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Operator: Greetings, and welcome to the TPG Real Estate Finance Trust Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Bob Foley. Thank you. You may begin. Robert Foley: Good morning, and welcome to the TPG RE Finance Trust Earnings Call for the Third Quarter of 2025. Today's speakers are Doug Bouquard, Chief Executive Officer; Brandon Fox, Interim Chief Financial Officer; and Ryan Roberto, Head of Capital Markets and Asset Management. Doug and Brandon will provide commentary regarding the company, its performance and the general economy in which TRTX operates. Doug, Brandon and Ryan will answer questions from call participants. Yesterday evening, we filed our Form 10-Q, issued a press release and shared an earnings supplemental, all of which are available on the company's website in the Investor Relations section. This morning's call and webcast is being recorded. Information regarding the replay of this call is available in our earnings release and on the TRTX website. Recordings are the property of TRTX and any unauthorized broadcast or reproduction in any form is strictly prohibited. This morning's call will include forward-looking statements, which are uncertain and outside of the company's control. Actual results may differ materially. For a comprehensive discussion of risks that could affect results, please see the Risk Factors section of the company's latest Form 10-K. The company does not undertake any duty to update our forward-looking statements or projections unless required by law. We will refer during today's call to certain non-GAAP financial measures, which are reconciled to GAAP amounts in our earnings release and our earnings supplemental, both of which are available in the Investor Relations section of our website. Today's earnings call is my last. After more than 12 years with TPG and 10 years as CFO of TRTX, my wife and I decided, I will retire at year-end to become a senior adviser to TPG Real Estate, which was announced via press release 6 weeks ago. As a senior adviser, I will remain a member of the investment review committees of TRTX and our other real estate vehicles. Brandon Fox has assumed the role of Interim CFO, and Ryan Roberto has assumed all duties regarding capital markets and portfolio management. The succession plan was in place prior to my decision to retire, and Brandon and Ryan have been growing into their new roles for several years. The final stages of this transition will be complete by the holiday season. I've worked with Brandon and Ryan for 7 and 10 years, respectively, and I have every confidence in their well-developed abilities and judgment. Brandon and Ryan have been strong teammates to Doug as he continues to drive TRTX's success. It's been a privilege to work with my TPG colleagues since 2015 to transform TRTX from a $25-billion loan portfolio purchased from a bank into a market-leading commercial mortgage REIT. Important memories for me include $17.9 billion of loan investments, TRTX's 2017 initial public offering, early entry into the CRE CLO market and establishment of a strong brand as issuer and collateral manager. I'm also very proud of TRTX's deeply ingrained culture of disciplined credit investing, portfolio management and liability management and the firm's transparent communication with its shareholders, lenders, bond investors and borrowers. Like most of you on this call, I'm a shareholder, and I look forward to TRTX's continued growth and success. I have the utmost confidence in the TRTX team and its ability to execute its business plan under Doug's thoughtful and energetic leadership. I've known many of you on today's call for decades, during which the real estate credit market has developed impressive depth, breadth and liquidity. I am appreciative of the confidence and support you have extended to TRTX, to my colleagues and to me. And I am deeply grateful for the many professional relationships and personal friendships developed over the years. I will miss you. Doug? Doug Bouquard: First, I want to take a moment to thank you, Bob, for your dedicated service to our firm over the past 12 years. Your incredible work ethic and strategic vision have served TRTX shareholders incredibly well. Like many in our industry, you have served a variety of important roles in my life, a thoughtful client, a close mentor, a dedicated colleague and a great friend. We are excited to have you remain as a senior adviser to the TPG real estate platform and congratulate you and your family on a well-earned retirement. Additionally, I look forward to continuing a close working relationship alongside Brandon as Interim CFO and Ryan as Head of Capital Markets and Asset Management. Over the past quarter, the equity market again hit multiple all-time highs, while the 10-year treasury rallied nearly 40 bps to hover near 4%. Meanwhile, the real estate equity market continues to heal, albeit not at the ferocious pace of the broader asset market. As a result, the backdrop for real estate credit continues to remain attractive on an absolute and relative value basis. This market dynamic continues to be driven by a combination of reset valuations, reduced lending appetite from the banking sector and elevated risk premium driven by the uneven recovery across real estate property types and geographies. In the third quarter, TRTX's investment activity accelerated. We closed $279 million of new investments during the quarter, another $197 million subsequent to quarter end. And beyond that, we currently have over $670 million of loans expected to close in the fourth quarter. To dimension our investment momentum this year, when you combine our closed loans year-to-date of $1.1 billion and the loans we expect to close in Q4, this totals over $1.8 billion of new investments during 2025. This steady growth in activity will drive TRTX earnings growth and demonstrates the offensive posture of our investment platform. We continue to lend primarily on multifamily and industrial assets, which represent approximately 91% of the $1.1 billion of our closed and in-process investments. For loans closed in the third quarter, we averaged 65% loan-to-value ratio and a credit spread of 3.22%, which speaks to the attractive credit risk profile we can source in the current investment environment. Our investment activity would not be possible without TRTX's stable credit profile and substantial liquidity, coupled with the investment insights of TPG's integrated debt and equity investment platform. While we were very active on the investment side, we continue to enhance our liability structure as evidenced by last week's pricing of our latest series CLO, FL7. This $11-billion transaction represents our latest match term nonrecourse non-mark-to-market financing with 30 months of reinvestment capacity. Since both FL6 and FL7 were issued in 2025 and have 30-month reinvestment periods. These 2 vehicles will provide for the next 30 months, approximately $1.9 billion of financing capacity at a blended cost of funds of SOFR plus 1.75. These stable, cost-effective, flexible financings will accelerate earnings growth and provide substantial ballast for years to come. This quarter's operating results and investment activity demonstrate TRTX's continued ability to deliver on its strategic goals. Year-over-year, our loan portfolio has grown by $1.2 billion or 12% net. We intend to continue our growth in a prudent manner. TRTX shares currently trade at a 20% discount to book value, which we believe offers substantial value. This value continues to be realized as we pull the many levers for growth, including deploying excess liquidity and prudently increasing our debt-to-equity ratio to meet our full investment objectives. Combining these growth levers with the differentiated sourcing and investment capabilities of TPG's integrated real estate platform fuels our ability to create value for TRTX shareholders. With that, I'll turn the call over to Brandon to discuss our results. Brandon Fox: Thank you, Doug, and good morning. Before I review our third quarter operating results, I also want to recognize Bob and his impact on TRTX, TPG and my professional career. Through his tenacity and commitment, Bob's reach and influence is felt across TRTX and TPG. His mentorship over our 7 years together has been invaluable to me, and I wish him all the best. Thank you, Bob. For the third quarter of 2025, TRTX reported GAAP net income of $18.4 million or $0.23 per common share and distributable earnings of $19.9 million or $0.25 per common share, covering our quarterly dividend of $0.24 per common share. Book value per common share increased quarter-over-quarter to $11.25 from $11.20 due to our share repurchase program and another solid quarter of operating results. Our operating results reflect the continued execution of our investment strategy, which is supported by our nimble capital allocation approach and durable liability structure. During the third quarter, we originated 4 loans with total commitments of $279.2 million at a weighted average credit spread of 3.22%. We received loan repayments of $415.8 million, including 6 full loan repayments of $405.8 million across our loan portfolio. These repayments were primarily multifamily and hotel loans originated in 2021 and 2022. These par loan repayments continue to demonstrate the ability of our borrowers to execute their business plans and validate the credit performance of our loan portfolio. We repurchased 1.1 million common shares for total consideration of $9.3 million or $8.29 per common share, generating $0.04 per common share of book value accretion. In total, the company repurchased 3.2 million shares of common stock at a weighted average price of $7.89 per share, resulting in $0.13 per share of book value accretion in the current year. We remain a market leader in optimizing our capital structure. On Monday, we announced the pricing of TRTX 2025 FL7, a $1.1 billion managed CRE CLO, which will settle on or about November 17. The company marketed to institutional investors approximately $957 million of investment-grade securities that will provide TRTX non-mark-to-market, nonrecourse term financing. FL7 includes a 30-month reinvestment period, an advance rate of 87% and a weighted average interest rate at issuance of term SOFR plus 1.67% before transaction costs. Simultaneously, with the issuance of FL7, we expect to redeem TRTX 2021 FL4. The FL7 issuance and FL4 redemption are expected to produce roughly $100 million of liquidity to fund new loan investments. We ended the quarter with near-term liquidity of $216.4 million, consisting of $77.2 million of cash-on-hand available for investment, net of $16.4 million held to satisfy liquidity covenants under the company's secured financing agreements; undrawn capacity under secured financing arrangements of $78.6 million and collateralized loan obligation reinvestment proceeds of $44.2 million. Our net earning assets have grown year-over-year by $377.3 million or 12%, driven by $1.2 billion of loan originations. At quarter end, our loan portfolio was again 100% performing with no negative credit migration. Our weighted average risk rating for the loan portfolio is 3.0, consistent with the prior 7 quarters. Our CECL reserve decreased by $2.6 million quarter-over-quarter, primarily due to loan repayments, while the reserve rate of 176 basis points is flat from June 30. The company's liability structure is 87% non-mark-to-market, reflecting our long-held preference for liabilities that are stable, long-dated and low cost. Total leverage was flat quarter-over-quarter at 2.6x. At quarter end, we had $1.6 billion of financing capacity available to support loan investment activity, and we're in compliance with all financial covenants. Our third quarter operating results again demonstrate that the company's disciplined approach to capital allocation, asset management and capital markets execution will continue to deliver quality earnings growth and enhanced shareholder value. We remain focused on sustaining our momentum to further narrow the current share price to book value discount. With that, we welcome your questions. Operator? Operator: [Operator Instructions] First question comes from Steve Delaney with Citizens JMP. Steven Delaney: First, Bob, congratulations to you on a wonderful career and all the best in what I would call your semi retirement, given that you're going to remain an adviser, a trusted adviser. So, this is a special call for just that reason. Brandon, I'm just curious, when you look at the portfolio, which is performing exceptionally well, but at $3.7 billion, when you look at that and you look at your 2.6 debt-to-equity, do you feel that the company has some amount of organic portfolio growth available to it with the current capital base? Brandon Fox: Thank you for your question. And I do believe that, that is the case. We have previously discussed the potential growth of the balance sheet as it's currently constructed. In June, we put out materials that show as you lever the company's balance sheet to 2.5, 3, 3.5x that there's incremental DE growth on a per share basis of $0.04 to $0.06 depending on the ROEs of the loans originated and timing of when that occurs during the quarter. Steven Delaney: This afternoon, we'll hopefully get a cut from the Fed. As you -- and your partners there, as you talk to borrowers, do you feel that there are -- there is CRE equity money for transitional properties that is sort of waiting for a more attractive rate environment? And would you expect not just this one 25 basis point cuts, but if we get 3 to 4 over the next year, like a lot of people are expecting, do you see a significant increase in demand for your primary bridge loan product? Doug Bouquard: Yes. It's an important question. This is Doug, by the way. I think that from an investment activity perspective, we're already starting to see some of that acceleration. I mentioned that when you combine the loans that we closed this past quarter, what we have closed thus far in Q4 and what we have signed up, that totals about $1.1 billion just in Q1 and -- sorry, just in Q3 and Q4 of this year. So we're kind of starting to see some of that. As I look forward to the next year, I think there's sort of a few things that I expect will increase the demand for our product. I think, one, SOFR actually going lower, I think, will be a big driver. That will probably on the margin push some of those acquisition dollars for transitional assets into our sector, one. And then two, simply put is there's more -- as there's a reduction in interest rate volatility is when you tend to see more appetite for real estate transactions, generally speaking. So I think when you think about our current pipeline and portfolio, I think as I've shared in prior quarters, it's been, I'd say, predominantly refinance focused, typically, give or take, about 80%. And what we're expecting, at least for next year is to have perhaps a little bit more balance between acquisition activity and refinance activity, driven again by part of what the Fed's actions will be. But also, there's just kind of to my earlier comments about broader asset classes, there is -- there's been a pretty dramatic rally across all asset classes globally. I would say that real estate has not fully participated in that rally. And I think it does put our asset class at a particularly attractive spot in terms of risk appetite. Operator: Next question, John Nickodemus with BTIG. John Nickodemus: And before I start, I just want to congratulate you, Bob, on a fantastic career at TPG and elsewhere. Always was a pleasure working with you since we started picking up coverage. First off, similar question to what Steve led off with. Obviously, saw leverage stay flat quarter-over-quarter. Brandon, you just noted the sort of pickup in earnings power from raising that leverage. So I was curious, both headed into the end of this year as well as next year, given the new CLO, given what appears to be a ramp in origination volumes, sort of how you see the cadence of that leverage as we assume going up both at the end of 2025 and into 2026, just how you're thinking about the timing there? Doug Bouquard: Sure. Yes. I think what Brandon alluded to back to that kind of path to growth chart, does map out, again, a bit of as we lever up and frankly, how that can flow into DE. I think that what you're seeing within, let's call it, this quarter, and I think thus far, what we've seen so far in Q4 is the -- you're not really seeing that kind of full earn-in of our new investment activity because even in Q4, exactly what we're seeing is that the repayments for Q4 have largely happened within the sort of first half of the quarter. And the bulk of the new investments, we expect will close towards the end of the quarter. So as we're -- I think one of those players in the market who is pretty meaningfully growing our balance sheet. We will have that lag that can be 45 to 60 days in between when loans pay off and when we make new investments. And we continue to want to kind of keep that day count as short as possible. But that's a little bit of what you're seeing, I'd say, Q3 earnings, and I think that will be a dynamic over the kind of coming quarter or 2 as we continue to kind of scale and grow our balance sheet. John Nickodemus: Great. That's really helpful for us. And then my other question, a little more minute here, but noticed that your largest new loan of the quarter was actually on the Nashville hotel. This has been in recent quarters, an area that you've been reducing exposure. Obviously, you have been more focused on multifamily and industrial. So just curious what went into this loan, if it was just sort of a unique opportunity, just kind of something that caught our eye when we were looking through the new loans for the quarter. Ryan Roberto: Sure. This is Ryan. As you know, as you said, we have been reducing some exposure to hospitality over time as we've seen repayments accelerate in that sector for us. And this was just an unique opportunity to lend on a very high-quality asset to a high-quality borrower where the business plan has largely been completed at that point in time. So a good ROE for the company and an interesting investment per se. Operator: [Operator Instructions] Next question comes from Rick Shane with JPMorgan. Richard Shane: Bob, I'm sure we'll catch up afterwards. But I think we've followed your companies for approaching 20 years, and it has truly been a pleasure. Really appreciate all of the wisdom and consideration over the years in terms of thoughtfulness, so thank you. As we think about the levers that are available, you've had questions today about whether or not you can take operating leverage up. You've done a great job managing down nonaccruals. So the portfolio is accruing. Is the opportunity at this point to enhance ROE a function of taking down that REO portfolio, having more leverageable capital there and obviously having a portfolio that no longer drags earnings. Is that the next leg as we move forward in terms of enhancing ROE? Doug Bouquard: Yes. No, I think that's really not the path specifically. I think that it really is just net balance sheet growth is the single most important driver. I think unlike many of our competitors, our REO portfolio is really not a material drag in terms of our DE. I think more of what really will frankly drive our growth is just the growth in our net balance sheet over time. Our liquidity position continues to get further buttressed even by this recent series CLO. So I think for us, the next kind of coming quarters will be focusing on just frankly growing our balance sheet and really moving our debt-to-equity ratio up from -- we've kind of been in the mid-2s recently. And I think getting closer to 3, 3.5 over time is really -- that's the important driver, frankly, less so in terms of REO dispositions. Richard Shane: Got it. Okay. And that's helpful. I appreciate the specificity. I wasn't -- perhaps I misunderstood the earlier answers, but I wasn't as confident about increasing that leverage until the specificity of answers. That seems to me to be where the opportunity is. And is part of this a function of the CLO market is going to, given the efficiency there, give you incremental leverage based on sort of recent transactions? Doug Bouquard: Yes. No, that definitely does give us more leverage, one, and also that it both gives us more leverage, but also it lowers the cost of capital of the company. And the deal has priced but has not closed yet. So these are all things that you'll start to see flowing through in coming quarters. Richard Shane: And Bob, like I said, we'll catch up later, but thank you for everything over the years. Robert Foley: Thank you. Operator: I would like to turn the floor over to management for closing remarks. Doug Bouquard: Thank you, everyone, for taking the time this morning, and we look forward to updating you on further progress in the future. Thank you very much. Operator: This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
Operator: Ladies and gentlemen, good day, and welcome to the Leonardo DRS Third Quarter Fiscal Year 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this event is being recorded. I would now like to turn the conference over to Steve Vather, Senior Vice President of Investor Relations and Corporate Finance. Please go ahead. Stephen Vather: Good morning, and thanks for participating on today's quarterly earnings conference call. Joining me today are Bill Lynn, our Chairman and CEO; John Baylouny, our COO and incoming CEO; and Mike Dippold, our CFO. They will discuss our strategy, operational highlights, financial results and forward outlook. Today's call is being webcast on the Investor Relations portion of the website, where you will also find the earnings release and supplemental presentation. Management may make forward-looking statements during the call regarding future events, 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 factors. For a full discussion of these risk factors, please refer to our latest Form 10-K and our other SEC filings. We undertake no obligation to update any of the forward-looking statements made on this call. During this call, management will also discuss non-GAAP financial measures, which we believe provide useful information for investors. These non-GAAP measures should not be evaluated in isolation or as a substitute for GAAP performance measures. You can find a reconciliation of the non-GAAP measures discussed on this call in our earnings release. At this time, I'll turn the call over to Bill. Bill? William Lynn: Thanks, Steve. Good morning, and welcome, everyone, to the DRS Q3 earnings call. We continue to perform well. Our third quarter results demonstrate DRS' close alignment with customer priorities, which was clearly reflected in our strong bookings, revenue and profit growth as well as solid cash flow generation. As I told you last call, we expected second half bookings strength, and that materialized in spades in the third quarter. We secured $1.3 billion of bookings in the quarter, resulting in a 1.4x book-to-bill ratio. Our year-to-date book-to-bill ratio sits at 1.2x, and we continue to see a solid path to remain above 1x for the full year. This quarter, demand was most evident for our counter UAS, advanced infrared sensing, naval network computing and electric power and propulsion technologies. Our exceptional bookings propelled us to another record total backlog, which now sits at $8.9 billion, up 8% year-over-year and also up sequentially. Funded backlog also saw remarkable year-over-year growth of 20% in the quarter. Diving deeper into our quarterly financial performance. Across metrics, we sustained double-digit growth in the year-to-date, including in Q3. This provides greater visibility to close out the year on a strong footing. Furthermore, the foundation built in the year-to-date leads us to increase our full year revenue growth expectations to 10% to 11%. Our profit metrics also showed strong performance. Adjusted EBITDA was up 17%, although margin slightly lagged behind prior year levels as we continue to ramp our investment in internal research and development. Adjusted diluted EPS increased by 21%. Lastly, free cash flow significantly surpassed prior year levels, reflecting improved collection linearity and working capital efficiency. In aggregate, our strong Q3 results place us in a solid position to meet our full year outlook. However, we continue to operate in a dynamic market environment and are focused on smoothly navigating its complexities. The team and I remain focused on execution discipline and maintaining investment to sustain strong organic growth. While DRS continues to perform well, the operating environment offers both opportunities and challenges. Global threats persist, leading to continued growth in U.S. and allied defense investments to expand and enhance capabilities to deter and contest these adversaries. We are thankful that earlier this month, the remaining Israeli hostages were returned and that initial steps toward peace are being made in the Middle East. We are hopeful that the cease fire sustains and brings lasting stability, not only for our employees in the region, but for all situated there. Domestically, the federal government remains shut down, marking the longest full shutdown on record. Unlike the last lengthy government shutdown in late 2018, all agencies, including the Department of Defense are impacted. Thankfully, to date, we have not seen a meaningful impact on our ability to execute our programs or deliver for our customers. However, as the shutdown extends, we are keeping a watchful eye on any impacts. We are hopeful that Congress and the administration negotiate and enact funding to provide clarity and visibility to our national security customers. Zooming out and taking a look at the bigger picture, DRS remains well positioned in areas of customer priority with strong alignment to enduring themes of counter UAS, improving shipbuilding throughput via industrial base expansion, enhancing missile production, and sensing and electronics modernization. There are clear funding tailwinds in the $150 billion for defense embedded in the tax reconciliation passed earlier this year. We are eager to see the enacted funding start to flow to our customers. Shifting to the supply chain. We are executing the strategy laid out last quarter to strengthen our germanium supply chain. We have begun recycling initiatives and are seeing early success in extracting adequate levels of germanium. We are also actively working on strategic agreements with several partners to ensure consistent supply in 2026. Overall, I am pleased with the progress made to date. There's still work to be done before resolving this constraint fully, but I am confident that the initiatives that we have put in place will successfully resolve this challenge in 2026. Let me wrap up my remarks with a few closing thoughts. Our year-to-date results reflect the resilience of our business and the strength of our differentiated technology portfolio. Customer demand is clear for our capabilities, and we remain focused on executing with excellence to support them in their most critical missions. The team has performed remarkably. Their commitment is unwavering and their incredible contributions are foundational to our financial success. Earlier today, I announced that I will be retiring as Chairman and CEO on January 1, and our COO, John Baylouny, has been named the company's new CEO. I've had the distinct privilege of leading DRS as CEO since 2012. The DRS we have today is unmistakably better and stronger than the one I joined 14 years ago. I could not be prouder of what the team and I have accomplished together. We have strategically transformed DRS through a steadfast focus on reshaping the portfolio into enduring areas of demand, driving consistent innovation and executing to provide exceptional capability into the hands of our war fighters. All of these strategic actions have resulted in a consistently growing business with expanding profitability and strong cash generation. I am pleased with where the company is positioned today and the incredible potential ahead of it. This inflection point offers an opportunity for me to hand the reins over to someone who has been my right hand for a near decade. While I'm delighted with what we have achieved, I have high expectations for what this company will achieve under John's leadership as our next CEO. Many of you already know John. He's an outstanding leader and is absolutely the right person to take this on. He has a wealth of knowledge, deep technological expertise and vast experience at DRS spanning over 35 years with significant operational impacts. Equally important, he possesses a profound understanding of our customers and their needs, coupled with an unwavering commitment to driving innovation and delivering solutions that ensure their mission success. Separately, the Board has unanimously elected Fran Townsend, our current Lead Independent Director, to become Chair. She has been a steady hand on our Board dating back to our acquisition by Leonardo. As part of this transition process, John, Mike, Steve and I will have several opportunities to meet with many of you over the coming months. John and I will be sharply focused on ensuring a seamless transition through the end of the year. Congratulations, John. Now let me turn the call over to him so he can review our operational highlights. John Baylouny: Thank you, Bill. First, on behalf of all of our employees, I want to thank you for your extraordinary leadership and the incredible impact you've had on the company. I am honored to be the next CEO of DRS, and I appreciate the trust you and the Board have in me to lead this exceptional organization. I'm very excited about where DRS is today, more importantly, where we can take this company moving forward. The opportunities to create value for both our customers and shareholders are abundant as ever. Let me now turn to discuss key business highlights from the quarter. As Bill mentioned earlier, we continue to see vigorous appetite for our counter UAS solutions. Due to the evolving threats, we are constantly iterating our offerings to stay ahead of the threat. Earlier this month, at the AUSA Annual Meeting, we showcased our leading expertise in counter UAS. We demonstrated our ability to develop and integrate a palletized mission equipment package that is vehicle and platform agnostic and applicable to both manned and unmanned systems. Furthermore, we successfully combined both short-range air defense and counter UAS missions into a significantly smaller and lighter platform to JLTV. In a growing field of counter UAS solutions, DRS stands out due to its reputation for bringing best-of-breed technologies well ahead of others and with proven field-tested results and mission effectiveness. To that end, I would like to commend the team for taking first place at our recent Army counter UAS competition, showcasing our cutting-edge electronic warfare capabilities to disrupt drone threats. Additionally, in Q3, we demonstrated cross-modality success in solving some of the hardest problems facing our armed forces, integrating our sensors to enable threat neutralization through a platform to platform kinetic kill handoff. Our leadership position in counter UAS has translated into demand across our portfolio, including our integrated systems and sensing solutions in tactical radar, electronic warfare and infrared. I want to highlight that in the quarter, we were awarded over $250 million of contracts for our premier ground-based counter UAS and short-range air defense programs. Moving to sensing. We continue to see strong demand building in the missile domain. We are actively engaged in initiatives to expand sensing capacity and bring generational upgrades to sensing content on new platforms. Additionally, unmanned systems present a growing area of opportunity for our multimodal sensing business as we integrate our technologies into both unmanned aerial and surface vessel platforms. Lastly, in our core infrared business, we continue to capture an outsized share of the market to supply our customers with infrared capabilities for dismounted and ground combat vehicle applications. Next, I want to highlight our new software offering, SAGEcore. SAGEcore is an integrated operating system that brings AI, advanced sensor and edge computing together in a single deployable solution for use on tactical platforms across multi-domain environments. SAGEcore is one piece of the innovation we are bringing to the next generation computing and sensor fusion. In the quarter, we also released THOR, a 4 plus 1 multifunction network computing product with the ability to host electronic warfare, onboard crypto and tactical WiFi capabilities. THOR complements the AI processor we developed earlier this year and supports the Army's next-generation C2 initiative with a Zero Trust cost-effective solution for tactical and ruggedized computing at the edge. Additionally, we continue to see steady demand for our next-generation enabled network computing solutions in support of the Navy's network sensor and integrated fire control initiative, Cooperative Engagement Capability, or CEC. Last but certainly not least, I want to commend our electric power and propulsion business for the consistent and remarkable performance. The impact of their strong execution is evident not only at the segment level, but also at the company level. We continue to see this part of our business driving significant growth and margin expansion. We are well positioned to capture incremental scope and remain in active conversations with our customers on industrial base expansion, particularly steam turbine generators. The growth opportunity of proliferating our electric power and propulsion technology into future platforms remains an exciting growth vector. Let me now turn the call over to Mike, who will review our third quarter and our revised 2025 guidance in greater detail. Michael Dippold: Thanks, John, and congratulations. I look forward to working closely with you in your new role to create value for our customers and shareholders. Bill, it's been a heck of a ride, and I'd like to thank you for your outstanding leadership. Overall, I'm pleased with our solid year-to-date performance, particularly amidst a complex and dynamic operating environment. Our third quarter reflects the results of our sustained focus on driving innovation, processing customer demand into revenue growth and maintaining disciplined execution. Let me start by discussing our Q3 performance. Quarterly revenue grew by 18% over the prior year, totaling $960 million. The team did an impressive job converting strong customer demand. We also benefited from favorable timing of material receipts, resulting in revenue above the framework laid out on the Q2 call. From