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Operator: Ladies and gentlemen, thank you for standing by. I'd like to welcome you to Fibra UNO's Third Quarter 2025 Results Conference Call on the 29th of October 2025. [Operator Instructions] So without further ado, I'd like to pass the line to the CEO of Fibra UNO, Mr. Andre El-Mann. Please go ahead, sir. André Arazi: Thank you, Luis. Thank you, everybody. Good morning. We are very pleased to deliver the results of the third quarter 2025. And I would like to make a few comments about that before I pass the mic to Jorge to go in depth of the numbers. We are focusing on the year-on-year results. We expect and we projected last year to be in the double-digit area of growth in our top lines, our most important lines, which are, in our view, total revenue, NOI and effective payout per share. All of those, we think we will be in the double-digit area by the end of the year, comparing year-on-year. Although it's a very predictable business, ours, it has seasonality also and especially seasonality quarter-over-quarter. We have seen throughout the year that the fourth quarter is the strongest of them all, and we expect to close the year in the double-digit area in the top line that we -- that I referred earlier. As the year-end approaches, we also are looking at the projection that will be released by our company by year-end for 2026. And we expect more resilience, more stability, even brighter number for next year. The top line is important for us to have a little bit of context. In order to achieve double digit in the top line, as you have seen, we have been posting a very interesting leasing spread in all of our sectors. Let's say that we have achieved double digits overall in our portfolio. The double digits, it is only in the revisions of the contracts. And as you know, we revise only 1/4 of the contracts every year. So if we achieve, let's say, 10%, it only impacts on the whole portfolio 250 basis points. So for us, this 250 basis points plus the 400 points, let's say, of inflation will only bring us to 650 basis. And we are projecting as we projected last year, double digits. In order to get -- to fill that gap, we need to have a lot of efficiencies, cost efficiencies, cost of debt efficiencies that we are now in the verge of obtaining because of the decreasing of the rates, both in the U.S. and in Mexico. And -- but what I want to say is it's difficult for a company like this to achieve the double-digit area. We are committed, and we will project for the next year. You will see our projection by year-end. But I want to stress that it has to take all the effort of the team in order to get to that area of double-digit growth in the top line, the 3 main lines that I relayed earlier. For this year, I think we will -- I mean, for 2026, we will rely on this year's achievement, the positive impact on the internalization of the management, the execution of the joint investment with Fibra NEXT, which is due in the next coming months. To achieve these goals, we will need yet again all hands on board. Proudly, I can't stress enough that these results will never be possible without the help of each and every one of FUNO's collaborators. To all of them, my most sincere and deepest gratitude. In the ESG front, Again, we are setting the bar very high for the rest of the sector. We are absolute leaders in equality, which with our highest -- our higher than market goals and stronger and more aggressive than market, policies in our hiring staff, our staff hiring. In sustainability, I will relate to what I described earlier about stability in the economic because we need to have stability in our economic lines in order to have stability in the environmental lines of our business. More than ever, environmental policies that have placed our company in the outstanding place that we have as the best-in-class across the board. Finally, in governance. Governance is the line in which we have invested more economically and intellectually, starting with a long time awaited internalization of our management, but following with the outstanding job on reshuffling our Boards and the Board of FUNO and also the installment of the Board of our partner sister company, Fibra NEXT. All these decisions have placed our company in higher ground. And we absolutely lead the sector, and we champ the industry, which makes me personally very, very proud. In recap, I am very happy to have delivered yet again a very attractive third quarter and even more to have a clear view of the fantastic numbers ahead and with the transformational steps taken, that we will be having great times ahead for our company. Thank you for your trust. And again, the best is yet to come. I will now pass the mic to Jorge for the numbers in depth. Jorge Pigeon Solórzano: Thank you very much, Andre. Thanks, everybody, for joining us in our quarterly results call. I will now go into the quarterly MD&A, as usual, and then open up the floor for questions and answers. Starting with the revenue line. Total revenues increased by MXN 20 million quarter-over-quarter or 0.3% to reach MXN 7.5 billion. This is a 5.1% increment on a year-over-year basis, we consider that this against the third quarter of 2024. This change was mainly driven by inflation indexation in our active contracts. Rent increases on lease renewals, as Andre has mentioned, only a fraction of our contracts expire each year, and those are the ones in which you are seeing the leasing spreads that add basically about 100 or 200 basis points on top of inflation on a quarterly basis. And these were offset by the peso-dollar exchange rate appreciation that we saw during this quarter. And the effect it has on our U.S.-denominated rents as well as U.S.-denominated interest expense lines, which I'll discuss a little bit later. In terms of occupancy, the operating portfolio's occupancy stood at 95%, which, as you know, has been the long-term goal of the company to have a 95% occupancy stable compared to the previous quarter. Industrial portfolio recorded 97.4% occupancy, stable versus the second quarter of '25. We're happy to see that we are having a very high retention rate of our tenants and strong leasing spreads, as I will describe shortly. In the retail portfolio, we saw a 93.6% occupancy rate, basically 10 basis points below the previous quarter. The office portfolio recorded an 83% occupancy, 80 basis points above the previous quarter. The Others segment reported 99.3%, occupancy stable versus the second quarter of '25, and the In Service portfolio recorded an 84.4% occupancy or 400 basis points above the previous quarterly primarily due to improved occupancy in the retail segments of the Samara Satelite property, which is on its way to stabilization after we delivered the project a little bit earlier this year. Very happy with the performance of that asset. In terms of the operating expenses, property taxes and insurance, total operating expenses increased by MXN 36 million or 3.7% versus the second quarter of '25, mainly due to increases in the cost of some suppliers and services above inflation. As you know, this is something that we have been working on to contain over the course of a couple of the last couple of years, and we are making good progress in containing those expense growth. In terms of property taxes, they decreased by MXN 4.6 million, mainly due to updates that were reflected in the second quarter that did not happen during the third quarter of '25. Insurance expenses increased by MXN 7.9 million or 6.4% compared to the second quarter, mainly due to the biennial update of our insurance policies. In terms of net operating income, the effect of the above resulted in increase of MXN 2.9 million or 0.1%, basically flat versus the second quarter to reach MXN 5.58 billion. NOI margin calculated over rental revenues was 82.2% and 74.2% compared to total revenues. This compares to an NOI increase of MXN 167 million or 3.1% year-over-year. In terms of interest expense and interest income, net interest expense decreased by MXN 45.8 million or 1.5% compared to the second quarter of '25. This was mainly due to a combination of factors, which includes the interest rate reduction in pesos and its effect on a variable-rate of debt. The appreciation of the exchange rate, which went from MXN 18.89 to MXN 18.38 and its effect on interest payments in dollars during the quarter. This was offset by a decrease in interest capitalization and the impact of pricing of our derivative financial instruments as well. Compared to the third quarter of 2024, net interest expense decreased by MXN 150 million or minus 5.4% year-over-year. So we're starting to see that effect in our numbers. Funds from operation as a result of the above, controlled by FUNO increased by MXN 46.7 million or 2% compared to the second quarter, reaching MXN 2.4 billion. When compared to the third quarter of 2024, FFO increased by MXN 112 million or almost 5% year-over-year. Adjusted funds from operations increased by MXN 90.8 million or 3.9% compared to the second quarter of '25, reaching a total MXN 2.435 billion as a result of gains from the sale of a plot of land in Altamira, Tamaulipas for MXN 44 million. When compared to the third quarter of '24, the AFFO increased by MXN 156.5 million or almost 7% year-over-year. FFO and AFFO per CBFI. During the quarter of 2025, FUNO did not issue or repurchase CBFIs, closing the quarter with 3.805 billion CBFIs outstanding. The FFO and AFFO per average CBFI were MXN 0.6285 and MXN 0.64, respectively with variations of 2% and 3.9% compared to the second quarter of '25. When compared to the third quarter of '24, the average FFO and AFFO per CBFI increased 5.2% and 7.1%, respectively, on a year-over-year basis. Lastly, on the P&L, speaking about the distribution. The net distribution, which is one of the important lines that we focus on. The third quarter distribution amounted to MXN 2.305 billion or MXN 0.605 per CBFI, 100% attributable to fiscal result, which represents a 94.7% quarterly AFFO payout. After the end of the quarter, FUNO issued 5. 330 billion CBFIs related to the employee compensation plan leaving the final CBFI count at 3.810 billion CBFIs outstanding eligible for distribution going forward. Moving to the balance sheet in terms of accounts receivable. Accounts receivable for the quarter totaled MXN 2.309 billion (sic) [ MXN 2.390 ] billion a decrease of MXN 17.2 million or 0.7% compared to the previous quarter, basically normal course of business operation. In terms of investment property value -- the value of our properties, including financial assets and investments in associates increased by MXN 567.1 million or 0.2% versus the second quarter of 2025 as a result of CapEx invested in our portfolio as well as the fair value adjustment of our investment properties, including financial assets and investments in associates. In terms of debt, the total debt as of the third quarter of '25 stood at MXN 147.99 billion or MXN 148 billion compared to MXN 143 billion in the previous quarter. This variation was primarily due to the final disbursement of the Mitikah mortgage loan for MXN 2.3 billion. This is the last installment of the prepayments that we had for Mitikah. A net increase of MXN 393 million in bilateral lines of credit and the exchange rate effect of the peso, which appreciated from MXN 18.89, as I mentioned, to MXN 18.38 per U.S. dollar. The net effect of the above on our total equity meant an increase of MXN 2 billion or 1.1%, including the participation of controlling and non-controlling interest in the third quarter '25 compared to the previous quarter, was primarily due, as I mentioned, net income generated from the quarter, derivatives valuation, shareholders' distribution or CBFI distribution, sorry, and the executive compensation plan provision. Moving to the operating results. We are very pleased to see that leasing spreads continued to show a very solid performance with growth in peso terms for our Industrial segment of 16.8% or 1,680 basis points, 610 basis points or 6% for the Retail Segment, 530 basis points for the Others segment and 130 basis points for the office segment. So we're pleased to see that even in the office segment where we don't see a lot of pricing tension we have been able to increase rents a little bit. Leasing spreads in dollar terms for these renewals were 10.4% in dollar terms for the Industrial segment, almost 9% or 890 basis points in the retail segment, and we saw a slight decrease of 2.5% in the office segment. In terms of constant property performance, the rental per square meter in constant properties increased 5% compared to the annual weighted inflation of 3.75%. So we recorded a 1.2% increase in constant properties in real terms, mainly due to rent increases above inflation, the above-mentioned leasing spreads, rent renewals, the natural lag that we see in inflation indexation in our contracts, which were also partially offset by the appreciation of U.S. dollar-denominated rents. On a subsegment level, the portfolio's total annual rent per square foot went from $12.7 to $13 or a 2.2% increase compared to the previous quarter, mainly due to increases in both contracts as well as renewals offset by the peso appreciation and its effect on U.S. dollar-denominated rents. NOI at a property level for the quarter remained stable compared to the previous quarter. This is mainly due to the following: for the Industrial segments, Logistics decreased 1.4%; Light Manufacturing decreased 9.7%; Business Parks decreased 24.1%, latter mainly due to appreciation of a credit note to one specific tenant. The decrease in NOI in the segment was mainly driven by exchange rate appreciation, its effect on U.S. dollar-denominated rents. The office segment NOI decreased 4.5% on a quarterly basis, mainly due to exchange rate appreciation and the effect of U.S. dollar-denominated rents. In the retail segment, Fashion Mall subsegment increased 11.6%; Regional Center subsegment decreased 0.8%, almost flat; and the Stand-alone subsegment decreased 2.5%. The decrease (sic) [ increase ] in Fashion Mall segment was mainly due to the contribution of variable income. The Others segment's NOI increased by 11.3%, mainly due to hotel's variable income seasonality. And for more detail on this, we can move to Page 24. With this, I conclude the commentary on the MD&A for the quarter. And Luis, I would like to ask if you can poll for questions and open the mic for the Q&A session. Thank you very much. Operator: [Operator Instructions] Okay, our first question is from André Mazini from Citi. André Mazini: So 2 questions, and thanks for the color on the internalization. So the first one is when will Samara, Midtown Jalisco, Montes Urales stock contributing revenues to FUNO as they're going to be used for the internalization, if it's going to be January 1 or some other date? This is the first one. And the second one, the office occupancy has been increasing but at a slow pace, right, currently at 83%. So maybe looking further ahead at the end of 2026, say, what do you think it's fair occupancy for us to have in the models, say, 1 year, 2 years down the road for the office space? And what needs to happen for occupancy in office to increase more rapidly? Jorge Pigeon Solórzano: Thanks, André. On the internalization, January 1 is the date that we expect to have the transaction effectively hit our financials. So basically, we will stop paying the fees, and we will stop receiving the revenues from the 3 properties and have those properties outside of our balance sheet as of January 1, 2026. Regarding the office space, we expect to continue to see gains in our portfolio as well as the market in general. I don't know Gonzalo, if you want to comment a little bit further on more or less what targets -- occupancy you expect going forward. Gonzalo Pedro Robina Ibarra: Actually, as you may be aware, there are some core results that are already above 90% occupancy as Reforma, [Lerma], Torre Cuarzo are already above 90%. The ones that are struggling more are [Periférico Sur] [indiscernible] area. And I think that in order to bring the whole portfolio up to 90% occupancy will take us all 2026 and 2027. Operator: Our next question is from Jorel Guilloty from Goldman Sachs. Wilfredo Jorel Guilloty: I have a question about Mitikah. Just wanted to make sure. So one, is there no more payments going into Mitikah going forward? And two, what are next steps? Because if I remember correctly, there were supposed to be some divestments, some lease-ups in terms of apartment buildings there. So if you could just provide us an update on how that is going? Yes, that would be it. Jorge Pigeon Solórzano: As of Mitikah, yes, that was the last payment. We don't have anything pending with Mitikah. And the second part of your question, I didn't understand what divestments you were referring to, Jorel. Wilfredo Jorel Guilloty: No. I was just -- basically if there is anything else that we should be looking forward to happening in Mitikah. So in order -- in terms of lease-up, in terms of anything else that for -- related to the asset? Jorge Pigeon Solórzano: Just the good performance that the asset is having. We expect it to continue to perform very well. Our tenants are selling very well. We're starting to get some variable rent component on that. It's definitely on, I would say, on the stabilization and fully leased for Mitikah. For the time being, that's the expectation on that asset. Wilfredo Jorel Guilloty: And another question, if I may. So just thinking about your leverage, I mean, you did have to do a payment there and that had a bit of an impact on leverage. But how do you see your leverage trajectory going forward? Jorge Pigeon Solórzano: Definitely, this is a good question. Thanks, Jorel. This is a business that since everything is inflation indexed. And as Andre mentioned, we're seeing positive leasing spreads and occupancy gains, in particular, in the office sector. The expectation we have is to have double-digit growth on our top line, NOI, et cetera, which will lead to a deleveraging -- naturally deleveraging of the portfolio from 2 pieces of the equation, let me say. One is, obviously, as we generate more cash flow, the properties are worth more. So the value of the company goes up on the asset side and debt remains stable. So that means that we delever on an LTV basis. And since the cash flows grow with inflation and interest expense remains flat on the fixed component of our leverage and is going down on the variable rent on the variable expense portion of our debt. The leverage on a net debt-to-EBITDA basis is also going down. So we have both of those figures going down, let's say, on an accelerated basis going forward, given where we're standing today. Operator: Our next question is from Gordon Lee from BTG Pactual. Gordon Lee: Congratulations on the results. Just a quick question, Jorge, I guess it's a little bit more on the technical side. But with the FX where it is now, I would assume that you'll be booking FX gains. And as a result of that, find out yourself in a situation where you were in previous years where you have to maybe pay an extraordinary a dividend above AFFO. One, just to confirm whether that's the case? And two, if it is the case, can you -- would you pay for it in cash? Can you pay for it in CBFIs? And for the portion that would be related to the debt that's going to go with the industrial assets to NEXT, who would pay that extraordinary? Would it be FUNO or would it be NEXT? Jorge Pigeon Solórzano: Okay. On the overall FX situation, that's something obviously that we are monitoring closely. But we had a different scenario the last time that we saw this, which was a combination of appreciating FX and high inflation, which we don't have today. We have low inflation and an appreciating currency. So we don't anticipate at this point to having the same situation we have in previous years, in which the fiscal result was higher than the FFO and we had to pay extra. Our policy in the past was not to pay in CBFIs. As you may recall, we basically paid with a little bit of the money from the first quarter of the following year, given that the fiscal year-end deadline for payment of the fiscal result is [ March 31 ]. So we use some of the first quarter cash flows to pay that. And we are basically catching up to that. In the last couple of years, we have been catching up. So if we were in the scenario, which we don't anticipate, but if we were in the scenario where the fiscal result is higher than the FFO, we would expect to make that payment in cash and not with CBFIs and utilize the cash flows of the first quarter given that we have, again, the first quarter of the following year to catch up with that result. I don't know if I explained myself? Gordon Lee: Yes. It was clear. Fernando Toca: To answer the rest of your question, Gordon, this is Fernando. You have to calculate the FX gain for FUNO from the period where the properties were at FUNO. And then you will have to calculate the gain or loss in NEXT when the properties were contributed to NEXT. So if the FX moves significantly from the drop-down of the properties to the end of the year, then NEXT could have a significant FX gain or loss. But at least myself, I'm not expecting that. Operator: Our next question is from Pablo Ricalde from Itaú. Pablo Ricalde Martinez: I have one question on the contribution from Fibra UNO assets into NEXT. That has already been approved by you, and you're waiting for the antitrust authority to approve that. So I don't know if there's an update on that front or no? Jorge Pigeon Solórzano: Well, we are expecting that to happen imminently, meaning the approval from the antitrust authorities. Hopefully, as soon as today, we may get a publication of the items that are going to be discussed in the plenary session of the Antitrust Commission. We have a favorable technical recommendation going into the plenary session. So we don't anticipate any issues and expect that to occur imminently, literally between, let's say, today and hopefully, this Friday, we should have a resolution from the Antitrust Commission. And once we do that, obviously, the Antitrust Commission will make it public, and we will publish ourselves the information that, that has gone through. And as for the drop-down, obviously, that is something that we have been looking into carrying it out. And as you know, it has market transaction components associated to it. So we're looking at market conditions to determine what the best timing for that is to happen. And I would say that this is as soon as immediately and no later than next year, but we're monitoring the market closely. Operator: Our next question is from Adrian Huerta from JPMorgan. Adrian Huerta: I have just 2 follow-up questions on prior ones. The first one on the internalization. Is there anything pending that you guys need in order to go ahead with the internalization in January 1? Or is everything set and there's no risk of this taking place on January 1? That's my first question. The second one, it's regarding Mitikah. When -- I remember about the Phase 2, is there any plans to launch the Phase 2 of Mitikah anytime soon? Jorge Pigeon Solórzano: First question first, signed, sealed and delivered. There's nothing to wait other than for the time to happen, and it happens January 1, which is how the documents are set. January 1, 2026, is when you will see the swap of asset fees and everything. So -- nothing else to be done. That's basically a done deal. Gonzalo Pedro Robina Ibarra: Just to be clear, up to December 31, the assets will be on the balance of Fibra UNO. As of January 1, they won't be any more on the balance of Fibra UNO. Jorge Pigeon Solórzano: Correct. Exactly. And regarding Mitikah Phase 2, obviously, we do have a license available. We have space to work with it. We have several ideas. As you know, there's been a live project that has evolved. If you recall from the very early stages, we had the Condo Tower -- wasn't a Condo Tower, it had a hotel in there. And then we had a hotel somewhere else in the shopping mall. And now we have about -- I don't remember if it's 80,000 or 100,000 square meters of additional space available to be constructed there, but we have to wait and see a little bit market conditions to decide what we do. Shopping mall is working fantastically well. So we want to make sure that whatever we do adds to the success of what Mitikah is today, but we don't have any specific plans as of right now to execute on Phase 2. We do have the availability, but not right now. Operator: [Operator Instructions] Our next question is from David Soto from Scotiabank. Okay. It looks like David does not have a question anymore. We'll give a few more moments for any further questions to come in. Okay. It looks like we have no further questions. Prior to the closing remarks, a friendly reminder that the Fibra UNO will be hosting the FUNO Day on November 13 in New York. I will now pass it back to the Fibra UNO team for the closing remarks. André Arazi: Thank you, Luis. Thank you. As Luis just reminded you, we have our Investor Day on November 13. We are -- you are very welcome to join. And also, we are approaching March of 2026, which will be our 15th anniversary. We are very happy and very proud about that. Thank you for your attention to this call. And I hope I'll see -- you'll hear from us again with the full year or fourth quarter 2025 numbers shortly. Thank you very much. Operator: That concludes the call for today. Thank you, and have a nice day.
Operator: Good morning, and welcome to the Zurn Elkay Water Solutions Corporation Third Quarter 2025 Earnings Results Conference Call, with Todd Adams, Chairman and Chief Executive Officer; David Pauli, Chief Financial Officer; and Bryan Wendlandt, Director of FP&A for Zurn Elkay Water Solutions. A replay of the conference call will be available as a webcast on the company's Investor Relations website. At this time, for opening remarks and introduction, I'll turn the call over to Bryan Wendlandt. Bryan Wendlandt: Good morning, everyone, and thanks for joining the call today. Before we begin, I'd like to remind everyone that this call contains certain forward-looking statements, which are subject to the safe harbor language outlined in our press release issued yesterday afternoon and in our filings with the SEC. In addition, some comparisons will refer to non-GAAP measures. Our earnings release and SEC filings contain additional information about these non-GAAP measures, why we use them and why we believe they're helpful to investors, and contain reconciliations to the corresponding GAAP information. Consistent with prior quarters, we will speak to certain non-GAAP metrics as we feel they provide a better understanding of our operating results. These measures are not a substitute for GAAP. We encourage you to review the GAAP information in our earnings release and in our SEC filings. With that, I'll turn the call over to Todd Adams, Chairman and CEO of Zurn Elkay Water Solutions. Todd Adams: Thanks, Bryan, and good morning, everyone. I'll get right to it on Page 3. In aggregate, we had a decent third quarter. Our sales grew 11% organically year-over-year and EBITDA grew 16% to $122 million as margins expanded 120 basis points to 26.8%. We leveraged our free cash flow of $94 million in the quarter to repurchase about 600,000 shares, bringing our year-to-date repurchases to $135 million or about 3.8% of total shares outstanding, and all this while leverage declined to 0.6x. As you may have seen in the release, we also raised our dividend 22% and our Board has refreshed our share buyback program to $500 million. Dave will highlight it more in his comments, but we also completed our U.S. pension plan termination in the quarter, which is really just a nice thing to have behind us. This morning, as we've done in prior years, we'll take everyone through all the market data we have on the U.S. nonresidential construction market and dissect it in ways we believe makes the most sense to understand how the macro data flows through to our end markets and ultimately into our business, setting the stage for what we think the market grows over the coming years. To cut to the chase, we think our markets in 2026 look a lot like they did in 2025. Last year this time, the data showed an acceleration into 2026 that, with some of the uncertainty around tariffs and really the lack of interest rate reductions throughout '25 relative to what was projected a year ago, pushes that acceleration to 2027. The market outlook being relatively stable over the past few years, we've been much more focused on what we can control, which is leveraging our internal growth initiatives, which are amplified by the competitive advantages we've cultivated around our product portfolio breadth, high levels of specification and our unique go-to-market positioning. As we discussed last quarter, we feel like we continue to demonstrate that our teams have got a really good handle on the tariff, supply chain and pricing dynamics. And Dave will update you on all the numbers in a bit, but overall, relatively consistent with what we communicated in the second quarter. All year, our approach to outlook has been to take things a quarter at a time because there's been several scenarios as to how all this change could have played out. But with only 1 quarter to go and basically only 2 months left in 2025, we are again raising our full year estimates for growth, profitability and cash flow. Now I'll turn it over to Dave, and he'll take you through some more color on the quarter. David Pauli: Thanks, Todd. Good morning, everyone. Please turn to Slide #4. Our third quarter sales totaled $455 million as we continue to have solid execution on our growth initiatives. $455 million of sales represents 11% core growth year-over-year. In the third quarter, we generally saw our end markets perform in line with our expectations as the nonresidential market remains positive while the residential market continues to experience softness. Core growth reflects both a full quarter of impact and higher realization of the tariff-related price increase that we put into the market in April. We also saw about $8 million of incremental demand shipped in the quarter as a result of customers ordering ahead of a discrete pricing action we put in place in mid-September within our water safety and control products. The discrete pricing action was primarily to reflect incremental tariffs on copper-related goods and the updating of country-specific tariff rates. Turning to profitability. Our second quarter adjusted EBITDA was $122 million and our adjusted EBITDA margin expanded 120 basis points year-over-year to 26.8% in the quarter. This strong margin and year-over-year expansion was driven by volume leverage, productivity initiatives, leveraging our Zurn Elkay Business System and continuous improvement activities across the organization. 26.8% consolidated EBITDA margins are the highest quarterly margins we've had since the Elkay merger. Year-to-date, our sales and EBITDA have increased $93 million and $39 million, respectively, which represents a 42% drop-through on the year-over-year volume increase. Our year-to-date EBITDA margin improved 120 basis points year-over-year as our core sales grew by 8%. Please turn to Slide 5, and I'll touch on some leverage and free cash flow highlights. With respect to our net debt leverage, we ended the quarter with leverage at 0.6x, the lowest leverage we've had as a public company. We continue to repurchase shares, and in the quarter, we deployed $25 million to repurchases. That puts our year-to-date repurchases at $135 million. Free cash flow again finished strong at $94 million in the quarter. We continue to cultivate and evaluate our funnel of M&A opportunities, and our combination of management team capability, low leverage and cash flow generation all support our ability to execute on the right M&A opportunity while at the same time entering adjacencies through investment and internal development. Todd mentioned it in his opening remarks, we exited the U.S. pension plan in the quarter. That eliminates an approximately $200 million liability and the related assets, and also eliminates the need for cash payments to support the pension plan on a go-forward basis. So a nice win for the team to remove that and exit the plan in the quarter. I'll turn the call back over to Todd. Todd Adams: Thanks, David. And I'm back on Page 6. We continue to make solid progress this quarter toward our sustainability goals, advancing initiatives that support long-term value creation really for our customers. You can see some of the highlights here. Beyond delivering 1.8 billion gallons of safer, cleaner filtered drinking water so far this year through our commercial bottle filling stations, and eliminating the need for 14.6 billion single-use plastic bottles, we're continuing to find new ways to bring our commercial-grade filtration to even more people. Many people assume their water is safe because it tastes fine or it comes from a trusted municipal source. But the reality is our sense can't detect contaminants like lead, forever chemicals and microplastics. And while the refrigerator or pitcher filters are convenient, most are only certified to improve taste and odor, not remove harmful contaminants. At Zurn Elkay, we've been tackling these challenges for years, protecting kids in schools, travelers in airports and employees in offices with our commercial-grade filtered bottle filling stations. Now we're bringing that same trusted technology into the home with our Elkay Liv built-in filtered bottle fillers. These sleek modern units complement any home design and deliver filtered water to every room, from home gyms and mud rooms to primary suites. Our newest Liv EZ models bring convenience anywhere there's a water line. No electricity, no drain needed. Just a wall, a water line and a couple of batteries. We're supporting this launch with a robust marketing effort, including influencer partnerships focused on families, health and DIY audiences, helping more people experience the benefits of cleaner, safer water right at home. David Pauli: Thanks, Todd. I'm on Slide 7. And similar to the data we've shared in the past, I'll provide an update on the market. As we look ahead to 2026, it's helpful to revisit some of the key indicators that shape our view of how the market will perform and what that means for our business. On the top of the page are 3 macro indicators that we track: the Dodge Momentum Index, Architectural Billing Index and construction backlogs. I'll talk through each of these. The Dodge Momentum Index measures the value in dollars of nonresidential building projects in the planning process against a baseline year of 2000. The index is meant to be a leading indicator for all future nonresidential construction spending, and therefore, it's generally used to monitor the future direction of construction spending. Think of the Dodge Momentum Index as a 9 to 12-month preview of what's likely to start. But also recognize that there's a lot of -- there's a lot in there: price, various end markets and geographies. Next is the ABI, which is a sentiment survey that tracks a cohort of partners of AIA member-owned architectural firms, whether their billing activity for the previous month grew, declined or remained flat. The way to interpret ABI is a score of 50 indicates a balance between positive and negative reports, while a score of 100 indicates all firms reported improvements. A rise in the index above 50 means that more firms reported an increase in demand for design services than reported a decline in demand. It's important to note that a rise in the index above 50 is not a direct measure of the rise in demand because the survey does not ask firms reporting stronger demand to quantify the level of increase in demand, nor does it provide information on the size of those firms. That being said, higher readings in the ABI generally coincide with growing demand. Finally, on the right, construction backlog, which measures the amount of work surveyed contractors have in their current backlog. In some ways, it's their lead time to taking on new business. And as you might expect, it's their best estimate, assuming no delays and consistent levels of staffing. All 3 of these metrics have a level of validity in them on how we think about the future. But as you know, our business is hyper-local, hyper-regional and it all varies by region, vertical. And other than the backlog reporting, there's limited certainty as to what's really going on in the ground level where the projects are actually happening every day. While the 3 macro indicators we just walked through on the top of the page were third-party data, the bottom section is specific to our business. On the bottom left, you can see how our portfolio of products participates across the full construction cycle, from the start of the job all the way through to finishing front-of-the-wall product 18 or so months later. Nonresidential construction is a complex ecosystem, coordinating multiple trades, supply chains, permitting and weather impacts. On average, projects take about 18 months from start to finish. And our portfolio is uniquely positioned across that time line. From flow systems early in the build, to water safety and control mid-cycle, and hygienic and environmental solutions and drinking water at the completion. With an understanding of how our products participate across the construction cycle, the other item to factor in is the lag effect. And this concept is illustrated in the chart on the bottom right. The lag effect shows how Dodge starts ultimately translate into Zurn Elkay sales. In a typical year, roughly 20% of our new construction revenue is tied to projects that started in that same year, while the other 80% reflects work initiated in prior years. I'll talk through this more a bit. Start with Q1 of 2026. Virtually all of our new construction sales come from starts that happened in 2025 and before. And by the time you get to Q4, current year 2026 starts will have about a 40% contribution to our sales. This lag effect, combined with the breadth of our portfolio, gives us visibility in the demand and confidence in the durability of our growth as we look into 2026. Moving to Slide 8. We have Dodge starts on a square foot basis, with actual starts data from 2023 and 2024 and then Dodge's projections out to 2028. The Dodge data in this slide and the next slide is the most recent report published by Dodge as of August 2025. We like to look at square footage because it strips out pricing, renovations and alterations, providing a clear view of the market-driven growth that underpins the roughly 55% of our business that comes from new construction. A couple of things I'll point out with the data. The Dodge data is separated between institutional and commercial end markets. For us, it's the majority of our revenue. The pie charts on the right-hand side shows the 2026 square footage starts by building type. And you can see that within institutional, education dominates the square footage at 40% of the total. And within commercial, warehouses are the largest building type at roughly 50% of the square feet starts. And the last item is just a caution, that focusing only on the headline Dodge starts growth for these categories can be misleading since the mix of education and health care within institutional, and warehouse within commercial, affects growth differently than how these segments are weighted within our own portfolio. Turn to Page 9. This is the same Dodge data in square foot terms now further broken down by our key verticals. As we highlighted last year, when reviewing the Dodge data, the resilience of our business over the past 20 years reflects in part our significant overweighting to the strong, stable segments within nonresidential construction. On the top left, the graph shows the education and health care vertical starts information for the same time period as the page before. These 2 verticals represent 60% of the entire institutional index within Dodge and 80% of our exposure to the institutional nonresidential construction market. Simply said, we're materially over-indexed to the strong, stable parts of the institutional nonresidential construction market. On the bottom left, this graph is for office, retail and hospitality verticals, again, same periods as the page before. With the conclusion being that these verticals represent only 30% of the overall commercial starts within Dodge, yet represents 75% of our exposure. When we focus on the building types that are critical to our sales, we see that both health care and education and retail office and hotel starts are projected to continue to increase in terms of square footage each year, with growth rates generally accelerating in the out years. While the starts data has evolved this year as events like tariffs have come into play and the projections around interest rates have continued to change, the level of construction starts remain strong. Ultimately, the Dodge data supports that our pure end market growth in 2026 should look a lot like what we just experienced in 2025, a low market growth environment. As you know though, beyond end market, we have other factors when we consider our outlook: growth within drinking water, our other key initiatives as well as price. We've shared this stat in the past, but as of this quarter, we have had year-over-year quarterly growth 55 out of the last 59 quarters. That's a 15-year track record of consistent growth. I'll turn the call back over to Todd. Todd Adams: Okay. Last one for me is on Page 10. And hopefully, most of you have seen this page before. But if not, it's been our simple and, we believe, effective way to depict how we think about and manage our business, leverage our operating philosophy and ultimately how we measure ourselves. And honestly, it's more than just a chart; it's exactly how we operate the company day in, day out. And even more importantly, inside the company, everyone can see how and where their impact is expected, creating great accountability and alignment throughout the organization. Beginning on the left, it starts with a relentless focus on the game we want to play. The choices here require discipline, and we've been very intentional and, I'll say, picky about getting this piece right. Because it's easy to drift and convince yourself that it's close enough to make sense, but having this filter, if you will, provides perfect clarity and avoids distractions or any strategic drift. It guides how we drive our strategy, beginning with our end markets, what we look for in terms of what geographies, competitive dynamics and characteristics, approach around our portfolio, and most importantly, our relentless focus on being a premier pure-play water business in North America. In the middle, we highlight that the glue to all of this is the Zurn Elkay Business System. It's our common language and deep culture of continuous improvement. It drives the manner in which we operate every day, everywhere and defines the capabilities we can leverage or, in some cases, need to build, while aligning all of our resources to drive organic growth, profitability and free cash flow. Finally, on the right, measuring our performance across all of our stakeholders: customers, shareholders, associates, and the impact we can have on a much broader scale through sustainability. At the end of the day, if we get all these facets within our business model, I'll say, right, or close to right, we end up building sustainable, competitive advantages, which we feel over time drive superior outcomes for all stakeholders. As we sit here near the end of 2025 and begin thinking about 2026, one thing I would call out or emphasize is that over the coming years, we intend to further sharpen our focus capabilities and resource investment on driving even more organic growth into adjacent categories. We feel more confident than ever that we're in a position to exploit our competitive advantage around driving specification, establishing robust supply chains and leveraging best-in-class go-to-market capabilities into adjacent markets with new, innovative products that we have a long track record of introducing into our core markets, which has led to the kind of organic growth record that Dave just talked about. So more to come on that in the coming quarters and years, but now I'll turn it back to Dave for the outlook. David Pauli: For the fourth quarter of 2025, we are projecting year-over-year core sales growth to be in the high single digits and we anticipate our adjusted EBITDA margin -- or our adjusted EBITDA to be between $99 million and $102 million. As a result, we are again raising our full year outlook for core sales growth, adjusted EBITDA and free cash flow. We now see core sales growth of approximately 8% for the full year, adjusted EBITDA in the range of $437 million to $440 million and free cash flow greater than $300 million. We've included our fourth quarter and full year outlook assumptions for interest expense, noncash stock compensation expense, depreciation and amortization, adjusted tax rate and diluted shares outstanding. I also wanted to provide an update on total tariff costs for the year. Last quarter we expected our tariff costs before any offsetting price for 2025 to be between $35 million and $45 million. As country-specific tariff rates were updated and new tariffs on copper came into play during the third quarter, we now believe our tariff cost impact on 2025 will be modestly higher and be approximately $50 million for the year. While the environment around tariffs continue to be a bit of a moving target, our team is confident that we can remain price/cost positive in the short and long term. Thanks, everyone. We'll now open the call up for questions. Operator: [Operator Instructions] Your first question comes from the line of Bryan Blair with Oppenheimer. Bryan Blair: Another very solid quarter. The Q3 market updates and outlook and framing of ZWS participation across the build cycle is helpful. With that in mind, has there been any meaningful divergence in the growth rates across legacy Zurn product categories over Q3 or into Q4? And then given the run rate market reads and the lag effect detail on the new construction side, can you offer any finer points on how your team is thinking about momentum into the first half of 2026? Todd Adams: Yes, Bryan. I mean first of all, I think we'll talk about '26 in '26. But when you look at many of our -- almost all of our core categories are experiencing solid unit growth on top of a little bit of market, on top of a little bit of price. And so I wouldn't say that there's been any significant change from maybe the second quarter. And I don't see any reason why that momentum changes as we head into the fourth quarter. Bryan Blair: Okay. Understood. I caught a bit of a play in words with the filter afforded by the Zurn Elkay Business System. With that said, maybe you can offer a little if there's an update on the reception of Elkay Pro Filtration, whether there'd been any surprises positive or otherwise in the early going? And then it would be great to hear more about the market opportunity with the Liv EZ line, and how impactful that launch might be to growth going forward? Todd Adams: Sure. I think as we highlighted last quarter, the introduction of the Pro Filtration was really significant in terms of taking a lot of the market feedback around ease of installation, the incremental filter capacity, along with the pre-sediment filters and a lot of those things. And so we've seen a really strong uptake right away. We expect that to continue. I mean if you can change it in 30 seconds or less and you can change it essentially once a year, I think these are things that were right at the heart of the feedback that we got as we were developing the product. And so really good -- I think a really good, solid start, but it's only a start. With respect to the Liv unit, we've had a, I would say, a more expansive Liv unit with a drain that required, I would say, higher levels of installation capability. This product was developed really to make it easy and do-it-yourself. And we're excited about it. I think it's just good exposure to begin to tap into a market that is not big. I mean this is not something that everyone is going to put in their home for a whole bunch of reasons. But we do think it's a nice extension of what we're doing, and it affords people the opportunity to gain the benefits that they get from using these filters when they're at school, when they're in the office, when they're in the airports, et cetera, you can get that same kind of quality water at home. And so I expect it to grow nicely, but I don't know that we're counting on this to be sort of a pillar of what our commercial drinking water offering is. It's something that we're excited about and I think the uptake on it will be pretty nice. Operator: Your next question comes from the line of Nathan Jones with Stifel. Adam Farley: This is Adam Farley on for Nathan. My first question is going to be around growth, and specifically volume expectations. So it sounds like there's a little bit of volume may be pulled forward into the third quarter. But you're guiding strong high single digits for the fourth quarter. So how should I think about volume in the back half? Todd Adams: Well, Dave, maybe you can clarify, but we saw good volume growth absent even this modest pull-forward in Q3. And we expect sort of the same as we go into Q4. I will tell you that I think that some of the pull-forward is essentially offset by, I would say, a little bit of incremental weakness in the residential market. And so when you look at it all the way through, I think the growth in Q3 is relatively high quality. And I think the way we're guiding Q4 is equal to that kind of momentum that we saw in really Q3 and for the second half. David Pauli: Yes. The only thing I'd add, Adam, is in the quarter we had a price increase late September, and so we saw customers order in advance of that. And so about $8 million was pulled from Q4 into Q3. If you look at where we've -- if you eliminate that from Q3 and look at where we've guided Q4 to, it's about the same. The unit volumes continue to grow nicely. Todd Adams: Yes. We don't communicate order rates. But if you go to the first 9 months of the year, the order rates in aggregate are a touch above 1. And I think we're sort of guiding to book-to-bill of about 1 in Q4. So nothing crazy. A little bit of choppiness from Q1 to Q2, Q2 to Q3, but I think when you get to the Q4 numbers, it sort of plains out and we're delivering to real live demand. Adam Farley: That's great to hear. Thanks for that additional detail. My second question is going to be around capital allocation. So increased the dividend, increased the share repurchase authorization. So what are the priorities going forward? Has anything changed? Should we maybe expect a little more share repurchase going forward? Any color there? Todd Adams: Yes. As we've done for a long time, we obviously generate significant amount of free cash flow. If you go way back, the objective initially was to reduce our leverage to a very comfortable zone, continue to invest in our core business, cultivate proprietary M&A opportunities, establish a dividend and then look at the value of our stock relative to what we think the intrinsic value of the company is. None of those things have changed. And so I think that we continue to generate significant amount of free cash flow. Our dividend yield, we've tried to leverage that cash flow to keep the dividend yield right around 1. We're in the process of looking at the next 3 years and determining what we think we can do and how that translates to where the current stock price is. I think we will be sort of steady repurchasers. And obviously, this gives us just incremental flexibility to the extent there's a larger dislocation for whatever the reason. So I don't think we're signaling anything new, just that over the last 3 years we've generated a ton of cash, we've increased the dividend, we bought back some shares and cultivated M&A. And I think that's what you should expect going forward. Operator: Your next question comes from the line of Mike Halloran with Baird. Michael Pesendorfer: This is Pez on for Mike. Maybe following up on Adam's question here, Todd. Maybe if you could provide a little bit more color on the M&A funnel. How has it changed over the last 12 months in terms of actionability, the pricing expectations? And then maybe if you would comment a little bit on the mix of hygienic and environmental versus drinking water. If we could just get a little bit more color on what you're seeing in the funnel and how that's evolved over the last 12 months. Todd Adams: Yes. I mean the funnel hasn't changed a bunch near the bottom. I think near the top of the funnel, some incremental things have come in, and we continue to cultivate those things. As far as valuations and actionability, it sort of -- it depends, right, depending on the fit, depending on where people are thinking. So I don't know that you're ever going to get us to talk about valuation because we look at M&A through the lens of what can we -- what kind of returns on invested capital can we generate at a particular value and the synergies we bring to the party. So I don't think much has changed in aggregate. There's been a handful of things that are in an auction process. Some modestly interesting, others not at all. So we continue to do the work, and I wouldn't characterize our funnel as unique to just drinking water. I think our flow systems funnel, I think our valving funnel, all those are equally important. And so it's broad. Not much has changed in the middle to the bottom. I would only say that the top of the funnel has gotten modestly larger really over the course of the last 12 months. Michael Pesendorfer: Got it. That's super helpful. And then maybe just on a more philosophical question, obviously, moving into residential drinking water with the Liv EZ product. Maybe could you tell us a little bit about how you think about your aspirations for drinking water on the residential application? Is there broader aspirations to get into residential drinking water? And is that something that can be developed internally? Is there something externally that might be interesting? Maybe just a little bit of thoughts on how you think about the opportunity within residential drinking water beyond maybe the Liv EZ product. Todd Adams: Yes. I wouldn't characterize our appetite to go into residential filtration as high. I think this is more of an extension of what we're already doing to a relatively small market that we have access to. So the technology -- it's an opportunity for us to try some design work, try some technology with speed, and I don't think you're going to see us wade into residential filtration in a meaningful way. I think this is more of an extension from what we're doing on the commercial and institutional side to a relatively small market that gives us the opportunity to test some things and learn. Operator: Your next question comes from the line of Andrew Buscaglia with BNP Paribas. Edward Magi: This is Ed on for Andrew. Another very strong margin quarter with high incrementals. Just wondering if you could speak to the consistent strong margin results and how to think where we can go from here off of these record levels? David Pauli: Yes. I mean I would say we've had consistent margin expansion. If you go back to when we merged with Elkay and just look at the quarterly progression each year, we've seen nice margin expansion. So started with delivering on the synergies, leveraging our Zurn Elkay Business System, the #CI improvements. So I think we're confident that the level that you're seeing is a new baseline in terms of where Zurn Elkay margins can be. I would just think about a more long-term view as 30% to 35% incrementals on volume. Edward Magi: That's helpful. And then just a follow-up here. You managed the tariff environment very well on the top and bottom line. Can you speak to the Zurn Elkay Business System and remind us why you would consider yourselves perhaps relatively -- in a relatively stronger position to navigate the tariff environment versus competitors? And yes, I'll leave it there. Todd Adams: Yes. I won't really speak to comparisons because I wouldn't want people speaking about us. I think what we did going on 5 years ago is think through the risks to our business and how we protect our service levels over a long period of time and developed a plan to primarily move our manufacturing supply chain partners out of China to other regions, including the U.S. And so over 50% of our COGS comes from the U.S. today, and by the end of next year, only about 2% to 3% will come from China. And so I think it speaks to that front end of what are we trying to do, what game are we trying to play, getting in front of it, doing the hard, long work to position ourselves. And as it turns out, no one, including us, would have predicted the kind of tariff environment that we saw beginning in April, but by starting well in advance, doing the long, hard work, I think it's positioned us really well, not only this year, but really for the long term. Operator: Your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. David Tarantino: This is David Tarantino on for Jeff. Maybe could you give us what price versus volume was in the quarter? And then maybe could you give us what you think the carryover pricing into next year will be based on the increases you've already taken to date? I think you highlighted another increase in 3Q. So do you think this supports another year of above-average price realization in 2026? David Pauli: Yes. So I think, David, to start, price realization in the quarter, we saw about 5 points of price in the quarter. I think we'll wait to provide 2026 price till we provide guidance. But I think the way to think about it is we've been deliberate with the pricing actions and how that has followed our cost. And so as we've seen incremental tariff costs, we put the right amount of price to be price/cost positive into the market. And so as we think about price next year, what I will say is think about it in terms of last year -- or this year, Q1 into Q2 had very little price and then you start to get to a run rate price here in Q3 and Q4. So more price in the first half than in the second half going into next year. And then we'll evaluate whether or not a 2026 price increase is necessary as we move forward here. David Tarantino: Okay. Great. And then maybe just to put a finer point on the 2026 commentary around the end market. It seems like this points to market growth in the low single-digit range. So any more color there would be helpful. And then how should we think about the outgrowth levers into next year between the key product lines both in and outside of drinking water? David Pauli: Yes. So our read of the Dodge data that we presented is really, from a pure market perspective, 2025 and 2026 looks a lot alike. And so that's a low-growth environment. If you look at where we think some of the levers are going on a forward basis, I would think about things like we've continued to see outperformance in drinking water. We've continued to see some of the other sales initiatives, whether that's in product categories like our water safety and control have outperformance, the new products that we've talked about, adjacent markets. And so there's a number of things as we look forward that we feel like we have the opportunity to outgrow the market. And so when we think about growth, it's market, price and then our initiatives. And if you put those together, that's how we think about our ability to grow. Operator: Your next question comes from the line of Brett Linzey with Mizuho. Brett Linzey: This is Brett Linzey on for Brett Linzey. Just wanted to come back to the Filter First and really wondering if you had a post-mortem assessment on year 1 of that program specific to Michigan. Are you able to quantify the contribution from those installments thus far? And any color on some of the share capture as part of that program? David Pauli: Yes. I would say we've done a really nice job in Michigan. There's about 1.5 million students in Michigan, and the law requires 1 bottle filler per 100 occupants. And so you can do some math on that, Brett, just to see how much the opportunity is. But I would say our team has done a nice job of capturing what we expected in terms of the Michigan opportunity, and it's still ongoing. And so this was the first year that schools actually were able to access the money from the state. The state set aside $50 million to accomplish Filter First, and it will continue into next year. And so while we saw a lot of schools comply with the law this year, there's still a series of schools that need to comply next year. I'd say also on the Filter First front, while not a Filter First fill, we did see New Jersey enact some legislation and release some funding that will help accomplish the same thing: allow schools to purchase filtered bottle fillers to eliminate lead and other harmful contaminants for students. So we spent some time in New Jersey over the last 90 days helping schools work through what their drinking water plans are and really just helping keep students safe in New Jersey and Michigan. Brett Linzey: Okay. Great. And then just back to Slide #8 and specific to the project cycle that you laid out, you illustrated the flow systems tends to lead. I guess has there been any discernable increase or inflection in those categories or that product segmentation that maybe informs you some of these areas like commercial are beginning to show some improvement? Todd Adams: Taken as a whole, our flow systems business has grown at or above the fleet average the entire year. So I think that portends I think the kind of market that we're talking about, which is relatively stable to low growth, at least for the near term, with the opportunity to accelerate moving forward. So I think from a leading indicator perspective, our flow system business has done well really over the course of the last 24 months. So I think we're monitoring all these things, but recognizing that we're sort of in a unique environment, to say the least. But we do find that that leading indicator is relatively encouraging for us. Brett Linzey: Congrats on the quarter. Operator: That concludes our question-and-answer session. I will now turn the call back over to Bryan Wendlandt for closing remarks. Bryan Wendlandt: Thanks, everyone, for joining us on the call today. We appreciate your interest in Zurn Elkay Water Solutions. And we look forward to providing our next update when we announce our fourth quarter results in early February. Have a good day. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corp. Third Quarter 2025 Conference Call. [Operator Instructions] This call is being recorded and will be available for replay shortly after its completion on the company's website at www.cpb.bank. I would like to turn the call over to Mr. Jayrald Rabago, Senior Strategic Financial Officer. Please go ahead. Jayrald Rabago: Thank you, Dustin, and thank you all for joining us as we review the financial results of the third quarter of 2025 for Central Pacific Financial Corp. With me this morning are Arnold Martines, Chairman, President and Chief Executive Officer; David Morimoto, Vice Chairman and Chief Operating Officer; Ralph Mesick, Senior Executive Vice President and Chief Risk Officer; Dayna Matsumoto, Executive Vice President and Chief Financial Officer; and Anna Hu, Executive Vice President and Chief Credit Officer. We have prepared a supplemental slide presentation that provides additional details on our earnings release and is available in the Investor Relations section of our website at cpb.bank. During the course of today's call, management may make forward-looking statements. While we believe these statements are based on reasonable assumptions, they involve risks that may cause actual results to differ materially from those projected. For a complete discussion of the risks related to our forward-looking statements, please refer to Slide 2 of our presentation. And now I'll turn the call over to our Chairman, President and CEO, Arnold Martines. Arnold? Arnold Martines: Thank you, Jayrald, and aloha to everyone joining us today. I want to begin by expressing our sincere gratitude for your continued interest and support of Central Pacific Financial Corp. We are pleased to report that our bank delivered strong results this quarter. We remain well positioned to pursue our strategic objectives while maintaining flexibility to navigate economic headwinds with a high-quality, well-capitalized balance sheet and strong liquidity. Our foundation is solid, and our focus is on exceptional customer experience, disciplined growth, sustainable profitability and long-term value for our shareholders. While Hawaii's economy is experiencing some softness in tourism due to U.S. trade policies, our market has historically proven resilient. Ongoing construction and military spending continue to provide meaningful support, helping to stabilize the local economy. This quarter, our results were highlighted by deposit and loan growth, margin expansion and the strategic consolidation of our operations center into our main headquarters, which positions us for improved collaboration among employees and future efficiencies. We also announced a strategic partnership with the Kyoto Shinkin Bank, strengthening economic ties between Hawaii and Japan's Kyoto region. This collaboration will create new opportunities for our small and midsized customers, enhancing growth prospects and reinforcing our commitment to supporting business development. At Central Pacific, our vision is to be a bank that people want to invest in, work for and partner with. For our employees, this means fostering a workplace where talent can thrive. For our customers, this means providing exceptional experience with safe, reliable and accessible financial solutions that help them achieve their goals. And for our shareholders, this means delivering consistent attractive returns, distributing income responsibly and building long-term value. Our governing objective is anchored in disciplined capital stewardship. Our strategy is focused on optimizing bottom line returns while maintaining a high level of liquidity and prudent levels of capital. We achieved this through thoughtful capital allocation, measured risk taking and ethical business practices. Operationally, we are building a resilient business model designed for steady returns rather than short-term gains. Our balance sheet strategy is focused on enhancing composition, improving risk-adjusted returns, shortening duration and increasing diversification across products and geographies. In essence, our focus is on 4 priorities: enhancing our products to better serve customers and capture growth opportunities, building the strongest team possible to execute our strategy effectively, strengthening the balance sheet to deliver durable profits and solid returns and growing the business prudently through disciplined programmatic strategies. We are confident that this approach positions Central Pacific for continued long-term success and value creation for our shareholders. With that, I'll turn the call over to David. David? David Morimoto: Thank you, Arnold. Our balance sheet growth strategy continues to focus on deepening customer relationships and increasing market share within our core Hawaii market. As expected, in the third quarter, we reported solid net growth with loans increasing by $77 million and deposits by $33 million. The Hawaii loan portfolio saw growth in commercial, commercial mortgage and construction loan types, which was offset by runoff in residential mortgage and home equity. The Mainland loan portfolio also saw solid growth in commercial mortgage and construction. While this quarter's growth was led by Mainland activity, we anticipate a more balanced contribution between Mainland and Hawaii markets moving forward. We continue to operate within our historical range of Mainland loans, maintaining 15% to 20% of total loans in that segment. Average yields on total loans increased 5 basis points to 5.01% compared with the prior quarter. Our loan pipeline remains healthy, and we continue to expect full year loan growth in the low single-digit percentage range for 2025. Deposit growth of $33 million brought total deposits to $6.6 billion, reflecting both business development wins and deposit stabilization following recent interest rate volatility. While period-end noninterest-bearing DDA deposits experienced normal fluctuations, we are pleased to see continued growth in average noninterest-bearing deposits. The average rate paid on total deposits remained steady at 1.02% as the Fed rate cut occurred late in the quarter. Overall, these results demonstrate the continued strength and resilience of our balance sheet and our commitment to disciplined growth and long-term value creation for shareholders. With that, I'll turn the call over to Dayna. Dayna Matsumoto: Thanks, David. In the third quarter, we reported net income of $18.6 million or $0.69 per diluted share. Excluding $1.5 million in onetime pretax office consolidation costs, adjusted net income was $19.7 million or $0.73 per diluted share. ROA was 1.01% and ROE was 12.89%, underscoring disciplined execution in the current environment. Net interest income rose 2.5% from the prior quarter to $61.3 million, and net interest margin expanded 5 basis points to 3.49%, primarily driven by higher average yields on loans. There was approximately $230 million in loan portfolio runoff in the third quarter. Our weighted average new loan yield this quarter was 6.9% as compared to our portfolio yield of 5.0%. The investment portfolio also has runoff of about $30 million per quarter, which we are currently reallocating to fund loan growth. We are not planning at this time to do any further material investment securities or loan portfolio restructuring as we believe our profitability is strong and will be further enhanced over time through ongoing repricing. For the fourth quarter, we are guiding to $62 million to $63 million in net interest income and a net interest margin increase of 5 to 10 basis points. Total other operating income was $13.5 million, up $0.5 million from last quarter, primarily driven by higher investment services income from the Wealth Management Group. There is some seasonality in the revenue from Wealth with the third quarter usually being strong. Additionally, BOLI income benefited again this quarter from favorable market movements. Our normalized fourth quarter guidance for total other operating income is $12 million to $13 million. Total other operating expenses were $47.0 million, up $3.1 million from the previous quarter. During the quarter, we recorded a net $1.5 million onetime expense related to the consolidation of our operations center, which included a $2 million write-off of fixed assets, partially offset by a lease accounting credit. Going forward, we expect to realize total annual savings from reduced lease operating and maintenance expenses of approximately $1 million. Additionally, salaries and employee benefits increased by $2.1 million due to higher incentive accruals and commissions tied to stronger production. Our guidance for total other operating expense is $45 million to $46 million, which anticipates similar levels of incentive accruals in the fourth quarter. During the third quarter, we repurchased approximately 78,000 shares at a total cost of $2.3 million, and we have $23 million remaining repurchase authorization as of September 30. Additionally, fourth quarter to date through October 27, we have repurchased about 127,000 shares at a cost of $3.7 million. The Board increased the fourth quarter dividend by 3.7% to $0.28 per share. The dividend is payable on December 15 to shareholders of record as of November 28. Finally, on October 1, we notified holders of our subordinated debt notes that we will redeem the full $55 million outstanding at par on the upcoming call date of November 1. The subordinated notes, which were fixed for the first 5 years at 4.75% would have repriced to floating rate at SOFR plus 456 basis points on November 1. Our current target CET1 ratio is in the range of 11% to 12% and our TCE ratio in the range of 7.5% to 8.5%. We plan to deploy our capital first by continuing our quarterly cash dividend with about a 40% payout ratio. Then our priority is to fund accretive loan growth and opportunistically continue share repurchases. Overall, we have a healthy capital position and are optimizing our capital structure to provide sustainable long-term value for our shareholders while continuing to maintain prudent capitalization levels to protect against downside macroeconomic scenarios. I'll now turn the call over to Ralph. Ralph Mesick: Thank you, Dayna. Our risk appetite is informed by our strategic goal of delivering acceptable risk-adjusted returns while maintaining a high level of solvency. We seek accretive growth, balance and diversification. Credit risk is measured and evaluated against expected results and established guidelines and limits. In the third quarter, we continued to maintain strong credit performance and asset quality. Credit costs stayed within an expected range and the level of NPAs, past due loans and criticized assets remained low. Net charge-offs were $2.7 million or 20 basis points annualized on average loans with consumer book losses continuing to trend downward. Nonperforming assets totaled $14.3 million or 19 basis points of total assets, down 1 basis point from the last quarter. Past due loans over 90 days decreased to $1.5 million, representing just 3 basis points of total loans. Criticized loans declined to 177 basis points of total loans, maintaining low levels. Provision expense for the quarter was $4.2 million. including $3.4 million added to the allowance and $0.8 million to the reserve for unfunded commitments. The decrease in provision expense was primarily driven by lower net charge-offs this quarter. We maintain a strong capital position to support the bank through the credit cycle and against additional impacts that could arise from periods of prolonged stress. At quarter end, our total risk-based capital was 15.7%. Looking ahead, we will continue to take a prudent approach to building our loan portfolio, one that considers a range of outcomes and builds margins of safety to protect against adverse conditions. Let me now turn the call back over to Arnold. Arnold Martines: Thank you, Ralph. In closing, our third quarter results reflect disciplined execution, strong profitability and prudent risk management in a dynamic market environment. I'm grateful to our employees for their dedication and innovation, which continue to drive our success. To our customers and shareholders, thank you for your trust and support as we execute our strategy and deliver long-term value. We are now happy to take your questions. Operator: [Operator Instructions] And our first question comes from the line of David Feaster from Raymond James. David Feaster: I wanted to start on the growth side. I appreciate some of your commentary, but I did want to get a sense of what drove the declines in loans in Hawaii? And what gives you confidence that growth on the islands accelerates? And then maybe just touching on -- in that conversation, some of the impacts of the government shutdown in the islands as well as opportunities to capitalize on some of the disruption as well across your footprint, too. Arnold Martines: Yes. Thanks, David. David Morimoto will take that question. David Morimoto: David, yes, again, we did see net growth in the Hawaii market in the areas that we expected. So that would be in construction, C&I and commercial mortgage. The net growth in those sectors were overcome by runoff in the residential, primarily the residential mortgage and the HELOC portfolios, which are 2 portfolios that have been under a little pressure as a result of the interest rate environment. With interest rates hopefully continuing to moderate, we are hopeful that we can see some reduction in the runoff in those 2 portfolios, and that would bode well for future Hawaii loan growth. In addition to that, we do have a healthy Hawaii loan pipeline. There are a number of deals in the pipeline right now. It's just a function of timing. There's a number of loans that are between the fourth -- closing in the fourth quarter and the first quarter. So we'll need to see how that plays out. But we're cautiously optimistic that forward loan growth will be more balanced between the Hawaii and Mainland markets. David Feaster: Okay. That's helpful. And then maybe touching on the expense side. I appreciate the color that you gave in the guidance. It's a bit higher than what we've been expecting. It sounds like there's some cost saves with that op center consolidation. I know a decent amount of its incentive accruals. But just kind of curious, as you think about the expenses, where are you investing today? I mean, are you seeing opportunities for new hires? Are there some other key investments that you guys are making? And just how do you think about your ability to drive positive operating leverage going forward? Arnold Martines: David, this is Arnold. Let me just maybe start, and then I'll turn it over to Dayna. Obviously, as you know, we have been investing in technology, harvesting some of the investments that we've made in the past to be able to drive efficiencies. So that continues to be an area where we focus in on. We have a few systems that we're putting in place today. That's going to create a lot of efficiencies for us and just creates better tools for our employees to be able to support our customers and drive our effectiveness. And then I think just generally speaking, we are very focused in the development of our people and looking at areas where we have gaps and building skill levels in order to execute on our strategies as we move forward. So there will be some investment in people for sure. And I appreciate that you brought that up because that's -- the people is going to help us execute on the strategies. So with that, kind of overall, I'll turn it over to Dayna for additional further comments. Dayna Matsumoto: Sure, sure. David, what I'll add is that managing expenses and our efficiency ratio continues to be a key focus of ours. This quarter, we were impacted by the onetime expense from our office consolidation, and this will create significant efficiencies going forward. Additionally, this quarter, as we had greater revenue, we needed to increase our incentive and commission accruals. This is a good thing. Our objective continues to be driving our efficiency ratio to the high 50% range and mid-50s over time, and we plan to achieve this through consistent revenue growth while we continue process automation and greater use of technology. David Feaster: Okay. That's helpful. And then hoping you could maybe touch on the deposit side of the equation and what you guys are seeing there from a competitive landscape, some of the core deposit growth initiatives that you've got in place? And just how do you think about your ability to -- we just got another Fed cut, right? How do you -- just given the competitive landscape, how do you think about the ability to pass through some of these and reduce deposit costs with Fed cuts? David Morimoto: David, it's David again. Yes, on the deposit growth, again, we're cautiously optimistic. The fourth quarter is going to be a little more challenging of a quarter because we do have some known outflows. So I think we're striving to probably keep deposit growth relatively flat year-over-year. So on a full year basis, whereas we were guiding to low single digit, I think right now, it's probably more flattish as a result of what we know at this point in time on the fourth quarter. Having said that, we are optimistic on 2026. We do think we can drive towards low single-digit deposit growth in 2026. And the strategies there are -- it's the same strategies that we have been deploying probably with just a little more rigor going forward. So it is the blocking and tackling of banking. And we are seeing success in the Hawaii market with those efforts. And then we also are optimistic on Asia. We continue to have initiatives in Japan and Korea, and we're hopeful that those strategies will continue to gain traction in 2026. Operator: Our next question comes from the line of Matthew Clark from Piper Sandler. Matthew Clark: Just on the -- starting on the margin, interest-bearing deposit costs up a couple of bps, but the NIM guide implies -- you're calling for NIM expansion. So my sense is those costs have rolled over. Do you have the spot rate at the end of September on interest-bearing deposits? Dayna Matsumoto: Matthew, it's Dayna. The spot rate on -- I have it on total deposits at 9/30, it was 100 basis points. And if you're also looking for the September month-to-date margin, that was 3.51%. So we continue to feel like it's moving in the right direction. Matthew Clark: Got it. Okay. Great. And then you're going to get a 2-month benefit from redeeming the sub debt. When you strip out the sub debt, it implies the rest of your long-term debt costs are about $623. Can you remind us of the duration of that long-term debt that's left? And I just want to try to forecast the rate. Dayna Matsumoto: Sure. Matthew, we just have one $25 million FHLB advance outstanding, and it matures in February of 2028. Matthew Clark: Okay. Got it. Maybe there's some repos in that number. Okay. And then just on the -- do you happen to have the -- or just on the loan growth this quarter, the Mainland piece, the CRE and construction. Maybe if you could just provide some color on what you originated this quarter. I assume it's all participations and just an update on the size of the SNC portfolio. David Morimoto: Matthew, it's David. I'll start off on the Mainland part of the question, and then I'll turn it to Dayna for -- Dayna or Ralph on the SNC details. But what we saw in the third quarter is growth in the industrial and multifamily sectors. That's for both the multifamily -- I'm sorry, the commercial real estate and the construction portfolios. So they were in the industrial and multifamily sector. And then maybe just to take a step back on the Mainland lending strategy. What I will say is that Hawaii will always be our core banking market. Having said that, CPF has always had some loan exposure on the Mainland, and that's really due to some structural factors with the Hawaii banking market. the Hawaii banking market has always been characterized as having more deposit balances relative to good lending opportunities. And a lot of that has to do with Hawaii being largely a service-based economy without large manufacturing. And due to those structural factors, that's why we always have had a portfolio on the Mainland. Mainland lending provides CPF with geographic diversification, shorter duration assets and attractive risk-adjusted returns. But having said all of that, the third quarter was -- the growth was largely -- net growth was largely driven by the Mainland. What we'll see going forward is very much based on opportunities. It will fluctuate between Hawaii dominant growth versus Mainland dominant growth based on opportunities in that particular quarter. Matthew Clark: Great. And then just maybe on the SNC exposure at the end of the quarter. Ralph Mesick: Yes. This is Ralph. The total SNC exposure for the bank is around $526 million. And how that breaks out is Mainland CRE is about $190 million. And then Mainland corporate lending, which is really sort of the large syndicated -- broadly syndicated loans, that's around $144 million. And that's been coming down over the past year. Matthew Clark: Okay. That's helpful. And then the last one for me, just on the special mention and substandard balances, where those stood at the end of September. Ralph Mesick: Yes. From a balance perspective, let's see. Special mention was $34.3 million. Classified was $62.1 million. So relatively flat from the prior quarter. And in general, I think we had mentioned on the last call, we have a couple of large credits that probably represent about a little over half of that. Both of those loans are secured. They're performing loans. We've done individual sort of assessments. We would expect no loss in the event that they did default, but they are performing and our expectation is that they'll continue to perform. The sponsors have, I think, meaningful equity invested in these projects. And I think they're very committed to working through the situations that they're facing today. Operator: Our next question comes from the line of Kelly Motta from KBW. Kelly Motta: I was hoping to circle back to the expense side to David's question on compensation. You had mentioned some of that increase was related to step-up in bonus accruals. I'm just wondering how much of that, call it, $2 million was related to that. I appreciate the guidance about Q4, but just trying to get a good run rate as we kind of start the year next year. Dayna Matsumoto: Kelly, it's Dayna. Of that $2.1 million, about $1.5 million was related to the incentive accruals. Kelly Motta: Okay. That's super helpful. And then I appreciate the new color on capital targets. It looks like you're currently within the range on TCE and above on CET1. Kind of wondering how you guys are thinking about this level here. Does that imply potentially some more capital return? And given your outlook for balance sheet growth, it would seem that absent maybe more aggressive buybacks that would build. So wondering how you guys are kind of thinking about managing that and kind of the intermediate-term trajectory of capital levels. Dayna Matsumoto: Kelly, let me start off by saying that our target range, it considers a number of factors. First is our debt rating agency expectations. We also further maintain a level to protect against potential downside macroeconomic scenarios. And really, at this point in the cycle, we believe this is prudent. We also regularly perform capital stress tests, and those results are considered in our decisions. So with that said, we are currently slightly above our target range for CET1, and we are taking a more proactive but still prudent approach to capital return. So as I mentioned in the remarks, the priority is first for loan growth, and we are well positioned to support loan growth. We do plan to also continue share repurchases. The level and extent of those share repurchases will be a function of where the loan growth is and where the market is. Kelly Motta: Okay. That's helpful. I guess kind of given this low single-digit outlook, like what would -- as we look to next year, make you more confident with the loan growth stepping up to kind of deploy more of that CET1 into that range? Arnold Martines: Kelly, this is Arnold. I think we -- all of us are expecting that rates are going to decline, and we believe that there's pent-up demand, particularly in Hawaii, the Hawaii market. People are on the sidelines waiting for rates to decline. And so we're pretty confident from the standpoint that assuming rates decline, we are going to see more demand for loans. And so therefore, we believe that if that happens, that's going to be where we're going to focus capital on. That's the most accretive for the company, for our shareholders. But we'll adjust as we move forward and we see how the market opens up and what the opportunities are. Kelly Motta: Got it. That's helpful. Last question for me. It looks like you have a new Japanese bank partner. Just if you could remind us about the potential opportunities that you see leveraging now your third relationship that you have with the bank over there. Arnold Martines: Yes. Thanks, Kelly. This is Arnold. Yes, we're really excited about it. It's something that we've been working on for a little bit. We have a couple of other relationships in Japan, but we didn't have any one in the Kansai area, the Kyoto region, but also includes neighboring areas like Osaka and Kobe. And as you know, we have -- given our history and the ties that we have with Japan, starting with Sumitomo Limited, when we first started -- when the bank was first founded, those relationships are important. And we have a lot of business of Japanese corporations that have operations in Hawaii. So we believe the Kyoto region was an area where we didn't have a relationship with, and we're excited that we can now kind of move forward and hopefully facilitate our customers working together to create economic opportunities maybe in Hawaii, but also maybe in the Kyoto region. Operator: There are no further questions. I will now turn the call back over to Jayrald Rabago for closing remarks. Jayrald Rabago: Thank you, Dustin, and thank you all for joining our third quarter 2025 earnings call. We appreciate your continued engagement and look forward to updating you on our progress next quarter. Operator: The meeting has now concluded. Thank you all for joining. You may now disconnect.
