and consumers seeking value. Do you have a target for $230,000 of BK store level cash flow in 2026 in order to sustain 50 basis points of marketing spend incurred by the franchisees. And I'm just curious your confidence to reach this as well as key priorities to reach this beyond sales growth. Joshua Kobza: Yes. Thanks, Andrew. I would say on the ad fund, there are two ways that we can extend the higher ad spend, both by -- one by hitting the franchise profitability target or through a franchisee vote. So there are kind of two pathways to that. I think, obviously, there has been some headwinds from beef costs in 2025. So we're cognizant of that. And like I said, thankfully, those beef costs have started to come down. So I think it's too early to say kind of exactly where we'll land next year, but we're certainly keeping an eye on it. I think the other piece of that is just our relationships with the franchisees are really great. I think we all have a lot of conviction that we did the right thing in increasing the ad fund rate. I think if you look at the same-store sales performance over the last couple of years, it's very clear that on top of the other important changes we made in BK, the advertising spend, the increased advertising spend and the quality of the advertising are having an excellent ROI for everybody in the system. So I think everybody gets that. And I think because of that, I think we should be able to find a good path to extend it over time. Operator: Our next question comes from Sara Senatore from Bank of America. Sara Senatore: Okay. I just wanted to ask a couple of questions on Tims, and I apologize if I missed anything, but I wanted to first ask about the top line drivers. You mentioned loyalty members increase in spend by about 50% versus prior to joining, can you give me a sense of how -- what percentage of your total -- like unique customers, the 7 million loyalty members might account for, I'm just trying to think about as you -- the opportunity to grow that loyalty base as a top line driver because it's a pretty big increase. And then maybe the second point about top line is just you mentioned total beverage sales grew 4%. Obviously, if cold is growing 10%, the implication is maybe brewed coffee decline. Are there any margin implications for franchisees just in terms of that product mix shifting? Joshua Kobza: So Sara, just first on your first question in terms of loyalty members as a percentage of unique customers, we'll have to come back to that, we just don't have it in front of us right now. In terms of the beverage mix, we have seen a shift. I think the shift from hot to cold beverage is something that you've seen across the industry, both in the U.S. and in Canada. And it's one of the reasons why it was a big part of our innovation focus over the last few years to make sure as the customer preference shifts towards cold beverage, we've got all of the products that they want, and we're leading that shift in Canada. So you're naturally seeing if beverages are growing 4%, you're seeing higher growth in your cold bevs and you're seeing lower growth in your hot bevs that is something we anticipated. And that's why the kind of the innovation priorities are what they are. In terms of margins, they're both good margin products, both very healthy businesses. for our franchisees. So no big impact that comes out of that shift, I would say, in terms of the percentage margins. J. Doyle: And Sarah, it's Patrick. The one thing I'd add is the cold bev can be a little bit more complicated. And one of the things that I'm proudest of with our franchisees in Canada is our speed of service is better than it has ever been in Canada. They're doing just a terrific job of managing that as you continue to see the shift from hot bev to cold bev. Operator: Our next question comes from Brian Harbour from Morgan Stanley. Brian Harbour: Yes. I guess just on the Popeyes side. I appreciate there's sort of some of the opportunities you laid out there. But any -- is there anything from your perspective with like customer exposure, sort of like competitive dynamics that's also affecting that business right now? Or what do you see as sort of the real hurdles to seeing improvement there? Joshua Kobza: Yes, Brian, I think there's a lot of controllable stuff. I think it's been the case that we know we've got the best products in the industry, but we've got some inconsistency in our operations. And we're making some progress there, but I think we need to make more sustained progress. And I think that's what's going to allow us to improve the sales trajectory. So I'd say that's the biggest focus from my perspective. I think secondarily, as I mentioned, I think we can shift some of our marketing and innovation focus from a little bit more LTO focused. You've seen things like dippers and pickles, which gain a lot of customer interest, but sometimes don't drive the sustained sales growth that we'd like to see. So you're probably going to see us shift back a bit of that focus to some of our more core platforms. So those are the places that I'm focused on. I think that's what's going to drive the turnaround. I don't see something in kind of a customer-based SKU or anything like that, that's probably responsible for sales. If you go back over the last few years, we grew our same-store sales tremendously when we focused on the core and got things right. So I think this brand is amazing. It's in exactly the right segment. It has every right to win. We've got relatively new assets. I think like half of the stores were built in the last 10 years. It gets tremendous reaction when we do new things. It gets a lot of engagement online. So I think we've got every right to win. We've got a couple of things we need to work on, and we're very much focused on those. Operator: Our next question comes from Jeff Bernstein from Barclays. Pratik Patel: Great. This is Pratik on for Jeff. I had a broader question on the quick service category in the U.S. Can you comment on whether you're seeing the lower-income consumer trade back into fast food with greater frequency now that there's emphasis on value across the board? And also, are you seeing signs of middle and upper-income consumers finally trading down from some of those higher priced options as maybe there's more caution around discretionary spending. Joshua Kobza: PrPratik, what I would say in terms of the income cohorts is we haven't seen a big departure over the course of the year. I think we mentioned over the last couple of quarters that we did see a bit softer relative performance of the lower and middle income consumers. That hasn't changed too much, so nothing too new there. I think we've been operating in that environment pretty much all the year. . And what's worked for us is that we've been staying focused, executing well and delivering consistency and consistency in value among other things. And you saw that play out in our results in Q3. The one thing I would call out is that October has started out a bit choppier in the U.S., though nothing that would cause us to change any of our plans at this point. . And I would just keep in mind, we do run a large global and diversified business where 70% of our AOI is generated outside the U.S. So we feel good about the overall trends globally and ability to deliver our 8% AOI growth. But I do want to call out the U.S. trend in October, which I imagine a lot of you guys have already seen. Operator: We currently have no further questions. So I will hand back to Josh for closing remarks. Joshua Kobza: Great. Thank you, everybody, for the time today. We appreciate very much the hard work by all of our teams and franchisees around the world in helping us to produce a good quarter here. We look forward to updating everyone on our progress on our Q4 call and wish you a great day. Operator: This concludes today's call. Thank you for joining us. You may now disconnect your lines.