a segment perspective, IMS was our growth engine. IMS quarterly revenue was up 34%, driven by strong contributions from counter UAS and electric power propulsion programs. ASC demonstrated a healthy upper single-digit increase of 9%, thanks to growth from naval network computing, advanced infrared sensing and tactical radar programs. Shifting to adjusted EBITDA. Q3 adjusted EBITDA was $117 million, up 17% from last year. Quarterly adjusted EBITDA margin was 12.2%, reflecting a 10 basis point margin contraction from the prior year. Higher volume and improved electric power and propulsion program profitability were offset by increased research and development investments, less favorable program mix and less efficient program execution, leading to the slight margin decrease in the quarter. Shifting to the segment view. ASC adjusted EBITDA was flat on a dollar basis, but saw a 100 basis point contraction due to greater internal research and development investment, along with less favorable program mix. IMS adjusted EBITDA was up 47%, with margin expanding by 120 basis points, thanks to higher volume and improved profitability on our Columbia Class program. On to the bottom line metrics. Third quarter net earnings were $72 million and diluted EPS was $0.26 a share, up 26% and 24%, respectively. Our adjusted net earnings of $78 million and adjusted diluted EPS of $0.29 a share were up 22% and 21%, respectively. The favorable year-over-year compares were driven primarily by operationally led profit growth, coupled with slightly lower interest expense. Now on to free cash flow. Free cash flow was $77 million for the quarter, up significantly over the prior year despite increased capital expenditure investment, driven by increased net profitability and better working capital efficiency. With 1 quarter remaining, we are revising our full year 2025 guidance to incorporate our strong year-to-date performance, along with factors we expect to influence the business as we close out the year. We now expect revenue in the range of $3.55 billion to $3.6 billion, implying 10% to 11% year-over-year growth. Our backlog position provides clarity into the execution range. The single most important factor driving the output is the variability in the timing and level of material receipts received by year-end. I would resist the urge to fixate on the implied fourth quarter trends. Over the past few years, we have steadily worked to improve quarterly linearity and our year-to-date performance this year is certainly reflective of that initiative. We expect Q4 to reflect comparable patterns as last year, where there is a step down in growth from the first 9 months of the year. Lastly, the nature of our business makes it challenging to run rate quarterly performance into any useful trend. Bottom line, the step-down in implied growth to close the year should not be used as a read-through for next year just as Q4 2024 was not indicative of the growth. We are currently on track to deliver for 2025. Next, we are maintaining the range of adjusted EBITDA. As a reminder, the range is between $437 million and $453 million. As evidenced by our year-to-date results, we continue to expect IMS to be the source of the vast majority of profit and margin expansion for the year. Adjusted EBITDA margin at the company level continues to be constrained by increased R&D investment, less favorable program mix and less efficient program execution, including the impact of germanium. The increased adjusted diluted EPS range incorporates a slightly lower effective tax rate. We now expect adjusted diluted EPS between $1.07 and $1.12 a share. Our revised tax rate assumption for the year is 18%, and our other nonoperational assumptions remain static from our prior guidance. Lastly, with respect to free cash flow conversion, we are still targeting an approximately 80% conversion of adjusted net earnings for the full year. Shifting to 2026. We are in the middle of our normal course budgeting process. It's premature to provide specific guidance for next year, but as a team, we are focused on driving continued organic growth and expanding adjusted EBITDA margin. Consistent with past practice, we plan to provide formal guidance in conjunction with our fourth quarter and fiscal year 2025 call in late February. In conclusion, I want to thank the team for their incredible contributions in bringing innovation to solve complex national security challenges, delivering exceptional technologies to our customers and delivering solid financial results for our investors. We will continue to remain focused on rigorously executing our strategy to create value through durable long-term growth. With that, we are ready to take your questions. Operator: The first question today will be coming from the line of Peter Arment of Baird. Peter Arment: Congrats, Bill and John. Bill, thanks for all the support over the years. Really appreciate it. A question on just IRAD spending. Obviously, you're seeing a lot of opportunities up pretty significantly, 35%, I think, in 2025. How do we expect that trending just because of kind of some of the margin performance we've seen at ASC just because some of that is impacting that? How does that trend as we go forward? Michael Dippold: I would expect to see this internal research and development investment kind of stay at this percentage of revenues. I think we're in a more dynamic operating environment where the procurement processes has changed from the department. And I think that we're going to continue these investment levels to provide that agility in order to maintain this growth. Peter Arment: Okay. So that was roughly like mid-3% or so roughly or right around there? Michael Dippold: Yes. I think around there. Yes. Peter Arment: Okay. Helpful. And then just, I guess, any updates on just kind of foreign military sales activity. Obviously, there's a lot of demand signals from Europe. You guys are well positioned. What are you seeing there, Bill? And any opportunities for DRS? William Lynn: Yes. Thanks, Peter. We do think we're going to see a ramp-up in foreign military sales opportunity. We're just at the -- I think, at the start for the force protection, the counter UAS. I think that has a real opportunity. We continue to see demand for our sensors, the EO/IR sensors and for our network computing. And I think given the threat environment, we expect those to continue. And then we are working to develop markets for our naval power and propulsion system, particularly in Asia. Peter Arment: Just last one for me, just on Mike, on the germanium pricing, has things stabilized there? Have you gotten more suppliers or supply lined up for next year? Michael Dippold: Yes, I'll take that out to start and then maybe hand it over to Bill. But first, on the pricing side, as we talked about in our last call, I think we've got 2025 kind of lined out, and there were no real surprises or anything from our last call on the germanium front. We are making some progress in terms of solidifying supply into '26. And I'll hand it over to you, Bill, there. William Lynn: Yes. As Mike said, we're trying to build a structure that supports our revenue flow for optics going forward. And so that involves in the near term, recycling existing germanium from older optics. Over the midterm, we've moved to diversify our supply base with agreements with different suppliers and processors. And basically, we need to move it away from reliance on China. We're seeing success in both those near-term and midterm initiatives, and we think that will put us in a strong position in 2026. Operator: And our next question will be coming from the line of Robert Stallard of Vertical Research. Robert Stallard: Best of luck, Bill, and congratulations, John. First to kick things off, very good quarter for bookings. And I was wondering if there was any unusually large orders that were placed this quarter. And in relation to that, how do you expect these bookings to flow through to revenues? Michael Dippold: Yes. I would say there was an increase in demand that we saw on the counter UAS and short-range air defense programs. So those came in heavy for the quarter, which accelerated some of the bookings results, primarily in the IMS segment. So that was a little bit of a pop there. And then we did see some acceleration just across the board as just the typical flow you see at the government fiscal year-end as September wrapped out. So a little bit plused up. That said, as I look out for the year, I expect to be comfortably ahead of that 1:1 target that we've put out there. We've got a good foundation for that. So we expect the demand to continue and feel good about our bookings number for the year. In terms of the revenue turn, obviously, for us, it's about our funded backlog and how that pulls over into revenue. Bill mentioned in the prepared remarks here that the funded backlog was up 20% year-over-year. And if you look at it sequentially, it's up 7%. So we're feeling good about the foundation we have for 2026, Rob. Robert Stallard: Okay. And then as a follow-up for Bill, you highlighted the extended U.S. government shutdown. If this carries on, what sort of potential risk do you see for DRS from this situation? William Lynn: Yes, Rob, it depends for how long, of course. We're anticipating at least going well into November. And as I said in the prepared remarks, the impact of that length is moderate. As it starts to go longer than that, it's -- the people who pay us and give us the awards aren't there. And so you'll start to see delays in awards and delay in pay. But it would really have to keep going for a longer period, where we're already basically longer than we've ever seen, but it would have to be a historic length before we'd see an impact. Robert Stallard: Okay. And then just one final one for Mike. You said there were some, I think, operating efficiency issues on programs in the quarter. You highlighted germanium. But is there anything else we should be aware of? Michael Dippold: It's primarily germanium. Obviously, with our development programs, we always have a little lower margin when we have that mix. But in terms of the context of the comment, it centers around germanium. Operator: And our next question will be coming from the line of Michael Ciarmoli of Truist Securities. Michael Ciarmoli: Bill, John, congrats. And Bill, thanks for everything over the years. Maybe just back to Peter's question on the margins. I mean you guys had '26 targets out there. You've obviously got this elevated R&D. How do we think about the payback and measuring the return on this R&D? Do we -- should we expect? Do we see new programs, maybe an acceleration of revenue growth off of what you've done this year? Just trying to get a sense of really measuring the payback on the R&D investments. Michael Dippold: Yes. I think the payback on the R&D investments are going to put us in position to attack a lot of those adjacent markets and growth opportunities that we've had. So I think as you think about the kind of new way of procurement and coming to the table with solutions that are already at a higher kind of technical maturity, that's what we're really doing here. And I think it is giving us some good opportunities in the counter UAS domain. I think it's giving us some opportunities here as we look to kind of unmanned surface vessels. So all of these are giving us some additional opportunities to continue the growth that we've seen, and that's really what we're expecting from the IRAD investments at these levels, Mike. Michael Ciarmoli: Okay. Okay. Is that -- you just mentioned counter UAS, and we've heard it a couple of times. Is there any way to sort of quantify or size your exposure at this point to counter UAS programs and maybe size the pipeline of opportunities? You mentioned AUSA. There's certainly a lot of competing companies from new entrants to large-scale primes guys like yourselves, everybody is thrown around new offerings. I mean, can you give us any sense of where your revenues are today or what you think your growth rate is or sort of adoption penetration there? Michael Dippold: Yes. And I think this is one of DRS' nice differentiators is when we talk about counter UAS, that is largely all of our force protection type of revenue that we have there. So we talk about and disclose force protection being about 20% of our revenues. That's largely dominated by the short-range air defense and counter UAS programs. So we have real penetration, which we believe gives us an advantage as we look to the future here. So that's -- think about that kind of in that 18% to 20% range of revenue is all tied to those efforts. John Baylouny: Let me add to that quickly and just say that we're the current provider, the approved provider for counter UAS for the U.S. Army. Our solutions are battlefield tested. We know that our solutions work, and we're always adapting our solutions to the evolving threat. We did see a lot of counter UAS solutions on the AUSA floor, but we distinguish ourselves by having a battle-proven capability. And we're very close to our customer. We understand what they need. We understand where they're thinking. We do expect that counter UAS to kind of expand and proliferate to all echelons of the forces and really all domains. And so we see a real opportunity in the future here is driving innovation and pushing this out new technology. Michael Ciarmoli: Okay. Would you say you're kind of equally exposed to both kinetic and kind of non-kinetic solutions for counter UAS? John Baylouny: Yes. I would say this, Michael. I think that you're going to see both capabilities on the battlefield. It's going to depend on where you are in the Echelon. If you're up in the front -- next to the front, you're going to see some capabilities back in the back at higher echelons, you're going to see other capabilities. DE is going to end up probably at both echelons, but those capabilities are going to be different. So you're going to start seeing the counter UAS market kind of proliferate across all echelons, all different capabilities, and we provide all of that. Michael Ciarmoli: Okay. Okay. Last quick one for me, Mike. Just should we expect the same margin profile in '26 with kind of IMS being the lead engine and some more of that IRAD dampening down the ASC margins? Michael Dippold: Yes, I wouldn't expect the trends to continue. We're not going to go deep into '26 here. But in terms of just the allocation of profit, the investment is going to stay heavy at ASC, and we still feel pretty good about the tailwind that is Colombia as we look into the future. Operator: And our next question will be coming from the line of Kristine Liwag of Morgan Stanley. Kristine Liwag: Bill, congratulations on your retirement. It's been a pleasure to see how you've transformed DRS over the years. And John, congrats on your new role. I guess following up on the supply chain, you guys have called out germanium a few times. So I just wanted to dive a little bit deeper into this. Can you talk a little bit more about your sourcing strategy for this? Like how much inventory do you have? It sounds like you got a little bit better access, but it would be really helpful to understand regarding some sort of time line or some sort of quantity. William Lynn: Yes. Thanks, Kristine. I don't think I can give you precise numbers, but let me give you kind of the approach. We had before anticipating these kinds of issues, bought a buffer stock, which is we are using to transition '25 and support our '25 flow-through. At the same time, we're now actively involved in recycling from older optics and pulling the extracting the germanium and constructing new optics from that. And that's -- now we've seen success in that process, and that will bridge us into '26 and get us partway through '26. And then at the same time, we're involved in developing partnerships with companies in both the mining and the processing area outside of China, so that we have a long-term supply, and that's what gives us confidence that we're going to have a robust '26, and we're going to be able to support our germanium needs with these both midterm and short-term initiatives. Kristine Liwag: Great. And maybe pivoting to a different topic. I mean, in the quarter, you guys made a $15 million investment in Hoverfly. I wanted -- I think you're now at 25% of your equity stake here. I wanted to better understand what's your strategy regarding these unmanned capabilities? Where does this fit into your broader portfolio and strategic vision? Michael Dippold: Yes. I would say the investment with Hoverfly is really kind of key to some of the strategy that we have in terms of making sure we're bringing the best-in-breed technologies to different solutions. We think this tethered capability is going to allow for -- obviously, for elevated sensing, for targeting, potentially for counter UAS. So there's some good applications here for this capability, and that's what fostered the investment. Kristine Liwag: Got you. Great. If I could do a follow-up question. IMS growth was up 34% year-over-year, 32% up sequentially. Can you provide any color on how much of this was driven by the Columbia Class? And were there any other transitions in shipsets that drove this step up? Michael Dippold: I didn't catch what -- the first part of that question, Kristine, I'm sorry. Kristine Liwag: Sorry, on IMS growth, IMS was up 34% year-over-year, up 32% sequentially. Just trying to understand how much of this step-up was driven by Columbia Class or if there were other transitions in shipsets that drove this increase? Michael Dippold: Yes. So a good question. The increase in the revenue -- actually, Columbia has been pretty stable from its revenue output in a quarterly cadence throughout the course of the year. The increase in revenue is really coming from a lot of the short-range air defense and counter UAS programs for the quarter. So that's where the big pop was this quarter. Operator: [Operator Instructions] The next question will be coming from the line of Anthony Valentini of Goldman Sachs. Anthony Valentini: Bill, congrats on a great run. I'm just trying to get a sense for the longer-term growth prospects here. Are there opportunities to take what you guys are doing in propulsion on Columbia to other types of ships and programs? And the primes are talking about significant growth in missiles, which I think are highly dependent on the sensors. You guys have expertise there. So I'm wondering how large the missile business is today for DRS and where that can go over time? Any color really on the large growth vectors would be great. William Lynn: Thanks, Anthony. This is John. Let me start with the ship and the propulsion systems. And absolutely, we are looking and bidding other ship classes, and we have some real progress in that regard, shaping. We believe that we have an advantage in providing energy flexibility on board a ship. It's not obvious, but the more energy, more power a ship has, the further away can fight longer range of radars, longer-range electronic warfare, a longer-range directed energy. And our solutions allow for that capability to be able to direct that energy to different places on the ship. So yes, for sure, we believe that there's opportunity long-term growth for us there. Turning to missiles. DRS has always been a supplier of the best infrared sensing in the industry and other sensors as well. We're really at the top of the food chain. When it comes to missiles, those missiles have to be smarter. They have to have longer range. They have to have greater capability. So we're seeing an increased pull for those higher-performing sensors into that space. And so we're playing at all different levels from the very low-cost, high-volume missiles and effectors all the way to the very high-end missiles and effectors. Operator: And the next question will be coming from the line of Seth Seifman of JPMorgan. Seth Seifman: Congratulations to Bill and to John as well. I wanted to ask, John, you mentioned at the outset the SAGEcore. I wonder if you could talk a little bit about how that fits into the Army's NGC2 plans and the extent to which that can be a growth driver. It seems there's a good amount of funding headed in that direction. William Lynn: Thanks, Seth. Let me step back and talk about the fact that when we see platforms, all platforms are going to end up having to think for themselves. They're going to have to sense for themselves and think for themselves. At the end of the day, those platforms that are at the edge of the battle space, whether it's land, sea or air, are going to have disrupted communications in battle. So those -- the computing resources for those platforms to think about what's happening on the battle space has to be on the platform, has to be at the edge. And so this is where we're putting our energy. This is where we're putting a lot of our money is to build out that capability. The connectivity from the platform up to the enterprise we'll be there at certain times and some of the enterprise capabilities will play there. But those platforms have to think. So this is part of NGC2, next-generation C2 program with the Army is being able to build out a capability on the platform, not just to communicate but also to think. And so we're adding the AI capability. And now with the SAGEcore, it's really the DRS' operating system, which we're going to place on to those computing resources at the edge that allow those platforms to think for themselves, to fuse the sensing information to have AI to understand what's going on in the edge and to be able to make sense and act on the information. So that's where SAGEcore fits into the program, not just for the Army's platforms, but we're also using it in the sea for USVs. We're also putting in other air platforms and in space as well. Seth Seifman: Excellent. Excellent. And as a follow-up, if we could just talk about IMS and on the Colombia, kind of what shipset you're up to? Or maybe a different way of saying it is, how far up the curve are we in terms of when you've got kind of to a place where pricing has kind of stabilized? Michael Dippold: Yes. And we've talked about Colombia in the past that we're always kind of working on 3 different shipsets simultaneously in terms of our revenue base. What happened in 2025 is we will start to pretty much retire the second chipset, which was bid at a lower price point. So subsequent to 2025, we'll be at a cadence where all of the new ship and revenue base associated with the different ship classes will be negotiated after the design was materially complete after the inflation impacts to labor and materials. So we should see more consistent margin output from Colombia starting in 2026 with one more year of margin expansion. And then the little asterisk I'd put on that is before we see the margin benefit from the South Carolina facility and think about that impact starting in 2027. Operator: Our next question will be coming from the line of Andre Madrid of BTIG. Andre Madrid: Congrats to Bill and John. I wanted to talk again about Hoverfly. Great to see the up investment there. Is this something that fits into your previously outlined M&A criteria? Michael Dippold: Yes. I would say that when we're talking about M&A, we're looking at different aspects of that, whether they're joint ventures, partnerships, minority investments. And certainly, with this capability having the ability to assist us in elevated sensing to bring our sensors through from a network perspective, I think that this kind of checks the boxes that we were looking at from an M&A perspective, and it's certainly strategic to where DRS is headed. Andre Madrid: Got it. Got it. That's helpful. And then I wanted to follow up on the C-UAS work that you guys are doing. Could you maybe talk a bit more about the margin profile of that work and if it's generally accretive or dilutive to IMS? Michael Dippold: Yes. We don't get into the marginality of this particular programs, but it's the same customer set. It's in line with the rest of our portfolio. There's no anomalies here from a drag or from a tailwind perspective. Operator: And our next question will be coming from the line of Ronald Epstein of Bank of America. Alexander Christian Preston: This is Alex Preston on for Ron today. First of all, I just wanted to echo the congratulations to both Bill and John. I wanted to circle back on the government shutdown. Obviously, 3Q bookings are really strong. You guys mentioned there's not a ton of material impact at this point. But I'm wondering if you're seeing any slowness in the contracting environment? And if so, where? I think, for instance, we might have expected Golden Dome awards to be maybe a little more firmed up by now given reconciliation funding is to be spent. There's contract vehicles in place. Curious if you have any commentary on that. William Lynn: Yes. As I said, it would take a while before this would catch up to influencing things like that. It would through -- think of things like testing to prove systems out, but those schedules are generally pretty far out. And so we haven't really seen much more than modest impact yet. And it would have to go much closer to the end of the year before we'd see that. Alexander Christian Preston: Okay. And then just as a quick follow-up, we've noted -- a bunch of us have noted the strength in counter UAS bookings and revenue this quarter. Just curious if you could characterize more on where the demand is coming from. I know you mentioned there's particular strength in the U.S. Army, there's foreign military sales involvement. Just curious if you could provide any color on the split there. John Baylouny: Yes. I think that's where the demand is coming from for sure. We are seeing demand coming from really all over. We're seeing demand coming from the Army for sure, and that's evident in the bookings. We're seeing demand coming from Navy, Marines as well in the U.S. Air Force has also plagued with this problem. We're seeing progress there in demand building and some bookings there as well. And of course, direct commercial and international FMS sales as well. There's demand coming from all avenues, as you might imagine, due to the changing nature of warfare. Operator: And our next question will be coming from the line of Jon Tanwanteng of CJS. Jonathan Tanwanteng: Bill, congratulations on your retirement, and John and Fran on their appointments. My first question is, if you could drill just a little bit more into the germanium supply, that would be helpful. You mentioned bridging into the future with the recycling and then the alternative supply. But do you expect to be constrained in the coming quarters as your stockpile falls off and then maybe catch up later in the year? Or how do you expect that to shape up? Does -- do the programs that you have in line fill 100% of the supply right out of the gate or does it take time to get there? William Lynn: We think we have a plan, Jon, that does bridge from the '25, where I think we've taken account of the supply restrictions and price increases. And we have it planned into '26 with the different initiatives that I mentioned. So we're feeling comfortable as to where we are. Jonathan Tanwanteng: Okay. Great. That's helpful. And then second, is the price on these alternative supplies significantly higher than what you're seeing in the market? And does that further impact the ASC margin as we go forward? How should we think about the profitability there as you ramp these alternative sources? Michael Dippold: Yes. I would say that, as you know, we're largely a fixed price shop. So the higher pricing is certainly going to be inherent in those programs as we look into 2026. Jonathan Tanwanteng: Okay. Got it. One last one, if I could. Just any changes to thoughts on capital allocation? You obviously did the Hoverfly investment, you did some share repurchases, but any thoughts on capital allocation and use of cash going forward? William Lynn: Yes. I mean, as we've said that we want to have a balanced capital allocation strategy. So we've instituted a dividend this year. We have a moderate buyback, but our priority continues to be seeking out M&A opportunities that meet both our strategic and financial criteria. In that, we've exercised patience. We've looked at a lot of things. We are doing the Hoverfly this quarter, as we mentioned. We're looking at larger investments as well. But you should expect going forward to see more M&A, but a balanced strategy as well. Operator: And our next question will be coming from the line of Austin Moeller of Canaccord. Austin Moeller: Just my first question here. You've talked about recycling germanium from older optics. It sounds like you're going to get additional legs on your supply beyond Q1 '26, which is I think what you discussed last time for your visibility. Have you looked into alternative like glass-based solutions like BlackDiamond glass potentially to replace the germanium just given it has less temperature sensitivity and better supply? William Lynn: We -- you're correct. We are looking at alternative materials. It's particularly relevant for smaller optics where you can replace germanium with other. And that is part of the portfolio of solutions we're pursuing. And that one is in the early stages, but we are seeing success there as well. Austin Moeller: Okay. And just a follow-up. If we -- I know we're in a shutdown here, but if we think about the opportunity for Golden Dome and when do we start to get RFPs and contracts for that, do you have any sense of the timing next year? And there's also like your partner, AeroVironment has been testing per UAS solutions at Grand Forks in North Dakota. John Baylouny: Let me take the Golden Dome part of that. For sure, we're seeing a lot of activity on Golden Dome. While the architecture is not yet public, we certainly see movement. You're probably aware of the SHIELD RFI -- RFP that I think 1,500 companies bid, including DRS. We do expect that to move forward very quickly. I think that we see opportunity here, not just in the space sensing, but also in the underlayer and also in the over-the-horizon radar area. So we believe that, that's going to move forward and general [ recruit ] lines moving forward very quickly. On the counter UAS front, we see a lot of activity in counter UAS, including Leonardo's activity. And I think that just to go back to the points about the fact that we are the ones that are solving this problem for the Army. We have battle-proven technology. We've proven our capability, and we're following the threat, making sure that we're ahead of the threat and very close to our customer. Operator: Thank you. I would now like to turn the call over to management for closing remarks. Please go ahead. Stephen Vather: Thank you, Lisa, and thank you all for your time this morning and your interest in DRS. As usual, if you have any follow-up questions, please call or e-mail me. We look forward to speaking with all of you again soon. Enjoy the rest of your day. Operator: This does conclude today's program. Thank you all for participating. You may now disconnect.