Operator: Ladies and gentlemen, good day, and welcome to the Q2 H1 FY '26 Earnings Conference Call hosted by Larsen & Toubro. [Operator Instructions] I now hand the conference over to Mr. P. Ramakrishnan from Larsen & Toubro. Thank you, and over to you, Mr. Ramakrishnan. Parameswaran Ramakrishnan: Thank you, Ruthuja. Good evening, ladies and gentlemen. A warm welcome to all of you into the Q2 H1 FY '26 Earnings Call of Larsen & Toubro. The earnings presentation was uploaded on the stock exchange and in our website around 6:20 p.m. Hope you had a chance to take a quick look at the numbers. I will first walk you through the important highlights for Q2 FY '26 in the next 20 to 25 minutes or so, post which we will take questions. Kindly note that when the Q&A session starts, I will also have with me our Deputy Managing Director and President, Mr. Subramanian Sarma. Before I begin the overview, the disclaimer from our end, the presentation, which we have uploaded on the stock exchange and our website today, including the discussions we may have on the call today may contain certain forward-looking statements concerning L&T's business prospects and profitability, which are subject to several risks and uncertainties, and the actual results could materially differ from those in such forward-looking statements. I would request you to go through the detailed disclaimer, which is available in Slide 2 of our earnings presentation that we have uploaded today. I will start with a brief overview on the economic conditions in India and the Middle East, which are key markets for the company, especially for the Projects and Manufacturing businesses. The country that is India's economic outlook continues to remain optimistic. The domestic conditions are favorable with GDP growth for FY '26 projected between 6.5% to 7%, largely driven by retail consumption resilient services sector and steady CapEx. The new private sector capital expenditure plans are also being driven by increased investments in manufacturing, renewables, real estate, digital infrastructure and power generation projects, even as the public infrastructure continues at a steady pace. The economic growth in the Middle East is expected to remain stable, supported by a rebound in oil output, controlled inflation and continued diversification into non-oil sectors. However, flat oil revenues as lower prices offset the higher production may lead to a renewed focus on efficient and prioritized spending. Countries in the region are increasingly prioritizing natural gas and renewables over oil for domestic power generations as part of their long-term economic diversification strategy. This shift supports their transition to cleaner energy while enabling higher oil exports and greater value capture through petrochemicals production. Having covered the macro landscape, let me share some few important highlights for the quarter. The L&T's onshore and offshore hydrocarbon businesses have secured each ultra mega orders in the Middle East. The onshore order involves the setting up of a natural gas liquids plant and allied facilities, while the offshore order involves multiple packages, including EPC, installation of offshore structures and upgradation of existing facilities. During the quarter, we have entered into strategic MOUs and partnerships across our renewables, green energy, defense and semiconductor businesses, strengthening the foundation for our future growth. The renewables business within the Infrastructure segment has entered an MOU with ACWA Power for the renewables and grid scope of the Yanbu green ammonia project in Saudi Arabia. The scope involves multiple facilities, including solar photovoltaic, wind and battery energy storage system plants, along with associated substations and transmission lines. The cooperation involves a commitment from L&T to enter an EPC contract once the final proposal is accepted. L&T Greentech Limited, a wholly owned subsidiary has entered into a joint development agreement with ITOCHU Corporation of Japan to develop and commercialize a 300 KTPA green ammonia project at Kandla in Gujarat. Under the agreement, L&T Energy Greentech and ITOCHU will collaborate on the development of the facility with ITOCHU planning to offtake the product for bunkering applications in Singapore. The company has formed a strategic partnership with Bharat Electronics to support the AMCA program of the Indian Air Force. The consortium has submitted an expression of interest in response to a notification issued by the Government of India's Aeronautical Development Agency. L&T Semiconductor Technologies, another wholly owned subsidiary, acquired the power module design assets of Fujitsu General Electronics of Japan. As part of the transaction, the semiconductor company has acquired Fujitsu's R&D equipment, design patents and various intellectual properties related to power module technologies. Additionally, the semiconductor subsidiary has signed an MOU with the Indian Institute of Science Bangalore to jointly develop a national 2D innovation hub. The envisioned hub will serve as a world-class facility focused on next-generation semiconductor innovation beyond silicon chip technologies, placing the country at the forefront of global semiconductor research and development. Besides this, the company has reached an in-principle understanding with the government of Telangana, wherein the government will take over the Hyderabad Metro SPV by refinancing the current debt and acquiring the entire equity stake in L&T Metro Rail Hyderabad Limited. The contours of the final agreement are being finalized, and we expect this transaction to get consummated by the end of the current fiscal FY '26. The company has secured a sustainability-linked trade finance facility from a commercial bank worth USD 700 million. The facility is aligned with international sustainability standards and ties its terms to the KPIs such as greenhouse gas emission intensity and freshwater withdrawal, which are critical to L&T's operations. I will now cover the various financial performance parameters for Q2 FY '26. We continue to witness strong ordering activity in Q2 FY '26 across India and the Middle East, with order inflows growing 45% Y-on-Y. Supported by this sustained momentum, the order book expanded to INR 6.67 trillion as of September 2025, reflecting a 31% Y-on-Y increase and providing a strong revenue visibility in the near future. Our group revenues grew 10% Y-o-Y in Q2 FY '26. The execution levels remain broadly in line with expectations, barring a few sector-specific challenges. The Projects & Manufacturing portfolio margin improved from 7.6% in Q2 of the previous year to 7.8% in Q2 FY '26. As of September 2025, the net working capital to revenue ratio remained healthy at 10.2%, an improvement of almost 200 basis points Y-on-Y. Our continued emphasis on capital efficiency also translated into a further improvement in the return on equity, which rose to 17.2%, up 110 basis points Y-o-Y. I now move on to the individual performance parameters. During the quarter, the group order inflow stood at INR 1,158 billion, registering a Y-on-Y growth of 45%, reflecting the continued traction across our key businesses. Within this, the Projects & Manufacturing, that is the P&M portfolio delivered a strong performance with order inflows of INR 968 billion, up 54% Y-on-Y, underscoring the broad-based demand environment across both domestic and international markets. The growth in the P&M portfolio was broad-based with domestic order inflows growing 40% Y-on-Y and international inflows up 62% Y-on-Y. The order inflows during the quarter were driven by strong activity across hydrocarbon, buildings and factories, heavy civil and the renewable subsegments. During the quarter, the share of international orders in the P&M portfolio stood at 65% as compared to 62% in the Q2 of the previous year. Moving on to the prospects pipeline for the near term. We have an overall prospects pipeline of INR 10.4 trillion vis-a-vis INR 8.1 trillion at the same time last year. This represents an increase of 29% on a Y-on-Y basis. The increase in the prospects pipeline is mainly led by infrastructure and hydrocarbon segments. The broad breakup of the overall prospects pipeline for the near term is as follows: Infrastructure, INR 6.50 trillion vis-a-vis INR 5.42 trillion last year, representing an increase of 20%. Hydrocarbons, INR 2.93 trillion vis-a-vis INR 2.25 trillion last year, representing an increase of 30%. Carbon Light Solutions, the prospects pipeline as of September '25 is INR 0.46 trillion as compared to INR 0.24 trillion last September 2024. The green and clean energy opportunities aggregate to INR 0.18 trillion as compared to INR 0.01 trillion last year. The increase is primarily because of gas to power-related opportunities outside of India. The Heavy Engineering and the Precision Engineering Systems, which aggregate to what we call the Hi-tech Manufacturing segment, the order prospects as of September '25 is at INR 0.31 trillion as compared to INR 0.16 trillion last year. Moving on to the order book. The order book as of September 2025 stands at INR 6.67 trillion, up by 31% as compared to September '24 last year. The Projects & Manufacturing order book has a balanced geographic mix with 51% of the order book coming from domestic markets and 49% from outside India. Out of the international order book of INR 3.27 trillion, around 84% is from Middle East and the balance 16% is from other parts of the world. The client-wise composition of the domestic order book of INR 3.4 trillion as of September '25 is as, central government constitutes 14%, state government and local authorities, the order book share is 24%, public sector corporations 32% and the private sector composition is at 30%. As you may note, the share of the private sector in our domestic order book has increased from 21% as of March '25 to 30% as of September '25. This growth reflects improved activity in the residential and commercial real estate, power generation and data storage solutions as well as the minerals and metals sector. Approximately 12% of our total order book of INR 6.67 trillion is funded by bilateral and multilateral funding institutions. Again, 91% of our total order book is from infrastructure and energy. You may refer to the presentation slides for further details. No major orders were deleted during the quarter. And as of September, the share of slow-moving orders is around 3%. Coming to revenues. The group revenues for Q2 FY '26 at INR 680 billion registered a Y-on-Y growth of 10%. The international revenues constituted 56% of the revenues during the quarter. The strong execution momentum in the Energy and Hi-Tech Manufacturing segments drove the overall group revenue growth for the quarter, while execution in the Infrastructure Projects segment was a little subdued during the quarter. Within the overall group revenue, the P&M businesses recorded revenue of INR 490 billion for Q2 FY '26, marking a 10% growth over the corresponding quarter of the previous year. Moving on to EBITDA margin. The group level EBITDA margin without other income for Q2 FY '26 is 10% as compared to 10.3% in Q2 of the previous year. The decline in EBITDA margin is primarily due to the margin compression in our IT&TS segment. The detailed breakup of EBITDA margin business-wise, including other income, is given in the annexures to the earnings presentation. Our EBITDA margins in the P&M business portfolio has improved from 7.6% in Q2 FY '25 to 7.8% in Q2 FY '26. The segment-wise EBITDA percentages will be shared in detail during the discussion on the segment performance. Our consolidated PAT for Q2 FY '26 at INR 39 billion is up by 16% as compared to Q2 of the previous year. The increase in PAT is reflective of improved activity levels and efficient treasury management. The group performance, the P&L construct, along with the reasons for the major variances under the respective function heads is provided in the earnings presentation. You may go through for further details. Coming on to working capital. Our group NWC to sales ratio has improved from 12.2% in September '24 to 10.2% in September '25, mainly due to an improvement in the GWC to sales ratio backed by strong customer collections during the last 12 months. Our group level collections, excluding Financial Services segment for Q2 FY '26 is INR 600 billion as compared to INR 620 billion in Q2 of the previous year. The year-on-year dip is primarily timing related as we had witnessed a very strong collection growth in the first quarter of the current financial year. With the continued focus on customer collections, our cash flow from operations, excluding Financial Services segment between April to September 2025 is at INR 106 billion as compared to INR 61 billion in H1 of the previous year. We have added a slide on group cash flows, excluding L&T Finance in the annexure alongside the reported cash flow slide to give more clarity on the cash flow performance. Finally, the trailing 12-month ROE for Q2 FY '26 is 17.2% as compared to 16.1% in Q2 of the previous year, an improvement of 110 basis points. Very briefly, I will now comment on the performance of each business segment before we give our final comments on our outlook for the remaining part of FY '26. The first would be infrastructure. The segment order inflow grew 6% in Q2 FY '26 on a Y-on-Y basis, driven by strong domestic private sector demand spanning residential, commercial buildings, airports, data centers, pump storage projects, ferrous and nonferrous facilities, solar PV manufacturing plants and semiconductor fab facilities that were witnessed during the quarter. These together account for nearly 60% of the domestic orders for the quarter. Like I mentioned earlier, our order prospects pipeline in infra for the near term is around INR 6.50 trillion as compared to INR 5.42 trillion during the same time last year, representing an increase of 20%. The infra prospects pipeline of INR 6.5 trillion comprises of domestic prospects of INR 4.25 trillion and international prospects of INR 2.25 trillion. The subsegment breakup of the total order prospects in infra segment is as, the share of transportation infrastructure is 21%; Heavy civil infrastructure is 16%; water and affluent treatment, 15%; Power Transmission and Distribution, 14%; Buildings and Factories, 13%; Renewables at 11% and Minerals & Metals at 10%. The order book of this segment is at INR 3.95 trillion as of September '25 with the execution period around 3 years. The revenues for the quarter in the Infrastructure segment registered a marginal decline of 1% Y-on-Y, largely attributed to an extended monsoon season and slower progress in the rural water supply projects, which continue to face sector-specific challenges. In addition, a few large renewable projects are in the initial execution phase. Our EBITDA margin in the segment was at 6.3% in Q2 FY '26 as compared to 6% in Q2 FY '25. The margin uptick has been driven by improved execution efficiency. Moving on to the next segment, which is Energy Projects, which comprises of hydrocarbon and carbon light solutions. The order inflows in this segment were robust at INR 382 billion in Q2 FY '26 as compared to INR 78 billion in Q2 FY '25. The segment order book was helped by receipt of ultra mega orders across onshore and offshore verticals of the hydrocarbon business in the Middle East. We have a strong order prospects pipeline of INR 3.57 trillion for the segment in the near term, comprising of hydrocarbon prospects of INR 2.93 trillion, carbon light solutions of INR 0.46 trillion and the clean energy prospects of INR 0.18 trillion. The hydrocarbon prospects remain predominantly international with approximately 93% of the opportunities is overseas, while carbon light solution prospects are primarily domestic and clean energy is largely driven by gas to power opportunities. The order book of the Energy segment is at INR 2.14 trillion as of September '25 with the hydrocarbon order book at INR 1.66 trillion and carbon solutions -- carbon light solutions at INR 0.48 trillion. The Q2 FY '26 revenues for the segment at INR 131 billion registers a robust growth of 48%, driven by the execution ramp-up in international hydrocarbon projects and commencement of execution in the carbon light solution orders secured in the recent past. The Energy segment margin in Q2 FY '26 is at 7.3% vis-a-vis 8.9% in Q2 of the previous year. The margin decline for the quarter in the hydrocarbons business was primarily due to cost overruns in some few domestic and international projects. These projects are in the final stages of execution and are expected to conclude over the next few quarters. We do anticipate soft margins in the segment to persist in the near term. As already communicated during our Q1 FY '26 earnings call, this is factored into our FY '26 P&L margin guidance. The Carbon Solutions margin improvement benefited from a favorable customer claim. The Clean Energy businesses within the Energy segment is in the incubation stage and is yet to meaningfully contribute to the segment numbers. We will now move on to the Hi-Tech Manufacturing segment, which primarily comprises of Precision Engineering Systems and the Heavy Engineering business. The lower order inflow in Q2 FY '26 is to order deferrals in both the businesses. The order book of the segment is INR 391 billion as of September '25 with the Precision Engineering order book at INR 328 billion and the Heavy Engineering order book at INR 62 billion. Our order prospect pipeline for the near term in this segment is around INR 315 billion, comprising of INR 251 billion of precision engineering prospects and the remaining INR 64 billion from the Heavy Engineering business. The segment revenue at approximately INR 28 billion registered a strong growth of 33% Y-on-Y with robust execution momentum across both the businesses. During the quarter, operational efficiencies aided margin improvement in Heavy Engineering, while lower margin in PES, that is the Precision Engineering Systems, is largely reflective of larger share of early-stage jobs and costs incurred on certain development projects. Moving on to the next segment, IT and Technology Services, which comprises 2 listed entities, LTI Mindtree and LTTS and as well as our newly incubated business of digital platforms, data centers and semiconductor design. The revenues of this segment at INR 133 billion in Q2 FY '26, registered a growth of 13%. The segment margin variation vis-a-vis previous year is largely due to the subdued margins in LTTS and costs incurred towards the newly incubated businesses. I will not dwell too much on the segment as both the companies in the segment are listed and the detailed fact sheets are already available in the public domain. We move on to L&T Finance Limited. Here again, the detailed results are available in the public domain. But to sum up, Q2 witnessed -- Q2 for L&T Finance witnessed the highest ever quarterly retail disbursement and improved collection efficiency. The Financial Services business achieved 98% retailization of its loan book in September '25, well ahead of its Lakshya 2026 targets. The ROAs remain healthy at 2.4% for Q2 FY '26 and adequate capital is available on the balance sheet to pursue growth in the medium term. Moving on to Development Projects segment, which primarily includes Nabha Power and Hyderabad Metro. The higher average fares post the fare hike that we did in the current year has led to the revenue growth and margin improvement of Hyderabad Metro. The average fare per passenger has increased from INR 38 in Q2 FY '25 to INR 46 in Q2 FY '26. The average ridership during the quarter was at 4.39 lakh passengers per day as compared to 4.68 lakh passengers per day in the same period of the previous year. At the PAT level, the Metro -- Hyderabad Metro posted a loss of INR 1.75 billion in the current quarter as compared to a loss of INR 2.07 billion in Q2 of last year. As I stated earlier, we have reached an in-principle understanding with the Government of Telangana, where the government of Telangana will take over the debt and the equity of L&T from the concerned SPV, which is L&T Metro Rail Hyderabad. The EBITDA margin of this segment was impacted by a litigation-related provision in respect of Nabha Power. Moving on to the others or the last segment. This segment comprises Realty, Industrial walls, construction equipment and mining machinery, rubber processing machinery and the residual world -- residual portion of the Smart World business. The segment witnessed healthy order inflow growth driven by higher presales in the Realty business and increased orders in the construction equipment business. The segment revenue at INR 14.2 billion declined by 14% Y-on-Y, primarily driven by the lower handover of residential units in the Realty business. The segment margin improvement was primarily due to sales of commercial space in the Realty segment. We have given the segment breakup between Realty and other businesses within the segment as part of our annexures in the presentation. Before I conclude, let me cover the guidance on the various parameters for FY '26. Order inflows. We witnessed a strong ordering momentum in H1 of the current financial year, and we see a robust prospects pipeline for the near term. We are confident of exceeding our full year FY '26 guidance of 10% growth in group order inflows for the current year. As we speak, we are also well placed to secure a few ultra mega opportunities. On revenue, the group revenue grew by 13% in H1 FY '26, in line with our expectations. As highlighted during the Q4 FY '25 earnings call, we expect a stronger revenue visibility in the second half of the fiscal year, driven by a ramp-up in the execution. Accordingly, we maintain our full year revenue growth guidance at 15%. Coming to the EBITDA margin for the P&M business. As you may have seen, the EBITDA margin for the P&M business has improved by 10 basis points in H1 FY '26. With the execution momentum expected to pick up in H2, we are reasonably confident to achieve our full year EBITDA margin target of 8.5%. On working capital, our guidance for working capital for FY '26 remains unchanged at around 12% by March 2026. With this, I conclude. Thank you, ladies and gentlemen, for the patient hearing. We can now begin the Q&A part of the call. In the interest of time, I would encourage all the participants to stick to the broader questions on strategy and outlook to take full advantage of the presence of our Deputy Managing Director and President, Mr. Subramanian Sarma. The bookkeeping questions can be taken up by the IR team at a suitable time. Thank you. Operator: [Operator Instructions] The first question is from the line of Mohit Kumar from ICICI Securities. Mohit Kumar: My first question is, sir, as per media, it seems we are quiet ahead in Kuwait in large projects. Is it possible to help us with the prospect pipeline and the sustainability of these prospects in the country from the medium-term perspective? Subramanian Sarma: Yes, Sarma here. Good evening, all of you. You're right. I think this was a public opening. So we are -- have an L1 position on 3 of the bids we have submitted out of 5, I think, adding up to about $4.5 billion. We'll have to see how the whole process now moves on in terms of budget allocation, but we are kind of optimistic that they should be able to get the extra funds because all these prices are -- though we are L1, the prices are above the budget. So they are completing their process for getting additional funding. And that should get done by this quarter or maybe latest by next quarter. And hopefully, this should come through. We are hoping for that. What was the other question? Yes. I mean I think the overall -- in terms of opportunities, the pipeline looks strong in terms of what is available in Saudi, in Qatar and Kuwait and also the joint operation of [indiscernible]. And also, there are a lot of opportunities coming in UAE. So we are quite bullish on Middle East now for the time being. Mohit Kumar: Yes. My second question is, sir, of course, the rising order book in Middle East. What are the execution challenges while sustaining the profitability? Are you with any big order book which you think of the level at which we have -- we don't have to worry about the resource mobilization? Subramanian Sarma: No, you don't need to worry because we worry about the order book in terms of our risk exposure. We have a very good robust system here internally. Mr. Shankar Raman and the team and Govindan and team, we have a very strong risk management system. They interrogate all the businesses in terms of country exposure and geopolitics, et cetera. So we have strong system there. And we are very cognizant of that in terms of what is our exposure. Our experience has been good. The customers are paying well. All these companies are national oil companies. They have a reasonably good cash flow, and we have not seen any payment risk. The commercial terms and conditions, what is available in the contracts are quite reasonable, acceptable, pretty balanced. And the execution risks are more or less same as what we have been having experiencing in the past and historically, I mean, in the sense that we have to be sort of aware of the supply chain constraints and logistic constraints and local work availability. I think we have overcome many of those through having strategic partnership at the time of bidding and negotiating some of the critical high-value orders during the bidding and back-to-back contracts and things like that. So we know the market, we know the risk and we have a plan to mitigate those risks. So by and large, I would not be too concerned about [indiscernible]. Mohit Kumar: Understood. My last question, sir, as the media we are looking to invest in electronic manufacturing services. Can you please explain the kind of investment within the EMS is interesting to us and the expected investment and the market potential? Parameswaran Ramakrishnan: So Mohit, I will take that. We are in a way, we have a Precision Electronics part as a small sub item under our Precision Engineering business, and we have a unit in Coimbatore. As part of our Lakshya L31 strategy, we are seriously looking into expanding the electronic part of our L&T's portfolio. Various options are being explored, including the need to set up units in some parts of the country. At this juncture, it's a little premature for us to comment on the extent of investments and which areas we will be covering. Kindly wait maybe in sometime, in May '26, once we complete our financial results and we are ready with our stat plan for L31, we will be in a position to possibly give you a more greater detail of the future business prospects and the investment potential, along with the opportunities insofar as this business is concerned. Operator: [Operator Instructions] The next question is from the line of Mohit Pandey from Citi Group. Mohit Pandey: Sir, my question is on the Infrastructure segment. So when you mentioned execution pickup into it, is it safe to assume infrastructure execution also has been seen as picking up? And associated question is on margin. So this quarter despite revenue decline, there has been 30 bps of margin expansion in infra. So safe to assume that is sustainable because that looks driven by execution efficiencies? And also you mentioned a sizable jump of incremental orders have been via private sector. So what could that mean for margins? And are these generally lower generation compared to a non-private sector orders in the infrastructure? That would be my question. Parameswaran Ramakrishnan: So thank you, Mohit. I think you were asked to ask 1 question. You asked 4 questions now. Okay. I'll take one by one. So the infra revenue, there has been a sort of -- infra revenue has been stagnant for Q2 of the current year. Having said this, one of the main reasons, as I explained, was because of extended monsoon across many parts of the country that affected the pace of execution. And secondly, and this I have mentioned in the Q1 earnings call also that because of the payment-related issues with respect to certain projects in the water and affluent treatment segment, we have slowed down execution, okay? Having said this, the overall revenue guidance that the company has provided for 15% of full year is on track, okay? And this we can confirm. And we do believe -- and as you know that the H2 for infrastructure is a far more busier 2 quarters as compared to a relatively subdued H1. So this is baked in terms of how the revenue map -- revenue growth has happened. This is baked into our 15% overall P&M guidance on revenues. And as far as number 2 point is concerned, I think over the years, the infra margins have come down, have been southward bound for various reasons. But given the fact of rigor of execution and better control on project execution time lines and with also looking to ensure that the growth is related to the collections we get, this has finally resulted into a slow improvement in the infra margins. We do believe that infra margins will be a little northward. But since we don't give margin guidance for the individual P&M segment, this is also baked into overall FY '26 target of 8.5%, okay? So number three, of course, the share of private sector orders have gone up, largely driven by real estate and the carbon light type of orders. So one important thing is, as far as private sector orders is concerned, obviously, the execution momentum in line with the payments, I think, will be faster. This is something I think we have always maintained a share of -- higher share of private orders could potentially result into an improved working capital situation. But having said this, as far as margins is concerned, we should be seeing it as the execution of the projects progress. But let me also tell you that the company, as Mr. Sarma was referring to the answer to the previous question, we are ensuring a proper risk mitigation or risk evaluation mechanism while we bid for projects concerning the customer, the sector and the geography. Operator: The next question is from the line of Aditya Bhartia from Investec. Aditya Bhartia: My first question water segment. How big is the segment in the overall scheme of things? What proportion of domestic order book could be from the water segment? And is it that we are really going slow on execution given the payment challenges? Or are you seeing some improvement around that? Parameswaran Ramakrishnan: Sorry. As far as the water segment is concerned, the order book that we have is around INR 400 billion. Subramanian Sarma: 7% of the total order. Parameswaran Ramakrishnan: 7% of the total order book. And these are projects which have been related to the Jal Jeevan Mission projects. And once the allocation of the government start coming in, we do expect the execution momentum to smoothen out in the subsequent quarters. Aditya Bhartia: Understood. So as of now, we are going very slow on execution of these projects. They are not really contributing. They're not -- there is no money that's getting stuck over there because we are just going slow on execution itself. Parameswaran Ramakrishnan: Yes. Money is getting slow on execution, but we are not just building up execution without getting paid. Aditya Bhartia: Understood, sir. And sir, my second question is on Realty, wherein for the last couple of quarters, we've been seeing very high margins. I mean, if we look at this quarter, revenues might have been lower, but margins have been exceptional. So how should we think about this business from the perspective of next 2 or 3 years? What's the road map? What kind of growth should we be seeing in? And what kind of margin should we be building in? Parameswaran Ramakrishnan: So the issue is in so far as the Realty business is concerned, it is more of an accounting development because in a particular quarter, when you have a higher handing over of the residential units, the entire sales and margin gets clocked in, unlike the other P&M business where the margins get crystallized over the period of execution. So this is at a point of time, recognition of sales and margin. To that extent, you can have some quarters margins dipping at the overall P&M level because of lower residential -- lower handing over of residential units. And in case of any quarter where the number of units go up, then consequently, the Realty business will show a better profit. And this apart from -- in a particular quarter, if there is a particular sale -- a sale of a commercial property, that adds up also to the overall margin. So for example, in the current quarter, we have had in terms of a sale of a commercial property along with sale of TDR rights has enabled the profitability to go up almost by INR 0.9 billion. Aditya Bhartia: Understood, sir. And could you give us some road map on how we should think about the Realty business for next few years? What kind of growth should we anticipate in terms of residential project sales and any large commercial project that we should be aware of? Parameswaran Ramakrishnan: So as of now, the way we are focusing is that we will try to expand the presence in the cities of the Mumbai Metropolitan region, National Capital Region, Bengaluru, Chennai. And this development will be happening through a mix of monetizing of our existing land parcels, acquisition of new land real estate parcels, and also increasing growth through the joint development route. As we speak now, the order book for the real estate segment, that is where we have secured the flat purchases have happened, but we're yet to handover is in the range of INR 120 billion. And we have an unsold inventory of almost INR 40 billion for the near term. So this will be -- I think over the next 2 to 2, 3 years, this will get converted to revenues. But long and short, we -- you could see an increased visibility of L&T Realty in terms of the overall perspective on the real estate sector in the regions or the locations that I spoke about. We also will continue to focus on select commercial property developments in some of these areas, driven by the market demand. So it will be largely led by residential property development and interspersed with some commercial properties at some certain locations. Operator: The next question is from the line of Bharanidhar V from Avendus Spark. Bharanidhar Vijayakumar: Can you tell what is the total funding L&T places into Hyderabad Metro by way of both equity and not funding? And how much of that are we getting through this deal? And how from accounting point of view, this will have an impact on, say, any one-off income or any [indiscernible] in the coming quarters? Parameswaran Ramakrishnan: Okay. So the total investment of L&T in Hyderabad Metro till date is in the range of INR 70 billion, okay? And since as it is there in the public domain in terms of the incentives and the Hyderabad Metro has a debt of almost INR 130 billion, okay? Now until now, the losses of the Hyderabad Metro, they are all factored in our consolidated financial results, okay? So if you see this time, if you have seen our advertisement in the stand-alone, which is the investment that we are carrying at INR 70 billion, we have now brought the investment to what we believe as a realizable value by tendering our stake to the government of Telangana at INR 20 billion. And thereby, we have taken an impairment charge in Q2 of the current financial year in L&T stand-alone results. The fact is insofar as the consolidated results go, the YTD cumulative losses of Hyderabad Metro is already adjusted against the INR 70 billion of our investment. And consequently, the Hyderabad net worth -- share of net worth in our consolidated books is actually even lower than the current standalone post impaired value of INR 20 billion. So technically speaking, tomorrow, if we were to do the -- if tomorrow, we were to do the divestment, there could be a chance that the consolidated financial statements will actually possibly show a marginal credit in the P&L because the consolidated financial statements has the share of net worth is almost INR 10 billion as compared to the restated value of INR 20 billion. Is that clear, Bharani? Bharanidhar Vijayakumar: Sir, so one question follow-up is that the INR 7,000 crores or INR 70 billion of book value or net worth that is reflected in Metro balance sheet, we are essentially selling we are realizing INR 2,000 crores from the buyer. Parameswaran Ramakrishnan: So consequently, you see that impairment charge in the stand-alone. Bharanidhar Vijayakumar: Okay. Okay. Fine. So I will take up some follow-up on this later. My second question is on, say, our Indian domestic order inflow, while we are doing very well on the private side, the order inflow from state sensor definitely is lower than what it was in the past. What is our outlook on that going forward? Is it set of customers likely to improve? Or where do you see that going? Parameswaran Ramakrishnan: Okay. So one of the major reasons for the share of private sector order inflow going up in the recent maybe last 4 or 5 quarters is because of a higher amount of real estate transactions or real estate development, both commercial, real estate -- sorry, residential, data center development. All of this, we have seen a strong traction from the various developers, number one. Number two is, if you note that in the Q1 that we had reported order inflows in domestic also included carbon-light private sector orders that we secured, okay? And we do expect as far as coal-based power plant ordering is concerned, you see as is evident that there's a lot of projects up in the pipeline, which is a mix of both state-owned or central public sector-owned project opportunities and also some of the major private sector power plant producers also setting to expand their current power plants or new greenfield. So we do believe because of this increase in the -- or revival of the coal-based power plant equipment business, the share of private sector has actually gone up. Bharanidhar Vijayakumar: So I got that. My only question was areas like metros, bridges, all these things which used to be a major part, it seems to be slowing down. So that was my question, meaning... Parameswaran Ramakrishnan: That is mostly on the government funded no. So we do have a sizable amount of opportunities as far as central government or state government or public sector corporation is concerned in the areas of energy, which comprises hydel, thermal that I spoke about, nuclear. So the entire energy landscape is there. And we do see sizably large opportunities in the transportation infra in terms of roads and elevated corridors. In fact, the order prospects that I communicated for heavy civil and transportation infra, to the extent they are all domestic, they are largely all government projects only. Operator: [Operator Instructions] The next question is from the line of Shirom Kapur from Jefferies. Shirom Kapur: I just wanted to ask about your 34% growth in domestic orders this quarter. Could you highlight what drove this? And what are some of the major orders that contributed here? Parameswaran Ramakrishnan: So the major orders that we secured on the domestic side is the pump storage project that we secured from a private sector client, which is almost INR 35-odd billion, plus a whole lot of residential and commercial real estate orders that we have secured from private sector developers. Shirom Kapur: Noted. And just if you could help break up the order prospects into domestic and international and within domestic, what the breakup should be across your segments? Parameswaran Ramakrishnan: So I guess -- yes, I think we have been giving quite an articulated granular detail. But let me put it like this, that the total order prospects that we have given for domestic and international, we'll stay and put with it. We will see at an appropriate point of time. In case something is very major for a particular subsegment, we will give the details at that point of time. Operator: The next question is from the line of Sumit Kishore from Axis Capital. Sumit Kishore: My question is in relation to the hydrocarbon margins, which were subdued and the explanation given around cost overruns in certain international and domestic jobs that are approaching completion. So what were the reasons for the cost overrun on a generic basis? And how can we be sort of assured that going forward for a substantial international order book, some of these issues will not get repeated. So that's my question. Subramanian Sarma: Yes. Again, this is Sarma here. This is a bit of a phasing issue. I mean we have in our portfolio mixture of projects. Some of them are old legacy projects, some of them are new projects and some of them are, like I said, we have new projects waiting to be awarded. So in this quarter and maybe for some time, I think we'll have -- some of these legacy projects are closing. I mean some of these projects are large projects which have been running even during the pre-COVID time, it was awarded. So I think as they close, there have been some cost overrun because of COVID. But definitely, there is a contractual entitlement for us, we'll pursue those. But as per our internal policy, we don't recognize any entitlement unless it is approved. So I think that will manifest maybe in the future at some point in time. But otherwise, going forward, the portfolio is quite reasonable. And in fact, the market is quite buoyant, and we are very selective and our intention is to pick up jobs, which will help us to realize better margin in the future. Parameswaran Ramakrishnan: The current southward movement in energy margins is big. I reiterate is big when we have given the guidance of 8.5%. Sumit Kishore: Very clear. Sir, just a follow-up here on margins. Given the fixed price order backlog now would also be close to 50% of the order backlog, how are you thinking about the commodity price risk to margins here for the order backlog? Subramanian Sarma: Yes. I mean I think this question keeps coming up. But in general, we are in the business where we have fixed price models. And like I said, I think when we are bidding, we take a lot of care in terms of trying to have back-to-back contracts with -- for construction, back-to-back contracts for major high-cost items in supply chain. And so that we have a reasonable sort of cover, I mean, risk mitigation on those items. And of course, we also have a strong treasury group, which gives us a reasonable forecast about how the commodity prices will move. Based on that movement -- based on that forecast, we also provide certain adequate provisions in terms of contingencies, commodity contingencies, specifically in our pricing. So I think broadly, we are covered unless we have a very, very unexpected situation like what happened in Ukraine-Russia war, which is something nobody could forecast. We kind of, yes, built in that in our pricing. Operator: The next question is from the line of Amit Anwani from PL Capital. Amit Anwani: Sir, my question pertains to the strategic partnership with Bharat Electronics for AMCA. So here, it would be better to understand what role L&T will have in this joint venture? And what is the long-term strategy? We understand that we have supplied wings and I think some other components for LCA in the past, and we have been doing that. Wanted to understand, are we getting into full-fledged aircraft manufacturing in the future? Is there any capability which is required? Any investments required? Any thoughts and details on this joint venture consortium, yes? Parameswaran Ramakrishnan: So I will take that. So the Aeronautical Development Agency, which is the customer, is likely to shortlist the eligible bidders for the AMCA program based on the expression of interest where we also provided. This shortlist is expected in the current quarter, October to December '25. Basis the shortlist, we expect the customer to issue the request for proposal, that is RFP sometime in Q4 of the current financial year. And the announcement of the winner to build the prototype most likely is going to happen Q4 of the next financial year after the bidding process. Now in terms of the L&T Bharat Electronics JV for this particular program is essentially the scope of the JV is to build the prototype airframe, fixtures, system integration, and the flight certification of the prototype. As of now, both L&T and BEL are equal partners in the JV, which is it will be a separately incorporated company that will house this transaction in case the particular consortium gets the -- becomes the winner. And in terms of how the work will be shared between L&T and the other partner will be finally assessed after we receive -- go through the entire details of the request for proposal. Our understanding is that the order for the prototype will be one single PO for the entire value. And most likely, if it is awarded in the Q4 of the next financial year, then in terms of the prototype getting delivered, I think it's sometime in '28, '29, the test flight to happen in FY '29, '30, then followed by the usual trials. So in terms of serial production, I guess we are still around 8 or 9 years away, okay? I've given you quite a detailed perspective of this. Now beyond this, I think I don't have anything to talk about. Amit Anwani: Right. So for prototype, any investment which would be required once we get this order by Q4 next year, if at all, this is coming to us. Parameswaran Ramakrishnan: So there are so many ifs and buts, so we should get the order in Q4, hopefully. So we will have to evaluate the scope. This is the RFP scope. That time, we will be able to understand. But since it is a prototype, a prototype, usually, the customer works with the contractor or in this case, the consortium and ensure that there is no -- the consortium will not suffer in principle any cash outflow. It is like a sort of a funded project. Operator: The next question is from the line of Atul Tiwari from JPMorgan. Atul Tiwari: Another question on this BEL, L&T consortium. So what kind of risk you run? Suppose this is obviously a technically complex project. And if you get it and in case there are unusual delays because of some technology challenge is out of your control. So do you have to fund that over next several years? Or is there some kind of carve-out clause? Could you throw some light on that? Parameswaran Ramakrishnan: So Atul, it is like this. L&T in the past with respect to the PES business, okay, we have engaged with the customer across the major other two forces that we usually deal with. In terms of -- when it comes to a prototype, it is usually cash neutral for the contractor like us. So that is the principle we believe will be followed when it comes to the AMCA program as well. But it is still early days because once the RFP is rolled out, then only we'll be able to clearly understand the outcome of the proposal. But given our past experience, usually prototypes have a 0 cash implication because the customer, along with the contractor, in this case, the consortium will jointly work to have a successful prototype done. So the customer also has a sort of, I would say, a skin in this whole transaction. Atul Tiwari: Okay, sir. And just to confirm, sir, you said that the winner, eventual winner will be announced by fourth quarter of FY '27. Parameswaran Ramakrishnan: That's our understanding as we speak now. Operator: The next question is from the line of Girish Achhipalia from Morgan Stanley. Girish Achhipalia: I wanted to just check with Mr. Sarma that we are almost doing $4.5 billion, $5 billion worth of international projects last couple of quarters. The order prospect pipeline is also very strong. I wanted to understand like you've been with the company since 2016, I believe, and you've seen a lot of cycles up and down, a lot of contracts, competition. How do you think about the next couple of years in terms of different types of jobs that are coming through? And I wanted to understand the win rate typically that we've enjoyed in the last 12 months across, let's say, infra and then within hydrocarbon offshore versus onshore, if you can just split that up? And also on the domestic opportunity, are you seeing any prospects on nuclear? And how much of coal-based order pipeline is still left in the domestic side that could come through in the probably more medium term? Subramanian Sarma: For your information, I've been with the company since 2015. So I completed 10 years, not 2016. Anyway, I see this has been, like you said, we had a good run over the last decade. The industry is cyclic, but I think what has happened is that our share of the market was not that good in the previous years, and we have established ourselves now as a major player. So we are able to access larger market share -- larger market. So I think our ability to access larger projects, multibillion-dollar projects has now enhanced substantially over this decade. So therefore, our ability to continue to build a strong order pipeline has substantially increased over the last few years. Today, as you see, I mean, we are winning quite a few $3 billion, $4 billion projects, which was not the case earlier. So I'm quite bullish. I think we will continue to have that market available to us, and we'll bid in a disciplined way. And I think this run will continue for some more time, at least for next 2, 3, 4 years. I mean, beyond that, I cannot predict. So all in all, I'm quite optimistic. When it comes to domestic on the thermal power, the market is, like I said, has suddenly become very buoyant and very active because of the two reasons. One is that the renewable power round-the-clock availability has become a bit of an issue. So we need additional power -- stable power generation to stabilize the grid. And two is that there is a general increase or forecast increase in the power demand because of the sudden acceleration of the AI and the data centers, which are going to consume a huge amount of power. So a combination of that, I think there are a lot of plans coming up. It can be met through either thermal power or nuclear or other means. But I think nuclear -- thermal power becomes the most simplest and fastest solution. So we've seen a significant uptick in that. We have picked up about 13.5 gigawatts. We are going ahead with expansion of our capacity, and we are gearing up for ideal, taking up additional maybe 10, 15 gigawatts in the next 2, 3 years. That's how we see the market now. Parameswaran Ramakrishnan: So I think I told Girish, that the order prospects pipeline for CarbonLite is almost INR 460 billion as of September. Girish Achhipalia: Okay. And sir, just one small follow-up. In international, I understand that the oil sensitivity to GDP for larger countries like Saudi Arabia and UAE is coming down. Is there a different approach that the customer is taking irrespective of whether he's in infra or offshore or onshore versus the previous cycles? Like if you can qualitatively remark on how confident or are you seeing closures happen at a faster clip? Or is there a little lesser competition? I mean, what is driving the market share higher? Subramanian Sarma: No, I think there were projects which were of different size, right? I mean I think there were -- earlier, we were able to compete in a segment which was less than $1 billion. So we had a different level of competition. Now when we move up the ladder and then we are able to access multibillion dollars, I think the level of competition and intensity of competition changes. I mean I think now I believe that for larger jobs, we are better placed to win, and we have a reasonable win rate on those projects. I mean many of these projects are very critical. I mean some of them are like gas development projects. Many of these countries are committed to those projects. I don't expect too much of sensitivity to the current spot market prices. These are long-term views. And next 2, 3 years, I mean, at least I can talk about only 2, 3 years beyond that, I cannot predict. I expect to see multiple projects. And our order book is so strong that we have almost 3 years of workflow in our hand. And we pick up some more projects in the next 1 year or so, we will have about almost more than 3 years of workflow. So I think that brings a lot of stability to our business. Operator: The next question is from the line of Parikshit Kandpal from HDFC Securities. Parikshit Kandpal: So my first question is on the margins. So now with the share of international order book growing, for the thesis of improvement in margins from this year, P&M margins from FY '26 and building over the next 2, 3 years, so does it get challenged somehow? Parameswaran Ramakrishnan: So Parikshit, this is P.R. As you know that we have a way of taking the margin guidance restricted to the year under question or under review, okay? We'll get back to you in terms of how the margin uptick looks like in the subsequent periods. Having said this, I also referred to the improvement in infra margins is now slowly changing in terms of going into the positive trajectory. And we do expect that this particular momentum to continue in the future quarters, okay? Insofar as the softness in the margins for the Energy segment in the current 6 months is concerned, I did refer to this during the Q1 call that the softness in margins is going to be reflected in Hydrocarbon performance in the current year. Hopefully, by the time March '25 gets over, many of the cost or the cost overruns in certain select jobs that we secured in the earlier years will get into -- they're all in the final stage of execution, which is also baked in our revenue and margin guidance. So we do also expect that margins in the subsequent periods to improve. Now to what extent the improvement will happen, we will communicate that once we close March '26 and give the guidance for the next year. Parikshit Kandpal: Okay. So the second question is on Hyderabad Metro. So now you said that INR 2,100 crores is somewhere where it settles. So is this a cash inflow, and is it adjusted for the INR 900 crores of the support which we have received from the Hyderabad Metro? So basically, I want to understand how -- will this be a cash item or a non-cash item from the government side? And what will be the quantum likely? Parameswaran Ramakrishnan: So as we understand basis the discussions that have happened, L&T will get a cash consideration against tendering its 100% equity stake in the Metro SPV to the particular vehicle which the government of Telangana will propose as the buyer and L&T should be getting cash. That's the understanding. And this has got nothing to do with the INR 900 crores that the SPV received as part of the soft loan assistance. So that loan has already got -- is residing in the SPV as an interest-free long-term debt. What we are talking about this L&T exiting its entire -- or divesting its entire exposure in the Metro SPV to the government of Telangana. So the SPV debt of INR 13,000-odd crores will be taken by the buyer as the new equity shareholder when they take the stake -- when they purchase the stake from L&T. And that consideration as we speak now, is in cash. Parikshit Kandpal: The INR 2,100 crores you receive in cash, so net-net. Parameswaran Ramakrishnan: Around -- I did not tell a number. I said around INR 2000 -- 21 -- INR 20 billion or INR 2,000-odd crores. Parikshit Kandpal: Okay. And just the last thing on the NWC. Last quarter, you highlighted that because of the water receivables, there was a negative impact on NWC of about 75 basis points because there was delay in receivables collections on the water side. So if you can quantify in this quarter, 10.2% NWC, so how much better it would have been if the water receivables have come on time? Parameswaran Ramakrishnan: So I will not -- okay, let me put it like this. The fact is that we have slowed down execution also means that the position of the segment remains as the same as it was in June. okay? Wherever the projects are getting executed in that segment, when we are getting paid, that execution happens. But let me tell you, when we talk about 10.2% as the working capital at the group level, the share of projects and manufacturing working capital is 7.8%. Operator: The next question is from the line of Renu Baid from IIFL Capital Services. Renu Baid: Just a couple of bookkeeping quick questions. On the power equipment terminal portfolio, you mentioned that you are targeting 10 to 15 gigawatts of incremental orders in the next couple of years. So given the order book that we have at what utilization levels are we working through? And do you see that the market today with the existing only two domestic vendors is stretched in terms of supply and Chinese BTG equipment manufacturers are probably getting the feedback in the market? Subramanian Sarma: No, I think the government has taken a stock and both us and BHEL are working on expanding the capacity. Chinese equipments are not something which is preferred. And we have given -- even 6 months back before these awards came, we had given a commitment to the ministry that we will add our -- enhance our capacity to almost 5.5, 6 gigawatts. We are looking at even further expanding this in the next 6 to 9 months' time. So between us and other supplier, which is BHEL, we believe that we should be able to handle this. The time lines are a little longer, which is acceptable to most of the PPP developers. So I don't expect Chinese products to come in. It will be between us and other Indian manufacturers. Renu Baid: Got it. And second, just to clarify, broad-based, whatever we understand of the Hyderabad Metro at the console level, net of all the losses, et cetera, that you have booked is close to about INR 10 billion at the end of first half. So incrementally, even if on a stand-alone level, the book value has been brought down to investment value has been brought down to INR 20 billion. On a console basis, we still would be having net positive impact on the transfer of -- or receive of the cash consideration. Parameswaran Ramakrishnan: So Renu, I think I responded this in the -- as an answer to the previous question. So it is like this, let me put it like this. In the stand-alone, the Hyderabad Metro is valued at INR 20 billion. In the consolidated, it is valued because the original investment of INR 70 billion has taken all the losses YTD. So in the console, it is around INR 10 billion. Now if we were to do the divestment today, the stand-alone further, there will be no profit, no loss because you are getting cash against the INR 20 billion that you have restated. And in the consolidated, you will have the gain because obviously, you are getting value at INR 20 billion as compared to the value that you hold at INR 10 billion. Renu Baid: True. And the debt or whatever... Parameswaran Ramakrishnan: Debt goes to the -- it is residing in the SPV. So one of the fundamental attributes to this transaction or understanding is the vehicle, which the government of Telangana will propose, the buying vehicle will take over the complete debt as it is, which is today around INR 130 billion. Renu Baid: And of this, the L&T support to -- in debt format to the SPV would be how much at the end of the first half? Parameswaran Ramakrishnan: So the entire debt, the debt comprises of roughly order of magnitude, INR 80 billion in terms of medium-term nonconvertible debentures and a commercial paper portfolio of the balance, I would say, INR 40 billion to INR 50 billion adjusted for the movement that will happen. So the debt is having a guarantee of the parent. So the fact is when the debt moves in, the guarantees all fall off. So there will be no further recourse after the transaction is consummated, there will be no recourse on L&T as far as Hyderabad Metro operations is concerned. Renu Baid: So technically, we will be completely out of the asset by the end of fiscal '26 once the transaction is closed. Parameswaran Ramakrishnan: That's the target. Renu Baid: And will we continue to have any O&M responsibility with the asset or be completely out? Parameswaran Ramakrishnan: The Metro itself has an O&M contractor, which is doing the operations and maintenance. The understanding is we will have no further obligation right or any sort of indemnity post the transaction. Operator: The next question is from the line of Priyankar Biswas from JM Financial. Priyankar Biswas: One very quick question from my side. Earlier, we used -- earlier like almost like 5, 6 years back, we used to talk about landing platform docks as an opportunity in Defence. So recently, there has been some approvals and movement regarding that. So are we considering LPDs in our prospects? I mean, this year or maybe the next? So that's the first. Parameswaran Ramakrishnan: It does not feature in the current prospects. But once that opportunity comes where it is in a position to get bid, it will get added. Priyankar Biswas: Okay. So it's like a potential that may be there potentially, let's say, next year or the year after that somewhere whenever it comes up. So that would be... Parameswaran Ramakrishnan: Whenever it comes. At this juncture, don't ask me timelines because it's not yet come into -- it is not featured in our current order prospects. Priyankar Biswas: Sir, one more question that I have because there was a mention of green ammonia project in Kandla. So is there more such projects that are planned by L&T? And if so, how should we look at the CapEx that may be required? And what is the business economics for it? Parameswaran Ramakrishnan: So the -- you're referring to the joint development opportunity for the green ammonia project with ITOCHU, right? Are you referring to that? That's the one we are looking -- we had actually put it in the public domain. Sir, would you like to comment on that? Subramanian Sarma: Yes, there's no problem. So that project is under evaluation, and we will go through the process. And once we work out the economics, and then we'll have discussion with ITOCHU. And I think for all these development projects, we have a very standard where we have metrics -- financial metrics in terms of return on investment, IRR, project IRR, et cetera, et cetera. So we will not pursue any of those projects unless it meets those criteria. So I think that applies to the ITOCHU and any other future potential opportunities. I mean, there are a few which we are discussing both in domestic and international customers, a bit too early to sort of specify those prospects. But as a principle, I think the process will be the same. We'll engage with the customers. We'll have an MOU and we'll go through the process and we'll evaluate. And if they meet the IRR criteria and the risk criteria, then we'll go ahead. Otherwise, we will not. Priyankar Biswas: Okay, sir. And just one more thing. You had already provided a detailed answer regarding Middle East oil in earlier questions. My question right now is more on the Middle East renewables and, let's say, T&D for that matter. So can you shed some light like what sort of, let's say, market shares we have in, let's say, the GCC renewable space and T&D? And how do you see the order prospects similarly like for this, let's say, 2, 3 years down the line? Subramanian Sarma: We are one of the largest EPC contractors in the renewables sector. I think the projects we have in the portfolio are sometimes -- I mean, most of them are very iconic and are being done for very large customers like ACWA and Masdar and UAE, our performance in these projects have been pretty good. Some of the projects we have executed ahead of time and the customer is extremely happy and they want to engage us more and more. And I see -- I'm quite optimistic again on this sector as well. Parameswaran Ramakrishnan: In fact, the softness of our renewables opportunity starting with KSA, we are extending this relationship across as we move... Subramanian Sarma: [indiscernible . Yes, we have gone to [indiscernible] also. So I think it's -- currently, it is a good story, yes. Priyankar Biswas: Sir, can you give some light on like gigawatt size opportunities? Like what is the size of the KSA market? What do you... Subramanian Sarma: They have about 18 gigawatts and maybe there is another 15 gigawatt of opportunities in the next 2 years. Operator: Ladies and gentlemen, due to time constraints, that was the last question for today. I now hand the conference over to Mr. P. Ramakrishnan for closing comments. Parameswaran Ramakrishnan: Okay. So thank you, everyone, for taking this call. It was a pleasure to interact with all of you. Good luck and wishing you all the very best. Thank you. Operator: Thank you. On behalf of Larsen & Toubro, that concludes this conference. Thank you for joining us, and you may now disconnect your line.
Operator: Good morning, ladies and gentlemen, and welcome to Hypera Pharma's Conference Call where we will discuss the earnings for the third quarter of 2025. We have with us Mr. Breno Oliveira, CEO; and Mr. Ramon Sanches, CFO and Investor Relations Officer. We would like to inform you that this event is being recorded, and you may watch a recording of this video on the company's Investor Relations website, ri.hypera.com.br. [Operator Instructions]. Before we continue, we would like to highlight that some of the information in this conference call may include projections and statements about future results. This information is subject to known and unknown risks and uncertainties that may make these expectations not come to pass or to substantially differ from what was expected. We will now hand it over to Mr. Breno Oliveira, who will begin the company's presentation. Go ahead, sir. Breno Pires de Oliveira: Good morning, and welcome to the Third Quarter 2025 Earnings Call. We're going to start on Slide 3. This is the first quarter after concluding the working capital optimization process that was started last year. And results show that this was implemented successfully. There was no impact to sellout. We conserved profitability, and we had a significant improvement in our operational cash generation. And we've also maintained investments and shareholder remuneration as planned last year. Sell-out went up nearly 2 percentage points above the market and nearly 3 percentage points above our growth in the second quarter. Our highlights were influenza medication, pain killers, gastric, cardiology, skin care and hydration. This acceleration in sell-out and market share gains are a result of the recent initiatives to strengthen our portfolio of leading brands with new launches and more investments in marketing in points of sale and digital media. We've maintained our operational profitability, reaching an EBITDA of nearly BRL 760 million with a 34% margin. This level is similar to what we had before the working capital optimization process, and it is higher than last quarters. We reduced investments in working capital as a percentage of net revenue to 30%, the lowest in the last few years. This has been led especially by reduction in accounts receivable, which was at 58 days at the end of the quarter. This quarter, we combined sell-out growth, profitability and strong operational cash generation, sustaining shareholder payouts and strengthening our corporate governance and I'll go into details about that on Slide 4. We approved payments of BRL 185 million. And we've updated the committees in the company to strengthen the governance and the technical competence of these committees. Ramon will continue with more details about this quarter's results. Ramon Frutuoso Silva: Thank you, Breno. Good morning, everyone. We will begin on Slide 5. Our net revenue went up 16% to BRL 2.2 billion, a result of the combination between sell-out growth in retail and a reduction of 4% in the institutional market. This reflects a lower level of sales to the public market. And this improved our performance due to the optimization process concluded in the last quarter, and it was started in the third quarter of 2024. As I mentioned in the last call, our expectation is to combine sustainable growth of sell-out with maintaining operational profitability and thus conserving our margins. Gross margins were 61.2%, slightly higher than the second quarter of 2025 and the third quarter of 2025. And this was benefited by a mix in products sold that was not impacted by the working capital optimization strategy. Marketing expenses came to a total of BRL 367 million, the same level as the last 3 quarters and it was mostly more directed to digital media. Selling expenses were 5% lower than what was posted in the third quarter of 2024, showing a reduction in R&D expenses, which had a positive impact by the [indiscernible] benefits and also some synergies from the sales structure reorganization carried out in the first quarter. General and administrative expenses went down to BRL 85 million as a result of better efficiency in expenses with teams. Therefore, our EBITDA margin from continuing operations reached a -- reached 34% converted into cash flow this quarter, as I'll mention in the next slide. We also reduced investments in working capital, representing 30% of our net debt at the end of the third quarter. Last year, we had been investing half of our net debt into working capital. This reduction has led us to the lowest historical level of operational cash with a growth of 16% versus the third quarter of 2024. We invested in CapEx for the scopolamine extraction plant. That's the raw material behind the Buscopan brand and the Itapecerica plant, which will produce the products acquired from Takeda. Intangibles were BRL 55 million. This is mainly innovation, research and development. We also concluded the 20th debenture issuance with a term of 5 years and the lowest historical spread, CDI plus 0.75%. This issuance is being used to pay the higher spread issuances, allowing us to extend the average term of our debt. With that, the company's total cash generation was BRL 630 million, which reduced our net debt to 7.3 or 2.4x our annualized EBITDA for the quarter. Now we will hand it over to Breno for his closing remarks. Breno Pires de Oliveira: Thank you, Ramon. What we saw this quarter was a good summary of our long-term strategy, growth with profitability and strong operational cash generation. We accelerated our retail sellout growing nearly 2 points above the current market, and we increased our investments in leading brands without compromising our profitability. We also reached the highest operational cash flow in our history. We have many opportunities to grow sustainably on the short and medium term, extending our leading brands and launching products in new markets, including those that will no longer be exclusive such as semaglutide. Our pipeline for the next years has several products across all of our business categories. They are selected carefully in order to maximize value generation for our shareholders. We are the only company that has a leading position across all segments in the pharmaceutical industry. And with our leading brands and our innovation pipeline, we are well positioned to capture growth opportunities in the medium and long term. Thank you, and we will now continue with the questions-and-answer session. Operator: [Operator Instructions]. The first question will be asked by Mauricio Cepeda from Morgan Stanley. Go ahead sir. Mauricio Cepeda: We have a few questions about the future. Semaglutide is nearly having its patent expired. And I know that this will be an important moment for you as a competitor in the generics market. So I'd just like to ask a few things about how competitive you believe this market will be. We know that ANVISA gave some registration priority to local production and you are licensed for that. So are they considering other stages in the production? And have you received a position from ANVISA about that. Also, one of the concerns we've seen for semaglutide globally is the production bottleneck. It seems to have many bottlenecks, the pen, the purification stage. So do you have any confidence in the supply from your licensor? And do you think there could be bottlenecks in the purification stage and in the production of the pen? And if there is a shortage in the industry, is the -- can the original price of the generics be higher? Breno Pires de Oliveira: Cepeda, considering some points in your question. Just one clarification. We're not trying to license it. We have a partnership, but the product is ours. It's -- the registration belongs to Hypera. And we have a third party manufacturing it for us. This is different from licensing. Also, we don't intend to place this in the generics market. Our goal is to have a brand, have a branded product. We would have medical visitation teams. So there is space for more -- better margins than just having a generic approach. Considering availability, we don't have any indications from our partners that amounts will be limited. In fact, we've been talking about these amounts for initial requests, and there's no indication that this would not be met. I think the timing for the patent expiring is good because Brazil will be one of the first countries in which the patent will be expired. So production could happen here in Brazil. If this happened in other developed countries, I think that could be an issue. Concerning the priority Q, I'm not going to go into details, but we wanted to launch it as soon as the patent breaks. We believe that the first players to launch will have a competitive advantage, and that will be significant, especially in the beginning, right, because the market will be less competitive. And also, they will be able to establish their brands. In the future, when there are more competitors, they will have a stronger brand position because of that. As you know, this is a big market. We have GLP-1 market and the most recent figures are around BRL 10 billion per year. So semaglutide is about half of that 8%. So there was no opportunity -- there was never such a big opportunity than what we will have, and we're working to launch a product as soon as the patent expires. There are many risks, especially timing, registration, but we're confident that we have a very strong dossier. And we believe that we'll have approval to sell after the patent expires. Operator: The next question will be asked by Mr. Bob Ford from Bank of America. Go ahead sir. Robert Ford: Congratulations on your results. Well, there are several other molecules whose patents will expire next year. What are you thinking about the rest of the pipeline for 2026? Breno Pires de Oliveira: Bob, yes, this is a great opportunity. Semaglutide is a major opportunity for Hypera and for new entrants. But like you said, there are other products. We're trying to develop new projects that were started 3 or 4 years ago. We have some impacts from ANVISA because their approval times are a bit longer than when the business cases were created. But we're making a big effort with ANVISA, with the new directors and the new head so that, that can be reduced. So we hope that this line will be reduced and that we can launch things beforehand. But there are products like [indiscernible] and other major products that we will have an opportunity to use. Their patents have either been recently expired or will expire very soon. And also, it's important to say that our pipeline is not limited to medications whose patents have expired. There are many other products that we can invest in and we vested in the past. One examples of the over-the-counter muscle pain market. So we invested BRL 1 billion into muscular Neosaldina, and it's doing very well according to our plans here. We also went into the probiotics market, which has over BRL 400 million with Neogermina and Tamarlin Germina. These are also doing very well, but this takes time to mature. So the cough market, we are already working in, but we should start with a new molecule with a BRL 400 million market. So these are many other markets, just as examples that have no patents where we have been investing with line extensions. There's one more major market for medical prescriptions for vitamin B12. This is a big market where there are no patents, and we're also working hard to go into it. So our R&D has several fronts, business development. We are looking at patent breaks, of course, but we're also looking at major markets in Brazil that haven't -- that where we don't work yet. We're going to start hearing the results from these investments, and we'll start to understand the results of these investments. Operator: The next question will be asked by Gustavo Miele from Goldman Sachs. Gustavo Miele: I'd like to talk about 2 things with you. So considering sell-out, when we talk about this market, we know that this was a tougher winter this year. Hospital occupation rates were higher. Is that reflected in your operations? We see that influenza medication has performed better this quarter, but how relevant was it this year versus the last few years? I think that will allow us to understand the sellout effect this quarter. Also, if I could ask about October, I know that it's still early, but if you're seeing sellout rates similar to what we saw in the third quarter and if the winter has impacted it. Also, I have a question about the [ Lei do Bem ] and why it was higher this quarter, BRL 38 million. I'm just trying to understand the concept. Maybe this could be a good reference for the fourth quarter. Breno Pires de Oliveira: I'll answer your first question, and Ramon will answer the second one. So about sell-out for the third quarter. The winter has been a bit tougher this year than the last 2 years, but I wouldn't say it's higher than average. The growth in the second quarter was higher. It was about 20%. But on the other hand, pain killers and -- had a lower growth in the second quarter. So our biggest over-the-counter categories grew about 7%. So growth was about 7%, and we were able to gain market share across all of these categories. So it's hard to foresee, but we still see an impact from the temperature variation is also impacting October and growth has been in line in October. As you said, these are still preliminary figures, but we have been seeing growth levels similar to what we had in the third quarter. Ramon will answer your second question. Ramon Frutuoso Silva: Considering the [indiscernible] , we did have a higher rate this third quarter. This benefit depends on 3 main factors. First, expenses with innovation; and second, the real income for this period. So the real income was higher this quarter, which has resulted in this higher benefit. But this value is what we expect for the year. So for the fourth quarter, this benefit will be lower. And this impact is more regular with what we expect to see looking at our history. This higher value was a one-off this quarter because of the factors I mentioned. Operator: The next question will be asked by Mr. Lucca Marquezini from Itau BBA. Lucca Marquezini: We have 2. First, about cash generation. So looking towards the future, I would like to ask if it makes sense to consider a drop considering OTCP payments? That's my first question. And also, I have a question about the institutional market. There was a drop due to lower level of sales. I would like to know if this is a one-off or if we should expect that for the next quarters. Ramon Frutuoso Silva: Lucca, this is Ramon. So considering cash generation, it was high. We captured this benefit from the working capital adjustment. So we do expect to see a reduction in operational cash flow, considering free cash flow or the total cash generation, excuse me, it will be a bit lower due to the dividends being paid out, as you mentioned, the OTCP payments that is done every fourth quarter. And Breno will answer the second question. Breno Pires de Oliveira: Considering the institutional market, we saw a deceleration in the market because of the performance of the government, and this also impacted several national companies, not only ours. But we've been seeking short-term alternatives to minimize this effect. We're trying to be more competitive in prices for some specific molecules that we have the production capacity for where we have some idle capacity and a potential of generating profits even being more aggressive commercially. But that's for the short term. For the medium and long term, our institutional focus is the private market. So increasing our participation in the private market through development, our medication pipeline, we've had 4 or 5 launches that are performing according to what was foreseen, reaching market shares of 5%, 10% across the categories that we recently entered into. So over time, growth in the institutional market will be much more in the public -- excuse me, in the private than the public market and in more strategic categories in the future, such as oncological and biological drugs. We're starting to see the first products in those categories in 2026. That was very clear. Thank you. Operator: The next question will be asked by Mr. Leandro Bastos from Citibank. Leandro Bastos: I have 2 questions. First, I'd like to ask about R&D. You mentioned the effects from the [ Lei do Bem ], but we see investments in R&D and intangibles very similar to what we had in 2022. So I'd like to ask about the pipeline opportunities and so on, if you are running at an optimal R&D level or if we should expect any accelerations in the future? That's the first point. My second question is, we saw high discounts this quarter, still a bit above sell-out. So I'd like to get an update on that competitive dynamics and the company's strategy on the commercial side. Breno Pires de Oliveira: Leandro, I'll take the first question, and Ramon will answer the second one. About the R&D level, we think that the current level, although nominally, it is not growing, it's at an optimal level. So basically, revenue has been going up. Our R&D has been working deeply on that, on sales. The full team is still working. And we've been focusing on, one of the things we learned in the last few years is to focus on more relevant projects. We're also looking at this from a marketing context. The launch is not just about a new product being successful. It's not only about R&D. We have to do the launch plan with investments in media, working with clients to position these products as soon as we can. And on the prescription side, the medical promotion so that these medications are promoted in a relevant way. And so that will lead to increase in sales. So our pipeline has not changed especially when you have pilot batches and clinical studies, it varies. But in the -- but also in the number of projects. This is at the same level still. Ramon will answer the second part of your question. Ramon Frutuoso Silva: Leandro, to answer your second question, this increase in the discount is related to a variation in the product mix. We had above-average sales in generics and similars, and we don't expect a huge variation from that level for the next quarters. Operator: The next question will be asked by Mr. Samuel Alves from BTG Pactual. Samuel Alves: We have 2 questions. First or rather both of them are related to working capital, which was more positive this quarter. The first question is about CapEx. We noticed there was a drop of 11% when you look at CapEx as immobilized tangibles year-on-year. So if you could talk about the seasonal pattern for this CapEx for the rest of the year, if we should expect a deceleration and be executed versus the budgeted for the rest of the year? That's my question about CapEx. Secondly, the company had robust cash generation this quarter. And the suppliers line was very helpful at doing that. We saw an improvement year-on-year and quarter-on-quarter. So I'd just like to understand if any credit was granted or if there was any outside factors this quarter that helped in this cash generation. That's all. Thank you. Ramon Frutuoso Silva: Samuel, this is Ramon. First, about CapEx. This was aligned with what we expected in our budget for the quarter and it's a level that is very similar to what we expect to see. To answer your second question on suppliers, we started buying inputs in a more normalized way after this working capital adjustment, so more in line with the sell-out rate. When we reduced inventory in channels, we also reduced some expenses that we did not expect. And these purchases were concentrated in inputs with lower terms or shorter terms, excuse me. So as we go back to the normal sellout level, we have longer terms. This impact came from the mix, and this will benefit our cash flow for this quarter specifically. There were no changes in these credit sessions. I mean, if you look at the levels, it didn't change that much. So we didn't change it. This impact is coming from a change in mix quarter-to-quarter. Operator: This concludes the company's question-and-answer session. We will now hand it over -- we'd like to thank everyone for participating and wish you a good day.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Airbus' Nine-Months 2025 Earnings Release Conference Call. I am Sharon, the operator for this conference. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to your host, Guillaume Faury, Thomas Toepfer and Helene Le Gorgeu. Please go ahead. Helene Le Gorgeu: Thank you, Sharon, and good evening, ladies and gentlemen. This is the Airbus' Nine-Months 2025 Earnings Release Conference Call. Guillaume Faury, our CEO; and Thomas Toepfer, our CFO, will be presenting our results and answering your questions. This call is planned to last around an hour. This includes Q&A, which we will conduct after the presentation. This call is also webcast. It can be accessed via our home page by clicking on the dedicated banner. Playback of this call will be accessible on our website, but there is no dedicated phone replay service. The supporting information package was published on our website earlier today. It includes the slides, which we will now take you through as well as the financial statements. Throughout this call, we will be making forward-looking statements. I invite you to refer to our safe harbor statement that appears in the presentation slides, which applies to this call as well. Please read it carefully. And now over to you, Guillaume. Guillaume Faury: Thank you, Helene, and hello, ladies and gentlemen. Thank you for joining us today for our nine-month 2025 results call. We are here in Amsterdam with Thomas to run you through our results. Our operating environment remains complex and dynamic. Navigating strong demand combined with the specific supply chain tensions, and that have not changed, still requires continuous operational discipline and agility, in particular, in the environment of changing trade policies. We welcome the U.S.-EU trade agreement, which restores a stable and tariff-free environment for trade in aircraft and parts since the start of September. This is a crucial step that allows our global industry to move forward with the predictability it needs to invest and innovate. Yet the still unstable geopolitical situation remains an area of continuous vigilance. In that context, we are rolling out our plan to reach the A320 family production target of rate 75 per month by establishing 10 A321 capable final assembly lines across four global sites. The recent addition of a second line in the United States and the second line in China marks a critical milestone in our global industrial growth strategy, but also enhances our overall business resilience. We are scaling up our operations and expanding capacity as we move forward with the commercial aircraft ramp-up. We're also committed to contributing to European defense and remain focused on delivering more competitive and innovative products and services with our two divisions, and we see a growing momentum. When it comes to European strategic autonomy, we have made significant progress towards the consolidation of our space activities together with Leonardo and Thales aiming at establishing a leading European company, and I will come to this in a minute. In Q3, we delivered 201 commercial aircraft. And as the engine situation is showing signs of recovery, the number of gliders is now at 32 as of the end of September. This brings our year-to-date deliveries to 507 aircraft as compared to 497 last year. Deliveries continue to be back-end loaded as we navigate the engine situation. We have a strong year-end rally ahead of us, and our teams are in the sprint. Our EBIT adjusted stood at EUR 4.1 billion as of nine months 2025. This reflects the commercial aircraft deliveries and the solid performance at both Airbus Defense and Space and Airbus Helicopters. Our free cash flow before customer financing was minus EUR 0.9 billion. It notably reflects the inventory buildup that supports the Q4 deliveries and the ramp-up. On that basis, we maintain our 2025 guidance, which now includes the impact of currently applicable tariffs, and we'll come back to this later. Moving to space. We've made a major strategic step forward. We are very pleased with the recent announcement of signing a memorandum of understanding an MOU with Leonardo and Thales to form a new European space player in 2027. If you recall last year, I was clear we needed to focus on fixing our foundations and restore profitability. The turnaround plan is in full motion, and we are pleased with the first results. In parallel, we've been working on strategic options to create scale and increase competitiveness facing global players. The new company aims to unite and enhance capabilities in space by combining the three respective activities in satellite and space systems manufacturing and space services. The MOU is a collective industry commitment to strengthen the European space sector. The next steps include launching the social consultation process with our social partners, preparing to carve out the space businesses and addressing regulatory needs. We have a busy journey ahead, and we are fully committed to this major and exciting project. Let's now look at our commercial environment, starting with commercial aircraft. Passenger traffic continued its growth momentum, while air cargo demand remained resilient. During the nine months '25, we booked 610 gross orders, including 116 in Q3. On the A220, we booked 40 gross orders. And looking at the A320 family, we booked 371 gross orders. This brings our backlog to 7,105, out of which around 75% are for the A321. And the 7,105 is just for the A320 family, of course. Moving to the wide-bodies. On the A330, we booked 90 gross orders, confirming the high demand for this versatile product. Finally, on the A350, we booked 109 gross orders, underpinning the continued commercial momentum of what has become the reference in the market. Net orders amounted to 514 aircraft, including 96 cancellations, which were largely anticipated and already embedded in our backlog valuation as of December 2024. Our backlog, total backlog in units stood at 8,665 aircraft at the end of September. Looking at Helicopters. In the nine months '25, we booked 306 net orders compared to 308 in the nine months '24, so very similar, and this is well spread across the portfolio. We continue to see positive momentum, in particular on the military market, and we remain focused on securing new business opportunities in both our home countries and export markets. A new Airbus final assembly line will be established in India to build H125 helicopters in collaboration with Tata Advanced Systems, aiming at capturing the full potential of the civil, parapublic and military markets in South Asia. Let me conclude by highlighting that we have streamlined our small and medium tactical uncrewed aerial systems, UAS, the drones offering into a single comprehensive portfolio managed by the Airbus Helicopters division. This aims at delivering a focused market approach for defense and security customers and provides customers with cutting-edge capabilities for surveillance, intelligence and operational flexibility. Finally, in Defense and Space, order intake stands at EUR 6.8 billion for the nine months. On Air Power, this notably reflects an order from the Royal Thai Air Force for a next-generation Airbus A330 MRTT+. This advanced aircraft is an evolution of the combat proven A330 MRTT, introducing innovations from the A330neo as well as upgraded military capabilities. So, in particular, the new engine of the NEO that is now on the MRTT+. While on Air Power, let me highlight the recent contract with Germany for the acquisition of 20 Eurofighter aircraft to be produced at our final assembly line in Manching and to be delivered to the German Air Force starting from 2031. The order intake will be recorded once all contractual conditions are met. So the order intake is not yet recorded in the Q3. The momentum for the Eurofighter is also strong on the export market outside of the home countries of the Eurofighter, and that was also demonstrated by this week's commitment from Turkey, Turkey to acquire 20 units. The Eurodrone program is making progress as we successfully completed the CDR, the so-called critical design review earlier this month. This officially concludes the design phase and paves the way to prototype production and ground tests ahead of first flight. On FCAS, we remain convinced that Europe needs to have its Future Combat Air System in order to meet its security challenges and further develop its critical skills and know-how in this field. Given the level of effort and investment required, we are convinced -- I am convinced of the benefits of a collaborative approach, and we intend to play a leading role in making it happen in a way or the other. Overall, on what concerns the defense part of our Airbus Defense and Space and Helicopters businesses, we are observing a growing momentum, and we expect it will continue in the foreseeable future. And now Thomas will take you through our financials. Thomas? Thomas Toepfer: Thank you very much, Guillaume, and hello, ladies and gentlemen. I'm now on Page 7 of the presentation. And as Guillaume said, I will take you through our financial performance. So, as you can see on the chart, our nine months 2025 revenues increased to EUR 47.4 billion, which is up 7% year-on-year, and it mainly reflects the higher contribution from our divisions with stronger services volumes across our businesses and a higher level of deliveries, partially offset by the U.S. dollar depreciation. And as you can see on the right-hand side, our R&D expenses stood at EUR 2.1 billion for the first nine months of the year, lower compared to the nine months of 2024, and we continue to benefit from the prioritization of our activities, and we now expect that the R&D expenses will be slightly lower in 2025 than in 2024 when we talk about the full year. Now let's look at EBIT adjusted on Page 8. As you can see, our nine months 2025 EBIT adjusted increased to EUR 4.1 billion from EUR 2.8 billion in the nine months of 2024. And of course, let me remind you that in the nine months of last year, we recorded EUR 989 million of charges in our space business, which obviously did not repeat themselves. As of the nine months of this year, the higher commercial aircraft deliveries embed a less favorable mix, which is offset by a more favorable hedge rate and lower R&D expenses. And it also reflects a stronger performance in both divisions. So, let me just clarify the impact of the currently applicable tariffs at this point. We expect this to represent anything between EUR 100 million and EUR 200 million for the full year, of which, however, the vast majority will be recorded in Q4. And as you can see on the right-hand side of the page, the level of EBIT adjustments totaled a net negative EUR 0.8 billion, and I'll just walk you through the items. It has in a negative EUR 577 million impact from the dollar working capital mismatch and the balance sheet revaluation, mainly reflecting the mechanical impact coming from the difference between transaction date and delivery date, of which negative EUR 186 million occurred in Q3. Secondly, it has negative EUR 105 million related to the Airbus Defense and Space restructuring, which we recorded already in Q1, and it has negative EUR 88 million related to the stabilization of certain Spirit AeroSystems work packages, of which EUR 31 million recorded in Q3. And finally, negative EUR 11 million other, including compliance costs and also M&A. So this takes our nine months 2025 EBIT reported to positive EUR 3.4 billion, and the financial result was positive EUR 374 million, and it mainly reflects the revaluation of certain equity investments and the revaluation of financial instruments, partially offset by the evolution of the U.S. dollar. The tax rate on the core business continues to be at around 27%. However, the effective tax rate is 32.4%, including the tax effect on the revaluation of certain equity investments as well as a net deferred tax asset impairment. And we still expect the French surtax to result in an impact of around EUR 300 million in 2025, both for P&L and cash. And in the nine months of this year, we recorded the part that is related to the year 2024 as well as the part corresponding to the first nine months of this year. And so the resulting net income is EUR 2.6 billion with earnings per share reported of EUR 3.34, as you can see on the chart, and the nine months 2025 EPS adjusted stood at EUR 3.97 based on an average of 790 million shares. Now with this, let's turn the page to Page 9 and look at our U.S. dollar exposure coverage. Consistent with what we said during our business update, we began to implement a limited number of 0 cost collars, exactly EUR 2.1 billion in the quarter into our hedge portfolio. And the EUR 2.1 billion is dollars, not euros, obviously. Now this strategy aims at addressing the longer-term horizon with an acceptable level of volatility and to potentially capture the favorable evolution of the U.S. dollar, while at the same time being protected against a material weakening of the dollar. And let me just be clear, we do not aim at replacing our forward, but rather to complement our coverage with a limited amount of colors. And as indicated, the collars will, at this stage, remain at around a single-digit percentage of the overall coverage. Now with the integration of colors, the blended rate now includes the least favorable rate of our colors. And so hence, it provides you with a protected or conservative view. And with all that being said, as you can see on the page, in the nine months of 2025, USD 14.8 billion of forwards matured with the associated EBIT impact and euro conversions realized at a blended rate of $1.18 versus $1.21 in the nine months of 2024. And we also implemented USD 12.7 billion of new coverage at a blended rate of $1.18. And as a result, our total U.S. dollar coverage portfolio in U.S. dollar stands at $80.7 billion, with an average blended rate of $1.21 as compared to $82.8 billion at $1.21 at the end of 2024. So now let's look at our free cash flow on Page 10. Our free cash flow before customer financing was negative EUR 0.9 billion in the first nine months of the year. And as you can see on the chart, this outflow was mainly driven by the change in working capital, and it notably reflects the planned inventory buildup to support our ramp-up across our businesses, and it also includes a favorable phasing effect of cash receipts and payments. On the A400M, the aircraft slightly weighted negatively on our free cash flow in the nine months of 2025 as the deliveries of the aircraft are back-end loaded However, we continue to expect it to be broadly neutral from a free cash flow perspective in the full year 2025. As you can also see on the chart, the nine-month CapEx number was negative EUR 2.3 billion, and we continue to expect it to increase in 2025 to support our industrial ramp-up so that the free cash flow was negative EUR 0.8 billion, including customer financing of a positive EUR 0.1 billion. What we can say is that the aircraft financing environment remains strong and competitive, and we expect sufficient liquidity to finance our 2025 deliveries. So with that, our net cash position stood at EUR 7 billion as at the end of September, also reflecting the dividend payment as well as the weakening dollar environment, but I should stress that our liquidity remains very strong at around EUR 30 billion. And in September, as you might have noticed, Moody's upgraded our credit rating to A1 with a stable outlook, and we think this is underlining our consistent strong credit management and the strength of our balance sheet. And with that, I would like to hand it back to Guillaume. Guillaume Faury: Thank you, Thomas. Very clear. So now let's start with commercial aircraft. In the nine months 2025, we delivered 507 aircraft to 79 customers. Looking at the situation by aircraft family. On narrowbodies, we delivered 62 A220s and 392 A320s. And out of the 392 A320 family aircraft, 250 were A321s, representing 64% of the deliveries for the A320 family. We are very pleased that Air New Guinea has taken delivery of its first A220, becoming the 25th global operator of the aircraft, which is now flying with carriers on five continents. The A320 family reached a major milestone, becoming the most delivered aligner in history. There's a bit of pride here, as you can feel. And we continue to ramp up towards a rate of 75 A320 family aircraft per month in 2027. That's no change compared to previous assumptions. On the A220, the current balance between supply and demand has led to an adjustment of the ramp-up trajectory and the ramp-up ahead of us. We are now targeting to reach rate 12 in 2026, allowing time for the integration of the Spirit AeroSystems work packages, mostly the wings and the progressive introduction of engine durability improvements for our customers. This means more work to reach breakeven, and our team are actually on it. In the nine months, we delivered 53 widebodies, of which 20 A330s and 33 A350s. On the A330, we're currently stabilizing at a monthly production rate of four. As previously introduced, we are now targeting to reach rate five in 2029 to meet the customer demand for the A330. On the A350, there's no change. We continue to target the rate 12 in 2028. When it comes to the A350 freighter, I'm pleased to say that we started the assembly of the first flight test aircraft in Toulouse with the first flight planned next year. In a nutshell, we continue to produce in line with the plan. The challenges for the year have not changed, notably with cabin and for the A320, the persisting tensions on engines, resulting in 32 gliders at the end of September. The engine situation is showing signs of recovery, and we continue to work closely with the engine manufacturers to deliver on our 2025 commitments. Now let's look at the financials for our commercial aircraft business. Revenues increased 3% year-on-year, mainly reflecting the higher number of deliveries and growth in services. EBIT adjusted was at EUR 3.3 billion in the nine months, driven by favorable hedges rates and slightly lower R&D expenses, while the increase of deliveries embeds an unfavorable mix. Looking at helicopters. In the nine months, we delivered 218 helicopters, 28 more than at nine months of 2024. Revenues increased around 16% to EUR 5.7 billion, reflecting a solid performance from programs and Services growth. EBIT adjusted increased to EUR 495 million, reflecting growth in services as well as higher deliveries, as I mentioned earlier. And let's complete our review with Defense and Space. Revenues increased 17% year-on-year to EUR 8.9 billion, driven by higher volumes across all business lines. EBIT adjusted stood at EUR 420 million, supported by higher volumes and improved profitability, in line with the divisional midterm trajectory. On the A400M program, we engaged in positive and forward-looking discussions with the launch nations and OCCAR. This was notably marked by the agreement reached in June with OCCAR to advance seven deliveries for France and Spain and to further increase the visibility we have on the production for the program. In light of uncertainties regarding the level of aircraft orders, Airbus continues to assess the potential impact on the program's manufacturing activities. Risks on the qualification of technical capabilities and associated costs remain stable. And now on to our guidance, which, as you have seen, is maintained. On the basis of its 2025 guidance, the company assumes no additional disruptions to global trade or to the world economy, air traffic, the supply chain, the company's internal operations and its ability to deliver products and services. The guidance now includes the impact of currently applicable tariffs. The guidance also includes the impact of the integration of the certain Spirit AeroSystems work packages based on preliminary estimates and an assumed closing in the fourth quarter of 2025. On that basis, the company targets to achieve in 2025 around 820 commercial aircraft deliveries, an EBIT adjusted of around 700 -- sorry, of around EUR 7 billion. We're not yet there. And the free cash flow before customer financing of around EUR 4.5 billion. Just to clarify my statement on EBIT, it's -- we target an EBIT adjusted of around EUR 7 billion. The anticipated impact of the integration of certain Spirit AeroSystems work packages on the company's guidance remains broadly in line with previous estimates. But maybe, Thomas, you want to be more precise on some of those elements? Thomas Toepfer: Yes. Let me just add a couple of precisions and details to what you said, Guillaume. So, first of all, on tariffs, as I said earlier, we expect this to represent anything between EUR 100 million and EUR 200 million for the full year, but the vast majority of the total amount will be recorded in Q4. And secondly, on Spirit AeroSystems, when we say broadly in line, what do we mean is that the closing date is now expected before the end of the year, and all parties are putting all necessary efforts into the closing process, and this is on track for the operational readiness for day one. But of course, it is later than what we had anticipated at the beginning of this year when we put out the guidance. Now this shift of the closing into Q4 comes with a partial relief to free cash flow because we didn't own the business, and therefore, we did not record any negative operational result in our free cash flow. On the other hand, you have also seen in our financial statements that we, of course, provided credit lines to Spirit, which are recorded below the free cash flow line. So in total, this remains broadly neutral in terms of the net cash position for the company. But everything else being equal, you could take this slight free cash flow positive adjustment in the range of a low triple-digit number into your models, if you want. But obviously, the order of magnitude is not such that it led us to change the guidance. And with that, back to Guillaume. Guillaume Faury: Thank you, Thomas, for those precisions. And I'll conclude with our key priorities, and they have not changed. We are and we remain fully committed to executing the next steps of our commercial aircraft production ramp-up together with our suppliers. Our focus is twofold: addressing the remaining specific supply chain tensions, in particular, on narrow-body engines where durability remains a headwind as well as cabin while also preparing the integration of the key Spirit AeroSystems work packages. As we focus on our production goals, we're also maturing the critical technologies that will define the successor of the A320 family in line with our ambition to pioneer the next generation of commercial aircraft. When it comes to Airbus Defense and Space, we are progressing on our transformation and contributing to establishing a European space leader. On European defense, the industry is clearly in motion. We are embracing this challenge by leveraging the combined expertise of our Defense and Space and Helicopters divisions to drive scale and cooperation in Europe. And now let's turn to your questions in the Q&A. Helene Le Gorgeu: Thank you, Guillaume. Thank you, Thomas. We will now start our Q&A session. Please introduce yourself and your company when asking a question. Please limit yourself to two questions at a time, and this include sub questions. Also, as usual, please remember to speak clearly and slowly in order to have all participants, particularly ourselves, to understand your question. So, Sharon, please go ahead and explain the procedure for the participants. Operator: Thank you, Helene. We will now begin the question-and-answer session. [Operator Instructions] We will now go to our first question. And our first question today comes from the line of Benjamin Heelan from Bank of America. Guillaume Faury: Ben, we don't hear you. Benjamin Heelan: Can you hear me now? Guillaume Faury: Yes. Benjamin Heelan: Yes. Sorry about that. First question was on the margin. Margin, I think, in Q3 looks pretty positive. Could you just talk through some of the drivers? It looks to me though as a very positive mix in commercial, but any comments there would be helpful. Thomas Toepfer: Well, Ben, I think we're repeating ourselves a little bit when we say that the margin of a single quarter should not be overestimated or over interpreted, I would say. So the margin in commercial indeed was, let's say, positive. That does not necessarily come from the mix. The mix was actually not specifically helping us in Q3, but it was more driven by, let's say, cost discipline in terms of SG&A, R&D, where the LEAP program that we have started is now really showing its full effect. So we're pretty pleased with, I would say, the efficiency that the company has shown over the course of the year and specifically in Q3. So the things that we have done are not, let's say, of short-term nature, but we expect them that we can actually keep them in our trajectory. And secondly, I would say, in Defense and Space, all divisions are showing a good performance. There's two drivers for it. One, that our improvement program for space is actually showing good effects, and we're very pleased with the results that we see, not only in terms of measures that they take, but first outcome, which is rather better than what we had expected. And secondly, as Guillaume pointed out, a good momentum in defense in general, where we see not only good order intake, but also, let's say, good margins for the first nine months of the year. So, I would not specifically point to the mix, but rather some self-help measures and operational discipline that are helping. Benjamin Heelan: Okay. And then a follow-on. I know you won't give us a delivery number for 2026 today. But are there any building blocks that you can provide to point us broadly in the direction of where we should be headed for next year from a delivery perspective in commercial? Guillaume Faury: I would say not more today than what you know already in terms of ramp-up trajectory for the A320, the 330 and the 350. There's change, as you have seen on what we target for next year on the A220, where we target to reach rate 12 instead of rate 14. So nothing new on that horizon except this slight modification on the 220, and we'll be targeting rate five for the A330 a bit later. So that's basically a lot of stability in the ramp-up trajectory compared to what we had shared earlier in the year. Operator: Your next question comes from the line of David Perry from JPMorgan. David Perry: So, two quick ones from me. Just on this tariff impact, Thomas, if it all falls in Q4, do we annualize that impact going forward? And then on Space, can you just clarify exactly what you're putting in? Unless I'm mistaken, I think you're putting a little bit more than just the manufacturing business, but maybe I've misunderstood on that. And maybe any other comments you want to make in terms of like is this going to have a meaningful impact on the ADS margin going forward, this transaction? Are you making any equalization payments or receiving any? Thomas Toepfer: So, on the two questions, the tariff impact, let me repeat what I said. So the total full year impact will be between EUR 100 million and EUR 200 million. Why is the majority of that occurring in Q4? Because the material that we have shipped or that is necessary has already been shipped into the United States, but we hold it as work in progress so that we will only record the impact of the tariffs once the material is actually built into the aircraft and the aircraft is sold. So therefore, to your question, you should not annualize the Q4 effect. It's a specific, let's say, impact of this year where a lot of the pre-September 1 effects are currently captured in our WIP and will then only materialize when the aircraft is delivered. That is the mechanic behind it. And on your second question, if I understood correctly, you're referring to BROMO. So what are we bringing into that cooperation? Two businesses essentially, our Space Services business, which is currently mainly in CI and our Space Systems business, which is also a subdivision of Defense and Space. And obviously, what has nothing to do with it is the launcher business, which is completely separate. But we're bringing in both Services and Space Systems. David Perry: Okay. And does the transaction have a big impact on the sort of future margin of ADS? Thomas Toepfer: Well, I mean, we do expect that there will be mid-triple-digit synergies five years after the closing of the transaction. So I would say in the medium term, it should be clearly accretive to the margin, and we will then hold a 35% stake in something which is more efficient and more profitable than what we have today. But let's be honest, in the very short term, I would not put in a big impact in the model that you probably have. Operator: Your next question comes from the line of Ross Law from Morgan Stanley. Ross Law: So the first one on your full year delivery guidance. So given that the engine suppliers have essentially said that they're getting you the engines that you need, what are the main challenges or bottlenecks outstanding from here into year-end? And then looking ahead to 2026, obviously, engines seemingly becoming less of an issue compared to '24 and '25, supply chain overall performing better. Is there any reason why you won't be able to deliver a double-digit increase in deliveries in '26, which is the growth rate you previously referred to? Guillaume Faury: Maybe I'll take the questions. When it comes to 2025 and the full year around 820 aircraft, the main challenge is the volume of aircraft that remains to be delivered in the fourth quarter. And what we will have to deliver in the last month is indeed quite unprecedented. We are not yet at the point where we will have all what we need to secure all deliveries. We are still expecting engines in the weeks to come that will support some 2025 deliveries. But the main challenge is indeed volume, backloading of the year and making sure that there's no mishap or no challenge ahead of us that would postpone aircraft and cross the line of the end of '25. So a lot of work the supply chain and the engine situation looks like we're going to make it. But again, still a lot on our plate. About the engine tensions, they will persist. There is indeed a bigger backdrop of airlines needing more engines for their in-service aircraft on the Pratt & Whitney side, but as well on the CFM side. And the engine makers need to continue to ramp up the production of parts and engines to serve both the manufacturers, the aircraft manufacturers and their airline and lessor customers. So we are not out of the woods when it comes to tension on engine availability. We think we have -- we will have what we need for the trajectory we have sketched out for 2026. But again, we are not at the point of guiding for 2026. But I confirm and I maintain what I said earlier, we are consistent with the ramp-up trajectory that we have given previously this year and next year, namely the reaching the rate 75 on the A320 in 2027, the rate 12 on the A350 in 2028 and the rate on the A330 in 2029 as far as I remember. On change A220, slightly lower rate for next year. We are in the steep ramp-up on the 220, and we now target to reach the rate 12 for next year, which is still a very steep ramp-up. But we believe this is the best balance between the different constraints we have next year and a lot of work actually on the A220 to get there by next year, including the integration of the wings and other work packages that will come from the integration of Spirit. Operator: Your next question comes from the line of Chloe Lemarie from Jefferies. Chloe Lemarie: The first one would be on the maintained guide. It looks fairly conservative for Q4 given the expected delivery growth. So I understand tariffs are a headwind, but any other moving parts you'd like to share to help us understand the building blocks for the Q4 year-on-year? And the second one, I think, Guillaume, you commented on the press call about gliders being half of what they were. Could you just clarify whether this is at end Q3 or more recently? And maybe compare and contrast the situation between the LEAP and GTF-powered aircraft, please? Thomas Toepfer: So maybe I'll start with the guidance and the remain to do. So starting from the EUR 4.1 billion as of the nine months. Let's start by saying last year, we did EUR 2.6 billion in Q4 of last year. I would say there's clearly a positive effect from the volume. You can attach roughly EUR 0.5 billion to it if all the deliveries materialize. But yes, then I would say there's at least two headwinds. One is the tariffs. And secondly, R&D, we're expecting that R&D will be slightly lower than last year, but that still could mean that in Q4, R&D would be higher than last year. So that is a headwind that you should have on your list. On the other hand, yes, I do believe that the two divisions, Helicopters and ADS could be performing positively, and that would be then a positive. So if you take those together, that would bring me then to the around seven. It all hinges on the deliveries. And as Guillaume said, it's a very, very steep ramp-up. The teams are on it. And if we make the deliveries, obviously, then I think the financial numbers should clearly be in sync with that. Guillaume Faury: Thank you, Thomas. When it comes to the question on gliders, we stood at 60 gliders by end of Q2, and we stood at 32 gliders by end of Q3, so by end of September, roughly a month ago. The situation obviously is dynamic as we are targeting to be with zero gliders by the end of the year. And as I said earlier, we still need to receive engines in the weeks to come to be fully sure that we will have what we need. But engine manufacturers have confirmed that they will deliver what we need to reach that objective of zero glider and reaching our guidance. And when it comes to the situation LEAP versus GTF, actually, it's both. And as we speak, it's shared between the engine manufacturers, and I can't be precise enough, but it's not far from balanced between the two, not far from 50-50 between LEAP and GTF. But again, it's a dynamic situation almost by the day as we deliver a lot of aircraft those weeks. So I can't be more precise than this at this very moment. Operator: We will now take the next question. And the question comes from the line of Sam Burgess from Goldman Sachs. Samuel Burgess: A couple from me. Thomas, can we just circle back on R&D. From memory, your initial expectation was R&D would be a bit above 2024 levels. I might have missed it, but what specifically is driving this trimming of R&D versus your initial expectations? And is that kind of sustainable going forward? Or do we get some catch-up in FY '26? And the second question, I know you don't want to dwell too much on individual quarters. But in your press release, you do explicitly mention a less favorable mix on deliveries year-to-date. Do you expect that mix to become more favorable in Q4? Thomas Toepfer: So, on R&D, we are roughly EUR 200 million below the 2024 numbers for the first nine months of the year, if I'm not mistaken. that is mainly a function of our lead improvement program where we're focusing on the things that really matter, but have the courage to also terminate some projects where we think they're simply not yielding the results that we feel they should. And that means less external consultants, that means less spending on all kinds of things. So it's not trimming R&D, as you said it, with a lawnmower approach, but it's really very specific and focused with a program where we think let's focus on the things that matter most to the company. That was pretty successful in our view. And so therefore, while admittedly, we said at the beginning of the year that we would expect R&D to slightly increase, we're now of the view that with the successes that we have, which we think are sustainable, we should be slightly below previous year for the full year, but that still means that in Q4, as I said in my previous answer, there might be a slight increase in R&D. Now going forward, what is unchanged is that we do expect R&D to increase in line with revenue. So as a percentage of revenue, I think you should keep it constant in your model, but of course, starting from a somewhat lower base in 2025. And then on the mix, it's simply a function that we have delivered more A220s, and you know that they have a lower margin than the rest. So it's just a function of all the ramp-ups and the numbers that we have given you. Operator: Your next question today comes from the line of Ian Douglas-Pennant from UBS. Ian Douglas-Pennant: The first is another on the supply chain. Aside from engines and the acquisition of Spirit being delayed, are there any other pain points that you'd like to call out in the supply chain that are causing the changes to the schedules that you've talked about today or elsewhere? Secondly, we've seen a number of A320neos being retired this year. I wonder, do you have any comments on why that might be happening? How sustainable you think whether they are edge cases or how we should interpret some very young aircraft being retired? Guillaume Faury: On the supply chain, of course, the main area of attention and concern are engines, as we mentioned earlier. The rest of the supply chain is actually doing much better than in 2024 and previous years. I mean, significantly better. The number of missing parts and the depth of delays is significantly better than it was before. We continue to have issues and delays on cabin equipment, interiors, seats, and that's probably more of a midterm issue than a short-term one, given the fact that this part of the industry has been since COVID or since the recovery after COVID, sort of overwhelmed by the combination of demand for new aircraft and retrofits and extension of the life of products. When it comes to your question on the retirement of A320neo, I'm a bit surprised. That's not what I have in mind. Maybe there's a confusion with aircraft being on the ground because of missing engines, in particular, on the Pratt side, but that's not something that is consistent with what I have in mind. It's not retirement of aircraft as much as I know. But we look at your question. Operator: We will now go to the next question. And the next question comes from the line of Douglas Harned from Bernstein. Douglas Harned: The first question is, if you could update us on the A350. It looks like deliveries may be a little bit better in October, but this has been very slow. And maybe you could update us on progress with Spirit with interiors related to the A350 and getting those rates up. And then second question is, we've heard some cautious comments from CFM on getting out to 75 a month, particularly most recently from Safran. Where do you stand now in working with the engine providers on ensuring that you can get to that 75 a month at some point, hopefully by the end of 2027. Guillaume Faury: So, on the A350, we continue to believe we will be consistent with what we have indicated so far, meaning that the ramp-up has been sort of -- the start of the ramp-up on the A350 have been sort of delayed by a year given the challenges and the difficulties we had with the Section 15 of Spirit. So we don't expect an increase compared to 2024 in 2025, but there is indeed a phasing and a quite significant level of backloading in deliveries in 2025. The ramp-up then comes later, and we think we'll catch up in the sense of maintaining reaching the rate 12 by 2028. We are mostly challenged by difficulties and delays on interiors, on laboratories, on seats. That's mainly what we're suffering from on the A350. And it's not different compared to previous quarters and even compared to 2024, unfortunately. When it comes to the ramp-up of the A320, actually, CFM is in line with us has confirmed regularly that they are in line with us on the need for rate 75 on the ramp-up trajectory. So I'm slightly surprised with the remark because the level of alignment with CFM is very strong. They had significant issues this year that has led to a lot of gliders and delays in delivering their engines, but they're catching up. And again, I'm comfortable that they will be back to where they have to be by end of this year to then deliver on the ramp-up trajectory to support us in '26, '27 until we reach the rate 75. I'm not suggesting they don't have their challenges. So I don't know what was the nature of the comment precisely. They have their challenges, obviously, but we are moving hand-in-hand when it comes to ramping up the A320 with the CFM engine, at least that's my current perception, and that's consistent with the last weeks and months meetings and interactions with CFM. Operator: Your next question comes from the line of Ken Herbert from RBC. Kenneth Herbert: I wanted to pivot and ask about the A220, if I could. The lower guidance for deliveries still seems relatively ambitious considering sort of where you are today on that program. Can you talk more about challenges with that ramp and what gives you incremental confidence still at the 12 a month in '26? And then as a second part, there continues to be speculation about maybe a third variant of that program. How do you view the investments in that and the potential return on that program considering what seems to be a more challenging ramp and some incremental comments about some demand pressure. Guillaume Faury: Yes. Thank you for the question. So, indeed, we are in a steep ramp-up for the A220. The team has a lot on the plate, and now they have on top to integrate the wings and other work packages of the A220. So that's indeed a lot of work to get to where we want to be. So we think the rate 12 for next year is the good balance between the different challenges and the demand and supply situation and the quantity of work to be delivered. Indeed, it's still a significant ramp-up, but what we learned from this year is that a rate 12 for next year reaching 12 next year actually is something we believe is well in the cards. So, basically, that's all about the quantity of work, all what needs to be achieved, the ramp-up in both Mirabel and Mobile. We have two files, the number of variants with different configurations that we have to deliver and industrial optimization to be able to accelerate the pace of production to that level. When it comes to the third variant, which is also nicknamed the dash 500, the first two variants being the dash 100 and the dash 300. That's something we believe the program will need and benefit from. We have demand from airlines and from the airline customers for these variants that on paper looks really as a very competitive product. We have said that the dash 500 is not a question of if, but it's a question of when. And we're still with the same type of statement. But again, we are giving priority to the short-term work and the short-term challenges that we have to perform the ramp-up to move forward to breakeven with the program to digest the Spirit work package that will be now under our responsibility. So that's a bit the way we're looking at the year and the years ahead of us. Operator: We will now take our final question for today. And the final question comes from the line of Olivier Brochet from Rothschild & Co Redburn. Olivier Brochet: The first one is very simple on tariffs. You mentioned a number. Should we think of the impact on cash to be similar for '25 and '26, please? And second, on Space, on accounting and the deconsolidation that you might be doing. Should we think of a deconsolidation, sorry, for that? And will it lead to some separation costs, please? Guillaume Faury: So, the second question is too difficult and the first one as well. So, I hand over to Thomas. Thomas Toepfer: So, the first one, obviously, is easy for me. The answer is yes. I mean, roughly the EBIT and the cash impact is the same. So you can put that into your model. On the space consolidation, so obviously, what we have to do is go from an MOU to signing and then from signing to closing. Closing means in order to be ready for that, we have to carve out the business. And currently, the business is spread over many legal entities and countries. So to your question, yes, we do have the task as Airbus to create an operationally and legally stand-alone separate business until 2027, which can be then put into the new legal entity. That will come with not insignificant, let's say, separation costs. And we said, however, in the statement on BROMO that they would be in line with industry standards. So I think you can plug in a normal number into your models, but it's not insignificant given the size of it. For 2025, that will not have an impact on our financial results. Helene Le Gorgeu: Thank you, Guillaume. Thank you, Thomas. This now closes our conference call for today. If you have any further questions, please send an e-mail to Olivier, Victoria or myself, and we will get back to you as soon as possible. Guillaume Faury: And Helene, I'd like to announce to the audience that you will actually move to new challenges still in the financial director of Airbus under the leadership of Thomas in the commercial aircraft team. And you will have Jean-Christophe Henoux as a successor. Jean-Christophe is joining from the strategic team and will take over on the 1st of December. So very soon, we will have JC, nicknamed JC with us. And with this, Helene, I would like to thank you very warmly for the pleasure working with you for the quality and the precision of all you've been doing with us for your constant voice on the call and for your very good availability with all our investors and analysts and all the financial community. So I wish you -- we wish you with Thomas, all the best moving forward to your new job, and I'm sure there will be opportunities for you to answer questions on what it is and what you will be doing next. So, again, thank you, Helene, and welcome, JC. And bye-bye, everyone. Thank you. Operator: Thank you. Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant evening. Goodbye.
Operator: Good afternoon. Welcome to the Penske Automotive Group Third Quarter 2025 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through November 5, 2025, on the company's website under the Investors tab at www.penskeautomotive.com. I will now introduce Tony Pordon, the company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead. Anthony Pordon: Thank you, Rob. Good afternoon, everyone, and thank you for joining us today. A press release detailing Penske Automotive Group's third quarter 2025 financial results was issued this morning and is posted on our website, along with a presentation designed to assist you in understanding the company's results. As always, I'm available by e-mail or phone for any follow-up questions you may have. Joining me for today's call are Roger Penske, our Chair and CEO; Shelley Hulgrave, EVP and Chief Financial Officer; Rich Shearing, North American Operations; Randall Seymore, International Operations; and Tony Facione, our Vice President and Corporate Controller. We may include forward-looking statements on today's call about our earnings potential, outlook and other future events, and we may also discuss certain non-GAAP financial measures such as EBITDA. Our future results may vary from our expectations because of risks and uncertainties outlined in today's press release. We also have prominently presented and reconciled any non-GAAP measures to their most directly comparable GAAP measures in this morning's press release and the investor presentation, both of which are available on our website. Our future results may vary from our expectations because of risks and uncertainties outlined in today's press release under forward-looking statements. I also direct you to our SEC filings, including our Form 10-K and previously filed Form 10-Qs for additional discussion and factors that could cause future results to differ materially from expectations. At this time, I'll now turn the call over to Roger Penske. Roger Penske: Thank you, Tony. Good afternoon, everyone. I'm pleased with the performance of PAG during Q3. Our teams navigated through several challenges across our business and delivered solid results. Q3 revenue was $7.7 billion, up 1%. For the quarter, EBT was $292 million, net income, $213 million and earnings per share of $3.23. Retail automotive same-store revenue increased 5%, which included a 5% increase in service and parts revenue, partially offset by approximately $200 million of annualized revenue of strategic divestitures and dealership closures made during the last year. Q3 each year typically is impacted by seasonality as we navigate the change to a new model year. This year's seasonality was coupled with the expiration of EV tax credit in the U.S., which drove a higher penetration of BEV sales during the quarter to more than 10% of our total sales, and that's up from 6% to 7% in previous quarters. The average discount from MSRP on BEV we sold in the U.S. in Q3 was $7,100. We estimate the higher percentage of BEVs sold during the quarter reduced total new vehicle gross per unit by approximately $100. The U.S. retail automotive business was strong during Q3 as same-store new units delivered increased 9% and revenue increased $300 million or nearly 10%. The strong U.S. performance was offset by two areas. The first, the U.K. retail automotive and retail commercial trucking businesses. In the U.K., a cyber incident at Land Rover impacted delivery of new vehicles during the September registration period as well as an interruption to our service and parts business. We estimate the impact reduced the total new gross per unit by approximately $61. Gross per new unit retail in Q3 was $4,726. If you add back the impact of the higher mix of BEV units during the quarter and the impact of Land Rover gross per new unit, we have been approximately $150 per unit higher. In addition to the cyber incidents, higher costs for government-mandated social programs in the U.K. drove higher SG&A costs. The net impact of these two events drove a reduction in EBT of approximately $5 million during the quarter. Also, the challenging freight backdrop continues to impact commercial truck sales and service and parts. As a result, PTG same-store unit sales declined 19% during Q3 and EBT declined $15 million. In summary, we estimate the impact -- EBT during the third quarter was approximately $23 million or $0.25 per share. Outlining at JLR cyber incident, $4 million; our social programs, $2 million to $3 million; premier truck freight and tariff impacts, $15 million; and we had a higher bad debt expense at PTS of approximately $2 million. Our teams have taken action to reduce the impact from these macro events through various initiatives, including headcount reduction, driving efficiencies, which should benefit future periods. Let me now turn it over to Rich Shearing to discuss our North American operations. Richard Shearing: Thank you, Roger, and good afternoon, everyone. As Roger indicated, our U.S. automotive retail business was strong during the third quarter. Same-store new and used unit sales increased 5% with new increasing 9% and used increasing 1%. During the quarter, 26% of new units sold were at MSRP compared to 32% in the third quarter last year. Used vehicle sales continue to be constrained by fewer lease returns, and we expect the lower level of lease return maturities to bottom this year and begin improving in 2026. We further expect franchise dealers, in particular, to benefit from these increasing lease returns for used vehicle sourcing. Our U.S. same-store service and parts revenue increased 6% and related gross profit increased 8%. Same-store gross margin also increased 120 basis points. Customer pay gross was up 5% and warranty was up 15%. On average, in the U.S., we estimate our automotive technicians generate approximately $30,000 of gross profit per month. Our automotive technician count is up 2% when compared to the end of September last year. While automotive service and parts revenue and gross profit is at a record level, we continue to focus on driving higher utilization of our base and increasing fixed cost absorption. And in Q3, our U.S. fixed cost absorption increased 380 basis points. Turning to Premier Truck Group. We operate 45 locations and remain one of the largest commercial truck retailers for Daimler Truck North America. As Roger indicated, EBT declined $15 million when compared to Q3 last year as the prolonged recessionary freight environment impacted orders, new and used unit sales and fixed operations. Tariffs pulled some orders previously scheduled for delivery in Q3 up to the second quarter, while other customers remain on the sidelines due to Section 232 tariffs and ultimate resolution of the EPA 2027 Emissions Regulations. As a result, the Class 8 market saw a 30% decline in orders and a 22% decline in retail sales during Q3. At the same time, industry backlog dropped 24% to approximately 88,000 units or 4 months of replacement demand. During Q3, Premier Truck Group was in line with the industry as new and used unit sales declined 19%. Service and parts revenue declined 3% as lower freight volumes caused customers to defer repairs and maintenance to future periods. Premier Truck Group remains one of the core pillars to the Penske Automotive Group diversification story, and we continue to adjust our cost structure to a level of business and are well positioned for an inevitable rebound. Turning to Penske Transportation Solutions. The freight environment also impacts the full-service lease, rental and logistic operations of PTS. During Q3, operating revenue declined 3% to $2.7 billion. Full service revenue, contract maintenance and logistics revenue was flat, while rental revenue declined 14%. In Q3, PTS sold 10,600 units and ended the quarter with 405,000 units, down from 414,000 units at the end of June. During the quarter, PTS incurred an increase in bad debt expense on its rental business of approximately $7.5 million from higher write-offs related to the freight environment. That increase impacted the PAG equity income by approximately $2.2 million during the quarter. Despite these challenges, equity earnings from PTS were $58 million, only down $2 million from the $60 million we reported in Q3 last year as PTS has been aggressive in rightsizing its fleet, reducing expenses and preparing for the rebound in the freight environment. I would now like to turn the call over to Randall Seymore to discuss our international operations. Randall Seymore: Thanks, Rich, and good afternoon, everyone. During Q3, international revenue was $2.9 billion. In the U.K., the macro operating environment remains challenging as inflation, interest rates, higher taxes, consumer affordability and the government push towards electrification impacts the overall market. During Q3, the number of same-store units we delivered declined by 7% as the zero-emission mandates, the cybersecurity incident at JLR and the previously discussed disposed or closed dealerships impacted our new unit sales. In fact, our unit volume at JLR was down approximately 700 units in Q3 2025 when compared to the same period last year. Despite the challenging operating environment, the loss of JLR units during Q3, new vehicle gross has only declined $163 per unit. Turning to used cars. Our same-store used units declined 8% as we closed or sold 4 locations and realigned the U.K. CarShop used-only dealerships to Sytner Select last year. We have now reached the 1-year anniversary of making the change to Sytner Select. As a result of this change and better management of used cars, total used gross profit in the U.K. increased 19%, contributing to the overall increase in used vehicle gross per unit. Service and same-store revenue -- service and parts same-store revenue was flat during Q3, while gross profit increased 4%, including a 270 basis point increase on gross margin. We also have operations in Italy, Germany, and Japan, and these businesses generated an increase in revenue of 23% during Q3 and an EBT increase of 54%. As we look to future opportunities in the U.K. and Europe, we opened our first Chinese brand locations. We will have 8 dealerships co-located in our Sytner Select locations as we look to drive further efficiencies to augment the investments at those sites. Turning to Australia. We operate 3 Porsche dealerships in Melbourne and distribute heavy-duty trucks and power systems through a network of more than 20 dealers across Australia. The Porsche dealerships are fully integrated and performing well. We have sold 1,700 vehicles year-to-date. And during Q3, the used-to-new ratio grew to 1.4:1 and fixed absorption increased 250 basis points. We utilize our existing scale of the Commercial Vehicle and Power Systems business in Australia to leverage costs while executing our one ecosystem strategy, which provides for a superior customer experience. For the Australian Commercial Vehicle and Power Systems business, we are diversified with revenue and gross profit split approximately 50-50 between on- and off-highway markets. We are really pleased with the growth we see in Australia. In fact, the recent announcement of rare earth minerals deal between Australia and the U.S. should help drive further growth in the off-highway mining segment. The Defence and Energy Solutions segments provide us with additional opportunities. In Defence, we have in-service support contracts on a variety of applications ranging from infantry fighting vehicles to frigates, destroyers, and armed personnel carriers. In Energy Solutions, we believe we are at the forefront of a rapidly growing segment that provide power solutions for data centers to support the future growth of artificial intelligence. Data centers require robust infrastructure with reliable power at the core of its operation. The engines and support we provide will be critical as this segment evolves. We see the potential for our Energy Solutions business in Australia to generate at least $1 billion in revenue by 2030. I would now like to turn the call over to Shelley Hulgrave to review our cash flow, balance sheet, and capital allocation. Michelle Hulgrave: Thank you, Randall. Good afternoon, everyone. We remain committed to our diversification strategy, a best-in-class balance sheet and a disciplined approach to capital allocation while implementing efficiencies and lowering costs across our businesses. Our SG&A to growth was 72.7% during Q3. The third quarter typically has a higher SG&A due to seasonality. However, Q3 SG&A to growth was also impacted by the higher social program costs in the U.K. the cyber incident in Land Rover and the lower business volume at Premier Truck Group. We believe these items contributed 120 basis points to SG&A to growth during Q3. Excluding these items, SG&A to growth increased by 30 basis points when compared to Q3 last year. For the 9 months ended September 30, 2025, we generated $852 million in cash flow from operations and adjusted EBITDA was $1.1 billion. Our free cash flow, which is cash flow from operations after deducting capital expenditures, was $625 million. On a trailing 12-month basis, adjusted EBITDA was over $1.5 billion, representing an increase of 3.2% compared to the same time last year. EBITDA for Q3 was $357 million. During the third quarter, we repaid $550 million of senior subordinated notes at their scheduled maturity, further reducing our non-vehicle debt. At the end of September, our non-vehicle long-term debt was $1.57 billion, which is down $281 million since the end of December last year. We have $5.6 billion total debt, of which $4 billion is floor plan and the remaining $1.6 billion is related to our 2029 senior subnotes, credit agreements and mortgages. 15% of the non-vehicle long-term debt is at fixed rate. We estimate a 25 basis point change in interest rates would impact interest expense by approximately $12 million. Debt to total capitalization improved to 21.5% from 26.2% at the end of December last year and leverage declined to 1.0x. Through September 30, we paid $253 million in dividends and invested $227 million in capital expenditures. We increased our dividend by 4.5% to $1.38 per share in October, representing the 20th consecutive quarterly increase. On a forward basis, our current dividend yield is approximately 3.2% with a payout ratio of 36.5% over the last 12 months. Year-to-date through October 24, we repurchased 1,086,560 shares of stock for $145 million, representing approximately 1.6% of our outstanding shares. We have $262 million remaining under the existing securities repurchase authorization. Over the last 4-plus years, we have returned over $2.5 billion to shareholders through dividends and share repurchases. As part of our strategic capital allocation, during the third quarter, we acquired the iconic Ferrari dealership in Modena, Italy and have 9 Ferrari dealerships worldwide. This dealership is strategic to both Penske and Ferrari and will enhance our relationship at the home of the Ferrari brand. We have an acquisition pipeline of over $1.5 billion of revenue we expect to close during Q4 and expect to meet our acquired revenue target for the year. Total inventory was $4.7 billion, down $145 million from the end of June and up $65 million from the end of December 2024. Retail automotive inventory is down $9 million, while commercial vehicle inventory is up $74 million. New and used inventory remains in good shape. New vehicle inventory is at a 51-day supply, including 54 days for premium and 34 days for volume foreign. Our BEV inventory is at 12 days in the U.S. at the end of September. Used vehicle inventory is at a 43 days supply. At the end of September, we had $80 million of cash and liquidity of $1.8 billion. At this time, I will turn the call back to Roger for some final remarks. Roger Penske: Thanks, Shelley. As I mentioned earlier, I continue to be pleased with our performance and remain confident in our diversified model and its ability to flex with market conditions. Thanks for joining the call today. We'll now open it up for your questions. Operator: [Operator Instructions] Your first question today comes from line of Michael Ward from Citigroup. Michael Ward: Randall, I wanted to clarify something. You went over kind of quickly. You mentioned 8 locations with Chinese brands, and then you tied in Sytner Select together with it. What were you talking about there? And can you identify the brands you're kind of working with now with the Chinese-based manufacturers? Randall Seymore: Yes, sure. So as we made the transition from CarShop to Sytner Select last year, we reduced the number of these big box retail stores down to 8. And -- so these are high-quality locations. The strategy there was to have less inventory, I'd say, better inventory through better source and increase our gross profit. And for the numbers we just went over, we were successful with that and happy and proud of the team with what they've executed over there. But we had the opportunity to take on some Chinese brands. So Chery, we've taken on in 3 locations. We launched that in October. And then Geely, we're in the process of launching right now. So we'll be running in November at 5 other locations. So look, these are existing locations, no capital expenditures to speak of. We've got fixed operations there. So it's a really good opportunity. And then just while we're on the Chinese topic, 2 other locations in Germany. So in Aachen, we're going to take on BYD again, at an existing location facility we already have. And then MG in Heinsberg, Germany, same thing with the location that we already have. Roger Penske: I think, Mike, also, when you think about these big box stores, these are built first-class originally for CarShop, and we've obviously changed the brand name, the Sytner Select, but we're getting about 400 people coming through the store, am I right, Randall? Randall Seymore: Per week. Yes. Roger Penske: Per week. So this isn't like opening up a new branch or a new dealership with no service and no sales. This gives us a chance really to do with the Chinese brands. And it's minimal, very minimal impact from the standpoint of capital expenditure. Michael Ward: Okay. Wow, so you're doing with the Chinese brands at a Sytner Select location? Roger Penske: Correct. Maybe that's the easy way to put it, correct. Michael Ward: Okay. Rich, you talked a little bit about on the truck side. In the Big Beautiful Bill, there was the tax deduction for depreciation. Is that or will that have any impact on 4Q demand? Or is that more of a '26 type story? Richard Shearing: No, I think it will have impact. In fact, the production schedule for DTNA is closed for Q4. So they filled their production schedule. And we saw, I wouldn't say significant activity as a result of the Big Beautiful Bill. I think that was a piece of it, but I also think DTNA extended the aluminum and steel tariff pricing through the end of the year and customers who are waiting or don't want to wait to understand what the impact of Section 232 tariffs are decided to lock in that pricing from the steel and aluminum tariffs and place orders in the fourth quarter this year if they're looking for business early next year. So I'd say it was a combination of those two things, Mike. Michael Ward: So we should expect a little uptick relative to Q3 and Q4. Richard Shearing: I think it's going to be consistent. If I look at what we've delivered on a year-to-date basis, just over 2026 -- sorry, 12,700 units. You look at what our backlog is for the fourth quarter, it's going to be in line with those quarterly numbers. Of course, they've got to deliver them to us, and we've got to get them retailed to our customers, but I think it will be in line with what we've seen from the first 3 quarters. Michael Ward: And then Shelley, that's still -- from a cash standpoint, that's still a positive rate depreciation intent? Michelle Hulgrave: Definitely, Mike. So it will ultimately depend on how many trucks PCS decides to buy, but I think we're still comfortably in that 125 to 150 range, especially as you look out at each of the next 3 years. Operator: Your next question comes from the line of Rajat Gupta from JPMorgan. Rajat Gupta: Just wanted to follow up on PPG. I appreciate the call out on the headwinds in the quarter. But it doesn't look like -- I mean, those headwinds are going away anytime soon. I'm curious what kind of visibility you have on the cadence there bottoming out. I'm assuming like once that business comes back, it's going to lever pretty well. But I'm curious like what kind of visibility do you have on the recovery there? And I have a follow-up. Richard Shearing: Yes. Sure, Rajat. Rich again here. I think if you look at freight rates, I think they have bottomed out. They just haven't improved. So they've been fairly consistent in the last 6, 9 months. The issue we've got at the moment is the capacity, meaning there's too many trucks and trailers for the goods that need to be moved. And I think as I look into next year, just returning from the American Trucking Association Conference, there were some discussions there that were encouraging to me. So there was two executive orders written this year, one in April and one in September, and they're both under the responsibility of the Department of Transportation and the FMCSA to enforce related to non-domiciled CDL holders and non-English-speaking CDL holders. These two groups of CDL holders is estimated between 500,000 and 600,000 or about 6% of the total CDL driver population. And so as enforcement and kind of reconciliation occurs with these CDL drivers, we think that's going to take some capacity out of the marketplace. What we're also hearing is that it's not a one-for-one removal because we think that a number of these CDL holders are operating illegally around electronic logging devices. So if you take out one of them, it's like taking 1.5 drivers out of the market. So I think those two things are going to be beneficial for capacity tightening and freight rates as we go forward. The other thing I would add is, obviously, we're anticipating some news today on interest rates. The housing market is a significant driver of freight as well. We're about 1 million units below the 2006 peak of housing starts at the moment. And if we get lower interest rates, that could drive some activity in the housing, whether it's relocations, people becoming more mobile, certainly refinancing. And I think those things will be beneficial as well. And as we look here in October, our fixed operations, we're still 122% fixed coverage. We are seeing that customers are only repairing what they have to repair. We are seeing our collision business is a bright spot. That is up year-over-year, but certainly, parts that are consumed as trucks go up and down the road is reduced and service activity is reduced as well from an RO count perspective. Rajat Gupta: Got it. Got it. That's clear. Maybe just to follow up on just the U.S. parts and service business. If I heard you correctly, you said the U.K. was up 4%, which would mean the U.S. business is probably up like high single digit, double digit on growth. I mean, it's a pretty solid number considering you do not have the easy compares from -- because you didn't have CDK issues last year. I'm curious, is there anything you would point out that's driving that kind of double-digit growth? Is that sustainable? Anything that you're doing company-specific that might be supporting that? Richard Shearing: Yes. Sure, Rajat. Rich here again. You look at our business, same-store performance, customer pay was up 3.5%. Warranty was up over 14% and collision is up 7.5%. And so I think each aspect of the fixed ops continues to perform well. And I think it's a combination of a couple of things. First of all, you look at the age of the car park, it continues to increase almost 13 years now. The average age of the vehicle we're servicing is 6.25 ages or years of age. And then average mileage is approaching 70,000 miles as well. So I think that's going to continue as even the SAAR this year is forecasted to be below historical norms. And so we're going to continue to see that increase. You look at what we're doing on the service lane and what we're doing with technician videos, all of these things are driving efficiencies. We're using AI in our service scheduling and reception answering. And these are driving efficiencies, which we see manifested in our effective labor rate, which is up 4% or almost $7 per hour, which comes to discounting and a focus there as well. So I think all those things combined are paying dividends. Obviously, the OEMs try to mitigate recalls, but we continue to see new recalls on a monthly basis from each of the OEMs. And so we'll see that warranty work, I think, continue. Roger Penske: I think the focus also on body shop, we were up significantly both in the U.S. and internationally, and we're making investments. And our return, Rajat, return on sales on the body shop somewhere between 10% and 12%. Rajat Gupta: Got it. Got it. If I can join like just one quick one. You mentioned like the data center like opportunity in Australia going very well. I'm curious like if there's any parallels there for you to tap into that opportunity in the U.S. at all, either through PTL or just building that business given how much build-out is happening here? I know the scale levels are very different, but any thoughts on that would be helpful. Randall Seymore: Yes, Rajat, it's Randall. So yes, this has been the fastest-growing part of our business in Australia. We've got about 60% market share when you talk about 1,250 KBI and higher. But one benefit we have in Australia and New Zealand is we're the exclusive importer for that MTU product. The challenge in the U.S. -- and look, we've looked at opportunities in the U.S. and continue to, but it's much more fragmented where you have numerous distributors in North America, contrasting that where we're the sole distributor in Australia. And then MTU, who's the provider, manufacturer of the engine, they go direct to some of the bigger players, data center players in North America, whereas everything in Australia is through us. So it's a little bit hard to copy and paste it, but we have a great relationship with them and evaluate opportunities as they come. Operator: [Operator Instructions] Your next question comes from the line of Jeff Lick from Stephens. Jeffrey Lick: A question for Rich. Rich, I was wondering, there's been some -- a lot of comments amongst the other dealers that have reported already about where things are in luxury in October and just kind of going into the all-important kind of December to remember season. I was just curious if you can just talk about where you see things playing out there? And then also, if you can maybe address the GPU was down about $300 on a year-over-year basis, where you see GPU trends heading? Richard Shearing: Yes. So Jeff, if you look at the Q3, start there first. Our premium luxury was up almost 9%, so we felt good about our mix and performed well in the quarter. As you look to where we're at right now, it's certainly a brand-by-brand situation. And of course, we've talked on the call here about Jag Land Rover. If you look at where we're at when the production cyber incident occurred, we had about a 74-day supply. As I sit here today, we're down to a 39-day supply. We expect to get visibility to their wholesales and what we'll receive in the fourth quarter on November 8, when their production software system comes back online. So in the interim, obviously, with the demand still being high for that product, it enables us to hold price, and that should be good for our grosses. So that's kind of the story on JLR. You look at Lexus, they've been one of the hotter luxury brands this year. Certainly, the launch of the GX and the TX, those models are taking a younger demographic that they really haven't played with in the past. And I think they're competing neck and neck with BMW for the highest volume luxury car this year. So I would expect BMW and Lexus to be pretty aggressive in the fourth quarter incentive-wise to try and knock down that trophy. If you look at BMW, I think the challenge we have in the fourth quarter this year with BMW is the comps to last year. If you recall, last year and really into the first part of this year, they had a significant recall that impacted almost their entire model range with the integrated brake system, stop sale and fix. And it was about this time last year where all those BMWs came off stop sale. And so the fourth quarter was a heavy delivery schedule for BMW last year. So that's kind of some color on what I would say from a premium luxury standpoint for the fourth quarter. Going to your second question on grosses, I think Roger talked about in his commentary, a couple of things I'd say when you look sequentially or compared to Q1, you got to add back the impact from the higher BEV sales in Q3. We think that was about $100 in gross. And then the JLR impact with the deferred deliveries about $60. So you add that $160 back, we're just under $5,000 all in, which is comparable to Q1. And the reason I'm not putting Q2 in there is because that's when we had a little bit of that tariff bump as people rushed out to get cars when we fully didn't understand what that impact was going to be and what the OEMs are going to pass along. Roger Penske: Jeff, let me add a little bit here. When you think about BMW going into the fourth quarter, BMW probably in the premium side was the most successful selling EVs. So we're seeing this drop. If you look at October month-to-date, we've sold 128 in the total U.S. versus 4,000 in Q3 -- for the Q3. So when you look at that, there's going to be a pivot here because BMW, they're pulling back, obviously, production. Now they're still supporting it to a certain extent. They're going to have to fill that back with ICE units. And I think that's going to be a conversion. We see the California where we had sometimes 20% of our business was going to be EVs. We're going to see that have a little bit of dynamic, I think, in Q4. And I'm sure it will smooth out as we go into the new product line and more of the hybrid units available for sale. So our days supply today, if you can believe it is only 10 days. We were talking about 100 days in the past. So taking the money out it certainly has impacted the business. Jeffrey Lick: Appreciate that color. And just kind of a quick one for Shelley. Shelley, on the net kind of $150 million tax benefit you're receiving from the accelerated depreciation on the one Big Beautiful Bill, never get tired of saying that. Where will that show up? And when will that show up in the P&L? Michelle Hulgrave: I don't really get tired of talking about it either, Jeff. So it's cash flow. It's -- we are able to defer taxes -- cash taxes paid. So you will ultimately see that at the top of the cash flow statement under cash flow from operations. When we add back the change in deferred income taxes, it will be a positive, whereas last year it was a negative or at least it will swing by that amount. So you'll see that in cash flow from operations, and we certainly look to utilize that in our capital allocation. It does not impact income or our tax rate though, Jeff. Jeffrey Lick: And does that start hitting now? Or is that kind of -- part of it was retroactive, correct? Michelle Hulgrave: Yes. It was retroactive to purchases made starting January 19 of this year. We would -- we've certainly seen it as we've made quarterly tax estimates. But as it wasn't effective until July 4, it didn't really have much of a cash impact until the second half of the year. Operator: Your next question comes from the line of David Whiston from Morningstar. David Whiston: So on the retail used, the GPU was up over 12% to a little over $2,100. And I'm just curious how much of that 12% is Sytner versus other variables? Richard Shearing: Could you repeat that, David? It was a little hard to hear you. David Whiston: Sorry. Roger Penske: How much of Sytner versus U.S. unused growth impact? David Whiston: Yes. Anthony Pordon: It basically was -- this is Tony. It basically was all coming out of Sytner. It's coming all out of Sytner and the change that we had with respect to the Sytner Select locations and moving to a lower amount of inventory but better quality used cars. Roger Penske: Yes. The GPU, David, was up 37%, up 600 pounds per unit, which obviously when you melt that in with the U.S., everything else, it is exactly what we wanted to see happen. I would say that part of the Sytner Select has worked out well then when you add on the ability to see the margins, at least initially that we're seeing somewhere in GBP 3,000 to GBP 3,500 on the Chinese brands. It will be interesting to see how that plays out over time when they add more dealers to see if the competition would drive that down. But obviously, our big issue on used in the U.S. is acquisition. And I think Rich has talked about it before that we're going to start seeing considerably more lease returns as we look at Q4 and Q1 next year. And remember that probably what today, Shelley, 55% of our new vehicles at premium are leased. So -- and those are 3- and 4-year leases, which are perfect for us as we bring those back in. And then on top of that, now with the supply will be available, we'll be able to turn our loaner cars quicker. And you think about Crevier out in California has 300 loaners. We turn it 3x. That's 1,000 used cars that come internally, and we get all the new car programs for those. So those are levers that we're pulling here as we go forward. But it's a big focus, even our CarShop business. If I look at the month of September and October, we're a little off in volume because we just can't buy the right cars and just to buy them and try to -- we're just not a 8-, 9-, 10-year-old car supplier. We want to be in the sweet spot. And I would say when you look at that, that's probably in the 3 to 6 year. Randall Seymore: One more comment on that. From the U.K. standpoint, certainly, the Sytner Select strategy has worked. But our franchise used car gross profit is up about the same as Select. So I think it's more of a I'll use the word institutional change that we've done with our team over there. It really boils down to, if you look at our total used inventory right now, less than 1% over 90 days old. So it's an age factor. It's better sourcing, so buying cars better. And then it's just discipline. I mean it is intense focus on units and then agility of pricing, quickness of reconditioning. So it's really a big -- I'd say a big, big effort for sure and discipline by the team in the U.K. Anthony Pordon: Reducing aging has been a big part of that as well. So you didn't have to discount as much. Operator: And there are no further questions at this time. I will now turn the call back over to Mr. Roger Penske for some final closing remarks. Roger Penske: Yes. Thanks, everyone, for joining us for Q3. We look forward to the remainder of the year, and we'll see you on the next call. All the best. Thank you. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and welcome to Verra Mobility's Third Quarter 2025 Earnings Conference Call. My name is Towanda, and I will be your conference operator today. This call is being recorded. [Operator Instructions] I would like to turn the presentation over now to your host for today's call, Mark Zindler, Vice President of Investor Relations for Verra Mobility. Please go ahead, Mr. Zindler. Mark Zindler: Thank you. Good afternoon, and welcome to Verra Mobility's Third Quarter 2025 Earnings Call. Today, we'll be discussing the results announced in our press release issued after the market closed along with our earnings presentation, which is available on the Investor Relations section of our website at ir.verramobility.com. With me on the call are David Roberts, Verra Mobility's Chief Executive Officer; and Craig Conti, our Chief Financial Officer. David will begin with prepared remarks, followed by Craig, and then we'll open up the call for Q&A. Management may make forward-looking statements during the call regarding future events and expectations, anticipated future trends and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of risk factors. These factors are described in our SEC filings. Please refer to our earnings press release and investor presentation for our cautionary note on forward-looking statements. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today, and we do not undertake any obligation to update forward-looking statements. Finally, during today's call, we'll refer to certain non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measure is included in our earnings release, quarterly earnings presentation, and investor presentation, all of which can be found on our website at ir.verramobility.com. With that, I'll turn the call over to David. David Roberts: Thank you, Mark, and thanks, everyone, for joining us. Before I dive into our consolidated financial results, I'll start with an update on our automated photo enforcement contract with the New York City Department of Transportation, which will help contextualize our third quarter financial performance and our revised guidance for the year. We are actively working with the New York City Department of Transportation to finalize the new automated enforcement contract, which was announced at the end of March 2025. As we work to finalize the new contract, we are now in a position to share the key financial expectations. We expect that the new contract will have a 5-year term, with an option for a 5-year renewal and an estimated total contract value of $963 million. We expect annual service revenue to grow from about $135 million in 2024, to a range of $165 million to $185 million by 2027. Furthermore, the New York City Department of Transportation has elected to purchase its own equipment, which is expected to add $20 million to $30 million in product revenue in both 2026 and 2027. Craig will cover additional financial details in his prepared remarks. In parallel with working to finalize the new contract, the New York City Department of Transportation has instructed Verra Mobility through a change order process to install up to 250 red-light cameras by year-end 2025, as a part of the legislatively authorized expansion. The new red-light cameras are expected to generate approximately $30 million of revenue in 2025, of which about $10 million is expected to be product revenue and $20 million is expected to be installation services revenue. The red-light camera expansion program started in the third quarter, and consequently, we generated $17 million of revenue in conjunction with the red-light camera installations in the third quarter, of which approximately $6 million was product revenue and about $11 million with installation services revenue. We look forward to continuing to serve the New York City Department of Transportation and the citizen safety priorities of Vision Zero. This program has been demonstrated to improve safety on New York City's roads as evidenced by the data showing reduction in crashes and fatalities. Based on 2024 reports published by the New York City Department of Transportation, daily violations at speed camera locations have decreased 94% since the start of the program in 2014. Additionally, the average daily number of red-light running violations issued at camera locations has declined by 73% since the program began in 1994. We look forward to continuing to support New York City's safety mission. The contract is strategically important, and we believe a source of long-term value creation for Verra Mobility. Shifting now to our third quarter consolidated financials, we delivered a strong quarter with all of our key financial measures ahead of our internal expectations. Total revenue for the quarter increased 16% over the same period last year to $262 million, with all three business segments meeting or exceeding their respective internal plan. The aforementioned New York City red-light expansion change order was a key catalyst contributing $17 million of revenue for the quarter. Moreover, adjusted EPS increased 16% over the prior year period, driven by our operating performance, prior period share repurchases, and the reduction in our interest rate on our term loan debt. Moving on to segment level financials. Commercial Services third quarter revenue and segment profit increased about 7%, respectively, over the prior year period. Rental Car or RAC tolling increased 7% over the prior year period, driven by increased travel volume and product adoption as well as higher tolling activity compared to the third quarter of last year. The growth in RAC tolling was partially offset by a decline in fleet management revenue of about 3% compared to the third quarter of 2024, due to the customer churn that we had discussed on our second quarter earnings call. Next, moving on to the macro environment and the implications for our Commercial Services business. As we discussed on our second quarter earnings call, travel demand stabilized and grew modestly in Q3 over the prior year quarter. Third quarter TSA volume increased about 1% over the third quarter of last year, and year-to-date TSA volume is about the same as 2024. Based on the commentary from the major airlines, we anticipate solid fourth quarter travel demand at levels slightly ahead of our guidance provided during our second quarter earnings call. Moving on to Government Solutions. Total revenue increased 28% over the third quarter of 2024. Total revenue from New York City, our largest government solutions customer, increased 46% over the third quarter of 2024, driven by the new red-light camera installations. Additionally, service revenue increased 11% outside of New York City driven by expansion from existing customers and new cities implementing photo enforcement programs. International product sales increased $4 million over the third quarter of 2024, rounding out the year-over-year growth in revenue. Next, I'd like to highlight two important pieces of legislation that were passed during the quarter. First, California passed a work zone speed pilot that is expected to deploy up to 35 camera-based systems on state highway construction or maintenance areas. California also reformed its red-light camera enforcement program by shifting the violation from criminal to civil, reducing the fine amount and using certain program operating requirements. These reforms bring California's program more in line with other state safety programs, and we believe they will create additional positive momentum for automated enforcement. We estimate that these two legislative authorizations add an incremental $140 million in total addressable market, the majority of which is driven by the red-light camera reforms and the legislation. This additional addressable market opportunity increases our incremental TAM to approximately $365 million, with the potential to expand to $500 million if California passes additional enabling legislation. Contracted bookings in Government Solutions continued to be a source of strength in the third quarter. We entered into bookings of about $14 million of incremental annual recurring revenue based on a full run rate, bringing the trailing 12 months total to about $51 million. Notable third quarter bookings include a school bus stop-arm program in Seattle, Washington, a speed program in Phoenix, Arizona, expansion of the school zone speed program in Auburn, Washington, and a new red-light safety program in Modesto, California. Additionally, subsequent to the end of the quarter, we were notified by San Jose, California, of the intent to award the City's Speed Safety Program to Verra Mobility. We are incredibly honored to partner with the City of San Jose to bring this critical safety technology to the community. This award marks our third California Speed Enforcement Award, following San Francisco and Oakland. We anticipate the three remaining pilot cities, Los Angeles, Glendale and Long Beach to launch their respective procurements over the next several quarters. We're pleased to report that the San Francisco speed pilot program is demonstrating its intended effects. Through the first 4 months of operations, a San Francisco Municipal Transportation Agency study that tracks vehicle speeds along 15 of the corridors, where the cameras have been installed on an average 72% reduction in speeding, based on data captured before and after the cameras went into effect. Moving on to T2 Systems, our Parking Solutions business, total revenue increased about 7% for the quarter, driven by a 3% increase in SaaS and services revenue, and a 30% or $1 million increase in product revenue, and these results were in line with our internal expectations. Moving on to our full year outlook. We are increasing our full year 2025 revenue guidance driven by the New York City red-light camera expansion. We expect this expansion will generate an incremental $30 million of total revenue this year. Additionally, note that our expectations for the remainder of the business remain unchanged as we believe the market for automated enforcement is strong, our Parking business turnaround is ahead of our internal plan, and we expect stable travel demand. Today, we're also going to provide a preliminary outlook for 2026. As you may recall, our 2025 guidance to date assume New York City revenue would be flat in 2025 compared to 2024. Our outlook assumes that our new contract with New York City is effective in January 2026. Driven by the change order to our existing contract and the red-light camera installation shifting from 2026 into 2025, we expect total consolidated revenue to moderate to mid-single digit growth in 2026. At the segment level, we anticipate Government Solutions growing high single digits on strong service revenue. Additionally, we expect Commercial Services to grow mid-single digits on modest TSA volume growth combined with the impact of the customer churn we discussed in the second quarter of this year, which impacts FMC revenue through the first half of 2026. Finally, T2 is expected to grow low to mid-single digits next year on moderate SaaS and equipment sales growth. Additionally, we expect adjusted EBITDA margins to decline 250 to 300 basis points on portfolio mix and impacts from the New York City renewal contract. Craig is going to walk through this detail along with the path to margin expansion as we capitalize on the growth opportunities and cost reduction initiatives currently underway across our businesses. In my view, 2026 represents a year of transition between the investments made in the business over the past 2 years and the benefits we expect to realize. Over a multiyear period, beginning in 2027, we are poised to deliver strong growth and margin expansion, driven in large part by the growth in forward momentum in Government Solutions and our ability to execute at scale that business -- as well as the continued growth opportunity in commercial services and T2. Moving on to capital allocation. Due to the conviction in our long-term growth outlook and margin expansion initiatives, our Board of Directors authorized a $150 million increase to our existing stock repurchase program that is available through November of 2026. This brings the available repurchase authorization to $250 million and we expect to commence the buyback in the near term, subject to market conditions and other factors. Craig, I'll turn it over to you to guide us through our financial results, the New York City contract update, our revised 2025 financial outlook, and our preliminary perspectives for 2026. Craig Conti: Thank you, David, and hello, everyone. We appreciate you joining us on the call today. We'll turn to Slide 4, which outlines the key financial measures from the consolidated business for the third quarter. Our Q3 performance, which included 12% service revenue growth and 16% total revenue growth year-over-year exceeded our internal expectations. Service revenue growth, which consists primarily of recurring revenue, was driven by the change order for New York City red-light expansion program and service revenue growth outside of New York City in the Government Solutions business as well as increased revenue from RAC tolling and European operations in the Commercial Services business. At the segment level, Government Solutions service revenue grew 19% year-over-year. Commercial Services revenue increased by 7% over the prior year. In T2 Systems SaaS and services revenue increased 3% compared to the third quarter of 2024. Total product revenue was about $19 million for the quarter, Government Solutions contributed roughly $14 million with $6 million coming from the New York City red-light expansion and $8 million from international product sales. T2 delivered about $4 million in product sales overall for the quarter. On the profitability side, our consolidated adjusted EBITDA for the quarter was $113 million, an increase of approximately 8% versus the same period last year. We reported net income of $47 million for the quarter, including a tax provision of about $18 million, representing an effective tax rate of approximately 28%. GAAP diluted EPS was $0.29 per share for the third quarter of 2025, compared to $0.21 per share for the prior year period. Adjusted EPS, which excludes amortization, stock-based compensation and other nonrecurring items was $0.37 per share for the third quarter of this year compared to $0.32 per share in the third quarter of 2024, representing 16% year-over-year growth. The adjusted EPS growth was driven by the increase in adjusted EBITDA, a sustained reduction in interest expense driven by our prior year debt repricing efforts and our share repurchases in 2024. Cash flows provided by operating activity totaled $78 million, and we delivered $49 million of free cash flow for the quarter, in line with our internal expectations. Turning to Slide 5, we generated $416 million of adjusted EBITDA on approximately $943 million of revenue for the trailing 12 months, representing a 44% adjusted EBITDA margin. Additionally, we generated $153 million of free cash flow or a 37% conversion of adjusted EBITDA over the trailing 12 months. Next, I'll walk through the third quarter performance in each of our three business segments, beginning with Commercial Services on Slide 6. CS year-over-year revenue growth was 7% in the third quarter. RAC tolling revenue increased 7% or about $5 million over the same period last year, driven by increased product adoption and tolling activity, which benefited from a 1% increase in U.S. travel volume over the prior year quarter. Our FMC business declined 3% or about $500,000 year-over-year, driven by prior period customer churn. Additionally, our European operations contributed $2 million of growth compared to the third quarter of 2024. Commercial Services segment profit increased 7% over the prior year, representing a 67% segment profit margin. The margin improvement was largely driven by operating leverage created by improved travel volume and increased product adoption. Turning to Slide 7, Government Solutions saw strong service revenue growth in the quarter, driven by $11 million of installation service for the new red-light camera expansion in New York City as well as 11% service growth outside of New York City. The growth was broad-based across all customer use cases with particular strength in speed, bus lane and school bus stop-arm enforcement programs. Total revenue grew 28% over the prior year quarter, benefiting from about $14 million in product sales, of which $6 million were generated from New York City red-light camera sales and $8 million from international product sales. In total, product sales increased by $9 million over the same period last year. Government Solutions segment profit was $31 million for the quarter, representing margins of approximately 26% compared to 29% in the prior year period. The reduction in margins versus prior year was primarily due to readiness investments made to prepare the company for execution on the pending New York City contract. Let's turn to Slide 8 for a view of the results of T2 Systems. We generated revenue of $22 million and segment profit of approximately $4 million for the quarter. SaaS and Services sales increased 3% compared to the prior year, while product revenue increased 30% or $1 million, compared to the third quarter of 2024. Included within SaaS and services, recurring SaaS revenue increased low single digits compared to the third quarter of 2024. Let's turn to Slide 9 for a view of the balance sheet and take a look at net leverage. We ended the quarter with a net debt balance of $843 million, which reflects the strong free cash flow we generated over the first 9 months of the year. Net leverage landed at 2x, and we've maintained significant liquidity with our newly expanded $150 million undrawn credit revolver. Our gross debt balance at year-end stands at about $1 billion, of which approximately $690 million is floating rate debt. Subsequent to the end of the quarter, we executed a successful refinancing of both our ABL revolver and our term loan. The market for institutional debt is strong relative to recent historical levels, so we took action well in advance of our term loan going current. We increased the revolver limit from $125 million to $150 million and also added an accordion feature to provide an additional $75 million of liquidity if ever needed in the future, resulting in a potential limit of $225 million. Additionally, the maturity of the revolver was extended 5 years to October of 2030. Given the current favorable institutional debt market conditions, we proactively refinanced our term loan on extending the maturity 7 years to October of 2032, and lowered the interest spread by 25 basis points to 2% flat. Now let's turn to Slide 10, and have a look at full year 2025 guidance. Based on our year-to-date results and our outlook for the fourth quarter, we are increasing full year 2025 revenue guidance and affirming all other guidance measures. As David discussed, New York City has authorized the installation of up to 250 additional red-light cameras in 2025 under our existing contract, which is expected to deliver about $30 million of revenue, of which about $10 million is expected to be product revenue and $20 million is expected to be installation service. The adjusted EBITDA generated from these camera sales is expected to be offset by onetime readiness investments to support the new contract requirements in New York City. The readiness investments include the development of a world-class real-time camera health dashboard, cloud migration activities for certain legacy data, and minority and women-owned business enterprise subcontractor ramp-up costs. As a result of these investments, we are not increasing adjusted EPS or free cash flow guidance for the balance of 2025. Excluding the New York City camera installations, our perspective on guidance remains unchanged. The updated full year 2025 guidance ranges are as follows: we now expect total revenue in the range of $955 million to $965 million, representing approximately 9% growth at the midpoint of guidance over 2024. The remainder of the financial guidance remains unchanged and is as follows: we expect adjusted EBITDA in the range of $410 million to $420 million, representing approximately 3% growth at the midpoint over 2024. We anticipate an adjusted EPS range of $1.30 to $1.35 per share. Free cash flow is expected to be in the range of $175 million to $185 million, representing a conversion rate in the mid- to low -- low to mid-40th percentile of adjusted EBITDA. Moving on to the segment level. Government Solutions is expected to generate low to mid-teens total revenue growth for 2025, driven by the new camera installations for New York City, along with the expansion of camera installations with existing customers and new customers awarded in prior quarters. We continue to anticipate that Parking Solutions revenue will be about flat with 2024 levels. We expect SaaS revenue to grow low single digits, offset by a decline in installation of professional service revenue on roughly flat product sales. Based on assumption that travel volume will be only slightly elevated in 2025 compared with 2024, we anticipate Commercial Services growing at the high end of mid-single digits. We anticipate CS revenue, adjusted EBITDA and margins to decline sequentially in the fourth quarter, consistent with historical norms based on travel trends. Our key assumptions supporting our adjusted EPS and free cash flow outlook can be found on Slide 11. Turning now to Slide 12. I wanted to share the key financial assumptions for the New York City contract, we're in the process of finalizing, along with some updated perspective on the overall Government Solutions business. On March 31 of this year, New York City announced that Verra Mobility was selected as the vendor for their automated enforcement program with an initial term of 5 years with a 5-year extension option. The estimated total contract value for the first 5 years is $963 million, and we are currently in final contract negotiations with New York. We anticipate that New York City will again purchase its own equipment from Verra Mobility with all installation and relocation services included in service revenue and additive to the scope of the contract relative to our existing contract. We expect to sell and install about 1,000 incremental new red-light and fixed bus lane cameras over the next 2-plus years. New York City service revenue is expected to grow high single to low double digits through 2027, then to level off in 2028 and beyond. New York City product sales post-2027 are expected to be less than $5 million per year. Total Government Solutions service revenue is expected to grow high single to low double digits over the next several years, leveling at the low end of high single digits, following the completion of the New York City installations. And lastly, Government Solutions segment profit margins are expected to dip in 2026, to the low to mid-20% range on repricing and primarily due to the contract requirement that at least 30% of the total contract value was invested in minority and women-owned subcontractors. We anticipate that beginning in 2027, productivity improvements and platform consolidation will drive margin expansion and approach 30% in 2028 and beyond. Now let's move on to a brief review of how we expect 2026 will play out, incorporating preliminary estimates for commercial services in T2 on Slide 13. I'll remind you that our annual operating plan is not yet complete, so these estimates may change. At the consolidated level, due to the New York City red-light camera installations shifting forward into 2025, we're anticipating mid-single-digit revenue growth overall in 2026. Additionally, we're anticipating a 250 to 300 basis point reduction in adjusted EBITDA margins due to a combination of portfolio mix in the New York City renewal contract, partially offset by a year-over-year reduction in ERP implementation costs. Let me drill down a layer on both of these items. First, on the portfolio mix. This is simply the impact of Government Solutions outpacing Commercial Services growth, which has an approximate 25 basis point impact on consolidated adjusted EBITDA margins. More importantly, the New York City renewal contract is expected to result in an approximate 250 to 300 basis point decline in margins, driven by service pricing changes established through the competitive procurement process in the minority and women-owned subcontractor requirements. Adjusted EPS is expected to increase low to mid-single digits year-over-year despite the investment in ramp-up costs in Government Solutions, largely due to the expanded stock repurchase plan announced today. Rounding out the business segments. We expect Commercial Services to grow mid-single digits due to our expectation that TSA volume will grow approximately 1% to 2% over 2025, just as it has year-to-date, so far this year. Additionally, we expect the fleet business growth to moderate to low single digits due to the prior period churn in our FMC business, which will anniversary in the second quarter of 2026. Segment profit margins for Commercial Services are expected to be up about 25 to 50 basis points due to volume leverage and the reduction of the ERP spend in 2026. Finally, we anticipate that T2 Systems will grow low to mid-single digits with segment profit margins up 50 to 100 basis points over 2025. Looking out beyond 2026, we expect that the Government Solutions platform consolidation that we've discussed over the past several quarters will be a catalyst for margin expansion and general productivity enhancements in 2027 and beyond. This platform, which is highlighted on Slide 14, is an IT initiative to deploy our latest smart mobility platform, termed MOSAIC, internally. MOSAIC is a cloud-based, fully secured application intended to streamline the end-to-end processing of traffic incident events. The platform is expected to provide numerous benefits such as flexible architecture that improves project deployment pipelines, enhanced automation processing, and other productivity improvements and operating efficiencies, and as such, is expected to be a key driver of Government Solutions margin expansion in 2027 and beyond. As David discussed, our Board authorized the expansion of our existing stock buyback plan by an incremental $150 million, bringing the total authorization up to $250 million. We expect to commence the stock repurchases in the near term, subject to market conditions and other factors. We are incredibly excited about the future trajectory of the business. As David noted, finalizing the updated New York City contract provides financial predictability and a source of value creation. Additionally, we are poised for growth and profitability across our businesses as the benefits of investing in our platform yields the intended scale and margin benefits. This concludes our prepared remarks. Thank you for your time and attention. At this time, I'd like to invite Towanda to open the line for any questions. Towanda, over to you. Operator: [Operator Instructions] Our first question comes from the line of Faiza Alwy with Deutsche Bank. Faiza Alwy: Thank you so much for giving us all that detail around the New York City contract, really helpful, and just giving us a longer-term view there. I guess I wanted to double click on the margins, as you can imagine. So Craig, you pointed to a few different things. It sounded like there were some start-up costs that you're incurring this year. And then it sounds like there are some continuing costs next year and beyond and you mentioned the subcontracting with the minority and women-owned businesses. So I guess, just parse that out to the extent you can further quantify how much of this might be onetime versus continuing. That would be really helpful. Craig Conti: Yes, you bet. So let me start first with 2025. So when we talk about those onetime readiness costs, that truly is one time. And the scope of that is approximately $5 million to $10 million depending on where it shakes out. And that's all baked into the guidance. But I think the crux of your question is let's move into 2026. So at the total Verra Mobility level, I expect margins to come down about 250 to 300 basis points, okay? And there's three buckets I want you to think about there. The first bucket is the portfolio mix, which simply means that the GS business, which is a lower-margin business than CS, as you well know, is growing faster than CS in 2026 as compared to '25. That's about 25 basis points at the consolidated level. That's negative. Then we pick up about 25 to 50 basis points on the positive between two things. Number one is our CS business. We'll still have volume leverage and accrete margins as we've talked about. I don't see any change there. And also, the ERP spending, as we've discussed in the past, the thrust of that spend will be behind us. So we'll get some benefit there. So I get 25 to 50 basis points back. And then the New York City renewal in totality, I expect to be a 250 to 300 basis point reduction in 2026, and that's really two pieces. The first is the price normalization. This was a competitive contract, as everyone well knows. And then the second piece is the cut in of the minority and women-owned business requirements. Now those minority and women-owned business requirements is a recurring cost and that will be to the tune of $20 million to $25 million per year that we did not have previously as we look out for the life of contract. Faiza Alwy: Understood. And just a clarification, are you going to see -- is there an incremental CapEx spend that's maybe coming from purchase of these cameras? Or does that go through the income statement? Craig Conti: Let me be really clear on this one, Faiza, it's a great question. Absolutely not. Absolutely not. So the expectation here is that New York is once again going to purchase their own capital as they have in the past. Faiza Alwy: Okay. Got it. And then just a follow-up on this point right around the competitive process and the margin dilution that you're seeing from this contract. I know you have previously talked about, as the TAM has increased, you've made some investments in the business. Like are you seeing a similar outcome with some of these other contracts that you're signing with other municipalities or district -- or jurisdictions? And like how should we think about margins overall beyond just the New York City impact in the Government Solutions business? David Roberts: Yes. I would say -- this is David. I would say that New York City, obviously, given its size and scale makes it -- the impact there is significantly higher. Two, I would say that in general, we are competing at very similar levels across the board that we had in the past. And then what I would say is outside of New York, only a few other major metropolitan areas at this time have the same level of requirements around the use of, for example, for minority and women-owned businesses. So we're not seeing that pop up all across the country and things like that. So I would look at New York City as a bit of a -- as it always has been a bit of a unique one. Craig Conti: And I would add on to the end of that, as you asked about go-forward margins, I think we said on this call a couple of times that the GS business is a high 20s, 30% margin business. Clearly, it's not going to be that in 2026, and we know that. But that has not changed. That has not changed. So the investments that we've made in previous years and a little bit this year to consolidate our platform and I wanted to give some updated perspective on what that is today called MOSAIC will get us back to that level of profitability. So we feel very good about that. Operator: Our next question comes from the line of Keith Housum with Northcoast Research. Keith Housum: Appreciate the color on New York City here. Any color you can provide on '26 for the cadence of the cameras? Will they be pretty even throughout the quarter -- through the year or you guys need to build off throughout the year? David Roberts: It's -- we don't know yet. I mean, we'll get to the end of the year and do the planning with it, but it will probably be relatively smooth throughout the year, but there's always fits and starts depending on weather and other things that may go along within the city. Craig Conti: And I think the only thing I would say is that is if we look across all of the years, the thrust of the installs will be done by 2027, is our current -- is where we are currently with a few trickling into 2028. But yes, as David said, we're not at that level of detail where I could kind of give you a view by quarter. Keith Housum: Got you. And then Craig, you might have just mentioned it, what do you anticipate the benefit being from MOSAIC in 2027 and beyond? Craig Conti: I think that we will -- for the... David Roberts: Say, 2025, not 2026. Craig Conti: Yes, he said '27 and beyond, right? I mean the '27 and beyond you are asking. David Roberts: 2025, sorry. Keith Housum: Yes. Craig Conti: Yes. Here's how I think about that is, I'm actually going to back it up to 2026. I think this is about 1.5 points to 2 points of margin in the GS business alone until we get to, I'll call it, the level altitude here, which is probably out in the end of 2028. So when you look at the New York City slide that I put and you kind of look in the upper right, the major driver of bringing the GS margins from the low to mid-20s back up to those high 20s, approaching 30% by 2028 is MOSAIC. So I would level load it across that time period. Keith Housum: Okay. That's helpful. Appreciate it. In terms of the share repurchases, you guys have had a share repurchase outstanding $100 million out there previously for a while. But it sounds like you guys are ready to act on the combined 250 years shortly, correct? As opposed to previously you guys were more opportunistic and you hold for dry powder. Craig Conti: The short answer is yes. The slightly longer answer is we always have to say, obviously, subject to market conditions. But we feel pretty good about taking an active role on that, Keith. Operator: Our next question comes from the line of Louie DiPalma with William Blair. Louie Dipalma: Congrats on inching closer to the finalization of the contract. I was wondering what remains in terms of establishing the definitive contract? And do you have a sense of the timing? David Roberts: At this point, what I would call it is primarily administrative working inside of the process that the city has laid out for contract approval. There's not really any significant terms and conditions that we're working through at this point. I would expect it relatively short order. Louie Dipalma: And for Craig, you provided great detail on the 3-year Government Systems revenue and EBITDA outlook. I think, it implies a 3-year government systems EBITDA growth CAGR of approximately 7%. I was wondering what does the 3-year outlook assume for CapEx? I don't think you provided any CapEx assumptions, but anything regarding CapEx or the total company free cash flow conversion in 2028 would be helpful. Craig Conti: Yes. I won't go into 2028 free cash flow conversion just yet, Louie. We're still kicking around a potential date for an Investor Day, which will probably be a great time to do that. But as I think of 2026, I think the CapEx spend looks a lot like it did in 2025. And I got to say, I'm really proud of that because we're going to have another year of -- in 2026 for non-New York City high single-digit growth, and I think we'll have a CapEx total that looks a lot like the one that we put in front of investors this year. So as we continue to go out, all I would say is directionally, I expect that our CapEx as a percentage of service revenue, both for the company and for GS, everything I see today, we should have hit the high watermark here in 2025. That's the view I have today. Obviously, when I learn more, I can tell you a little bit more. Louie Dipalma: Great. And another New York City related question for David or Craig, you both discussed installing 1,000 incremental cameras over the next 2 years. Does that total include all of the upgrades for the existing cameras. And do you still plan on upgrading the entire fleet of existing cameras? Or does that 1,000 include everything? Craig Conti: Well, Louie, I can give you most of that. It does not include the upgrades. That 1,000 does not include the upgrades. However, when I went into the financial, we kind of did the CAGR discussion just a minute ago, that does include the upgrade. So those upgrades will be more. In terms of a number, I really want to see a final contract from New York because that's really at the customer's option. But the 1,000 does not include upgrades. It also doesn't include relocations of cameras from one spot to another. Louie Dipalma: Okay. And one final one. From a high level, how does the functionality of the new cameras compared to the cameras that you've been -- you were installing 5 years ago. Are there like many new features with the cameras? And is there the potential to add on like new revenue lines. And I'm not talking specifically about the New York market, but even for other markets, like what's the additional functionality with the latest generation of cameras? David Roberts: I would say primarily two things. One is obviously the resolution and the quality of the image detection gets much higher. So think of your iPhone 17 versus the iPhone 12 or whatever, just the quality of the images and video is significantly better. That's number one. The ability to shoot across other lanes. I would say a lot of the investment we made is into the platform that Craig had mentioned MOSAIC, which is functionality that will deliver a much more seamless, much more efficient capability for our customers, look at data, data dashboards, making decisions. But the third point is, yes, in the world of cameras, that is the direction, which is a single camera that can do 5, 6 or 7 things, not just one thing. And that's what we would anticipate moving with that type of technology going forward. Operator: Our next question comes from the line of David Koning with Baird. David Koning: I guess I was wondering, I was looking at the government revenue, if you take total less the New York, so total service less New York service, and when you do that, next year's growth is good, 7%, 8% when you just kind of take your numbers. The year out is really good. It's like 16% in that acceleration -- okay. I guess what's behind that? I mean, that's an amazing acceleration. And is that part of the EBITDA margin expansion because your higher margin work, assuming -- I assume, is going to be accelerating into '27. David Roberts: Yes. I mean, so the growth -- that's exactly right. So if you think -- that's why we -- in my remarks, Dave, we talked about there's a little bit of a reset because yes, because of the size and what's happening in New York, which is awesome, awesome stuff, it's just going to have a bit of a drag next year. But past that, when you get past the implementation of our technology upgrades as well as all of the winning that we have been doing in the marketplace, our win rate has been significantly higher over the last 12 months that was previously we basically won all of the opportunities so far in California. We're winning great opportunities in school bus. So what I would say is -- but remember, there is a time to book and then a time to realize revenue, which does take a little bit. So what you're seeing is all of the winning in the backlog turning into revenue as we get into early or mid-part of next year, that translated into real growth in '27. David Koning: Got you. Okay. No, that's great to see. And then I guess my follow-up, in commercial, you had the second toughest comp of the year, yet you accelerated growth despite the fleet management headwind, and so I'm wondering how you had the best growth for the year so far in Q3 despite both the tough comp and the fleet management. It seems like something is going really well there. Craig Conti: Yes. David, you get annoy with me here on fleet. I'm going to tell you again, it wasn't as bad as I thought. And basically, what that means is tolling activity outside of the churn that we talked about last quarter was as high as we've seen probably in the last 5 or 6 quarters. So the churn didn't have as large of an impact. Let's put it that way. And I do not expect that will be the case as we go into the fourth quarter. So if you remember, when we were -- all of us, if we remember, 90 days ago, we talked about, I expect that fleet business to have a mid-teens year-over-year negative [ beat ]. I do expect that to come in the fourth quarter. And quite frankly, I expected in the third quarter. However, that tolling activity picked up. But the RACs have been strong. Sitting here today, we are at -- we had a good solid Q3 in TSA throughput at [ $101 million ]. On a year-to-date basis, we're just north of [ $100 million ]. And then the month of October has been really strong. Last I looked on a month-to-date basis, it was plus 4%. So I feel pretty good about how the business is performing. But that fleet -- that fleet thing is going to show up in the fourth quarter, a little bit more than the last quarter. Operator: Our next question comes from the line of Chris Zhang with UBS. Chao Zhang: So I wanted to double-click on California a little bit, and I appreciate the legislative update, and the updates across different cities and especially congrats on the San Jose Award. I'm just wondering from the 2026 guidance perspective, is it fair to think that anything from what you've been awarded, including San Jose in the guide, whereas the upcoming pilots or especially -- specifically Los Angeles, Glendale, and Long Beach, those are not in the guidance yet. And can you give us a sense of what's your overall scale in California and what are the potential opportunities you have visibilities to especially those private cities? Craig Conti: Yes, Chris, first of all, welcome. Second of all -- yes. This is Craig. I'll give you the financial piece of that, and then I'll let David talk about the commercial motion that we've seen in California. So the ones that you just spoke of are pilots, right? So those pilots, I think, in totality for the state of California, all the pilots amount to about $10 million of ARR, and roughly half of those have only gone out for RFP. So to the degree that we won 100% of the pilots that have come out to RFP, as David just talked about, yes, that's in our guide, but it's not a significant amount of money. The other thing is, when you're talking about a new modality even in a state that's an existing customer, typically the time from winning of the contract or the award of the contract to revenue is 12 to 18 months. So even if those had been bigger numbers, the answer would be implicitly, it's in the guide, but it's not a really big number. But outside of that, with the red-light, I think, maybe, Dave, do you want to talk about that? David Roberts: Yes. I mean I think as I mentioned in my remarks, we still have a couple of pending from the school zone speed program, which we will anticipate first part of next year. The red-light is significant. So we're the largest provider of red light in the state of California currently. But historically, it had always had some unique administrative challenges to a way that it would fully -- with multiple different challenges that I mentioned some in my remarks that I won't go back into. But -- so we just look at that as an opportunity to reshape the way that we're serving customers already. And because they've removed some of the administrative barriers, we would anticipate some of those programs to expand. We feel like we're in -- California is really something that we've worked really, really hard on as an organization, an enormous amount of focus, partnering with our government relations as well as our local teams as well to produce what we consider is going to be a great outcome for many, many years to come. Operator: Thank you. Ladies and gentlemen, that brings our Q&A session to the end. And that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, ladies and gentlemen. Welcome to Pacasmayo Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this call is being recorded. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. I would now like to introduce your host for today's call, Mrs. Claudia Bustamante, Investor Relations Managing Director. Ms. Bustamante, you may begin. Claudia Bustamante: Thank you, Rafael. Good morning, everyone. Joining me on the call today is Mr. Humberto Nadal, our Chief Executive Officer; and Ms. Ely Hayashi, our Chief Financial Officer. Mr. Nadal will begin our call with an overview of the quarter, focusing primarily on our strategic outlook for the short and medium term. Ms. Hayashi will then follow with additional commentary on our financial results. We'll then turn the call over to your questions. Please note that this call will include certain forward-looking statements. These statements relate to expectations, beliefs, projections, trends and other matters that are not historical facts and are therefore subject to risks and uncertainties that might affect future events or results. Descriptions of these risks are set forth in the company's regulatory filings. With that, I'd now like to turn the call over to Mr. Humberto Nadal. Humberto Reynaldo Nadal Del Carpio: Thank you, Claudia. Welcome, everyone, to today's conference call, and thank you for joining us today. I would like to start with a quick overview of our results for the quarter. We continue to see solid momentum in sales volume with a 9% increase compared to the same period of last year. This growth was driven mainly by stronger demand from infrastructure projects and a consistent performance in the Self-construction segment. Gross profit increased by 14.4%, reflecting the impact of our ongoing efforts to improve cost efficiency and strengthen profitability. These efficiencies transferred into bottom line growth as net income also increased 14.4% this quarter, reaching PEN 71.5 million this quarter and a very solid accumulated growth of 15.6% for the first [indiscernible] months of this year. Moving on to the progress of our strategy. We continue to be at the forefront when it comes to advancing innovative building solutions, developing those that promote more efficient, safe and sustainable construction. A prime example of this is an industrial langard that integrates prefabrication and B-methodology, technologies identified by the World Economic Forum as having the greatest transformative potential for our industry. This strong combination allows us to significantly reduce execution times, ensure operational continuity, enhance quality, minimize waste and strengthen the safety of our teams. In the same spirit of innovation and collaboration, we are working closely with Newmont and Bechtel Corporation in the construction of our water treatment plant at the Yanacocha operation. Treating acidic water in mining is essential for environmental sustainability, helping maintain a balance between economic development and responsible use of natural resources. By ensuring proper water management, we not only reduce environmental impact, but also preserve resources for future generations. Both of these projects are clear examples of how we are adapting our products and services to meet current and future demand, always, and I stress always with a client-centric view and aligned with our purpose. Our reputation is not built on words, but on actions. And this year, we once again demonstrated our consistency and purpose truly make a difference. For the third consecutive year, we proudly ranked among the top 10 companies in the American corporate reputation ranking, a recognition that affirms our commitment to responsible, transparent and always ethical management. Reputation after all is simply the result of what we do every day. We're confident that these positive results are only the beginning and the momentum we've built, we will continue to strengthen in the coming quarters because ultimately, our long-term success stems from a simple conviction doing what's right for our clients, our communities, especially for our country. I will now turn the call over to Ely to get into more detailed financial highlights. Ely Hirahoka: Thank you, Humberto, and good morning, everyone. This quarter's revenues increased 10.9% compared to the third quarter of 2024, mainly due to the increase in sales of concrete and pavement for infrastructure projects as well as bagged cement, reaching PEN 574.1 million. During the same period, gross profit increased 14.4% when compared to the same period of the previous year, mainly due to a decrease in cost of raw material on the above mentioned higher revenues. Consolidated EBITDA was PEN 160.6 million this quarter, a 3.9 percentage increase when compared to the same period of 2024, mainly due to the previously mentioned increased operating income. For the first 9 months of the year, revenues increased 7.3 percentage when compared to the same period of 2024. Gross profit during this same period also increased 10.5 percentage when compared to the same period of 2024, mainly due to lower cost of raw material, higher consumption of our own clinker as well as the operational efficiencies derived from our maintenance and production plan. Likewise, EBITDA increased 4.6 percentage when compared to the same period in 2024. Turning on to operating expenses. Administrative expenses for the third quarter of 2025 increased 20.2% when compared to the third quarter of 2024. Likewise, administrative expenses for the first 9 months of the year increased 18.7% when compared to the same period of the previous year. This increase was mainly due to higher personnel expenses because of the union bonus. Selling expenses increased 25.5 percentage during the third quarter of 2025 and 24% during the first 9 months of the year when compared to the same period of 2024, respectively. This increase was mainly due to higher advertising and promotion expenses, as part of our commercial strategy focusing on our product attributes as well as the union bonus mentioned before. Moving on to the different segments. Sales of cement increased 10.4 percentage this quarter when compared to the same period of last year, mainly due to increased demand. Gross margin increased 1.6 percentage points during the same period when compared to the third quarter of 2024, mainly due to lower cost of coal and energy. For the first 9 months of the year, results were similar with sales increasing 7 percentage and gross margin increasing 2.5 percentage when compared to the same period last year. During this quarter, concrete, pavement and mortar sales increased 26.3 percentage when compared to the same period in 2024, mainly due to increased sales of concrete for infrastructure projects such as the Tarata Bridge and the Yanacocha water treatment plant. Gross margin increased 2.6 percentage points this quarter when compared to the same period of 2024, mainly due to higher dilution of fixed costs. For the first 9 months of this year, sales of concrete, pavement and mortar increased 19.5 percentage, mainly due to increased demand for infrastructure projects. However, gross margin decreased 2.3 percentage points during the first 9 months of the year when compared to the same period of last year. Regarding precast materials, sales increased 23% this quarter when compared to the third quarter of last year and 11.6% during the first 9 months when compared to the same period of 2024, mainly due to a strong increase in sales of [indiscernible], the most profitable product within the precast line. Gross margin this quarter and during the first 9 months of the year was higher by 5.6 and 1.3 percentage points, respectively, compared to the same period of 2024. Moving on to our consolidated results. Net income for the period increased 14.4 percentage this quarter when compared to the third quarter of 2024 and 15.6 percentage during the first 9 months of the year when compared to the same period of 2024, primarily due to higher operating income, lower interest payments due to debt amortization and a favorable foreign exchange rate effect. Finally, in terms of debt, our net debt-to-EBITDA ratio was 2.5x as we continue to delever because of both higher EBITDA and debt amortization payments. To summarize this quarter, we continue delivering solid financial results, making the most of our favorable market conditions while managing costs in order to achieve profitability. Operator, can we now open the call for questions. Operator: [Operator Instructions] We have our first voice question coming from Marcelo Furlan from Itaú BBA. Marcelo Palhares: I have two questions. The first regarding volumes and the second one regarding capital allocation. So for volumes, you guys mentioned in the release that you guys expected an accommodation at least until April 2026 ahead of the federal elections. So I'd like to understand what to expect in terms of cement volumes performance in the country and then also for the company? And also what we expect after that? Do you guys still have an expectation or maybe it's too early to say after the elections, so could cement volumes evolve? And my second question regarding capital allocation is, what has driven the CapEx deployments to date? And what could we expect for -- in terms of for 2026? And also in terms of dividends, could we see maybe similar dividends or yield levels as you saw -- announced in October around [indiscernible] expect similar levels for 2026? So these are my questions. Humberto Reynaldo Nadal Del Carpio: Marcelo, thank you. I'm trying to answer your questions even though the line was kind of on and off. So I'm trying to figure out your questions. I'm going to try to answer. If I don't, please, you can try again to ask. In terms of volumes, this year has been very positive. I think the north is growing -- the north part of Peru is growing above the national average, which is pretty flat. But we think that the remaining quarter of this year should see the same level of activity. I mean, we mentioned Yanacocha, we mentioned Tarata, self-construction, they all seem to be pretty strong. When you -- and in general, there is a concern about the [indiscernible] coming next year, I think we've had 7 presidents over the last 8 years. We've had many elections going left, right, up, down, whatever. And it seems that 80% of the economy of Peru doesn't really care much about that. So we don't see really an impact of the election. We have a recently appointed President, he is pushing very strongly for the regional governments to spend the money they have left for the remaining part of the year. I read today that 50% is normal. At this point, being 9 months of the year, only 50% of the budget has been spent in regional government. So I don't see the electoral situation affecting too much, either self-construction or infrastructure projects. I don't really quite heard your second part, but I think it has to do with debt. I mean, if not, please correct me. And like Ely mentioned, I mean, we keep lowering our debt, both because we are paying the club deal that is -- we have 4, 5 years remaining and also because the EBITDA keeps being at a higher level. Like I said, communication was poor, if you want to rephrase the question, we can try that. Marcelo Palhares: Yes. The first question was answered. The second was actually related to the CapEx deployment to date. So with the CapEx deployments and what we expect in terms of for '26? And the second part of the question is regarding dividends, we could see similar dividend expected for '26 as we saw now announced in October? Humberto Reynaldo Nadal Del Carpio: Once again, I know what's wrong with your [indiscernible], but to do with the CapEx, I mean, our sustaining CapEx has remained around PEN 100 million, which is roughly around PEN 30 million over the last 2, 3 years, except for 2021 when we did kiln number four in Pacasmayo, that level should remain pretty steady. And I don't know if your questions have to do with dividends. I mean, we just announced a dividend last week in line with previous years, even though probably net profit will be up in the double-digit field for the rest of the year. We remain -- we decided -- the Board decided to keep the dividend PEN 190 million. I think in line with what Ely was mentioning, keep lowering the debt at the level-1 and we think it's a reasonable dividend yield and keeps everybody pretty much happy and the company financially very solid. Operator: So we are moving to the next question, which is a text question from Cesar [indiscernible]. Considering that electoral cycles often lead to a pause in private investment and shift in public spending priorities, how are you adjusting your commercial and operational strategy to sustain volumes and margins in an environment where project execution may temporarily slow down? Do you see opportunities to gain market share if other players reduce their activity? Humberto Reynaldo Nadal Del Carpio: Cesar, I mean, with all respect, I mean, I differ hear in your view of what happens in Peru in the electoral period. I think over the last periods, companies, private sector have learned that, I mean, we have to keep going. I just had a chance to write an article that will be published a week from now for a National [indiscernible] Association saying that private sector, and I mean the small entrepreneur all the way to a big corporation like us, we cannot stop. The country keeps going, the country keeps growing. We have elections every 5 years, but we change Presidents on average every 3 years. So we have to keep going. And I think this is part already on the decision-making process of companies. I mean, you see [indiscernible] going ahead. You see many announcements happening over the last 60, 90 days, and they're going all across election. So nobody is really waiting for the March elections because if you have a leading position, no matter what is your industry, if you decide not to invest, somebody else will do it. And in terms of opportunities to gain market share. I mean, we fight for our market share every single day, but it's election time and election time arrived is basically the same. As Ely mentioned, we have increased marketing expenses because we defend clearly our position in the market, but that is really independent of whether there's an election or not in the short term. Operator: Our next text question comes from Giovanni Sánchez from Prima AFP. Could you explain the extraordinary increase in financial income to PEN 8.7 million in the third quarter -- next text question comes from Mariane Goñ from CrediCorp Capital. Humberto Reynaldo Nadal Del Carpio: So I'm going to take it here, and there's a question from Giovanni Sanchez saying, could you explain the extraordinary increase in financial income to PEN 8.7 million in 3Q '25. Any guidance -- okay. That increase has to do fundamentally because we want to try [indiscernible] over mining royalties. This lasted, I think, over 10 or 12 years. And that meant an extraordinary income for us, and that's why the financial income changed. Any guidance for the last part of the year, like I said, I think volumes should remain strong. Usually, seasonality helps us in the second part of the year. So we're doing that. And in terms of 2026, a little bit too soon to tell, but we're optimistic that we will be seeing another year of growth next year. And the next question, I think, from Mariane Goñi from CrediCorp Capital. I answer the first part. In terms of margins for 2026, there's 2 parts of the question. I think the margin should remain steady for the coming year, even though volumes are going to grow. And relating the SG&A, there's 2 things here. I mean, we're going to keep being very strong in terms of marketing expenses because there's increased competition, and we like to defend our solid market share. And like Ely mentioned before, I mean, in terms of administrative expenses this year because we signed the 3-year union contract, there's a higher impact of the bonus we give our workers on the signed agreement. In the coming years, there's still a little part of it, but the amount would be lower. And the last question from Integra. Looking ahead, do you plan to maintain this level of marketing and promotional spending for this year to the coming year? Like I said before, I mean, this is -- we'll see what is -- there's always a plan for us, but we always act depending on what the competition does. We'll have to see what is the impact of what we are doing. But yes, we are very happy with the levels of this year. We have to bear in mind that we have increased our marketing expenses and our net profit is up 15%. So that's the idea. I mean, it's not so much how much we spend in marketing, but it's really paying off our strategy. And as far as it pays off, we will probably keep along the same lines. We're going to give one more minute in case somebody else has any additional questions. Operator: [Operator Instructions] Humberto Reynaldo Nadal Del Carpio: Thank you very much. We had some technical issues. On the first call we have done like a self-service, like a McDonald's Drive-Thru. And to close this, I would like to take a moment to thank you for your continued confidence and interest in our company. Peru faced many challenges and changes in the last decade. Progress is never a matter of chance, it's a matter of choice. It relies on the conviction of those who believe and continue to build even in difficult times, and we are among those. Cement embodies that conviction, turning belief into roads, homes and opportunities. Those of us who believe in the outstanding potential this country holds cannot step back, cannot be on standby. It is our responsibility to move forward, to invest, to innovate and to keep building its future. Thank you so much for your time today. And should you have any questions in the future, we will -- you know where to find us. Thank you, and have a nice day.
Operator: Welcome to the Northeast Bank First Quarter Fiscal Year 2026 Earnings Call. My name is James, and I will be your operator for today's call. This call is being recorded. With us today from the bank is Rick Wayne, President and Chief Executive Officer; Richard Cohen, Chief Financial Officer; Santino Delmolino, Corporate Controller; and Pat Dignan, Chief Operating Officer and Chief Credit Officer. Prior to the call, an investor presentation was uploaded to the bank's website, which we will reference in this morning's call. The presentation can be accessed at the Investor Relations section of northeastbank.com under Events and Presentations. You may find it helpful to download this investor presentation and follow along during the call. Also, this call will be available for rebroadcast on the website for future use. [Operator Instructions] As a reminder, the conference is being recorded. Please note that this presentation contains forward-looking statements about Northeast Bank. Forward-looking statements are based upon the current expectations of Northeast Bank's management and are subject to risks and uncertainties. Actual results may differ materially from those discussed in the forward-looking statements. Northeast Bank does not undertake any obligation to update any forward-looking statements. I will now turn the call over to Rick Wayne. Mr. Wayne, you may begin. Richard Wayne: Thank you, and good morning, everyone. As I go through this presentation, as we go through it, I want to just outline what the agenda will be for this morning. I'm going to first go over some highlights for the quarter and dig a little bit deeper in some of the material that we had put out yesterday. And after that, Pat will discuss the lending activity, and Santino will go over the financial results for the quarter. Finally, I want to make a few comments on Richard Cohen, who is moving on after tomorrow after almost 2 great years at the bank. So first, as to the highlights. We consider the quarter very strong. We had net income of $22.5 million, a NIM of 4.59%, return on equity of 17.64%, a return on assets of 2.13% and diluted earnings per share of $2.67. And finally, within a whisker, if that's a technical term, I don't think it is, actually, of $60 of tangible book value at $59.98. I want to comment first on loan activity. Purchases were strong. We bought loans with UPB of $152.7 million at an invested amount of $144.6 million. Now as you know, in our past, we have had 2 very large quarters where we purchased large transactions, the first in the second quarter of our fiscal year '23 and the second one in the first quarter of fiscal year '25. If you exclude those very large purchases, this would have been our second largest purchase quarter going back 3 years and probably longer. I just looked at the material for 3 years for this. One of the things that we are frequently asked in investor calls and otherwise is what does the purchase pipeline look like? And with all of the caveats in the forward-looking statements, specifically, we may buy a lot or we may not buy any. It's transactional. I would say that the purchase pipeline is as large now as we have seen in quite some time. A lot of it triggered by M&A activity and some balance sheet repositioning by other holders of commercial real estate loans. We have both the capital and the human resources to do the appropriate diligence on the amount that's out there, and we will look at every -- virtually every opportunity that is within our parameters. On originations, we did $134 million with a little rounding this quarter. I would point out that there is some seasonality to the origination business. We went back and looked 4 years ago, and we only had one first quarter in our fiscal year, which was in Q1 of '23 that had a higher amount of originations, $182 million. That meant, obviously, that for -- out of the last 4 years, 3 of the quarters, we did not do as much origination volume as we have done this quarter. And our origination pipeline is also quite robust. I now want to comment briefly on the SBA activity. This quarter, we funded $42 million, and we sold $53 million of loans that, of course, include some that were originated prior to this quarter. As we discussed in the July call, there were changes made to the SBA rules, which suggested and we indicated that we would have lower volumes in some number of quarters to come. Because we had less closings, we had less sales and because we had less sales, we had less gains. The gain in the linked quarter was $8.2 million compared to $4.1 million for the current quarter. And that difference of $4.1 million amounted to $0.34 diluted EPS. I think it's very helpful to understand that. We expect a few things to happen. Of course, one, at some point, the government will reopen. Pat may touch on the impact of that for us. And we now have -- absent the government closing, we have been seeing a ramping up of the volume that was temporarily diminished for the reasons that I described. Finally, a few comments on asset quality, which Santino will expand on relative to our balance sheet size. Overall, our loan book was pretty flat. Our purchased loan book increased by $31 million and our originated loan book decreased by $39 million. Because for purchases, the allowance comes out of the purchase price typically rather than booking a provision and because our originated loan book decreased, as I mentioned before, the amount of the allowance also decreased. And finally, I want to make a point on the timing of transactions. As I said, our loan book was mostly flat but our average loan balances were down $92 million compared to the linked quarter because much of the activity around purchasing and some originations occurred late in September. So that had an impact on interest income in the quarter. But for the reasons I described, it bodes well for the future because our average loan balances were higher. And with that, I will now ask Pat to talk about our loan activity. Pat? Patrick Dignan: Thanks, Rick. We had a solid loan activity this quarter, especially for the summer months, as Rick pointed out, the real estate and financing markets are very active. And while this is fueling more loan payoffs than we'd like, it's also creating a lot of opportunity. First, another note on the SBA business. The $42 million closed is comprised of 286 loans at an average rate of 11.7%. Although we saw increasing volume in each of the 3 months of the quarter and felt like we were making real progress toward our volume targets, the government shutdown essentially halted any new originations since October 1. We continue processing loans in the hopes of funding soon after the government is reopening. So we won't be wasting any time with that. But obviously, it's out of our control. Meanwhile, we're very optimistic about our new insured small business loan product with annuity, which is off to a great start since launching on October 1 with about $10 million closed since then. In our purchase business, we bought 522 loans in 7 transactions with $153 million of principal balance and a purchase price of $145 million or just under $0.95. These were mostly smaller balance loans with no real concentrations of note. Five of the 7 transactions were from loan funds, one from a small bank and one from a national insurance company. As Rick pointed out, over the last few weeks, we've seen a significant uptick in purchase opportunities, mostly from M&A activity, which is likely to continue for some time. This is a lumpy business and no guarantees will win at all or any of it, but the sheer volume of new opportunity is very encouraging for the next several quarters. In our origination business, we closed $134 million, which included 22 loans with an average balance of $6 million, LTVs just over 50% and an average interest rate of just under 8%. While lender finance product continues to dominate the origination business, direct loan opportunities have picked up significantly. The belief from borrowers that interest rates will come down over the next year is fueling new transactions and at the same time, creating an aversion to traditional debt, which typically includes significant prepayment protection. Our pipeline is as full as it's ever been, and we expect that we can remain disciplined in credit and still show strong growth going forward. Back to you, Rick. Richard Wayne: Santino? Santino Delmolino: Thanks, Rick. As Rick mentioned, this was another good quarter for the bank. We had earnings of $22.5 million or $2.67 per diluted share. ROA was 2.1% and ROE 17.6%. Total assets ended the quarter at $4.17 billion, which is down slightly from $4.28 billion at June 30. Loans were flat as purchases of $145 million and originations of $134 million were offset largely by paydowns and payoffs. Much of these purchases and originations occurred at the tail end of the quarter, so you'll see our average balances are down quarter-over-quarter, partially -- which is partially impacting our lower NII for the quarter. The excess cash we carried on the balance sheet at June 30 was put to use during the quarter to pay down our brokered CDs. So you'll see some shrinkage in the deposit portfolio as well. Capital remains strong with Tier 1 leverage at 12.21% and tangible book value came in just under $60 a share. Switching focus to the P&L. NIM was strong this quarter, coming in at 4.6%, resulting in pre-provision net interest income of $48.2 million, down from NIM of 5.1% in the prior quarter and pre-provision net interest income of $59.4 million. Decrease here is largely a result of heightened transactional income that we saw in Q4 fiscal year '25. Additionally impacting that is the higher average cash balances we carried during the quarter, which while accretive to net interest income did compress NIM a little bit. Provision for loan losses was a credit this quarter of $435,000, as Rick mentioned, which is due to a few things: one being less loans put on the balance sheet that required a provision as well as a slight decrease in the allowance coverage ratio. This is largely a factor of our continued strong asset quality, particularly in the originated loan business. From an SBA front, we had gains on sales of $4.2 million on sales of $58 million compared to $8.2 million in gains on sales of $108 million last quarter. As Rick and Pat previously mentioned, this is largely due to rule changes at the SBA back in May, which we previously disclosed the projected impact on this -- on earnings. On the expense side, we continue to be disciplined while strategically investing in our people and in technology that set up the bank for long-term success. Rick, back to you. Richard Wayne: Thank you, Santino. And now we would welcome any questions that you might have. Operator: [Operator Instructions] Our first question comes from Mark Fitzgibbon from Piper Sandler. Mark Fitzgibbon: Rick, I wondered if you could share with us. I noticed in the press release, you said there was a change in the cost structure arrangement with annuity, I assume over the SBA stuff. Could you share with us how that structure changed? Santino Delmolino: Yes. So we put out an 8-K on this back in last October. So beginning October 1 of last year, the cost structure changed where instead of a split in the gain on sale with annuity, they're charging us a flat fee on a per loan submitted basis. So that structure has been consistent for the past 4 quarters now. It's really just in comparing to the quarter end September 30, 2024, it was different. Mark Fitzgibbon: And then just how do you think we should be thinking about gain on SBA loans for the fourth quarter? I mean, assuming the government opens up maybe halfway through the quarter, can you kind of get back on track and get to a volume level that looks something akin to what you had in the third quarter? Richard Wayne: A little bit hard to say that, Mark, because there's a bunch of variables. I could say that starting in that we were seeing, and Pat mentioned this, we were seeing a ramp-up in SBA activity each month in the past quarter, which is what we expected to happen as both from a technology perspective and retraining those at annuity that are doing the first cut of underwriting and then our team as well. And I think if absent the government shutting down any of those things that happened, we probably would have been reasonably comfortable saying that by the end of this calendar year, we would have been up to where we were. But the reason there's less certainty about saying it now is what will the ramp up -- one, how long will the government be shut down? Because now it's essentially other than doing as much as we can do, there are critical things that we cannot do while the government shut down. We can't get an SBA number, and we can't get tax transcripts and we just can't get the loan to close. And how long that will -- that ramp-up will take, it's hard to say. I would say this reasonably comfortably that once the government is reopened over some number of months, let's say, 6 months. This is really an estimate because I don't know this for sure. We would expect we would get back. There's no reason to believe there won't continually -- continue to be large demand for that product. But there are a bunch of variables that would impact that. Mark Fitzgibbon: Okay. Fair enough. And then it looked like there was a decent linked quarter increase in professional fees. Anything unique in there? Santino Delmolino: A couple of things impacting that. One is just some temporary employees for folks that we've had out on leave during the period. So that aspect of it shouldn't continue on a go-forward basis. We've also seen -- we had some heightened legal fees in relation to the new growth term loan product, the insured loan product as well as just general increases in professional fees period-over-period. Richard Wayne: I want to just use that as a jumping off point, if I can, Mark, and others on the call because I want to comment about Richard before -- I don't want anyone to leave the Q&A before I've had a chance to say this. And the triggering thought to that was what Santino just said because we had hired a highly experienced auditor to come in and help us as we got through getting our financials. That's why that was more expensive. But as everyone knows, a while ago, we announced that Richard would be leaving the bank at the end of this month. This will be the last time you'll hear him in this room, I suspect he may, because he's still a stockholder, he may call up and be a really aggressive questioner, but we'll have to see about that. But I want to make a few points clear on this. One, Richard left on his own. I tried to talk him out of it almost every day, but unsuccessfully. Richard came to us. He moved his family boldly from South Africa. He was formerly a partner at KPMG. He came here without a job and not knowing much other than visiting from time to time the states, not knowing exactly what he would do. We were lucky that we were able -- first, we hired him as a consultant and then in this role, he's really done an extraordinary job for us. He grew a lot in the job. And this sounds like cliche because this is what people always say when someone leaves. In this case, it happens to be very true. He's really liked by everybody, he's respected by everybody. He added a lot of value to us, and he will be missed. I just want to add one other thing because 2 things can be true as I suggested to the Board yesterday, Richard can be all of those things, but we're lucky we have a deep enough bench, and Santino, who was our controller, could step right up. And Rebecca Jones now Rand, married name, sorry, Rebecca, who is our Director of Accounting, will be here, and we've hired a new controller. So we still continue to have a very, very -- and lots of other people in the accounting and finance roles. We have a very, very deep bench. But I just wanted to be clear about Richard that he's going out to start some business he's figuring out. And I suspect at some point, I would bet that he'll be wildly successful. I am not going to say bet, I'm not going to invest in it, but I believe he will be. Richard, do you want to say anything before we. Richard Cohen: I really do. Thank you, Rick. I mean it's been a very difficult decision to leave the bank. I'm immensely privileged to have been part of this fantastic organization. I'm equally immensely grateful for the relationships that I have with all of you, the investors, with the Board, with the leadership of the bank, with my team and with the incredible staff here. I so thoroughly enjoyed the culture. It's an amazing place to work. The bank is solution-oriented. It's focused. It's a warm place to work, and it's a very open environment. Maybe the last thing I'd like to say is a very special thanks to Rick and to Pat and to the Board for their faith in me for the close relationship that I have with them personally, which will continue into the future. And my very best wishes to Tino and to my fantastic team in whom I have immense confidence. I leave you in very, very capable hands, and I intend to stay very close and in contact with the bank over here. Richard Wayne: Thank you for that, Richard. We're clapping, you can't hear us. Thank you, Richard. Mark, I apologize for jumping off on that, but I wanted to make sure those things were said and heard. Mark Fitzgibbon: Richard, congratulations and best of luck in your new role. And Tino, to give you an opportunity to swing to the fences here, can you tell us what the margin is going to look like next quarter? Santino Delmolino: Almost, almost. No, we generally don't give guidance on margin. The real challenge, as you know, is with the transactional income, it can be really lumpy just depending on which loans pay off during the period. Richard Wayne: Here's a stat we don't mention often, but we have $207 million of discount on our purchased loan book. And what happened last -- for the linked quarter, we had more primarily, because of one big transaction. But -- and it's hard for us to know when there are going to be payoffs. And some loans have very significant discount. Most of all what I described is interest discount from loans that we bought at a discount because of interest rates, but that's always out there. So it's hard for us to say -- to predict what our margin will be because that's really the piece of it that is unpredictable and can be significant. Operator: Our next question comes from Damon DelMonte from KBW. Damon Del Monte: Richard, good luck with your new endeavors. Just a quick question on the -- NDFI lending has become kind of a hot topic in the industry in the last couple of months, and you guys do a lot of similar financing in that regard. Just kind of curious how you're feeling about the quality of the people you're with and the underlying assets and if you're seeing any signs of stress or there's any concern from your seats? Patrick Dignan: I assume you're talking about that... Damon Del Monte: Well, yes, but like the lender financing you do in general. I mean the items in the news have been tied to subprime auto lending. But I think just overall, just kind of how do you feel about the health of your lender financing portfolio? Patrick Dignan: We've heard from a few investors concerned about that recent fraud issues that were in the news, specifically the case where a title policy was doctored to improve the lender's perception of a lien position, resulting in significant credit deterioration when the truth was revealed. And our approach is and has always been a trust but verify. In the lender finance business, obviously, our borrower is the lender, and they are collecting documents from their borrower. And so I think oftentimes, we're getting that documentation secondhand. And so we have developed over time -- there's no way to 100% protect yourself from fraud, but we've -- we believe we're doing all we can to prevent this type of issue from happening. We do complete third-party background checks on all borrowers, funds and principles. We do independent verification of lien position and title insurance. We hold all the original loan documents in custody. We do daily monitoring of all court and recording activity relating to our borrower, the underlying borrower and the underlying collateral. In fact, it's fairly frequent that we will know that there's been a lien or some judgment on the underlying collateral and these usually minor things before our borrower does because we monitor it so closely. And we have very robust monthly reporting from our borrowers that show all activity, loan payments and communications with the borrower. So I think the short answer is this is a business that you just got to stay very, very closely on top of, and I think we do. Richard Wayne: In addition to what Pat just said, apart from potential fraud risk, it's not really the same business we're in. I know it's loan on loan and some people may consider that to be indirect financing and maybe that's true in some sense. But in another sense, it's totally different. We underwrite every single loan. So virtually all of our transactions are structured into bankruptcy, remote, special purpose entities with carve-out guarantees generally for any fraud or something that's specified in the documents, but it's a guidance line underscored. Meaning somebody comes in and they have a line with us and they want to take an advance under that line, we have to approve that advance, and we underwrite that loan right next to him. And so it's very different, totally different than some kind of a warehouse line where a borrower can borrow based on a borrowing base certificate without the lender focusing on the actual credit like we do, is totally different what we do. So to answer in a word, and we're very comfortable with our asset quality. And especially, as you know, from what we include in the material, the low LTVs throughout our whole book. Damon Del Monte: Right. Okay. That's great color. That's kind of what I was looking to hear. And then I guess just on the loan growth, obviously, pipelines for both purchased and originated sound like they're pretty healthy and you have some strong optimism to close out this calendar year and going into next year. Just wondering if you have any visibility on the payoffs thus far this quarter to kind of help give us some perspective as to what the net growth could be for loans outstanding for the quarter? Richard Wayne: I'll just make a general comment. Let me ask Tino to fill in if he has the information, he's saying no. This quarter, we had, I would say, a larger amount of payoffs than we typically have. And kind of something that is surprising is usually when you have large payoffs, in the purchase space, you tend to have more transactional income. But in this quarter, we had larger payoffs and we didn't have as much transactional income as I would have estimated at the beginning of the quarter. We purchased $145 million. We can just think through this live and Tino or Rebecca will correct me when I go wrong here. We purchased -- invested $145 million in our loan portfolio on purchase did what -- what was the net change in it, Tino or Rebecca? Santino Delmolino: Net change. Purchase is up like 20 -- I don't have the number right in front of me, but on Slide 3... Richard Wayne: So $24 million. So that would say we had $122 million of paydowns and amortization. That is high for that. And I think that in an interest rate environment that is declining, we would expect payoffs to increase. When somebody didn't have a better offer on the table, they wouldn't refinance just for the support of it. But historically, we've seen in lower interest rate environments, we have seen more payoffs. And so I would kind of -- I'm not saying it will be more than the $120 million we had this quarter. This quarter was particularly high, but we had some loans that we were -- sometimes when you have paydowns on the purchase in particular, it's a good thing because you have loans that we think are teetering. Teetering may be too strong, but loans we would be happier if they were out of our portfolio. And we made an effort, and it was either last call or the one before, we took a look and we provided detail on where we thought there was risk in the New York multifamily portfolio based on rent stabilization and the possibility of an administration change going forward. And we've made a concerted effort to reduce our exposure in the area of rent-stabilized or rent-controlled portfolio for that reason. So I think that was kind of a big chunk of why the purchase -- the payoff around purchase book was a result of that. And just on that topic, as it relates to originated loan, one thing we're seeing is we're seeing borrowers now negotiate much more strongly for getting rid of floors or having a floor that is -- typically what we like to have is the floor set at the rate when we originate a loan, but for borrowers, that's not market anymore. So we're seeing some lowering of the floor also. That sounds very pessimistic in terms of loan growth, but that's not my intention because we would expect both our originated loan book based on what we know that's in the pipeline. And with the caveat I said about purchase loans earlier, you win or you don't win, but there's an awful lot out there. We would expect -- I got to give another caveat, but I won't. You get the point that we would expect a fair amount of volume and opportunity in both of those spaces. Damon Del Monte: Got it. Okay. That's good color. I guess just lastly on the tax rate that came in lower this quarter. Is that just a function of taxable income? Or is there something -- I know there was like some state law changes. Does that like carry through for the next year? Santino Delmolino: Yes. A few things there that are impacting our tax rate this quarter. There were 2 state law changes that had pretty significant impact. One, Massachusetts, we're now paying very little taxes in the state of Mass because of their apportionment law changes. California also changed their apportionment laws, which has caused -- which offset the decrease in Massachusetts a little bit. We're paying more in California now. And the third piece is in Q1 of the fiscal year is when we have all of our stock vests and grants. So to the extent that tax -- the fair value of the vest exceeds what we booked for book expense on that restricted stock, we get a tax benefit for that. So with where the stock price was at the date of vesting this quarter, we saw a pretty good tax pickup on that front as well. That won't be recurring through the rest of the year. So on a go forward, we're expecting the effective tax rate for the rest of the year to be somewhere in the realm of 31% to 32%. Operator: [Operator Instructions] Now I will turn the call over to Rick Wayne for closing remarks. Richard Wayne: Thank you for those of you on the call -- I'm sorry, no. Thank you for those who are on the call for listening. Thank you, Damon and Mark, for very thoughtful questions. And again, thank you, Richard, for your work, your friendship, your professionalism, so much appreciated. And we will talk to you again at the end of January. Thank you all. With that note, we will say goodbye. Operator: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
Operator: Good day, and welcome to the BrightSpire Capital Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to David Palame, General Counsel. David Palamé: Good morning, and welcome to BrightSpire Capital's Third Quarter 2025 Earnings Conference Call. We will refer to BrightSpire Capital as BrightSpire, BRSP, or 'the company' throughout this call. Speaking on the call today are the company's Chief Executive Officer, Mike Mazzei; President and Chief Operating Officer, Andy Witt; and Chief Financial Officer, Frank Saracino. Before I hand the call over, please note that on this call, certain information presented contains forward-looking statements. These statements, which are based on management's current expectations, are subject to risks, uncertainties and assumptions. Potential risks and uncertainties could cause the company's business and financial results to differ materially. For a discussion of risks that could affect results, please see the Risk Factors section of our most recent 10-K and other risk factors and forward-looking statements in the company's current and periodic reports filed with the SEC from time to time. All information discussed on this call is as of today, October 29, 2025, and the company does not intend and undertakes no duty to update for future events or circumstances. In addition, certain financial information presented on this call represents non-GAAP financial measures. The company's earnings release and supplemental presentation, which was released yesterday afternoon and is available on the company's website, presents reconciliations to the appropriate GAAP measures and an explanation of why the company believes such non-GAAP financial measures are useful to investors. Before I turn the call over to Mike, I will provide a brief recap on our results. The company reported third quarter GAAP net income attributable to common stockholders of $1 million or $0.01 per share, distributable earnings of $3.3 million or $0.03 per share, and adjusted distributable earnings of $21.2 million or $0.16 per share. Current liquidity stands at $280 million, of which $87 million is unrestricted cash. The company also reported GAAP net book value of $7.53 per share and undepreciated book value of $8.68 per share as of September 30, 2025. Finally, during this call, management may refer to distributable earnings as DE. With that, I would now like to turn the call over to Mike. Michael Mazzei: Thanks, David, and welcome to our third quarter earnings call. We're pleased to report the strong results achieved during this past quarter and are particularly encouraged by the overall trajectory of the business. In the third quarter, book value remained stable, and we made considerable progress toward established objectives, which include resolving watch list loans and REO properties, and rebuilding our loan portfolio and maintaining dividend coverage. Our adjusted DE continued to cover our dividend, but we also achieved net positive loan originations for the second consecutive quarter, and also saw a meaningful growth in our origination pipeline. Together, these results demonstrate clear progress toward transforming our loan book and growing earnings. Also of note, we are observing continued improvements in the overall commercial real estate markets. Credit and lending spreads continue to tighten, and this has contributed to a steady increase in loan inquiry. Additionally, both the CMBS and CLO markets remain very highly active, showing solid new issuance growth. Coupled with a more favorable interest rate environment, these trends should create a supportive backdrop for increased loan originations. Along these lines, during the third quarter and through the first half of October, we originated 10 loans totaling $224 million. We have currently 7 loans in execution for an additional $242 million. To date, this will bring our total new closed and in execution commitments to $741 million since resuming loan originations late last year. Given this progress, we have already begun the process of preparing for our next CLO securitization. An essential part of our progress this quarter is due to meaningful developments in our watch list, as several of these borrowers have now commenced a formal sales process on the underlying properties. As a reminder, we started 2025 with a watch list of $411 million, which has now been reduced to $182 million. If successful, these borrower-led sales will substantially reduce our remaining watchlist exposure. Turning to the REO portfolio and our largest exposure, the Signia Hotel property, we continue to make gradual improvements while we address deferred maintenance and CapEx needs at the asset. Given the upcoming sporting events calendar, we expect to hold this property through the first half of 2026. Additionally, we currently have 2 REO office properties in the market for sale, and we have a specific timetable to market additional REO assets early next year. Our timetable for sale of REO assets will generate liquidity for future loan originations and drive the loan book growth toward our targeted portfolio of approximately $3.5 billion. The execution of this strategy will strengthen earnings and improve positive dividend coverage in 2026. Furthermore, we're also seeing a continued gradual reduction in our office loan portfolio, which now stands at $653 million, down from $769 million at the start of 2025. We expect an additional reduction as some borrowers have indicated intentions to sell properties in this improving market. The CMBS market has also accepted more office loans over this past year. In closing, we believe the coming quarters will be among our most productive. With each passing quarter, the combination of new loan originations, steady progress on watch list loans and the resolution of REO assets will drive the transformation of our portfolio and improve earnings. With that, I will now turn the call over to our President, Andy Witt. Andy? Andrew Witt: Thank you, Mike. I'll start by walking through the details of our net positive originations activity and then provide further updates on watch list loans and REO assets. During the third quarter, capital deployment consisted of $146 million of total commitments across 7 multifamily loans, as well as future fundings of $11 million, resulting in total deployment of $157 million. As for repayments, 2 loans paid off in full, 1 hospitality loan and 1 office loan for total proceeds of $88 million. Additionally, there were 5 partial paydowns during the quarter, totaling $9 million, resulting in $97 million in total repayments. For the second quarter in a row, we've achieved net positive loan originations, a trend we expect to continue with increasing momentum over the next several quarters. Currently, the loan portfolio stands at $2.4 billion across 85 loans, with an average loan balance of $28 million and a risk ranking of 3.1. Our average loan balance decreased year-over-year as a result of a deliberate strategy to reduce concentration risk and diversify the portfolio. During the quarter and subsequently, we continue to make progress on the watch list loans. The watch list portion of the loan portfolio currently stands at 8%, comprised of 5 loans for a total gross book value of $182 million. Reducing total watch list exposure remains a priority as we are working actively with the borrowers to effectuate resolutions. In a number of cases, the borrowers are in the process of actively marketing the underlying properties for sale. The reduction in watch list loan exposure quarter-over-quarter was driven by the removal of the Oregon office loan, which we took ownership of during the quarter. The property is currently in the market for sale. During the third quarter, one Austin, Texas multifamily loan was added to the watch list with a gross carrying value of $23 million. Performance at the property deteriorated primarily due to the insufficient funds to complete the property stabilization. As for our REO portfolio, it stands at $364 million of undepreciated gross book value across 8 properties. We completed the sale of the Phoenix, Arizona multifamily property in the third quarter, substantially in line with carrying value. Additionally, we are currently in the market with 2 office properties, including the Oregon office property previously mentioned. REO office exposure is comprised of 3 properties for a cumulative undepreciated book value of $81 million or 22% of the REO portfolio. We continue to make progress on our 4 multifamily properties within the REO portfolio. We are actively executing on value-add business plans with respect to 3 of the properties. These plans contemplate repositioning the properties, leasing them up and then taking them to market for sale. In each case, we are making progress toward that end and expect to be in the market with 2 of the 3 properties in Q1 2026, with the remaining property to follow in the summer of 2026. The fourth multifamily property is a predevelopment site in Santa Clara, California, which we intend to hold for the time being. As we've discussed before, the broader Bay Area is seeing a resurgence in demand, and we anticipate this property will benefit as a result of the favorable market tailwinds. Multifamily REO exposure stands at $147 million or 40% of the REO portfolio. Lastly, as Mike highlighted, we continue to make progress on the $137 million San Jose, California hotel, which comprises the remaining 38% of the REO exposure. In closing, we are encouraged by the momentum generated during the third quarter and look forward to sustaining and increasing that momentum on the originations and asset management front as we head into 2026. With that, I will turn the call over to Frank Saracino, our Chief Financial Officer. Frank? Frank Saracino: Thank you, Andy, and good morning, everyone. For the third quarter, we generated adjusted DE of $21.2 million or $0.16 per share. Third quarter DE was $3.3 million or $0.03 per share. DE includes specific reserves of approximately $18 million. Additionally, we reported total company GAAP net income of $1 million or $0.01 per share. First, a reminder regarding one of our legacy office equity investments. Earlier this year, we defaulted on the CMBS financing for our multi-tenanted office equity property located just outside Pittsburgh. During the third quarter, a receiver was appointed and as a result, we deconsolidated the assets and liabilities from the company's consolidated balance sheet. With that, we reported a GAAP impairment of $2.5 million related to the property. However, the impairment charge had no impact on our undepreciated book value as we had previously written the investment down to 0 over a year ago. Quarter-over-quarter, total company GAAP net book value decreased to $7.53 from $7.65 per share in the second quarter. We reported undepreciated book value of $8.68 versus $8.75 per share in the second quarter, slightly down quarter-over-quarter. Now I would like to quickly bridge the third quarter adjusted distributable earnings of $0.16 versus the $0.18 recorded in the second quarter. The change was primarily driven by the lender foreclosure of the Equinor Norway net lease asset, which occurred in 2Q, and the deconsolidation of the multi-tenanted office equity property previously highlighted. This was partially offset by positive net loan originations. Looking at reserves. During 3Q, we recorded a specific CECL reserve of approximately $18 million related to taking ownership of the property associated with the Oregon office loan, which Andy discussed earlier. As the loan was resolved during the quarter, we charged off the reserves. Our general CECL provision decreased to $127 million or 517 basis points on total loan commitments versus $137 million or 549 basis points reported in the second quarter. Our debt-to-assets ratio is 63% and our debt-to-equity ratio is 1.9x. Lastly, our liquidity as of today stands at approximately $280 million. This comprises $87 million of current cash, $165 million under our credit facility, and approximately $28 million of approved but undrawn borrowings available on our warehouse lines. This concludes our prepared remarks. And with that, let's open it up for questions. Operator? Operator: [Operator Instructions] And the first question will be from Jason Weaver from JonesTrading. Jason Weaver: Congrats on the quarter. First, I wonder if you could give me some update on your liquidity position, post quarter-to-date originations and those what you expect to -- the ones that are in execution that you expect to close? And if you're placing those recent loans into the 2024 CLO or holding those online? Andrew Witt: Those are being held on balance sheet. Liquidity is hovering around $100 million in cash. And as we said in the prepared remarks, much of the future originations that we're doing will come out of the resolution of assets, and the equity repatriation for assets that are either largely unencumbered -- totally unencumbered or largely unencumbered today. So from a liquidity standpoint, we plan on a lot of the fundings coming out of REO resolutions. Jason Weaver: Then just help me think about the pace of 4Q originations through the next couple of months. I know you put up the $320 million number, and I guess that's about $308 million net. But for November and December, do you expect that to be more muted or similarly active, just due to the sort of dovish posture and the progress we've seen on rate? Andrew Witt: Similarly active, because the pipeline has been gaining some momentum, if you will, and it's been increasing over time. I don't want to jinx this, but it's a pretty good environment. We're seeing a lot more loan inquiry quarter-over-quarter. And so to kind of go to the end result here, what we need to do for 2026, and I've said this on the previous earnings call, we need to get to a loan book of about $3.5 billion. And net-net, between now and the end of next year, we need to do well over $1 billion in originations. Gross, we need to do about $1 billion -- close to $1.5 billion in originations gross to offset any payments that we have. So you're looking at something that is probably like $300 million a quarter to really keep abreast of that. Jason Weaver: I think you're on your way. Operator: Our next question will be from Chris Muller from Citizens Capital Markets. Christopher Muller: Congrats on a solid quarter. So I want to start and ask about your net lease portfolio. We just saw Blackstone and Starwood jump into that space. So I wanted to ask how you guys are thinking about that space? And is this an area that there could be some growth for BrightSpire? Or are you happy with the assets you have there already? Michael Mazzei: I'd say we're happy with the assets we have right now. We have not explored going into the triple net market. I don't think we have a necessarily competitive advantage in that market. So I think from a net lease standpoint, we'll deal with the assets we have now. If we can get an interesting bid on some of these assets, we might consider selling them. But right now, no change in plan. Christopher Muller: Then I guess on overall sentiment in the market, do you expect to see a boost in demand if we get another cut from the Fed today? Or does that more just help continue to close that gap between buyers and sellers? Michael Mazzei: It's absolutely improving. The commentary we had yesterday, some of our originators were very pleased to see the price of caps going down in their discussions with borrowers. It is a pretty solid environment. You've got a dovish Fed. The long end seems to be coming down because of maybe the employment numbers. So you have a sub-4% 10-year treasury. I think you've also -- you've got some lenders that are getting exhausted. And I think they've gone on several years with loan modifications, us included. And we're encouraging borrowers to either refinance or sell the properties, which is why you saw the commentary around some of the borrowers on our watch list now have those properties up for sale. And you're seeing that across the board. So it's a pretty Goldilocks environment right now. You've got still a low level of construction lending, which will hopefully help absorption late 2026, early 2027. Interest rates lower. The negative carry on these assets because the cap rates are still 5% for multifamily, in some cases, even a little less. So that negative carry environment is becoming less. So it's making transaction sales volume increase. So we're starting to see a big uptick in that, and we're starting to see an uptick in acquisition financing versus in the first half of the year, first quarter, substantially refi. So we're seeing a lot more requests for acquisition financing than we have earlier in the year. Christopher Muller: Congrats again on a solid quarter and some great progress. Operator: The next question is from Tom Catherwood from BTIG. William Catherwood: So just wanted to pivot back to the answer on originations. Andy, obviously, you had mentioned out originating your repayments, and that's been the second quarter in a row you've done it. But because of REO, the loan portfolio has contracted over the last 2 quarters. With that $320 million of loans that you've talked about closed or in closing in 4Q, are we at the point where you think we can grow the loan book going forward? Or with other potential REOs in the pipeline, could it be 2 steps forward, 1 step back? What are your thoughts as far as getting beyond the takeback period so that the portfolio can get up to $3.5 billion that you're targeting? Michael Mazzei: Andy, do you want to jump on that? Andrew Witt: Yes. So, I think we're really at that point right now. So we've been increasing the momentum of our loan originations. The pipeline is growing, and we are pushing things through REO sale. And so that will be a little bit of a headwind. But it's really that capital that is the fuel for building the loan book. So I think you will see the loan book increase. It's increased kind of quarter-over-quarter for the last couple of quarters when you're just looking at the loan book. And so what you'll see in the future quarters is increased rate of growth, moving towards that $3.5 billion number. William Catherwood: Andy, then in terms of your San Jose hotel, I was in the market there in September and walked the property. It looked great. It had a tech conference going on, so it was crowded. The question I have for you, though, is kind of with that packed event schedule that you mentioned for 2026 in San Jose, what could the asset contribute towards distributable earnings as occupancy ramps up? I mean this is a high operating leverage business. To us, it seems like there could be a material contribution. What are you underwriting for 2026? Michael Mazzei: The NOI, it's still about -- it's still going to be a sub-$10 million NOI. For this year, we're coming in below that. So next year, as we said, we have some significant events occurring in the first half of the year. We also have, as we said in the prepared remarks, some deferred maintenance elevators, lobby work that needed to be done and some CapEx that needs to go into the hotel. So that dovetails well into that timeline. We have to put these in place, because if we sold the asset, any buyer would look at those and say, elevators need to be redone, and we're taking that off the purchase price. So we need to get that done. Those have been needing to be done for quite a while. But yes, our hope is that we continue to see uplift in that Bay Area. You just saw the hotels in San Francisco, 2 large 3,000 collective rooms in these 2 hotels traded. We are seeing a lot of interest in the -- generally in the Bay Area and in San Francisco. The one caution I would have is that there is a concern that if San Francisco really is coming back the way people are saying, that there may be some latent group demand to go to San Francisco. So we really need to observe that. But in terms of contribution, I would say roughly a $10 million number for NOI would get you within a stone’s throw where we think we might end up for 2026. We haven't gotten a budget yet for that year. We're running slightly behind that for 2025. Operator: [Operator Instructions] The next question is from Gaurav Mehta Alliance Global Partners. Gaurav Mehta: I think in your prepared remarks, you talked about preparing for a new CLO issuance. Can you provide some details on the size and timing of the expected issuance? Michael Mazzei: Thank you for the question. Actually, because it is so close, we actually can't comment on it. It would be inappropriate. But I would say it would be within the context of what you're seeing in the CLO market. Gaurav Mehta: As a follow-up, I think in your prepared remarks, you talked about 2 office properties listed for sale. I think one of them was Oregon. Can you provide some detail on which is the second office property you're looking to sell? Michael Mazzei: It is one of the Long Island City properties, and we are in the process of soliciting offers for that as we speak. Operator: Ladies and gentlemen, this concludes today's question-and-answer session. I would like to turn the conference back to Mike Mazzei for any closing remarks. Michael Mazzei: Thank you. Well, in summary, we covered our dividend. We had positive net loan originations for the second quarter in a row. Our pipeline is improving. As we mentioned, we are in the process of embarking on a new CLO. And we anticipate, as we said in the prepared remarks, substantial progress on our watch list and REO in the coming 2 quarters. So we look forward to that. With that, I would like to thank you for joining us on the call today, and we will see you in February. Operator: Thank you, sir. The conference has concluded. Thank you for joining today's presentation. You may now disconnect.