Operator: Good morning, and welcome to Bausch + Lomb's Third Quarter 2025 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to George Gadkowski, Vice President of Investor Relations and Business Insights. Please go ahead. George Gadkowski: Thank you. Good morning, everyone, and welcome to our third quarter 2025 financial results conference call. Participating on today's call are Chairman and Chief Executive Officer, Mr. Brent Saunders; and Chief Financial Officer, Mr. Sam Eldessouky. In addition to this live webcast, a copy of today's slide presentation and a replay of this conference call will be available on our website under the Investor Relations section. Before we begin, I would like to remind you that our presentation today contains forward-looking information. We would ask that you take a moment to read the forward-looking legend at the beginning of our presentation as it contains important information. This presentation contains non-GAAP financial measures and ratios. For more information about these measures and ratios, please refer to Slide 1 of the presentation. Non-GAAP reconciliations can be found in the appendix to the presentation posted on our website. The financial guidance in this presentation is effective as of today only. It is our policy to generally not update guidance until the following quarter unless required by law and not to update or affirm guidance other than through broadly disseminated public disclosure. With that, it's my pleasure to turn the call over to Brent. Brenton L. Saunders: Thank you, George, and good morning to everyone joining us today. I'm going to provide an overview of our impressive third quarter performance and speak to how our strategy and patience is paying off. Sam will go deeper on the financials and update 2025 guidance, and I'll close with a look at products driving growth and opportunity. I'd like to thank my 13,000 colleagues around the world upfront because without their commitment and belief in what we can achieve together, we'd be stuck in neutral. Instead, we're delivering on the vision we laid out in 2023. 6% constant currency revenue growth was once again fueled by a base business engine that continues to hump and the steady introduction of innovative products across categories. Pharmaceuticals was a standout, thanks to $84 million in Miebo revenue. Miebo growth helped bolster our comprehensive dry eye portfolio, which is front and center for eye care professionals, patients and consumers. Effective selling has also meant more surgeons implanting enVista intraocular lenses, helping drive 27% constant currency revenue growth in premium IOLs. Our loaded and differentiated pipeline will be on full display in just a few weeks at Investor Day. Importantly, the pipeline products we'll highlight aren't aspirational. These are clinical stage programs with anticipated launches over the next several years. Every part of our nearly 3-year journey since I returned as CEO has been aligned to 1 or more of 3 categories you've all become familiar with: selling excellence, operational excellence and disruptive innovation. Those aren't optional. They are imperatives. While our journey is nowhere near complete, given how far we've come, we've introduced a fourth category, financial excellence. This is our opportunity to deliver sustained profitable growth that reflects our real potential. We'll show you what that looks like at Investor Day when we share our 3-year plan. We've reached a pivotal point in our journey to becoming the best eye health company. Being the best means elevating the standard of care in eye health, which is why our pipeline is filled with products that have the potential to be truly disruptive and reset expectations for eye care professionals, patients and consumers. You'll learn much more about the science behind our pipeline and market opportunity at Investor Day, but here's a sneak peek. In consumer, new formulations of LUMIFY, PreserVision and Blink Triple Care will make category leaders even more appealing and are expected to unlock significantly larger audiences. In Pharmaceuticals, next-generation lifitegrast would change the dry eye disease treatment paradigm. Our ocular surface pain medication would be the first of its kind, and our glaucoma medication would be the first to improve visual acuity. The contact lens market has been starved for innovation. There's been no material science breakthrough since 1999, which we're addressing with a first-of-its-kind bioactive lens. Our highly successful SiHy platform will expand with a cost-competitive daily disposable, a frequent replacement offering and a lens designed to slow the progression of myopia in children and young adolescents. Finally, in Surgical, we're building on a steady stream of premium products representing consumables, equipment and implantables, the holy trinity of that business. We delivered growth across all segments in the third quarter, once again demonstrating our holistic strength. I mentioned Pharmaceuticals as a standout earlier, but I would be remiss if I didn't recognize Vision Care, which captures contact lenses and consumer offerings. Several franchises in both categories are highlighted here, including Blink with 37% reported revenue growth, Artelac at 24%, Daily SiHy offerings at 22% and eye vitamins at 12%. Our overall contact lens portfolio grew a healthy 6% on a constant currency basis. We'll discuss new iterations of some of the highlighted products at Investor Day as we work to make established high performers even more popular with meaningful scientific advancements. I'll now turn it over to Sam for a closer look at the financial metrics, including significantly improved cash flow figures and an update on 2025 guidance. Sam? Osama Eldessouky: Thank you, Brent, and good morning, everyone. Before we begin, please note that all of my comments today will be focused on growth expressed on a constant currency basis unless specifically indicated otherwise. In Q3, we delivered strong performance with year-over-year revenue and adjusted EBITDA growth. We're also very pleased with our cash flow generation this quarter. Turning now to our financial results on Slide 8. Total company revenue for the quarter was $1.281 billion, which reflects year-over-year growth of 6%. The revenue growth was across all our segments. For the third quarter, currency was a tailwind of approximately $19 million to revenue. Now let's discuss the results of each of our segments in more detail. Vision Care third quarter revenue of $736 million increased by 6%, driven by growth in both consumer and contact lenses. The consumer business grew by 6% in Q3 as our key brands performed well and consumption trends remained steady. We delivered solid growth in the quarter while absorbing a destocking impact of approximately $6 million. Let me go over a few highlights. Eye vitamins, PreserVision and Ocuvite grew by 11%. LUMIFY generated $48 million of revenue, up 2%. In the quarter, we continue to see strong consumption. Year-to-date, LUMIFY revenue is up 13%. We saw strong execution in the consumer dry eye portfolio, which delivered $113 million of revenue in Q3, up 18%. Our 2 key franchises, Artelac and Blink, once again contributed to the strong performance. Artelac was up 18% and Blink was up 36%. Contact lens revenue growth was 6%. Our contact lens business has outpaced the market, and we saw strong performance once again in the quarter. The growth was led by Daily SiHy, which was up 24%. Biotrue was up 7% and Ultra was up 4%. In Q3, our contact lens business saw growth in both U.S. and international markets. The U.S. was up 9% and international was up 4%. Moving now to the Surgical segment where we continue to see steady market dynamics and procedure volume. Third quarter revenue was $215 million, an increase of 1%. Excluding the enVista recall, Q3 revenue growth was 7%. In Q3, implantables were up 2% and 14% sequentially. As Brent will discuss, we are continuing to make solid progress with the enVista return to market, and we are regaining momentum in premium IOLs. Consumables were flat on a constant currency basis and up 4% on a reported basis as we lapped last year's notably strong Q3, which saw stronger volumes driven by resupply to the market. Finally, equipment was up 4%. Revenue in the Pharma segment was $330 million in Q3, which represents an increase of 7%. Our U.S. branded Rx business was up 13% in the quarter. Miebo delivered $84 million of revenue in Q3. This represents sequential growth of 33% and a 71% increase year-over-year. It also reflects TRx growth of 110%. Xiidra delivered $87 million of revenue in the quarter, which is in line with our expectations. Xiidra TRx growth was 8%. Our international pharma business was up 12% in the quarter. We continue to make progress in our U.S. generics business. As anticipated, we are seeing sequential growth with U.S. generics up 2% this quarter compared to Q2. Now let me walk through some of the key non-GAAP line items on Slide 9. Adjusted gross margin for Q3 was 61.7%, which represents a 130 basis points decrease year-over-year. This was mainly driven by product mix and the onetime impact of the investor recall. In Q3, we invested $95 million in adjusted R&D, which represents an increase of approximately 13% over Q3 of 2024. Third quarter adjusted EBITDA, excluding acquired IP R&D was $243 million, up 7% year-over-year on a reported basis. Q3 adjusted EBITDA margin, excluding acquired IP R&D was 19%, which represents a sequential increase of 400 basis points. We are continuing to execute our margin expansion strategy as we transition from the most active product launch cycle in the history of the company to a growth phase and as we remain focused on disciplined cost management. Adjusted cash flow from operations was $161 million in the quarter, and adjusted free cash flow was $87 million. We are pleased with the continued progress of our efforts to drive cash flow optimization initiatives. Net interest expense for the quarter was $98 million. Adjusted EPS, excluding acquired IPR&D, was $0.18 for the quarter. Now turning to our 2025 guidance on Slide 12. We are maintaining our full year revenue guidance at a range of $5.05 billion to $5.15 billion. This revenue guidance represents constant currency growth of approximately 5% to 7%. Shifting to adjusted EBITDA. We are updating our adjusted EBITDA guidance to a range of $870 million to $910 million from a range of $860 million to $910 million. The raise in the lower end of the range is driven by the strength in the performance of the business. In terms of the other key assumptions underlying our guidance, we continue to expect adjusted gross margin to be approximately 61.5%. For the full year, we continue to expect investments in R&D to be approximately 7.5% of revenue and interest expense to be approximately $375 million. We continue to expect our adjusted tax rate to be approximately 15%. We now expect full year CapEx to be approximately $295 million. Consistent with our previous guidance, our current guidance excludes any potential onetime IPR&D charges that we may incur in 2025. Finally, a brief word on tariffs. The tariff policy remains fluid, and we are continuing to monitor updates. Based on where the policy stands today and the actions we're taking, our updated guidance assumes we will be able to offset the impact of tariffs in 2025. To conclude, we had a strong quarter and our business fundamentals remain solid. We are committed to our strategy to drive sustainable growth and margin expansion. I look forward to seeing you all at our Investor Day on November 13. And now I'll turn the call back to Brent. Brenton L. Saunders: Thanks, Sam. Let's spend some time highlighting growth drivers in each business. There's not much I need to say here as these charts plotting TRx growth for Miebo and Xiidra speak volumes. 110% year-over-year prescription growth for Miebo is outstanding, especially considering there was a new entrant in dry eye disease treatment. Xiidra is doing what we said it would, steadily growing in volume while maintaining a sizable market share. We expect both medications will continue to benefit from ongoing category expansion as dry eye awareness and education increase. As a reminder, we're at the tip of the iceberg when it comes to treating the millions of Americans who suffer from dry eyes. We often reference a thoughtful approach to expanding our daily SiHy portfolio as was the case in the third quarter when we launched a toric model in Japan. We're now in more than 50 countries and the portfolio still shows no sign of slowing down with 24% constant currency revenue growth in Q3. We're still in early innings, but remain excited for additional expansion and anticipated introduction of new SiHy offerings under development. At a macro level, in consumer, we saw impressive consumption considering a work-down of inventory in the trade. That's a testament to brand building and confidence in our products among eye care professionals whose OTC recommendations carry significant weight. It's worth taking a moment to remember that we only acquired the Blink family of eye drops a few years ago in a deal that was largely overshadowed by our Xiidra acquisition. In that short period, we've completely revitalized the global brand and introduced new options, helping drive nearly 40% reported revenue growth in the third quarter. Earlier, I referenced Artelac, which, as a reminder, continues to be our most global dry eye option with availability in more than 40 countries and plans to expand further. Double-digit reported revenue growth is common for the brand and Q3 was no different. Eye vitamins saw a nice uptick with 12% reported revenue growth. Our new formulation of PreserVision, which we expect will be on the shelves in the first half of 2026, could significantly increase the addressable market for age-related macular degeneration. One caveat on LUMIFY performance. Our typical growth wasn't reflected in the third quarter due to the timing of a large promotional order shipped to Costco in June. Then that we saw the benefit in the second quarter with 27% reported revenue growth. LUMIFY's popularity and category dominance is clear with consumption seeing 14% growth in Q3. Two call-outs for Surgical, both related to our momentum in the high-margin premium market. While not fully recovered, progress on our return to market for the enVista IOL platform and Envy in particular has been faster than expected, thanks to the tireless work from the team and our deep relationships with ophthalmic surgeons. Total enVista sales in the third quarter reached 82% of Q1 or pre-recall levels, with Envy coming in at 91%. In September, Envy sales surpassed first quarter average monthly sales. While enVista Envy has a foothold in North America pending additional launches, our LuxSmart premium offering continues to expand in Europe with 6% constant currency revenue growth in the third quarter. I've already said as much as I can on our pipeline. The rest we'll save for Investor Day, which will take place at the New York Stock Exchange on November 13. What I can say is we put a premium on durability of growth through innovation and that these are exciting times for Bausch + Lomb. Let's now move to Q and A. Operator? Operator: [Operator Instructions] And the first question today is coming from Patrick Wood from Morgan Stanley. Patrick Wood: I'll keep it to one just in the interest of time. But not to steal the thunder from the Investor Day, but you added obviously that financial excellence pillar. High level, any kind of commentary you could give us on like how we should interpret that? Are we thinking about is this a cash conversion thing? Is this like a margin structure thing? What was the impetus at least behind kind of adding that? Curious what you can add at least ahead of the Investor Day in November. Brenton L. Saunders: Yes, of course. And thanks, Patrick. Look, under our roadmap, which we've been talking about since I joined 3 years ago, we've made really strong progress across our 3 core pillars: selling excellence, operational excellence and innovation. This fourth pillar, financial excellence, is really about sharpening how we execute really on a day-to-day basis. In essence, really ensuring every dollar we spend drives growth and/or efficiency. So look, we announced this Vision '27, which you'll see some greater detail in 2 weeks. But essentially, we're being very intentional about controlling operating expense, improving our mix and setting up for meaningful margin expansion over time. So it's not really about just cost cutting. It's really about disciplined execution and better outcome and resource allocation. But I'll turn it over to Sam; maybe you want to add some more color. Osama Eldessouky: Absolutely. And what Brent said here, Patrick, is very important because it outlines our strategy. So let me give you more insights on how we see this strategy drives both the top line growth, the margin expansion and the strong cash flow generation. So when you think about the effects on the revenue, we've been driving gross all our businesses. And our team executed really well, and you see that throughout the last number of quarters, and you also see that in Q3 as we reported this morning. We expect to continue with this momentum with our guidance suggest above-market growth as we go forward. And as we look forward, again, we'll say more in a couple of weeks, but we see that momentum carrying forward with us. On the margin expansion, it has been a focus for us. And this quarter, we're seeing a margin improving sequentially 400 basis points. We're seeing the benefit of the work that have been sort of going on with the Vision '27 that Brent announced earlier in the summer. And we're seeing these benefits this quarter with a lower SG&A percentage sequentially and year-over-year, which is very important. That sets the foundation for us as we think about margin expansion for this quarter and more importantly, for the future as well. And then the last pillar of the financial metrics is the cash flow. On the cash flow, we've been working on optimizing our cash flow generation and we're seeing the results this quarter with a strong cash generation, adjusted cash flow from operation by $161 million. That's a 66% conversion to EBITDA, which is very strong. And what's important here is that sets also the foundation for us of what we were able to generate this quarter, but also as we go forward. So the point that I can't emphasize enough is what we've been doing and executing on the work that we've been doing for the last number of quarters is setting us up well for what we delivered this quarter in Q3, but more importantly, setting us up well for the rest of this year and what we will be able to do beyond 2025, which we'll talk about more on November 13. Brenton L. Saunders: Yes. And I would just add a little bit more color. I think it's important to know that our Vision '27, which is the project that instigated our financial excellence pillar, is very broad. Almost all 13,000 colleagues are included. There are hundreds of projects. We have a dedicated PMO that we put our -- some very high potential people in full time to manage. And so this is a really comprehensive initiative. And there's no project that's too small. And obviously, every dollar counts. And so this is a full core press to really deliver financial excellence over the next few years. Operator: The next question will be from Joanne Wuensch from Citibank. Joanne Wuensch: My favorite question is always to ask about your contact lens business and you put up growth ahead of the market growth rate from what we can calculate. I'd love to get your impression of your share and the market. And there was an article in the Wall Street Journal that talked about changes in the contact lens market, and you were quoted in it. And I was interested if you had any additional color you could add. Brenton L. Saunders: Yes. Thanks, Joanne. So look, I think the lens market is growing still in the mid-single digit, probably at the lower end of the mid-single digit. We'll see when a few more of our competitors report, but that's probably where it's at. We have now, I think, for several quarters, grown the fastest in the industry and growing faster than -- significantly faster than the market. And I attribute that to new product innovations and good execution. And I've said this before, but the thing that I've always been very proud about our team is that they continue to grow our new products, our Daily SiHy INFUSE or Ultra Daily while continuing to maintain growth in the older products and thereby really avoiding the leaky bucket syndrome, and that's a big contributor to our growth. With respect to, I guess, the Wall Street Journal article and the Cooper situation, I want to be very clear about one point that the matter is that they're facing is strictly between Cooper and its shareholders. We have no intention of getting involved. That being said, what I did say, which I do believe, that a more scaled competitor certainly would strengthen competition and be beneficial to consumers and patients. And so look, we continue to evaluate it, but it really is a matter for Cooper and its shareholders. Operator: The next question will be from Young Li from Jefferies. Young Li: I guess first one is just on Miebo dry eye and the launch of TRYPTYR. So I heard your comments about Miebo's performance even with the competitive launch, went to AAO and joined some of the sessions where docs were talking about using products and combo, either TRYPTYR or Xiidra to stimulate tear production and then Miebo to sort of lock that in. Can you maybe expand on that thought a little bit where you talk about just the use of combo drugs to help expand the dry eye market opportunity? Brenton L. Saunders: Yes, absolutely, and thank you for the question. And Yehia Hashad, our Head of R&D and Chief Medical Officer, is here. And so maybe he can weigh in here as well. But look, when I look at the third quarter, and I've been through competitive launches. I remember when I was at Allergan when Xiidra launched, we're seeing the same pattern here when TRYPTYR is launching in the face of this market, which is the market tends to expand. And there's no better proof point than looking at TRx growth of 110% for Miebo and 8% for Xiidra in the face of a competitive launch from an established significant player in the industry. So that's a really good sign. I think when you look at -- and always difficult to do, so I wouldn't read into this precisely, but I think it's helpful to think about it directionally. If you look at TRYPTYR on a launch-aligned basis with Miebo, it's running at a very small percentage of TRx compared to where Miebo was. I think in last week's number, it was around 20% on a launch-aligned basis of the MBO launch. So clearly a different type of launch with a different type of profile and curve. That being said, we do think that there is a place for a drug that stimulates tear production. There are other drugs in the market. TRYPTYR is not the first to do it. Restasis has that in its label as well as a few of the other smaller products. And so that leads to the last point, which is this is a multifactorial disease. The 2 most prevalent conditions are evaporation and inflammation that probably makes up somewhere close to 80% of the patient population, and thereby creates a great opportunity for combination therapy to allow ECPs to really have the, what I call the easy button of not trying to -- and many of them don't even have the diagnostic capabilities to determine the etiology of the disease in the patient. And so having a product where lifitegrast and Miebo or Xiidra and Miebo are combined really is, I think, an advancement for patients and certainly an advancement in treatment. But Yehia Hashad, please jump in. Yehia Hashad: I think, Brent, you addressed really the critical points just to reemphasize that dry eye disease is a multifactorial disease. Naturally, it could actually be triggered by either aqueous deficiency or much more common by evaporation of the tear film. Miebo is the only product that's been approved for the evaporative component of the dry eye. Regardless it's an aqueous deficient or evaporative, if the osmolarity and with the chronicity of the disease if the osmolarities changed, this could trigger a visual circle of inflammation. And actually it's a very good reason to start to think about combining 2 mechanism of actions in order to address the disease. It has the potential of more efficacy and also it has the potential of more compliance for the patients, and it has also the potential for maybe less adverse events due to much better innovative formulations. So I think this is where we are targeting our new programs as well with the combination between Miebo and Xiidra. And we still are actually very confident about our profile of products as the only evaporative -- the only treatment for evaporative dry eye, which is Miebo. Operator: The next question will be from David Roman from Goldman Sachs. David Roman: I was hoping, Brent, you could spend a little bit more time on the surgical business. And I appreciate you sharing the metrics around the evolution of the franchise, both in third quarter and how you exited relative to where you had started pre-recall. But maybe you could just contextualize a little bit the enVista launch with where it's going, what feedback you're getting, how the recall may have impacted the overall trajectory and how to just think about the business as we head into Q4 and then just next year maybe directionally? Brenton L. Saunders: Sure. And David, welcome. So look, progress on the enVista platform, I think, has been impressive and certainly faster than we expected. This was an all-out effort on everyone in our Surgical team, but in particular to our frontline sales colleagues who worked so hard to work with surgeons and ASCs to make sure that they manage through the recall and came out with trust in us and our products. I would say the other unintended super big benefit of this is the way we handled the recall. I think really even at this AAO, where the recall is something that was really not discussed at all, but the trust that we developed in how we handled it, I think, was on full display and many, many surgeons always commending us for doing the right thing and handling it with such transparency. When you look at all the metrics though, you can really see that the recovery is strong, showing both a year-over-year basis and sequentially. And we are, as we had planned quickly approaching Q1 pre-recall revenue levels. In fact, Envy slightly surpassed that in the month of September. So third Q '25 revenue relative to Q1 '25 pre-recall, total enVista sales in Q3 reached 82% of Q1 pre-recall levels. Envy sales in Q3 reached 91% of Q1 pre-recall levels. And as I mentioned September, Envy sales surpassed Q1 on a monthly basis. Revenue growth year-over-year in the total implantable portfolio was 2% sequentially and total premium IOLs was 27% sequentially. When you look at Q3 '25 versus Q2, so on a sequential basis, the implantable portfolio was up 14% sequentially and the premium IOL was up 67% sequentially. I think to just answer the last point of your question, there is still some impact, right, which is many of our sales colleagues, particularly in North America, really spent the last several -- well, 3 or 4 months managing the recall, right? We had to go and get the inventory back. Our reps had to help establish new consignments and the like. And so that did probably shift some focus from some of their other responsibilities to focusing on managing this situation. I think that's nearly behind us now, and we're back out on our front foot and moving quickly. I think with respect to consignment, we have most of our brands in full consignment with Envy getting there and probably before Investor Day, we should be back at full consignment in the market. So we're at the very tail end of hopefully having to talk about recalls anymore and just focusing on growth. David Roman: Super helpful perspective. And maybe just a follow-up on the P&L here. Clearly you're starting to see a lot of SG&A leverage as a reflection of the focus you've put on financial excellence. But maybe just can you help us think about the sustainability of that trend and how you balance reinvesting in the business for growth given the plethora of opportunities you have in front of you versus driving financial leverage? And I know you'll get into more of that at the analyst meeting, but just maybe help us think about Q3 in context here. Brenton L. Saunders: Yes. So maybe I'll start and then Sam could add some color. Look, our goal is that it is sustainable, and we've been saying this for some time. I think now we're trying to put some points on the board to show you that we can deliver. And really, the emphasis of the Investor Day is to walk you through our 3-year plan to show you what we believe we can deliver and how sustainable it really is. And I would say that under Vision 27, some key factors here, not just about cost and OpEx discipline, but some of our launch products are moving more to growth mode, right? So where we overinvested, now we can come back to just growing some of these products that are no longer in launch mode, but just growth mode. So that's a piece of it. Product mix continues to be a large portion of how we can improve margins. And then lastly, I would say some of our manufacturing efficiencies are probably towards the tail end or the back end of the 3-year cycle just because of the timelines, and regulatory burdens and whatnot of improving manufacturing capabilities. But all those things are in motion, and you'll get much more color when you see the 3-year plan in 2 weeks. But Sam, anything you'd add? Osama Eldessouky: Yes. Let me give you more insights here and put in context for you in terms of the numbers. And when you think about the Q3 P&L and you think about what we accomplished, again this is -- we're very pleased with what we have done from an execution because it really sets the foundation, like Brent said, of what we will be able to do going forward. And we'll speak about that more as we go into the Investor Day in a couple of weeks. But just to focus on Q3 right now and the trajectory short term this year, SG&A hit its lowest point this year in Q3. We're running SG&A roughly about 40%, which is about less than what it was sequential, about 290 basis points on a sequential basis lower. When you look at it on a year-to-year basis, about 130 basis lower than compared to Q3 of last year. So, we're seeing the sequential improvement, and that's really setting the new foundation for us of what we think about. And it's all about not just the quantum of SG&A declining or going down, it is actually also the shift in the mix of what we're doing with the SG&A and repointing many of the dollars within SG&A to revenue generation. And you're seeing that in the top line growth here, David. So really, everything is pointing into the right direction for us in terms of what we've been doing and the execution that we've done is going pretty well. And that will be setting up the foundation for us as we wrap up 2025 and more importantly, as we go beyond 2025. Brenton L. Saunders: I would add one other thing because you asked the question, David, how do we prioritize investment? You see this nice improvement in the quarter despite a 13% increase in R&D expense. And that's because we are prioritizing this continuous stream of innovation, which Yehia and his team are going to be, I think, very proud to highlight in 2 weeks. So I think we can continue to invest in R&D and reallocate towards internal R&D development and still deliver the margin expansion we discussed. And so that's the balancing act, but I think we figured it out. Operator: The next question is coming from Matt Miksic from Barclays. Brenton L. Saunders: I guess we lost Matt. We'll see if he gets back in the queue, but let's move on. Operator: Certainly. The next question is coming from Robbie Marcus from JPMorgan. Lilia-Celine Lozada: This is Lily on for Robbie. I heard you said you expect to be able to offset tariffs in 2025. But how should we think about your ability to offset that in 2026? And with where things stand now, how big is the gross tariff impact for next year, if you're willing to share any color on how we should be thinking about the magnitude of that? Brenton L. Saunders: Yes. So Lily, I think we've been very transparent about tariffs and the impact and our ability to mitigate it. The problem is that the situation remains very fluid. One of the biggest impacts to us from tariffs is the reciprocal tariff from China. And as we know, the President is on a trip to Asia right now and is meeting with President Xi Friday to try to finalize trade negotiations. He did tweet or Truth Socialed yesterday that he expects a deal to be done and tariffs to be lowered. That would obviously be easier if that were to go the other way, then we'd have to continue to work hard to mitigate. The point, I guess, I'm making is I know people were upset with us after the first quarter where we just didn't add it to our guidance because of the fluidity of the situation. I think we turned out to be correct, and we managed through it. I would hesitate to guess what the President is going to tweet tomorrow. But I think the long story is we can absorb it, we can manage it. Our team is -- we've got a dedicated team that tracks it and mitigates and we've got a lot of levers we can pull to do it. Now if something came out of left field, we'll have to deal with that. But I think we feel like we're on very solid ground now with tariffs. Lilia-Celine Lozada: Great. That's helpful. And just as a follow-up, I heard you said contact lens market growth at the low end of the mid-single-digit range, which sounds like it's a little bit softer than what you had been pointing to previously. So if you could just dig into that a little bit more, that would be helpful. What's driving what sounds like a slightly softer outlook? And how big of a contributor do you think price can continue to be? Brenton L. Saunders: Yes, absolutely. So I always think about this as a mid-single-digit market, but that could be 6% one year and 4% another. I think we're probably more between the 4% and 5% this year. There is some softness in different parts of the world. We see a little bit more softness in Southeast Asia. China is a watchout. We do see consumer softness in the data, in the global data. We grew 10% in China, but we do have it on our watchlist. We have a very important event on November 11. Singles' Day is a very big event for us with our DTC approach in China. And so I'll know a lot more when we get to Investor Day after we see the results of Singles' Day for the Chinese market. That being said, big online players like Alibaba have seen big, big decreases. And so you just have to be thoughtful and watch. The data is mixed. There were some positive data Monday out of China on exports. So we watch it carefully. I think when you look at the market, maybe there's a little bit of a bifurcation. I think some of the lower income consumer is, I think, feeling more stress than the higher income consumer. There's a nice bifurcation there. And so some of the private label or cheaper lenses seem to be growing the market a little bit slower than the more premium part of the market. And even in the U.S., we're in this weird place where you see the stock market at all-time highs, yet consumer confidence on a relative basis quite low. And that's hard to reconcile. And so we just keep monitoring it very closely. But our outlook is positive. We'll grow faster than the market. We feel good about our business, but some of our competitors may have some different struggles. Operator: [Operator Instructions] The next question is coming from Pito Chickering from Deutsche Bank. Pito Chickering: Just sort of digging into sort of the gross profit margin that you saw this quarter, just looking at the strong constant currency growth coming from pharma and the mix tailwind that that provided, and then can you sort of walk us through sort of the other moving parts sort of within this quarter, including tariffs and/or FX changes. Brenton L. Saunders: Yes. Sam, why don't you take that one? Osama Eldessouky: Yes. So let me put in context for the gross margin. When you look at the gross margin this quarter, we had roughly about 130 basis point year-over-year decline. And that's really, as I said in my prepared remarks, there's the element of that we're still ramping up the reintroduction of the IOLs with enVista. That's a higher margin. So you're seeing the impact in the quarter from a mix perspective. And also you see product mix playing out in some of our businesses driving some of that remainder of the 130 basis points. So it's really more of a product mix story plus the enVista recall adjustment on a year-to-year basis. Pito Chickering: Right. Then for the guidance, I guess, implied on the fourth quarter that that ramp from 3Q to 4Q, that's primarily from enVista coming back online. Or are there any other moving parts we should think about there? Osama Eldessouky: Yes, there's 2 parts here. I think the enVista, as Brent said earlier, we're seeing the ramp-up in enVista continue. So that will continue in our Q4. So that playing a big factor there. The other part of it is also our seasonality in our business, which tend to be -- Q4 tends to be a stronger quarter out of all 3 -- out of all 4 quarters. So you'll see that seasonality playing out into the gross margin. Operator: The next question is coming from Matt Miksic from Barclays. Matthew Miksic: Sorry about earlier. Just a couple of quick follow-ups, one on surgical and one on pharma. So congrats on the great kind of comeback from the recall and momentum and interest in Envy and the rest of the portfolio. Just on the market, I know you're in a position of, I'd say, it seems like share growth, share recovery maybe from the recall. Just health of the market, volumes in the market, it was kind of a question and debate over the weekend at AAO. I'm just wondering your thoughts on that. And as I mentioned, just one quick follow-up on pharma, if I could. Brenton L. Saunders: Yes. I think that the health of the market is steady. I was also at AAO, and I talked to hundreds of surgeons there as well. I look at all of our data on a regular basis. And I really see a very steady market in cataract. We know that there is a growing patient population as the world ages. And so I don't see any real watchouts or anything to worry about in terms of the health of the market. I think it's pretty steady and over time should expand. Matthew Miksic: That's helpful. And then just on pharma, the Miebo momentum has been impressive. I'm not sure, but I'd love to hear if you feel like you're at a full sort of array of coverage at this point. Or is that something that's still improving? And then on Xiidra, if you could just remind us when you begin to annualize some of the investments that you made late last year, early this year as you get into next year? Brenton L. Saunders: Yes. So I think coverage for both products is pretty steady in the 70% range, which is for this product category is pretty much full coverage. So, I think we're -- we've made those investments. We feel good about where we're at. With Xiidra, the investments were made this year. So this year, 2025, establishes the new baseline. And so I think we're in the fourth quarter now, so we're near the end of that investment cycle. Operator: Our next question will be from Gary Nachman from Raymond James. Gary Nachman: So back to dry eye, Brent, just talk about the overall market growth and where you think that could go and how underpenetrated it still is. And if that factors into how you'll be investing behind Miebo going forward, if you can still taper that spending, if you want to still grow the market meaningfully since you guys are the market leader there. And then I have a follow-up. Brenton L. Saunders: Yes. I mean I think being the market leader with the 2 products, and we saw growth in U.S. pharma around 13% for the quarter. Most of that is driven by Miebo and Xiidra. And so I think the market is growing roughly around 10% plus. And I do think that that can sustain itself for some time for at least the next several years. I think combination therapy, when we bring that to market in a few years, would be an additional opportunity to expand the market. And so I think this has a very long runway. With respect to our spend, it is not necessarily about significant tapering. It's about surgical tapering of our spend where we get the highest ROI. We will continue to maintain the largest field force. Obviously, with the pipeline, it would be important for us to maintain the largest field force and continue to drive patients into the channel -- into the prescription channel. So it is a, again, a delicate balance, but we're very experienced in the dry eye market. A lot of us, including me, have been doing dry eye for a long time. And so I think we've got it sorted out and we'll continue to grow it while being more prudent with our investments. Gary Nachman: Okay. That's helpful. And then just what else are you looking to do to accelerate U.S. generics? It sounds like you made some good progress there in the third quarter. And I mean, longer term, any thoughts on potentially divesting it? Or are you definitely committed to it, I guess, when you look out over the next 3 to 5 years? Brenton L. Saunders: Yes. So look, I mean, we saw sequential improvement in the generics. Obviously, the first quarter was a bit of a surprise to all of us, and we'll see sequential improvement into the fourth quarter as well. But I think the way to think about that business is it's really opportunistic for us. We have a plant in the United States that makes our -- most of our U.S. pharmaceuticals, including our generics. And that plant is quite good. And so we look at generics as being very opportunistic. 