Operator: Greetings, and welcome to Regency Centers Corporation Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Christy McElroy. Thank you. You may begin. Christy McElroy: Good morning, and welcome to Regency Centers' Third Quarter 2025 Earnings Conference Call. Joining me today are Lisa Palmer, President and Chief Executive Officer; Mike Mas, Chief Financial Officer; Alan Roth, East Region President and Chief Operating Officer; and Nick Wibbenmeyer, West Region President and Chief Investment Officer. As a reminder, today's discussion may contain forward-looking statements about the company's views of future business and financial performance, including forward earnings guidance and future market conditions. These are based on management's current beliefs and expectations and are subject to various risks and uncertainties. It's possible that actual results may differ materially from those suggested by these forward-looking statements we may make. Factors and risks that could cause actual results to differ materially from these statements may be included in our presentation today and are described in more detail in our filings with the SEC, specifically in our most recent Form 10-K and 10-Q filings. In our discussion today, we will also reference certain non-GAAP financial measures. The comparable GAAP financial measures are included in this quarter's earnings materials, which are posted on our Investor Relations website. Please note that we have also posted a presentation on our website with additional information, including disclosures related to forward earnings guidance. Our caution on forward-looking statements also applies to these presentation materials. As a reminder, given the number of participants we have on the call today, we respectfully ask that you limit your questions to one and then rejoin the queue with any additional follow-up questions. Lisa? Lisa Palmer: Thank you, Christy. Good morning, everyone. We're proud to share another quarter of outstanding results, highlighted by strong same-property NOI growth and earnings growth. These results reflect the continued success of our team in leasing space, commencing our SNO pipeline and driving rents higher amid robust operating fundamentals and strong demand at our shopping centers. Our tenants remain healthy, which is evident in sustained sales strength and historically low bad debt. Our earnings growth is further amplified by the successful execution of our capital allocation strategy this year. Our investments team has accretively deployed more than $750 million of capital into high-quality opportunities, including acquisitions, ground-up development and redevelopment. By year-end, we expect to have started around $300 million of projects, bringing total starts to an impressive $800 million over the past 3 years. I am so proud of our team for this accomplishment. I'll let Nick talk in just a few minutes about the specific development projects we started in the third quarter, but I want to emphasize again how ground-up development is truly a key differentiator for Regency. We are the only national developer of grocery-anchored shopping centers at scale in an environment of otherwise limited new supply. We are building the types of assets that we would acquire, and we're doing so accretively and with manageable risk, creating meaningful net asset value with yields well ahead of market cap rates. Given our exceptional results and a continued strong fundamental backdrop, we are raising our full year earnings growth outlook and reflecting that strong performance, increasing our dividend by more than 7%. Our strong and consistent track record of dividend increases over time is very important to us in driving total shareholder returns while also maintaining a substantial level of free cash flow. Before turning it over to Alan, I want to say again how proud I am of our team's performance this year. And as we look ahead, we believe our competitive advantages position us well to drive sustainable cash flow growth from our essential grocery-anchored shopping centers in suburban trade areas with strong demographics to our leading national development platform, strong balance sheet and the best team in the business. Alan? Alan Roth: Thank you, Lisa, and good morning, everyone. Our team did an incredible job producing another quarter of outstanding results, growing same-property NOI by nearly 5% with strong base rent growth as the primary contributor at 4.7%. This outperformance is a culmination of a record amount of new leasing in recent years and accelerating rent commencement from our SNO pipeline, combined with favorable bankruptcy outcomes and historically low levels of bad debt. Our tenant base is healthy. And across our portfolio, we continue to experience significant demand from nearly all retailer categories and for both anchor and shop spaces. Our same-property percent leased rate sits at 96.4%, and we remain confident that we can exceed prior peak levels in this favorable retail environment with limited new supply and sustained strong demand for our high-quality space. Looking ahead, our leasing pipeline is robust, fueled by interest from vibrant restaurants, leading health and wellness brands, off-price retailers and, of course, our best-in-class grocers. In fact, we signed 3 new grocer leases in the third quarter alone, unlocking exceptional redevelopments that will drive enhanced merchandising and better foot traffic to these assets, all at highly accretive returns. Our same-property commenced rate increased by 40 basis points in the quarter to 94.4%, with 8 anchors rent commencing, including several key openings at redevelopment projects. At our hub at Norwalk asset located in Fairfield County, Connecticut, the long-awaited Target opened in the quarter to strong crowds. We also opened a brand-new Publix at our Cambridge Square asset in Atlanta and a Nordstrom Rack at our Pine Ridge Square Center in South Florida. All of these retailers reported exceptional openings, and we couldn't be more pleased with the upgraded merchandising and success we've seen at each of these projects. While we've made meaningful progress converting our SNO pipeline into lease commencements, we are also actively backfilling our pipeline with newly executed leases. Our 200 basis points of pre-leasing now represents approximately $36 million of signed incremental base rent. Additionally, we have another 1 million square feet of leases in negotiation, representing visibility to continued strong leasing activity. We also continue to have great success driving higher rent growth. Cash re-leasing spreads were strong at 13% in Q3, while GAAP rent spreads were near record high levels at 23%, demonstrating our ability to achieve strong mark-to-market rent growth while also embedding meaningful annual rent steps into our leases. Importantly, we are also being prudent with our leasing capital investment. In closing, I am so proud of our team's great work. Strength in retailer demand, leasing fundamentals and tenant health indicators remain favorable, and we have great visibility into continued above-trend same-property NOI growth in 2026. Nick? Nicholas Wibbenmeyer: Thank you, Alan, and good morning, everyone. As Lisa mentioned, this was another very active quarter for accretive investment activity. We're seeing great momentum in starting new development and redevelopment projects, executing on our in-process pipeline as planned and continuing to successfully source acquisition opportunities. Since our last update a quarter ago, our most significant progress has been in growing our development and redevelopment pipeline. We started over $170 million of projects during the third quarter, bringing our year-to-date total to more than $220 million. Our starts in the quarter included 2 exciting new ground-up projects. Ellis Village will be a 50,000 square foot Sprouts-anchored center located in the Bay Area at the front door of a thriving master planned community. The Village at Seven Pines will be a 240,000 square foot Publix-anchored center in the heart of Jacksonville's well-established retail node. The property will serve as the commercial hub of an iconic master planned community that will also include over 1,600 homes. Given our success in bringing projects to fruition, we now expect approximately $300 million of starts in 2025. As the only active national developer of high-quality neighborhood shopping centers, leading grocers remain engaged with us on new projects across our platform. Our team continues to execute well on our in-process development and redevelopment projects, which now totals more than $650 million, with strong leasing activity and blended returns exceeding 9%. On the transaction side, we had another active quarter as well. As mentioned on our last call, we acquired the 5-property $350 million RMB portfolio in South Orange County at the beginning of the quarter. As a reminder, this was an off-market OP units deal with the value proposition of owning Regency stock playing a meaningful role in seller motivation. We've already fully integrated these centers into our platform and are seeing them perform very well. We also purchased our JV partner's interest in 3 grocery-anchored centers during the quarter, including 2 in Houston and 1 in Northern New Jersey. We welcome these opportunities to convert to full ownership of high-performing centers and strong markets. In closing, our team is actively working to source attractive opportunities and further build our future investment pipeline. While the opportunity set for new development projects remains limited, our flywheel effect is real and our ongoing success uniquely positioned us to take advantage of future opportunities to create value. Mike? Michael Mas: Thank you, Nick. As you've heard this morning, the Regency team delivered another outstanding quarter of results, driven largely by the strength of our leasing efforts, the health of our tenant base and the value we're creating from capital allocation. This is reflected in earnings and same property NOI growth that again exceeded our expectations. As a result, we now anticipate same-property NOI growth of 5.25% to 5.5% with the increase driven by lower credit loss and higher rent commencement from our SNO pipeline. Notably, within that expectation, we have decreased our credit loss guidance range to 50 to 75 basis points. This higher organic growth is driving our increased full year outlook for earnings per share with our new ranges now calling for growth of mid-7% for Nareit FFO and mid-6% for core operating earnings. And as Lisa mentioned, we also raised our dividend by more than 7% this quarter. Our balance sheet remains strong with leverage squarely within our target range of 5 to 5.5x. We are generating significant free cash flow to continue funding external growth, and we have nearly full availability on our $1.5 billion credit facility. You'll recall that late last year, we issued $100 million of forward equity. To update you on timing, please note that we settled $50 million in August and we will settle the balance by the end of October. Looking ahead to 2026, we plan to provide detailed guidance when we report Q4 results in February, but I want to offer some early thoughts on our current expectations for growth as we work to finalize our plan. We expect same-property NOI growth in the mid-3% area, including a credit loss environment similar to 2025. We expect total NOI growth in the mid-6% area, which includes our expectation of delivering approximately $10 million of incremental NOI from ground-up development projects currently in process. As Lisa and Nick discussed, development is an important differentiator for Regency as you consider our external growth prospects, and we are gratified to realize a more significant impact from these successful projects as they lease towards stabilization. Nareit FFO growth is expected to be in the mid-4% area, representing continued solid growth after taking into account the impact of current year and planned 2026 debt refinancing activity, which collectively is expected to have an impact on growth of approximately 100 to 150 basis points. Organic same-property NOI growth of 5.25% to 5.5%, an internally funded and growing development and redevelopment pipeline, evidencing Regency's unique competitive advantage, an A-rated balance sheet prepared to weather all seasons and an outlook for continued growth even through the realities of today's higher rate environment, it's clear that Regency's best-in-class team is operating on all cylinders. We are happy to take your questions. Operator: [Operator Instructions] Our first question comes from Greg McGinniss with Scotiabank. Viktor Fediv: This is Viktor Fediv on for Greg McGuinness. Can you provide some color on this 11 asset distribution transaction with your JV partner? What options does this transaction open actually for Regency? Nicholas Wibbenmeyer: Sure, absolutely. This is Nick. Appreciate the question. Regarding GRI, I would start with the fact that they've been a very, very good and long-term partner of ours, and our interests have been aligned for many, many years. And that portfolio aligns completely with our strategy, and we like every asset we own with them. The only challenge sometimes with these long-term partnerships is there's not a perfect way to capital recycle. And so this allowed us to do a mini DIK in order for them to own 6 assets, they now have full control over. And we now own 5 assets at 100% that we are excited about owning and anticipate owning long term and excited about the partnership on a go-forward basis, again, because they've been great partners. We expect them to continue to be aligned with our interest on the portfolio we continue to own together. Operator: Our next question comes from Michael Goldsmith with UBS. Michael Goldsmith: Mike, I appreciate the early parameters for 2026, if you will. You pointed to the same-property NOI growth in the mid-3%. What's changing from the environment that you're seeing there? Or can you help bridge to get there? And then also, you mentioned you expected a credit loss environment similar to 2025. Does that mean like your expectations at the start of 2025 or this historically low bad debt that Lisa mentioned at the beginning of the call, is that applied for next year? Michael Mas: Sure, Michael. Let me start with the second, and I'll just clear that before I move to the first on the bridge. We're expecting next year's credit loss provision to look a lot like '25 ended. So we're -- I would call that a continuation of really on both fronts, whether it's bankruptcy losses or uncollectible lease income, better than historical averages. So our tenant -- the roster of our tenants is as healthy as it's ever been. With respect to the bridge, I think you have to start with an understanding of 2025 before you can appreciate that our outlook as we sit here today, and by the way, as we continue to refine our plans, we feel pretty proud with. But I think if you really think about '25 and think about the components of this year's growth, which are culminating in today's targeted area of 5.25% to 5.5%, a lot -- this is about as much commenced occupancy as we have absorbed in this company in our history. And kudos to the team for building that SNO pipeline through 2024, kudos to the team for delivering that SNO pipeline into 2025, and they've continued to [indiscernible] expectations of that delivery. And we are quickly -- we've quickly absorbed space, and we're approaching levels of NOI that are -- levels of occupancy that are what we would call peak levels. Together with that, we have benefited from an extreme uptick in our recovery rate. All of that recovery rate benefit in 2025 is about 100 basis points. So if you -- reflecting on 2025, as I think about a mid-3% area of same-property growth next year, all of which -- nearly all of which coming from base rent, I think that's pretty darn good growth on top of really good growth in 2025. So we still feel really confident with our outlook. Lisa Palmer: Yes. And I would just like to emphasize that. I think Mike said it really well. But mid-3% same-property NOI growth a year after what we're doing this year and then adding on top of that the contributions that we're getting from development with a 6% NOI growth, we feel really good about how well positioned we are for our future growth. Operator: Our next question comes from Cooper Clark with Wells Fargo. Cooper Clark: Great. I appreciate the early '26 thoughts. I guess how should we be thinking about the potential on development and redevelopment starts into next year, considering an increasingly competitive transaction market and strong leasing? And then I would also appreciate any color on the mix between ground-up and redevelopment as you think about starts moving forward. Nicholas Wibbenmeyer: Yes, Cooper. I appreciate the question. This is Nick. So I think there's a couple of pieces to that. So let me just actually step back for your benefit and others. It wasn't that many years ago, we were talking about starting between our development and redevelopment program, $1 billion over the next 5 years. And now fast forward and as we look over our shoulder here as we round third base in 2025, we will have started $800 million just in the last 3 years. And so as we've been articulating, we continue to feel really good about finding more than our fair share of investment opportunities in our development and redevelopment program. And so I would say, as we look forward, we would expect to continue to find more than our fair share in that run rate, we feel good about as we move into 2026. And the team is working every day to find even more opportunities. And where we find those, we'll take advantage of those. And then in terms of the divide between development and redevelopment, look, wherever we can invest our capital accretively, we're going to lean into. But because of the success we've been having on the development program, as you can see, the split is starting to lean into the ground-up development. And so I expect that to continue. If you look at our in-process today, this is the first quarter in quite some time, our in-process developments outnumber from an investment standpoint, our redevelopments. And so we have now flipped the script where the developments are outweighing redevelopments. And as I look more near term into 2026, I would expect that to be the case as well. Operator: Our next question comes from Samir Khanal with Bank of America. Samir Khanal: Mike, just looking at your net effective rent page, when I looked at the new leases, just curious, there seems to be a little bit more leasing being done on -- the new leasing being done on the anchor side versus shops, which you go back the last several quarters, it's been -- the mix has been primarily shop space. So just can you provide a bit more color? Was there something like did you get boxes back? Is this related to some of the development side? Just trying to understand why the mix has gone up for anchors here? Alan Roth: Samir, this is Alan. I appreciate the question. So no, it's just an anomaly for the quarter. We happen to do more anchor transactions. It's not development-driven per se in the quarter. And again, I'd say 10 anchor transactions came in. That's what's also skewing, I think, with the lower rent that you're seeing. But importantly, that I'd slide you over and go look at the cash rent spreads and the GAAP rent spreads that happened for the quarter. So nothing more than coincidental timing that a lot of anchor transactions happen to come through the queue in quarter 3. Operator: Our next question comes from Ronald Kamdem with Morgan Stanley. Ronald Kamdem: I just want to touch on acquisitions because we definitely appreciate the early '26 thoughts on same-store. But on the acquisition front, just number one, just on just cap rates or IRRs, just what are you guys seeing in the market and how that's trended? And we also noticed a lot of the JV transactions in the quarter. I guess, you still have over 100 assets in those JVs. Is there more incremental willingness to sort of sell or buy those assets out? Nicholas Wibbenmeyer: Appreciate the question, Ronald. Let me start with your second question first, which is the joint venture side. The short answer is yes. I mean the assets we own, whether we own 100% or we own with partners, we're excited about owning them. And so where there's an opportunity with our partners to buy out their interest, we're constantly having those conversations. And where the stars align, we plan on taking advantage of that. We are obviously set up to transact quickly, and we're having those conversations on a very regular basis. So excited about the ones we were able to execute on last quarter. We can't perfectly predict when our partners want to exit the future. But again, we expect that to continue to be a pipeline on a go-forward basis. And then in terms of cap rates, I'll just reiterate the good news for us, given the development program we just spoke about based on Cooper's question is, I would just reiterate, we don't have to acquire assets to grow. But where we can find the opportunities to lean in, where they match our quality, match our future growth profile, and we could fund accretively, we're leaning in. And as you can see, that's led to over $0.5 billion of acquisitions this year. But that's becoming more difficult in this environment because there is capital flowing into our sector, no question about that. And so I would have told you last quarter, we'd probably be talking cap rates 5.5% to 6% on most core assets. Now from what we're seeing in the market, I would say it's more of the minus side on 5.5%. There's a lot of capital chasing these opportunities. And so we're going to continue to be true to our business plan, make sure we're investing our capital wisely, but also excited to see so many people finally waking up to understand how defensive and quality our NOI streams are. Lisa Palmer: Really quickly, I would just like to add, I'm going to reiterate, I think with Nick's answer to one of the first questions, we really value our long-term partners and continue to do that. And it was not that long ago that Oregon committed even additional capital to us, and you've seen us continue to acquire assets with them into that partnership. So that's one that we're growing, for example. So again, we value long-term partnership -- our long-term partners, and we often are the best buyer if there's a reason that the partner wants to exit, and that's when we have those opportunities. Operator: Our next question comes from [ Sydney Rome ] with Barclays Bank. Unknown Analyst: I was wondering if you could give a little bit of color on what your expectations are for rent spreads and if you expect them to continue to be around this percentage or... Alan Roth: Sydney, thank you for the question. Look, I'm really proud of the trajectory we have been on and how committed the team is to ensuring not just these elevated levels of rent spreads, but even more importantly, the GAAP spreads that we always talk about and the continued embedded rent steps. So I don't necessarily have a target on it per se. But what I would say is I look back at Q3 new shop leasing, 85% of our shop transactions had 3% or higher in terms of embedded rent steps and 25% of our new shops had 4% or higher. So the teams are really embracing that long-term sustainable approach with these embedded rent steps while on top of that, getting that 13% rent spread that you have seen. I will take as much as they are willing to give, and I just believe in this sort of supply-constrained environment, we have an opportunity to continue to lean in. Operator: Our next question comes from Todd Thomas with KeyBanc Capital Markets. Todd Thomas: I just wanted to revisit the mid-3% same-property NOI comments. You said that that's the base rent component primarily, so contractual rent steps and cash re-leasing spreads. Do you expect a further contribution from the SNO pipeline in 2026? And can you also speak to what sort of contribution you might anticipate from redevelopment in '26? Is that going to be sort of a neutral impact year-over-year? Or do you still expect there to be some additional growth on top of that from redevelopment? Michael Mas: Sure. Thanks, Todd. And I'm happy to dig in a little bit deeper here. But I'm going to leave some of that detail to our full plan, which we'll provide to everybody in February. Yes. So to get to mid-3s, it's going to take some occupancy climb. And we still see an opportunity, and we have some slides in our investor materials that articulate that. There remains opportunity in our commenced occupancy percentage to close that gap. We're sitting at 200 basis points wide right now. The historical average is in the 175, 180 area. And we are confident that we will continue to make headway towards closing that gap into '26, which will drive some of that base rent growth that I articulated. We do -- that includes delivering on redevelopments. So in 2025, we had a year where we contributed to growth from redevelopments north of 100 basis points. I actually think that, that's going to repeat itself into 2026. Those are overlapping concepts in some way. It's really about absorbing space and driving commenced occupancy. And then the balance is going to come from rent growth. And I thought Alan did a really nice job of articulating our position in that marketplace, both driving contractual steps as well as cash re-leasing spreads. I hope that helps. And again, we'll give some more color on this outlook in February. Operator: Our next question comes from Craig Mailman with Citi. Craig Mailman: Maybe just a 2-parter here. As we think about the breadcrumbs you laid out for next year for same-store and implicitly total NOI growth and maybe even FFO. Just looking at your same-store occupancy, you guys kind of ticked a little lower than where you peaked out at. Is there room to push that lease rate higher? Or are we going to close the gap to the historical spread by just commencing and you kind of are at the frictional level for that leased occupancy? And then just the second piece for Mike, I know you said 100 to 150 basis point drag from refinancing. Are you guys giving any consideration to putting some term loan debt in the stack, which is from what I'm hearing from some of your peers, pricing in the mid-4s, which would kind of compress that headwind a bit? Alan Roth: Craig, it's Alan. I'll take the first part and let Mike color up the second part. I do believe that we can pierce through the occupancy of where we are. That 20 basis point drop this quarter really was attributable to the Rite Aid bankruptcy and us getting 10 Rite Aid spaces back in the quarter. But as we look at, again, as I think I said on one of the prior questions, strong demand, limited supply. I think there's certainly upside there. And I think what we'll probably see that come from largely is on the anchor front. We're at 98% leased. And as we look back at peak levels there and I look at the pipeline of deals that is in process right now for those anchor transactions, there's real opportunity there. And what is even further encouraging to me is when we look at kind of who those tenants are and Five Below, Barnes & Noble, HomeGoods, J. Crew Alta, there's just a whole lot of them that are out there that are materially engaged and just great operators that will be really fantastic adds to our portfolio. Michael Mas: So hard pivot to the balance sheet, and I appreciate the question. Yes, we consider all forms of capital as we think about refinancing our obligations. And the 100 to 150 basis point impact on refinancing is a pretty wide range that we're sharing today largely because we're still considering what options we may take for 2026. The 2025 financing activity has already been executed. So we know what that impact is next year that the balance of our expectation will be driven on the solution we choose, term loans, converts, vanilla bond offerings, all of those are always considered by Regency. We will make the best decision at that point in time depending on the market conditions. Let me lastly say that with the credit position that we're in from an A-rated balance sheet and the extreme pricing we can achieve on just the vanilla bond offering with a 10-year term, I do think you squeeze out a lot of that potential opportunity that others may have as they consider their alternatives. Operator: Our next question comes from Juan Sanabria with BMO Capital Markets. Juan Sanabria: I guess a 2-part question. One, you mentioned $1 million -- or sorry, 1 million square foot pipeline in your prepared remarks. So just curious if you could contextualize that historically? And is that being skewed by some of these anchor opportunities you've kind of noted? And then the second part would just be anything unusual on bad debt this quarter that was actually a contributor to growth? And is there any of that assumed seemingly in 2026, given you expect bad debt to kind of be similar next year versus this year? Alan Roth: Juan, I appreciate that question. That 1 million square feet is pretty consistent with multiple prior quarters, again, I think speaking to the strength of the environment that we're in right now. It is -- there is no disproportion of anchors versus shops on a relative basis in terms of how we look back. And again, it's full of great retailers. And I rattled off a few junior box players that we're engaged with, but we're also doing multiple transactions and that pipeline is full with the Warby Parkers and the Jersey Mikes and the Mendocino Farms and the Joe & the Juice and just a whole host of great operators that were sprinkling in across the country. So again, we always say qualify the right operators and merchandising is very important to us. We don't just lease to anybody. And so while I'm proud of the 1 million square feet in terms of the numbers that are in there in the pipeline, I'm equally, if not more proud of the quality of those retailers that are in it. Michael Mas: On the bad debt question, and I think you're referencing our uncollectible lease income line item. Interesting this quarter -- so again, this is a line item that is reflecting the collection rate on our cash basis tenants, right? So that pool of property -- we just had higher collections from that pool of property -- the pool of tenants, I should say, this quarter. In fact, interestingly, we've been collecting this quarter on some receivables from tenants who had previously moved out we had long written off ago. And kudos to the team, both operations and legal for continuing to pursue those owed receivables, and we've collected on those this quarter. So that's what drove the positive anomaly. On a year-to-date basis, we're running in the 20 to 25 basis point area on ULI. That's as a percent of total revenues. You've heard us talk about our historical averages before, which are in the 40 to 50 basis point area. So for a couple of years now, we've been operating at historical lows. Again, the tenant base that we have today is extraordinarily healthy, doing very well. And that comment I'm making at the end, we believe will continue into next year. So we are anticipating that we'll continue to be lower than our long-term historical averages on uncollectible lease income in 2026. Operator: Our next question comes from Michael Griffin with Evercore. Michael Griffin: On the developments, I'm curious if you can give us a sense of where you're underwriting rents, both for anchor and small shop versus where current rents are in the market? And then maybe stepping back more broadly, we've heard about this dearth of new supply in strip land. And clearly, Regency is a differentiator on the development side. I mean, I realize you don't want to give away all the secrets, but how are you all able to make the math pencil? Is it the land basis? Is it the proximity to population areas like these master planned communities? It just seems like you're able to make this work, whereas others out there in the market aren't able to. Nicholas Wibbenmeyer: Appreciate the question, Michael. This is Nick. I'll start with your second part, which is, yes, there's no secret sauce. I'll tell you that. It's a lot of really, really hard work over years and years that build up to put us in the position we're in. And it comes back to, again, starting with the relationships. We have the best relationships across the country with the best grocers. If you look at our end process, I mean, we're building for Whole Foods, we're building for H-E-B, Safeway, Publix, Sprouts, doing a major redevelopment with Kroger. And so those relationships have been forged over decades of work. Capital, there's no question. We have the capital. It's where we're allocating it as we keep talking about. And so we are blessed to be in a position with our free cash flow and our balance sheet to be able to lean in and take advantage of these opportunities, and that really matters to a seller to know that we are committed and we have the capital ready to go. And then last but not least, it's just expertise, really, really hard work to grind into every aspect of our pro forma. And again, years of experience, the best professionals in the business, no doubt, working on our construction costs, working on our underwriting and sharpening every aspect of that pro forma to make these things pencil. And so again, no secret sauce, but we're really, really proud about what we've done here recently and what the future looks like for us. But it's not 0 competition. There's -- we are the only active one nationally, but we're competing with local developers in these markets. And there's some quality local developers that are forcing us to up our game and sharpen our pencil every day. And so we're excited about the ones that we're winning for the reasons I just articulated and continue to believe we'll get more than our fair share. And in terms of rents, you're absolutely right. I mean 2 aspects to every pro forma, what's the cost, which we're really smart about and understand really well, which is why you've seen our in-process perform the way they have. But the other side is the income. Given the operating portfolio we have, the platform we have there as well as our leasing agents on the ground looking at our ground-up developments, really proud of the team's ability to forecast the income side of these developments and redevelopments as well. And so if you were on our internal calls, you'd hear us say, we don't want to underperform, but we also don't expect to outperform. We expect our teams to really understand both sides of the pro forma. And you'll see on the margin, we're outperforming more than underperforming based on the team's great work. Lisa Palmer: I really appreciate Nick's answer, but I'm going to -- because he's so much more intimately involved, I think he just described the secret sauce. And I wouldn't underestimate what that is because it's our team and it's the decades of experience and track record that have built those relationships. And Nick is a part of that. So it's not something that's easily replicated. Operator: Our next question comes from Haendel St. Juste with Mizuho. Ravi Vaidya: I'm Ravi Vaidya on the line for Haendel today. I wanted to ask about capital recycling. Can you offer more commentary on the decision to sell the asset in Miami? What was the competitive process like? Were there a number of bids? And was there anything in particular about the asset or the market itself that led to this decision? Nicholas Wibbenmeyer: Ravi, I appreciate the question. I'll start again, just high level. Again, given where we're at from a capital standpoint, we don't have to sell anything, and we really like our portfolio. So I always start answering disposition questions with that. Now that being said, we're always looking at assets that we believe are nonstrategic. And they may be nonstrategic from a format perspective, which you've seen some of these smaller assets we sell at or nonstrategic from a future IRR perspective. We obviously have a future view of capital and income on these assets. And so the Miami asset would fit into that second bucket where our view of the future IRR didn't align from a strategic standpoint based on what we believe the market would pay for that asset because that market is in such high demand. And so yes, there was a deep pool of bidders that did allow us to drive pricing we thought was appropriate to transact and recycle that capital. And then I would just say, again, when you look at high level, we're selling just over $100 million of assets this year, just over a 5.5% cap rate. but we're buying over $500 million at a 6%. And so our capital recycling right now is accretive, not dilutive. And we're proud about that because we own such a great portfolio, we can take advantage where we feel like those stars align to exit an asset that we're not in love with from a future IRR and reinvest that capital in assets we think have high single-digit, if not double-digit IRRs. Operator: Our next question comes from Wes Golladay with Baird. Wesley Golladay: I just want to go back to the developments. You're doing a lot more, it looks like this quarter with master planned communities or next to master planned communities. Are the grocers leading you there? Or are you putting more emphasis on being next to those projects? And then for a development start, are you still targeting around a 50% pre-lease level? Nicholas Wibbenmeyer: Appreciate the questions, Wes. So all the above. And so we are targeting master planned communities. Our grocers are targeting master planned communities. And to be quite frank, master plan developers are reaching out to us. And it really goes back to the question I answered before, which is if you're a master plan developer, then most -- one of the most important aspects of many of these projects is having a great community grocery anchored shopping center to be an amenity to your project. And not only is it important that you can count on your retail partner to build a world-class project, but you also want to know that they're going to own it and operate it in perpetuity. And so we love the opportunity to sit down with master plan developers to create a really, really win-win partnership on both sides. And you've seen, in many cases, we've done multiple transactions with the same master plan developer. And so for all of those reasons, I think that will continue when you look at our go-forward pipeline, as you've indicated, led to success this quarter. And so -- I forgot the second part of the question. Wesley Golladay: [ Are you targeting ] pre-lease... Nicholas Wibbenmeyer: Yes. The prelease, absolutely. Again, and when you talk about derisking, that's what we're also excited about in our development program is we really do derisk these assets. And so they're fully entitled. They're designed, they're bid. We have a real understanding of the visibility on the cost side. And to your point, they're tremendously pre-leased. And so the anchor is always in place. And so depending on the size of the anchor compared to the overall project, it's not always right at 50%, but it's a large portion of that NOI is guaranteed. But again, if you look at our in-process pipeline, the team is just doing a phenomenal job. I'll point to 2 projects where our anchors aren't even open, shops at Stonebridge, our Whole Foods-anchored project in Connecticut and Jordan Ranch, our H-E-B-anchored project in Houston. Neither of those anchors are open yet, and both of those projects are already over 90% leased. And so it just gives you, again, the sense of the demand in the market for these new projects we're building. Operator: Our next question comes from Linda Tsai with Jefferies. Linda Yu Tsai: A 2-parter regarding your snow pipeline. The 1 million square feet of leases in negotiation, any initial thoughts on how much that could further contribute to your snow pipeline? And then with your snow pipeline having compressed in 3Q, is the expectation that it continues to compress in '26? Michael Mas: I'm happy to take it for Alan, you can color up the pipeline. I would -- so we're sitting at 200 basis points spread today. From my comments earlier, I do think we are -- we have the setup to continue to compress that snow pipeline into '26. That being said, and the comments that Alan has shared about our prospects for setting new levels of percent lease, there is a scenario during -- at which we also -- we maintain or potentially expand that snow pipeline. So I hope that's helpful, Linda. I think as we normalize or stabilize our occupancy, I think the comments around snow pipelines will start to dissipate, and this will just become regular leasing activity, where we're replacing a lot of the GLA every year just from natural attrition, some of which is decided by the tenants themselves, a lot of which is decided by our leasing teams who are looking to upgrade the tenancy in our shopping centers. Operator: Our next question comes from Mike Mueller with JPMorgan. Michael Mueller: I guess, Mike, what's prompting you to talk about '26 this early? Is it something looks off with the '26 estimates that are out there where you just don't want people to have sticker shock with the 3% to 3.5% same-store number after this year's great print? Or is it something else? Michael Mas: Mike, maybe a little bit surprised by the question. I feel like we've had a track record of sharing an outlook at this point in time every year. And you got to take the COVID area out of it. Maybe that's what some of our memories are missing is during COVID, all the rules were off. But we're prideful in our ability to provide some transparency on a forward basis sometime in this period -- in this quarter, in the fourth quarter of the year. Long time ago, in the way back machine, we used to do December Investor Days, and we would put out forward-looking guidance. Today, we're doing that together with Q3 results, and we've done that for a year or 2 at this point. So nothing more than that practice. I hope it's helpful. I know we want more details behind the head nods that we've provided. We look forward to providing those details later. And I'll just leave it at that. Operator: Our next question comes from Floris Van Dijkum with Ladenburg Thalman. Floris Gerbrand Van Dijkum: My question is sort of related to the occupancy. Obviously, you're 10 basis points off your peak in both leased and commenced. You've got a big pipeline coming up. There's not a whole lot more you can push in terms of your anchors. I mean, you did allude to the fact that it's 98% and your peak is probably closer to 99%. My question is partly related to your most valuable space, your shop space. How much more can you push occupancy in your shop? And maybe also talk about your renewal percentage today? And where do you see that trending going forward? It sounds like you think there might be more churn going forward as you keep raising rents, but curious to hear your comments. Alan Roth: Floris, thank you for the 2-part question. I don't know maybe it's a trend here for us to always answer the second one first, just from a memory perspective. But the renewal retention, we've always hovered around 75-ish percent. And I am very comfortable with that number. It's an opportunity to retain exceptional retailers, and it's an opportunity to also infuse additional higher-quality merchandising and higher rents into the portfolio. So on the edges, sometimes it's 70%, sometimes it's 85%. But typically, we're in that 75%. And I'm really, really comfortable with that in terms of active and engaging leasing. And so you'll also find that from a new leasing perspective, we are leasing occupied space. We have a few tenants on our watch list that for some time, we've been thinking we are getting space back. We have leases sitting there executed waiting to get some of those spaces back. And so again, that's the proactive mindset. I'm not going to guide to a percentage per se in terms of where we ultimately can go, but we're going to continue to be creative. And one example I would give you is the fact that we are invoking some relocation provisions and leases to relocate a successful tenant that the community knows is there that's doing really well, such that they can occupy a perhaps more challenging space to us to lease on the market, which then unlocks the ability to lease their space, right? And so the team is out there, I think, really creatively doing everything they can to continue to still grow occupancy and pierce through that. And again, in this environment, I feel really comfortable and confident, coupled with the quality of our assets to continue to be able to do that. Operator: [Operator Instructions] Our next question comes from Paulina Rojas with Green Street Advisors. Paulina Rojas-Schmidt: So as it has been mentioned a few times, your commenced occupancy is near peak levels. When I look at your presentation, the last time your occupancy levels were this high was around 2014, 2018 when commenced occupancy actually stayed elevated for a long period. So I'm curious how does retailer sentiment today compare to that period? What similarities or difference are you seeing between then and now? Lisa Palmer: I believe I heard consumer sentiment. Is that the retailer sentiment. I think that, Paulina, the way I would address that is there's -- a lot has kind of changed over that period of time and that retail is always evolving. We've seen that. So coming out of the GFC, there was a lot of demand for new store growth. And then we saw a little bit of a dip when we all saw the headlines of this retail apocalypse and how is e-commerce going to affect our business. And then COVID hit. And when -- what the pandemic did, and we've said this a lot, is it really generated a renewed appreciation from our retailers for the importance of a physical location. So while they may have been dialing back in that '17, '18, '19 time frame of new store expansion coming out of the pandemic, they realized the importance of having that location, the last mile close to their consumer. At the same time, a renewed appreciation from the consumer for shopping for not just buying online, but actually enjoying what we at Regency offer with regards to our fresh look connecting placemaking and having a curation of great merchants at our shopping centers. Over that period of time, from 2014 to today, there's been really limited supply. So we've had the tailwinds coming out of the pandemic. We've had the retailers understanding and really appreciating the need for and importance of a physical location. And we are the -- again, it gives me another opportunity to say, we have been the only national development platform at scale for a period of time. So with that limited supply, it's -- the supply/demand is in our favor. So as Alan has said repeatedly today, he believes that we will have the ability to push that percent commenced for all of those reasons. And I have the utmost confidence in the team to be able to do that. Operator: We have reached the end of the question-and-answer session. I'd now like to turn the call back over to your host, Lisa Palmer. Lisa Palmer: So thank you all for your time with us today. And once again, I just want to give a shout out to the Regency team. Really proud of our results year-to-date. Thank you all. Operator: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to Kadant's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Michael McKenney, Executive Vice President and Chief Financial Officer. Please go ahead. Michael McKenney: Thank you, Olivia. Good morning, everyone, and welcome to Kadant's Third Quarter 2025 Earnings Call. With me on the call today is Jeff Powell, our President and Chief Executive Officer. Before we begin, let me read our safe harbor statement. Various remarks that we may make today about Kadant's future plans and expectations, financial and operating results and prospects are forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward-looking statements as a result of various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading Risk Factors in our annual report on Form 10-K for the fiscal year ended December 28, 2024, and subsequent filings with the Securities and Exchange Commission. In addition, any forward-looking statements we make during this webcast represent our views and estimates only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views or estimates change. During this webcast, we will refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our third quarter earnings press release and the slides presented on the webcast and discussed in the conference call, which are available in the Investors section of our website at kadant.com. Finally, I wanted to note that when we refer to GAAP earnings per share or EPS and adjusted EPS on this call, we are referring to each of these measures as calculated on a diluted basis. With that, I'll turn the call over to Jeff Powell, who will give you an update on Kadant's business and future prospects. Following Jeff's remarks, I'll give an overview of our financial results for the quarter, and we'll then have a Q&A session. Jeff? Jeffrey Powell: Thanks, Mike. Hello, everyone. Thank you for joining us this morning to review our third quarter results and discuss our outlook for the remainder of the year. I'll begin with our third quarter highlights. We had solid earnings performance in the third quarter and benefited from record aftermarket parts revenue. As you know, our aftermarket parts business is one of our core strategic development areas, and it is encouraging to see this part of our new business continue to thrive. This is especially true in volatile times like now where economic headwinds are strong and global trade tensions remain high. Overall, market demand for capital equipment continued to be sluggish, though we are seeing increasing activity early in the fourth quarter. As has been the case throughout 2025, our operations teams around the world delivered exceptional value for our customers. I want to thank them for their outstanding effort and the results they generated during these challenging times. Turning next to Slide 6. I'd like to review our Q3 financial performance. Q3 revenue and earnings performance continued to improve sequentially from Q1 to Q2 despite softness in our capital business. Revenue was flat compared to the prior year period at $272 million and benefited from record aftermarket parts business, which was up 6% compared to the third quarter of last year. Solid execution contributed to an adjusted EBITDA of $58 million and adjusted EBITDA margin of 21.4%. Cash flow from operations and free cash flow in the third quarter was $47 million and $44 million, respectively, demonstrating the continued strength of our business model. Bookings were relatively flat compared to the same period last year due entirely to a sustained weakness in capital project orders, which has been in a lull since 2023. While capital project activity and quoting remains high, the timing of these capital projects continues to get pushed out. That said, we do see greater optimism in our sales teams with respect to capital orders moving forward in the near term. Next, I'd like to review the performance of our operating segments, beginning with our Flow Control segment. Good performance in aftermarket parts revenue could not offset reduced capital shipments in the third quarter, leading to a 3% decline in Q3 revenue compared to last year. Encouragingly, new order activity was up 5% with aftermarket and capital demand both contributing to this increase to $94 million. Adjusted EBITDA of $26 million was down 10% compared to the record EBITDA performance in the third quarter of last year. Factory automation and general industrial end markets continue to show strength, particularly in the Americas, while capital project activity in Europe and Asia reflects the persistent economic headwinds in those regions. In our Industrial Processing segment, revenue decreased 4% to $106 million. The revenue decline was entirely due to reduced capital shipments as aftermarket parts revenue was a record $81 million and represents 76% of total Q3 revenue. Solid demand for aftermarket parts was not enough to offset the decline in capital bookings, leading to a 5% decrease in bookings compared to the same period last year. The outlook for capital bookings in the near term remains positive, and we are well positioned to win those new orders when they are released. Adjusted EBITDA margin in the third quarter was 25.4%, down 330 basis points compared to the record margin set in Q3 of last year. I should note that our third quarter results do not include any contribution from our recently announced acquisition of Clyde Industries as that acquisition was completed after the third quarter closed. The acquisition will be included in our fourth quarter results, and we look forward to reporting on the integration in the next call. In our Material Handling segment, we benefited from excellent commercial and operational execution in the third quarter. Revenue was up 11% to a record $70 million with solid increases from both product lines. This record revenue performance was led by capital shipments, up 18% compared to the same period last year. Bookings declined 4% compared to the third quarter of last year due largely to softer demand for aftermarket parts for our Bulk material handling equipment during the quarter. Adjusted EBITDA margin increased 290 basis points to a record 23.3% compared to Q3 of last year. While we expect demand to stabilize in the near term, we continue to see good level of activity in the aggregate sector, particularly in North America. As we look ahead to the remainder of 2025, we expect aftermarket demand to remain healthy and business activity to improve. We are seeing a lot of activity around capital projects, and this is expected to be a meaningful contributor to our Q4 new order activity. Though the timing of these projects can be uncertain and could shift due to macroeconomic uncertainty or other factors. I will now pass the call over to Mike for his review of our Q2 -- Q3 financial performance. Mike? Michael McKenney: Thank you, Jeff. I'll start with some key financial metrics from our third quarter. Our third quarter revenue of $271.6 million included record aftermarket parts revenue of $188.4 million. Gross margin was 45.2% in the third quarter '25, up 50 basis points compared to 44.7% in the third quarter '24. Our parts and consumables revenue increased to 69% of revenue in the third quarter of '25 compared to 65% in the prior year. Gross margin included amortization expense associated with acquired profit and inventory of $0.5 million and $1.2 million in the third quarter of '25 and '24, respectively. Excluding this negative impact in both periods, gross margin was up 10 basis points over the third quarter of '24. For the first 9 months of '25, gross margin increased 120 basis points over the corresponding prior year period and 70 basis points after excluding the impact of acquired profit and inventory in both periods. This demonstrates our ability to maintain our gross margin profile despite various cost pressures, including the recent tariff challenges. SG&A expenses as a percentage of revenue increased to 27.9% in the third quarter of '25 compared to 25.4% in the prior year period. SG&A expenses were $75.8 million in the third quarter of '25, increasing $6.8 million compared to $69 million in the third quarter of '24. This includes $1.2 million from unfavorable foreign currency translation, $1.3 million in acquisition-related costs and $0.8 million from our recent acquisition. The remaining increase is primarily associated with incremental compensation-related costs. Our GAAP EPS decreased 12% to $2.35 in the third quarter, and our adjusted EPS decreased 9% to $2.59 in the third quarter of '25 compared to a record $2.84 in the third quarter of '24. The third quarter '25 adjusted EPS exceeded the high end of our guidance range by $0.36 due to higher-than-expected aftermarket parts revenue at our Industrial Processing segment. In addition, all of our segments had higher-than-expected gross margins due to the mix of aftermarket parts in the period. Our effective tax rate of 29.5% in the third quarter was higher than the anticipated rate, primarily due to the shift in geographic distribution of earnings expected for the year and an increase in nondeductible acquisition costs. Our adjusted EBITDA has increased each quarter in '25 with strong performance in the third quarter from our Material Handling segment. However, overall, our third quarter '25 adjusted EBITDA and adjusted EBITDA margin were comparatively lower than the record performance we achieved in the third quarter of '24. Turning to our cash flows. We had strong operating and free cash flow in the third quarter of '25 at $47.3 million and $44.1 million, respectively. On a year-to-date basis, both metrics are ahead of last year with free cash flow up 13% over last year. Nonoperating uses of cash in the third quarter of '25 included $16.5 million for the acquisition of the Babbini net of cash acquired, $3.2 million for capital expenditures, $4 million for a dividend on our common stock and $2.4 million for debt issuance costs. Let me turn next to our EPS results for the quarter. Our adjusted EPS decreased $0.25 from $2.84 in the third quarter of '24 to $2.59 in the third quarter '25. This included decreases of $0.32 due to higher operating expenses, $0.17 due to lower revenue, $0.05 due to a higher tax rate and $0.01 due to higher noncontrolling interest. These decreases were partially offset by $0.15 in lower interest expense, $0.10 due to a higher gross margin percentage and $0.05 from the operating results of our recent acquisition, excluding associated borrowing costs. Collectively, included in all the categories I just mentioned was a favorable foreign currency translation effect of $0.03 in the third quarter of '25 compared to the third quarter last year due to the weakening of the U.S. dollar against certain currencies. Now I'll review our liquidity metrics on Slide 15. We renewed our revolving credit facility at the end of the third quarter, increasing our borrowing capacity from $400 million to $750 million and extending the maturity date to September 2030. This will help support the acquisition strategy we outlined in our most recent 5-year plan. Our net debt, that is debt less cash, decreased $20.6 million or 14% sequentially to $131.1 million. Our cash balance grew to $126.9 million due to an increase in cash held in anticipation of our fourth quarter acquisition of Clyde Industries. Our leverage ratio calculated in accordance with our credit agreement increased to 0.94 compared to 0.86 at the end of the second quarter of '25. At the end of the third quarter '25, we had $502 million of committed borrowing capacity, which was lowered to $332 million following our acquisition of Clyde at the beginning of the fourth quarter. Our cash conversion days, which we calculate by taking days in receivables plus days in inventory and subtracting days in accounts payable, increased to 131 at the end of the third quarter '25 compared to 129 in the prior year quarter. Working capital as a percentage of revenue increased to 18% in the third quarter '25 compared to 17.7% in the third quarter -- in the second quarter of '25. Now turning to our guidance for the fourth quarter and full year '25. In early July, we completed the acquisition of Babbini for $16.5 million, net of cash acquired. And after the end of the third quarter, we acquired Clyde Industries for approximately $175 million, subject to customary closing adjustments. Both of these acquisitions were funded primarily through borrowings under our revolving credit facility. We have revised our guidance to include the operating results and associated borrowing costs from these 2 acquisitions. We are continuing to monitor the impact of tariff changes and pursue opportunities to reduce the impact of these costs by finding alternative suppliers through cost sharing and in some cases, making investments to change our manufacturing capabilities and manufacture components at different Kadant facilities. Capital bookings were below our expectations for the third quarter. Weak market conditions in the pulp and paper industry resulted in lower demand for our capital equipment products in our Industrial Processing and Flow Control segments. The larger impact by far was in our Industrial Processing segment, where certain market conditions have resulted in a lengthening in quote-to-order times with the majority of these pending orders moving into the fourth quarter or early 2026. This has negatively impacted our 2025 guidance as we will not receive the associated revenue and earnings related to these orders until '26. We are increasing our full year revenue guidance range to $1.36 billion to $1.46 billion from $1.02 billion to $1.04 billion. The revenue guidance increase includes the net effect of incremental revenue from our recent acquisitions and lower forecasted organic revenue in our Flow Control and Industrial Processing segments as a result of lower-than-anticipated capital bookings in the third quarter. We are maintaining our adjusted EPS guidance of $9.05 to $9.25 for 2025. Adjusted EPS guidance excludes $0.51 of acquisition-related costs and $0.02 of other costs. Our '25 guidance includes a $0.03 negative effect from foreign currency translation compared to our prior guidance. Future actions by the central banks may impact the U.S. dollar and other currencies, which could have an impact on our guidance. Both GAAP and adjusted EPS guidance are calculated using our initial estimates of purchase accounting adjustments, which are subject to change as we review and finalize the valuation work for our 2025 acquisitions. Our revenue guidance for the fourth quarter of '25 is $270 million to $280 million, and our adjusted EPS guidance is $2.05 to $2.25, which excludes $0.14 of acquisition-related costs. We anticipate gross margins for '25 will be 45.1% to 45.4%. This includes a 20 basis point negative impact from $2.1 million of amortization expense associated with acquired profit and inventory. We anticipate fourth quarter gross margin will be approximately 44% to 44.5%. We expect SG&A for '25 will be approximately 28.7% to 29% of revenue. This includes onetime acquisition-related costs of $4.8 million. We now anticipate net interest expense of approximately $14.4 million for '25. We expect our tax rate for the fourth quarter will be approximately 27% to 27.5%. I hope these guidance comments are helpful, and I'll now turn the call back over to our operator for our Q&A session. Olivia? Operator: [Operator Instructions] First question coming from the line of Gary Prestopino with Barrington Research. Gary Prestopino: Just as I usually ask here, Mike, do you have on the segment basis, the percentage of aftermarket parts revenue for this quarter versus last quarter or last year at this time? Michael McKenney: Yes. I can walk through that, Gary. For Flow Control, current quarter, 74% prior year quarter, 70%, for Industrial Processing, 76% this quarter, comparing quarter, 67%, and for Material Handling, this quarter, 52% comparing quarter, 55%. And then as we stated on an overall basis, 69% for this quarter compared to 65% last year. Gary Prestopino: Okay. That's very helpful. And then just a little bit -- I'm a little bit fuzzy on what you're talking about or you're talking about that orders are being pushed back into 2026 for capital bookings, particularly in the Industrial Processing but then you expect stronger capital equipment demand in the fourth quarter. So maybe could you kind of square what's going on there? And then I'd have another follow-up after that. Jeffrey Powell: Gary, so we have several projects that are in the late stages that we expect to book. And so the question becomes we've got essentially whatever the rest of this quarter to get these things booked. And in some cases, it requires down payments. In some cases, it requires letters of credit to be established. So there's some administrative things that go on after we receive the official contractor order. And so the question is, will we be able to get all of those administrative things taken care of this year and get those actually booked. We have fairly stringent booking requirements concerning down payments and letters of credit and bank credits and things like that. And some of those are out of our control. When you're talking about foreign orders in, say, Northern Africa or somewhere going to take quite a while to get some of that administrative work from the banks signed off on. So there's some several large orders out there and just a question of whether we will book them this quarter or those strip into the beginning of next year. But we're encouraged by the activity level we're seeing and the opportunities that we're seeing now on the capital side, particularly on the Industrial Processing business. Gary Prestopino: Okay. And then just in terms of the challenges the sales force has been having in terms of just the worldwide -- the tariffs issues and things like that. Is that more or less in the rearview mirror in your opinion and the future capital equipment needs across all 3 segments? Have the clients come to realize that this is going to be the case for a while, and we need to order new capital equipment because we're running our old hard. Jeffrey Powell: Well, I think it's certainly better than it was earlier in the year but it's not settled. I mean just this week, Trump got upset with Canada over a commercial they ran and said he's going to put another 10% tariff on them. He's meeting with China, I think, today to try to hammer out a deal there and maybe reduce some of the tariffs. So I would say there's still a level of uncertainty and volatility that's going on. It's less -- I would say it's less chaotic than it was 6 months ago but it's still not settled. And I think, as you said, some people are starting to realize, okay, this is the new environment we're living in, and we've got to move forward with our business. And that's why we think we're seeing some activity level. But it's not where it needs to be. It's not -- we really need to get this sorted out and kind of everybody agree on what it's going to be, so we can all work accordingly. So it's improving, but it's not where it needs to be yet. Operator: Our next question coming from the line of Ross Sparenblek with William Blair. Ross Sparenblek: Maybe just sticking on the order disruption. Can you maybe help us think through kind of sizing the range of outcomes for the fourth quarter and maybe also thinking through like this to Gary's point, brownfield, greenfield, what's kind of the near-term driver? Jeffrey Powell: I'll answer the latter part first. So some of the opportunities are brownfields, their existing plants with upgrades. And then in the developing world, as is often the case, there will be greenfields. There'll be kind of new opportunities in the developing world. So it's kind of both. As far as the range, we really don't kind of give bookings range. So I don't know what you want to say there, Mike. Michael McKenney: All right. I think we kind of lost you there for a second. But it looks like one of your peers called out maybe some disruption for several quarters, presumably because of tariffs. I mean those are larger greenfield orders. So you're not really seeing that level of impact or potential impact going into 2026. Jeffrey Powell: I think the impact we see from tariffs is just the uncertainty that it creates. And so our customers are more cautious and move more slowly as they try to better understand what the environment looks like going forward. So I would say it has impacted the timing on a lot of our projects. But the projects that we're tracking I don't think we've seen any of them that we think are going to go away or be extended for years. I mean I think the ones we're tracking that we have kind of building our business strategy around, we think will occur over the next short period of time. Ross Sparenblek: Okay. That's really helpful. One more question, I'll hop back in queue. Can you just give us a sense of factory utilization rates globally and how we should think about the parts and consumable mix here as we look at the year? Jeffrey Powell: Yes. Well, so as we've said all year long, we had another record parts quarter. Our parts are overperforming relative to the operating rates, and that's because the equipment is getting quite old and it's just taking a lot more parts to keep it running. So the operating rates, it kind of depends on the business you're looking at, whether you're talking about the wood processing side or the or the paper side. But in the U.S., operating rates are higher than the rest of the world. I would say they're higher here, maybe in the kind of in the wood side, maybe in the low 80s -- or I'm sorry, on the paper side in the low 80s. The wood side, it's a little less clear. Those they can kind of curtail very quickly. And so it's a little harder to keep track of those. But they're certainly running at a reduced operating rate and taking downtime. China, I would say, still in the 60s percent operating rates and Europe is in the kind of the 70s. So it really hasn't changed much throughout the year. Operator: Our next question coming from the line of Kurt Yinger with D.A. Davidson. Kurt Yinger: Just wanted to stick on the capital equipment side and understanding we're not going to kind of guide to a Q4 bookings number. If we were to look at the Q3 performance, kind of low $60 million in capital equipment bookings, the last 2 years have kind of been in the low 70s. I guess my question is, when we think about these larger fiber processing orders that you seem to have visibility to, but maybe kind of still pushed out, like are those sufficient to really pick things up relative to maybe what we've seen versus the last 2 years? Or is it just kind of helping get back to that baseline relative to the weak Q3? How would you kind of frame that for us? Michael McKenney: I think it would be a step change for us. It would be very, very helpful. These are projects that will be processed over a number of quarters, and we'll be able to recognize revenue on a percent complete basis. So as they get processed over, say, 3 or 4 quarters. I did -- on the -- and we usually kind of stay away from trying to forecast bookings but I can give you a little color on what we're looking at by the segments. If I look at capital activity in Flow Control compared to what -- to the prior year period, so fourth quarter of '24, we're looking for capital activity to be up 3% or 4%. So somewhat modestly in Flow Control. And in Material Handling, I'd say kind of same boat, up about 3% to 5%. And interestingly there, I want to clarify that isn't on the capital side. That's in parts and consumables, whereas flow control is on the capital side. But going to the -- I think the big wildcard is really in industrial processing. On the capital side there, wood is looking to be up, say, 3% or 4%. But the big difference maker is, as we've been discussing in fiber processing. So it could be up significantly compared to, frankly, many periods. There are a number of really nice projects that we're hoping will come in, I'd say, over the next quarter to 3 quarters. So first half of '26 to the fourth quarter of '25. But that's really the big wildcard for us. There's a number of good projects there. They haven't gone away. We feel we're well positioned, and we're just waiting for the order to be finally booked. Kurt Yinger: Got it. Okay. That's super helpful. And maybe bigger picture, the multiyear targets of 3% to 5% kind of organic top line growth, do we need a more broad-based recovery expanding past just some of those fiber processing orders? Or would those be kind of sufficient to help you get back into that range from what you can see? Michael McKenney: I would say we do need a more broad-based to really get back to that. Jeffrey Powell: In particular, housing. We need to see the housing environment improve because, as you know, that drives a lot of the economy and it drives a lot of our businesses. So a pickup in housing, I think, is quite important, not only to us but to the general economy. Kurt Yinger: Right. Okay. That makes sense. And then switching over to parts and consumables. That's obviously been a nice consistent performer here. How should we think about price versus volume kind of contribution so far this year? And then as we just kind of look across the backdrop, a lot of closures in the pulp and paper space, probably more to come on the wood processing side. Does that give you any concerns about potential deceleration there even? Or is kind of that older age of installed base still supporting pretty healthy demand? Jeffrey Powell: Yes. I would say that on the -- a lot of those closures, of course, you've got to kind of look at the details of those. They may not be -- if it's a pulp plant, of course, as you know, we -- until the recent acquisition of Clyde, which mainly focuses on the new mega plants, we've not had a lot of business on that. So when they announced closures of some of these mills that are virgin mills, that has less of an impact. It's not 0 but it has less of an impact on us. But I think we tend to look at the global market. In the global production, global demand is continuing to grow somewhere between 1.5% and 2.5%, depending on where you're at around the world right now. And so because we operate pretty much in every mill in the world, what you're seeing is you're seeing a shifting of the production to meet that demand growth. And we work very hard to make sure we're there so that we kind of -- if it's something shuts down in Georgia and something opens up in Turkey or Algeria, we're there to capture that. And so we think that for the most part, our -- as long as global demand continues to grow, our parts business, which is a function of operating rates and total production demand will be okay. Kurt Yinger: Okay. Okay. That makes sense. And Mike, as we think about the Q4 revenue guide, can you just put a finer point, I guess, around how much contribution you expect from Clyde and Babbini and then the overall kind of organic growth assumption in there? Michael McKenney: Yes. So for -- it's a good question, Kurt. For Clyde and Babbini, I'd say we're anticipating revenue in the $23 million to $25 million for those combined. I actually in mine -- I'm kind of the lower side of that to the $23 million. But a couple of comments I want to make on that. You can -- you'll be able to see, you heard in our comments, what you saw in our press release, Babbini had a very good third quarter. They shipped $5.9 million. You saw on the graphic, the chart we put up, that's $0.05 without interest cost. But a note of clarification there. Their third quarter tends to be their strongest third quarter. And of course, we've just brought them into the fold and haven't been able to -- we are working on but it will take us a little time to get them reoriented towards a parts and consumable business and capturing that flow. I think the management team there is very excited about doing that and changing their business model, not being as focused on capital equipment. But for capital equipment in the fourth quarter, there -- it's quite weak. Frankly, it's quite a weak quarter for them. On the Babbini front -- or excuse me, on the Clyde front, we had said their revenues were about $92 million. So if you divided that by 4, you'd say $23 million, and they actually would have been pretty close to that. But they pulled a capital order into their third quarter. So they're a little -- they're going to be a little under that $23 million because they shipped an order a little bit earlier. It was scheduled for the fourth quarter. I think they would have come in pretty spot on, on the '23, but they're a little lighter