1, it creates absorption in the plant; but 2, it creates opportunities for when there is a disruption in the market or another competitor goes out, that business can generate very good margins and profitability as well. So it's not about growth necessarily in sales. It's more about maintaining profitability and being opportunistic. Operator: The next question is coming from Doug Miehm from RBC Capital Markets. Douglas Miehm: First question, just to continue on Miebo to get that out of the way. When you think about the profitability of that drug, I know you've always guided to 2026 though. But given the strength in the most recent quarter and what's likely to happen in Q4, is there a possibility that that could shift ahead to later this year or certainly into early 2026? And my second question just has to do with capital allocation. As the company becomes more successful and more profitable over the next year or 2, with that incremental cash, do you expect to be paying down debt or reinvesting it in the business at reasonable multiples? And I'll leave it there. Brenton L. Saunders: Yes. Maybe I'll answer the part of the capital allocation and turn it over to Sam for the remaining answer in the Miebo profitability question. Look, capital allocation is pretty always a debate, right, and something that you have to take quite seriously. Clearly, we are committed to delevering. A lot of that will come from EBITDA growth, but also from debt paydown. And with respect to M&A, we're always looking for smaller tuck-ins that we can drive profitability from quickly and/or investing in R&D or intellectual property that we can develop into successful products. But I would say managing our -- or lowering our debt ratios is a very high priority for us. Sam, do you want to add some more color? Osama Eldessouky: Yes. So let me take them and I'll start with the capital allocation. I'll come back to Miebo. But when you think about capital allocation, really the framework for us is continue to strengthen the balance sheet and ensure that we're delevering. And we'll talk more about our sort of leverage as we go forward into our Investor Day. But our North Star remains unchanged, which is targeting an investment grade. So that's really where the path that we're going after from that perspective. Investment in the business is always very important. And now we've seen that in the last, I would say, 2 years, we've seen the investments that we put into the business, and they're all been paying quite high level of dividends. We're seeing that on the top line growth, and we're seeing that this quarter starting with the margin expansion as well. So it's really good to see the rewards from the investments in the business. That's something we'll continue when it makes sense to continue to invest in the business. And then the last like sort of to the stool here, which is very important, is how we can continue to increase shareholder value. And as we think about that capital allocation, where we drive the shareholder value is going to be a very important metric for us to think about and deploy that cash appropriately. So that's really -- it's a good position to be in with the cash -- strong cash generation that we had this quarter and the conversion that we had. So again, it's a good place to be in and we look forward to building that foundation. Now just going back to the Miebo profitability timing. I want to just emphasize one point that Brent made, which is very important around the investments in the business and sort of the shift in terms of how we're thinking about the SG&A because even within the dollars of SG&A, although the quantum of SG&A is coming down and as a percentage of revenue is coming down, the deployment within the SG&A dollars is very important where it's going. And we are continuing to ensure that this deployment is putting and providing a very high level of ROI for us. So it's really what we described on the Miebo as we were in the launch phase. And as we wrap up '25, we're exiting that launch phase and we're going to a growth phase, which means that we're going to continue to invest behind Miebo. But we're going to be very deliberate about that investment and where we're going to make this investment. So I think we'll see that as part of the overall leverage in the P&L story as well as the margin expansion. And again, we'll speak more about it as we go into our Investor Day for 2026. Operator: And the last question today will be coming from Tom Stephan from Stifel. Thomas Stephan: Quick one for me. Just on Miebo ASP, a bit choppy year-to-date. I know coverage has been the focus. But Brent or Sam, maybe if you guys can talk about the moving parts there and notably why this quarter was up a lot sequentially by our math on the realized ASP. And then is this 3Q base maybe where we can work off moving forward? Brenton L. Saunders: Yes, Sam? Osama Eldessouky: Tom, you -- probably the best point I'll highlight you or I'll point you to is it's very difficult to look at just any given quarter. It's only 90 days in terms of trying to sort of extrapolate from that point of view. The way I would encourage you to think about the ASP and the Miebo, think about it as with the gross to net is about mid-70s and you think about that more of an annual rate. So if you do it on an annual run rate, I think that probably will get your math sort of closer to what we are seeing as well. Operator: Thank you. And this concludes our question-and-answer session. I would now like to hand the call back to Brent Saunders for closing remarks. Brenton L. Saunders: Great. Well, thank you, everyone, for joining us. I'd like to end where I started, which is thanking our colleagues around the world for all the hard work and dedication on delivering an impressive third quarter. We look forward to an even deeper dialogue around our 3-year plan and more specifically around our R&D pipeline on November 13 at the New York Stock Exchange. And we hope all of you will join us either in person or via webcast, and we look forward to seeing you. Thank you, guys. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, everyone. My name is Bo, and I will be your conference operator this morning. At this time, I would like to welcome everyone to Veralto Corporation's Third Quarter 2025 Conference Call. [Operator Instructions]. I will now turn the call over to Mr. Ryan Taylor, Vice President of Investor Relations. Please go ahead, sir. Ryan Taylor: Good morning, everyone, and thanks for joining us on the call. With me today are Jennifer Honeycutt, our President and Chief Executive Officer; and Sameer Ralhan, our Senior Vice President and Chief Financial Officer. Today's call is simultaneously being webcast. A replay of the webcast will be available on the Investors section of our website later today under the heading Events and Presentations. A replay of this call will also be available until November 7. Yesterday, we issued our third quarter 2025 news release, earnings presentation and supplemental materials, including information required by the SEC relating to adjusted or non-GAAP financial measures. These materials are available in the Investors section of our website, www.veralto.com under the heading Quarterly Earnings. Reconciliations of all non-GAAP measures are also provided in the appendix of the webcast slides. Unless otherwise noted, all references to variances are on a year-over-year basis. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. Actual results may differ materially from our forward-looking statements. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements, except as required by law. And with that, I'll turn the call over to Jennifer. Jennifer Honeycutt: Thank you, Ryan, and thank you all for joining our third quarter earnings call today. During the third quarter, we continued to drive consistent growth through strong top line performance, disciplined operational execution and rigorous deployment of the Veralto Enterprise System. For both the third quarter and year-to-date, our team delivered mid-single-digit core sales growth, double-digit adjusted earnings per share growth and over 100% free cash flow conversion. These results underscore our ability to successfully navigate a dynamic macro environment, particularly with respect to changes in global trade policies. Our steady growth and improvement this year is a testament to our durable business model and the critical role our technologies and services play in supporting the daily operations of our customers. Given the strength of our third quarter results, we raised our full year adjusted earnings per share guidance to a range of $3.82 to $3.85 per share, and we raised our full year free cash flow conversion guidance to approximately 100%. Our financial position continues to strengthen, giving us ample flexibility to evaluate opportunities to deploy capital within our proven framework. Our capital allocation bias is towards acquisitions, and our pipeline of opportunities is comprised of a mosaic of attractive targets across both Water Quality and PQI. We continue to take a prudent approach to evaluating opportunities consistent with our disciplined market company valuation framework. I also want to highlight that during the quarter, we published our annual sustainability report. We have approached our commitment to sustainability with the same rigor and discipline that we apply to operating our businesses by leveraging our VES tools for continuous improvement to drive results. We have achieved significant milestones in developing innovative and sustainable products that not only meet the needs of our customers but also support the health of our environment. Our commitment to excellence in product design and functionality ensures that we contribute positively to the world we share. In 2024, our products and services helped provide daily access to clean water for 3.4 billion people, treat and recycle 14 trillion gallons of water, save 85 billion gallons of water and ensure product authenticity and safety by helping customers mark and code over 10 billion products each and every day. Additionally, we are making progress on reducing our own carbon footprint, an important commitment for many of our stakeholders. We are proud of the steps we are taking to support our environment and help our customers progress their sustainable journeys. The work we do helps customers deliver higher-quality products, accelerate time to market, minimize resource consumption and ensure compliance with relevant standards to improve overall operating efficiency. The essential need for our technology solutions, our durable business model and the secular growth drivers across our end markets fortified by the Veralto Enterprise System enable us to deliver long-term sustainable growth. The third quarter 2025 marked our fifth consecutive quarter of mid-single-digit core sales growth, consistent with our long-term value creation algorithm. I am proud of our global team for the steady growth and improvement we have achieved while embracing our purpose, a reflection of our high-performance culture. Looking at our third quarter results in detail. We delivered 5.1% core sales growth and 11% adjusted EPS growth. Our commercial teams continue to drive outstanding execution, leveraging their applications expertise to deliver growth through new customer wins and increased market penetration, while also capitalizing on steady demand across our key markets. Our core sales growth came in at the high end of our expectations and was broad-based across geographies in both segments. Water Quality delivered 5.3% core sales growth and PQI, 4.6% core sales growth. In PQI, our marking and coding business continued to see strong year-over-year core sales growth in both consumables and equipment. And in packaging and color, our Esko team continued to drive core sales growth by expanding software solutions in the mid-market CPG segment. In Water Quality, we delivered mid-single-digit growth across both water treatment and water analytics with particularly strong growth in North America. Moving on to margin performance. Adjusted operating profit margin came in at 23.9%, in line with our underlying guidance assumption. Adjusted earnings per share grew 11% year-over-year to $0.99, $0.04 above the high end of our guidance range. Looking at sales by geography and end market, growth was broad-based across key verticals and regions. In North America, which accounts for 50% of our business, core sales grew 6.9%, led by high single-digit growth in PQI and strong mid-single-digit growth in Water Quality. Core sales in high-growth markets were up 4.3%, and core sales into Western Europe grew 2.5%. Taking a closer look at North America, core sales in PQI grew 9.2% over the prior year period. This growth reflects strategic pricing adjustments related to tariffs that were implemented in the second quarter, along with higher volumes of marking and coding equipment-related consumables and Esko software solutions. From an end market perspective, demand trends in PQI were in line with our expectations during the third quarter. PQI's volume growth through the first 9 months this year has been strong relative to the market. This reflects the disciplined cross-functional execution and rigorous application of VES tools to deliver on our strategic initiatives. And overall, CPG demand was also in line with our expectations. At Water Quality, core sales in North America grew 6% year-over-year with broad-based growth across water treatment and water analytics. In our water treatment business, we continue to capitalize on strong demand for our chemical treatment solutions where core sales grew mid-single digits year-over-year. This growth was broad-based across most of the industrial markets we serve and was most pronounced in chemical processing and technology-related industries supporting artificial intelligence, including data centers. We are well positioned to capitalize on the rapid growth of infrastructure required to support AI growth. Our application expertise in water treatment is essential to helping deliver efficient water utilization and reduced energy consumption for hyperscalers and data center operators. We are also well positioned to capitalize on adjacent industries supporting AI growth such as semiconductors and power generation. In our water analytics business, core sales into North America grew mid-single digits with growth across both municipal and industrial verticals. Our water analytics growth was primarily driven by demand for our laboratory instrumentation and related chemistries. In Western Europe, core sales grew 2.5% with both segments up year-over-year. PQI grew 3.7%, driven by marking and coding and Water Quality grew 1.3%, driven by water analytics. In high-growth markets, core sales grew 4.3%, highlighted by strong growth in the Middle East, Latin America and India. Core sales into China grew low single digits in both segments. Overall, we continue to deliver consistent top and bottom line growth in the third quarter. At this time, I'll turn the call over to Sameer for a detailed review of our financial results and an update on our guidance. Sameer Ralhan: Thanks, Jennifer, and good morning, everyone. I'll begin with our consolidated results for the third quarter. Total sales grew 6.9% on a year-over-year basis to $1.4 billion. Currency was 150 basis points or about a $20 million tailwind year-over-year. Acquisitions net of divestitures contributed 30 basis points of growth, primarily from TraceGains and AQUAFIDES. Core sales grew 5.1%, with both volume and price up year-over-year in both segments. Volume grew 2.7% year-over-year and price contributed 2.4% to core sales growth in the quarter. Recurring revenue grew high single digits year-over-year and comprised 62% of our total sales. Gross profit increased 8% year-over-year to $844 million. Gross profit margin expanded 50 basis points to 60.1%, reflecting the benefit of our strategic pricing actions and strong procurement and supply chain efforts related to the tariff environment. Adjusted operating profit increased 6% year-over-year and adjusted operating profit margin was 23.9%, in line with our expectations. Strong year-over-year margin expansion in our Water Quality segment in the quarter was offset by acquisition dilution, strategic growth investments and tariff mitigation costs at PQI. Additionally, corporate expenses were up year-over-year, reflecting our full run rate costs. Looking at EPS for Q3, adjusted earnings per share grew 11% year-over-year to $0.99 per share. As compared to our guidance, adjusted EPS came in $0.04 above the high end of our range. This was primarily driven by stronger volume growth in both segments, higher operating margin in our Water Quality segment and lower net interest expense. Our free cash flow generation was strong in the third quarter. We generated $258 million of free cash flow at 20% or $43 million increase year-over-year. I'll cover the segment results, starting with Water Quality on the next page. Sales in our Water Quality segment were $856 million, up 7% on a year-over-year basis. Currency was a 140 basis points tailwind, and acquisitions contributed 30 basis points of growth, driven by AQUAFIDES. Core sales grew 5.3% year-over-year. Higher volume drove 360 basis points of core sales growth and price contributed 170 basis points. Water Quality's volume growth was driven by strong demand for water analytics at municipalities and water treatment solutions in our industrial end markets. And to a lesser extent, we also saw growth in UV treatment installations. Water Quality's recurring sales grew high single digits year-over-year, and equipment sales were up more than 3% year-over-year. Adjusted operating profit increased 13% over the prior year period to $225 million, and adjusted operating profit margin was 26.3%, up 150 basis points versus the prior year. Overall, it was a very strong quarter for Water Quality, reflecting the attractive secular growth drivers in our end markets and the ability of our Water Quality team to create value through VES-driven execution. Moving to our PQI segment on the next page. Sales in our PQI segment grew 6.9% year-over-year to $548 million in the third quarter. Currency was a 200 basis points tailwind. Contribution from acquisitions was 30 basis points year-over-year, primarily driven by TraceGains. This was net of the AVT divestiture, which was completed in Q1 2025. Core sales grew 4.6%, with price contributing 3.3% growth, helping offset tariff-related cost increases. Volume contributed 1.3% to core sales growth. PQI's core sales growth was broad-based across most of our key end market verticals and geographies. Recurring revenue grew high single digits year-over-year, led by consumables and software. And equipment sales were up just over 3%, driven by sales of marking and coding equipment. We continue to see strong demand for Videojet's refreshed technology portfolio. Equipment sales were strong across continuous inkjet and laser technologies with particularly high customer demand for the UV laser marking system that we introduced at the end of last year. Our UV laser is an attractive alternative to thermal transfer overlay technology. Additionally, it is helping our customers transition to more sustainable, flexible film packaging solutions. From an acquisition perspective, core sales growth for TraceGains continued to exceed 20% year-over-year. We continue to invest in TraceGains to scale the business and further penetrate the CPG market to create long-term value. We believe the transition to digital connected workflows in the food and beverage industry is poised for strong growth over the next decade. The combination of Esko and TraceGains provides us a unique opportunity to deliver value to our consumer brands as they digitize workflows with connected data across product development, compliance and packaging. Looking at PQI's profitability for the third quarter, we reported $139 million of adjusted operating profit, resulting in adjusted operating profit margin of 25.4%. The year-over-year change in PQI's profitability reflects the impact from acquisitions, strategic growth investments and to a lesser extent, tariff mitigation costs. Specifically, we continue to enhance our manufacturing utility with new production lines in strategic locations to improve our ability to serve customers in every region. We are in the final stages of completing these product line shifts. Overall, we are pleased with the growth at PQI and progress on our strategic investments during the quarter. Turning now to our balance sheet and cash flow. In the third quarter, we generated $270 million of cash from operations. We invested $12 million in capital expenditures. As a result, free cash flow was $258 million for the quarter or 108% conversion of net income. At the end of the third quarter, gross debt was about $2.7 billion, and cash on hand was nearly $1.8 billion. Net debt was just under $900 million, resulting in net leverage of 0.7x. Our financial position is strong and provides us the flexibility in how we deploy capital to create long-term shareholder value. We will remain prudent and disciplined in our approach to capital allocation. Over the long term, our goal is to continue to create shareholder value with a bias towards M&A. As Jennifer mentioned, we have an attractive pipeline of opportunities in both Water Quality and PQI. Looking now at our guidance for the fourth quarter and full year. Our underlying assumptions have been updated to reflect our current view of demand in our end markets, our most recent assessment of trade policies and currency rates as of October 3. Beginning with sales. For the fourth quarter, we are targeting total sales growth in the mid-single digits year-over-year. On a sequential basis, we expect total sales to be roughly in line with the third quarter, even with fewer shipping days. This assumes a year-over-year currency benefit of approximately 3% and core sales growth in the low single digits. Core sales growth is expected to be negatively impacted by 3 fewer shipping days versus the prior year period. 3 fewer shipping days represent a little more than 2.5% impact on Q4 core sales versus the prior year period. For the full year 2025, our assumption for core sales growth remains mid-single digits for the total company. This assumes approximately 5% core sales growth in each segment for the full year. Favorable currency rates are expected to benefit full year sales growth by a little more than 1% and the impact from acquisitions and divestitures is expected to be neutral on the top line for the full year. Looking at adjusted operating profit margin. In the fourth quarter, we expect to deliver approximately 30 basis points of margin expansion versus the prior year period. And for the full year, we expect adjusted operating profit margin in the range of flat to up 25 basis points year-over-year. For adjusted earnings per share, our fourth quarter guidance is $0.95 to $0.98 per share. And we raised our full year adjusted EPS guidance to $3.82 per share to $3.85 per share. We are now expecting adjusted EPS to grow high single digits for the full year. Finishing up our guidance update with free cash flow conversion. Based on our strong conversion through the first 9 months, we raised our guidance for free cash flow conversion to approximately 100% of GAAP net income. That concludes my prepared remarks. At this point, I will turn the call over to Jennifer for closing remarks. Jennifer Honeycutt: Thanks, Sameer. In summary, we continue to demonstrate Veralto's ability to successfully navigate dynamic macroeconomic environments with confidence. Our high-performance culture grounded in VES has helped to deliver mid-single-digit core sales growth and double-digit growth in adjusted earnings per share through the first 9 months of 2025. We expect to deliver another quarter of year-over-year growth in the fourth quarter given the essential need for our technology solutions, our durable business model and the secular growth drivers across our end markets. Our financial position continued to strengthen in the third quarter, and we are prudently evaluating opportunities to create shareholder value within our disciplined capital allocation framework. We are excited about the bright future ahead for Veralto, its associates and the opportunities in front of us to help customers solve some of the world's biggest challenges in delivering clean water, safe food and trusted essential goods. That concludes our prepared remarks. And at this time, we are happy to take your questions. Operator: [Operator Instructions] We'll go first this morning to Deane Dray of RBC Capital Markets. Deane Dray: Nice job on margins and free cash flow. Really good to see that quality coming through. Just start off with a couple of kind of nuanced questions regarding the macro. Can you clarify about tariffs? You were -- there was a bit of a mismatch on the last quarter on the timing of pricing. So do you feel like you've caught up there and then anything about the government shutdown that you may be seeing on the Water Quality side, any ripple effects? Sameer Ralhan: Yes, Deane, as you go to look at it on the pricing side, at this point, the teams have taken really good actions from a strategic perspective, really working with the customers on the pricing front, and you started seeing that flowing through the numbers, PQI a little bit more than Water Quality. So at this point, I think on the pricing front, we feel like we're in a good place to help offset the tariff -- any kind of a headwind. But again, pricing is one of the elements. As you know, we've been working on the supply chain, production changes as well to help offset any of the impact on tariffs at this point in a pretty good place, but the environment is volatile, and we're staying on top. Jennifer Honeycutt: Yes. And I would say relative to your second question, Deane, we watch the government environment closely. At this point, we've really not seen any material impact. So it's steady as she goes. We're running the business, continue to have critical needs for clean water, safe food and trusted essential goods. Deane Dray: Good to hear. And then just a follow-up on the regions. Any specific comments about China, the pace of demand? There's been -- some of your peers have had some softness there. Jennifer Honeycutt: Yes. I mean, China is effectively performing as we expected it to. We had an easier comp here relative in Q3. But sequentially, if you look Q2, Q3, we're not really seeing any meaningful changes to our total sales in China. And I would say our team continues to do a great job of executing well in what has really become a more mature market. Operator: We'll go next now to Andy Kaplowitz at Citi. Andrew Kaplowitz: So Jennifer, you've had many quarters in a row of strength in your industrial-focused Water Quality business. So could you talk about the durability of that strength into '26, especially given your comments regarding data center-related growth? Can you size that particular business at this point and its impacts that you expect moving forward? Jennifer Honeycutt: Yes. Data centers for us continues to remain a strategic priority. We're seeing strong double-digit growth here from sales to both existing customers and new builds, mostly driven by the big 5 tech companies. As you know, data centers tend to consume large amounts of water and operators are looking to us to maintain uptime while reducing both water and power consumption. And so our involvement really starts as early as preconstruction with consulting services that we provide to maximize energy efficiency and water conservation, including the design of the water treatment train. So a great opportunity here in data centers themselves. But I would also say, if you zoom out, data centers are just part of the AI value chain. Water treatment that we provide to the market, these technologies play a critical role in chip manufacturing, power generation, mining and other critical raw materials needed to build and operate these data centers. So we play in a broad space here in terms of the entire value chain leading up to data centers. I would say, relative to the opportunity, very big opportunity for us. We'll remain strategically focused on it. It is a smaller portion of our business, but it's got substantial runway for growth going forward. Andrew Kaplowitz: That's helpful. And then, Sameer, you lowered the '25 margin guidance slightly. Was that all PQI tariff-related pass-through? Or was it the incremental investments you're making? When you look out a bit into '26, would you expect to resume more normal incrementals at least well into the 30s as per your algorithm? Sameer Ralhan: Yes, Andy. As you kind of look at the full year margin guide, it does reflect the first 9 months of the performance and what we expect for Q4. You're absolutely right. As we kind of look at Q4 at this point, the tariff stuff should be lapping, but there's a little bit of a math impact just from the price and cost side, given we are offsetting the dollar impact. And as you know, in Q4, we typically tend to make some investments as we kind of drive the efficiency set up for the next year. So some of that timing will hit us in Q4 as well. So that's really kind of driving -- but most of that, Andy, as you're absolutely right, will flow from the PQI side than on the Water side. Water has had a great year with a great fall-through, and we expect that to continue. But as you're going to look at the margin side, right, for the full year from an EPS perspective, Andy, as you're going to look down the P&L, we feel really good. There's a little higher assumption on the sales volume, interest expense and some of the below-the-line tax rate should be a benefit to us as well. So that's why we felt confident despite the margin raising the EPS guide. Operator: We'll go next now to Andrew Buscaglia at BNP Paribas. Andrew Buscaglia: I just wanted to check on some of your trends were really strong in the quarter, especially in North America, especially PQI within North America. I was surprised to see that. How much of this would you attribute to pull forward? And clearly, I mean, there's a lot of noise into Q4, but what's your sense on sequential trends in PQI, if you're seeing any impact one way or the other from CPG markets? Jennifer Honeycutt: Yes. We really don't see any meaningful pull forward. We've had exceptionally strong commercial execution in our PQI businesses in North America, particularly from Videojet. And Videojet's performance has not only been on the back of strong commercial execution, but also on the back of the products launched in the last year. So we're seeing strong CIJ and laser sales as well as sales in the secondary packaging. So customers are needing increased case level traceability tied to the Food Safety Act. That's driving some of that strength. And we're just seeing higher share of wallet with existing customer base really driven by new technologies and go-to-market strategies on their part. So it's a great job by our commercial teams executing on our strategic price initiatives as well. Andrew Buscaglia: Yes. Okay. Okay, great. And in Water Quality, margins there have exceeded my expectations at least this year, and it seems like past investments are paying off. I'm wondering, this kind of was the case last year in PQI, but I'm wondering, going forward, do we need to see more increased investments in either segment? Or is this sort of a sustainable run rate for both segments in terms of margins into 2026? Sameer Ralhan: Yes, Andrew, let's start with Water Quality comment first. On the Water Quality side, you're absolutely right, great execution by the team as we kind of think on the [ margin ] side, really very disciplined VES-driven execution, and you're seeing the benefit of that on the fall-through side. PQI this year had a little bit of a heavy lift as you kind of think about some of the tariff-related moves we had to make. So you're seeing that. But as you kind of move forward, the way to think about the PQI margin is, the incremental margins as we move forward should be driving that 30% to 35% kind of a fall-through as we laid out in the long-term value creation algorithm. And that kind of translates into 25 to 50 bps of [ OMX ], right? So we expect that. Now there may be some one-off items that we had this year that should be offset next year. So that should benefit. But we'll take all the puts and takes and in February, talk about the '26 guidance. Operator: We'll go next now to John McNulty with BMO Capital Markets. John McNulty: Maybe the first one, just in Water. So it seems like on the pricing side, you've kind of been gradually creeping higher. I guess should we continue to see that pricing accelerate as we go into the back of like into 4Q and into the early part of 2026? And then also, can you give us a little bit of color as to if there's much variation between the subdivisions in Water. Jennifer Honeycutt: John, just to clarify, you're inquiring about the pricing differences in the subdivisions in Water? John McNulty: That's right. That's right. Jennifer Honeycutt: Okay. Yes. We don't really delineate there at that level. But what we will say is we've had strong price execution on the back of covering for some anticipated tariff activity. But both price and volume on Water has been equally balanced, which is pretty fantastic in the environment that we're in. Pricing going forward is going to look a lot like our frame that we have talked about in prior calls relative to 100 to 200 basis points of contribution in the growth number coming from price. But having said that, we believe we're going to be in a strong position here to deliver price in the fourth quarter. John McNulty: Okay. Fair enough. And then maybe just with regard to your cash flow. So you did incredibly well in 3Q. It looks like a solid outlook for 4Q. Your cash is definitely starting to build on the balance sheet. Your leverage is pretty anemic at this point. I guess, do you see opportunities that you think in the next 6 to 9 months, you may be able to actually get across the finish line when it comes to M&A? I know these are hard to time, but your capital efficiency seems like it's starting to maybe drift a little bit lower just given how successful you've been with the cash you've been building up. So maybe a little bit of color on that. Sameer Ralhan: Yes. Thanks, John, for that. First, on the cash side and the free cash flow side, really proud of all the execution of the teams across our businesses as you kind of think about the quality of the earnings, working capital management and that kind of flowing into the free cash flow. So really great execution is really driving the cash generation. And ultimately, as you said, cash is accumulating nicely on the balance sheet. Now our intention is to deploy that capital to create long-term value. As you've heard from us in the past, look, the pipelines are pretty active. We are very actively looking at the number of opportunities, but we're going to stay disciplined. You know us. We're going to stay true to our framework of market company valuation. So more to come. But as we kind of think about our cash, we'll look at all the opportunities to deploy it to create value for the shareholders. Operator: We'll go next now to Will Grippin at Barclays. William Grippin: Just one quick one for me, another one on M&A. I know it's still early, but I would be curious if you have any updates on your recent investment in Emerald Ventures and maybe how some of those early discussions or opportunities being presented to you are looking? Jennifer Honeycutt: Yes. We remain excited about our partnership with Emerald, and they are vetting a number of technologies in partnership with us that address treatment, monitoring and emerging contaminants. It's steady as she goes here. We continue to work with them on vetting and looking at opportunities there. And we'll let you know when we have something to report. Operator: We'll go next now to Nathan Jones with Stifel. Nathan Jones: I guess first question, Jennifer, 6 months ago when tariffs had just been announced, you were pretty excited about the potential for Veralto to use the disruption from tariffs to gain market share. I'm wondering if 6 months later, you can maybe talk about any opportunities that the teams have taken advantage of and how that's played out relative to expectations over the last 6 months? Jennifer Honeycutt: Yes. I think we're fortunate enough to really get ahead of this relative to our 3-pronged strategy of strategic pricing, supply chain and procurement changes and product line shifts. The product line shifts that we've made are really no regret moves, right? So moving product lines closer to where customers are offsetting tariff impact is something that we have been nimble in executing and VES has helped support do that. Certainly, if you look at price-volume balance here, it would suggest on the volume side that we're holding up well with regard to being able to continue to penetrate markets regionally where localization provides good strategic competitive advantage for us. So as you well know, we've got a warehouse now here in North America for our Trojan business that's headquartered out of Canada. They continue to have great opportunities here in the U.S. And so all of these sort of initiatives that we've taken here have gone the way we thought them to, and we're seeing good opportunity to be closer to our customers and serve them locally. Nathan Jones: I guess my follow-up is going to be PQI in North America. I mean it's 3.3% of price in PQI. I assume that's obviously skewed to North America given the tariff environment. So there's a pretty heavy pricing in PQI there. Maybe you could just talk a little bit more about any opportunities there are for non-price mitigation actions in PQI. I guess the tariff impact was a little bit higher than I expected. And then does that present an opportunity to maybe mitigate some of the tariff impacts, keep some of the price and have that drop through to margins as we move into 2026? Jennifer Honeycutt: Yes. I would say relative to PQI in North America, we are seeing great balance between price and volume within our marking and coding segment. And that is largely on the back of Videojet products launched last year in terms of new CIJ and laser products, including secondary packaging products that actually tie to the Food Safety Act that I spoke about earlier. So we're confident in terms of the ongoing sort of demand and stability of these products. And I think what we're seeing here in North America is those products that were newly launched last year are really starting to gain traction. So great execution by our commercial teams. And we will continue to monitor the environment as we go forward. Operator: We'll go next now to Jacob Levinson at Melius Research. Jacob Levinson: Just tacking on Andy's question earlier on the data center side of things. Is there any way you could frame for us the content intensity or the opportunity that you would have at ChemTreat or Trojan relative to some of those other types of non-res facilities that they operate in? I'm just trying to get a sense of how a data center would compare to, say, a power plant or a chemical plant. I'm sure they all use a lot of water, but it's not entirely clear which ones would be more intensive for what you sell? Jennifer Honeycutt: Yes. Thanks for the question, Jake. I think the way to think about this is our commercial teams are really skilled at pivoting where the opportunities are in any given quarter or year. We are seeing double-digit growth in data centers and in applications closely tied to data centers. We don't publicly disclose sales by vertical market, but we can say that we feel very good about our current position and our opportunity to continue to grow double digits in these areas going forward. Sameer Ralhan: Yes. And Jake, the other way to think about also is as you kind of think about the applications within the data center, there are multiple touch points where our services kind of get into. Think about the data center, some of the key issues are around reducing the water and power consumption, both. So we play a part on both sides of the equation. And also the other part of the data centers is to really think about the uptime, right? Maintaining uptime is critical in the data center infrastructure. We're all kind of learn based on some of the news that you've seen in the last couple of weeks. So as you kind of think about minimizing corrosion, scaling biological growth, there are tons of applications you're going to think about and expertise that is needed in making sure the data centers maintain their uptime and our country team plays a phenomenal role in helping our customers achieve that. Jacob Levinson: Okay. That's helpful. And just one quick one on TraceGains. It sounds like that deal has been working out nicely for you. Maybe you can just help us understand the puts and takes on the deal as we come out. I think you've had it now for almost a year now. And I think part of the thesis at least was that there was an opportunity maybe to pull in some of your traditional products into that smaller mid-sized CPG segment. So any color there would be helpful. Jennifer Honeycutt: Yes. We are incredibly happy with TraceGains' performance and the integration here has gone well. They are now at their first year anniversary. And so their growth rate greater than 20%, which has been in line with expectations, will go into the core growth calculus going forward. In terms of opportunity there, both TraceGains and Esko have been working together to integrate the digital backbone here that will create a single source of truth for all stakeholders in both the packaging and the product development workflow. So all of that is on track. We do believe that the CPG market is early in its digitization journey, but there continue to be strong regulatory and consumer safety drivers there, making an attractive place for us. So TraceGains is doing great, strong grower for us on track. We continue to invest in building out that business, but they are growth accretive to the profile. Operator: We'll go next now to Brian Lee with Goldman Sachs. Brian Lee: Just a couple more follow-ups. I know we've talked a lot about margins in PQI. But if we think about the cadence, it seems like we're 2 quarters into tariffs hitting margins in this segment. So do we maybe not really fully lap the tariff impact until 2Q of '26? And is that kind of the way to think about when from a modeling perspective, we start to see PQI margins start to expand again year-on-year? And maybe just to add on to that, when you think about pricing in PQI, is that -- I mean, I would assume it's the biggest lever, but are the increases enough to get back to kind of recapture the 100 to 200 basis points of margin decline you've been seeing here at the end of the year? Or do you need productivity gains, mix, other factors to help there as well? Just any sense on the puts and takes there. Sameer Ralhan: Yes. Brian, a lot of questions to unpack there. So let's go one by one, right? First, I think your instinct is right as we're going to think about when we start lapping up the impact from the tariff side from the -- all the actions perspective, you're going to start seeing in the second quarter. I think that's a good way to think about that impact. But overall, as you kind of think about the margin expansion, look, price is one of the impacts. We look at price versus the raw material costs and that we call it the [ PPE kind ] of that expansion all the time. That is one of the -- definitely one of the factors that we're going to move into next year. But productivity is part of it, right? As we're going to think about the volumes that are coming through, they should be falling through at 30% to 35% kind of a range. That itself should give us 25 to 50 bps kind of a margin expansion as you're going to start looking at things moving forward. But there are some one-off things as we kind of talked about the tariffs and the actions and the costs that come with mitigating those. Some of those -- one of those -- one-off things like that should be offsetting next year as well. So lots of moving parts, but we feel really good about where the business is, the new products that come in, the acceptance we're seeing from the customers and the volume gains that you've seen. So really positive as we kind of think about our opportunity to expand the margins -- to continue to expand the margins, I should say. So you're going to see us in February kind of talking about that in more detail. Operator: We'll go next now to Saree Boroditsky at Jefferies. Jae Hyun Ko: This is James on for Saree. I wanted to look at some reason for Water Quality. I think high-growth markets kind of underperformed other regions over the past few quarters, but it outperformed this quarter. So what are kind of key factors kind of driving growth in these regions? And how do you see this trajectory like going forward for the next several quarters? Jennifer Honeycutt: Yes. I mean I think we've had good strong growth really contributing from our high-growth markets. Certainly, China is no longer a drag here for us. First time in several quarters that we've seen growth from both of our segments there in China, and the team is doing a great job to execute commercially. We see continued strong growth here in Latin America. And I would say there's real upside and double-digit growth that we're seeing also from India and the Middle East. India on the back of a rapidly growing middle class, lots of infrastructure development there and so on. India still is a relatively small part of our overall enterprise as a percent of sales but rapidly growing. And we've got a team on the ground there who's driving some great execution, both for our Water Quality and for PQI. In the Middle East, it's -- everyone knows that they have considerable challenges with water and energy utilization and so on and so forth. So there's great opportunities there as they look to drive recycle, reclaim water as they focus on how to make the water that they do have last longer, recycle more of it and so on. So we think the secular drivers here for our high-growth markets are going to continue to remain strong. And certainly, the focus that we've had on executing commercially in those target regions has gone well. Jae Hyun Ko: Got it. Great color and great to hear that. And kind of moving on to recurring revenue, it kind of grew strongly like high single digit in the quarter. Can you kind of discuss the drivers behind this growth? And do you expect recurring revenue to continue to outpace equipment sales growth going forward? Jennifer Honeycutt: Yes. I mean I think you've got to look at the relationship between equipment and consumables or recurring revenue over the cycle. They're going to be modest changes in which is the faster grower. But I would say in the main, we've got strong growth from both right now as in the case of PQI on our coding and marking business, strong printer placements and the inks and solvents and consumables to go with them. Same thing that we see on the Water side, great instrument placement as well as the consumables that go with them. So we've got a very sticky business, as you probably know, with regard to consumables and their relationship to the hardware that they support. I would also say we're starting to see some higher contributions from our software-based businesses. So if you look at our packaging color side, where you're starting to see our [ SaaS ] and annual revenue start clocking in here with both TraceGains and Esko, those are starting to be meaningful contributors as well. Sameer Ralhan: The only one more point I would add is as you're going to think about our instrument business as well, right, I mean there's a finite life, and that is a reoccuring business as well. So as you're going to think about that growth from the growth perspective, so that's nice add on as we're going to continue to move forward. Operator: We'll go next now to Bobby Zolper of Raymond James. Robert Zolper: Were there any variances relative to your expectations in Water Quality pricing? Sameer Ralhan: No. I think, look, pricing in general has been along the expectations, Bobby. As you recall, when we -- the tariff environment started earlier this year, we said we're going to be very strategic with respect to our pricing versus one-off items being added tied to tariffs. So we work very closely with our customers to make sure -- ultimately, the goal here is to create value through a combination of price and volume, and that's kind of reflected as you kind of think about the overall core growth, both in the Water Quality and PQI side as well. So we saw a little bit higher pricing in PQI versus Water, but ultimately, it's a combination of both that creates long-term value, price and volume. Robert Zolper: Okay. Understood. And what are your thoughts on the attractiveness of water metering as a platform? Jennifer Honeycutt: Yes. I mean I would say we look at the entire value stream of where water is used, analyzed and consumed. Metering is part of that value chain. We actually are in the metering business today with magmeters in our McCrometer business, smaller overall portion of our revenue profile, but we're actively in metering today. Operator: We'll go next now to Andrew Krill of Deutsche Bank. Andrew Krill: I don't think this was explicitly touched on. But for 4Q, I just was hoping you could give some segment level color on margin expectations, maybe sequentially is the best way to do that? And also anything on core growth for the fourth quarter by segment? I know you said, I think both around 5% for the full year, but just wondering if any big differences for 4Q. Sameer Ralhan: Thanks, Andrew. There are 2 distinct questions over there. So let me start with the margins first. For the fourth quarter, we expect the margins in aggregate to be around 30 basis points. Both segments should be driving the year-over-year expansion in the margin side. You're going to see that. Water Quality, just driven by continued disciplined execution. Frankly, they've done a phenomenal job in the first 9 months, and we expect that to continue in Q4. PQI should start benefiting from the reduced tariff-related costs and some of the operating efficiencies that we've been driving. So you're going to see that, but PQI should be on a year-over-year basis up as well. But in aggregate, we should be in the 30 basis points kind of a [ ZIP code ] on the margin side. As far as the core growth, again, as you know, we don't give guidance by segment, but both segments are lined up pretty nicely and should be contributing to the growth that we've laid out. And Andrew, as you know, we said core growth around low single digits. But just to highlight and reiterate what we said in the prepared remarks, we do have 3 less shipping days. So if you pro forma for that, the core growth across the portfolio is in the solid mid-single digits range. Andrew Krill: Great. Very helpful. And then going back to cash conversion, again, very impressive in the quarter. Could you expand a little on like what went well? And as we look forward, I think in the past, you said 1Q and 3Q often go below 100% conversion as you do your cash interest payments. Just -- is there a chance maybe like you can hold the line more consistently going forward? Or should we still be expecting a more normal outcome of below 100% in 1Q and 3Q? Sameer Ralhan: Yes, Andrew. As you kind of look at the free cash flow, I think it makes sense to look at it on an annual basis because interest payments are always going to be heavy in Q1. There's always a meaningful comp in Q1 payout as well. And then in Q3, we're going to have a heavy interest payment as well. That's just the architecture of how the -- our capital structure is. It's less about the business. Underlying businesses when you look at, Andrew, the cash flow generation is very consistent, very strong, high-quality earnings. So I think that's the way to look at it. Ryan Taylor: Thanks, Andrew, and thanks for everyone that joined us on the call today. This is Ryan Taylor. This concludes the Q&A portion of our call. We appreciate everybody's engagement and joining on the call today, and we look forward to talking to you next time. Thank you. Operator: Thank you, Mr. Taylor. Again, ladies and gentlemen, that will conclude Veralto Corporation's Third Quarter 2025 Earnings Conference Call. Again, thanks so much for joining us, everyone, and we wish you all a great day. Goodbye.
Operator: Good morning. Joining me on today's call is Michael Dale, AxoGen's Chief Executive Officer and Director; and Lindsey Hartley, Chief Financial Officer. Michael will discuss third quarter 2025 financial results and corporate highlights. Lindsey will then provide details on financial performance, guidance and overall outlook for the year. This will be followed by a question-and-answer session. Today's call and presentation is being broadcast live via webcast, which is available on the Investors section of AxoGen's website. Following the end of the live call, a replay will be available in the Investors section of the company's website at www.AxoGeninc.com. Before we get started, I'd like to remind you that during the conference call, the company will make projections and forward-looking statements. Forward-looking statements include, but are not limited to, statements relating to financial guidance, market development priorities, estimated market opportunities, timing for future product and application launches and the company's expectations for approval of the biologics license application for Avance Nerve Graft in December 2025, including the anticipated timing of approval and the assumption that Avance Nerve Graft will be designated as a reference product for any future biosimilar nerve graft and that such designation will provide marketplace exclusivity. Forward-looking statements are based on current beliefs and assumptions and are not guarantees of future performance and are subject to risks and uncertainties, including, without limitation, the risks and uncertainties reflected in the company's SEC filings, including its most recent Form 10-K and 10-Q. The forward-looking statements are representative only as of the date they are made, and except as required by applicable law, the company assumes no responsibility to publicly update or revise any forward-looking statements. In addition, for a reconciliation of non-GAAP measures, please refer to today's press release, short presentation with highlights from today's call and the corporate presentation on the Investors section of the company's website. I'll now turn the call over to Michael. Michael Dale: Thank you, operator, and welcome to everyone joining us this morning as we discuss our 2025 third quarter financial results. I'll begin today's call with a financial and corporate overview, highlighting our progress through the third quarter and year-to-date, implementing our strategic plan, followed by an update on the Biologics License Application, or BLA, for our Avance Nerve Graft. I will then pass the call to Lindsey to review the quarter's financials and outlook for the remainder of 2025, and then we will open the lines for a question-and-answer session. As remarked in this morning's earnings release, we are delighted with our third quarter performance and progress year-to-date for the business. Our strong revenue growth and notable milestone achievements during the quarter further validate our strategic plan objectives and market development strategies and importantly, AxoGen's ability to operationally execute our plans. Indeed, I am proud of our executive team in each of the respective operating functions at AxoGen for the performance year-to-date that is at or above plan. Looking ahead, we will continue to optimize our business models based on experience and have confidence in our ability to continue delivering growth consistent with the guidance we have provided for our strategic plan in both the near and longer term. Regarding the quarter, Q3 sales increased to $60.1 million, growing 23.5% compared to the same period last year. This performance reflects double-digit growth across all of our nerve repair target markets, including extremities, oral maxillofacial and head and neck and breast. Consistent with prior quarters, our growth is driven by expanding adoption of nerve care using AxoGen's nerve algorithm for the treatment of all types of peripheral nerve injuries, including traumatic, hyrogenic and chronic nerve injuries. The Avance Nerve Graft is the primary growth driver, often complemented based on the clinical situation by one or more of our nerve repair connection, protection or termination products. In extremities, we continue to execute our high potential account strategy with solid growth in both traumatic and chronic nerve injury procedures in the quarter. In OMF and head and neck, surgeon adoption of the AxoGen algorithm during the quarter was strong across all products -- all procedures, but particularly in mandible reconstruction procedures. And likewise, in breast, we continue to see strong adoption of our breast resensation techniques, supported by new surgeon activation, increased procedure volume in implant-based reconstruction cases and the expansion of our commercial infrastructure. In summary, we are encouraged by the broad-based adoption of our nerve care portfolio and momentum across each of our 3 target markets. To assess our progress, we continue to monitor key metrics tied to our plan in 2025 strategic priorities, including high potential accounts, commercial expansion, professional education, new product development, clinical research and prostate market development. I'll begin with an update on our performance and growth in high potential accounts. We continue to focus on expanding our presence in these accounts to drive more consistent customer creation, algorithm adoption and improvements in sales force productivity. Our goal for 2025 is to generate at least 66% of total revenue growth from high potential accounts and average account productivity of 21% -- through the first 3 quarters, approximately 64% of revenue growth was driven by high potential accounts based on an average account productivity of 19%. These results are slightly below our planned target, but notably the result of the fact that we are also seeing double-digit revenue growth and account productivity growth year-to-date in our non-high potential designated accounts as well. Growth in all account types was amplified in the quarter by the discontinuation of our case stock sales program for Avance Nerve Graft in preparation for the anticipated BLA approval. This sales program previously allowed for Avance Nerve Grafts to be shipped for a case for an unused product to return to AxoGen. With the discontinuation of the case stock program, previous case stock customers are transitioning to either order by direct sale or consignment. This shift in purchasing behavior contributed to our top line performance and reduced revenue growth from high potential accounts by an estimated 4%. To be clear, high potential account growth was actually quite strong on an absolute basis, while it appears lower than last quarter, it's really just a function of the denominator getting larger because of the benign high potential base is performing better as well. The underlying fundamentals in all account types remains very positive. And after accounting for the case stock impact in the third quarter, we continue to realize that our focus on high potential accounts is enabling broader and more enduring adoption of nerve care and as such, more predictable growth. During the first 3 quarters of 2025, there were 668 active high potential accounts. of the approximately 780 accounts that meet our high potential criteria, which represents an increase of 8 accounts or 1.2% as compared to the first 3 quarters of 2024. Regarding our 2025 commercial infrastructure expansion goals, as of the end of third quarter, we are now at or ahead of our hiring plan for each target market. In breast, we ended the quarter with 22 breast resensation sales specialists and 2 regional sales directors. We have met our goal to double the breast sales force in 2025 by the end of the year. To support broader adoption in non-breast markets, we ended the quarter with 125 sales professionals, including 15 regional sales directors. In OMF and head and neck, we ended the quarter with 4 field-based market development managers. Surgeon training remains a core component of our customer creation and nerve repair algorithm adoption. Execution of our 2025 professional education programs are on track, and we fully expect to meet our 2025 surgeon training targets. In breast, we have trained 62 surgeon pairs year-to-date with one program planned in the fourth quarter. We are confident we will meet our 2025 target of 75 surgeon pairs trained. Active breast resensation programs increased 7% from the third quarter of 2024 from 113 to 121. We estimate 281 surgeons performed a breast resensation procedure in the third quarter, which represents a 20% increase versus third quarter of 2024. In Extremities, we have trained 97 surgeons year-to-date, of which 30 were trained in the third quarter with 3 additional programs planned in the fourth quarter. We expect to meet our 2025 target of 105 surgeons trained. In OMF and head and neck, we have trained 57 surgeons year-to-date, up 16 from second quarter 2025, exceeding our 2025 target of 45 surgeons trained. Next, I will provide an update on our clinical research priorities. We continue to advance our 2025 initiatives and are on track to complete a Level 1 study protocol for implant-based neurotization, a clinical evidence plan for Avance versus autograft and Vic and motor nerves and a clinical evidence plan for oral maxillofacial and head and neck. Regarding research and development, as we have outlined in our strategic plan, innovation remains critical to our long-term growth -- through the 3 quarters of the -- through the first 3 quarters of the year, we continue to progress and advance our innovation platform across 3 pillars. Those include therapeutic reconstruction, ease of coaptation and protection expansion. Consistent with our clinical research objectives to build evidence in support of nerve care, in the third quarter, we received meaningful external validation of AxoGen's differentiated technologies and leadership in peripheral nerve repair. 