than they would normally be. So that's some color on the top line. And what was your -- what else? So I'll stick to -- you can see -- you saw for the third quarter, the $0.05. If we allocate the interest to that, that would be $0.04 for Babbini. And interestingly enough, with their weaker top line fourth quarter with interest allocated, they'll be dilutive $0.04 in the fourth quarter. So they'll be for the year breakeven but in the fourth quarter, dilutive $0.04 on our adjusted EPS. For Clyde, we have them right now at being dilutive of $0.02 with the interest charge in there. Excluding the interest charge, they'd be accretive $0.3 -- so if I took then both of those, Babbini, Clyde, with interest allocated to them, they're actually a dilutive $0.06 in the fourth quarter for us. Kurt Yinger: Got it. Okay. Perfect. And then just last from me on kind of run rate SG&A, if we were to back out some of the onetime acquisition costs and whatnot, is a good kind of go-forward quarterly number in the $80 million range or even a little bit above that? Michael McKenney: Well, I want to be -- we're working through the valuation. So we just have markers in currently. I think we'll run a little bit lower than that but you're not far off the mark there. But I think it will run just modestly lower than that. So maybe it's in the somewhere between the 78 to 80. Operator: [Operator Instructions] Our next question coming from the line of Edward with Boston Partners. Edward Odre: I just had one here. When you talk about delayed bookings, what's the sort of quantum of official orders that you've received and that are just waiting for administrative to include relative to just conversations that are being had that are kind of still up in the air. Could you provide any color around that? Jeffrey Powell: Yes. I mean we really -- because we don't kind of give bookings and they haven't officially been booked, I can't give you a number. I can just tell you that we're in discussions, the final discussions on some of these larger projects. And I said in some cases, we might have some of the paperwork but we're waiting for down payments where we can officially book it or we're waiting for a letter of credit. So I mean, there -- in some cases, they're very far along. So we feel quite confident about them, but they just haven't met our bookings requirements so that we can actually book it and disclose it. We just -- as I said, we stay pretty disciplined on that and make sure that we check all the boxes before we actually call the bookings. Edward Odre: No worries. And then just one thing I might have missed it earlier. In terms of price and consumables performance, how much of this was driven by price versus volume this quarter? Michael McKenney: I'd lean more towards the volume side of it. Operator: Our next question coming from the line of Ross Sparenblek with William Blair. Ross Sparenblek: A couple of questions. Can you help me pinpoint what the backlog was? I'm around like $260 million and also on the equipment side, I know there's some moving parts. Michael McKenney: Yes, Ross. The -- we ended the third quarter with backlog at $273 million and capital in that is about 60%, so about $163 million. Ross Sparenblek: Okay. And then is there any margin differential within that backlog versus the run rate for the year? Michael McKenney: No. I think it's fairly consistent. Ross Sparenblek: Okay. And then now that you've had some time with Clyde, what should we expect for that backlog contribution going into the fourth quarter? I know you said it was fairly strong, $92 million of revenue. I mean, where should that be shaking out as we think about modeling orders? Michael McKenney: I have that here somewhere, Ross. I think it's a little over $30 million. So use $30 million as a marker. Ross Sparenblek: Okay. And then is it all primarily -- it was not book and ship. There's about $25 million that's equipment but sales similar to orders for Clyde on a quarterly basis? Is that kind of the assumption? Michael McKenney: Sorry, Ross, what was that? What's the -- I didn't catch... Ross Sparenblek: When we include Clyde, are the orders going to be similar to what we should expect on the top line for revenue contribution, kind of a one-for-one. Everything goes through the order book? Michael McKenney: Yes. Everything is going to go through the order book is a certainty. Yes. Everything will be through the order book. 75% of the business is parts and consumables. What I can't give you right now because we're acclimating ourselves the business is exactly that turn cycle. Ross Sparenblek: Okay. And then just one last one on the margins. Can you give us a sense for Clyde, where the D&A, SG&A, R&D, gross margins all shifted out after you finish your accounting? Michael McKenney: Well, I can talk to the margin profile. And one thing I'd say is broadly, it fits very well in the Industrial Processing segment. So what you see for metrics in Industrial Processing, this will fit really well, both on the gross margin and EBITDA margin front. Ross Sparenblek: Okay. So nothing really to do there, pretty similar to the existing [ aftermarket. ] Michael McKenney: Yes, it fits very nicely in that segment. Operator: [Operator Instructions] Our next question coming from the line of Edward Odre with Boston Partners. Edward Odre: Just one more thing from me. Just regarding the Clyde acquisition, I wasn't able to see this in the release but how much cash do you acquire with that business? Michael McKenney: We always do it -- we do all our things net of cash because we're just going to -- at the end of the day, the only cash that's going to be left is operating cash. I can do it off from the top of my head but it's -- to be quite honest, it's somewhat irrelevant because we'll sweep it and just pay down debt and just have operating cash there. Operator: Thank you. And I'm showing no further questions at this time. I will now turn the call back over to Mr. Jeff Powell for any closing remarks. Jeffrey Powell: Thanks, Olivia. Before we wrap up the call today, I just wanted to leave you with a few takeaways. The second half of 2025 is expected to show solid improvement compared to the first half across a wide range of metrics despite the turmoil in global trade policies and other societal challenges that we're currently facing. As we look ahead to the fourth quarter of 2025, we expect demand for capital equipment to improve and strong aftermarket parts order activity. We made solid progress this year in our efforts to drive operational improvements, which includes our 80/20 performance enhancement program and other initiatives to maximize value despite the continuing challenging macroeconomic environment in various regions of the world. And lastly, we look forward to updating you next quarter on the integration of Clyde Industries and our other recent acquisitions. Thanks for joining today, and we wish you the best for the rest of the day. Operator: This concludes today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Good morning, ladies and gentlemen. Welcome to the Trican Well Service Third Quarter 2025 Earnings Conference Call and Webcast. As a reminder, this conference call is being recorded. I would now like to turn the meeting over to Brad Fedora, President and CEO of Trican Well Service Limited. Please go ahead, Mr. Fedora. Bradley P. Fedora: Thanks, everyone, for joining us. As usual, first, Scott, our CFO, will give an overview of the quarterly results, and then I'll provide some comments with respect to the quarter, the current operating conditions and our outlook for the rest of this year and early next year. And then we'll open the call for questions. Various members of the executive team are here in the room today and available to answer any questions that may come up. So I'll now turn this back to Scott. Scott Matson: Thanks, Brad. So before we begin, I'd like to remind everyone that this conference call may contain forward-looking statements and other information based on current expectations or results for the company. Certain material factors or assumptions that were applied in drawing conclusions or making projections are reflected in the forward-looking information section of our MD&A for Q3 of 2025. A number of business risks and uncertainties could cause actual results to differ materially from these forward-looking statements and our financial outlook. Please refer to our 2024 annual information form for the year ended December 31, 2024, for a more complete discussion of business risks and uncertainties facing Trican. This document is available both on our website and on SEDAR. During this call, we will refer to several common industry terms and use certain non-GAAP measures, which are more fully described in our Q4 2024 MD&A. Our quarterly results were released after close of market last night and are available both on SEDAR and our website. So with that, a brief summary of our quarterly results. I'll draw some comparisons to the third quarter of last year, and provide a bit of commentary about our activity levels and our expectations going forward. Trican's results for the quarter compared to last year's Q3 were generally stronger as overall operating activity came in a bit higher in spite of continued pressure on commodity pricing. Oil pricing, in particular, was hit hard as we moved through September, which led several customers to either delay or shelf projects in oilier plays. Combined with some timing shifts on natural gas-related activities, this took a bit of the wind out of our sails on what was shaping up to be a very strong quarter. Brad will comment a little bit about our outlook on Q4 later. Our revenues for the quarter at $300.6 million compared to the $221.6 million we generated in Q3 of 2024. Adjusted EBITDA for the quarter was $59.5 million or 20% of revenue compared to adjusted EBITDA of $50.2 million or 23% of revenues generated last year. Just a reminder that our results include the contributions from Iron Horse from the date of acquisition through September 30. I would also note that our results include $2.5 million of transaction costs related to the acquisition that were expensed in the quarter. Adjusted EBITDAS for the quarter came in at $66.9 million or 22% of revenue, up from the $53.1 million or 24% of revenues we generated in Q3 of last year. To arrive at EBITDAS, we add back the effects of cash settled share-based compensation recognized in the quarter to more clearly show the results of our operations and remove some of the mark-to-market impact of movements in our share prices between the reporting dates. And you'll note that this number was larger this quarter at $7.4 million compared to an average of about $2.3 million over the last 4 quarters, again, due to the movement in our share prices versus June 30. And this is a very good example of why we always focus on EBITDAS when we have conversations versus EBITDA as those numbers can vary pretty significantly period-to-period. On a consolidated basis, we generated positive earnings of $28.9 million in the quarter, that's about $0.15 per share, both on a basic and a fully diluted basis. Trican generated free cash flows of $35.4 million during the quarter. Again, our definition of free cash flow is essentially EBITDAS less nondiscretionary cash expenditures, maintenance capital, interest, current taxes and the cash settled stock-based comp piece that I talked about earlier. You can see more details on this in the non-GAAP measures section of our MD&A. And again, I would note this figure is impacted both by the transaction costs that I talked about and stock-based comp I quoted earlier. CapEx for the quarter totaled $18.9 million, again, a split between maintenance capital of about $13.5 million and upgrade capital of $5.4 million. Again, that upgrade capital was dedicated mainly to the electrification of our fourth set of ancillary frac support equipment and ongoing investments to maintain the productive capability of our active equipment. From a balance sheet perspective, we exited the quarter with positive noncash working capital of about $209 million. As of September 30, we had net debt of $130.6 million, comprised of loans and borrowings of $139.1 million, offset by cash of $8.5 million. Our debt at September 30 was primarily related to the acquisition of Iron Horse and some normal working capital investing activities during the quarter. And a couple of points to note that September 30 debt number translates into just over half a turn of leverage using our trailing 12-month EBITDAS figure, which does not make us uncomfortable given our outlook for the rest of this year and into early 2026. And also a portion of this is already unwound, and we would expect our debt position to trend down as we move through the end of this year and certainly into next year. With respect to return of capital, we repurchased and canceled about 100,000 shares during the quarter and closed out our 2024-2025 NCIB program. We completed that program on October 4. And under the program in total, we repurchased 13.2 million common shares at a weighted average price of about $4.27 per share. On September 30, we announced the renewal of our NCIB program, which will allow us to purchase up to 18.4 million common shares, representing 10% of our public float as at the time of renewal. This program is scheduled to run from October 5, 2025, through October 4, 2026. And finally, as noted in our press release, the Board of Directors approved a dividend of $0.055 per share, reflecting approximately $11.7 million in aggregate payments to shareholders. The distribution is scheduled to be made on December 31, 2025, to shareholders of record as of the close of business on December 12, 2025. And I would note that the dividends are designated as eligible dividends for Canadian income tax purposes. So with that, I'll turn things back to Brad. Bradley P. Fedora: Okay. Thank you. And I'll just remind everybody that my comments will include Q3 2025 and forward-looking observations for Q4 and 2026. So please refer back to Scott's disclaimer. Overall, the quarter, it went well. We obviously -- we had a great September -- July and August and then we had a bad September. It's actually one of the worst months of the year for us. But all -- that's just a reflection of work got pushed out of the month into the next month. And that's our business. We don't focus too heavily on the exact timing of the work. I know we live in a quarterly world, but from a business perspective, that doesn't get us too fast. It just got moved. The work didn't go away. So it's not -- it wasn't a concern of ours at all. And as I'll talk later, it's going to boost our Q4. We're very fortunate to have our customer list. They continue to level out throughout the year. We don't expect that this year is going to be any different. I know there's a lot of talk about budget exhaustion into Q4. We typically don't experience that, and I don't think we're going to experience that this year either. There is a little bit of pricing pressure going on just as some of our competitors don't have busy Q4s. There's a lot of jostling to fill the board, and that always reflects pricing down. And of course, the rig count is down slightly from last year. Again, those I think, are temporary situations. We still expect to have a good 2025 and certainly a good Q4. We remain gas focused, I'd say, corporately, overall, where about 75% of our work is based on natural gas plays. I know a lot of those plays are liquids-rich, but we're very excited about what we think is going to be a great year in 2026 for gas prices. So it's one of the reasons why we continue to be so optimistic in the context of a lot of -- sort of mooning and complaining about current environment. A lot of the cost inflation has slowed very significantly. We're actually seeing cost reductions on some of our inputs. A lot of the tariffs that were proposed didn't happen or have been reversed. We've seen fuel surcharges come off. So that's helping sort of offset some of the pricing pressure we're getting, and we're still able to maintain pretty reasonable margins given a more negative price environment. We are experiencing lower Northeast BC work. I don't think that's any secret to anybody that follows the rig count, but it's getting made up for work in the Duvernay. And so -- which is very fracturing intensive. It's very similar to what's happening in Northeast BC. So all 4 divisions when we think about market share and the customer list that we have, we've got the 2 frac divisions, the cement division and the coil division. All 4 of them are running really well, and we're really happy with our business plan and how it's unfolding. One thing I did want to point out because just reading some of the analyst notes is we exited the quarter with about $135 million of debt, but we also had about $218 million of positive working capital. So it's a timing issue. I don't want anybody to focus on this debt number because it's already come down substantially since month end. And this debt at this level does not concern us at all. I mean we'll likely pay it down, but that will depend, frankly, on what's available to us from an investment perspective. But certainly, debt in the 100 range does not concern us one bit. In the frac division, in the Trican frac division, it's still going very well. We're viewed as a technical leader in the industry, electric equipment, efficient operations, our engineering, our lab group are working towards or we continue to evaluate 100% natural gas solutions. We're evaluating all of the solutions. And so I think we'll come up with the best one. We continue to add customers in the Montney and the Duvernay in the quarter if frac intensity continues to increase, making the logistics -- our logistics department, which is the largest in the industry, that much more valuable. We're focusing on technology improvements. We will be testing all of the available 100% natural gas pump technologies. And I think we'll choose the one that we think provides the best service at the lowest cost, and we continue to expand our last mile logistics. I would expect that we will add 100% natural gas fleet mid-2026. On the Iron Horse frac division, we're very happy with the acquisition that we made. We still view this as a combination of 2 best-in-class businesses. The transaction closed August 27. And so we only had 1 month of Iron Horse in our Q3. And it's -- as we talked about in our MD&A in our outlook section, obviously, Q4 for Iron Horse is lower than we had hoped or expected or even modeled when we purchased the company. But that's just oil price related. We think it's temporary. A lot of their oil projects were canceled or kicked down the road until next year. We don't buy businesses for 1 quarter performance. We buy it for the next sort of 10 years. So very happy with that business. They're still seeing sort of more pinpoint completion designs in all of their plays. The annual frac with fracking through coil or around coil, I should say, is still going to be the main completion technique. And even in the older plays that there are things like the Viking, stuff like they're still seeing sand volumes and stages increasing. And they have a very, very busy Q1. So that division is going well. On cement. Again, we're very happy with the performance of this division. They've always been viewed as a technical leader in the industry. We have the best equipment, the lab, the blends, the operators. We've actually added rigs to our portfolio despite an overall year-over-year rig count decline. They continue to leverage operating efficiencies and initiatives to reduce downtime, which has enabled them to increase margins in what would be an overall sort of slightly down market. We've developed blends to target the heavier oil basins. We're aligned with all the right E&Ps, all the busy E&Ps. Our market share in plays like the Duvernay is as high as 80%. In the Montney, it's over 50% in the overall basin, our market share has grown has grown year-over-year. So very, very excited about what's happening in that division. The coil division as well has really started to show its potential. Really pleased with how that has gone. I know we've talked about the coil division for the last several years about focusing on this and making sure that this division performed in line with the rest of our company. And I think that's finally starting to happen now. Q3 was one of the best quarters in the coil division or was one of the -- the coil division's best quarter. It had lots of operational excellence delivered with less than 1% nonproductive time, which is a real achievement to the people running that division. Our portfolio of customers consists of the top operators in the basin. We set horizontal and total depth records this year in Canada, and that sort of extended reach operations has allowed us to add customers in the Montney and the Duvernay. So we're very happy with what the next sort of 12 to 18 months looks like. And they started to generate financial margins in line with the other divisions. So very happy with how that's worked out. I'll just talk about the Q4 and touch very lightly on next year. We still believe our premium service offering in all of our divisions continues to be valued by customers, and I think that shows in our financial results. We're, of course, watching oil and natural gas prices. There's always potential for projects to get delayed or canceled or changed into next year. But we -- and we expect that our customers like us are taking a fairly defensive stance in their fall budget season just based on the volatility we've had on oil prices, especially. But we still think 2026 will be better than 2025. Our customers are still talking to us about equipment availability in the next few years. Well, that's a very good sign. The LNG Canada facility has continued to ramp up its export volumes. It's now exporting in the range of about 1 Bcf a day. Natural gas prices have recovered significantly in the last month. We expect them to get better this winter and into next year. The Duvernay, as we've talked about, continues to be a busy play, very, very fracturing intensive. We were very thoughtful about the long-term development of this play and actually designed a Tier 4 spread around the Duvernay that pumps at higher pressures, higher -- longer pump times. So our equipment is better able to withstand sort of the abuse that, that play gives the average pumper. So it's reduced our R&M costs even though the pumping rates and pressures are so high. And the Q4 to date has been great. We're still forecasting 2025 to be fairly level loaded between the quarters. And especially in a year like this where we've had so much work bumped out of September into October and November. We expect Q4 is going to be very good. Like when we -- when I read some of the analyst notes, I think this might be being a little underestimated about how busy we are in this quarter. It's likely to be better than Q3 and possibly could be one of our best quarters of the year. So we're not seeing a sharp decline in activity in Q4 like maybe some of our competitors have seen or had planned for. And nothing's changed from our focus. It's very much Montney, Duvernay. Obviously, the Iron Horse division focuses on the oiler plays. And as oil prices stabilize and start to gain a little momentum, those plays will get very, very busy very quickly. So just on -- I'll touch on a few other things, one being tariffs. I know we've talked a lot about tariffs in the past. And actually, as it's turned out, tariffs were put on sand and coil. Both of them have been removed. And actually, the tariffs that were paid -- and sorry, I'm talking about the retaliatory tariffs put on by the Canadian government. In both cases, any tariffs that were paid are -- they're telling us they're going to refund them, refund the money. So we're not really seeing retaliatory tariffs being a big issue in our life. A lot of the cement products are made locally. So that's not an issue. And we're not seeing any tariff pressure on things like chemicals yet. It will affect overall steel prices, of course, from the tariffs that were put on by both the Canadian and the U.S. governments, and that will affect the price of parts and pumps and things like that going forward. But it certainly isn't working out to be as big an issue as we had feared at one time. And there's various industry groups that have done a really good job of lobbying the Canadian government to make sure they're not sort of putting unfair retaliatory tariffs on our business in places like where we don't have a Canadian alternative. So sort of -- I would say we're very happy with how that's worked out. On the sand logistics side, we focus on this every call, and we're going to continue to focus on this because this is certainly becoming more and more of an issue every year. There's about 8.5 million tons of sand pumped in Canada this year. And some analysts are estimating that this could get as high as sort of 12 million to 15 million tons by 2030. And so when you think about all the sand that needs to move around the basin, whether it's on rail or on truck, this certainly has turned into a logistics challenge, which, of course, we see as an opportunity for profitability. And so we hope these predictions are correct, and we're making moves in our last mile logistics to make sure that we're positioned as having the premier provider of sand from the transload facility to the well site. And there's a lot that goes into it. You think about some of these locations, they're pumping sort of 50 to 100 railcars of sand over a period of 48 to 72 hours. And that means having a 40-ton B train truck show up every 10 minutes on location. So if you can schedule that correctly, you can run that efficiently. That's an efficiency that our customers certainly value, and we expect to provide to them in the future as the sand volumes grow. So we view this as a real area of focus and actually may be a focus of our M&A in the next few years as well. On the technology side, I would say things are sort of progressing as we had expected. We're reviewing the cornerstone of our technology strategy is 100% natural gas fueled operations in all of our divisions eventually. But right now, we're mostly focusing on frac. We're evaluating all of the technologies available to us from a 100% natural gas pump perspective, which will allow us to pick what we think is the best -- the most practical technology so that we can provide our customers with 100% natural gas solution. And like I had said earlier, I expect we'll be providing this by mid next year. So back to the long-term outlook, certainly, nothing's changed from our view. Even though you go through little bumps like we're going through now with commodity prices, it doesn't change the long-term outlook of the industry in Canada. We still think it's a great place to be. We're going to continue to invest in it. We view the Canadian -- the Western Canadian Sedimentary Basin is a very attractive place to develop and grow our business. The Montney is increasingly becoming recognized as the premier play in North America. LNG Canada is going well. We fully expect that, that will go from 1 Bcf to 2 Bcf eventually to 4 Bcf a day in the next few years. So -- and there's other facilities as well that are coming in behind it. So we think the LNG export off the West Coast of Canada is great for the business. All of the plays that will fill that capacity are extremely pressure pumping intensive. So we think it's a great place to grow our business. And on the -- what's our return on capital strategy. I think, again, nothing's changed there. We continue to generate what we think is industry-leading free cash flow, and we maintain a conservative balance sheet. I would say our views on debt has changed just given how stable this business has become compared to prior cycles. So we're not afraid to have a little bit of debt on the balance sheet. And we do subscribe to a diversified return of capital strategy, which is a combination of a sustainable and hopefully growing dividend with the combination of the NCIB. And since we put the NCIB in 2017, we're over 51% of the shares purchased, which is amazing to think about that in the context of the industry. And we flex the NCIB up and down in the context of other investment opportunities. And -- so we'll continue to do that. We'll very likely have a very low base level of NCIB, but we're not afraid to really hit the gas or maybe even pull back for a while depending on what else we're seeing and what's happening in the market. Again, we're not afraid to use our bank lines if we find attractive investment opportunities, just like we did with the Iron Horse deal. They wanted all shares. We wanted to pay them all cash. We sort of sought it off somewhere in the middle, but hopefully, we can use our bank lines in the future. We're -- and our corporate priorities remain unchanged, build a resilient, sustainable and differentiated company, invest in high-quality growth opportunities. Hopefully, they're organic, focus on the logistics side of the business, provide a consistent return of capital for our shareholders through the dividend and the NCIB. So I think, operator, I think we'll stop there, and we'll go to questions. Operator: [Operator Instructions] And your first question today will come from Aaron MacNeil with TD Cowen. Aaron MacNeil: Brad, you mentioned you expect '26 to be better than 2025. I know you also referenced this in your prepared remarks, but we started to see CapEx cuts this quarter, most notably with Whitecap. We're just kicking off earnings, so presumably more producers could follow. I guess I just -- I'm wondering at a high level, what your assumptions are for year-over-year changes in Montney and Duvernay activity and how you think pricing will evolve over the next year? Bradley P. Fedora: Yes. Like I don't think we're going out on a limb. I mean we just had 24 months of the worst gas prices this basin has ever seen on an inflation-adjusted basis. Now we've got LNG line maintenance is done. We're talking about sort of a much more balanced or even a negatively balanced gas market in North America as more LNG comes online in the U.S. Our customers have very sophisticated marketing programs. They're not just sitting around relying on AECO or Station 2 gas. But now that sort of all of the pieces are in place, I just don't see how we don't have higher gas prices next year. And this is a gas basin, as everybody knows. So higher gas prices mean better economics. When our customers have sort of 3- to 9-month payback on wells, how do they not drill those. So -- and of course, everybody takes a defensive stance in their budgeting, just like we do. We take a very defensive stance at this point. But I think there's upside, and I think it will come next year. And that's from an activity perspective. Who knows what's going to happen in the pricing environment? I mean, we all know what I think about how undisciplined this space is and irrational this space is. But when we talk to our competitors, they're blunted for Q1. So are we -- I don't see how prices go anywhere but up from here. So -- and even if they don't, I mean, we'll figure out how to make a little bit more money with efficiencies. So I'm not expecting big year-over-year changes that we would see 15, 20 years ago. That's not what I'm saying. But sort of 3% to 5% increases in activity, we can work with that. And I just don't see how that doesn't happen given that we've come out of the worst 24 months imaginable from a gas price perspective. We're going into a much more constructive gas market, North American-wide. I think that will just reflect in more activity going forward. Aaron MacNeil: Yes. And again, I wasn't trying to challenge your outlook. I was just more curious if you've had any specific conversations with customers that would indicate that activity was going up year-over-year, but... Bradley P. Fedora: Yes, we do, Aaron, I'm sort of challenging myself on my assumptions because I seem to be the only one that seems to think like this right now, which is either a really good sign or a really bad sign. But yes, we do have conversations with customers that I would say are more bullish than maybe what gets put in print. Aaron MacNeil: Got you. Okay. And then just as a follow-up, I wanted to sort of better understand the new natural gas-fired frac spread. It sounds like it's going ahead, but is there any scenario that you would maybe pump the brakes? And then what sort of contract structure and duration should we expect? And maybe as another follow-on, how should we think about capital spending next year, assuming that, that investment goes ahead? Bradley P. Fedora: Yes. I would think our capital spending will be in line with the past. We're very careful not to overcapitalize the space. Even though we have, by far, the largest market share in Canada, we don't operate in a bubble. And so we're not just going to flood the market with equipment, even if it is from a technology perspective, the best. But we've been a leader in new technology development over the last -- or since COVID, say. And I don't expect that's going to change. We've had incredible success with our electric backside or all of the ancillary equipment. Our customers continue to demand our electric blenders, very well designed, great performance, great from an R&M perspective. And so the last piece of that puzzle was the evaluation of all of the available 100% natural gas pumps, and it's all of the manufacturers. It's natural gas -- conventional natural gas engines, turbines, it's electric. We took, I would say, maybe a frustratingly long time to evaluate everything. But I think we have a pretty good understanding of what's available in the pros and cons of the various technologies. So I think we're in a really good position to sort of pick a horse at this point. And we're always working on R&D projects in the background. We've got to -- I mean, one of the challenges with natural gas pump engines is they want to run at constant speeds, which, of course, is not great when you're trying to increase rates and pressures and stuff like that. So -- in conjunction with a partner, we've developed a variable speed transmission that we want to try. That would go really well with natural gas engines, and it would allow us to pump more efficiently and actually spin off energy into our electric backside. So there's little things like that, that we're always working on that we may not always be able to talk about. But we'll -- we want to provide our customers with 100% natural gas solution, but we want to make sure that it's a sustainable solution for us as well from a returns perspective. And I think all too often, people jump head first into the latest, greatest equipment design without sort of thinking thoughtfully about, hey, how do you provide your shareholders with a return at the same time as you're providing your customers with a valued service. Aaron MacNeil: And so just not to needle you too much on this, but on the contract duration, do you think you can go? Bradley P. Fedora: Sorry. Yes. We don't talk in too much detail about contracts with our customers, and we have various discussions with various customers, but you would expect that the -- we're very fortunate to have long-term customers that have been with us for years. They will, of course, get first dibs on any technological developments we make. Operator: And your next question today will come from Keith MacKey with RBC Capital Markets. Keith MacKey: Just like to start out with Q4, if we could. Can you maybe just work out some of the pieces here of how you think Q4 will unfold? Certainly, you did kind of high 50s for EBITDAS in Q4 of 2024. Relative to that, how do you see Q4 of this year playing out, recognizing that there's been some work moved from Q3 to Q4, but then also some of the Iron Horse oil-related work has gone away. So how do you see kind of all those pieces playing together? And obviously, there's always a holiday season that makes things less busy as well? Bradley P. Fedora: Yes. we -- if anything can happen, like we didn't see September coming. Frankly, we had a whole bunch of stuff on the board. And then boom, you wake up one day and it's been moved. And that's our business. You have to be prepared to roll with the punches like that. So we were -- we actually didn't realize a month like September was going to turn out like it did until sort of mid-September. So I'm a little hesitant to talk in absolutes here. But if we don't beat last year's Q4, I mean, that would be very, very surprising. And I would think we would beat it by a fairly reasonable amount. And like I said in my prior comments, this could be one of the best quarter -- this could be the best quarter of the year for us. And so again, I think we've gotten a little too focused on what happened in September as an indication of what's happening in the business. That isn't the case for us. Things get moved around, water availability issues, budget issues. I mean, we're built to absorb those changes. And what we gave up in Q3, we think we're going to gain in Q4. So I'm not going to give you any more color than this, but we expect Q4 to be good. Keith MacKey: Maybe you could just talk a little bit more about the sand logistics commentary. Certainly, more sand per well and more wells over time means you need a lot more sand in total. Can you just talk about kind of where the sand is coming from these days? Are we seeing more local sand versus imported sand? I know there was a trial on damp sand in a little while ago with one of your competitors. Can you just talk about some of these trends and where you think the market ultimately goes and where the opportunity is for Trican? Bradley P. Fedora: Yes. Those are all good questions. So out of the 8.5 million -- about 8.5 million tons of sand that gets pumped in Canada, about 5 million of it comes from the U.S., so Northern White Tier 1 sand. The other 3 million, say, comes from the Canadian mines. It's hard to predict how this works out because, I mean, the issue with sand is everybody wants to pump more of it. But of course, it's expensive. So everybody is always looking for the lowest price alternative from a sand perspective, and then you have to measure that against the crush strength of the sand that you're putting into your wells. And so that has brought up this wet sand issue. The idea behind wet sand is you have lower quality, less sorted, less clean sand. And as a result, it hasn't been sorted, hasn't been washed, it hasn't been dried. And so you can have it for less money, you can truck less of it due to the water content, of course. But the idea is that hopefully, the reduction in sand quality is made up for in the reduction of price. And from what we understand, and we are not experts in what happened at either one of these 2 trials. But we -- as what we understand, they didn't go that well. But I think people will continue to experiment with it. It's obviously a lot harder to deploy wet sand in Canada versus Texas when we have 6 months of winter. So you can't move wet sand around if it's frozen. And there's sort of operational issues on location as well with wet sand in the winter. So it's probably not ever going to be a massive substitute for what's happening today. But I think people are going to continue to experiment with lower cost alternatives and we hope to be there with our customers as they do that. But one thing that is certain is sand has to get moved from A to B, and we're really good at moving sand from A to B. And we have the largest trucking fleet. We will continue to grow that. We'll continue to make investments in storage and transloads if we think they're strategic. But at the end of the day, moving sand from A to B can be a good business if you do it well, and we think we do it well. So that's something that we're going to continue to focus on. Operator: And your next question today will come from Joseph Schachter with SER. Josef Schachter: Two questions for me. The first on the ERP platform and using AI, how do you see that integrating? Is it a multiyear thing? You're talking about spending $10 million this year, putting it through under the G&A. Is it going to affect manpower? Is it going to affect the software side that upgrades? How does this affect and benefit you? And how does it affect and benefit the customers? Scott Matson: Yes. Interesting question, Joseph. So I mean, fundamentally, we need to modernize all of our systems and get ourselves into the next level. That will then help us facilitate more aggressively moving into things like AI and machine learning, analyzing pump data, preventative maintenance schemes, all those kind of things, which is a great benefit to us as we move forward. But you're correct that, that should translate into efficiencies from an operations perspective, potentially cost side as well. So it's a long-term process, as you would know. There's lots of conversations about utilizing AI and use cases, but you've got to first have good solid quality, clean data for a period of time to be able to run any of those use cases. So before we start talking about AI efficiencies and improvements going forward, we've got to get the base level data clean, scrubbed and into a reliable form. And that's really what our platform is driving us towards. So yes, this is a bit of a multiyear exercise. As we move forward, there'll be internal efficiencies that we would hope to gain and that insure -- in turn should benefit our customers as well. Josef Schachter: So this will be an ongoing conversation issue? Scott Matson: Sorry, I missed that. Josef Schachter: This will probably be an ongoing conversation issue as you make headway there? Scott Matson: Yes. It will be something that we'll continue to talk about and keep forward in our discussion so that you get a clear picture of where we're going. Bradley P. Fedora: And Josh, it's Brad. Like the AI, the potential of AI is limitless, right? And it's -- even in a business like ours, who knows what this could do for us from a -- we collect millions and millions of data points on the pumps and the engines every day. And so what do you -- what can AI do with that data? And we certainly hope it will help reduce our R&M costs. Is AI one day, do we have better programming to help our sand logistics get more efficient? Does that help us run the frac? And so we're currently not running it manually, but we have people controlling the computer systems that run the frac. And so maybe AI or the software will run it a little bit more efficiently than we're running it. And so we're always looking for opportunities to get better with technology. We just got to pick our spots and be aware of the fact that we're not that big of a company, right? We're big enough that we need to invest in this. But at the same time, we got to be careful that we don't waste money on it as well. And I can assure you we will be very thoughtful if we -- when we deploy capital on technology. We'll be looking to get an immediate return for the investment. Josef Schachter: Super. Another area to pursue, you mentioned on the last call that when you bought into Iron Horse that you had equipment in the legacy business that might fit because of it's not up to the current standards needed for the big jobs. Are you moving equipment there? Are they using it or upgrading it so that they'll be busy with it in Q1, as you mentioned, that you expect them to have a very busy quarter in Q1? Bradley P. Fedora: Yes, exactly. We've got equipment going back and forth from them to us and us to them as we speak. So one of the big advantages of a transaction like this is you get to spread the equipment around to where it's going to be most impactful and most efficient. Josef Schachter: Okay. And do you have much in the yard still from the legacy equipment? Or is more of it going to Iron Horse? Bradley P. Fedora: Well, there's always stuff kicking around the yard, Joseph, don't get me started here. Yes, there's still stuff there. But that's fine. That's -- we have actually done -- and prior to COVID, the prior team had also done a really good job of cleaning up really old equipment, and we've continued on with that. And so I think we're -- we've done a really good job of making sure we don't turn our operating bases into these old boneyards of equipment that will never see the light of day. We've -- I think we've done a pretty good job of getting rid of a lot of the stuff that will never go back to work. And so anything that we have parked on fences today is something that we think could go to work at any time. And we work very hard. If we don't believe that the equipment can't go to work, we work very hard to get it sold. Operator: And your next question today will come from Tim Monachello with ATB Capital Markets. Tim Monachello: Most of my questions have been answered, but I have a few follow-ups. Just around the nat gas fleet that you're contemplating for 2026. What's the lead time on that? And when do you think that might be entering the fleet? Bradley P. Fedora: I didn't quite catch all that, Tim. What is the... Tim Monachello: Sorry, the lead time -- lead time... Bradley P. Fedora: All of this equipment has a 6- to 12-month lead time on it. It doesn't matter what you order these days. Companies like whether it's Cat, Cummins, NOB, et cetera, they -- it's all a long lead time. So we don't expect this fleet would hit the field until next summer, probably at the earliest. Tim Monachello: Okay. So that capital investment decisions already made like you're going forward with it? Bradley P. Fedora: Not necessarily, no. Tim Monachello: Okay. That's helpful. And I assume that, that would have to come with some customer commitment behind it? Or would you do that on spec? Bradley P. Fedora: It will likely come with a customer commitment, but we typically test our investment thesis on if the customer commitment went away, would you still want to own it. And so the answer to that is sort of yes to both. But yes, it will likely have a customer commitment, but we wouldn't bring it on if we didn't think we could sell it if the customers get sold or change their mind or whatever. Tim Monachello: Okay. That's helpful. Then a follow-up on Keith's question around profit. Any market dynamics, have you seen any changes in terms of customer in-sourcing behavior or willingness or desire to in-source the logistics side of sand in Canada? And if so, how do you move around that? And what does it mean for margins and stuff? Bradley P. Fedora: Yes. Definitely, we've seen the trend to more self-sourced sand from our customer base. And that's why we're focusing on making sure that we can make some of that back on the logistics side. So it's one of the reasons I'm saying it's going to be a focal point for the business. There's nothing we can do about the trend other than try to make sure that we're included along the value chain somewhere. And there's corkage fees and things like that. But... Scott Matson: But as we mentioned earlier, I mean, that logistical piece of moving x number of tons from A to B is no small task, right? And so that's something that Trican has got expertise in and has developed over time, and we continue to push forward on. So keeping engaged on the transportation side of things is a bit of a hedge against that motion. Bradley P. Fedora: Yes. Tim Monachello: Does that come to pass in any of your customers' programs currently? Or is that something that's more contemplated for in the coming quarters? Scott Matson: It's going to continually happening as we move forward. So there's a mixture today of customers that self-source various items, including whether it's sand or chemical or others. So it's just a continued trend as we move forward. Tim Monachello: And have you had any pushback on corkage fees or trying to capture margin in logistics rather than... Bradley P. Fedora: We get pushed back on everything. Tim Monachello: Makes sense. But are you able to push it through ultimately? Bradley P. Fedora: Sometimes. I mean most of our customers, like it's -- everyone is different. We're very fortunate that our customer base wants us to be sustainable. And they -- I would say they have a very good understanding of our company economics and what is required to make sure that we're going to be able to provide new technologies and top-tier service. And so we're very fortunate to have the customer and we've had them for 10, 20 years in some cases. So the relationship is very good and lots of the elements of the business are well understood by them. So we'll get through this, and we'll continue to make money. Tim Monachello: Okay. That's helpful. Just looking at the acquisition allocations, it looked like Iron Horse didn't come over with much working capital. But the working capital investment in the quarter, I assume, being fairly elevated included funding working capital for Iron Horse. So I'm just curious like with that onetime impact, if you could help quantify what the working capital investment related to Iron Horse was in the quarter? Scott Matson: Yes. I probably won't get into that much detail, to be honest, Tim. Iron Horse did come with a chunk of working capital in it. I would say that funding requirement was not massive. And so most of the working capital build was really a result of a strong July and August, right, that then translates into an elevated balance as you come through September. So I'm not giving you as much detail as you'd like, but a portion of it, sure, but the majority of it would be activity based. Tim Monachello: And maybe I missed this in Joseph's question, but how long do you expect this ERP integration to last? And what do you think the 2026 investment in that is going to be? Scott Matson: Yes. We don't -- we would have an ongoing spend as we move through 2026, and we'll be able to give you a bit more guidance on cadence as we get into the year. But we're scheduled to flip the switch midway through the year and then get to sustainable factors at the end of that year, and then we've got to make another decision as to whether we continue forward on different parts of it. So there'll be a chunk of spend in '26 as well. Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Fedora for any closing remarks. Bradley P. Fedora: Thanks, everyone. Thanks for your interest and joining -- taking time to join the call. The management team at Trican will be around for the rest of the day. So if there's any follow-up questions, don't hesitate to reach out, and we should be able to take your call very quickly. Thanks. Operator: This brings to a close today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.
Operator: Welcome to the BioInvent Q3 Report 2025 presentation. [Operator Instructions]. Now I will hand the conference over to the speakers CEO, Martin Welschof; and CFO, Stefan Ericsson. Please go ahead. Martin Welschof: Yes. Welcome, everybody, to our Q3 report presentation. And as usual, Stefan and myself will go through what has happened during that time period. Stefan will cover the financials. I will do the rest. And without any further ado, I will start the presentation. Our forward-looking statement. And I would like to start with a quick summary what has happened, events in the third quarter as well as the events after the end of the period. And obviously, one very important events during the third quarter was our prioritization in the portfolio to really focus on the two lead programs, all the resources doubling down on the two most advanced programs, 1808 and 1206, and I will come back to a little bit more details later. And then the other thing was that there was a change in the Board. So Vincent Ossipow, who is with us for many, many, many years, stepped down for priority reasons. And I think this is a very normal change. And as I said, he has been with us almost 10 years. So then the events after the end of the period. So the most important thing, and we probably will discuss it also later a little bit more in detail, BI-1206, we started the Phase IIa trial in advanced or metastatic non-small cell lung cancer and uveal melanoma, and this is a first-line study. So super exciting. So this is basically based on the good data that we have generated in heavily pretreated patients. We showed that data to Merck and they agreed that we could go in the combo trial in first-line non-small cell lung cancer and uveal melanoma. So very, very exciting. Then we had some data presentations, so the Phase I clinical data for BI-1910, our TNF receptor 2 agonist for the treatment of solid tumors, will be presented at SITC in 2025. And then together with Transgene, we presented translational data and updated clinical results on the armed oncolytic virus program, BT-001 that was at ESMO this year. So coming back to our prioritization. So what you see here on this slide is the portfolio, and that's still our portfolio. So we think what we're doing is, of course, now we prioritize the two lead programs, and that was -- makes a lot of sense because those 1808 and 1206 are now in advanced clinical studies, which means Phase II. Those are two assets that are active in liquid as well as in solid tumors, first-in-class and the other programs on 1910, our second TNF receptor 2 program as well as 1607, our second anti-Fcgamma 2b program. They are now paused and then the BT-001 program in solid tumors, which is basically the oncolytic virus containing our anti-CTLA-4 antibody, is continued based on investigator-initiated trials. So we are really now focusing and doubling down on 1808 and 1206. And on this slide, you have a summary of what I partly already have said. So in August 2025, we announced the decision that we will focus on our two most advanced programs, BI-1206 and BI-1808. And what I always say, this is obviously an unfair competition, because 1910,1607 might be also interesting, but they're much, much more early. They're still in Phase I, dose escalation. And of course, 1206 and 1808 are already in Phase II. So the earlier clinical programs, as I already have said, will be paused after a [ wind-down ] period to complete the ongoing trial activities, because we want to pause it in a way that we can reuse it either ourselves or with a partner. And also the underlying research activities are now streamlined to better support the 2 lead clinical programs, 1206 and 1808. So this slide then would show you the prioritized portfolio where we then have basically 1808 and 1206, as I already said. So 1808 is our anti-TNF receptor 2 program, which is running as a single agent as well as in combination with pembrolizumab in solid tumors and T-cell lymphomas. And BI-1206, our lead anti-Fcgamma IIB program is running in combination for non-Hodgkin lymphoma with rituximab and acalabrutinib and in solid tumors with pembrolizumab. And there, I already mentioned that this trial has been kicked off where we're focusing on first-line non-small cell lung cancer and uveal melanoma. Then BT-001, as I already said, continues development in an investigator-led Phase I/II trial in collaboration with Transgene. Just for completeness, on the right-hand side of this slide, you see our partners. So whenever we use pembro, we do this under a supply and collaboration agreement with Merck. And whenever we use acalabrutinib, this is under a similar agreement with AstraZeneca. And that, of course, is something very interesting, because those are two potential partners that are already sitting at the table in a way. And then, of course, the last name, this is our long-standing partner in China, CASI. They have exclusive rights for 1206 in China, Hong Kong, Macau and Taiwan. So a little bit more then in detail around the programs, just to recap where we stand. So as I already mentioned, 1808 is developed in T-cell lymphoma as well as in solid tumors as a single agent as well as in combination. Here on this slide, this is the data that we presented in June this year. Basically, the monotherapy showing really promising strong efficacy in CTCL and PTCL. We had 100% disease control in nine evaluable patients, complete responses, partial responses and stable disease. And of course, it's important to remember or to remind everybody that these patients are heavily, heavily pretreated. But we also have then on top of that, two available patients in PTCL, which is an even more severe form of T-cell lymphoma, where we have one partial response in one patient with stable disease. Important to note that the treatment is well tolerated with very mild to moderate adverse events. So basically no toxicity issues. And also very importantly, immune activation was observed early on with depletion of regulatory T cells and the influx of CD8 positive T cells into the skin lesions, which is very, very important. And then to remind everybody, so we have Orphan Drug Designation for T cell and Fast Track designation for CTCL. So what is next? This will be actually additional data already this year, additional Phase IIa data. I think we guided the market that this will come next year, but we have good progress, and we will have already an update this year. Then going into the other parts of the 1808 program, which is the solid tumor study. We have established single-agent activity, which is really something exciting, because antibodies against TIGIT or LAG-3 never have done this. So we saw complete responses, partial responses, and we had actually 11 out of 26 available patients that showed a response. And obviously, again, here, very, very heavily pretreated patients. And again, I emphasize this is single-agent activity. Very good safety profile. And then what we also -- and that was presented at ASCO and what we also presented at ASCO in June 2024 is some first activity or data that we had in the combination, which, of course, was a little bit later since we start with -- started the single-agent clinical development first and then followed on with the combination with pembro. And here, we already guide the market. So the Phase IIa pembrolizumab combination data in solid tumors, there will be also a first data point or the second data point actually after then the ASCO in 2024 this year. So basically, for 1808, there will be an update on monotherapy for CTCL and as promised already the update on the combination with pembrolizumab in solid tumors, both this year. Then I switch to our anti-Fcgamma IIB program, BI-1206 that we develop in non-Hodgkin's lymphoma and in solid tumors. And start with the data that we presented also this year. That is the combination with acalabrutinib and rituximab. We had 100% disease control in the first 8 patients out of 30 patients in the complete trial and complete responses, partial responses and stable disease, a good overall response rate. And again, also this treatment has been well tolerated with no safety and tolerability concerns. And of course, it's important to note that 1206 is subcutaneous. So that means we have a very convenient and safe profile of this combination and which is a highly competitive option in the evolving non-Hodgkin lymphoma treatment landscape. We have Orphan Drug Designation and also here, we have an update, because we guided the market that will come out with a next data set during the first half of next year, and that will already happen this year. So also very, very exciting, which means that is already the third update that will come to in addition to what we already had guided the market for. So then on the other side, the solid cancer study, you might remember the data that we have shown. So very strong also data targeting patients that do not respond anymore to anti-PD-1 or anti-PD-L1 and that were patients that have received two or more -- two and three, so two or more IO treatments. We saw complete responses and partial responses. We showed that data to Merck, and they agreed that we can move into first line. And that's what we have started already. So there was a press release a week or two weeks ago. And we're focusing on advanced metastatic non-small cell lung cancer and uveal melanoma, and we are focusing on sites in Georgia, Germany, Poland, Romania, Spain, Sweden and the U.S. And here, as we have guided already the market, so we will have a first glimpse of the data during the second half of next year. Then very briefly on CTLA-4, even though that is not our core, but at least since it happened, so that was presented at ESMO. We could show that the BT-001 inject in combination with pembrolizumab was well tolerated, showed positive local abscopal and sustained antitumor activity in injected and non-injected lesions, long-lasting partial responses were observed and the overall data support further developments across a range of solid tumor types to improve responses to cancer immunotherapies. And the next step here is that the evaluation of BT-001 via the investigator-led trial in early-stage setting, what I already have mentioned. And then I hand over to Stefan for the financial overview. Stefan Ericsson: Thanks Martin. Okay. I will present the financial overview for Q3 and the 9-month period, January to September. All amounts are in SEK million, unless otherwise mentioned. Net sales were SEK 3.3 million in Q3 2025 compared to SEK 12.8 million in Q3 2024. That decrease is related to the production of antibodies for customers was SEK 9 million lower in 2025. Net sales for January to September 2025 were SEK 223 million. For the same period in 2024, net sales were SEK 23 million. That's an increase of SEK 200 million. The increase is mainly related to the $20 million payment when XOMA Royalty acquired future royalty rights to mezagitamab. Prior to that, a $1 million milestone was received in the collaboration with XOMA. Operating costs increased from SEK 120 million in Q3 2024 to SEK 137 million in Q3 2025. That's an increase of SEK 17 million. We had quite higher costs in BI-1808 and higher cost in BI-1206 and somewhat lower cost in BI-1910. And we also had higher personnel costs in Q3 2025. For January to September, the increase of operating costs was SEK 77 million from SEK 369 million in 2024 to SEK 446 million in 2025. During the period, we had quite higher cost in BI-1206 and BI-1808 and higher costs in BI-1910 and personnel costs in 2025 were quite higher compared to 2024. And the result for Q3 2025 was minus SEK 129.2 million, and the result for January to September was minus SEK 207.1 million. Liquid funds and current investments end of September 2025 amounted to a total SEK 690 million. And based on our current plans, we are financed into Q1 2027. Over to you, Martin. Martin Welschof: Thank you, Stefan. So then at the end, I would summarize again the key catalysts for the remaining 2025 and 2026. I think I mentioned it already, but I think it's always good to go over this again, and you see it here on this slide since there has been some changes, because originally, we guided the market that we will have for 1808 in solid tumors, a data update in combination with pembrolizumab. But in addition to that milestone, we also will update on 1808 additional Phase IIa single-agent data this year as well as additional Phase IIa data with rituximab and acalabrutinib for 1206 in non-Hodgkin's lymphoma. Otherwise, then for next year, so we'll have then the Phase III data with pembro in [ TC/TCL ] for 1808. And then there will be then, of course, additional triplet data, so for BI-1206 in non-Hodgkin lymphoma in combination with rituximab and acalabrutinib. And then in the second half, we'll have the first data update regarding 1206 first line in solid tumors, and that will be the first readout that will be during the second half of next year. So I stop here and open up for questions. Operator: [Operator Instructions] The next question comes from Sebastiaan van der Schoot from Kempen. Sebastiaan van der Schoot: There appears to be a lot of data still coming in 2025. And I just wanted to know whether you can provide a little bit more color on the different readouts. Maybe starting with the triple regimen for 1206. I noticed on the slide that said disclosed data on the first 8 out of 30 patients total. Does that mean that we will get an update on the total patient on 30 with the next one? And how long will the follow-up be for that particular readout? Martin Welschof: Yes. So for that -- Sebastiaan, for that program, BI-1206, that's in combination with acalabrutinib and rituximab. So basically, we have now more patients. We'll have an update on the overall response rate. We'll have an update on the complete response rate. So basically, an update on the study as it's going at the moment. Sebastiaan van der Schoot: Okay. Got it. And could you also provide a little bit more color on the 1808 readout in CTCL for the combination of pembrolizumab in tumors, like how many more patients will we get? Is it going to be like a handful? Or is it going to be a substantial update? Martin Welschof: For the -- so 1808, I'm just repeating because you were interrupted actually because there's some background noise where ever you are, Sebastiaan. So for 1808, this is, of course, monotherapy in T-cell lymphomas, right, so not combination. And because the combination will be next year as already guided. So this is an additional update that we have. And as you might remember, so the single-agent part or dose escalation has been done, and that will be basically then a further analysis on that data and update where we are with the different complete responses, partial responses and stable diseases. And then also quite some interesting information on the translational side. Sebastiaan van der Schoot: Okay. Got it. Thank you so much Martin. Operator: The next question comes from Richard Ramanius from Redeye. . Richard Ramanius: I just continue where Sebastiaan left off. And could you remind us about the next steps for both BI-1808 in T-cell lymphoma and BI-1206 in normal lymphoma in 2026? Martin Welschof: Yes. So basically, I start with 1808 first, as I said to Sebastiaan. So the single-agent part, the dose escalation, et cetera, has been done, so that is finished. What we have already have started is also the combination with pembrolizumab. And the reason why we do this is just to see whether it can be even better. So as you remember, so the data, the single-agent data is very impressive. But nevertheless, we also wanted to test the combination. And that is currently ongoing and the update on that data will then be at some time point next year. And then for 1206, the update that is coming now is basically a further progress of the study. And then next year, we will, of course, then finish the 30 patients. And then it depends on the data a little bit where we move, but we already had discussions with the regulators, such that we potentially could do at some time point a pivotal study. But as you know, so this is something that we want to do in a collaboration. So basically, what we're doing is to finish really up the 30 patients that will happen during next year and hopefully, with a very strong overall response rate plus a very high rate of complete responses, and we are quite optimistic that we can achieve that. Richard Ramanius: And I was thinking about your potential license partners. You're going to get some data in the triple combination now and somewhere in early 2026, while the data in combination with pembrolizumab in non-small cell lung cancer and uveal melanoma will be one year later. So what -- hypothetical question, what if AstraZeneca is very interested, what are the options for MSC Merck then? Martin Welschof: Yes. It's a very interesting question. Obviously, first of all, maybe a slight correction. So the first data that we'll have for the 1206 pembro combination will be during the second half of next year. So it's not a year later because I think we'll have during the first half, we'll have then further update or actually what we have guided now it's mid next year on the triplet. So I think we might even have -- and as you know, Merck as well as AstraZeneca, they don't have any rights, but they see the data a little bit earlier. So what we're doing now is pushing really hard on the 1206 pembro combination as much as we can, such that we might have already some interesting data that we may be -- that are not in the market yet, but that Merck will see since they are following us closely, and that could then trigger interesting discussions. So that might be enough, let's say, AstraZeneca would make the move. And if Merck would see something that is bubbling up, something interesting that is bubbling up, they might be able to counter. And also, I think I will use the opportunity here to update or to remind everybody. So with 1206, obviously subcu. And if you only would see, let's say, a 10% increase of responses to KEYTRUDA first line, this is, of course, a very interesting thing for Merck because Merck KEYTRUDA or Merck's KEYTRUDA has been just approved as subcu. So you could then really think of co-formulating KEYTRUDA subcu and 1206 subcu into one injection basically. And that could be something very, very interesting. And coming back to your question. So I think if we see initial data and Merck would see that rather early, they might then still be able to react in case AstraZeneca should come forward and is interested in a collaboration. Richard Ramanius: And what about an interest from AstraZeneca in combining BI-1206 with Imfinzi or durvalumab, their checkpoint in... Martin Welschof: Absolutely. That could be another option. So because the thing is because I get this question a lot that some people think, okay, AstraZeneca might, if they're interested to collaborate on non-Hodgkin lymphoma and Merck on solid cancers. But if either party is interested to do that, then probably they will opt for the full program, even if they have some specific interest. So AstraZeneca absolutely could also then consider if they think 1206 is interesting enough for them to consider collaboration to also consider on other applications besides non-Hodgkin lymphoma, absolutely. Richard Ramanius: Okay. Then I just have one more financial question. Are we going to see any more results of the cost-cutting measures just recently? And what type of burn rate could we expect going forward? Stefan Ericsson: I think you could say -- you see right now, we had -- for the first three quarters, we have SEK 446 million. So you could extrapolate that to the full year, a little bit less than SEK 600 million, and that will go down a little bit next year. Operator: The next question comes from Oscar Haffen Lamm from Stifel. Oscar Haffen Lamm: My first one would be on the readout coming out earlier than last communicated. Could you just give us some granularity on the reasons behind? Is it simply due to a faster recruitment than you initially planned? Martin Welschof: It's basically due to progress on different fronts. Obviously, recruitment is one part of it. But the interest in both studies is very high. So recruitment is going very well. And then, of course, you have better progress than we originally planned. So that's the main reason. That's the main reason. Oscar Haffen Lamm: Okay. Got it. And then a second question on the 1206 triplet combo data. What is the next data patients that are treated with higher dose of 1206 compared to last update? I'm thinking the 225 milligram compared to 150 milligram that was mainly used in the preliminary data. Martin Welschof: Yes. So basically, the data that you will see is a continuation of the data that we already presented earlier this year. So it will be the same dose, just a higher number of patients. Operator: The next question comes from Dan Akschuti from Pareto Securities. Dan Akschuti: Just one follow-up on the previous one. So in May of this year, you showed that all 8 patients in the triplet combo in NHL had shown a reduction of some of the target lesions, even the stable disease ones moving towards response. And now I'm just wondering, is this end of this year, is that going to be another interim readout? Or will it be of the full 30 patients? Or will we get the full one then still in the first half of next year or -- is there a possibility to go into Phase III as a single agent for 1808 in CTCL number? Martin Welschof: Yes. So starting with 1206 first. So the full 30 patients will be then at some time point next year. So I think roughly by mid next year. So what we have now is not the full 30 patients yet, but significantly more what we have shown in May. And on 1808, so yes, absolutely. So the plans and what we have discussed with the regulator is single-agent pivotal study. And I don't have the slide here in the deck, and I just have to memorize what we will do. So as I said already earlier, so we're currently running the combination with pembro. In parallel, we will start with dose optimization such and then also preparing for the pivotal study such that -- and those plans are still the same. We potentially could start a pivotal study for monotherapy first line in 2027. Operator: The next question comes from [indiscernible] from DNB Carnegie. Unknown Analyst: So good to see the planned readout being ahead of schedule. So first off, on 1206 and the triplet, you've seen pretty upbeat, Martin, on response rates being able to move up as patient numbers increase. So can you say anything about your expectations for the readout before year-end? And what would make this readout live up to expectations? And secondly, you should have a pretty substantial data set on the doublet, and we've seen some really nice long-lasting responses. And we've also seen the duration of complete responses. But can we also expect you guys to disclose the median duration for all responses? Is this data mature enough essentially? I'll start there. Martin Welschof: Yes. Thank you. So for the data package, what we're expecting is basically, as I already mentioned earlier, the overall response rate that should be, and that's our target above 75%. And then on -- then the other point, obviously, is a very high ratio of complete responses. So that is what we hope to present to the market. And then just remind me of the second part of your question. Unknown Analyst: Yes. So that was on the median duration of response for the doublet and whether or not that data is mature enough to present. Martin Welschof: Yes. So what we have, we can present. But obviously, so the study did not start that long ago. But it looks like what we have seen, but it's, of course, since the study is still relatively young, still preliminary data, but it looks that we have a similar or the same duration as we already have presented when we came out with the doublet data. And also to tell everybody, so those patients that were in complete response are still in complete response. So now this is more than 3 years for some of those patients. But obviously, we don't have the same length with the triplet combination because that just started less than a year ago. But we can see that the responses that we get are enduring basically, right? But it's still early days. Operator: [Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Martin Welschof: Yes. Thank you, everybody, for participating and also for the good questions. So we are, of course, happy and excited that we can update the market earlier than what we projected around 1808 single-agent CTCL and 1206 in non-Hodgkin lymphoma. I think this is very good and shows the interest in the study regarding the sites that are involved. And of course, this is driven by good data. Obviously, otherwise, we wouldn't have that progress. And then also next year, I think we are really then zoning into a very interesting phase of the company because then we have more mature data, which should drive partnering and/or financing. And I'm really looking forward to that, especially partnering. So I think I will conclude with those words. I don't know, Stefan, do you have any final comments from your financial perspective? Stefan Ericsson: No further comments. Martin Welschof: Okay. Then I think we can close the meeting. Thank you very much, and talk to you soon.