10 new peer-reviewed publications cited clinical use for discussion of our products, bringing our total nerve repair related literature body to 339 publications. This growing body of evidence underscores the clinical relevance and impact of our solutions. Notably, there has been a 70% increase in the number of nerve repair publications in the last 5 years, reflecting in part the growing experience and interest in nerve repair. For those interested, all peer-reviewed studies are available on our website. During the third quarter, we also saw significant validation from medical societies. Both the American Association of Hand Surgery and the American Society for Reconstructive Microsurgery released official position statements recognizing nerve allograft as a nonexperimental and medically necessary standard medical practice option for the treatment of peripheral nerve defects. These position statements add to the previously released clinical practice guidelines from the American Association of Oral and Maxillofacial Surgeons. Together, these endorsements mark a critical step towards establishing peripheral nerve repair with allograft as a recognized standard of care, and we believe this support will be helpful in our efforts to expand coverage. On the coverage and reimbursement front, we continue to see noncoverage policies removed within the Blue Cross Blue Shield network and within Medicare Advantage for Nerve Care, resulting in an estimated 1.1 million newly covered lives in the third quarter. Year-to-date, we estimate 18.1 million additional lives are now covered for nerve repair for peripheral nerve injuries using synthetic conduits or allografts. This expansion brings coverage amongst commercial payers to more than 64%, reflecting continued momentum and expanding access. And finally, I will provide an update on our prostate clinical and market development plan. We remain enthusiastic about the opportunity to improve nerve function outcomes in robotic-assisted radical prostatectomy and are actively collaborating with key opinion leaders to advance surgical technique development. During the third quarter, our clinical development team provided field-based support to surgeons and clinical sites incorporating nerve repair into the robotic-assisted prostatectomy cases. We added 4 new clinical sites during the third quarter, bringing our total to 10 active sites meeting our year-end goal. Procedures are ongoing, and we remain on track to complete 100 cases by year-end. Before I hand it over to Lindsey, I would like to address the status of our biologics license application for Avance Nerve Graft. In August, the FDA extended the PDUFA goal date from September to December 5, 2025. In the communication from the FDA, it stated that a recent submission by AxoGen, a facility and manufacturing information provided in the response to an FDA information request constituted a major amendment to our BLA for the Avance Nerve Graft submission, which resulted in the 3-month extension. Since our last public update, interactions with FDA have expanded to all elements of the BLA application. Based on these interactions, we remain confident we will successfully complete the application process, consistent with the new December 5 PDUFA date. The BLA approval will secure 12 years of market exclusivity from biosimilar nerve allografts and establish Advance Nerve Graft as the only implantable biologic indicated for the repair of functional deficits in peripheral nerves. With this, I will now turn it over to Lindsey. Lindsey Hartley: Thanks, Mike. I'm pleased to report our third quarter results. We reported strong growth with revenue of $60.1 million, reflecting a 23.5% growth compared to the third quarter of 2024 and a 6% sequential increase over the second quarter of 2025. Revenue growth continues to be fueled by strong sales of Avance Nerve Graft and the adoption of our comprehensive product algorithm across our target markets, with unit volume and mix serving as the primary driver of our performance -- revenue performance. As Mike noted, during our third quarter, we successfully ended our case stock sales program for Avance Nerve Graft in preparation of the anticipated BLA approval. We estimate our revenue for the third quarter was positively impacted by $1.6 million or 3% as the result of customers transitioning away from purchasing Advance through the case stock program and ordering through direct sales. Our gross profit for the quarter came in at $46 million, up from $36.4 million in the third quarter of 2024 and $42 million in the second quarter of 2025. This represents a gross margin of 76.6%, up from 74.9% in the same period last year and up from 74.2% in the second quarter of 2025. The year-over-year increase and sequential increase from second quarter were primarily driven by lower inventory write-offs and reduced shipping costs on products sold. These gains were partially offset by modestly higher product costs, which had a minimal impact of less than 0.5 percentage point on gross margin compared to both periods. Gross margin for the first 3 quarters of 2025 was 74.4%, 1.3% less than the first 3 quarters of 2024. The decrease of gross margin for the first 3 quarters of 2025 was driven by a 1.9% increase in year-over-year product costs. Product cost increased as a result of the transition of processing Avance Nerve Graft to our AxoGen processing center and costs related to additional steps and tests required as we approach the transition to processing as a biologic anticipated in December. We expect the cost of our advanced product to decrease over time as we gain economies of scale at the AxoGen processing center. And once the BLA is approved, we can begin implementing more significant continuous improvement programs. Our operating expenses increased to $44.1 million, up from $36.8 million in the third quarter of 2024. And as a percentage of revenue decreased 2.2%, highlighting our ability to increase our operating leverage. Sales and marketing expenses as a percentage of total revenue were up nearly 4% to 42.7% from 38.9% in the third quarter of 2024. Research and development expenses increased 8.1% to $7.6 million from $7 million in the third quarter of 2024. As a percentage of total revenue, research and development expenses were down 1.8% to 12.6% from 14.4% in the third quarter of 2024. General and administrative expenses remained flat quarter-over-quarter at $10.8 million. As a percentage of total revenues, general and administrative expenses were down 4.2% to 18.1% from 22.3% in the third quarter of 2024. Net income for the quarter was $0.7 million or $0.01 per share compared to a net loss of $1.9 million or $0.04 per share in the third quarter of 2024. Adjusted net income for the quarter was $6.1 million or $0.12 per share compared to an adjusted net income of $3.1 million or $0.07 per share in the third quarter of 2024. Adjusted EBITDA for the quarter was $9.2 million compared to an adjusted EBITDA of $6.5 million in the same period last year. Adjusted EBITDA margin improved 210 basis points to 15.4% from 13.3% in the same period last year, driven by revenue growth and increased operating leverage. As of September 30, our balance of cash, cash equivalents, restricted cash and investments increased $3.9 million to $39.8 million from $35.9 million at the end of the second quarter of 2025. I am pleased to report that for the first 3 quarters of 2025, our balance of cash, cash equivalents, restricted cash and investments increased $0.3 million from a balance of $39.5 million at December 31, 2024, demonstrating our ability to be free cash flow positive for the year. Now turning to our full year financial guidance for 2025. We are raising our revenue growth guidance to at least 19% or revenue of at least $222.8 million. We reiterate our gross margin in the range of 73% to 75%, inclusive of onetime costs related to the BLA approval for Avance Nerve Graft, which we are expecting to impact gross margin by approximately 1% or $2 million. As a reminder, these costs will be incurred around the anticipated BLA approval date currently expected in December. Also, we estimate that 2/3 of these costs relate to the vesting of our BLA milestone related stock compensation awards and are noncash. We continue to expect to be net cash flow positive for the year. In summary, we are very pleased with our third quarter performance and the progress we have made. We remain focused on executing our strategy, investing in innovation, optimizing our resource allocation and driving towards profitability. With that, we will now open the line for questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Chris Pasquale with Nephron Research. Christopher Pasquale: Congrats on the nice quarter. If I look back at the last few years, your fourth quarter revenue tends to be up slightly compared to 3Q. I know guidance is for at least 19% growth. So you're leaving the door open for something better than that. But at 19, it would imply a 4% sequential decline. So I want to make sure we understand how to think about this case stock program transition and whether that $1.6 million was in effect kind of pulled forward from 4Q into 3Q? And then there's anything else about the dynamics this year that we should be keeping in mind as we're updating our models, especially related to the BLA decision date. I would love to sort of flesh that out. Lindsey Hartley: Thanks, Chris. For our fourth quarter, we are expecting our typical seasonality. But in giving our guidance, we have been prudent as because of the case stock program. During the third quarter, we saw an increase of $1.6 million related to these customers transitioning mostly to direct sales. We discontinue that program September 1, so we're just 1 month in. So we're still trying to get a grasp on what that full potential impact could be and if that was a onetime pickup as a result of a shift to direct sales. So in modeling, I would exclude the $1.6 million that we saw from the case stock program in Q3. Christopher Pasquale: Okay. That's helpful. And then looking ahead to consensus is right now embedding about 16% revenue growth. You've actually done better than that now 3 quarters in a row, but that's obviously going to create some tougher comps as well. I know you guys will give formal guidance in February, but just curious if there's any directional comments you'd like to make now about how you're thinking about next year and maybe some of the key puts and takes across the business. Michael Dale: Chris, we're not prepared at this point to give any color on 2026 beyond the general statement that we remain very positive about the business and have full confidence in the strategic plan. I realize you guys are looking for more granularity than that, but not ready to provide that. Operator: Our next question comes from the line of Michael Sarcone with Jefferies. Michael Sarcone: I guess just to start on the BLA, thanks for all the color, Mike. In the press release you had put out in late August, you mentioned the FDA was targeting November to maybe start talks around the label. Is this still the expectation? And then I guess just a follow-up, I'll throw out there. Just on the labeling front, can you comment on how you're thinking about the label in terms of being broad versus narrow? And you've made some good progress with the medical societies. Does the FDA take that into account when kind of thinking about the label? Michael Dale: Sure. With regards to the last part of your question, we do not know explicitly whether or not the FDA takes that information into account. So I can't comment definitively. With regards to label, as I mentioned in my comments a moment ago, we have expanded already into all parts of the BLA application to include scope of label and hence, why I was able to provide some color that based upon those interactions, we believe that we will continue to serve the full scope of patient indications that we have been serving historically. So no dimidiation of our ability to provide support and service for mixed and motor nerve patients as we have historically. Operator: Our next question comes from the line of Caitlin Cronin with Canaccord. Caitlin Cronin: On an awesome quarter. I guess just to start off in terms of the commercial coverage, I mean, pretty impressive move up from last quarter. I mean, do you see this plateauing at a certain point prior to the BLA? Or can you give any more color in terms of the trajectory going forward? Michael Dale: Well, I think it's -- I'll tell you, I'll let Rick answer that question. Rick Ditto: All right. Caitlin, great question. So the increase in our percentage of commercially covered lives primarily reflects the refinement in our data. So we acquired a data set that tracks health plan enrollment by state and metro area. And so that is the main driver of the uplift from 55% coverage to 64% coverage. We're really excited with the progress we've made, and we're a few weeks away from engaging the national payers. There are 3 big national payers that currently list us investigational experimental. And so that work is ongoing. I've been here 7 months, and I would say we're probably 5 or 6 months ahead of the initial plans on when we would engage them. So the society support is helpful. We're not going to speculate on when those payers will flip medical policy to cover us. But we're marching forward in our pursuit of making nerve repair an expected standard of care, and we're happy with the progress. Michael Dale: The way we look at it in our strategic plan over time, Caitlin, is use that phrase I often use, like little engine it could. It's going to become fits and starts, but it's going to keep going up and to the right. simply because factually and objectively, we have the information to justify these asks. What what's happening over the last 12 months and going forward is that we are methodically engaging with the payers with regards to the information they need and the processes they utilize so that we can make these asks. And when you do, when you have a high ground objectively to make the ask, most of the time, you're going to win. And so that's really what's underway and the effort that Rick and his team is leading. And all we can say is so far, so good. Caitlin Cronin: That's awesome. And then just as a follow-up, Lindsey, I don't think I heard the breakdown in revenue growth this quarter between price and volume and mix. Do you have that available? Lindsey Hartley: Yes. We're seeing about the typical increase from price. Our mix is the same as what we see historically. Operator: Our next question comes from the line of Jayson Bedford with Raymond James. Jayson Bedford: Congrats on the progress. Maybe just a quick financial -- Mike, the case stock program, was there -- I realize it's relatively small, but was there any impact on gross margin either in 3Q or an expected impact in 4Q? Michael Dale: From case stock specifically? Jayson Bedford: Yes, on the gross margin line. Lindsey Hartley: We're not seeing it yet. In the future, we do anticipate some savings just from the nature of that program. It required a lot of additional resources shipping back and forth. With 1 month in right now, it's hard to say what that total impact is going to be, but we hope to see in the next quarter or 2. Michael Dale: But there will be no negative impact. The only question is to what degree positive. The case stop program was not a very efficient program. Jayson Bedford: Okay. Okay. Internationally, I think historically, you've talked about addressing the international market. I'm just wondering what the timing is? And is it somewhat dependent on the BLA at all? Michael Dale: Completely connected to the BLA in terms of any formative efforts going forward. So until we actually have that and then can then reengage with competent authorities overseas, we're not going to make any significant investment changes. So bottom line, at some point during the first half of 2026, we'll come to a conclusion as to what we will do and where we will do it, and then we'll be providing updates at that point. Operator: Our next question comes from the line of Mike Kratky with Leerink Partners. Michael Kratky: Congrats on the strong quarter. You provided some really helpful color on the dynamics between high productivity accounts and other accounts. So what seems to be driving some of the adoption in the non-high productivity accounts? And then have you seen any signs of utilization growth in those or how you could convert some of those to high productivity accounts over time? Michael Dale: Sure. Jens, are you on the call still? Jens Schroeder Kemp: I am. Michael Dale: Go ahead. Jens Schroeder Kemp: So yes, so our strategy continues to be really focusing the majority of our efforts in the high potential cohort, which is about 800 accounts. The reason for focusing in that segment is because that's where the majority of the nerve repair takes place in the hospital segment. Now we do have, of course, a lot of other accounts. And the progress that we've been making and the support that we're getting from societies and the increased awareness of the AxoGen nerve repair algorithm also basically means that you have more procedures adopting the AxoGen algorithm outside of our high potential focus. So in some ways, the progress that we're making within these academic institutions also has a spillover effect in the other non-high potential accounts. Operator: Our next question comes from the line of Ross Osborn with Cantor Fitzgerald. Ross Osborn: So what are the next steps for targeting the prostate market following the completion of your targeted 100 procedures by year-end? Michael Dale: At the conclusion of the initial clinical trials that we're running and development of the procedure guides, we will follow those patients, and we will evaluate those outcomes. And based upon those outcomes, that will determine the velocity that we invest thereafter. So we're assuming it will be positive, but we are watching. And realistically, we won't see the clinical feedback on that initial 100 patients that we are enrolling in this trial until sometime towards the middle part of 2026 at the earliest. In the meantime, what we are doing in terms of work product is we are further characterizing the market, refining the support plans and beginning the process to think through what would be required in terms of a controlled study, Level 1 type studies. So that's what's underway with prostate. Ross Osborn: Perfect. And then outside of prostate, would you provide some more color on where you stand on generating Level 1 evidence across your portfolio? Michael Dale: So we have protocols in development with respect to breast. And then we will have the same -- really for each of the segments that we prioritized, we will have one or more studies that we will be looking to kick off formally during 2026. Actual dates and timing of that have not been confirmed. But as soon as we do, we will update everyone publicly. Operator: Our next question comes from the line of Dave Turkaly with Citizens JMP. David Turkaly: Mike, I know the society updates are positive, and I know you've been working on them for a while, but I was curious if you could just comment on sort of the process there and maybe why you think this happened kind of right in front of the BLA? Is there anything to read into that? Michael Dale: Well, fortunately, it's serendipitously coincidental, but this is really a process of socialization of clinical evidence and the society's understanding that for nerve care to go forward, they, as the leaders of their membership need to take an effort formally to provide the guidelines and the expectations because that's part of their duties and roles as a society. And for any novel therapies until societies do that, it's very difficult for these types of new therapies to be adopted to go forward. And furthermore, it directly impacts coverage and payment as coverage and payment is really driven by medical care and clinical guidelines. David Turkaly: And then just as a quick follow-up. Is there any thoughts on sort of your other products, maybe the AxoGuard lines and such in terms of the societies maybe looking at them and maybe having a policy at some point down the line that may include them or incorporate them as well? Michael Dale: There is nothing imminent in that regard. And frankly, it will be really dependent upon evidence in the future for them to take up the mantle or something like that, and that's work that still has to be done. So some of these algorithms that are being adopted are things that people believe in based on their clinical practice and experience. But objectively, we also need to develop the evidence to support them the way you would to create -- to put them into the guidelines. So that's underway, but that won't happen this year and unlikely to actually complete next year either, more like a 2027 event. Operator: Our next question comes from the line of Anthony Petrone with Mizuho Group. Sorry. disconnected. Our next question comes from the line of Frank Takkinen with Lake Street Capital Markets. Frank Takkinen: Congrats on a nice quarter. I was hoping to start with some more guideline commentary as well. How should we think about impacts commercially? Can you do anything differently? Would you maybe pull hiring forward even more? It sounds like you've already been hiring a little faster than anticipated. But with some of these positive guideline wins, do you change strategy and get a little bit more aggressive in any of those areas? Michael Dale: No, we won't change strategy. Although I think maybe to provide open clarity on this, what we have decided is with respect to the strategic plan is we will incrementally hire on a quarterly basis across all target markets. So we believe that we do not touch every customer and every opportunity and that the most important thing we can do for our therapies to ensure that we have coverage in order to develop use of nerve care in all locations of service. So to that end, and we'll continue to update everybody, but Act will be incrementally expanding the sales footprint for several years going forward on an incremental basis. But we will also do that within the constraints we previously described in terms of financials. So we'll do this with our operating cash flow, and we'll do this only as we can maintain positive leverage. Frank Takkinen: Got it. That's helpful. I know there was previously some street perception that the government shutdown could impact the BLA process. Based on your commentary today, that feels like those conversations are going well and potentially ahead of expectations in some areas. I assume it's fair to think that the government shutdown is not having an impact on any of your FDA interactions at this point? Michael Dale: That is fair. So to date, we've maintained productive discussions. And as I've just described, we've already extended our discussions to future labeling and scope and expectations. So these things are not finalized yet. But directionally, we are already receiving... Operator: Our next question comes from the line of Anthony Petrone with Mizuho Group. Anthony Petrone: Congrats on the quarter. I apologize to just hopping between earnings calls, so I had some phone difficulties. It's actually a follow-up question to the one that was just asked just on timing, just to get that down a little bit more closely. So the label will -- I think the original communication was that label could come before BLA announcement, targeted PDUFA date, December 5. Is that still the thinking? Or will those sort of coincide more in a December time frame? And then I'll have a quick follow-up. Michael Dale: Well, we will I think the way everyone should plan for this is explicit to the guidance previously provided in which the FDA said November would then be labeling and then the final date would be December 5. So could it come earlier? Yes, but there's no discussions to that effect, and we have no insight that, that will occur. All we know is that the work product that supports labeling and all the rest of the BLA application is continuing to pace and some of it a little bit ahead of the official schedule. So I think for the sake of planning and assumptions, everyone should still assume because we are that this will go through December 5. Anthony Petrone: And then just a higher level one. It was kind of asked a couple of times here, but you did get some medical society positive announcements and also Blue Cross Blue Shield as well as Medicare Advantage extended number of covered lives. And so when you think about what a BLA can do to maybe incremental society announcements and/or coverage expansion, is that just something that we should be expecting in 2026 under a scenario where you do get a positive outcome on the BLA? Michael Dale: Thank you, Andy. So the BLA will no doubt be a positive support for all of our market development efforts and guidelines development. There are still institutions. There are still certain quarters of medical community who based upon the current regulatory status, consider Avance Nerve Graft as experimental. So with the conclusion of the BLA, that question will be resolved. And we will have, as part of our regulatory status a now codified official benefit risk profile that we can all refer to and reference and all of our future data will build off of that. So strategically and tactically, it will have an impact. What I want to caution everybody about, though, is it will not be a light switch effect. So there's -- for many customers, they are barely aware that this process is underway, but there are exceptions. So it will be positive, but I don't want anyone to think that this is going to be like a traditional market approval where you're not on the market and then all of a sudden, the floodgates open. That's not what will transpire. Operator: Our final question this morning comes from the line of Yi Chen with H.C. Wainwright. Yi Chen: This is Eduardo on for Yi. I guess to follow up a little bit on the segment growth. I'm curious about if you're seeing particular profitability. I know you have different fragmentations of each of these markets in breast and extremity and OMF. I'm curious if you see anyone to be more specifically profitable and if that's guiding any of your strategic decisions and investing. Michael Dale: Good question. The simple answer is all the segments are from a profitability standpoint, very positive. The markets that we have established were part of a process to determine what would be the most efficient as well as effective ways to further our business purpose. And so in that sense, we love all of our children to use that expression. So they were selected explicitly because we thought they were addressable in different ways. So I know it's a little bit of a nonanswer, but it's because they're all positive in that we make progress in is accretive to the business. Yi Chen: Got it. And then just following up, if you could -- you mentioned how the BLA would obviously unlock better coverage potentially. I'm curious if you could quantify that. You obviously, again, have pretty good support within the medical groups and societies. And like you mentioned, reimbursement is largely driven by these medical guidelines. I'm curious if you could quantify the impact of the BLA. You mentioned international markets. I'm just kind of focusing -- obviously, that would be a gate to open up international market discussions, but I guess, focusing on more local in the U.S. Rick Ditto: This is Rick. I'm happy to chime in and answer that. Sorry. In terms of the BLA unlocking incremental coverage and quantifying the impact, I think the way to think about it is that it helps unlock portions of the TAM that may have not been accessible prior rather than thinking about it in terms of a direct impact to revenue in '26 in the way Mike said it, this isn't a light switch, and so that's how I would think about it. Operator: Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Dale for any final comments. Michael Dale: Thank you, operator. On behalf of the AxoGen team, I want to thank everyone for their time and interest in our work to fulfill the promise and potential for all stakeholders in our business purpose to restore health and improve quality of life by making restoration of peripheral nerve function and expected standard of care. We look forward to updating you on our continued progress and plans on our earnings call next quarter. Thank you. Operator: Thank you. This concludes……
Operator: Good day and welcome to the quarter 2025 earnings call. Please note that this conference is being recorded. At this time, I'd like to turn the conference over to Brian Ezzell, Vice President, Investor Relations, Treasurer and Corporate Finance. Please go ahead. Brian Ezzell: Thank you, and good morning, everyone. Welcome to Flowserve's Third Quarter 2025 Business Update. I'm joined by Scott Rowe, Folserve's President and Chief Executive Officer; and Flowserve's Chief Financial Officer, Amy Schwetz. Following Scott and Amy's prepared remarks, we'll open the call for questions. Turning to Slide 2. Our discussion will contain forward-looking statements that are based upon information available as of today. Actual results may differ due to risks and uncertainties. Refer to additional information, including our note on non-GAAP measures in our press release, earnings presentation and SEC filings, which are available on our website. With that, I'll turn it over to Scott. Robert Rowe: Thank you, Brian, and good morning, everyone. I'll start on Slide 3. The momentum we built in the first half of the year continued in the third quarter as we delivered exceptional results across bookings, margin expansion, earnings and cash flow. We remain focused on driving growth while leveraging the Flowserve Business System to accelerate margin expansion. With 3 quarters of the year now behind us, we have increased confidence in our ability to meet our 2025 objectives and we are raising our adjusted EPS guidance range for the second time this year to $3.40 to $3.50. The midpoint of our revised guidance represents a 31% increase from last year. and an increase of more than 60% from 2023 and highlights consistent execution of our strategy and our confidence in the growth opportunities ahead. In the quarter, we delivered bookings of $1.2 billion and revenue growth of 4%. We also continued our enduring margin expansion journey with adjusted gross margins increasing 240 basis points to 34.8%. While adjusted operating margins were 14.8%, driven by incremental margins of 115% during the quarter. Adjusted earnings per share was $0.90, an impressive increase of 45% compared to the prior year period. We also returned $173 million of cash to shareholders in the quarter, including $145 million of share repurchases. We have a healthy balance sheet, low leverage, and we continue to see improved cash flow performance from the business. This, coupled with what we viewed as a discounted share price relative to intrinsic value makes repurchasing shares an attractive capital allocation decision. Later in the call, Amy will provide more detail on our full year guidance and our approach to capital allocation. She will also provide more details on the separately announced divestment of our legacy asbestos liabilities, which will further enhance our capital allocation optionality on a go-forward basis. I'm proud of all the Flowserve associates for continuing to navigate a dynamic environment while driving relentless execution of the Flowserve Business System to expand margins, drive growth, simplify our product portfolio and ultimately deliver enhanced value for our customers and shareholders. Now to Slide 4. Bookings for the quarter were $1.2 billion, improving sequentially by over $130 million and growing 1% versus the prior year. Our strong aftermarket franchise continued to deliver with Q3 representing the sixth consecutive quarter of bookings greater than $600 million. In fact, 2 of the last 3 quarters have seen aftermarket bookings above $650 million. I remain excited about the opportunity to leverage our capabilities to drive further aftermarket growth. Project activity in the quarter was steady and improved sequentially with strong growth in the power markets and solid trends across most other end markets. For the quarter, we delivered over $140 million of nuclear bookings, a record for the company. Our 2 largest bookings in the quarter were both nuclear awards related to 2 separate new reactors in Europe. Each of these bookings was approximately $30 million. Many of the project delays we saw in the second quarter did come to market in the third quarter. However, we continue to see some slowness in project timing for larger engineered projects, primarily in the energy end market. Over the last 5 years, we have evolved Flowserve into a more resilient business. 10 years ago, large-engineered projects often represented 20-plus percent of our bookings which naturally led to more cyclicality based on project investment cycles. Today, engineered projects remain an important part of our business, but this mix is typically around a mid-single-digit percentage of our bookings. The shift in mix is driving more consistency in our bookings and revenue, allowing us to manage more effectively through cycles. We have also sharpened our focus on capturing more aftermarket opportunities while selectively pursuing the most attractive engineered projects that deliver better margins and a healthy aftermarket entitlement. For the quarter, if we were to exclude engineered pump original equipment bookings, our bookings growth was an impressive 9% across the remaining portfolio. Turning to Slide 5. Our end markets remain stable with strength in areas, including traditional power and nuclear. Power demand continues to represent an exciting and significant opportunity while general industries is benefiting from continued industrial build-out in emerging areas of opportunities like pharmaceuticals, food and beverage. Mining has been an area of excitement for us, though project deferrals have hampened bookings over the past 12 months. In the third quarter, we saw mining project activity start to pick up with overall mining increasing over 60% versus last year. Within energy, asset utilization for large process industries remains elevated and maintenance spending has continued as expected. Chemical remains our lowest growth end market. However, we were encouraged by improvement in North America Chemical in the quarter and the potential for an improved outlook in this space. With our year-to-date book-to-bill at 1.0x and a strong project funnel, we are optimistic about delivering on a full year book-to-bill of approximately 1.0x. Additionally, our commitment to the Flowserve Business System should drive growth in 2026 and beyond as we leverage commercial excellence and 80/20 principles to further grow our business. Moving to Slide 6. Let me take a moment to highlight the significant opportunities we see ahead in the power space and specifically nuclear. Our offering of pumps, valves, seals and actuators play an important role across the nuclear spectrum. Today, we have content in over 75% of the roughly 400 nuclear reactors operating across the globe. Our mainstream isolation valves and actuators play a critical safety role in the nuclear island with other types of valves used across the balance of the nuclear facility. Our pumps are often found in the turbine island, helping to ensure the cooling process runs as intended with additional legacy pumps within the containment zone itself. Importantly, we have the critical quality assurance certificates and customer approvals necessary to leverage our technology across the global nuclear landscape. We also maintained great relationships with key industrial partners and customers around the world as Flowserve's nuclear equipment is essential to their operations. This set of key capabilities and domain expertise that we bring to the nuclear space makes us one of a few preferred vendors for pump valve seal and actuation content worldwide positioning Flowserve for leadership and nuclear flow control for decades to come. Moving to Slide 7. Today, power represents roughly 7% of our revenue with about half of that coming from traditional power and the other half coming from nuclear. Our bookings show an evolving picture with accelerating growth across all power and nuclear growing at the fastest rate. On a year-to-date basis, our total power book-to-bill is 2.0x. The expansion of artificial intelligence, cloud computing, data centers and broad scale electrification are creating significant growth for power broadly and specifically within nuclear power generation. Looking forward, we see the potential for 40 new large nuclear reactors to be under construction in the next 10 years across North America, Europe and parts of Asia. In addition, technology for SMRs or small modular reactors, continues to progress, and we believe this technology represents an additional growth driver as the expansion for the global nuclear fleet begins to accelerate. While the technology still is in the development phase, many of our SMR partners are making significant progress and industry data suggests as many as 30 SMRs could be under construction in the next 5 years. The existing fleet of nuclear reactors is also aging, and we expect almost all existing large reactors will go through life extension upgrades over the next decade, providing further opportunity for Flowserve. We are working very closely with nuclear power operators to refurbish and supply equipment to enable life extensions, power uprates, refurbishments and restarts of reactors that have previously shut down. Turning to Slide 8. Power nuclear represents one of the most compelling multiyear growth opportunities for Flowserve. With our strong market position, differentiated product portfolio in decades of domain expertise, we are exceptionally well positioned to capitalize on the accelerating investment in this space. As global electrification advances and new nuclear capacity expands to meet AI, data center and energy security demands, we see a sustained growth cycle emerging with nuclear becoming a larger contributor to our business over the next 5 to 10 years. Based on our current content opportunity of approximately $100 million plus per gigawatt, we believe that nuclear flow control opportunity set could be $10 billion plus over the next decade. Importantly, nuclear carries attractive, accretive margins, offering the potential to drive substantial value creation for Flowserve over the long term. With the potential for double-digit growth in the nuclear and power and our non-power business benefiting from healthy demand and reindustrialization, we believe we are well positioned to continue driving long-term growth. Before I turn it over to Amy, I will conclude by saying that Flowserve is in a strategically advantaged position. We have a robust and expanding aftermarket franchise with additional upside and capture rates, balanced by a diverse mix of industries that includes both high-growth power demand opportunities and stable recurring end markets. The Flowserve Business System is driving quantifiable improvement in execution and margin expansion and we see significant runway ahead. Our cash flow generation continues to strengthen, enabling greater capital deployment and incremental returns to shareholders. We remain focused on driving sustainable growth, expanding margins and enhancing cash flow, all with the goal of delivering superior value for our shareholders. With that, I'll turn the call over to Amy. Amy Schwetz: Thank you, Scott, and good morning, everyone. Turning to Slide 9. We delivered another strong performance in the third quarter, an outcome of our growth strategy and exceptional delivery through the Flowserve Business System. Third quarter revenues were $1.2 billion, a 4% increase versus last year. In the quarter, organic sales were flat, while the Mogas acquisition contributed 3 points of growth. We continue to see strong growth from aftermarket, while revenue from original equipment was slightly lower in the quarter due to the timing and composition of projects in the backlog. Our profit performance in the quarter demonstrates our execution focus. Adjusted gross margins increased 240 basis points, driven by actions taken under the Flowserve Business System including improvements in operational excellence, our 80-20 complexity reduction program and improved cost performance. With additional leverage from SG&A, adjusted operating margins increased 370 basis points to 14.8%. This represents the second consecutive quarter of operating margins within our long-term targeted range of 14% to 16%, which we originally set out to deliver by 2027. Our ability to continue to deliver in this range well in advance of initial expectations is a testament to the more resilient business model we have created and an impressive execution by our associates around the world. Moving to the performance of our segments on Slide 10. I'll start with FPD. FPD continues to deliver strong performance with another quarter of adjusted operating margins around 20% in line with best-in-class peers. The 80/20 program is driving clear results for FPD with the year-to-date benefits from 80/20 pacing ahead of our initial expectations coming into the year. Aftermarket also remains a strength with bookings growing in the mid-single digits for the quarter. We continue to improve our aftermarket capabilities, and we see further opportunity to capture more from our large base of installed equipment over time. Bookings in the quarter were negatively impacted by lower engineered pump projects, which Scott referenced earlier as well as some year-over-year timing of project awards. Overall, FPD book-to-bill for the quarter was 1.02x, a healthy level as we continue to grow the business even with lower levels of large energy project activity. Turning to the FCD segment. We delivered strong performance in the quarter with bookings growth of 24%, sales growth of 7% and adjusted operating margins expanding 230 basis points. Bookings in the quarter benefited from strong aftermarket growth as well as a large nuclear award and project activity in the Middle East. FCD adjusted gross margins increased 220 basis points year-over-year and 130 basis points sequentially, largely driven by improved execution and better performance from Mogas. Combined with improved SG&A leverage and accelerated synergy realization from Mogas, adjusted operating margins improved 410 basis points sequentially. For the quarter, Mogas operating margins were accretive to FCD, consistent with our expectations for the business when it was acquired. The fabricated modules that hampered Mogas and FCD margins in the first half of the year have been shipped with the remaining exposure related to final installation and completion. With these projects largely behind us, synergies accelerating and the Mogas business now fully on the Flowserve Business System, the team is focused on driving growth opportunities across the globe through our expanded offering of severe service fallouts. I'll add that Alice DeBiasio joined the company as our new President of FCD. We're excited to have her on board and look forward to leveraging her unique set of industrial experiences across product management, software solutions and engineering to continue the progress in FCD. Turning to Slide 11. I'll take a moment to highlight one of the many areas of significant progress within the Flowserve Business System. When we launched our 80/20 complexity reduction program in 2024, we had conviction around the opportunity to drive significant value and margin improvement over time. We were intentional with the approach focusing on individual business units within our segments and ensuring we let data lead the way. From the start, we have viewed this as a way of doing business, a process and not a project, and something we wanted to embed in our culture. Our Industrial Pumps business unit was the first to come into the program and is now in its second year of driving 80/20 actions. The team has made tremendous progress on a number of 80/20 pillars. First, within Industrial Pumps, we reduced our original equipment SKU count by 45% leading to a more efficient manufacturing process, less working capital and importantly, better value for our customers. While the SKU reduction had some initial impact on top line performance, the team has quickly pivoted to maximize opportunities with a core set of products. These target selling efforts led to a 21% increase in year-to-date bookings for key customers. By reducing SKUs and focusing efforts on our best products, the team has made a difference for both our customers and shareholders, improving gross margins by roughly 150 basis points compared to last year. In addition to these efforts, the 80/20 program led us to a decision to divest a small gear pump business within the Industrial Pumps business unit. This decision was made using our analysis of the market opportunity, our right to win and our ability to deliver profits in line with our expectations. After analyzing this business closely, we determined it was better off in someone else's hands. While this divestiture was immaterial to our overall financials, it is a decision that ultimately improves our profitability, working capital and cash flow. We are focused on continuing to execute utilizing the 80/20 methodology, not only in Industrial Pumps but across our entire portfolio, and we'll share more details over time. Turning now to Slide 12. Our continued focus on managing working capital and converting more profits into cash, combined with the merger termination payment, led to significant cash from operations of $402 million in the quarter. For the quarter, adjusting to exclude the net impact of the merger termination payment, our free cash flow conversion was an impressive 174%. As I look at our year-to-date cash flow performance, our improved working capital management under the Flowserve Business System, and our healthy leverage level, I'm encouraged by our ability to allocate capital in growth-enhancing ways. In the quarter, we returned $173 million to shareholders. including $145 million of share repurchases. We continued share repurchases into October for an incremental $55 million bringing our year-to-date repurchases through October to $253 million, with $200 million remaining on our share repurchase authorization. Looking ahead, we'll continue to allocate capital in a disciplined manner with continued commitment to our investment-grade rating. On Slide 13, in another example of our disciplined approach to capital allocation, we are excited to announce today that we have reached an agreement to divest our legacy asbestos liabilities. The transaction simplifies our capital structure, reduces volatility and improves our annual cash flow, all of which will enhance our ability to focus capital allocation on growth opportunities. We have found a great partner for this transaction, and we look forward to closing the transaction in the fourth quarter. Turning to our outlook on Slide 14. As a result of strong year-to-date performance and increased confidence in executing through the Flowserve Business System, we have increased our earnings outlook for the second time this year. We continue to deliver strong year-over-year margin expansion and now expect to deliver over 200 basis points of margin improvement for the full year. The midpoint of our full year guidance represents a 31% increase in EPS year-over-year and an impressive increase of more than 60% since 2023. I'm proud of our teams, their strong delivery and our focus on execution. In closing, our performance in the third quarter and year-to-date in 2025 has been outstanding. Adjusted EPS for the first 3 quarters of the year is up 31% versus prior year. Aftermarket growth is strong, margin expansion is accelerating and cash flow performance continues to outpace historical levels. The 80/20 program is early in its life cycle, but we are seeing tangible benefits with performance in the quarter in line with our long-term margin targets. And while we execute using the business system, we have been able to allocate capital to opportunistic share repurchases to drive shareholder value. These efforts, combined with healthy end markets and significant expansion in power, including nuclear, creates a compelling opportunity for profitable growth in 2026 and beyond. We look forward to providing a more robust view of 2026 including our financial outlook for the year on our fourth quarter earnings call. And with that, I'll turn the call back over to the operator for Q&A. Operator: [Operator Instructions] We'll go right to Michael Halloran with Baird. Michael Halloran: Would you put in context what you're seeing from an environment perspective, more of a pipeline funnel thought process? I know you mentioned some of the larger projects may be pushing to the side a little bit, a lower percentage of the portfolio today. But if you think about what the underlying trajectory looks like, both from an order perspective, from a funnel perspective, how that's converting? Are we talking about a framework on a forward basis, '26 specifically or however you want to think about it, that's pretty consistent with what your long-term thought process here is? Or do you think there's something in the environment that pushes you one way or another relative to that framework? Robert Rowe: Sure, Mike. Let me start by just breaking this into aftermarket and then kind of our OE business because I think it's really important. On the aftermarket side, we delivered another very strong quarter at $650 million. That's 2 out of the last 3 now. And we've got a street going over $600 million a quarter now for many quarters. And so we feel really confident that, that continues, right? And that work is on the back of refinery utilization, chemical plant utilization, desalination plants operating, just general health of the macro environment allows that business to continue to grow. And then additionally, we continue to drive our capture rate up. We're doing that through a lot of different levers in terms of making sure that we can be responsive to our customers. We're in the proximity with them with our quick response centers, but then we're also doing really good things to make sure that we're providing the support and service. And then ultimately, we think we can continue to grow that by moving more from just parts and service and repair to driving full-scale solutions. And so I would say long-term growth there is tremendous, and we feel really good about our ability to continue to capitalize on aftermarket. And then if you go to OE and projects, and we put this in the slides, like that's -- this becoming less important for us than ever before. And so historically, this was roughly 20% of our business, so large kind of OE projects. Now we're talking roughly high single digits, less than 10% of our business and we're doing that deliberately. That's part of our diversification strategy. And it's really something that we're looking to do to drive cycle resiliency as we go on the forward look. With that said, we're still very much in the project game. We feel that projects -- the project environment is reasonably constructive. We talked in Q2 about project slippage. Some of those came to fruition in Q3 and I would just say the Q3 environment was slightly more constructive than what we saw in Q2. And then on the forward look, if we break this down to end markets, we're obviously very excited about power and nuclear. We think that is a significant growth rate going forward at a tune of double-digit growth. We put out some markers there that I can talk about maybe in a follow-up question. But we also think the rest of the markets are generally in a good space. And then the other thing I would point to is in 2025, the Middle East Energy projects are at a very low level. And for us, it's roughly a 5-year low. We believe that, that doesn't go down from here. There's a lot of opportunities in our funnel there. They just got to work through some of the larger projects and some of the diverse projects as we turn the corner to 2026. And so all of that said, I think we're in a good position to grow our business. The geopolitical and macro environment needs to settle down a little bit to give operators confidence in their ability to cost projects and ultimately move things over the financial investment decision line. But overall, we feel constructive about 2026 and beyond. Michael Halloran: And then follow-up question is just maybe a thought on pricing. How pricing looks in the marketplace, receptivity, competitive dynamics and how we should think about price cost on a forward basis? Appreciate it. Robert Rowe: Sure. Yes. You can't talk pricing without tariffs sadly. And so we've really hammered price in the U.S. on the back of all of the tariff changes. I think we've done 3 or 4 price increases this year. What we're finding is in the run rate business, the aftermarket business, our MRO replacement business, that price been incredibly sticky. We're seeing the peer group and the other industrials doing very similar things that we're doing there. And we feel very good that we're at a price cost neutral basis, if not slightly positive on the forward look. And so I'd say that's working, and that obviously is more of a U.S. phenomenon than anything else. And then as we think about the project pricing, this has always been the case since I've been here. The bigger the project, the more exciting or flagship the name of the customer or what it's doing, it seems to just attract more attention and there's always an element of competitiveness. And so that's kind of the nature of the game there, the EPCs make sure there's several bidders. But I would say, we're not seeing anything fundamentally different than what we've seen in the last couple of years or anything in my tenure here. And so we believe that the environment is constructive for us to be selective with our bidding, especially with the large pump projects. And when we say selective, it's making sure that we have the right to win. We're working with customers that we know we can execute on. We know there's a large aftermarket content where they support that and then ultimately bringing margins in that will drive value creation for Flowserve. And so I think we're in a good place there. We're more focused on pricing than ever before, and we feel we can be on the positive side of price cost as we go forward. Operator: [Operator Instructions] We'll move next to Andy Kaplowitz with Citigroup. Andrew Kaplowitz: Scott, can you give us a little more color into the margin inflection you saw in FCD this quarter? How much of the improvement was Mogas improving versus core FCD? And you mentioned that both of your segments are in line to at least make the range of 16% to 18% segment adjusted operating margin that you set for FY '27. But as you know, FPD is already higher than that. So could that range end up being conservative? Robert Rowe: Sure. Maybe I'll hit the Mogas piece because I was there last week, and then I'll let Amy talk about just the margin progression in general at FCD, and we can touch on the Pump division as well. Look, Mogas is going incredibly well. I was able to -- I was in their site last week with Alice, and we had a fantastic visit. And I'd say, some of the takeaways there is the integration has gone incredibly well. The Flowserve Business System is fully embedded. And when I mean business system, the operational excellence is in place, shop floor daily management, problem solving, how we do inventory, all of that is now embedded and operating at a level that I would say is equivalent to the rest of the Flowserve peer group. We've really pushed the portfolio excellence side, and so they're on the 80/20 program now, and we look at that as a severe service kind of ball valve offering, and we're now making -- we've been making rationalization type decisions with our other offering. And now we're moving into commercial excellence. And so the commercial excellence is about driving growth and making sure that we get clean orders into the facility itself. But I couldn't have been more pleased with the progress that they've made. And so in the quarter, Mogas margins were accretive to FCD. As Amy said in the prepared remarks, the modules that had given us some concern and maybe a little bit of -- we were slower to deliver than what we had expected when we signed up the deal. Those have now shipped in the third quarter. And then there's minimal revenue from the modules in Q4 and Q1, and that's associated with the installation and commissioning work. And so now the focus is on bookings and driving growth, and we're excited about what that product offering can be. And as a reminder to everybody, the end markets here are mining and refining. And what we've seen in the mining space is that funnel has increased, we had a pretty decent booking number in the quarter, but the outlook continues to improve. And so structurally, we think the end markets will support Mogas growth and leaning in with commercial excellence and the 80/20 principles, we believe that we'll get to that $200 million that we keep talking about. And then lastly, I would just say, this is a great example where we're applying the business system as part of an integration. And what we saw -- and what we've seen now is in a relatively short period of time. We can take a family-owned business that maybe wasn't highly focused on business process and turn that into something that we're extremely proud of that we know can drive enhanced margins to the FCD portfolio, but also drive enhanced growth with our customers and outlook here. Amy Schwetz: Yes. And Andy, I'd just add with respect to FCD, we improved 410 basis points sequentially. You don't do that without all boats rising within the FCD platform. And we've been talking about some of the levers that we had available to us, whether or not that's operational excellence and some footprint decisions that had been executed in late 2024 going into 2025, as well as other tenets of the operational excellence program. 80/20 is taking hold in the platform. We're seeing that start to contribute as well. And then obviously, the story behind Mogas as well. And so we continue to think that there's runway with respect to FCD margins. And then once again, with respect to FPD, obviously, a great story there as well in terms of both platforms being within the range of their long-term targets, actually FPD being on the outside in a good way of that range. And so I think we'll go through our annual planning process this year, knowing the additional levers that we have to pull from a margin expansion standpoint, both in 2026 and beyond, and we'll look to reset those long-term targets in 2026. Andrew Kaplowitz: And Scott, you talked about that $10 billion nuclear flow control opportunity over the next decade. What do you think your share could be of that opportunity? And then nuclear bookings per quarter, we know are lumpy, but they seem to be rising overall. I think they've averaged higher than your specific nuclear sales exposure that you mentioned, maybe close to high single digits of bookings -- high single-digit percentage of your bookings each quarter over the last year or so. Could they continue to average that amount or even more over the next couple of years? Robert Rowe: Sure. So let's look back first, and then we'll talk about the forward look. The nuclear bookings are rising. Power in general, has been up double digits for us, and we've had 3 quarters now over $100 million in the last -- of the last 4 quarters for our nuclear bookings. And so I would just say, with all the noise in the nuclear space in a positive way, the noise in a positive way and all the recent announcements, we only see nuclear starting to move forward in a -- with a trajectory and in an inflection that's higher than what we have today. And so we're incredibly excited about the nuclear opportunity. It's why we put 3 slides in our presentation. But maybe to frame up the $10 billion a little bit, we do have substantial share within the nuclear space. And so we're leveraging our domain expertise, we're leveraging our installed base, we're leveraging the partnerships and the quality certifications that we have around the world that put us in the forefront and allow us the opportunity to do this work as we go forward. And so we're -- and I would just say the barriers to entry here are really, really high, right? The quality plans and what our customers are looking for are pumps and valves and actuators that will work for the 30-year planning life. And they take it very, very seriously and getting an in-stamp in the U.S. is incredibly hard. And so we just feel like we're in a great position to carry on with this work with companies that we've worked for, for decades. And so we're excited about the prize. We did put some kind of market share numbers in there, and it's to orient folks, there's roughly 400-plus nuclear reactors out there in the world today. We have equipment in 75% of those. And we called out some geographies because it is important. In North America and Europe, we do incredibly well. We do really well in Korea, and then we believe we can do well in India as they're going forward. And so those are the areas that we'll target. Obviously, China is a massive market in putting -- growing more reactors than any other region at this point. With China, we have installed base in the early reactors and the early facilities. But over time, they've shifted to a more nationalistic approach on all of their equipment. And so that's why we've deliberately kind of excluded that as we talk about our numbers. And then as you build to kind of the $10 billion prize, we put some numbers out there around 40 reactors in the next 10 years. That could have up to $100 million of content for Flowserve. We talk about SMRs progressing and moving forward, and we believe we're well positioned with what we think are some of the winners in the SMR technology. And so there's a large contribution in the $10 billion number on the back of SMR. And then our aftermarket today is roughly $100 million of bookings a year. That number only grows with our increased installed base. And so we feel very comfortable that continues, if not grows pretty aggressively over the 10-year period. And then finally, on the last category there would be extensions and rerates and then kind of where we're bringing assets back to life. And this week, both Google and Brookfield announced 2 projects of bringing existing sites back online over time. And I would just say those are incredible opportunities for Flowserve. And so one of those examples, we have pumps and valves installed, and we will absolutely be a part of that project. And then the other one, the pumps and valves that we did manufacture got pushed to a different site or actually 2 different sites, but we're confident that we'll pick back up that work. And so again, we feel like we're in an advantaged position. We've got the expertise, and we're leaning in to make sure that we'll position our offering to capture the full benefit of this nuclear growth. Operator: Our next question comes from the line of Deane Dray with RBC Capital Markets. Deane Dray: I'll start with congratulations on the announcement regarding the legacy asbestos. It's such a smart move here. We've seen companies like Honeywell do this successfully. And if you just take us through, like, am I correct that you paid something less than $200 million to resolve this? And could you just clarify what the cash flow implications are? Amy Schwetz: Sure. So one, thanks, Deane. This was something that we were excited to get done. It just made sense given our cash position and obviously puts us in a great position going forward to have a more simplified approach to capital allocation. And so we think that the benefits are -- will range from a cash flow perspective between $15 million and $20 million a year going forward. We do have about $200 million, $199 million of cash that we will allocate to the sale in the fourth quarter of the year. But for us, this is about really simplification of the capital structure, doing an 80/20 on the administrative work that we do in the Flowserve corporate office and taking out some volatility for our investors in the process. Deane Dray: Great to hear. And Amy, just sticking with the free cash flow. It's outstanding this quarter and you were clearly -- you laid out how you were excluding the windfall from the deal termination. Is there anything else within the free cash flow, the working capital, any kind of improvements that you would cite there? And what does this mean for free cash flow for the year? Because it looks -- this puts you ahead of plan? Amy Schwetz: Yes. So I think that as we look at free cash flow now, we're targeting something at the 100% level or a little bit better. I think for us, really free cash flow starts with margin expansion. That's the quickest way to improve the free cash flow for any company, but working capital has been a huge focus. And we've made some improvements there. 80/20 is actually helping us with the process, even decisions that we made during the quarter around the small divestiture paid dividends in terms of simplifying the inventory that we need to keep on hand. But I'll just point out with working capital. And if I didn't remind you, Scott would remind me to remind you that our work is not done. And so we continue to have a substantial amount of improvement that can be made in this area, and we are focused on it. We are focused on it at the leadership team level. We're focused on it at the platform level and at the BU level. And so we're going to continue to do everything that we need to do to make free cash flow a real strength for Flowserve and its investors. Robert Rowe: And Deane, just to reiterate, we talked about this last month, but 80/20 helps on working capital dramatically plus the operational excellence program. And so we're not done. We've made progress. We're not celebrating our working capital numbers right now. But we feel like we're moving in the right direction in a very positive manner. Operator: We go next to the line of Damian Karas with UBS. Damian Karas: Scott, I appreciate your comments on the certifications required to compete in nuclear pumps and valves. But I just wanted to ask how you're thinking about the profitability of these awards? When I just think about how your industry has sometimes behaved in the past, it's gotten pretty competitive when you have these mega growth cycles, just like thinking about past oil and gas booms where the OE margins were slim to none. So could you maybe just talk a little bit about where you are projecting these nuclear awards you've been winning to line up kind of relative to the rest of your project base? And just as the capacity build-out for nuclear continues, how you're thinking about how to price that in your bidding process? Robert Rowe: Yes. I think it might be helpful to just kind of walk through the life of a new build nuclear reactor. And I would just say, these are very different than even kind of an oil and gas project or a water project or anything like that. And the amount of years on the front end to get the process dialed in fully and to ensure that the quality requirements are at a place that they're comfortable with is multiyears. And so when we win work on a new reactor, it's somewhere -- the time horizon for us is somewhere in that kind of 4- to 5-year mark to where we -- before we can start shipping equipment. And those first 3 years are all about engineering and quality. And so I just feel like as we go forward and we think about the folks that are designing these type of reactors, that's a Westinghouse, it's your EDF, it's your Korean nuclear authorities, like for them to make a change in terms of what they've been doing historically and introduce a new supplier is really -- it's really, really difficult to do. And so the barriers to entry here are incredibly high. With that said, obviously, we have to perform. And we have to perform with delivery. We have to perform with increasing our capacity to support the nuclear growth. And we've got to perform with our ability to be competitive to allow their financial decision to get over the line. But again, we've worked with these players for decades. We're very confident in our ability to retain that type of work, if not grow that work. And so we're leaning in on our opportunities. We're making sure that we can support the industry, and we're making sure that we can support our customers in the regions where they're operating. Amy Schwetz: Yes. And Damian, I'd just add one thing from a color perspective. I was with our sales leadership team on the pump side as well as our BU leaders last week. And there is focus on 2 things in this space. One, making sure that we have the resources in place to support these opportunities, and that includes adding nuclear expertise at the corporate level within Flowserve, but it also means that we're making sure that we remain competitive and that we're doing things to not be complacent about our cost structure where we can to really continue to protect this business, the margins and keep those barriers to entry as strong as we can. Damian Karas: That's all really helpful. And I wanted to ask a follow-up question on the asbestos transaction. Are you anticipating that is going to have any impact on your cost of financing? And curious what you plan to do with this new found increased balance sheet flexibility. Amy Schwetz: Sure. So probably from a financing perspective, I would say, it's credit enhancing, but given the size, probably not too terribly impactful. I think overall, we find ourselves in a position at Flowserve where we have more opportunities for capital allocation than ever before. We've made some of those decisions in the fourth quarter already with some opportunistic share repurchases in October as well as earmarking a little under $200 million towards this transaction. But I think what you've seen us do over the last several quarters is pretty indicative of the disciplined approach that we'll take. We're focused on sort of growth opportunities and earnings-enhancing opportunities around capital allocation. And so it's going to be environmental specific. It made a lot of sense for us to buy back shares over the last few months. We'll continue to keep that at the ready. We've got about $200 million of authorization still available to us under our share repurchase plan. But over time, we're also interested in growing the business. And as Scott pointed out, the Mogas -- kind of the Mogas turning point in the third quarter, their adoption of the Flowserve Business System, us now turning our attention to really growing that business over time gives us more and more confidence that M&A utilizing our strict criteria around value creation can be a powerful tool for us over time with respect to capital allocation. Operator: We'll go next to the line of Brett Linzey with Mizuho Securities. Brett Linzey: Congrats. I wanted to come back to the energy business and apologies if I missed it, I jumped on late, but the bookings down 19%. I was just hoping you could drill down a bit on some of the moving pieces there. And does any of the quoting in that segmentation and form this could be snapping back in the coming quarters here? Robert Rowe: Sure. Yes. When we think about the compare versus last year, it was a difficult comp. We had 3 large projects in the Middle East that were all energy a year ago, and those didn't repeat this year. And so I think that's the easiest way to describe that. Energy on the OE side for us is primarily Middle East. It's a lot of that kind of midstream processing and storage and then also on the downstream side. And we had a lot of activity last year. And quite frankly, we're in a little bit of a lull right now with the Middle East energy type project bookings. With that said, I feel confident that there is work to do in the Middle East, there are a lot of plans to move forward with some of the investments that have already been made public but have been delayed in terms of that project timing. And so we're incredibly well positioned to capitalize on that growth. And I would say, with just a little bit of stability in the system, maybe oil pricing coming back a little bit to provide them a little bit more cash flow to fund new projects, we could see a positive trajectory here in 2026 and beyond. Brett Linzey: Yes, that's great. And I appreciate the detail on nuclear. I guess thinking about the content and some of the ramp over the first 3 years, is there anything to be aware of in terms of development costs and how that might play out as you're ramping for some of these opportunities? Or do you think you can simply just repurpose some of the R&D to these areas? Robert Rowe: Yes. For us, it's a relatively low development cost. We are working with some of the SMRs on maybe some modifications to our existing products to support a slightly different reactor. But overall, this is not big dollars for us in terms of needing to redevelop our products. And so a lot of this is just making sure that we're meeting the current requirements and that we can adapt to the -- what's happening in the space. And so I wouldn't expect to see from us any massive incremental expense to make sure that we're positioned to win this work. Operator: We'll go next to the line of Nathan Jones with Stifel. Nathan Jones: I guess I'll dig a little bit more on the nuclear side of it. $10 billion of flow control opportunity over 10 years. Maybe looking for a little bit more color on what your expected market