Operator: Good morning. My name is Stephanie, and I'll be your conference operator today. At this time, I would like to welcome everybody to RenaissanceRe's Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] I will now turn the call over to Keith McCue, Senior Vice President of Finance and Investor Relations. Please go ahead. Keith McCue: Thank you, Stephanie. Good morning, and welcome to RenaissanceRe's third quarter earnings conference call. Joining me today to discuss our results are Kevin O'Donnell, President and Chief Executive Officer; Bob Qutub, Executive Vice President and Chief Financial Officer; and David Marra, Executive Vice President and Chief Underwriting Officer. To begin, some housekeeping matters. Our discussion today will include forward-looking statements, including new and updated expectations for our business and results of operations. It's important to note that actual results may differ materially from the expectations shared today. Additional information regarding the factors shaping these outcomes can be found in our SEC filings and in our earnings release. During today's call, we will also present non-GAAP financial measures. Reconciliations to GAAP metrics and other information concerning non-GAAP measures may be found in our earnings release and financial supplement, which are available on our website at renre.com. And now I'd like to turn the call over to Kevin. Kevin? Kevin O'Donnell: Thanks, Keith. Good morning, everyone, and thank you for joining today's call. Before we begin, I want to take a moment to acknowledge the devastating impact of Hurricane Melissa. Being in Bermuda, we are familiar with the challenges of hurricanes, but the scale of this storm is unprecedented, and our thoughts are with the people of Jamaica, Haiti and Cuba at this difficult time. Shifting now to RenaissanceRe's third quarter performance. We delivered another strong quarter with operating income of $734 million and an operating return on average common equity of 28%. In aggregate, year-to-date, we have earned almost $1.3 billion in operating income and delivered about a 17% operating return on average equity. Finally, we grew our primary metric, tangible book value per share plus change in accumulated dividends by 10% in the quarter and almost 22% year-to-date. These results are consistent with our track record of strong returns over the last 3 years. In fact, since Q4 2022, the quarter after Hurricane Ian and just prior to the step change in property CAT, and we have delivered operating return on equities above 20% in 10 of the 12 -- in 10 out of 12 quarters with an average return of 24%. As a consequence, we more than doubled tangible book value per share during this period. As strong as our performance has been over the last 3 years, I believe we can continue growing tangible book value per share in the future at an attractive pace. This is because many of the factors that have contributed to our success since 2023 should persist into 2026 and beyond. Looking back over our achievements. First, we grew into an attractive property CAT market, increasing our property CAT portfolio from $2 billion of gross written premium in 2022 to around $3.3 billion today, which creates a strong base of profit in our portfolio going forward. Second, we focused on preserving our underwriting margin. Our average combined ratio in property CAT since 2023 has been about 50%. David will explain the many tools we have to preserve this margin going forward. Third, we nearly tripled our capital partner fees from $120 million in 2022 to just over $300 million over the trailing 4 quarters. As we have discussed, these fees are consistent, low volatility addition to our earnings stream that should continue to grow in 2026. Fourth, we grew retained net investment income from $392 million in 2022 to almost $1.2 billion over the trailing 4 quarters. Despite declining interest rates, we expect investment income to persist and potentially grow over time as our asset base continues to increase. Finally, we returned over $1 billion in capital to shareholders so far this year. We continue to have considerable excess capital and believe our shares represent exceptional value making share repurchases highly accretive to our bottom line. Looking forward to 2026, while we are facing decreasing property CAT rates and falling short-term interest rates, these are challenges we successfully overcame in 2025. We will continue to do so in 2026 by executing on the 5 factors I just enumerated and building upon the foundation that we have established. Our success starts with strong underwriting. In 2026, we will continue to prioritize margin over growth. Strong returns have resulted in reinsurers increasing supply through retained earnings. Demand, however, is expected to grow at a slower rate than what we have seen over the last few years. This dynamic will likely put pressure on rates, resulting in some reduction in excess margin. That said, given the strong profitability of this business, we are confident in our ability to construct an attractive property portfolio. To be clear, we will always pursue top line growth when it makes sense. That said, reinsurance is a risk business where jointly managing the bottom line is more important than consistently growing the top line. Over emphasizing top line growth is the surest way to fail to grow tangible book value per share over the long term. Managing this business is knowing where and when to expand, and where and when to hold. In the current environment, the best move is to focus on margin. By doing so, I'm confident that our growth in tangible book value per share will significantly exceed our cost of capital. In our Casualty business, you can see our strong underwriting reflected in how we pulled back on several lines this year, such as general casualty and professional liability. We did this in a way that was sensitive to the needs of our customers, which will help preserve future options. While we believe rate is outpacing trend in general liability, we will not reflect this in our reserves until we have more confidence in sustainability of the improved results. Having maintained good relationships with our customers opens opportunities for future growth if conditions improve. Moving now to a few comments on the upcoming January 1 renewal, which David will elaborate on later in the call. We begin with a very profitable property CAT book. While we expect some market reductions return levels should remain very attractive. I expect the market to remain disciplined with reinsurers holding on retentions and terms and conditions. Consequently, in 2026, property catastrophe rates should remain strong and should produce returns significantly in excess of our cost of capital. In other property, this book is performing very well. As you saw this quarter, and we believe this momentum will carry into 2026. We are seeing increased competition in the CAT-exposed pro rata delegated book and are keeping a close eye on it. Ultimately, we will manage our exposure based on the expected profitability and the opportunities in the market. Moving now to our Casualty and Specialty segment, where January 1 is a significant renewal. We expect increased competition in some lines but are confident that our customer relationships and risk expertise will enable us to select the best risk and to construct an attractive portfolio. Ending now with some comments on capital management. Consistent an execution of the 5 factors I mentioned earlier has created a cash-generating engine. On a GAAP basis, we have earned $1.9 billion so far this year, while generating $3.2 billion in operating cash flow. This facilitated growing limits in our property CAT portfolio by over $1.7 billion during 2025. Adding new business and strong expected returns for all of our capital providers. It has also allowed us to share our success with our shareholders through repurchases. Despite significant capital return, we have grown tangible book value by $1 billion year-to-date. So we have grown assets, grown capital, deployed significantly into a high-margin business and returned capital to shareholders. Bob will address our future capital management plans in greater detail shortly. But for all the reasons I just gave, we expect to continue generating profits and cash at an attractive rate. And one of the best uses for that cash right now is repurchasing our shares because we believe they represent exceptional value. That concludes my opening comments. And as discussed, Bob will cover our financial performance for the quarter, followed by David who will provide an update on our segment performance. Robert Qutub: Thank you, Kevin, and good morning, everyone. We delivered excellent results this quarter with annualized return on equity of 35% and operating return on equity of 28%. Year-to-date, annualized return on equity is 25% and operating return on equity of 17%. As Kevin mentioned, this is the 10th quarter out of 12 where we have delivered an operating return on equity over 20%. Operating income per share was $15.62 in the quarter. This is our strongest operating EPS to date, driven by continued growth in all 3 drivers of profit. Specifically, we reported underwriting income of $770 million, nearly double from Q3 2024. Retained net investment income of $305 million, up 4% and fee income of $102 million, up 24%. One of the key messages you should take away from this call is that our earnings has improved significantly over the last 3 years. Our underwriting and fee businesses as well as our investment portfolio have reached a scale where earnings are consistently higher and large individual loss events are having a smaller impact on our financial outcomes. As a result, we are better able to deliver strong annual returns with less volatility now than we could 10 or even 5 years ago. Last quarter, I shared 4 numbers that demonstrated this strong earnings profile. I would like to highlight these numbers again on a year-to-date basis, which means they include the impact of the California wildfires. Reviewing our financials through this lens shows the improved returns and lower volatility of our business. The first number is 15 points, which is the aggregate contribution from fee income and net investment income to our overall return on average common equity so far this year. This is consistent with last year. And together, these 2 drivers of profit created a stable base of earnings quarter-over-quarter. The second number is $600 million, which is our underwriting profit so far this year, including the impact of California wildfires. This profit complements the stable earnings base we generate from fees and investments each quarter. The third number is 22%, which is the amount we have grown tangible book value per share plus change in accumulated dividends so far this year. Ultimately, we measure our ability to deliver enduring value to our shareholders through growth in tangible book value per share plus change in accumulated dividends. This metric reflects the aggregation of our past successes and most directly comparable to our peers. The final number is $1 billion, which is the amount of capital this year we have returned to our shareholders through repurchases as of October 24. As you can see, we are consistently generating substantial capital. Consequently, capital management will continue to play an important role in creating value for shareholders going forward. We pride ourselves in being good stewards of your capital and sharing our successes with you, our shareholders. Since Q2 2024, we have returned over $1.7 billion of capital through share buybacks. This represents about half of the net income during this period or alternatively over 80% of the shares we issued to support the Validus acquisition. In the third quarter specifically, we bought back over 850,000 shares for $205 million. We continued repurchasing post quarter end, buying back another $100 million as of October 24, 2025. Repurchasing over $300 million in the wind season demonstrates confidence in our sustainable earnings, our strong capital position and our conviction in the compelling value of our stock. For all these reasons, we anticipate continuing share buybacks, consistent with our long-term track record of being good stewards of our shareholders' capital. Now I'd like to provide a detailed view of our third quarter results, starting with our first driver of profit underwriting. In the third quarter, our adjusted combined ratio was 67%. This result reflects disciplined underwriting, coupled with a low level of catastrophic losses and favorable prior year development. Specifically, property catastrophe, we reported a current accident year loss ratio of 10% and an adjusted combined ratio of negative 8%. This benefited from 44 percentage points of favorable development on prior years, primarily from large catastrophes in 2022 and small events across accident years. Other property results were exceptional again this quarter with a 50% current accident year loss ratio and an adjusted combined ratio of 44%. Reported significant prior year favorable development, which was related to large catastrophes as well as attritional losses. Our Casualty and Specialty adjusted combined ratio was 99% this quarter consistent with our expectations. Prior year development in Casualty and Specialty was slightly favorable -- slightly unfavorable, however -- was slightly favorable, excuse me, however, noncash purchase accounting adjustments of 50 basis points pushed the segment's prior year to adverse. We remain comfortable with reserve development in this book and have not experienced heightened trend this quarter. Across our underwriting portfolio, gross premiums written were $2.3 billion and net premiums written were $2 billion, both slightly down to the comparable quarter. Within both these segments, we continue to shape the portfolio. Specifically, in property, we grew property catastrophe at the midyear renewal while keeping other property flat. As you can see on Page 12 of the financial supplement, underlying growth in property catastrophe was 22%, excluding the $116 million year-over-year change in reinstatement premiums. These reinstatement premiums were negative $50 million this quarter due to reversals of reinstatement premiums from accident years that have developed more favorably than expected. Conversely, gross reinstatement premiums were positive $66 million in Q3 2024 related to Hurricane Helene. In Casualty and Specialty, gross premiums written were roughly flat to the comparable quarter, but there was movement at a class of business level as we manage the cycle, specifically in general Casualty, we have been reducing our exposure to U.S. general liability. As a result, gross premiums written in general Casualty were down 7% this quarter with continuing rate increases helping to offset exposure reductions. In credit, gross premiums written increased by 19%, largely driven by additional premium on seasoned mortgage deals from older underwriting years. And finally, we held Specialty largely flat as we continued to retain our share in this attractive market. Looking ahead, in the fourth quarter, we expect other property net premiums earned of around $360 million and an attritional loss ratio in the mid-50s. Casualty and Specialty net premiums earned of about $1.5 billion and an adjusted combined ratio in the high 90s. Moving now to fee income on our Capital Partners business, where fee income continues to be a strong contributor to our results with $102 million in fees in the third quarter. As you can see on Page 17 of our financial supplement, only $13 million of these fees are included in underwriting income. The remaining $89 million of these fees are incremental to our earnings as they flow through noncontrolling interest. This quarter, management fees were $53 million, and performance fees were $49 million. Performance fees were particularly strong due to the impact of favorable development on prior years. Looking ahead to the fourth quarter, we expect management fees to be around $50 million and performance fees to be around $30 million, absent the impact of large losses or favorable development. Once again, we expect the significant majority of these fees to flow through noncontrolling interest, which means they are incremental to our underwriting income. Moving to our third driver of profit investments where retained net investment income was $305 million, up 6.5% from the previous quarter, driven by continued growth in our investment assets. In addition, we reported significant retained mark-to-market gains of $258 million, primarily from equity and gold futures. As I've discussed in the past, we have increased our allocations to derivatives over time, including equity, interest rate, credit and commodity futures. We use these derivative positions to shape our portfolio, and as part of this, we carry cash collateral to support the positions. Looking ahead, we anticipate our investment income to persist at similar levels and potentially grow over time as our asset base increases. Next, I'd like to provide an additional update on expenses, where our operating expense ratio was in line with expectations at 5.1%, flat from the comparable quarter. In the fourth quarter, we expect our run rate and operating expense ratio to be about flat. That said, we typically make accruals for performance-based compensation expenses at the end of the year, which may impact the ratio. In conclusion, each of our 3 drivers of profit outperformed this quarter and contributed meaningfully to our results. We deployed significant capital through share repurchases while also growing into opportunities in property catastrophe business. We believe the strong earnings engine that we have built will continue to generate enduring value for our shareholders in the fourth quarter and beyond. And with that, I'll now turn the call over to David. David Marra: Thanks, Bob, and good morning, everyone. We're pleased to deliver another excellent underwriting quarter, both financially and strategically. Financially, we grew underwriting income to $770 million with strong current and prior year loss ratios and low catastrophe activity. These results reflect our disciplined underwriting approach in addition to our market-leading access to business. Strategically, this preferential access enabled us to continue deploying capacity into an attractive market in 2025. We closed out a highly successful midyear renewal and began planning for January 1. Looking across the reinsurance market, we believe it remains highly attractive for underwriters with deep expertise and strong access to risk like RenaissanceRe. Our vision is to be the best underwriter. Our integrated systems and our underwriting culture are aligned around this goal. Our 2025 portfolio is largely underwritten, and I'm proud of the book we built. This is not a market where all risks are equally attractive. In fact, returns vary significantly between classes of business and between deals within each class, which presents opportunities for us. We've been successful in 2025 because we applied our deep underwriting expertise to differentiate the best deals and deployed our strong customer value proposition to secure these lines. This combination is a differentiator and enables us to build a portfolio that is accretive to shareholders year after year. You saw this benefit when we were able to bring on the full Validus portfolio in 2024. You saw it again in 2025 when we were able to shape our larger portfolio by growing property CAT, holding lines in other property and Specialty and reducing risk in Casualty. In 2026, we will follow the same disciplined playbook, engaging early with customers on how we can solve their risk challenges across lines, leveraging our underwriting excellence to identify the best opportunities and deploying our owned and partner capital balance sheets to construct an attractive portfolio. Moving now to a discussion of our segments and outlook for January 1 renewal in more detail. Starting with property, focusing on property catastrophe first. Over the last 3 years, we have grown this business by about 60% in one of the most attractive rate environments in history. It has been highly profitable with an average margin of 50% over this period, even with significant catastrophe activity. In 2025, we grew U.S. property CAT, which is our highest margin business by 13%. We did this by selecting the most attractive risks in areas like Florida, California and loss-impacted nationwide accounts and securing these lines with our strong access to business. As a result, we captured more than our share -- market share of the $15 billion in new demand this year. Looking ahead to 2026, we expect continued growth in demand. Supply will likely exceed this demand, which will result in some rate pressure at January 1. The market anticipates rates could be down about 10%. As we have seen in 2025, however, this will not be uniform across all accounts. There are some [Technical Difficulty] renewals, which are impacted by California wildfires, and some of our accounts are already secured on a multiyear basis. Our experienced team has a fantastic track record of underwriting and dynamic markets like this as we demonstrated at the midyear renewal, where we grew faster and at better rates than the market average. Let me provide some more context on our view of the market and our underwriting approach to deliver superior risk-adjusted returns. Since the 2023 step change, the market has appropriately balanced risk between reinsurers and insurers with reinsurers largely providing balance sheet protection. Interests are appropriately aligned. Insurers have adjusted their business to support current retention levels, and the level of expected attritional losses is well understood in the market. We do not expect insurers -- reinsurers to sell new bottom layers below expected cost, and we do not expect clients to pay high rates for these layers. Therefore, we expect new demand to be mostly at the top end of programs and most of the competition to be focused on rate rather than terms and conditions and retentions, which will help insulate our bottom-line profitability if rates decline. In addition, our gross-to-net strategy is a key differentiator and supports sustained attractive returns. We retain approximately 50% of our assumed property catastrophe premiums making our returns less elastic to rate change. To achieve this, we typically share about 1/3 of our property CAT business with partners in our joint venture vehicles, which produces fee income that is less sensitive to movements in rate. We also protect and shape our portfolio with ceded reinsurance. As we look 2026, I'm confident in our ability to deliver underwriting results that are substantially accretive to the guidance Bob gave on our other 2 drivers of profit. Following several years of strong growth, our focus is on preserving margin, enabling us to continue delivering market-leading returns on equity. Shifting now to other property, where we continued our disciplined approach through 2025 renewals and to deliver excellent returns. This book includes a combination and non-CAT business, and we adjust its composition based on market opportunities. Following years of rate increases, we are seeing pressure on rates in the most profitable areas. Similar to property CAT, terms and conditions such as deductibles and policy supplements remain attractive. This combination of rate and terms and conditions has led to profitable returns since 2023. We have seen positive development on our initial loss estimates from prior years, which has benefited our results in 2025. This consistent prior year favorable development, combined with strong current year underwriting results and solid terms and conditions favorably impacts our view of the sustained profitability of the other property business, despite pressure on rates. Moving now to Casualty and Specialty. Over the last year, we have seen positive progress in the Casualty market as clients have acted with determination to combat social inflation trends in U.S. general liability. Rates have nearly tripled since 2018. In early 2024, rates further accelerated and have been covering loss trend. In addition, clients are implementing increasingly sophisticated claims management practices. As we have discussed with you, we reduced our exposure to general liability business significantly through 2025. We did this carefully and thoughtfully taking the data-driven approach and working to understand our customer portfolio actions in order to position our portfolio with the best programs for the next cycle. At January 1, we will continue to stay closely connected with our clients to understand the trends they are seeing, and how they are managing claims. Actions of our clients and our portfolio repositioning will take time to show up in the claims data. Until this happens, we will not reflect the benefit in our reserving. As Bob discussed, we expect the Casualty and Specialty segment to deliver a high 90s combined ratio. This segment remains highly accretive due to the substantial float that it generates in an attractive interest rate environment. In addition, it is strategically important to our goal of being the best underwriter, allowing us to trade with clients across classes and access the most attractive lines across Property, Casualty and Specialty. In closing, through 2025, we built an attractive portfolio by focusing on our clients, identifying accretive growth opportunities in the market and preserving margin through disciplined execution. This market is one where underwriting excellence will produce a more attractive portfolio. We believe that this will continue to be true in 2026. Our underwriting expertise and access to risk will enable us to deliver superior underwriting returns in the short term and value creation for our shareholders over the long term. And with that, I'll turn it back to Kevin. Kevin O'Donnell: Thanks, David. In closing, we had another strong quarter in which all 3 drivers of profit performed well. We delivered excellent underwriting income as well as strong fee and investment income. Together with robust share repurchases, we delivered record-high operating EPS results. This outcome is especially impressive given our status this year as a Bermuda taxpayer. Looking forward, even with anticipated market dynamics, we are confident that our underwriting excellence, investment management capabilities and gross to net strategy will continue providing us with significant competitive advantages. Consequently, we are very optimistic regarding our potential for future performance and ability to continue delivering superior shareholder value. Thanks. And with that, I'll turn it over for questions. Operator: [Operator Instructions] We will now take our first question from Elyse Greenspan with Wells Fargo. Elyse Greenspan: For my first question, I wanted to start with something Bob said, right? So we said there was 15 points this year on your return from the aggregate contribution from fee income and net investment income. So obviously, this year, right fee income, I think, would have been higher than normal, right, just because it's been a pretty low CAT year. So for that 15-point contribution from those 2 pieces, what is, I guess, normal expectations? Like what would you be expecting from fee income and net investment income on your return going for 2026? Robert Qutub: Thanks, Elyse. I'll take that. This is Bob. My context was the full year, 15 points. So we look at around 11% to 12% from investment income and around 3-plus percent that comes in from the fees. That's our starting point. And that when you look back over the last 3 quarters and even back into last year, that's been what has been the absolute contribution to our operating return on equity. And that's how we think about it. We think about that as our starting point. And David goes, and I've said this on the past calls as builds his book of business, that is and will be accretive to that number, which is telling you that we have an outlook of a strong financial performance and giving you a foundation from where we start from. To be honest, I also want to point out I did say for the full year. So this isn't a low CAT year. Remember, we took a $750 million charge on a $50 billion event in the first quarter, and that was the point I was trying to emphasize on that for the full year. Elyse Greenspan: Okay. I appreciate that color. And then for my second question, just thinking about the market dynamics that you laid out on the property CAT side, right, it sounds like baseline expectation 10% decline in price at 1/1. Obviously, it will vary depending upon where you are in programs and maybe some incremental demand higher up, I think, is what you said. But as you guys' kind of think about the factors impacting the renewal, if it comes together based on how you expect today, what do you think the expected ROE on CAT business written in 2026 will be? Kevin O'Donnell: That's a tough question to answer because it's part of our portfolio. So they're stand-alone and kind of the marginal. But what I would say is Dave's comments, I think, are important and twofold. One is rate change, which is a benchmark is -- what is '25 and '26, relatively look like together. But more importantly, the bigger comment we're trying to make is rate adequacy. So if we -- maybe one way to frame it is, if we go back to when things changed, and the property CAT was rerated at 1/1/23, if it was rerated 10% less, which is where we ultimately expect '26 to look relative to '25, we would have done exactly the same thing over the last 3 years that we have done. So having the rates pull back a little bit is simply pulling some of the excess margin that we've been enjoying in property CAT. It is not bringing property CAT anywhere close to -- and it's still abundantly above rate adequacy. So we still have very strong rate adequacy even with some reduction in rate change. I don't know if anything you'd add, Dave? David Marra: That's true. We still remain very positive on the business. It's been very profitable over the last few years. We expect the terms and conditions to largely persist and some pressure on rate. Our team is well positioned to figure out how to underwrite around that. Not all risks will be equal. So we'll be able to pick the best risks based on what happens on each individual program and construct an attractive portfolio. Operator: We'll take our next question from Josh Shanker with Bank of America. Joshua Shanker: Typically, when people see pricing going down, there's an assumption that too much capital is chasing too little risk or something to that effect. I'm curious to the extent that your third-party investors or potential new third-party investors are showing interest such that 2026 might be a strong or maybe a weak year for capital raising. Can you sort of speak to that a little bit? Kevin O'Donnell: Yes, I'll start there. That's a -- it's a broad question. So we -- because of the structures we have and because of the reputation we have in managing third-party capital, we have very good access to third-party capital, and that has been true even when it's been more constrained for others. Right now, I don't think third-party capital is going to be the driving influence on pricing in 2026. I think it's more about comfort with return levels within property CAT, and I think reinsurers having a little bit more confidence and a little bit more capital. Good news is we expect that the demand side, so there'll be more -- will grow. So more property CAT demand, although that level of increase is smaller than what we saw in '26. So that said, the market will be slightly more favorable for buyers than for sellers, where I would say '25 was a little bit better balanced. And that's the reason we're projecting about a 10% reduction in rate. The other thing I want to mention is there is more third-party capital that is becoming interested in longer-tail liabilities. So basically looking at that to fund their investment strategies, I think that will continue through 2026. So I think there'll be a little bit more third-party capital coming into perhaps longer tail Casualty or Specialty lines. So all in all, it's going to be driven by traditional reinsurers, third-party capital will continue to be available but not driving the show. I don't know if anything you'd add? David Marra: Yes, yes, we're definitely -- the competition we're seeing, especially on the CAT side is from retained earnings on traditional reinsurers more so than new capital projections. Kevin O'Donnell: Thanks, Dave. Joshua Shanker: And given that situation, I mean, there's a lot of expectation that you'll be in the market for your own stock given where it's trading and how much capital you have. But in this third-party business, a part of the reason why it's been so successful is because you eat your own cooking and your investors know that whatever risks they're taking, giving you money, you're also taking yourself. When we look at the minority interest on our balance sheet and we look at your own shareholders' equity, there's obviously some off-balance sheet third-party capital as well. They're -- somewhere close to the same amount. If you're returning capital, do we ever think there could be a situation where third-party capital is a bigger balance sheet for RenRe than the proprietary capital of the company? Kevin O'Donnell: It's a good question. One of the things we look at each year is what is the right balance between what we're retaining and what we're sharing. And I think Dave mentioned, we share about 50% of our property CAT and anywhere, depending on the line of business, 15% to 30% on the Casualty, Specialty lines. There are scenarios where even -- we can make this narrow enough that within a certain target strategy, we are larger in third-party capital than we are with our own deployment of risk into that narrow strategy. So there are scenarios where we could have larger third-party balance sheets than our own balance sheets. I don't see that occurring in '26. Operator: We'll take our next question from Andrew Kligerman with TD Cowen. Andrew Kligerman: I was a little curious shifting over to the Casualty line or the Casualty and Specialty area. It looked like you talked on the call about pricing being very firm, but you're still pulling back a bit on the U.S. general liability. Yet, when I've talked to others in reinsurance, I've been hearing that there's certainly upward movement in pricing at the primary level, but a lot of reinsurers are kind of softening their pricing a little bit. So I was wondering if you could share some color on what you're seeing in the Casualty reinsurance line and how pricing is coming along? David Marra: Thanks, Andrew. This is David. So we're seeing a continuation of what we've seen for the last several quarters as overall, the market is responding to elevated loss trend. And we're seeing the market respond in a couple of different ways. Most of the pricing increase has happened at the insurer level. And if reinsurance is normally quota share of an insurer, so we're taking a share of every policy they write every loss they pay. And as they get additional rate, that inures to our benefit. So that's what's going on in the market. They've been getting rate, which has been exceeding trend. They're also investing in better claims management practices. So the third angle that we have to improve our own portfolio is to take action and reposition our reinsurance lines to those that we think that are doing that the best. And that's what we've been doing over the last year. It's just a standard part of how we would always optimize our Casualty and Specialty segment within a class like we're doing in general liability and then also the overall balance between classes. Andrew Kligerman: I see. So Ren is not increasing their ceding commissions at all. It's sort of steady as she goes. David Marra: So the ceding commissions that we pay to our clients have been pretty flat. Most of the improvements in the economics have been insurers getting more rate and improving claims handling. Andrew Kligerman: Got it. And then just one last thing on Casualty. So you talked about a slight favorable development. And I was wondering if you could provide some color around the vintages, the product lines that it played out. Were there any big movements in one direction or another with a specific product or vintage? David Marra: Yes. So the way I think about the overall Casualty and Specialty segment, like Bob described, there was slight favorable development. That -- our view is that was flat. That was stable reserves. And we think just from the top down, we've shown a lot of favorable development as a group, a lot of those products, our reinsurance book. A lot of those clients buy products across Property, Casualty and Specialty. Within Casualty and Specialty, reserves have been stable. Combined ratios are in the high 90s, and that -- the main contribution we get is from the float, which is an attractive piece of the ROE contribution with stable reserves and growing float. Operator: We'll take our next question from Bob Huang with Morgan Stanley. Jian Huang: My first question is a little bit of a follow-up on what Josh was asking earlier. If we look at -- so one of the things you've said was that you talked about loss volatilities are smaller now. And so consequently, earnings are more steady despite catastrophe risk. If this trend continues longer term, doesn't that also imply that longer-term pricing should be pressured by stable earnings, less volatility to me feels like it should have less pricing volatility as well? Like theoretically, how do you think about that? Like should we see less pricing increase going forward if we have medium-sized hurricanes running through Florida here and there? Kevin O'Donnell: Yes. So thank you for the question. I'm hearing 2 things in the question. What's going on in the market and what's going on at RenRe. What -- the volatility from catastrophes is relatively consistent from an exposure perspective and how it represents -- thinking -- you mentioned Florida -- in Florida. RenRe is different. We have much greater investment leverage with that, we have more stability coming from the investment earnings in our portfolio. We have a much bigger fee platform, which provides stability and buffers volatility. And then our property CAT has been touched on a few different points is shared between third-party capital and our own capital. Third-party capital represents the stability of fees. Our own capital represents the return for risk. So it's -- what we're trying to say is the representation of volatility from catastrophes is buffered because of who we are today compared to who we were 5 years ago. Within the market itself, it is about unchanged. Jian Huang: Okay. That's very helpful. My second question is on gold. Just given the volatility that we've seen -- and obviously, it was a strong quarter for gold in the third quarter. But just given the volatility in gold in October. Curious if you have any updates on holdings? Or have you have any strategy or change in strategy or change in view about the investments in gold? And then what is the impact of gold on the book value for October? Robert Qutub: Thank you for the question. Our view on gold from a strategic standpoint hasn't changed. We've been in gold for all of '25 and a good bit in '24, and we went into it as more of a hedge against our portfolio with the geopolitical environment and a lot of change going on and the shifting of the central governments and how they approach their base currency. This has proven to be a good strategy. I mentioned in my comments that part of our mark-to-market gain, the $258 million, a large chunk of that came from the gold position that we have out there. There's been some volatility up and down here in there, but we still see that within our strategic remit for the foreseeable future. Operator: We'll move next to Mike Zaremski with BMO. Michael Zaremski: I was curious on the Property segment, if we look at property, IBNR reserves and additional case reserves, those levels are hovering currently in the 70%-plus range. We all have the historical levels, they bob around a lot, but still above like the long-term historical levels. I'm just curious, do you -- is there a way for you guys to frame whether the reserves for those 2 buckets are kind of higher than historical levels for a certain reason, or is there any color you could add to try to frame whether there's some of just maybe some added conservatism here, how you guys think about it? Kevin O'Donnell: Yes. There's no added conservativism or any shift in the way that we've built our reserves. The property side, it can be difficult because any movement in any single large event can have a meaningful impact on whether we have adverse or favorable development within the Property segment. The -- I spend less time when I look at our reserves differentiating between ACR and IBNR for the property CAT portfolio, and I look at it as relative -- the normal process for us is looking at each large event on the anniversary of the event. So what you saw some third quarter events coming through with some favorable development from older years. I would say there's no story to tell with regard to the numbers or the way that you're looking at the reserves there, it's pretty much steady as she goes from a reserving perspective. Michael Zaremski: Okay. Got it, got it. Well, it's been a good thing you guys have been releasing a lot more than expected. So I'll keep trying to figure out how to develop that. Maybe just pivoting, you've made the point, and I think we got it that this year, because 1Q isn't a benign year for large losses, for example, would you be willing to frame kind of if you look at the year-to-date 9 months combined ratios, you could either use calendar year or accident year or both. Would you still describe this year, 9 months year-to-date as being below average, better-than-average year or about normal? Any help there? Kevin O'Donnell: It's a question because there's so many moving parts and we can get to this taking 20 different journeys. This journey began with a large wildfire loss and then light wind season and then some favorable developments and strong pricing. If I look at the economic balance sheet and our modeled loss ratios and then I look at the actual loss ratios that produce, they're not wildly apart. So it's hard to say because this is an event-driven book. So one change in the fourth quarter with the earthquake somewhere can change things dramatically. But this year doesn't look wildly dissimilar than our modeled portfolio. Operator: We'll take our next question from Meyer Shields with KBW. Meyer Shields: I don't know if there's a question for Kevin or for Bob. But when you have the sort of favorable development that we've seen in recent quarters in either the catastrophe segment or in property. How does that flow through to the models that you're using for pricing? Robert Qutub: It's all part of the information [ because there ] that we have out there. We look at our pricing. We look at our reserving, we do actual versus observed and what we do in terms of the pricing model. As we go into the 1/1 seasons, and David can talk about this, as we look at 1/1, whether it's Casualty or whether it's Property with an emphasis on loss ratios on property. As we look at the experience that we've had and over the years, we've seen that converge become closer, but that's based on the information and the data sets that we have. So they are connected, and we do observe that, and it does play into roles. But with reserving it's historical with pricing, it's forecasting in the future based on that information. I don't know if you want to add anything to that, David? David Marra: Yes. I think from an underwriting perspective, we take into account both qualitative and quantitative part of the risk when we think about future underwriting and rate change trend, that goes into the quantitative side. But some of the things that have driven favorable development will go into the qualitative side and take other property, for example, a lot of the terms and conditions like the supplements and deductibles have held up as claims have settled out. So something like that will go into our qualitative view, and that will have a positive impact on our expectations in future years. Meyer Shields: Okay. That's helpful. And the second question, and I'm not really sure how to ask this, but Kevin, you talked about an increase in demand, which makes sense, I guess. When that materializes in the marketplace, is competition for that increased demand different from the renewing demand? Kevin O'Donnell: You're right. It was a difficult one to ask. It's also difficult to answer. So what's happened last year, just to frame and maybe as a real example is a lot of the demand came in at the top of programs. Not every reinsurer is equally hungry for high layers as they are for low layers. But those that traditionally write high layers will have probably a pretty consistent targeting for the new demand if it's within their target appetite already. One of the things that David mentioned is we took a greater market share of the increased demand last year. That was partially because we have vehicles that complement our own targeted demand. And secondly, we recognize that the rate adequacy is at such attractive levels we should deploy into that because we'll be able to retain it for several years and continue to produce attractive returns. So I would say it's generally consistent if it's already within their appetite. And it doesn't -- then it could be that it's between the traditional market and the CAT bonds, but it's not as if it's binary between third-party capital and reinsurers. It's really whether it's consistent with appetite. Operator: We'll take our next question from Andrew Andersen with Jefferies. Andrew Andersen: Just on the Casualty and Specialty segment, I think you called out some higher attritional losses in the quarter. Was that on the Specialty side and more one-off in nature? David Marra: Andrew, this is David. I'll take it from an underwriting perspective. So it's been about 4 quarters now that we've had a higher view of Casualty trend. And so that has been baked in for the last 4 quarters, and there's no change there. And if you look at the comparable quarter, if you're comparing now to Q3 2024, that would be a difference. But that's been stable in the last 4 quarters. Andrew Andersen: Okay. And then just on the reducing some of the exposures to U.S. general liability, I think this kind of started the back half of '24. But maybe where are you in the reduction cycle here? Should we see this continuing throughout '26? And is it just ceding commissions that we need to see change here to get a bit more positive? David Marra: I think the thing with general liability is that the momentum in the market is very strong. It just needs to be continued momentum. So we'll be watching to make sure that clients are continuing to get rate above trend, continuing to vest in the claims. And with that, our appetite will be largely stable. If we see that slip, then we'll still be always optimizing the portfolio based on how we see the risk. Kevin O'Donnell: Yes. And one thing I'd add to Dave's comments is this isn't a re-underwriting of the Casualty portfolio. This is simply recognizing that certain companies are doing a better job changing claims behavior, underwriting and rating to address the elevated trend more effectively than others. So we just are continuing to optimize our portfolio into the best performers. Operator: We'll take our next question from Alex Scott with Barclays. Taylor Scott: I wanted to ask one on the capital. Maybe if you could frame for us the way you're thinking about the amount of excess capital you have based on the PMLs and all the things' you guys look at internally today. And maybe just help us think as well about if growth ends up being more limited next year or maybe more flattish, what would your approach to capital management and capital return be? How aggressive would you be in terms of taking the operating earnings and funneling it back? Robert Qutub: This is Bob. Thanks for the question. There's a lot packed into the question. Let me see if I can open it up a little bit. In my prepared comments, I did talk about a couple of things, probably more than a couple of things. One is that the earnings capacity in the foreseeable future, we do feel strong. As we've talked about, all 3 drivers of profit, a couple of times on the call, and we pointed it out in our prepared comments. So we feel that the earnings, the numerator, if you will, is performing quite well, and we're expecting that to continue. We're focused on margins. We're focused on protection. Growth is challenging, but we'll continue to find it and deploy it where we can, like what we did in property CAT in the third quarter where we grew that. A lot of our comments were based on managing the denominator, which would be the capital aspect. And $1 billion this year. We expect the earnings trend to continue. We expect the capital generation to continue. And rather than accumulate capital, we're looking to give back -- return that capital in the form of buybacks as we've done and we're expecting that return to continue. Taylor Scott: Got it. And second one I had is just if you could talk about an ongoing situation in California. And as we move into 2026, if there's anything we should be considering, particularly around 1/1 renewals that would be impacted by maybe moving out of some of those areas of California that you're impacted by? Kevin O'Donnell: Yes. Actually, we grew in California after the wildfires. I think the re-rating was in excess of what was required from the learnings from the wildfires that occurred. So from our perspective, we continue to like the California market. A lot of the issues that you're -- I think, that are resident within the market are affecting the primary companies more than they're affecting us as reinsurers because we're setting our own rate and our own terms for taking the wildfire risk out of California. So I would say our -- if everything continues as it is in California, our appetite is to continue to grow. Operator: We'll move next to David Motemaden with Evercore. David Motemaden: Kevin, you had said, I guess, this year, which sounds like not far off from what you had expected from a model basis, 17% operating ROE year-to-date, including that $50 billion event. I guess just given sort of everything that you're seeing as we get into 1/1, do you think that -- how should we think about that ROE profile as we head into 2026, just given everything that you're seeing from a pricing standpoint? Kevin O'Donnell: Yes. So to be clear, the question was is this year an outlier from an average year with regards specifically to property CAT. So my comment was really on what is the modeled loss ratio for property CAT and to what's our actual. If rates are down 10%, you can assume loss ratios are up. So I would say the important thing is within property CAT, it's going to be a well-rated book of business in '26. It is just going to be slightly less well rated than it was in '25. So the guidance we're trying to give or the directional information we're trying to give is fees look strong, investments look strong. And the underwriting in '26 is largely going to look like the underwriting in '25. David Motemaden: Got it. And then I think, David, you had mentioned just more interest from third-party capital and some of the longer-tail liabilities. So I'm just wondering how you're thinking about that dynamic strategically, sort of how it can impact your business, the opportunities, the risks? I'd be just interested in your thoughts there. Kevin O'Donnell: Yes. We have a long history of finding efficient capital and matching a desirable risk. This is an opportunity for us. So we will look -- we know the capital that's interested in property CAT. We know the capital is interested in other property, and we know the capital that is coming in, a lot of it to the longer-tail casualty lines. A lot of it is capital that's already been active in Bermuda, many of which have been in the life sector. So these are -- it's a different strategy where they're looking at the reserves as funding their investment strategy, not looking for low beta risk, which has been the traditional third-party capital appetite for property CAT risk. We're well positioned to produce that risk. We're well positioned to structure vehicles that allow them to share that risk that we have. The other side of that is its capital that's coming in that we'll compete with. So we're just trying to figure out how it's going to move the market, if it's going to move the market and then how it can be a tool for us to service it and to bring fee income to our shareholders. Operator: We'll take our next question from Ryan Tunis with Cantor. Ryan Tunis: I guess just for Kevin. So we're talking down 10% as sort of a base case. But I'm just curious, in a marketplace like this, as we move toward the renewal, what are the type -- for someone in your seat, what are the types of, I don't know, red flags that you'd be looking for that might suggest that the market is being a little bit less disciplined? Kevin O'Donnell: So it can be on any number of things. I am going into this renewal with optimism. It's going to be a pricing shift, not a terms and conditions shift, which I think is likely to be the case. Sometimes terms and conditions changing have material impact on economics and it's less transparent to see in the portfolio. I don't think that's what we're going to see this 1/1. So from my perspective, I think it will be a relatively transparent shift in economics, and we think it's in the ballpark of a 10% rate reduction. So there are numerous other things we'll monitor. We've got great underwriting capabilities. We have great tools to see changes in the portfolio. So we do see other ships. And economics that are less transparent than price, we'll react accordingly, but it's not my expectation. Ryan Tunis: Got it. And then I'll just end here with a couple of separate ones. First one is just for Bob. So in the 2024 10-K, the Property segment shows about $1.2 billion of IBNR for 2022 and prior years. I'm wondering after all the releases this year, if that's still a solidly positive number. And then just separately, just curious if there's anything you guys want to say at this juncture on Melissa exposure? Robert Qutub: I'll handle the first, and I'll give exposure to Melissa to David. Generally speaking, that's a question the way I would look at that and approach it. Period -- our point in time reserves in property right now are about $6.3 billion now. And a year ago, they were $6.5 billion. So we've continued to build reserves. We've had some reserve releases, and they're mutually exclusive of one another. The reserve releases are based on information that we get over time and we act accordingly. We've got independent advisers that look at this and test it. One of them is PricewaterhouseCoopers. So as far as absolute levels, they're relatively constant. David Marra: Yes. And then -- Ryan, this is David. I'll take the Melissa question. First of all, it is a CAT 5, a very powerful Cat 5 directed on Jamaica. So our sympathies are with the people in Jamaica as they work through this. It's too soon to put any number on it. We have a couple of locations and not a lot of exposure in the Cat book, but a couple of locations in the other property book. So we don't think it will be that anything of an outlier financial event, but too early to put a number on it. And it is still a live event that's going to the Bahamas next. So we'll be continuing that. We also -- in the Cat book, particularly, we don't write any of the local Jamaica companies. So we've already looked into that part of it. Operator: We'll take our final question from Tracy Benguigui with Wolfe Research. Tracy Benguigui: Interesting comments on demand, but you also mentioned that supply outweighs demand looking ahead into 2026. So this is more of a macro question rather than a run rate question specifically, but if you had to take an educated guess, how much of the $800 billion-ish reinsurance dedicated capital need to leave the industry, whether it be from like CAT losses or capital returns to get to a state of equilibrium? Kevin O'Donnell: That's a -- I don't know how to answer your question. I would say what we look at is what is the over placement programs, and maybe that is a barometer as to kind of what level of capitalization brings us back to a balanced market. I don't anticipate substantial over placement. So that would indicate that we're relatively close to balance. The fact that rates or forecast or our expectation is down 10%, would suggest we're relatively close to balance. So I think there's a bit of -- sometimes bringing together the amount of capital and then the appetite for risk. I think the appetite of risk is unlikely to be wildly disconnected from the increase in demand, which will be less than what it was last year, but still there. So I don't think we're far out of balance from a willingness to deploy into the market. So I don't think it's a matter of X billion dollars leaving the market, and then we're back in. It's really about the perception of risk, and what is the comfort level for deployment into peak zone, particularly property CAT. Tracy Benguigui: Okay. That was interesting. I understand the lot of property business that used to be underwritten by an insurer as a whole account backed by facultative reinsurance, and now that risk is being underwritten as shared and layered. So as a reinsurer, how is this trend impacting your opportunity set and relative pricing? Like I heard that some of the layers have different terms and conditions. David Marra: Yes, this is David. I think what you're referring to is a business that would go into our other Property segment or subsegment, you're right. CAT-exposed E&S business, a lot of that shared and layered, that's coming under competition. It's performed very well, but that competition for the large account E&S Fortune 1000 is where some of that is going on. That's a minority portion of our book. We also have positions in middle market, small commercial and homeowners. Overall, the book has performed really well. And like I think I said earlier, the favorable development we're seeing is a good example of how the terms and conditions that are on our portfolio are holding up really well. So there'll be some additional competition, but still optimistic with how that book is performing. Operator: And this does conclude the time we have for questions today. I would like to now turn the call back to Kevin O'Donnell for any additional or closing remarks. Kevin O'Donnell: Thank you for joining today's call. We hope the comments were helpful. We look forward to the renewal and talking to you after year-end. Thanks again for joining. Operator: Thank you. This concludes today's RenaissanceRe Third Quarter 2025 Earnings Call and Webcast. Please disconnect your line at this time and have a wonderful day.
Operator: Good morning, and welcome to Nabors Industries 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 William Conroy, VP of Corporate Development and Investor Relations. Please go ahead. William Conroy: Good morning, everyone. Thank you for joining Nabors' Third Quarter 2025 Earnings Conference Call. Today, we will follow our customary format with Tony Petrello, our Chairman, President and Chief Executive Officer; and Miguel Rodriguez, our Chief Financial Officer, providing their perspectives on the quarter's results, along with insights into our markets and how we expect Nabors to perform in these markets. In support of these remarks, a slide deck is available, both as a download within the webcast and in the Investor Relations section of nabors.com. Instructions for the replay of this call are posted on the website as well. With us today, in addition to Tony, Miguel and me, are other members of the senior management team. Since much of our commentary today will include our forward expectations, they may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Such forward-looking statements are subject to certain risks and uncertainties as disclosed by Nabors from time to time in our filings with the Securities and Exchange Commission. As a result of these factors, our actual results may vary materially from those indicated or implied by such forward-looking statements. Also, during the call, we may discuss certain non-GAAP financial measures, such as net debt, adjusted operating income, adjusted EBITDA and adjusted free cash flow. All references to EBITDA made by either Tony or Miguel during their presentations, whether qualified by the word adjusted or otherwise, mean adjusted EBITDA as that term is defined on our website and in our earnings release. Likewise, unless the context clearly indicates otherwise, references to cash flow mean adjusted free cash flow as that non-GAAP measure is defined in our earnings release. We have posted to the Investor Relations section of our website a reconciliation of these non-GAAP financial measures to the most recently comparable GAAP measures. With that, I will turn the call over to Tony to begin. Anthony Petrello: Good morning. Thank you for joining us today as we review our third quarter results. We will highlight a number of positive accomplishments. In particular, we have completed the transaction to sell Quail Tools. This is a transformational development for our capital structure. I will start my remarks with details of this transaction. The terms of the deal are straightforward. On August 20, we sold the Quail business for a total consideration of $625 million. This amount includes a working capital adjustment. We received $375 million in cash at closing and a $250 million seller note, which was fully prepaid earlier this month. To be explicit, we have collected the entire proceeds. Next, I'll discuss the merits of the transaction. When we acquired Parker on March 11 of this year, we estimated its operations would generate full year EBITDA of $150 million. Quail accounted for about $143 million of this EBITDA. Further, we were confident we would realize cost synergies during 2025 totaling $40 million. Consideration for Parker consisted of 4.8 million shares of Nabors valued at $180 million, assumed net debt of $93 million and less than $1 million of cash. This valued the acquisition at $274 million. We estimated full year EBITDA of $190 million, including synergies. That translated to paying a very attractive 1.4x EBITDA. Now we have sold Quail for $625 million. We estimated Quail by itself would generate 2025 EBITDA of $150 million. With those metrics, we sold Quail for approximately 4.2x EBITDA. These valuations speak for themselves. Combining both steps of the Parker and Quail deals, it is important to note that we effectively sold Nabors shares at approximately $130 per share. Moreover, following the Parker transaction, we have completed considerable restructuring efforts. We now expect the non-Quail businesses that were earning $7 million of EBITDA to earn $70 million in 2026. For this remaining business, we effectively paid $94 million or about a 1.4x multiple. In the third quarter, we used the proceeds to pay down approximately $330 million of debt. Adjusting our quarter end capital structure for the subsequent repayment of the seller note, pro forma net debt stood at approximately $1.7 billion. This is our lowest net debt in more than 10 years. We expect to deploy the entire proceeds from the Quail sale to debt reduction. In summary, we effectively issued common shares at a 350% premium to the market. We are reducing net debt by more than 20% this year, and we retain a business portfolio that includes the leading casing running contractor in the Middle East. Now let me turn to our financial results for the quarter. Adjusted EBITDA totaled $236 million. This performance was better than the expectations we laid out in September after the sale of Quail. Several factors contributed to these results: improved performance in our International Drilling segment, increased EBITDA from our legacy Drilling Solutions, excluding Quail and lower corporate expenses as we realize additional cost synergies from the Parker acquisition. I want to highlight that our total EBITDA, excluding Quail, improved in the quarter. I am pleased with these accomplishments. They provide further confidence to our performance outlook in the coming quarters. Next, I'll address the broader market environment. Global oil prices reflect a combination of factors. Most recently, the U.S. announced sanctions targeting 2 of Russia's largest oil producers. There is also the potential for secondary sanctions. Crude oil prices reacted sharply to this announcement. Should these actions impact Russian production, we would expect global producers, including a number of our customers to step in. We are carefully evaluating the ultimate impact of this action and any lasting impact on commodity prices. However, there remain a number of conflicting issues, including recent actions and lingering uncertainty around tariffs, oil production increases, both inside and outside OPEC, reported excess inventories and higher demand outside of the OECD. The sanction announcement was positive for oil prices. However, there remains the probability that global supply could potentially exceed demand. This outcome was weighing on oil prices prior to the sanctions announcement. We believe the effect on our global drilling markets could be mixed. Each market has its own drivers. U.S. Lower 48 has evolved to a very short-cycle market. We would expect a rapid activity response to lower oil prices there. Domestic E&Ps remain focused on meeting their production goals. This focus, coupled with economic uncertainty, improved drilling and completion efficiency leads to a muted activity outlook in the near term. We believe that U.S. activity should begin to stabilize and could see an uptick in the latter part of 2026. This market is complex. Numerous factors have influenced. With our diversification across geographies, we expect our international markets would lessen the effect of any potential further short-term decline in the U.S. As for natural gas, the outlook remains constructive over the next several years as expected U.S. LNG exports ramp up. In addition, large-scale natural gas development in the Middle East and Latin America should help drive drilling activity. The gas-directed industry rig count in the Lower 48 has increased thus far in 2025. Nabors rig count in the gas basins has grown since February. Natural gas activity in the U.S. appears poised for further recovery over the coming quarters. We are prepared to meet that demand. Next, I will comment on our third quarter results. Adjusted EBITDA in our International Drilling segment increased sequentially by more than 8%. SANAD, our land drilling joint venture in Saudi Arabia, drove most of this growth. The other significant driver was Kuwait. The 3 previously announced rig start-ups there contributed to the segment's growth. Next, I want to spend a moment on Nabors Drilling Solutions. Excluding Quail, NDS' EBITDA increased in the third quarter. In the Lower 48, the average Baker Hughes land rig count declined by 5% in the third quarter versus the second quarter. NDS' EBITDA without Quail in the Lower 48 was up slightly. This outperformance compared to the market confirms the strong value proposition we have developed at NDS. Turning to Lower 48 drilling business. Our average rig count exceeded our guidance. Our average activity in natural gas basins increased slightly. Oil-directed activity, especially in the Permian, declined. We entered the third quarter at 60 rigs. We held in a tight range throughout the quarter. The quarter ended at the high watermark, 62. Since then, a few operators have released rigs. Recently, our rig casted at 59. Our Lower 48 business continues to feel some pressure. A number of clients, especially in the oil basins, are still adjusting their activity. Next, I'll discuss the international markets. Let me start with Saudi Arabia. Drilling and completions activity seems to have stabilized recently. A rebound in the near to medium term may also be possible. Aramco remains committed to increasing gas production capacity through 2030. The client there recently conducted a tender for onshore and offshore rigs. The potential number of rigs to be awarded is significant, considering the large number of suspended rigs. We believe awards on land could return as many as half of the number of suspended land rigs by the second half of 2026. SANAD participated in the tender with its suspended units. We should know the results in the next several weeks. In the third quarter, SANAD delivered strong results. It deployed another newbuild rig. With the balance of new build awards in hand, SANAD's future newbuild deployment schedule calls for 1 more in 2025, 4 in 2026 and 2 in 2027, which would complete the fourth tranche of new builds or 20 rigs in total. This solidifies SANAD's growth trajectory over the coming years. Elsewhere in the Eastern Hemisphere, there is potential for further activity growth. Currently, we are aware of approximately 2 dozen opportunities for additional rigs. Nearly 2/3 of those are in markets where we currently operate. This number is encouraging. These additions would support both industry utilization and pricing. In Latin America, our activity outlook in Mexico remains uncertain. We currently have 3 offshore platform rigs working. As it stands now, 2 of those 3 are likely to suspend work during the fourth quarter. This is reflected in our outlook. Our customer in Mexico continues to express interest in working these rigs. The rigs were specifically designed for its offshore platform requirements. However, the customers' initiatives to conserve cash are impacting its activity levels. Turning to Argentina. As we previously announced, we have 2 rigs scheduled to start in the fourth quarter. These are for 2 different clients. We have a third rig scheduled to start work in Argentina in the second quarter next year. These deployments would bring our rig count in Argentina to 13 in early 2026. Next, I'll comment on the U.S. market. The Baker Hughes weekly Lower 48 land rig count increased by 3 rigs from the end of June through the end of September. This apparent stability was a welcome shift in the market after the reductions completed earlier this year. Once again, we surveyed the expected drilling activity of the largest Lower 48 operators. The group accounted for approximately 42% of the market's working rig count at the end of the quarter. In the aggregate, these operators expect the rig count to remain unchanged through the end of 2025. Digging deeper, 8 of the 13 companies surveyed expect some change. This indicates widespread fine-tuning of activity up and down across the group. We see modest downside risk to our own current rig count through year-end. Now I will make some comments on the key drivers of our results. I'll start with our International Drilling segment. In this business, we consistently focused on long-term development markets that via technology and performance. With this approach, we have established a portfolio that includes operations in 12 countries. This breadth serves us well as prospects in individual markets can vary over time. Across multiple markets, we continue to start up previously awarded rigs. These included 1 rig in Kuwait, a rig in India, marking our return to that drilling market, and we added 2 rigs in Colombia. In Saudi Arabia, beyond the future additions I mentioned earlier, SANAD is already in discussions with its client for the fifth tranche of newbuild rigs. We expect these discussions to conclude in the coming months. This tranche will bring the total number of new builds to 25. The program calls for 50 rigs over 10 years. Once this fifth tranche is deployed, SANAD will be halfway to completing the industry's most compelling growth opportunity. I've said multiple times that the visibility afforded by the newbuild program is unmatched in the industry. With that, SANAD shareholders remain committed to realizing the value that is accumulating in the venture. Now I'll discuss our performance in the U.S. Once again, our geographic diversification across the major U.S. markets demonstrated its value. Adjusted EBITDA from our operations in the Gulf and in Alaska combined exceeded our guidance. Alaska, specifically the North Slope, remains constructive. LNG developments would improve this outlook. We're tracking multiple future projects there. As expected, our Lower 48 daily rig margins declined in the third quarter. The effects of continuing rig churn and progressively more demanding drilling contributed to an increase in our daily rig expense. Daily revenue in the Lower 48 also increased, though less than our costs. Before I move on, I want to highlight an important development during the third quarter. We deployed the most powerful rig in the Lower 48 for Caturus in the Eagle Ford. This rig, which we call the PACE-X Ultra is an upgrade to one of our existing X rigs. The PACE-X Ultra combines a 10,000 psi circulating system, 35,000 feet of racking capacity, 1 million pound mast and an upgraded high-torque [ Can ] rig top drive. We worked closely with Caturus to develop the PACE-X Ultra's specifications. The rig recently completed drilling its first pad. I am pleased to report that its performance exceeded expectations. It drilled its first 2 wells ahead of their targets. In particular, in the lateral, it averaged more than 240 feet per hour. As an upgrade to an existing rig, this is a cost-effective solution to drilling requirements that are beginning to exceed the capabilities of the existing industry fleet. We are optimistic that more will follow this one. Next, let me discuss our technology and innovation. On the PACE-X Ultra rig I just discussed, NDS deployed a full automation package and its integrated managed pressure drilling. It also provides casing running services. Looking more broadly, our penetration of NDS services on Nabors' own rigs in the Lower 48 increased. We averaged 7 services per rig. This is an all-time high. And on third-party rigs in the Lower 48, NDS revenue, excluding Quail, increased slightly. That increase came in a market where the third-party average rig count declined by 6%. These successes demonstrate the wide-ranging demand for the NDS portfolio even in challenging markets. Next, let me make some comments on our capital structure. Our highest priority is the reduction of our debt. The Quail transaction demonstrates our commitment to this objective. Our net debt now stands at the lowest level in many years. We are dedicated to making even more progress. Now let me turn the call over to Miguel to discuss our financial results in detail. Miguel Rodriguez: Thank you, Tony, and good morning, ladies and gentlemen. I want to start by reiterating my steadfast commitment to our goals to improve balance sheet leverage and strengthen our capital structure. Reducing our gross debt undoubtedly remains our top priority. Our organization is poised to continue performing at its maximum potential and delivering sustained value. Our financial goals and objectives will be set in a way that while ambitious and demanding are at the same time realistic and achievable. In addition, we have recently increased our disclosure around our business portfolio, especially SANAD, and we will continue to build on that progress. Today, I will review our third quarter results and outline our guidance for the fourth quarter. Then I will provide an update on the integration of Parker Wellbore. I will close with some comments on capital allocation, adjusted free cash flow and recent actions that have materially improved our capital structure. Third quarter consolidated revenue was $818.2 million, a decrease of $14.6 million or 1.8% sequentially. The divestiture of Quail Tools resulted in a reduction of $28.4 million compared to the second quarter. This was partly offset by continued growth in our International Drilling segment. Our consolidated revenue without the contribution of Quail grew sequentially. EBITDA was $236.3 million, representing an EBITDA margin of 28.9%, down 96 basis points sequentially. These results exceeded the expectations we laid out in September after the sale of Quail Tools. In absolute dollars, EBITDA decreased $12.2 million or 4.9% with the effect of the Quail Tools divestiture representing $16.7 million of the sequential decline. I want to highlight the strong performance recorded by our International Drilling and Drilling Solutions segments, excluding Quail. Total EBITDA without Quail grew sequentially. Now I will provide you with details for each of the segment's results. International drilling revenue was $407.2 million, solid growth of $22.3 million or 5.8% sequentially. EBITDA for the segment was $127.6 million, increasing $10 million or 8.5% quarter-over-quarter, yielding an EBITDA margin of 31.3%, up 76 basis points and 44.4% fall-through. Our average daily margin was $17,931, a sequential increase of $397 and was in line with the [ open ] bound of the guidance from our last earnings call. The improvement was mainly driven by stronger activity in our Eastern Hemisphere markets, including the deployment of a new build in Saudi Arabia for a total of 4 year-to-date, the deployment of a rig in Kuwait, totaling 3 rigs working during the third quarter and the start-up of a legacy Park rig in India. In addition, rig start-ups that occurred in Q2 contributed to our incremental revenue and EBITDA in the third quarter. The international drilling average rig count increased by more than 3 rigs to 89. Our quarter end exit rig count was 91. Moving on to U.S. drilling. Third quarter revenue was $249.8 million, a 2.2% sequential decline. EBITDA totaled $94.2 million, a decrease of 7.5%, resulting in an EBITDA margin of 37.7%. These results exceed the guidance from our last earnings call, mainly due to stronger performance in Alaska. Looking specifically at our Lower 48 business, revenue of $185.4 million decreased by $4.7 million or 2.5% sequentially, reflecting a decline in average rig count of 3.2 rigs to 59.2 rigs slightly higher than the open bound of the guidance range we provided during the last earnings call. We exited Q3 with 62 rigs operating and recently stood at 59 rigs. Despite the lower sequential activity as a result of moderating industry demand in the Permian Basin, revenue per day improved by $551 to $34,017, including $220 from reimbursable revenue with little to no impact on margins. Our base revenue per day remained stable in the quarter in our most recently signed contracts, expected daily revenue remains at the low $30,000 range. Average daily rig margin was $13,151, a decrease of 5.4% sequentially, driven primarily by lower activity, labor inefficiencies and cost absorption related to higher-than-expected activity churn in the latter part of the quarter and higher repair and maintenance expenses as a reflection of harsher drilling conditions on several of our rigs. Turning to Alaska and U.S. offshore. On a combined basis, our Alaska and offshore drilling businesses generated revenue of $64.4 million in the third quarter a 1.4% decrease sequentially. EBITDA was $28.4 million, generated at 44.1% margin, essentially in line with Q2. Our Alaska drilling operations remained strong in the North Slope. Our Drilling Solutions segment generated revenue of $141.9 million in the third quarter and EBITDA of $60.7 million, resulting in a 42.7% margin. Quail Tools revenue and EBITDA for the third quarter were $34.2 million and $20.3 million respectively. Normalized for the sale of Quail Tools, NDS EBITDA increased modestly versus the second quarter. Notably, NDS EBITDA margin without Quail reached 37.5%, an improvement of 79 basis points sequentially, reflecting growth in casing running and performance software in the U.S. Now on to Rig Technologies. Revenue was $35.6 million in the third quarter, a sequential decrease of 2.5% and EBITDA was $3.8 million, down $1.4 million from the prior quarter. The decline reflects reduced demand for aftermarket offerings in the current market environment. Next, let me outline our expectations for the fourth quarter with total EBITDA to be essentially in line with the third quarter, excluding Quail. Turning first to U.S. drilling. As previously highlighted by Tony, given the outlook and market conditions for the next few quarters, with activity anticipated to remain relatively steady from current levels, we cautiously expect the average rig count in our Lower 48 drilling business to be in the range of 57 to 59 rigs for the fourth quarter. Daily adjusted gross margin is anticipated to average approximately $13,000. We foresee some decline in our average daily revenue as we renew contracts at leading-edge day rates that are lower than the third quarter average. We also expect a slightly lower OpEx. For Alaska and U.S. offshore drilling combined, we expect additional scheduled maintenance days in the quarter with EBITDA of approximately $25 million. International drilling average rig count is projected to be approximately 91 rigs. This mainly reflects 1 newbuild deployment in Saudi Arabia, 2 rig deployments in Argentina, partially offset by up to 2 rigs in Mexico potentially being suspended temporarily following activity and budget allocation uncertainty. We expect daily adjusted gross margin in the $18,100 to $18,200 range. Drilling Solutions EBITDA is expected to be approximately $39 million, reflecting a full quarter without the Quail business and some marginal decline in the Lower 48 market. Finally, Rig Technologies EBITDA should increase sequentially to $5.5 million, mainly from committed capital equipment deliveries. Let me now provide an update on our integration of Parker Wellbore, which is progressing in line with our expectations. Following the sale of Quail Tools, Nabors retained the balance of the Parker Wellbore operations. These retained businesses seamlessly integrate in our Nabors portfolio and are expected to produce approximately $55 million of EBITDA in 2025 post acquisition and including synergies. We continue to realize synergies as planned from cost savings related to overlapping administrative functions, procurement efficiencies and redundant facilities. These initiatives are and will continue generating incremental EBITDA and cash flow, and we remain confident in delivering $40 million in cost synergies in 2025. Based on our estimated EBITDA for the fourth quarter of 2025, this should translate into more than $60 million of cost synergies in 2026, with an estimated EBITDA from the retained businesses of $70 million. In summary, we are very pleased with the smooth progress of the Parker integration and robust realization on synergies in line with our plans. The combined organization is ideally positioned to continue delivering both operational and financial benefits in the coming quarters. Next, I would like to discuss our CapEx, adjusted free cash flow and liquidity. Then I will conclude with details of how the Quail transaction has transformed our capital structure and reset our financial flexibility. Total capital expenditures for Nabors in the third quarter were $188 million, including $81 million related to the SANAD newbuild program. Total CapEx in the second quarter was $199 million. For the fourth quarter, we are currently targeting capital expenditures between $180 million and $190 million. As a result, we are now revising our capital expenditure outlook to be slightly up in the range of $715 million to $725 million, of which approximately $300 million support the newbuild in Kingdom program. The slight increase from our previous guidance accounts for the earlier-than-anticipated successful deployment of our PACE-X Ultra rig in the Lower 48 market and other key automation projects planned for some of our rigs. From these and other drilling projects, we expect to receive upfront payments from our customers of approximately $9 million during the fourth quarter, bringing the total upfront receipts to approximately $42 million for the year, all of which are related to long-term contracts. Although we are not ready to offer capital spending guidance for 2026, we don't expect it will come down from the 2025 levels. This will be largely attributable to approximately $60 million of new build milestones originally planned for 2025, moving to 2026. We will provide firm guidance during our fourth quarter earnings call. During third quarter, we generated adjusted free cash flow of $6 million. This accounts for the negative impact of approximately $18.2 million on our adjusted free cash flow from the divestiture of the Quail Tools business. In addition, our collections from Pemex were only $12 million, falling short of our expectations by more than $13 million. During the third quarter, PEMEX implemented payment mechanisms targeted to address revenue earned during 2025. In October, we received $11.2 million under this mechanism, and we expect more robust collections over the remainder of Q4. There is no structure yet available to resolve the outstanding services from 2024. There is progress being made by PEMEX, although it is very slow based. We expect adjusted free cash flow in the fourth quarter to be approximately $10 million, considering timely settlement of outstanding receivables related to our 2025 operations in Mexico. We continue to work relentlessly with our customer to invoice and collect for our 2024 services. However, we have not considered these amounts in our fourth quarter guidance. These delays represent a timing factor in our adjusted free cash flow estimates. On a full year basis, we expect our adjusted free cash flow to be breakeven. The primary drivers of the variance from our full year guidance of $80 million are the impact of the Quail divestiture for the remainder of the year after the sale, totaling approximately $56 million and the outstanding collections from PEMEX related to 2024. These are partly offset by proceeds from sales on noncore assets associated with the Parker Wellbore acquisition in excess of $40 million, most of which have already been realized in prior quarters. Out of our full year estimated adjusted free cash flow, we expect SANAD to consume approximately $70 million with around $45 million to be consumed in the fourth quarter. Excluding SANAD, the rest of our business units are expected to generate $70 million of adjusted free cash flow for the full year with approximately $55 million in the fourth quarter, the strongest free cash flow generated quarter of the year. In addition to my earlier comments and the remarks made by Tony on the Parker and Quail transactions, each exceptional and transformative in their own merits, I would like to highlight the significant accomplishments we made during the third quarter regarding our capital structure and next steps. In August, we completed the sale of Quail Tools for a total consideration of $625 million, inclusive of the working capital adjustment, consisting of $375 million in cash received at closing and a $250 million seller financing note. We immediately applied the cash proceeds to repay all outstanding borrowings under our revolving credit facility. And later in the quarter, we redeemed $150 million of the notes due in 2027. Subsequent to quarter end, we received full prepayment of the $250 million seller note, well ahead of its scheduled maturity. We intend to deploy these proceeds to further reduce gross debt, concentrating on our outstanding notes maturing in 2028. In addition, we plan to refinance our 2027 outstanding notes. Taken together, these actions reflect our unconditional commitment to improve balance sheet leverage and to strengthen our capital structure. Our net debt leverage metric at the end of the third quarter and accounting for the receipt of the $250 million seller note on a pro forma basis stands at 1.8x, which is the lowest it has been in more than 10 years. I am looking forward to meeting more of you and helping you gain a further understanding of Nabors. With that, I will turn the call back over to Tony. Anthony Petrello: Thank you, Miguel. I will finish this morning with a few points. First, the Quail transaction has enabled a significant transformation in our capital structure. Now we are looking at opportunities to decrease debt further. In addition to improving our capital structure, we expect to materially reduce our annual cash interest payments that should result in a boost to our free cash flow. Second, we have seen recent relative stability in U.S. drilling activity, our own and the industries, but we also recognize some uncertainty in the global macro environment. We are prepared to adjust our operations accordingly. Third, our international business continues to demonstrate its value, highlighted by the continued expansion at SANAD. Each successive new build deployment adds material cash flow through the joint venture. As a result, value is building in SANAD. The next tranche of new builds will take that value even higher. And our growth across markets beyond the Kingdom highlights our success in expanding our broad-based international franchise. That concludes my remarks. Thank you for your time this morning. We'll now take your questions. Operator: The first question comes from Dan Kutz with Morgan Stanley. Daniel Kutz: So, maybe just on the U.S. Lower 48, appreciate all the color that you guys shared in terms of your own views and customer views on where you think activity trends from here. I guess, against that activity outlook, how would you -- anything you'd share beyond the fourth quarter on kind of daily revenue and cost or margin trends, assuming that the kind of broadly flat activity outlook that you guys shared would play out as you guys see it? Anthony Petrello: Sure. Yes. I think one thing to note, if you look at our numbers for this quarter, our daily revenue actually increased sequentially by about [ $500 ] per day. That was as a result of performance bonuses under contracts where we're trying to have operators recognize more of the value of what we're delivering because of the record times. So obviously, that's an objective for us going forward in the year. Now the net result of that, as became clear from Miguel's comments about our cost structure is because of the churn in the last quarter, that did not drop to the bottom line. In fact, it was more than offset I think looking forward, one of the objectives, and I'll let Miguel talk to it on operating expense is to actually make sure that more of that does drop to the bottom line and the priority is to actually make more realization from that as a mission going forward as well. So that's how I would say it. Miguel Rodriguez: Yes. Thank you, Tony. So, one thing that I will add is that one thing that encourage us actually is the fact that we have seen the daily revenue on a leading edge basis to be fairly stable over the past several quarters. So, at around the low $30,000 per day. Right now, when we look at the fleet, we are maybe around $700 away from that level. As the rig fleet reprices, once we get there, basically, we will be talking around a gross margin per day of $13,000. That's the reason why we are guiding our fourth quarter to be at that level, combined with a decline in the OpEx. So in terms of the activity levels for the quarter, we saw a lot of churn in the latter part of the quarter. We expect some level of churn to remain in Q4. But once we reach the low $30,000s in terms of daily revenue per day, excluding reimbursable items, if you will, I feel very strongly that the drilling team will be able to maintain the $13,000 per day going forward. We will see some erosion in pricing a little bit from current levels in Q4. From there, we should not see major pricing erosion, absent a bigger decline than what we are anticipating for the following quarters. Daniel Kutz: Great. That's all really helpful. And then maybe going to the comments around Saudi onshore activity, kind of 2 components of the question, one at the macro level and then one specific to Nabors. So of the -- and correct me if I'm wrong, but I think maybe there's been 30 or 40 onshore rig suspensions and against your comment that there's tendering activity and potential for as much as half of those suspended rigs to come back. Any sense for how much of that could actually be net activity adds versus just bringing back suspended rigs when other rigs roll off of contracts in the Kingdom? And then specific to Nabors, I think there were 3 at least rigs suspended. Wondering if you guys are participating in the -- in the tendering? Or anything you could share about potential for those to go back to work? Miguel Rodriguez: Sure. I mean, look, overall, I mean, since the start of the suspensions in 2024, on a cumulative basis, we have seen in excess of 80 rigs being suspended in land, right? We are not commenting about offshore here, but in land, we are talking about cumulatively around 80 rigs. A number of rigs have been added on unconventional projects here and there. But what we are hearing actually from the market is that Aramco may be contemplating to add back probably around 50% of the cumulative suspensions, right? So, a tender has been issued. A number of drilling contractors have responded to this tender. The customer is evaluating as we speak. And we will know the results probably during the course of Q4. The expectation or what we are hearing from the market is that potentially 50% of the suspended rigs will come back to work, right? Anthony Petrello: Yes. Just also realize that of the 80, 21 have actually come back online during the same period. So the net number down is 59. Miguel Rodriguez: That's right. Anthony Petrello: So, that's what he is talking about. And then there's -- and you're correct about 3, SANAD has 3. And as we indicated, we'll find out what happens with our rigs as well. Miguel Rodriguez: Of course, I mean, we answered to the tender for our 3 rigs, and we are waiting on the results. Operator: Next question comes from Derek Podhaizer with Piper Sandler. Derek Podhaizer: Maybe still going on the last conversation, the question Dan brought up about Saudi. I'm just curious kind of the philosophy around Aramco and these new tenders and bringing back some of the suspended activity. Is there anything different this time around versus prior cycles? Just thinking about the requirements around the rig, maybe through like a technology lens. I mean, I think there's going to be more gas development, more unconventional development, trying to bring that Western technology over to Saudi. Tony, you've been through many cycles. Like have you seen any difference now in the tendering and what they're looking for versus historically? Anthony Petrello: Well they're slow to move in terms of changing their requirements. The Schedule G requirement is still out there, and they haven't made a change to that yet. But we do -- we are aware that the fact is that because of stuff that we presented to them as well as others, that they are looking at introducing more technology there. That doesn't necessarily mean different rigs, but changes to the rig with automation and software and other things like that. So there is an interest on that. And that only applies to Saudi, that applies to also the ADNOC operations to Kuwait as well. The whole region is realizing that if they really want to get a quantum change level in performance, they have to start actually doing some things differently. But in terms of specifics on rigs themselves, I would say no. And Nabors has 80% of its fleet in SANAD is gas directed. So we're well positioned with the shift to the gas market to be -- to serve that. I think the other point is we have in the pipeline, we mentioned the or automation on the Caturus rig for the U.S. on the shale. That philosophy there is similar to what we did with the X rig back in 2011 when we announced the X rig, you remember that was the first pads specific rig and back then where we had the pump capacity, the power, and we also introduced the notion of XY walking rigs. remember the whole debate whether you needed that versus slide rigs. And I think we were saying XY or need in that slide. Anyway, the cannabis rig is a new paradigm to do that. And that rig has automation -- an automation package that's going to go in. And that kind of automation package, Saudi, the Saudi market is now looking at as well. In fact, we have a contract to actually to deploy an upgrade to our existing fully automated rig with our one major customer here in the U.S., and we have 2 other customer contracts lined up, including in the Middle East for that as well. So the changes our foot, I would say, if that's a long way of getting to your answer, but that changes our foot along the lines you're talking about. Derek Podhaizer: Got it. No, I appreciate all the color. It's very helpful. So obviously, a lot of detail in the opening comments. Just want to hone in on the leverage levels here. Obviously, exciting to see you guys at 1.8x on a pro forma basis, lowest in 10 years. So where could we go from here? Just thinking about the different levers that you could pull to continue to delever the balance sheet. Obviously, you'll be saving $45 million in interest expense annually. And just thinking about the ability to pull cash out of SANAD. Obviously, we'd love to see more collections out of Mexico. You have organic free cash flow generation ex SANAD new build. Just maybe help us understand the different levers you expect to pull over the course of next year, just considering that you don't see CapEx being down year-over-year? Just trying to think about where this $1.8 billion can go to over the next year or so. Miguel Rodriguez: So this is an excellent question to be very honest. I mean, first of all, I mean, when we talk about the 1.8 on a net leverage basis, I think in the next few months, you will see that our gross debt will move from the $2.4 billion to around the $2.1 billion because we plan to really use the $250 million proceeds to pay down some of our outstanding notes. Now going from the 1.8x forward and the CapEx, although we are not very ready to provide guidance, as I mentioned before, one thing that you need to consider is the fact that the SANAD CapEx will be the one going up in terms of the milestones. That said, in 2026, we should expect some reduction in the CapEx in the rest of the Nabors businesses, which should, everything being equal, free up additional cash flow from the rest of the business. One thing that I wanted to point out very clearly in the cash flow of 2025 and potentially beyond is that when you think about the breakeven cash flow of the consolidated Nabors, that includes SANAD are around $70 million, which means that the rest of the Nabors businesses post the sale transaction of Quail are going to generate $70 million, 7-0. Most of that will happen in Q4. On an adjusted basis, if you remove the impact of the Kingdom Bricks, the Nabors consolidated businesses are generated around $300 million, which I will say is equivalent to a 30% free cash flow conversion, which I believe is very, very strong for a drilling contractor. And we are choosing together with Aramco, obviously, to reinvest the standard cash flow into the business for longer-term or 10-plus year contracts. That's the decision that we have made in terms of SANAD for the Kingdom Bricks and the future of the Saudi business there. That said, we expect the rest of the Nabors businesses to continue to generate cash flow and use the proceeds really to continue to pay down debt from here. Where are we going to stop? I think Tony and I want to take the company on a net debt basis to something around the $1.1 billion, $1.2 billion, nothing lower than that. So we are absolutely in the right trajectory. We are not done yet. Anthony Petrello: Yes. In this climate, by the way, it's kind of interesting. We were asked that question 15 years ago, what my number was -- was always 2:1. And obviously, the world has changed and the way people think about it has changed. But what's also changing, I think now based on the press this point with Mr. Gates and his view on climate change is the concept that this industry doesn't have a half-life of 2030 anymore. People are starting to realize that if you're going to build x 100 gigawatts a year of power, 10 gigawatts more a year of power or 100 gigawatts more power than the new number is, that means natural gas can be a part of it. That means we're going to be a part of it, and that's going to go on for a long time. And therefore, I think the whole way we're thinking about capital is going to start to change as well. So I would just say that, which also means that you all need to really think about your terminal value multiples for valuation for the whole sector. Miguel Rodriguez: There you go. Anthony Petrello: I'm just going to get that out there. So... Operator: The next question comes from Arun Jayaram with JPMorgan Chase. Arun Jayaram: Tony, I want to get your insights on if Saudi is going to be bringing back a decent chunk of the previously suspended rigs. Any insights on what you think is driving that? Is this to rebuild productive capacity in the Kingdom, stem declines but I assume this is on the oil side, but just one of the more unique data points we've heard in earnings season, so I want to get more thoughts from your perspective. Anthony Petrello: I think it's more on the gas side. And remember, on their gas production, they get an extra bonus because there's a lot of condensate that comes out of that gas. And economically, that gas -- that condensate doesn't count against the oil quota as well for the OPEC requirements. So you get kind of a double bonus there. I think Saudi, I won't pretend to know anything inside because you guys all have multiple sources that you're hearing about Saudi, including the big 3 guys. But I mean, from my point of view, they are always the first mover. And so they're looking at a market basically in 2027, and I think they're realizing and coming to conclusion, whether it's to build their extra capacity or to ensure that the curve -- the decline curves that they're having are met, whatever those are, they're preparing for a 2027 event. And I think that's what's really going on, and they're moving before the market is moving. And so from that point of view, I think it's a good sign if they actually go through with it. We'll see whether -- how much they go through it. Like I said, this is just what the talk is right now from our perspective. But we know these concrete receipts have been done. And therefore, it is a positive development, I think a positive signal for at least 2027. Arun Jayaram: Great. And then, Tony, I just want to get your broad thoughts on the growth in unconventional activity outside of North America. Maybe you could give some insights on what you're seeing kind of around the globe. You mentioned in Argentina, you're up to, what, 13 rigs or so, at least on the contracted basis. Algeria is obviously spot. But just wanted to see if you could shed some more light on that. Anthony Petrello: Well, I think, you hit me on the head. I mean, Argentina, I think, is a great story with the elections -- with the change -- with the elections now over, I think whatever instability there was associated with that, I think it settled. And I think even ourselves with the 13, we see additional growth opportunities in Argentina. Algeria is another story. But oh, by the way, back in Argentina, I think actually that may -- they may actually be looking at becoming an LNG exporter market as well. So just giving you some insight there. I think Alaska, potentially gas up there could be a good story, including for an export market if they figure that out. And Algeria and the Middle East is for sure. So I think there's many signposts around the world right now where the gas story is real. And given what's happening on the whole power thing. You saw the announcement with Google in terms of their power data needs, et cetera. And all these guys are now saying they're not making the requirement anymore that they realize they can't get there with renewables, and therefore, they're all realizing natural gas is going to be part of it. So, I think that's going to drive a wholesale move around the world everywhere for natural gas from my point of view. Operator: That's all the time we have for questions today. I would like to turn the conference back over to William Conroy for any closing remarks. Please go ahead. William Conroy: Thank you, Asha. If there are any additional questions, please reach out to us directly. With that, we'll wind up the call here. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon. Thank you for standing by. Welcome to Allison Transmission's Third Quarter 2025 Earnings Conference Call. My name is Shamali, and I will be your conference call operator today. [Operator Instructions] As a reminder, this conference call is being recorded. [Operator Instructions] I would now like to turn the conference call over to Jackie Bolles, Executive Director of Treasury and Investor Relations. Please go ahead, Jackie. Jacalyn Bolles: Thank you, Shamali. Good afternoon, and thank you for joining us for our third quarter 2025 earnings conference call. With me this afternoon are Dave Graziosi, our Chair and Chief Executive Officer; Fred Bohley, our Chief Operating Officer; and Scott Mell, our Chief Financial Officer and Treasurer. As a reminder, this conference call, webcast and this afternoon's presentation are available on the Investor Relations section of allisontransmission.com. A replay of this call will be available through November 12. As noted on Slide 2 of the presentation, many of our remarks today contain forward-looking statements based on current expectations. These forward-looking statements are subject to known and unknown risks, including those set forth in our annual report on Form 10-K for the year ended December 31, 2024, and quarterly report on Form 10-Q for the quarter ended June 30, 2025. Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those we express today. In addition, as noted on Slide 3 of the presentation, some of our remarks today contain non-GAAP financial measures as defined by the SEC. You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures attached as an appendix to the presentation and to our third quarter 2025 earnings press release. Today's call is set to end at 5:45 p.m. Eastern Time. In order to maximize participation opportunities on the call, we'll take just one question from each analyst. Please turn to Slide 4 of the presentation for the call agenda. During today's call, Dave Graziosi will provide a business update and Fred Bohley will review recent announcements across our business. Scott Mell will then review our third quarter 2025 financial performance and full year 2025 guidance update prior to commencing the Q&A. Now I'll turn the call over to Dave. David Graziosi: Thank you, Jackie. Good afternoon, and thank you for joining us. Throughout 2025, our largest end market, North America On-Highway, has been negatively affected by extraordinary and volatile global macroeconomic factors leading to substantial reductions in demand for commercial vehicles. External pressures related to tariffs evolving trade policies and upcoming emissions regulations in addition to broader economic uncertainties have led to more cautious purchasing decisions from end users, which has impacted visibility and predictability in terms of demand. We expect this operating environment to persist in the near term with market activity likely to remain subdued until there is greater clarity around these regulatory and economic factors. A meaningful shift will depend on a clear catalyst or resolution to the aforementioned issues impacting demand. Despite these challenges, we remain focused on what we can control, including meeting our commitments to operational excellence, quality, customer service and maintaining strong execution across all aspects of our business. Our performance during the third quarter reflects Allison's resilience with the ability to flex our operating cost structure and generate meaningful cash flow during low demand environments. For the quarter, although revenue decreased 16% year-over-year, we achieved an adjusted EBITDA margin of 37% and generated adjusted free cash flow of $184 million. Importantly, we remain agile and responsive to evolving market dynamics, ensuring we can quickly adapt as conditions change. As mentioned on our last earnings conference call, we see the reductions in demand in North America On-Highway as a deferral of purchases by end users as opposed to a permanent change in market size. In summary, while the operating environment remains challenging, we are managing through the uncertainty with discipline, maintaining a solid balance sheet with over $900 million of cash on hand. A sequential quarterly increase of $124 million and making prudent decisions to preserve financial strength with a commitment to delivering long-term value to our stakeholders. At the same time, we are working diligently to successfully close our acquisition of Dana's Off-Highway business. I would like to thank the Allison team for their hard work and dedication during this period. Now I'll pass the call over to Fred to review recent announcements across our business. Fred? G. Bohley: Thank you, Dave, and good afternoon, everyone. Starting with our outside North America On-Highway end market. In early August, we were excited to announce that Volare microbuses equipped with Allison's T2100 fully automatic transmissions were delivered in Brazil in support of the country's student transportation modernization initiatives. In collaboration with the National Fund for Educational Development, these vehicles represent the first school buses utilizing fully automatic transmissions in South America. Allison's fully automatic transmissions eliminate the need for manual gear shifts, simplifying operations on the roads with mud, gravel and steep inclines, drivers report less physical strain and greater control, particularly in challenging driving conditions in rough terrain. We're pleased to support better access to education while demonstrating the performance, reliability and efficiency of Allison's fully automatic transmissions. In addition to the social impact, this milestone reflects our strategic priorities for growth in markets outside of North America. In our North American On-Highway end market during the quarter, we announced that Allison's Neutral at Stop technology has been standardized by PACCAR on the Kenworth and Peterbilt trucks equipped with Allison's 4700 Rugged Duty Series transmission. Allison's Neutral at Stop technology is designed to improve fuel efficiency and lower operating costs by reducing engine load at stops and reducing unnecessary fuel consumption when vehicles are at idle. Our technology ensures that fuel is used for movement, not for idling, enhancing overall fuel efficiency. We are proud to partner with PACCAR to make this innovative solution a standard offering for customers supporting fleets in their goals to reduce fuel consumption and vehicle emissions. Also in our North American On-Highway end market, earlier this month, we announced that Ozinga Renewable Energy Logistics has successfully deployed Kenworth's T880 tractors utilizing the Cummins X15N natural gas engine integrated with our Allison 4500 Rugged Duty Series transmission. The pairing sets a new standard for sustainable heavy-duty transportation delivering exceptional power and innovative technology. The integration also demonstrates how sustainability and operational excellence can go hand in hand, allowing industries to adopt cleaner fuel solutions like natural gas without compromising on performance. With these announcements, we reiterate the fuel-agnostic nature of Allison's fully automatic transmissions. Our products pair well with all propulsion solutions, providing customers with power of choice in selecting the energy source that best suits their needs. Moving on to our defense end market. This morning, we announced that WZM, a state-owned defense vehicle service provider in Poland is now an official channel partner for tracked vehicles. Allison's propulsion solutions power a wide range of wheeled and tracked defense vehicles that are actively deployed in more than 80 U.S. allied and partner nations worldwide. As a result of our growing international defense presence, Allison now enables local commercial or government service providers to become Allison authorized channel partners. We're excited to add WZM to our global network of authorized service providers to support Allison's cross-drive transmissions for defense applications. Allison continues to enhance our global support capabilities through strategic partnerships with local service providers, further solidifying our commitment to improving the operational readiness of defense vehicles worldwide. Also in our defense end market, we're pleased to announce that Allison was selected by FNSS Defense Systems, a subsidiary of Nurol Holdings to supply our 3040MX medium-weight cross-drive transmissions for the Turkish Land Forces Korkut program. The Korkut system is a mobile air defense solution developed in Turkey to protect ground forces from drones, helicopters and low-flying aircraft. The system consists of 2 track vehicles, is designed to move with armored units and operate across difficult terrain, adding fast and flexible protection for defense forces. This partnership with FNSS and our participation in the Korkut program is a testament to the trust and confidence in Allison's capabilities to deliver high-quality, reliable transmissions that meet the demanding requirements of modern defense vehicles. In addition, this partnership further solidifies Allison's presence in the Turkish defense sector, where we are supporting numerous wheel platforms and actively engaged supplying our X1100 transmission for the Turkish Firtina Self-Propelled Howitzer program. Thank you, and I'll now turn the call over to Scott. Scott Mell: Thank you, Fred. I will now review our third quarter financial performance and provide an update to our full year 2025 guidance. Please turn to Slide 5 of the presentation for the Q3 2025 performance summary. Year-over-year net sales of $693 million were down 16% from the same period in 2024, primarily due to lower demand for Class 8 vocational and medium-duty trucks in the North American On-Highway end market. In the defense end market, we continue to execute on our growth initiatives with third quarter net sales increasing 47% year-over-year. Net income for the quarter was $137 million, a decrease of $63 million from $200 million in the same period of 2024. The decrease was primarily driven by lower gross profit and $14 million of expenses related to the acquisition of Dana's Off-Highway segment. Despite a challenging operating environment, adjusted EBITDA margin was essentially flat year-over-year at 37%. Net cash provided by operating activities for the quarter was $228 million, a decrease of $18 million from the same period in 2024. The decrease was primarily driven by lower gross profit and $13 million of payments for acquisition-related expenses, partially offset by lower cash income taxes and lower operating working capital funding requirements. Our strong cash generation remains a key strength of our business, with adjusted free cash flow of $184 million in the third quarter. We continue to maintain solid operating cash flow, reflecting the resilience of our operations and disciplined cost management. We ended the third quarter with a net leverage ratio of 1.33x and $1.65 billion of liquidity, comprised of $902 million of cash and $745 million of available revolving credit facility commitments. We continue to maintain a flexible, long-dated and covenant-light debt structure with our earliest maturity due in October 2027. A detailed overview of our net sales by end market and Q3 2025 financial performance can be found on Slides 6, 7 and 8 of the presentation. Please turn to Slide 9 of the presentation for our 2025 guidance update. Given third quarter results and current market -- current end market conditions, we are revising our full year 2025 guidance provided to the market on August 4. Allison now expects net sales to be in the range of $2.975 billion to $3.025 billion. In addition to Allison's 2025 net sales guidance, we anticipate net income in the range of $620 million to $650 million including over $60 million of expenses related to our acquisition of Dana's Off-Highway business. Adjusted EBITDA in the range of $1.09 billion to $1.125 billion. Net cash provided by operating activities in the range of $765 million to $795 million, which includes approximately $70 million of cash outlays related to our acquisition of Dana's Off-Highway business. Capital expenditures in the range of $165 million to $175 million and adjusted free cash flow in the range of $600 million to $620 million. We are maintaining the midpoint of the implied full year adjusted EBITDA margin guidance. This concludes our prepared remarks. Shamali, please open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Rob Wertheimer with Melius Research. Robert Wertheimer: Thank you. So it's really no surprise, I guess, given truck orders that on-highway sales are down. This is a little bit of a steeper decline than we modeled and maybe we should apologize for that. But even so, it felt a little steeper than I would have thought. And I wonder if you could give -- maybe this is a little bit of a soft question, but your opinion because there's some different factors this cycle with body builders having been a bit backed up, so maybe there's more channel inventory. This cycle was a little bit higher than it was in recent downturns at least. And so I wonder if you could help us disaggregate the suddenness of this fall versus channel inventory and end market demand, which may or may not be as dramatic as this. David Graziosi: Rob, thank you for the question, Dave. So just a quick reference back to our August call when we talked about -- I mentioned what we were starting to see in terms of revisions to build rates. Getting to your question with the OEM announcements that we referenced at the time, layoffs, et cetera, that just was early Q3. There was certainly an expectation that those build rates would, at some level, start to normalize. To your point about steeper than we thought, so to speak, we, all of us, those reductions continued, frankly. So as we looked at getting by the end of third quarter or certainly earlier this quarter, you've started to see some level of normalization at those lower levels. So to your question in terms of how everybody is reading the market right now. No question that body builders continue to, in many cases, sit with quite a few chassis -- it really does depend on the end use, as you know, in terms of overall inventory levels that are out there. I think that's starting to improve in most cases. But the reality is that inventories needed to be further rationalized. I think the OEM comments about even third quarter results that are pretty fresh here all support that point. So as again, we talked about in August, medium-duty being a very tough year, vocational certainly starting to soften. And I think the comments that we referenced in our prepared script, certainly, there is no doubt that the level of uncertainty is extremely high. So it makes anybody's job at this point relatively difficult to forecast. And I think, frankly, even the ranges that the OEMs have provided for the balance of this year and even thinking about '26 are pretty wide, as you know. So we've had a very strong cycle coming out of COVID, as you mentioned. I think that certainly filled some of the gap that was there. Having said all that, equipment is being utilized. So to our prepared comments, we don't really view this as a change in market size. It's more a deferral, and you can't blame, frankly, the end users with the amount of uncertainty that they're all facing. Capital costs more. There's a higher risk premium. So from our perspective, anybody that's making investment decisions right now is likely looking for a more attractive risk-reward balance, and that's very difficult to come by until we all have more certainty around whether it be emissions, interest rates, trade, et cetera. So there's a lot out there at this point for all of us to digest. We feel very good about our market position as we continue to have very strong share, strong pull in terms of end users and our positioning to respond to whatever demand the market presents to us. So with our structure, as we talked about, whether that be cost, labor, et cetera, the investments that we've made in capacity, we feel very well placed to respond to whatever the market conditions are. But we're going to, as I said, focus on the things we can control at this point. And the revenue -- when you look at the revenue reduction on year-over-year basis, I think, again, supports the idea that we are a flexible organization. We respond accordingly and the margin performance really speaks to that. Robert Wertheimer: And then what -- I mean, you're seeing some mix trends, let's say, in construction equipment, which may be overlaps a little bit on the heavy side on vocational. Was vocational as bad as medium duty? And then if you have any way to quantify how much inventory was in the channel versus prior cycles, that would just help a little bit understand where we are. But the answer was comprehensive and I appreciate it. David Graziosi: Yes. I would just offer on the medium duty by far, much tougher sledding right now in terms of overall market. We don't necessarily view vocational as nearly as that has been challenged. And I would just point you to, I think, the OEM comments that do have meaningful share in the vocational space. They continue to support that very overtly and we believe, given all the infrastructure investment that's underway with AI data centers, et cetera, that, that certainly bodes well for the utilization of those relevant fleets. And as I said, that equipment is certainly being used right now. Operator: Our next question comes from the line of Tim Thein with Raymond James. Timothy Thein: Just a quick one. It's just on the implied revenues for the fourth quarter. The full year guide implies something like a 5% sequential improvement. And we just spent plenty of time talking about the challenges in North America On-Highway and fewer build days and OEM build plans certainly not being revised higher. So what's the offset there? Again, just what -- I don't know if defense or other segments that you'd point to in terms of why we see an improvement sequentially on the top line? G. Bohley: Thanks, Tim. This is Fred. As Dave mentioned, a tremendous amount of downtime by the OEMs in Q3, aggressively adjusting inventory levels. Rolling into Q4 is, clearly, we're going to have fewer workdays, which would generally drive that down versus Q3, but you need to take into consideration the significant amount of down days. And you also saw a defense ramp pretty aggressively off of Q2 into Q3, and we expect that to continue into Q4. Operator: [Operator Instructions] Our next question comes from the line of Ian Zaffino with Oppenheimer & Company. Ian Zaffino: Great. Just trying to understand maybe when you guys started to notice the weakness? And how did it look maybe by month throughout the quarter? And I guess what I'm trying to get at here is you guys did a great job of kind of curtailing SG&A, some of the R&D. So was that kind of a reaction to what you had seen? Or was this kind of preplanned? And then how do we think about kind of going forward in this environment? David Graziosi: Ian, it's Dave. I appreciate the questions there. So as we mentioned on the Q4 -- the August 4 call, really started to this weakness in build and reductions in build rates really started to manifest itself early Q3. What's -- to Fred's comments, there was certainly an expectation at least what we were being provided with from a build rate or forecast perspective at that stage was really focused on Q3 at that point in terms of adjustments. So what has since transpired is some level of adjustment, we would certainly look at it from a bit of a normalization from Q3 into Q4. So I think it appears to be starting to settle out simply because adjustments have been made to Fred's comments around inventory, also importantly, just bill rate capabilities. Once you start taking out your headcount, it very much does restrict output, obviously. So we see that some level of balance from Q3 into Q4. Our cost approach, as you know, you've covered us for a number of years, is pretty consistent as we entered the year and certainly focused on the macro environment and frankly, the volatility, the uncertainty, we would view as almost unprecedented other than COVID to a level because you had so many things coming into the market that became clear to us that, that was going to have the impact we believe, at the time of really inserting a tremendous amount of uncertainty into the end market for end users. So that implies that they have the ability to defer which they, in fact, have done, then we needed to better align ourselves accordingly. So what we've done has really been throughout the year, it wasn't -- we arrived in Q3 and decided to do certain things. It's been more of a full year approach. And again, thank the Allison team for their -- managing that situation in a way that is certainly consistent with our view, which is what we can control and really looking at the broader markets in terms of feedback to take whatever advantage we can, but also, I think, understanding the voice of the market in terms of what's needed, absolutely needed at this stage, and that's what's been reflected in our activity level. Operator: Our next question comes from the line of Tami Zakaria with JPMorgan. Tami Zakaria: I wanted to ask about tariffs. Given the latest Section 232 announcement. How should we think about your tariff impact, if there was any at all before this? And also the ability to offset some of these past tariffs given your U.S.-based manufacturing. So any color on the latest about tariffs would be helpful. G. Bohley: Sure, Tami. This is Fred. I think first, maybe just stepping back, big picture, our guide is $3 billion in revenue. That's down $250 million year-over-year, so down 7%. Dave talked through, certainly, the driver is our largest end market, North America On-Highway, primarily Class 6, 7, Class 8 straight, which are 80% of that total end market and the builds just being down. But operationally, we're performing at a very high level, 7% revenue down and EBITDA margin, we're guiding to being 80 basis point sup. So certainly, we're able to perform well in this challenging environment. Specific to tariffs, it's really important to continue to highlight that 85% of our components are purchased in the U.S., Mexico and Canada with the majority of those being in the U.S. The bigger impact on tariffs and then Section 232 tariffs becomes, I think, vehicle pricing, total uncertainty and how that impacts demand. But when you think about Section 232, our OEMs are certainly going to increase their prioritization on U.S.-made content and components. And that really well positions us as everything that we're providing to the OEMs in the U.S. is manufactured here in Indianapolis. So I think we're well positioned there. As far as additional cost to us, I think you can see in our disclosures, our material cost has been up very minimal because of just the footprint we have from a supply chain standpoint. And as we've talked about, we've always intended to offset that. And even in a challenging top line revenue, you see that we are doing that. Operator: Our next question comes from the line of Angel Castillo with Morgan Stanley. Angel Castillo Malpica: Just, Dave, Fred, I guess, as you roll everything up that we kind of have in place, all the puts and takes exiting 2025, I know it's still early, but if we do assume everything stays as it is today, Dana acquisition aside and assuming you continue to focus on what costs or what you can control on your end, as you noted, do you believe that, I guess, ultimately, you can grow earnings next year? Or do we need to see volume recovery in order for earnings to grow next year? How should we kind of think about that? G. Bohley: That's a tough one. We'll provide our guide in February. What we have talked about publicly is we've gotten meaningful price this year. We'll end up for the year with over $130 million in price, north of 450 basis points of price. And -- we also talked about the long-term agreements that we've signed. We didn't take all that price in year 1. So we have some visibility on pricing going into 2026. Clearly, good visibility on cost structure. I think what everybody is still really trying to get their arms around is going to be end-user demand, and Dave talked to it, the uncertainty with tariffs, do people feel a little bit better with 232 with some -- I guess, some level of more clarity now. The emissions change, is there going to be any sort of meaningful prebuy in 2026? So fortunately, we have a couple of months to continue to gather data points and really try to model the top line, and we'll provide our viewpoint in February of '26. Angel Castillo Malpica: Understood. Maybe just, I guess, given the part that you have visibility into that price, with the 450 that you did this year, the long-term agreements you have in place and the pass-through of kind of the tariffs that are -- have already kind of rolled through, what's kind of the price increase we should expect next year? G. Bohley: If you go back to pre-pandemic, we would pick up 50 to 100 basis points of price. And as we've got things modeled out, it's going to certainly be quite a bit higher than that. Operator: Our next question comes from the line of Luke Junk with Baird. Luke Junk: Maybe a tricky question to answer, but I'm just wondering maybe what your gut says in terms of how much more leeway there is in the model to maintain similar margins or at least to prevent decremental margins from getting closer, I think 60% maybe is the historical threshold. I know there's inefficiencies that were in the P&L last year because of the huge surge in production. Clearly, you're on the front foot in terms of taking tactical actions plus the incremental price into next year. Just how do you think through those permutations and sort of the level of buffer that's left in the business right now? David Graziosi: Luke, it's Dave. I appreciate the question there. So certainly, our approach, our history is that we focus a fair bit as we should on margins. I think here question on incrementals and thinking about that. The biggest unknown for us right now as we think about the future is just what this overall demand picture is going to look like. We've made, I think, good progress on our growth initiatives. The investments have been made in terms of capacity, we'll be winding up the balance of those by the end of next year, certainly early '27. So the efforts that we've also put into resourcing as well and optimizing our footprint, again, pre the Dana acquisition. But we feel very good about our ability to certainly come in within a reasonable range of maintaining margins. So we will size our -- continue to size our investments and initiatives with market opportunities. But to Fred's point, you'll certainly have some initiatives around price and cost line going into '26, and we'll take whatever appropriate actions there are consistent with end market conditions, which you would certainly view today in terms of North America On-Highway being a bit of a question mark. But when you look at our business in terms of whether it's parts support equipment, et cetera, defense, off-highway relatively, I think, stabilized at a lower level right now, we feel very good about positioning overall in terms of approaching market needs. But margins are right at the top of our list in terms of focus, and we continue to work through our plans and feel relatively good about what we're seeing at least from an initial pass, and we'll provide our guidance come February. Operator: Our next question comes from the line of Kyle Menges with Citigroup. Kyle Menges: I understand you're not wanting to give too much guidance on 2026 yet, but I would love to hear your thoughts on what you need to see for international On-Highway to hit your double-digit growth target next year. And then perhaps it would be good to hear an update on how you think the Dana acquisition positions you to win in international markets. David Graziosi: Yes. The -- it's Dave, Kyle. So on the -- overall, I would say, international On-Highway continues to be a very significant opportunity for our team. We're actually in this time of year involved in a number of regional meetings to look at the status of our growth initiatives. I believe the team there is doing a great job identifying a number of different opportunities for us. I think our relationships are where they need to be from an OEM and release plan perspective. There's always been a tremendous amount of opportunity out there. I think the team has become very focused on that, adjusting for some regional differences. The Japanese market last year moved around a fair bit because of emissions and safety regs and a number of things coming into the market that, that's a softer market this year. We expect that certainly to improve next year. And again, their ability to sell into the balance of Asia and relevant markets. We're excited about the team has done a very good job looking at applications for our product that certainly make the most sense, but where we sell based on value, as you know, versus cost. So I think on-highway outside North America continues to be a relatively large opportunity for us with very low penetration. So -- as you think about what that means over the longer term, all the investments that we've made in regional production, et cetera, and the investments specifically in China now to really be able to support Asia from the Asian region is important to us. It also reduces cost in a number of other areas. So I think all of that fits together. In terms of the Dana acquisition, we continue to work diligently towards closing that. We're pleased with the progress to date. As we mentioned on the calls around the announcement as well as the August earnings call, the attributes are very attractive to us. It's an accomplished team. It's a high-quality business. It really does allow us as a legacy Allison business to have a global footprint that starts to address some of the macro issues that I mentioned earlier. It's clear with tariffs and trade developments that there is much more of a focus from a number -- in a number of different regions for local content. The Dana footprint certainly fits well with that overall outcome, and you could look at that across all of our end markets. So for us, it's very attractive to have access to that type of footprint. It also allows us to further analyze make versus buy in a number of areas for our products as well and ultimately really start to leverage, although we've not quantified revenue synergies. We do have common customers in a number of different end markets, but also allowing our respective teams access to new customers, new markets. So overall, I think it's an exciting time for both respective teams, and we look forward to getting the acquisition closed and getting on with the business. Operator: And we have reached the end of the question-and-answer session. I would like to turn the floor back to CEO, David Graziosi, for closing remarks. David Graziosi: Thank you, Shamali and thank you for your continued interest in Allison and for participating on today's call. Enjoy your evening. Operator: Thank you. And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Good afternoon. My name is Stephanie, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the KLA Corporation September Quarter 2025 Post-Earnings Conference Call. [Operator Instructions] Thank you. I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics for KLA. Please go ahead. Kevin Kessel: Welcome to the September 2025 quarterly earnings call. I'm joined by our CEO, Rick Wallace, and our CFO, Bren Higgins. We will discuss today's results as well as our December quarter outlook, which was released after the market close and is available on our website along with the supplemental materials. We are presenting today's discussion and metrics on a non-GAAP financial basis unless otherwise specified. All full year references made refer to calendar years. The earnings materials contain a detailed reconciliation of GAAP to non-GAAP results. KLA's IR website also contains future events, presentations, corporate governance information and links to our SEC filings. Our comments today are subject to risks and uncertainties reflected in the disclosure of risk factors in our SEC filings. Any forward-looking statements, including those we make on the call today, are also subject to those risks, and KLA cannot guarantee those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking statements. We will begin the call with Rick providing commentary on the business environment in our quarter, followed by Bren with financial highlights and our outlook. Before I turn the call over to Rick, I wanted to provide a save the date for our Investor Day. It has been rescheduled for Thursday, March 12, 2026, in New York. Now over to Rick. Richard Wallace: Thank you, Kevin. To kick off our call today, I'll cover a few highlights from our quarter that showcase how the company is benefiting from the growing relevance of process control and AI infrastructure investment and our momentum in advanced packaging. KLA delivered strong results across the board in the September quarter with revenue of $3.21 billion and non-GAAP diluted EPS of $8.81. GAAP diluted EPS was $8.47. This performance demonstrates how KLA's process control leadership has expanded beyond leading-edge R&D investment to address all growth markets in WFE, including high-bandwidth memory and advanced packaging. Accelerating investment in scaling AI infrastructure is fueling technology development investment across the leading edge, driving more designs, increased complexity, shorter product cycles and higher-value wafers. Alongside this growth, the industry is also seeing rising demand for advanced packaging. In this complex environment of rapid AI technology development, process control accelerates time to results by resolving process integration challenges during the fab ramp-up phase to optimize time to market for a diverse mix of semiconductor designs. KLA's leading-edge customers are also challenged to optimize yield and limit process variability in high-volume production environment, resulting in increasing process control intensity. In this increasingly complex semiconductor device technology landscape, we're seeing rapid growth in demand for KLA's advanced packaging portfolio, which has emerged as a meaningful market for the company as heterogeneous device integration has become more complex. KLA's advanced packaging systems revenue continues to gain momentum through a combination of intensity gains and market share improvements across our portfolio. For calendar year 2025, we expect advanced packaging related revenue to exceed $925 million, up approximately 70% year-over-year. KLA's service business also continues to deliver strong growth. Services grew to $745 million in the September quarter, up 6% sequentially and 16% year-over-year. Consistency and resiliency are hallmarks of the KLA's service business. Finally, the September quarter was strong on both cash flow and capital returns front. Strong cash flow in the quarter was at a record of $1.066 billion. Over the past 12 months, free cash flow was $3.9 billion, with a free cash flow margin of 31%. Total capital return in the September quarter was $799 million, comprised of $545 million in share repurchases and $254 million in dividends. Total capital return over the past 12 months was $3.09 billion. In summary, KLA's business is both enabled and benefits from today's technology inflections and the growth drivers related to AI as well as from growth in advanced packaging. KLA's business has gone from being primarily indexed to leading-edge R&D investments in foundry/logic customers to now addressing all growth markets in WFE, including memory, advanced packaging and leading edge and legacy node logic. As we look ahead over the next several years, the long-term secular trends driving semiconductor industry demand and investments in WFE and advanced packaging are compelling and represent a relevant performance opportunity for KLA. In this dynamic growth environment, our consistent execution reflects the resilience of the KLA operating model, the strength of our global team and our disciplined approach to capital allocation focused on long-term investment and maximizing total shareholder value. With that, I'll turn the call over to Bren to discuss the quarter's financial highlights. Bren Higgins: Thanks, Rick. KLA's September quarter results reflect double-digit year-over-year growth and improved profitability. Revenue was $3.21 billion, above the guidance midpoint of $3.15 billion. Non-GAAP diluted EPS was $8.81 and GAAP diluted EPS was $8.47, each above the midpoint of the respective guidance ranges. Gross margin was 62.5%, 50 basis points above the midpoint of guidance, driven by a stronger product mix and manufacturing efficiencies. Non-GAAP operating expenses were $618 million. Operating expenses included $360 million in R&D and $258 million in SG&A. Non-GAAP operating margin was 43.2%. Other income and expense net was a $28 million expense with upside to guidance principally driven by a favorable mark-to-market adjustment on a strategic supplier investment. The quarterly effective tax rate was 14.1%. Net income was $1.17 billion. GAAP net income was $1.12 billion. Cash flow from operations was $1.16 billion, and free cash flow was $1.07 billion. The breakdown of revenue by reportable and end markets and major products and regions can be found within the shareholder letter and slides. Moving on to the balance sheet. We ended the quarter with $4.7 billion in total cash, cash equivalents and marketable securities and $5.9 billion in debt. The company has a flexible and attractive bond maturity profile supported by investment-grade ratings from all 3 major rating agencies. A cornerstone of KLA's business is consistent strong free cash flow generation, driven by one of the best operating models in the industry and a predictable, highly differentiated service business. This helps drive a comprehensive capital return strategy that includes consistent dividend growth and increase in share repurchases over the long term. Our actions this year emphasize our commitment to capital returns and our confidence in KLA's long-term shareholder value accretion. On April 30, 2025, we announced the 16th consecutive annual dividend increase, up 12% to $1.90 per share per quarter or an annualized dividend of $7.60 per share. Along with this action, we also announced a $5 billion share repurchase authorization. Turning to the outlook. It continues to be driven by increasing investment in leading-edge logic, HBM and advanced packaging. Growth of advanced packaging supporting heterogeneous chip integration has led to a new meaningful served market for KLA. What was once a rounding error in wafer fab equipment is now, according to KLA internal estimates, an approximately $11 billion market, growing faster than core WFE. This is particularly true as chip density shrink and the processing required for package increase risk for our customers. For KLA, this creates a new served available market that will augment the company's revenue growth over the next several years. The market and technology road map for leading-edge WFE supporting high-performance compute is driving relative inflections for process control. This opportunity, coupled with the evolving complexity of advanced packaging, supports an even broader market opportunity for KLA. As we approach the close of calendar 2025, we continue to expect mid- to high single-digit growth in WFE, modestly improved from our previous outlook discussed last quarter. Growth in 2025 is being driven principally by increasing investment in both leading-edge foundry/logic and memory to support growing AI and premium mobile demand, partially offset by lower demand from domestic China. Given KLA's business momentum, expanding market share opportunities and higher process control intensity at the leading edge across all segments, we remain on track to outperform the WFE market in 2025. The advanced packaging market is also expected to grow more than 20% compared to last year. Finally, customer discussions have become more constructive on expectations for calendar year 2026 to be a growth year for the industry with a broader spending profile than 2025 for both WFE and advanced packaging. While it is still too early to provide precise calendar 2026 revenue guidance, our view today is that first half revenue levels will be roughly flat to modestly up compared to the second half of calendar 2025, with accelerating growth in the second half of the calendar year. This outlook is inclusive of the revenue impact related to additional market access loss related to certain customers in China resulting from extended export controls from the U.S. government. We estimate the revenue impact on the December quarter and calendar 2026 to be approximately $300 million to $350 million for KLA. For calendar 2026, this impact is spread roughly evenly across the first and second half of the calendar year. KLA's unique product portfolio differentiation and value proposition are focused on enabling technology transitions, accelerating process node capacity ramps and ensuring yield entitlement and high-volume production. The market environment and the complexity of our customers' technology road maps are compelling and bring challenges and opportunities for KLA to continue its relative performance. In this industry environment, KLA remains focused on supporting customers, investing for the future, executing product road maps and driving productivity across the enterprise. KLA's December quarter guidance is as follows: Total revenue is expected to be $3.225 billion, plus or minus $150 million. Foundry/logic revenue from semiconductor customers is forecasted to be approximately 59% and memory is expected to be approximately 41% of Semi Process Control systems revenue to semiconductor customers. Within DRAM -- excuse me, within memory, DRAM is expected to be about 78% and NAND, the remaining 22%. As always, these business mix approximations pertain solely to our semiconductor customers and do not fully reflect our total Semiconductor Process Control systems revenue. Gross margin is forecasted to be 62%, plus or minus 1 percentage point, based on relatively consistent factory output versus the September quarter and product mix revenue expectations. Operating expenses are forecasted to be approximately $635 million in the December quarter as we continue to make product development and infrastructure investments to support expected revenue growth. Given our expectations for company growth and product development road map requirements, we will maintain our operating expense trajectory. Our business model is designed to deliver 40% to 50% incremental non-GAAP operating margin leverage on revenue growth over the long run. Other model assumptions include other income and expense net of approximately $32 million expense for the December quarter. The effective tax rate assumption has risen slightly to 14%, reflecting the impact of recent global tax changes. For the December quarter, GAAP diluted EPS is expected to be $8.46, plus or minus $0.78, and non-GAAP diluted EPS of $8.70, plus or minus $0.78. EPS guidance is based on a fully diluted share count of approximately 132 million shares. In conclusion, our near-term revenue guidance shows modest growth and is consistent with our views from the start of the year of relative top line stability. We expect to meaningfully outperform the mid- to high single-digit WFE growth rate in 2025, driven by rising process control intensity, inclusive of the significant growth of the advanced packaging market. KLA focuses on delivering a differentiated product portfolio that addresses customers' technology road map requirements, which are driving our longer-term relevance and growth expectations. KLA's business is well positioned for today's technology inflections and growth drivers. We are encouraged by the customer engagement that informs our business forecast. Long-term secular trends driving semiconductor industry demand and investments in WFE and advanced packaging are compelling and represent a relative performance opportunity for KLA over the next several years. In addition, the growing investment in custom silicon, particularly among hyperscalers developing their own custom chips, has led to a proliferation of unique device designs and increased demand on our customers to deliver performance, volume and time to market. As design complexity and diversity grow, so does the need for advanced process control. As a result, KLA has seen growth in process control intensity as each new chip design requires rigorous inspection, metrology and yield optimization solutions. KLA is uniquely positioned to benefit from these trends as we expand our market leadership and deliver differentiated value to our customers. That concludes our prepared remarks. Let's begin Q&A. Richard Wallace: Thanks, Bren. Operator can you... Bren Higgins: Sorry, I was just going to pass it over to you to start the process. Thank you. Operator: [Operator Instructions] And we'll take our first question from Harlan Sur with JPMorgan. Harlan Sur: Congratulations on the strong quarterly execution. Last quarter, you had this early view given your lead times, customer discussions on calendar '26 being a growth year. You reiterated that today, but talked about being more constructive on that growth rate. So it was another day -- with another 90 days of visibility given that leading-edge design starts are continuing to expand at a rapid pace, the recent and significant AI data center infrastructure announcements, has the magnitude on the WFE growth outlook improved? Or is it more just confidence level on the growth that you were thinking about 90 days ago? And you mentioned the broader spending profile on WFE and advanced packaging. Can you guys just elaborate on that a little bit? Bren Higgins: Sure, Harlan. I'll start. Thank you for the comments. I don't know if it's really a strengthening outlook as much as it's just we're getting closer to it. Customers, particularly our long-standing customers and their lead time expectations, we're starting to get more constructive about exact timing. We're encouraged by what we're seeing certainly for KLA at the leading-edge with a broadening level of investment. We think that's going to be positive on leading-edge foundry/logic. DRAM is also constructive. And with the investments in HBM, that's been very process control intensive. And so that's been a really good sign as well. Flash market is, I think, continues to grow. The rest of the legacy market, I'm not so sure there's much growth there, and I think we'll have a little bit of a correction in China. Obviously, we're feeling the effects of some new control that's impacting our view into next year. But we were expecting China to normalize anyway. So I think as we look at it all, we're pretty constructive on WFE growth, rising and capital intense or process control intensity. And packaging has a lot of momentum, both in terms of intensity. So we feel pretty good about what's in front of us, and we'll have a lot more to say specifically about growth in the industry and our expectations for KLA beyond what we said in the comments. We'll have a lot more to say when we report for December and January. Richard Wallace: One thing, Harlan, just to add to Bren's comment. What we do see and kind of feel is body language from customers are pretty strong in terms of wanting to make sure they're securing slots. So we're having kind of conversations with people not wanting us to get away from them because they're worried that they may not be able to achieve their objectives if they don't line us up. And I suspect that's across the other equipment guys, too. Harlan Sur: Got it. And I appreciate that. And then specifically on advanced foundry and logic, in addition to the increased process control intensity, as the industry moves from 2-nanometer to less than 2-nanometer, right? There's an added dynamic, I feel like where your foundry customers are standing up fabs in totally new geographies, right? So more uncertainty on yield ramps, systematic defects, like different type of workforce, right? And then on the advanced logic side, the large guy here is more focused on building out a world-class foundry business, which means way more focus on yield and manufacturability versus their historical trend. Wondering if these additional dynamics are driving the potential for incremental process control spend as you look into next year? Richard Wallace: Well, sorry, I do think that there -- as the customers are dealing with the new design rules and some of them, especially that are maybe back in it, if you will, trying to do leading edge, they're benchmarking what do they need for process control, and we're seeing kind of very constructive conversations around that. So I think that's true. I think it's kind of filling out the rest of the players, if you will, in terms of how they're thinking about investment and process control. So yes, I'd say that, that strengthens, if there are more players doing more leading edge in more locations, that's going to be accretive to overall intensity. Bren Higgins: Yes. One of the themes over the last couple of years has obviously been significant investment augmented by China and legacy design rules. But when you think about leading edge, leading edge was tremendously efficient, right, with most of the investment being really driven by one of our customers. I think as you start to see a broadening out there, it creates more opportunities for leading-edge engagement, process control intensity as a lot of the strategic investment happens to support what is an accelerating growth opportunity for our customers. So I think we're encouraged by that profile as we move forward. Operator: We'll take our next question from Vivek Arya with Bank of America. Vivek Arya: On the foundry/logic side, you are, I think, guiding it to decline to 59% from 74% of sales, I believe, so a decline of over $300 million sequentially. I'm curious what's causing this drop? How much of this is the China restriction? How much of this is the China impact? And is this kind of just a 1 quarter lumpiness? Or is there more to read into it as we look into the first half of next year? Bren Higgins: Yes. So Vivek, for our semiconductor customers on the mix side, on the leading edge, it's upticking in the December quarter, but it's being offset by a reduction in China. China was elevated in September at 39%. And just for a reference point, our expectations for the total year for China, and I have been pretty consistent with this for the last 9 months or so as we thought it would be somewhere in 30% plus or minus range. So it was a little bit elevated versus the annual trend. So as China comes down, part of that is you have leading edge going up. And then you also have memory as -- and particularly in DRAM, we see that upticking in the December quarter. So there's some moving parts there but that's what's happening. As it relates to the recent export controls, I would say the impact on the December quarter is fairly immaterial to the company overall and that we were able to move slots around. We've got certain products where customers get in the queue, and so we can pull business forward. It's a lot of different customers. But obviously, over the long term, that's lost business. And so as we said in the prepared remarks, we think that's about $300 million to $350 million between now and the end of '26. So hopefully, that gives you a little color on the moving parts. Operator: Our next question will come from C.J Muse with Cantor Fitzgerald. Christopher Muse: I guess I was hoping to focus on gross margins. You guided down 50 bps. I'm assuming that's just product mix. I would love to hear your thoughts there. And then, Bren, you're highlighting, again, the 40% to 50% incremental operating margins. If we are in a world where WFE continues to grow kind of in a double-digit world over the next couple of years, should we be thinking that you're at the higher end of that range given kind of greater contribution from the higher-margin silicon? Bren Higgins: Yes, C.J., on the guide down, you're right, it's about 50 bps, and it's mostly related to just mix adjustments in the quarter. As I've said over the last couple of quarters, there is a tariff impact that we're dealing with, which is more or less consistent quarter-to-quarter. That's roughly 50 to 100 basis points of the impact. So yes, we're guiding 62% and output is relatively consistent. So it's really a mix issue. In terms of how we were thinking about running the company and over the long run, certainly our 40% to 50% long-standing incremental operating margin target does drive how we size the company. Gross margin obviously is a factor in that. And so we have to think about where gross margins are trending as we consider that. We outperformed that target pretty significantly as revenue has grown in the mid-teens. I'd call it above trend line growth in 2025. So as we move forward, I think the easiest way to think about that is if you're more or less a trend line, we're more or less in the middle of the target range. And if growth levels are above that high single-digit trend line, we should outperform it. If growth level is below, we'll probably underperform the target a bit. But that's how we're going to size the company over time, and our performance over longer periods of time is obviously very consistent with that. Operator: We'll move next to Joe Quatrochi with Wells Fargo. Joseph Quatrochi: I appreciate the qualification or quantification on the advanced packaging WFE. I was curious just to think about just the advanced packaging process control intensity. I think just based on some of the things you put out there or talked about in the past, it's like high teens. Is that the right way to think about it? And then how do you think about where that goes over time? Bren Higgins: No, I wouldn't say it's that high. I think if you look at KLA's share of WFE, I mean, one of the interesting things, as I said in the prepared remarks, is it wasn't much of a factor for us in our business. And you don't have to go back more than just a few years, and the percent per KLA was in the 1% range. And now if you take our views on 2025 at $11 billion or so, we're approaching 6%. So we've seen an escalation here in terms of intensity as the requirements have changed fundamentally related to the high-performance computing on the logic side and the memory side. So we think that, that continues over time. I don't think you're going to see that kind of -- that slope of growth. But we do expect that as density shrink and processes become more complex, that it does play to the need for more advanced systems. And of course, we have our front-end portfolio that we can use to address this interesting market. So I think it's a new SAM for KLA. We have a lot of great drivers within WFE that we think are driving process control and KLA share of the market, and we're augmenting that growth with this growth that we expect to see in advanced packaging that likely over time grows modestly faster than WFE. So it's a really encouraging opportunity. And I think as we start to move up the value chain in terms of new capability required, and I think it creates an opportunity for us to drive something in the neighborhood or better than general corporate averages on margins. Operator: We'll take our next question from Tom O'Malley with Barclays. Thomas O'Malley: Nice results. I wanted to ask a bigger one that people have been trying to the earnings period here. I understand that it wasn't in the preamble. But Lam went out and talked about $100 billion of AI spend is roughly equivalent to $8 billion in WFE or additional spend. And they talked about most of that being related to memory. Do you agree with that statement? Or do you have any qualification for how you would look at that ratio? Richard Wallace: I think in general, this is Rick. I think in general, if you think about what goes into a data center, the percent that is memory, the percent that is GPUs or logic and then the rest, you're probably at about -- if you take $100 billion, then you could say that half of that would be semiconductor related and the intensity on that kind of gets you to that run rate. But I don't think it's necessarily 50-50 in terms of memory and in terms of the logic side. So our view is you're pretty close. And then we would -- as we were just talking out in packaging, so we get closer to $10 billion on the $100 billion because of the investment that's not just semiconductor but packaging. And we think our opportunity in that is pretty good because, again, those are all the high challenging process control elements, kind of everything that we've been talking about larger die, more valuable die, more HBM is really challenging from a process control, getting more so and then packaging. So we're in general agreement, we would add back in the packaging part, and we think our participation in there is above our average intensity for the rest of the industry. Operator: We'll take our next question from Timothy Arcuri with UBS. Timothy Arcuri: Bren, Rick was talking about customers starting to want to get in line for. So I would imagine bookings were pretty good. So can you give us RPO? I know it was $7.9 billion last quarter. Where did it end this quarter? Bren Higgins: Tim, we don't -- we changed our disclosures, so we're not disclosing that anymore. But what I will tell you is that if you look at our lead times, our expectations for our lead times, as I said last quarter and they've been converging after a couple of years of elevated backlog related to a number of greenfield projects that have now shipped through. And if you look at the composition of our business going forward, really tied to our -- some of our long-standing customers that tend to operate in 6-month kind of lead time windows. Our lead times have converged and I think, normalized between 7 and 9 months. Now if you go back and look at 2020, 2021, even go back historically for KLA, it used to be about 6 months. Now our customer base is broader today. And I think there's a combination of a little bit more new fab activity that will push those up. But the context that we provided in terms of our expectations for growth next year and how that plays through in terms of KLA's first half and second half is supported by an order flow that is consistent with those lead times. So I think that, that is how you should think about it in the 10-K each year, we will provide our -- as we have historically, we'll provide our backlog. And so that will give you an anchor point in terms of backlog on an ongoing basis. But 7 to 9 months, and it looks pretty consistent in that range as we go forward. Timothy Arcuri: I guess you did give it there last quarter, Bren, is that like new this quarter? Bren Higgins: Yes. We changed our disclosure, Tim, and we highlighted that we were going to make that change back in the March quarter earnings results. We said when we started the new fiscal year beginning July 1 that, that disclosure would change. There were a number of reasons for that. The primary reason being the inconsistency in how that disclosure was being interpreted and reported across our industry. So we have aligned more closely with the disclosure that our peers have, and that's what we're going to do here going forward. Timothy Arcuri: Okay. Then I guess as my second question. So you said last quarter, Bren, that China was going to be for you, down 10% to 15% this year. But even to get down 10%, I have to have China down like $250 million Q-on-Q in December. Is that the right number that China is going to be back to like 30%, 31% in December? Bren Higgins: Yes. In the December quarter, I think China will be high 20s. So yes, you're in the range. We'll see how the quarter finishes up. But I think in the high 20s is how I'm modeling and then it translates into maybe 30%, maybe 31%, very consistent with the way I've talked about it all year long. And the other thing I'd say is, as you look at 2026, we think it's probably it comes down into the mid-20s. And obviously, some of that is driven by the export restriction, but also some general normalization that we've been talking about that would be coming. So we think it's likely to settle somewhere in the mid-20s as we look at 2026, at least how we see it today. Operator: We'll take our next question from Krish Sankar with TD Cowen. Sreekrishnan Sankarnarayanan: Bren, I have a 2-part question. One is in the past, you've spoken about 2-nanometer gate-all-around is 100 basis points improvement in share for you versus 3-nanometer gate-all-around. A, is that true, still the case? And number 2 is, I think if I remember right, the advanced packaging share is about 50%. If I do the math on that $11 billion and $925 million, it seems like advanced packaging, WFE intensity is around mid-teens. Do you think advanced back-end inspect -- process control intensity is getting higher than front end? Or do you think it's still below? Bren Higgins: I think it's still below. I mean just the first part of your question, we haven't -- look N2 has been a more intensive process control intensive node. Obviously, you have an architecture change that's quite significant. The other issue is that as you think about larger die that creates opportunities for more process control intensity. So -- and I think the litho scaling and litho layers with larger die designs or HPC designs tends to drive more litho layers in the process as well. So when we look at N2 overall versus N3, we do see an improvement in overall intensity. There is a share element to it, too. We're encouraged by some of the share movement we're seeing. But overall, that's how we see it. As it relates to advanced packaging, I think our logic share is higher than our memory share. We'll have more to say in terms of articulating how this market breaks up. But as I look at KLA share of the advanced packaging market, we're about 6%. And if you look at KLA's share of the PC market, it's closer to 8%. So the process control intensity is not as high and sampling rates are pretty elevated these days. And we'll see over time if that changes. Certainly, the need for more capability will be a requirement here moving forward. But we'll see how those things trade off over time as our customers move forward. Sreekrishnan Sankarnarayanan: Then I think you also mentioned that some of your front-end tools are being used for back end. I'm just kind of curious, especially on the macro inspection or inspection side, is that an overkill? Like even ASML spoke about introducing new i-line tool for advanced packaging. Would you consider introducing new tools for back-end packaging? Or are you going to use the front-end tool? Richard Wallace: No, I mean -- it's funny you say that because that was our initial reaction when the customers want us to put our front-end portfolio in the back end, we said, are you sure? Because the cost of that are you sure you need it? And they were quite certain that they needed it because of the -- just think about the cost of yield failure in packaging and how much it's worth to ensure that that's not happening. So that's what we've really seen in terms of that. They're not -- it's obviously not our most advanced tools, but it is. They are systems that we use in the front end and that would have been considered the most advanced tools if you go back a few years. So absolutely, they're the ones that pulled us in. I mean we did not come to them. It was almost the other way. They said, we want you to provide this capability. So when we think about the road map for packaging, and remember what we're talking about advanced packaging, we're, in many ways, early innings because there's still other technology inflections that are going to go into HBM over the next several years as the rest of the market catches up with these advanced packages. So we're really talking about a pretty small percentage of available packages being inspected at this high level. Now over time, people will learn more about it, and they won't inspect at the frequency. So that's why we see the growth will continue, but it won't continue at the rate we've had for the last couple of years, but it should outpace overall WFE growth. And our share position is great for 2 reasons. One is that we've got this capability. But beyond that, unlike our competitors that are coming from the back end, we have road maps and a lot of customers have tremendous value in that road map ability. Operator: And we'll take our next question from Charles Shi with Needham. Yu Shi: I noticed that based on your Q4 guidance, the KLA process control revenue in DRAM is probably going to grow 50%-ish year-on-year. I don't think the overall DRAM WFE is growing that much. And I think historically, people don't really think the KLA as a DRAM house, more of a leading-edge logic house. So wonder what's happening this year? Why is it growing this much faster than DRAM WFE? Specifically, is it kind of tied to the EUV insertion DRAM? And how do we think about 2026 DRAM side of the process control growth? Richard Wallace: Yes. It's an interesting observation. For those of us who have been around for a long time, we remember when DRAM was actually leading technologically and was the biggest market for inspection for KLA. And what happened was, for many years, there was a bit of a holiday in terms of design rules in DRAM and the need for process control and what the use case was. But when you get into what's going on with -- especially around the high-bandwidth memory and the challenges that people have relative to the new design rules, we're actually seeing, in some cases, higher sensitivity requirements, in some cases, for DRAM on some layers than we're even seeing in logic. So we've had a bit of a reversal of some -- in some areas, and we've seen big adoption of early on as people are debugging these processes and then realizing they don't have a lot of process margin. So that's the other thing is there -- and when they start EUV, then they're using our systems for print check. So you see a lot of applications happening, and that's really what's been driving this increase. We thought it would happen. Years ago, we were hoping it would happen sooner, but it's definitely we're seeing leadership in some areas in terms of the need for process control as they retool these DRAM facilities to deal with some of the new market requirements. Bren Higgins: Look, the introduction of EUV was certainly a factor in terms of process control intensity. We think overall, probably changed it about 1 point. But then if you look at the requirements for HBM, we think it's increased it another point or so. Rick talked about a lot of the issues. The other thing you have to keep in mind is that the reliability requirements in a stack of DRAM chips in an HBM device, the device is only as good as the weakest DRAM. And so the performance requirements, the process variability that the customer can accept, you can't bin these devices that go into an HBM integration. So there are a number of things that are happening there that are positive for process control intensity. Yu Shi: Got it. Maybe a quick follow-up. I think going back a couple of years ago, you guys talked about the delayed pellicleization, what that means to the KLA mask inspection portfolio. I thought the thesis was that without pellicle, your existing mask inspection plus print check probably works the best. But with the pellicle, maybe actinic works better. I know this has been an ongoing discussion for many years, but we are hearing recent -- some recent reporting out of Taiwan, talking about your leading foundry customers potentially converting a fab into a pellicle fab and wonder what that means to your overall strategy on mask inspection. Mind if you shed some light on that? Richard Wallace: Yes. So rather than going to specific strategies, specific customers have, I can tell you we're in conversations with all the leading mask manufacturers in the fabs in terms of what is their strategy relative to reticle qualification and requalification because it's a critical area. And although we don't have all the pieces in that, we have many of the pieces because there's many points along the way, whether you're calling the reticles in the fab, you're doing recall or you're doing verification and print check. So we're heavily involved in those conversations. As you know, the challenges with pellicleization and the trade-off is throughput. And so that's always the issue of using pellicles as you give up some of the light performance. There have been advancements and we're well positioned to support those. But when we talk about a record year in our reticle business, obviously, people are buying with the future in mind as they do that, and we continue to see growth going forward. We feel pretty good about our ability to participate as we go forward in terms of any scenario that plays out. But I can tell you, we're very heavily involved in customers with those conversations. Operator: We'll take our next question from Chris Caso with Wolfe Research. Christopher Caso: I guess the first question is regarding the commentary on '26. Could you give a little more detail about what you're seeing first half versus second half? I assume that it's a combination of advanced logic and DRAM driving that second half? And is that just simply a function of where your lead times are that some of the improvements we've seen over the past couple of months are just now flowing through in orders given where the lead times are right now? Bren Higgins: Yes. As we said in the prepared remarks, I think the first half is maybe flat to slightly up. We'll see as we move forward where that ends up. But at least that's how it looks today. And I think you'll see growth accelerate more into the second half. Lead time discussions, we're talking about slots, but I think there's some facility dynamics also that are influencing some of the timing. But would expect advanced logic and the broadening of the investment that I mentioned to be a driver into the first half. But there's continued momentum on the DRAM front, too. So we're pretty encouraged by what we're seeing there. Obviously, it'll be offset by some weaker numbers out of China, but the leading-edge dynamics are encouraging. Christopher Caso: Just a question on gross margins as we go into '26 also. And with some of the mix changes, particularly with China probably coming down as a percentage of the mix, anything we should think about with respect to gross margins as we start modeling through '26? Bren Higgins: Yes, Chris, I'll give a little bit more specific guidance on margins and operating expense expectations based on our revenue picture next quarter. Gross margins for KLA are generally impacted, I'd say, almost exclusively impacted by what we sell, not so much who we sell to and where we sell it. So it really is a factor of how it's impacting certain product types that we have a pretty extensive portfolio of products, the broadest in our segment of the industry. And depending on what you're buying, it can carry different margin profiles. Certain parts of the market, like packaging tend to carry a more dilutive stream. As I mentioned earlier, I think, over time, that goes from being a headwind to a tailwind. Service tends to grow and has a dilutive gross margin, but we believe an accretive operating margin. So you do have some of the moving parts. The tariff impact, when you compare year-to-year, we really -- that's more second half dynamic this year. And my hope is given some of the things that we have going on in the company in terms of assessing how we can try to mitigate that exposure that, that becomes less of a headwind over time. I think structurally, we're in a world where we'll be dealing with higher tariffs, but I do think there are things we do in terms of how we operate the company, where there's some ROI in terms of just how we move parts around the world and how we reduce the leakage and drawback scenarios as we understand and track different parts attributes that help reduce some of that. So I think there are a number of dynamics at play that will become less of a headwind over time. And depending on the growth of the business, obviously, that will have -- volume will have an impact, too. So I'll have more to say about it. I think those are some of the context behind the different moving parts. Operator: We'll take our next question from Shane Brett, Morgan Stanley. Shane Brett: I wanted to follow up on Charles' earlier question, but your memory customers have been talking of CapEx growth into 2026. But just given how strong this December quarter DRAM guide is, how should we think about your memory growth expectations into next year relative to this really strong December quarter? Bren Higgins: Yes, I apologize. I know that Charles asked that and we didn't answer that question. There are definitely some timing factors that are influencing process control, timing relative to other products. As I look at where we're at, I mean, this year has been a very strong year in DRAM for the company. I would expect next year to be a growth year as well. And I think a lot of these announcements, I think, as we start to see that play out, we'll see whether that is more of a second half dynamic into next year and how much that sort of carries forward. But what is clear is, across all of our customers, I expect them to spend more and to see growth in our DRAM investment from our customers into next year. Operator: [Operator Instructions] We'll take our next question from Edward Yang with Oppenheimer. Edward Yang: Rick, Bren, most of my questions have been already answered, but maybe you could talk about your outlook for foundry-related revenue opportunities outside the dominant Taiwanese customer. I think at least one major foundry has historically underinvested in yield improvement tools. Maybe that tune is changing. So are you seeing any change in engagement there? Bren Higgins: Yes. I would say that we're encouraged by -- as we said earlier, we're encouraged by the broadening of investment that we're seeing at the leading edge as we go into next year. Richard Wallace: Yes. The conversation qualitatively, the conversations we have with customers that are looking to, as you mentioned, not the leader that are looking to do advanced logic, we do have a lot of conversations around what they're asking our advice, what do they need to be successful, especially since they maybe haven't been pressing the latest nodes. And so there's a lot of conversation we have about the specific things they're trying to accomplish. It depends on the dynamics. It depends on their mix. It depends on their die size. It depends on what their expectations are for how fast they want to ramp. But it is, for sure, a lot of conversations we're having. And as Bren says, we feel pretty good about those discussions. I think for a lot of people, the process control part, they haven't really fully understood how the world has changed in the last few nodes. And so those conversations are ongoing. Edward Yang: And just as a quick follow-up. Yesterday, the leading AI accelerator company talked about a $0.5 trillion backlog. We're seeing these flurry of deals involving the major AI lab players. From your vantage point, can you level set for us, is the semi-cap industry position to serve that scale of demand? Or is the ecosystem discounting some of these projections as aspirational? Richard Wallace: Yes. I don't -- I guess I would maybe pass it a little bit differently in the sense that I think the semiconductor industry has been prudent in terms of adding capacity. And right now, when we talk to -- when we try to reconcile the external discussions about CapEx and what that translate into in terms of wafers, not enough wafers will be available to achieve those objectives in the time frame. And our view is that it's not necessarily a bad thing. It means it's not going to -- it's unlikely to overheat if those forecasts remain intact because there's more gating factors than there are people making announcements. It's easier to make an announcement about investment in the data center than it is to build a new fab. So I think it's going to take some time for the industry to absorb and support the capacity demands implied by all the public announcements. Operator: We'll take our next question from Blayne Curtis with Jefferies. Blayne Curtis: I just want to go back to the DRAM comments. You talked about the increasing capital intensity. I'm just kind of curious about kind of the conversations. Obviously, massive numbers have been thrown out there. Just kind of curious, I think someone asked this prior about what -- was that always the plan to have DRAM up this much? Or have things been pulled in? And then I guess, just if you could elaborate a little bit more color on those conversations you said where they're looking for capacity, like what's holding it up? Is it just they need fab space? Or are they unsure about the demand? Just any color there would be great. Bren Higgins: Yes, I would say that you definitely feel there's more urgency on the DRAM front in terms of timing. We'll have to see how that plays out in terms of slots as we move into next year. Given our lead times, what we can accommodate, obviously, we try to work closely with our customers on that front. But there's certainly -- I think from a pricing point of view, I think the dynamics that are driving HBM pricing overall, there's definitely a sense of urgency from our customer base. And as I said earlier, across the top 3, I do expect higher investment levels next year than we're seeing here in '25. Richard Wallace: I think the other way to think about it, if you think that there's 3 components, primary components that go into supporting these AI infrastructure build-outs, you have obviously the GPUs and the accelerators around those, you have the packaging and then you have the memory. I think you're going to see over time that you go in phases of which one seems to be short supply. And we kind of went through a phase of that with packaging being behind. And now I think the realization by a lot of our customers is they might -- there might be more opportunity in memory than they thought, and those are accelerated from what they even told us a few months ago. So I think that, that's part of what you're seeing. I think everybody is a bit amazed by the number of applications that are being realized using AI. Even inside of KLA, we keep coming up with new ways to leverage the technology. And I don't think we're the only ones doing that. So I think the memory guys are right now feeling, wow, there's more opportunity if they could add capacity. And those are kind of the conversations because they realize that it takes longer, as I said, to ramp the supply chain than it does to make these announcements about CapEx. Operator: We'll take our next question from Jim Schneider with Goldman Sachs. James Schneider: Maybe just one follow-up relative to the earlier question about the diversification in your leading-edge logic and foundry customer base. Is that something that's more on the inquiry level at this point? Or are you actually seeing that either in your order book or in the form of forecast from those customers at this stage? Bren Higgins: I would say we are seeing it and certainly as it informs our views of next year, we're seeing it in the order forecast. And the -- as Rick talked about earlier, I think there's a lot of collaborative discussion about how we can help navigate and ramp and drive time to results in this capacity. James Schneider: And then maybe just as a quick follow-up. Maybe you can help us just refresh your expectations about kind of confirming mid-teens is the right level for service growth in 2025 and maybe give us a sense about whether that could accelerate next year? Bren Higgins: Yes. We've seen service actually pick up a little bit here. It's been a little stronger than we expected. Obviously, we've had some FX benefits, but we've also had some strengthening as utilization rates have gone up. We've seen some strengthening in some of our billable business. So I think our service growth will be in our target range of 12% to 14% this year. And I would expect right now, as I look at next year, that we'll be in the same range as well. So I think we feel pretty good about where that is, both based on the growth expected in the installed base, the lifetime increase in the tools, the incremental value that's coming from the complexity in the systems and how that's affecting the pricing as it relates to contracts, the opportunities in the acquired businesses that we've acquired over the last few years to drive their service business and new requirements that we're seeing, this is a factor in '25 as well. But as you think about packaging, a different service model for packaging, but also for DRAM, where the utilization rates to some of the earlier questions have been higher and higher expectations of performance of our system. So I think there's some new opportunities for growth there that, frankly, if you go back a couple of years, I don't think we fully anticipated, both on the packaging front but also on the high bandwidth memory front supporting HPC. Operator: We'll take our next question from Timm Schulze-Melander with Rothschild & Co. Timm Schulze-Melander: Actually, I just had one with respect to your outlook for next year. You talked about this broadening in demand for 2026. Could I just ask, could you just paint some color around to what extent that already bakes in high NA engagements or whether that would be an upside to your outlook for '26? Bren Higgins: One thing, look, on the R&D front, there's a lot of collaboration with customers. How that translates into revenue is not part of the outlook. Most of what the engagement is, is on ramping the continuation of the N2 ramp, our 2-nanometer ramp across our customer base. And so it isn't influenced by the adoption of high NA in that time frame, certainly not in a material way. Operator: We do have time for one additional question. We'll take our final question from Brian Chin with Stifel. Brian Chin: I appreciate that. Maybe a question here. I think there was a reference earlier about the potential for some acceleration in second half of next calendar year. I'm sure it's not one single thing, but how much of that second half outlook is tied to new cleanroom space availability, knowing that some of your tools, probably some of the first that go into a greenfield fab. Bren Higgins: Look, there are some issues, I think, with space constraints potentially. It's not, of course, on every customer, but I do think that it could affect some timing as we move into the second half of next year and into '27 as you start to think about the next node ramping and some of the new fabs coming online in memory. So right now, I don't think space is going to be an issue. Obviously, that would depend on the strength of demand, yes, that could change. But for now, it's certainly a factor, but I don't think it's a big factor as it stands today. We'll see how things go. Brian Chin: Maybe if I have time for a quick follow-up. Just on advanced packaging, I think to date, a lot of your inspection business strength has been strongly tied to logic. How much of your continued optimism on market and KLA growth in packaging next year involves expansion opportunities in HBM packaging? Bren Higgins: I feel good about market share, both in logic and in memory on the packaging front. We've seen positive trends in both segments over the last couple of years, and I think that, that continues into next year. Kevin Kessel: Thank you, Brian, and thank you, everybody, for your interest in KLA. We appreciate your time today, and we'll be in touch. I'll turn it back over to the operator for any closing instructions. Operator: Thank you. And this does conclude today's KLA Corporation September Quarter 2025 Post-Earnings Call. Please disconnect your line at this time, and have a wonderful day.
Matthew Bellizia: Okay, we might start now. It looks like we're stabilizing on the list. So good morning, everyone. Welcome to the Dubber Corporation's FY '26 Quarter 1 Update. Andrew, if you can move on to the key messages, please. So we did report positive net operating cash flow for the first time in history, excluding the exceptional cash flow items, which Andrew will talk to. Whilst there is a chunk of money in the quarterly -- in the onetime exceptional cash flows, most of it's not continuing. So we don't expect that to -- we expect this to be a little bit abnormal, the cash out for the quarter, and that should stabilize going forward. The group remains well capitalized with over $14.5 million of working capital, with a cash balances at 30th of September of $9.5 million and our $5 million undrawn facility. During the quarter, we exited our U.K. property leases, finding an annual saving, which will start flowing through of $2 million per annum. Cost us $300,000 to exit those leases. Our underlying recurring revenue for the quarter was $8.2 million, which is flat month-on-month with the previous quarter. Now we've excluded VMO2 from that. We do still have some VMO2 revenues, but we're not going to call that recurring revenue on the basis that VMO2 are still planning to move their services away. So excluding that, we were flat, and we had -- and probably our growth has been washed a bit by another change that I'll talk about coming through. The group has signed a new partnership with Crexendo. Crexendo, why this is good, and I'm going to talk about this on a slide, but Crexendo is the third biggest UCAS provider in the U.S. So Microsoft Teams, Cisco, Webex, and Crexendo is #3. That gives us a whole new market to attack and grow our business. Our Communications Service Providers still increased again. We are still focused, consistent with what we told you last quarter and the quarter before to get to cash flow breakeven during FY '26, and the recovery of the funds continues. Moving on to the CEO presentation, and reiterating that. To hit operating -- normalized operating cash flow breakeven during FY '26, a lot of it is driving revenue now. It's all about sales, marketing, and growth in this business. This is what's going to dominate our journey going forward. We are continuing a cost-out program. We continue to look for efficiency gains within the business. And that is anything we can do to automate the business, such as right now, we're working on automating invoicing. So when someone subscribes to our service, it adds a license into our system, it flows straight through our billing system, straight into NetSuite, and invoicing straight to the customer. So as much automation we can drive through the business, so we're a real simple automated SaaS business is what we're driving for to continue to optimize our costs. We've covered the real estate leases. And we're also working on decommissioning our U.K. data center, which will result in probably somewhere between $1 million and $2 million saving. This is a data center that came through acquisition with Speik and Aeriandi. We're moving Vodafone from Aeriandi to the Dubber platform. As you know, VMO2 intends to leave. We've got our payments customers being migrated across to the Dubber platform, and our archive customers. And once that's complete, we'll save another chunk of costs through the business. I'll move to the next slide to talk about revenue growth because it's a bit more focused on revenue through that quarter. Our strategy to grow our revenues is to go a bit deeper into some verticals, deeper in that specializing in verticals and bringing real value to some of those verticals, financial services and other verticals, where we can really get really good revenues, being a bit more specific about the value we bring to them so we can charge a bit more and get more content through that. We're also finding more CSPs. There's some telcos that who've got to focus on driving Recording as a Service products. We're talking with multiple telcos now about being the partner with them for Recording as a Service. And we're concentrating on partners who bring real value, such as Crexendo, and open up new markets so that it helps us not just to partner for the sake of a partner, but a partner that can really bring true revenue and a whole marketplace with them, a whole new platform of technology that we can integrate with and bring through. Our product is a very feature-rich product. We've actually invested again a lot more in R&D this quarter. We need to continue to drive that value through our sales and marketing message to get people to understand the value of moving from recording to our entry-level recordings plus trends through to our full AI SKUs and the benefits they bring to our business. This quarter, we've released 2 more features, which I'll talk about more in the later slides, but a new signals feature, which listens to all your voice recordings across your business and tells you all the key topics discussed in your business, not just those pertaining to sales or complaints, it does a broad brush of your entire business. We've also brought in our new natural language search with agentic AI, which we'll talk about in the same slide. The sales motion, we are driving promotions, particularly into the last quarter this year. With a number of partners, we are running promotions in the last quarter to drive AI uplift and AI sales. We are going to continue to differentiate our products through the greater value that our AI brings. And I've talked about -- and of course, it drives increased ARPU. We're also looking at bringing through partner training programs. We're talking with a company right now that's looking at bringing specialized training programs so that our partners have got a better skillset and better understanding. They've got to get certified to sell our products. So we think in a 30-minute [ to 1 hour ] training session, understanding the value supported by partners will help drive better uplift as well as, I think I mentioned last quarter, the training videos and the promotional videos that we're bringing through embedded into our products, so people, our existing customers, can see all the benefits very simply of the AI SKUs and what they bring for their business. Moving to the next slide, if I may, Andrew. On the Communications Service Provider updates, I've talked about Crexendo's Netsapiens. In terms of Cisco, Cisco is changing the way they engage with us. Instead of paying us for Dubber Go, we still have the Dubber Go Dubber Go SKUs. Nothing's changed with what we supply to Cisco, but we will now be [ remunerated ] by the end customers and selling them trends and AI SKUs and working on that upsell. When Andrew presents to you in a little bit to show you the numbers were flat quarter-on-quarter, this is the change that flattened our revenue for this quarter, but we hope to be able to get some growth back to replace this revenue by selling directly through a new motion in the Cisco environment and replacing this revenue in a different manner. We continue to see good engagement from Cisco partners and for the Dubber premium products for the Cisco Marketplace. But the change we're talking about pertained to the 30-day recording product, not our core products. Next slide, if I may. We've launched our first agentic AI product called the Insight Agent. The next slide will give us a better understanding of the agentic agent, so [ I might ] step onto that. But this is now allowing you to ask natural language questions, any question you like, across your entire voice recording platform in your business -- what was our best-selling product last week? Our agentic AI will have subagents, which will then analyze our [ offer expansion ] moments and information, our offer accepted moments, different moments, and there's 10 or 20 different agentic agents that operate and go back up to a key decision maker that come back and give you the outcome about what was our best-selling product last week. So in this case, it comes back with, Smartphone X2 was the top-selling product with 300 sales-related mentions across 77 conversations. Naturally, like all our products, you can quite easily drill down to hear those conversations and see what's going on. But there's a lot of conversations that happen in business between staff and staff, staff and customer, staff and suppliers. This agent now is going to allow you to delve into these conversations and find real value. Again, as a business, I still think we have to improve the way we get this messaging to our resellers to unlock the value of this business, so it's better marketing, better information to our sellers, better training for our sellers, so they understand the values our products bring in order to boost our sales going forward. And another example is the next screen of the same one. What were our most [ successful ] negotiation techniques last week? Volumes discount achieved higher acceptance rates than percentage discounts. Marcus C achieved the highest negotiation rate at 94%. So I hope that gives you an understanding of what the Insight Agent that we're launching with agentic AI, and again, the company continues to spend strongly in R&D. I'll now hand over to Andrew to handle the financial update. Andrew Demery: Thanks, Matty. So yes, revenue for the quarter was $9.4 million, so that's down 7% on the equivalent quarter last year and 12% on Q4. That's really reflecting the reduction in the VMO2 revenues as that process started in the quarter. If we exclude VMO2 from both Q4 and Q1, and any one-off revenues Q2 -- sorry, Q1 was $8.2 million, which, as Matt said, was consistent with Q4. So that's a like-for-like comparison, excluding VMO2. So yes, we saw some growth. That change to Cisco has impacted the quarterly revenue growth, so it's offset that as well as I think we talked last quarter a little bit about some of these long-term deals that were rolling off towards the end of last year for archive services and so forth that have been renewed, but at different rates. So they're largely done last year, but we see a bit of an impact quarter-on-quarter, obviously, from the [ full ] quarter's roll-off of some of those deals. So yes, some reasonable underlying growth has been just offset on a recurring basis quarter-on-quarter. So, yes, there's still a good growth prospect going forward, as Matt's talked to, with some of the new products coming through. And yes, we continue to add partners to the group. Again, that's not a primary focus, but again, we're still seeing the demand from new partners to take the Dubber suite of services and add them to their portfolio for their end customers. So this chart is really a reflection of what we've been talking about for a while. We achieved -- we got to cash flow run rate breakeven at the end of June. Obviously, the reduction in revenue resulting in VMO2 hasn't been offset by cost reduction, given the nature of our margins in the business. So that gap has opened up a little bit in this quarter. We've got $2 million of annualized savings coming through from Q2 as we've exited our surplus U.K. lease portfolio with all the ancillary costs that go with it as well coming off, too. So we'll start to see a benefit on operating costs for that coming through in the coming quarter that we're in. So just to touch a little bit more on that. Obviously, our gross margin impacted by that revenue reduction. Direct costs continue to come down a bit as we continue to get those operating efficiencies and improvements that we've been delivering over a long period of time now. I think, as Matt talked to, the next big [ lick in ] direct cost is the exit of the data center, which will go hand-in-hand with that -- with the customer migration and exit in the U.K. at the moment. So there will be another step change in the -- an improvement in margin at that point underlying for those customers once we're able to execute on that over the coming year. And operating costs continue to come down. You'll see more of that, obviously, as we said, from the leases and other cost-saving improvements, a bit more weighted towards the second half -- sorry, the second quarter of the year rather than Q1. So yes, we'll see some continued savings in operating cash-based costs as we come into the next quarter and over the rest of the year. If we look at the statutory cash flows, we had record receipts of $12.4 million in the quarter, which was good to see, up from $11.9 million last quarter. Again, that's largely around the timing of receipts from customers, but we're all over that at the moment, which is good. I'll talk a bit more about the operating cash outflows on the next slide, as it's probably a better representation of that. Net cash inflows from investing represents some payments we received on the exit of those leases for some of the surplus assets that were in those leases at the time. So we've got a little bit of income there. We had some outgoings as well, which we'll talk about on the next slide as well. But as Matt already touched to, we've got $14.5 million of available working capital at the end of the quarter, so remaining really well capitalized as we go through the rest of the year. So just touching on, if we look at the normalized operating cash outflows, we were at $11.7 million, down from $11.9 million down from $11.9 million and $12 million previously, so then again, continuing to reduce. So we had -- as Matt touched on at the opening, we've had a positive $0.7 million increase in operating cash, which is the first time we've had that as a business, I think, ever. So that was a good result. We spent about $1.4 million on abnormal items, so a bit bigger than last quarter. It really is starting to come down, even though it doesn't look like it. So we've just given you a bit of detail on the slide about where some of those go. So legal expenses for directors and the companies. They're all related to things that were done last year, paid in this quarter, so they are largely nonrecurring going forward. We obviously filed some claims for the historic term deposit matter in Q4, which we paid for this quarter. So again, there's some costs around that. We had some costs for the exit of the leases that we paid out in that cash flow as well. So again, they're definitely nonrecurring. Our historic tax repayments are now effectively done, so they shouldn't recur, and we had some redundancies as well. So those numbers will absolutely be reducing in general into the coming quarter. Substantially lower is what we expect. So the reported operating cash outflow will look much closer to the true operating cash flow going forward. Matthew, over to you. Matthew Bellizia: Okay. Thanks, Andrew. Again, this will be frustrating for shareholders because due to the legal nature, we can't disclose too much, but we continue with the investigation and recovery of funds through the Board subcommittee that we appointed in January to run this. There are still 3 cases underway, the Victorian Legal Services Board, where our argument really is the money was taken en route to a trust. The cases against the former CEO and Mark Madafferi, the lawyer, as well as the case against BDO. So again, we can't provide much detail on that, but these claims do continue, and hopefully, they do result in something for the shareholders in due course. Finally, wrapping up into the last slide before we move to questions. This business now is all about growth. We've reset our cost base, we've done a number of changes, we've cleaned up properties, other bits and pieces, we're driving automation, and obviously, we'll continue to have a lens on cost. We're still negotiating some vendors, such as Salesforce and others, into new deals and new prices to help drive down costs. But essentially, the way forward for this company is growth, growth, growth. I think we've actually got a really good product range. I think, again, we've got to get really better at our marketing. We're going to reset that. I'm going to bring that back home to Melbourne and reinvent our marketing team going forward. But it's really getting the messaging out, driving demand through effective marketing, both to end users and to partners, bringing in partner training to drive them to have better knowledge of the value proposition of our higher-value SKUs and continually improving the way our partners understand and sell our value propositions. We believe we have a good value proposition. We've just now got to get on to better execution at sales growth, and that will be where we spend money, invest money, and grow this business. Now we're leveling back into a more stable position and get ourselves hopefully cash flow breakeven as well as moving into a growth trajectory. That's all we have this quarter. We'll turn to questions if we can. Matthew Bellizia: If excluding VMO2 from both quarters, what's the percentage and dollar increase or decrease in sales? I might throw that to Andrew. Andrew Demery: Yes. So yes, that $8.2 million is the same number for both quarters. VMO2 is not in either of those numbers that we sort of restated. As Matt says, we're considering VMO2 nonrecurring from now on, whilst there are revenues in the quarter for that, and that will be in Q2 as well, and ultimately, there will be an end date on that. So yes, it was a flat quarter-on-quarter for the reasons I talked about. Matthew Bellizia: Okay. Does the change to Cisco's commercial model with Dubber adversely affect the timing and dollar value of Dubber's cash flow from Cisco? So the answer to that, and I think probably summing that up, the answer is yes, we would have shown growth, other than the Cisco not paying us does obviously impact cash flow in the first instance until we replace it back through customer growth. So there would have been normalized growth, but the Cisco is why we leveled out. And obviously, now we've got to get the motion going with Cisco to replace that and get growth there as well as our ordinary course growth. I hope that answered that question. Given the spend on legal costs was over $700,000, can we read that the company believes a recovery of some sort? Otherwise, why is the spend so much? I think the slide presented $172,000 on current spend, Andrew, for the quarter. Some of those payments and the stuff in Andrew's slide went back 6 months -- Andrew? -- and beyond some of the costs incurred, and some of that was pertaining to ASIC investigations and other fees, was it not? Andrew Demery: Yes. Matthew Bellizia: Can you clarify that please? Andrew Demery: So yes, if you split that $700,000 up, yes, the $172,000 number was the company seeking to recover. The other fees were a generic bucket of fees where we've had to respond to asset requests and a variety of other things, and that's over a 6- to 9-month period, and a lot of those got cleared in this quarter. So yes, some of it is responding. Some of it is on the offense, let me put it that way. So yes, we're being careful and cautious with the spend that will go to recovery. We need to make sure there's an ROI on that, I think, the questioner is pointing out. Matthew Bellizia: How are Dubber going to compete with the impending avalanche of customers talking to people to customers talking to AI service agents, which already have inbuilt recording [ radio ]? I think the question is you have lots of individuals -- sorry, you have a lot of products out there today that offer recording for individuals. Microsoft Teams you can record and so forth. We don't play in that space, in those individuals where I want to record my onetime conversation. We are much more in company space, compliance recording, and then AI across that where the intellectual property of the conversation is more owned by the company than it is an individual and just an individual using conversation. So in the consumer space where 2 people can record a call on Microsoft is not really our space. We are in the space where you need to have compliance recording, it needs to be saved in a compliant location, captured in the right manner, and then AI across that space. I hope that answered that question. When you achieve, say, $1 million in positive cash flow, what are you going to do with the cash? The cash here is invested very tightly and very wisely nowadays. We're very frugal with what we spend, and the money we do spend will either be invested in the R&D of our product or the growth of our sales and marketing, which we intend to get return on investment. So we are -- any cash that this company has is all about spending on either improving our service or improving the revenue growth of the business. You said, if I heard correct, bring back home to Melbourne regarding marketing. Can you elaborate, please? Yes, the marketing currently function runs out of New York. So it's just a bit difficult time-wise to get as much marketing and effectiveness as I'd like. So I want to get more senior marketers based in Melbourne next to me so we can have a real impact on what messages are going out, what marketing activities are being driven, and how we're going to grow this business. That's all the questions we have at the moment. We'll give another 30 seconds or so or 1 minute to see if anyone wants to add any questions. Okay. A clarification on one of the questions. Corporate customers who implement their own AI customer service agents with inbuilt recording, which replace human agents. Okay. That's essentially what -- that's in the contact center space a lot more. So there's a lot more agents typically going in -- this is AI agents bots. They're typically replacing things in contact centers. Again, it's not really a space that we've played. We have a little bit of contact center stuff, but not much. So again, it doesn't have a substantial impact on us. Now there is also a need to record agents. In fact, there's also an AI need to record what the agents say because agents get stuck -- this is robotic agents. They get stuck at certain junctures as well. So there actually is a market where even though you've got robotic agents, you still need AI to make sure they're performing and doing what they should do as well. So it's not really our space, but I understand. Hopefully, again, I answered that. Any guidance on revenue growth for the next 12 months, Andrew? Andrew Demery: No. I think we'd expect to have underlying revenue growth. Obviously, we're not providing any specific guidance aside from -- again, the key is to get the business back to the operating cash flow breakeven. So that will be through a combination of the ongoing efficiencies in the business and growth. Yes, there's a number of uncertainties around VMO2, for example, in terms of how that goes. So yes, we don't specifically want to pull out any revenue forecast at this point. Matthew Bellizia: Surely, there are sales targets for the teams. Absolutely, there are sales targets for teams and KPIs on what they do. But I don't know whether we intend to or want to give guidance to market on internal sales targets or where we're going. But absolutely, we're running the sales teams tightly and professionally, as you should expect. Are there any remaining major single partner exposures like VMO2 or Cisco that can upset the growth trajectory going forward? Don't believe so. The other substantive customer is Vodafone, who's migrating from Aeriandi starting on the 16th of November across to our Dubber platform. And there's lots of promotional stuff showing that Vodafone is going more into Dubber. But we've been visiting all their customers, showing them the value proposition of Dubber, the Dubber AI, and there's a migration commencing out of the data center across. So that gives you a fair bit of assurance that our substantive revenue partner is vesting in with us, not moving away. Are there any further questions? Well, if there's no further questions, I'll wind this up because I have been told I've let these go too long previous quarters. So thank you everyone for joining. I hope we provided a reasonable update to you, so you understand where your business is heading and look forward to a further update in 3 weeks' time at the AGM. Thank you, everyone.