share is? I know Andy asked about it, but I'll see if we can get a little bit more color on it. I mean, when you look at large utility scale reactors that have been out there for decades now, I'm sure you understand what your market share is on that, maybe a little less so on the SMRs given they're really still under development. But I'm just hoping you could give us any color on what your expected win rate on that kind of $10 billion worth of content over that time period was because 5% market share is very different to 50% market share of that opportunity. Robert Rowe: Yes. So Nathan, I'll point to Slide 6, where we talk about the current market share, and I'll try to give some color on the go-forward basis. And so of the 416 reactors that are out there, we have content in 75% of that. And so that could be a pump, it could be a valve, it could be our in seals, but we're very well positioned. And in my comments earlier, we do really well in North America with the Westinghouse technology. We do really well in Europe with Westinghouse and EDF technology. We do really well in Korea. What we -- where we don't do well today is in China. And historically, we have done well in China, but just because of their policy and moving to domestic supply, even though we have a strong presence in China, we typically will not win the new Chinese work. And so then if you think on the go-forward basis, who is involved with the forward North America growth, the forward Europe growth, what's happening in potentially India, in China -- or sorry, in Japan and in Korea, we're incredibly well positioned there with those operators. And so on the valve side, I would be disappointed if we did not have the highest share of mainstream isolation valves where we have the primary product globally for the main safety -- the safety valve and all the nuclear reactors. We have large content on the cooling pumps. We put a number out there at kind of a 50%. I think we can maintain that on a go-forward basis. And then we are moving back into some of the reactors with the primary cooling pumps within the reactor itself. We haven't done that work in a long time, just given the lack of some of the newer builds, but we're starting to secure our position there. And so I fundamentally believe that our market share could actually go up as we reposition some of our products to take on the balance of plant. But I think you could expect us to be a market leader here, certainly within pumps and valves on the go-forward basis. Nathan Jones: And so the $10 billion excludes China? Robert Rowe: We did not put China in our estimates. Nathan Jones: Got it. I would figure the biggest ticket item coming out of here would be the pump at that greater than 50% of currently operating reactors with Flowserve pumps would probably be reflective of the biggest dollar opportunity. Is that correct? Robert Rowe: I think that's fair. Yes. Nathan Jones: Okay. I think that gives a bit more color on potential win rates. So I'll leave it there. Operator: We go next to Joe Giordano with TD Cowen. Joseph Giordano: So I think we all appreciate the need for the power gen pickup here and nuclear is a logical way to do this. Like as you chase this business, we're throwing around a lot of numbers, right, all the companies, like $80 billion here, $100 billion there, all these gigawatts. Like how do you, one, like can we build all this stuff? And two, how do you have to think about who's backstopping this? Like on the SMR side, we're talking a lot of new companies making big commitments with like no revenues at this point. So how do you kind of judge where you want to chase and like how solid is the ground that you're walking on when you do it? Robert Rowe: Yes. Those are really important questions. Let me start with capacity, and then we'll start -- then we'll go to our customers and how we think about that. On the capacity side, we -- again, we've been doing this for decades. We have a designated facility for valves in North America. We have a designated facility for pumps in Europe. We can expand capacity at both of those sites. We're looking at making nuclear Center of Excellence is where we can put all of our product together into a site that then allows us to leverage the engineering, the project management, the quality and things like that. And so I would say we're confident in our ability to ramp. Back to some of my previous comments on this is when you win an award, you've got 3 years of kind of office type work and engineering and quality before you start delivering the equipment. And so you do have lots of visibility in terms of making sure that you've got the capacity. And the other thing I would just say is on the supply chain, that is an area that we're working today to make sure that we are investing in our suppliers to ensure that they can come along on the journey with us to be -- to participate and allow us to deliver as expected. And so I'm highly confident in our ability to expand capacity and to keep up with the industry at least at this point in time. And then on the customer side, it is -- I would -- this is a dynamic landscape, and there's announcements it feels like every week or every month in terms of some of the players here. And obviously, it's attracting a lot of money and names like Brookfield and Google and Amazon that are funding and backing some of these projects with large dollars just to make sure that these reactors can get back online and be a part of the power on a go-forward basis. With that said, we have been selective in who we are working with. And we have hired what I'll call is a nuclear expert that worked with the NRC for a couple of decades and then worked in the White House. And so he is helping us to be really selective on where we put our resources and where we put our efforts. And so we identified a few of those customers on our slide here. But I would say on the SMR side, we've narrowed that list down to kind of 10 to 12 players that we're actively engaged with that we believe will be successful in the long run. I don't think we'll be 100% right there. But if we're at least 60% or 70% right on who we've chosen, then we're in a really, really good place from a partnership perspective. And so I'd say, we've been very methodical about our approach and making sure that we're not overburdening some of our business development and engineering resources on the front end of this to get locked in into the future. Joseph Giordano: And then as a follow-up on that, are there any obvious gaps in the portfolio where you can tuck in new product that would be like specifically geared towards nuclear? And is it fair to think that given your commentary about the timing, like as you guys report as in the coming years, would we expect like the percentage of delivery over the next 12 months out of backlog to kind of move down commensurate with the amount of bookings you're doing in this sector? Robert Rowe: Yes, I'll let Amy hit the backlog conversion. I'll start with the other one. Amy Schwetz: Yes. So I think from a capital allocation standpoint, as we look at attractive end markets, nuclear is certainly one of them. We try and take a pretty good product approach for all we do on the M&A front. And so that sort of starts with mapping what we have, what we don't have. And although we are pleased with our product portfolio at this point in time, I think there's always ways that we can look to strengthen that portfolio through M&A. Robert Rowe: Yes. And so I think the thing for us is we may have some pumps on a facility, we may have a mainstream isolation valve, but not have the control valves or not have the butterfly valves. And so really, the focus is making sure that we can package more of our content together as we work on these new projects. And so that's the effort right now. There's a huge opportunity in front of us. And then to Amy's point, what we are looking to do is potentially on the programmatic M&A side is acquire other companies that may have the certifications and may have that installed base already in there where you're not having to work through some of those barriers to entry that I talked about before. Joseph Giordano: And then on the backlog conversion? Amy Schwetz: On backlog conversion, I would say, overall, last year, you started to see this in the context of our backlog with that ticking down from -- to kind of mid-80s overall for Flowserve. And I think we'll see that continue in some ways around the nuclear portfolio. I will say that, that is being slightly offset by the strength of our aftermarket business. So our aftermarket business, which converts relatively quickly is at historical highs. And so -- and we're continuing to be focused on that. So those 2 tend to offset a bit, but I would say there's probably slight pressure on backlog conversion with the nuclear content. Operator: We'll take our final question from Andrew Obin with Bank of America. Andrew Obin: Can you hear me? Robert Rowe: Yes, we can hear you. Andrew Obin: Excellent. So just nuclear bookings have been great. But if you look at underlying power bookings ex nuclear, it seems that they've been quite weak this year. I think we calculate down high teens. What is this a reflection of? And does core power pick back up because I would imagine the power gen trend is broader than nuclear? Yes. Robert Rowe: Yes. I think in the quarter for the traditional power, it might just be a little bit of a timing impact. We are seeing investments in all forms of power. And so you're seeing coal-fired power plants get extended where we have a lot of content on both pumps and the valves. We're seeing new kind of single cycle combined cycle plants going forward, where we may not have as much content, but we do have content there. And I would say this phenomenon is happening all over the world. And so we're excited about that opportunity. It is a more competitive type environment. And so we've got to be really selective in terms of making sure that we can get the right product in front of the right customers, the folks that value our aftermarket. And so I'd just say that's -- we're a little bit more selective here just given the wider -- the broader kind of competitive offering with the traditional power set. Andrew Obin: Got you. And just to help us understand, last year, bookings grew 9%. This year, bookings are sort of flattish. So how do we think about the relationship -- given that you're changing a business model, how should we think about the relationship between bookings and revenue? And just how did this year's bookings translate into hitting the 5% revenue target next year, right? Because the 9% bookings growth last year have really flowed through the P&L as top line. And no complaints about... Robert Rowe: I'll let Amy talk about the conversion to revenue. I'll talk a little bit about the growth. And so we're obviously right at kind of a book-to-bill at 1.0 is what we're committing to, which -- and the growth this year on bookings is lower. And we said this earlier, but a lot of that's your Middle East kind of OE project business has come down. When we think about the rest of the business, all other aspects, excluding kind of OE, Middle East or OE energy projects, has grown at 9%. And so we actually feel like we're doing a nice job growing and leaning into that growth. We need that kind of energy bookings to come back in 2026 to kind of get us back to what we want. And the last thing I would say is on the commercial excellence in 80/20, the teams are incredibly focused on growth. So commercial excellence is 100% about growth and aligning the sales organization the right way with the right incentive structure and the right project pursuit strategy and all of that good stuff to capture more share. And then on 80/20, we're now starting to move more and more into the growth side of 80/20. We showed some numbers with our industrial pumps that's growing our target selling accounts at 21% this year. And so I do feel like that we can -- with this kind of renewed commercial excellence and the 80/20 focus, we get back to this kind of 5% kind of -- over time, a 5% growth rate feels right for me. Amy Schwetz: Yes. The only thing I'm going to add there is I think overall, our conversion rates on sort of this quicker turn business is actually improving over time. The efforts that we've made around commercial excellence are reducing -- around operational excellence are actually reducing our lead times. And so that combined with our aftermarket strength, which we have no intention of slowing the intensity of those efforts does help with conversion. And so as Scott pointed out, with the overall health of a number of the end markets that we're focused on in addition to the efforts around commercial excellence and target selling, we see those things in conjunction with some Middle East opportunities, not just in traditional energy, but within power and water moving into 2026 as sort of more than offsetting headwinds that we see from 80/20. Operator: We have no further questions. I'll turn the call back to Brian Ezzell for any additional or closing remarks. Brian Ezzell: Great. Well, thank you, everyone, for joining the call today. We look forward to seeing many of you at upcoming conferences and investor events. And then, of course, we'll provide another update early next year. In the meantime, if you have any questions, please feel free to reach out to the Investor Relations team, and we'll be happy to talk through anything. And with that, we hope you have a great day. Operator: This concludes today's conference. We thank you for your participation. You may disconnect at this time.
Operator: Good morning, ladies and gentlemen, and welcome to Trustmark Corporation Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. It is now my pleasure to introduce Mr. Joey Rein, Director of Corporate Strategy at Trustmark. F. Joseph Rein: Good morning. I'd like to remind everyone that a copy of our third quarter earnings release and the presentation that will be discussed on our call this morning are available on the Investor Relations section of our website at trustmark.com. During our call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and we would like to caution you that these forward-looking statements may differ materially from actual results due to a number of risks and uncertainties, which are outlined in our earnings release and our other filings with the Securities and Exchange Commission. At this time, it's my pleasure to introduce Duane Dewey, President and CEO of Trustmark. Duane Dewey: Thank you, Joey, and good morning, everyone. Thank you for joining us again this morning. With me are Tom Owens, our Chief Financial Officer; Barry Harvey, our Chief Credit and Operations Officer; and Tom Chambers, our Chief Accounting Officer. Trustmark's momentum continued to build in the third quarter. Our performance reflected diversified loan growth and stable credit quality, along with cost-effective core deposit growth. During the quarter, we continued to implement organic growth initiatives and added established customer relationship managers and production talent in key markets across our franchise. These investments are designed to further enhance financial performance and shareholder value. Today, in our presentation, I will provide a summary of our performance in the quarter and discuss our forward guidance before moving to your questions. Now turning to Slide 3, the financial highlights. From the balance sheet perspective, loans held for investment increased $83 million or 0.6% linked quarter and $448 million or 3.4% year-over-year. Our linked quarter growth was diversified and led by C&I, other loans and leases, municipal loans and other real estate secured loans. Our deposit base grew $550 million or 3.4% linked quarter. Noninterest-bearing deposits grew at a faster clip of 5.9% linked quarter or by $186 million. The total cost of deposits in the quarter were up 1.84% or 4 basis points linked quarter, very effective cost-effective growth, very cost-effective growth in core deposits. Trustmark reported net income in the third quarter of $56.8 million, representing fully diluted EPS of $0.94 a share, up 2.2% from the prior quarter and 11.9% from the prior year. This level of earnings resulted in a return on average assets of 1.21% and a return on average tangible equity of 12.84% in the quarter. Net interest income expanded 2.4% to $165.2 million, which produced a net interest margin of 3.83%, an increase of 2 basis points from the prior quarter. Noninterest income totaled $39.9 million, up 0.1% linked quarter and 6.3% year-over-year. Noninterest expense increased $5.8 million or 4.7% linked quarter and included approximately $2.3 million in nonroutine items, including the establishment of a $1.4 million reserve for a single property in ORE and $900,000 in professional fees related to the conversion to a state banking charter and other corporate strategic initiatives. Salaries and employee benefits increased $3.2 million linked quarter, principally due to annual salary merit increases effective July 1, increased annual incentive accruals and the cost of additional customer relationship managers and production talent associated with our organic growth strategies. Credit quality remains solid. Net charge-offs were $4.4 million and included one individually analyzed loan totaling $3.1 million, which was reserved for in prior periods. Net charge-offs represented 13 basis points of average loans in the third quarter. Net provision for credit losses was $1.7 million, and the allowance for credit losses represents 1.2% of loans held for investment. Again, very solid credit performance. From a capital management perspective, each of our capital ratios increased during the quarter. The CET1 ratio expanded 18 basis points to 11.88%, while our total risk-based capital ratio increased 18 basis points to 14.33%. During the quarter, we repurchased $11 million of Trustmark common stock. In the first 9 months of the year, we repurchased $37 million of stock. We have $63 million in repurchase authority for the remainder of this year. This program continues to be subject to market conditions and management discretion. Tangible book value per share was $29.60 at September 30, up 3% linked quarter and 10.1% year-over-year. The Board also declared a quarterly cash dividend of $0.24 per share payable December 15 to shareholders of record on December 1. Now let's focus on our forward-looking guidance for the year, which is on Page 15 of the deck. As you can see, we're tightening the range of our guidance for net interest margin and affirming all other previously provided guidance for the full year. We affirm our guidance and expect loans held for investment to increase mid-single digits for the full year '25. Similarly, we affirm our guidance of low single-digit growth in deposits, excluding brokered deposits for the full year '25. There is no change in guidance regarding securities as they are expected to remain stable as we continue to reinvest cash flows. We've tightened the anticipated range of the net interest margin for the full year. The range is now 3.78% to 3.82% for the year compared to our prior of 3.77% to 3.83%. We have affirmed our expectations for net interest income to increase in the high single digits for 2025. From a credit perspective, the provision for credit losses, including unfunded commitments is expected to continue to trend lower when compared to full year '24. This is, of course, an affirmation of the prior guidance. There is no change in our noninterest income and noninterest expense guidance. Noninterest income from adjusted continuing operations for the full year '25 is expected to increase mid-single digits, while noninterest expense is expected to increase mid-single digits as well. We will continue our disciplined approach to capital deployment with a preference for organic loan growth, potential market expansion, M&A and other general corporate purposes depending on market conditions. As noted earlier, we do have remaining availability in our Board-authorized share repurchase program that we will consider opportunistically. You may have noticed the addition of 2 new slides in our deck on Pages 17 and 18. I encourage you to take a look at the progress we've made in improving our financial performance over the last several years. We're very committed to maintaining that momentum here moving forward. With that, I'd like to open the floor to questions. Operator: [Operator Instructions] The first question comes from Stephen Scouten with Piper Sandler. Stephen Scouten: You guys mentioned, and apologies, I missed like the first minute or 2 of the call, but I know you mentioned in the release, some of the expense growth was on progress on the new hire front. Can you give any color around kind of year-to-date hires quarter -- what you saw in the quarter and kind of what you have planned moving forward from a hiring perspective, assuming that's still kind of focused Houston, Birmingham, Atlanta, I think as you've spoken to previously? Duane Dewey: Right. Great question. And I'll start, Stephen. We hired approximately 29 new associates in the third quarter alone. 21 of those 29 new associates are production related, either direct producers or direct support of production. And those across all business units from commercial real estate, equipment finance, corporate banking, commercial banking and the markets you noted are absolutely the markets of focus. Houston, Birmingham, Huntsville, Alabama, the Panhandle of Florida, South Alabama and Atlanta. And the 21 are included in each one of those markets. So we consider that a major focus for the organization here moving forward. I don't know that we'll hit those levels in every quarter. We likely fourth quarter will not reach that level of new associates. But moving into the coming year or 2, we're very focused on that organic strategy in those key markets. Stephen Scouten: Okay. And would you expect to see some incremental expense build in the fourth quarter kind of related to the recent hiring levels? It seems as though to get to the increase in mid-single digits year-over-year, there needs to be a little bit of an uptick in the expense base from this quarter, but I want to make sure I'm thinking about that right. George Chambers: Stephen, this is Tom Chambers. Yes, that's true. What hit us in the third quarter for the additional new hires was about $400,000. And of course, that's because we're hiring throughout the quarter, fully loaded, we would expect that to increase during the fourth quarter. Duane Dewey: I will add to that, Stephen. There are some, we'll call them, nonroutine parts of that expense because there are recruiting fees. There's onetime signing bonuses and things like that, that are mixed into that. So at a run rate level, Tom noted the amount, but I would say there were some nonroutine things that would be included in that total. Additionally, as you know, I mean, the expectation is we're adding the talent to produce revenue as well. And so we will factor that into coming revenue projections. Stephen Scouten: Sure. That makes sense. And then lastly for me, just around the share repurchase. I think you said previously maybe $10 million to $15 million a quarter is the right way to think about that. But just kind of curious, given how bank stocks have been trading and just how rapidly you're building capital, if you would think about upsizing that range potentially and kind of how you think about that earnback on the repurchase versus potential M&A? Thomas Owens: Stephen, this is Tom Owens. I'll start. So yes, we've been very pleased at our ability to continue to deploy capital via repurchase while supporting loan growth and continuing to drive nice accretion to our regulatory capital ratios, I think we're up 18 basis points linked quarter. Certainly, as you suggest, as our capital levels continue to build, it may well be the case that as we enter '26 that we'd probably lean more proactively into share repurchase depending on how loan growth plays out. I think for the fourth quarter, it's reasonable to assume that we'll remain on the pace that we've been, which is about $50 million for this year. Operator: The next question comes from Michael Rose with Raymond James. Michael Rose: So there's clearly been some M&A within some of the markets that you guys operate on. I was just wondering if you could discuss maybe some of the opportunities, maybe expanding on Stephen's question just for hiring as we move forward. And if you think that kind of a mid-single-digit growth rate for -- I know it's a little early, but for next year is something we should contemplate given some of the opportunities that are in front of you and given some of the hires that you put in place. Duane Dewey: I'll start. Michael, absolutely. We think that and prior experience would say that every M&A deal in given markets does present opportunity. It's both to some extent on the hiring side and to some extent on the customer, customer acquisition side. And we look at it like that. I mean it's a competitive world. The one that was announced here recently in the last day or so is very much -- there's a lot of overlap in our markets. And we compete against them today. We have competed against them for a very long time. So it goes with the territory. No real change, I don't think from a real competitive perspective, but we do see it as creating opportunity for us. And it is really in predominantly all markets that we serve today. So I think good opportunity ahead. Michael Rose: Okay. Helpful. And then maybe just stepping back, I do appreciate the new slide you put in. Obviously, there's been some real good progress due in part somewhat to the sale of the insurance business and the restructure a couple of years ago. What's kind of the next evolution here, I guess, is what I'm trying to ask. Where do you think some of those numbers could go? And maybe if you can discuss some of the puts and takes of kind of getting to whatever the new numbers as we move over the next few years might be? Like what are some of the opportunities you guys see? And then what are some of the headwinds you guys think you're going to face? Thomas Owens: So Michael, this is Tom Owens. I'll start. First and foremost, when you look at those slides, I think the fourth quarter is likely to continue those trends. And then to your question about the longer term and what's the next evolution, we're focused on continuing to drive competitive growth in PPNR, which we think mid-single digits is reasonable in that regard. And I think when you add the deployment of capital from our strong run rate profitability, as I just mentioned earlier, as we head into '26, we're likely to -- we'll see where loan growth shakes out. Clearly, that's our preferred method of deployment for capital. But given that we're approaching now 12% in terms of CET1, I think it's safe to say that we'll probably deploy at a more proactive rate in 2026. So I think we're on pace this year to retire something like 2% of our shares outstanding. And so I think if you add mid-single-digit growth in PPNR to low single-digit decline in EPS outstanding, I think we're likely to wind up in high single-digit growth in EPS, would be a baseline. And then I'll let Duane and maybe Barry speak to what the opportunities might be from there. Duane Dewey: Well, I would add to that. And as we already discussed in the prior question, it allows better financial performance, all in all, allows us to invest in that organic strategy. And so we're very focused. We're very focused on key growth markets. We believe we operate already in very significant growth markets in our footprint. And we're focused in all business lines really at expanding in those key markets. And the improved financial performance allows us the ability to do that a little more aggressively than we had in prior years. So we're very optimistic there. A market like Huntsville, Alabama, that would be considered one of the top growth markets in the country, we hired a fantastic group of new bankers in that market. Very, very excited about them joining Trustmark. We've added teams across a couple of the other markets I already mentioned, Atlanta, Birmingham and so on. So the improved financial performance allows us to invest in that organic strategy. And then the last comment I'd say, of course, there's a lot of activity right now. We're very aware of what's going on, on the M&A front around us. There are discussions across the board up and down. So we're staying in tune with that. In a lot of cases, that creates additional opportunities. So we're on it. We like the organic strategy, though, at this point. Operator: The next question comes from Feddie Strickland with Hovde Group. Feddie Strickland: Just wanted to kick it off with a clarification question on expenses. It sounded like you might be guiding towards a little higher expenses in the fourth quarter. Is that the case? Because I thought you might have that $900,000 of nonroutine professional fees and maybe the ORE expense come down a little bit. George Chambers: This is Tom Chambers. Yes, we expect, obviously, those nonrecurrings should fall off, but we're still guiding to mid-single-digit growth year-over-year in expenses. So if you look at our fourth quarter, we will have a slight increase in expense or expected expense without nonrecurring items. Feddie Strickland: Got it. And then just shifting gear to the margin. Just given the asset-sensitive balance sheet, is it fair to assume we see a little bit of compression from here or near term and maybe a little bit of recovery just as deposits catch up down the road? Thomas Owens: This is Tom Owens. I'll take that. It's sort of a yes and no on that. First of all, you saw we printed a 2 basis point linked quarter increase in net interest margin for the quarter from 3.81% to 3.83%. We've talked in the past about the ongoing repricing of the back book fixed rate loans for both loans and securities providing a bit of a tailwind. And I think that's what you saw with the 2 basis point increase in loan yield quarter-over-quarter. We are slightly asset sensitive. And so when the Fed cuts, we have to be pretty proactive in terms of cutting deposit rates to maintain net interest margin on a linked-quarter basis. And clearly, that is our intention. We anticipate that the Fed will cut tomorrow or later today and then again in December. And then I think we have 3 cuts penciled in for 2026, so ending the year at about 3% at the top end of the range. So yes, in the short term, there can be some headwind. It just depends on how depositors and competitors in the market react to those cuts that we make in deposit rates. But we are optimistic about maintaining NIM in this general area of 3.80% to 3.83%. When I look at analyst estimates for the fourth quarter, I think I see something like 3.83%, which is the number we just presented. And then when I look at full year estimates for '26, I think I see a median estimate there of 3.82%. And so I think those are reasonable numbers. I think that there might be some choppiness quarter-to-quarter, as you suggest. But as we manage our way through it, on average, I think we would see net interest margin continuing to be in about this range where we are now. And I'll make the point, we're at about 3.80% year-to-date. And so I think we're stabilizing here, but it might be choppy quarter-to-quarter. Feddie Strickland: Just one other quick question. I was just wondering if you could talk about trends in classified and criticized loans. The provision was a little lower this quarter. So I was kind of curious if either of those were flat or maybe even went down a little bit. Robert Harvey: Sure. Frank, this is Barry. I was just going to mention that we did have a nice trend down of about $49 million in criticized loans this quarter. That gives us a trend down of about $123 million for the first 3 quarters of this year. So very encouraged by that, especially given the fact that we kind of were flat in the first quarter. So that $123 million has really come in the last 2 quarters. And so we're very encouraged by that positive trend. Like most of our peer banks, we trended up all during 2024, criticized, classified. And then we flattened out in the first quarter, felt like that was an inflection point. It turned out to be. And then we've been moving down at a nice pace, both Q2 and Q3 of this year. So we're very encouraged by that. That is part of our lower provision. That is 1 of probably 4 factors that went into the provision being lower this quarter than it has been in Q1 and Q2. Operator: The next question comes from the line of Catherine Mealor with KBW. Catherine Mealor: Just one follow-up on the margin. Just if we can kind of look at some of the components, it was interesting to see deposit costs increase a little bit this quarter. And I know we've got the cut and maybe another one today coming. But can you talk a little bit about where you're seeing deposit cost trends and maybe how you're thinking about the beta over this next round of cuts relative to what we've seen over the past round of cuts. And as kind of growth improves and maybe competition picks up, if it's fair to model maybe a little bit more conservative beta moving forward. Thomas Owens: Sure, Catherine. This is Tom Owens. Yes, the linked quarter increase in net interest margin, it almost builds on the answer that I just gave to Feddie, which is we are asset sensitive. We do have an extremely valuable deposit base, which we continue to demonstrate as we manage our way through interest rate cycles. Because we're slightly asset sensitive, we try to be proactive in pricing down deposits to maintain net interest margin. And it's always a balancing act, right? You're always trying to optimize that. I mean you want to reduce rates paid on deposits as much as you can at the same time as you're trying not to drive unwanted attrition of profitable customers. And so most of what we saw in the third quarter is what I'll call the pushback, right, the extent to which you cut deposit rates, but depositors push back. And so certainly, we have a framework in place where when depositors push back, the more profitable the customer and the stronger the pushback, the more willing and able we are to accommodate with exception interest pricing. And so that's largely what drove that linked quarter increase, Catherine. We also engaged in a pretty proactive promotional deposit campaign during the third quarter. Our loan-to-deposit ratio at the second quarter had risen to 89% from 87% at year-end '24. We wanted to manage that back down a bit. We were very pleased with the execution of that campaign. So that was a bit of a driver to that, but not a big driver. I'd say in the third quarter, it continued to be what I would characterize as a surprisingly competitive environment for deposits in our space with loan growth in the industry generally outpacing deposit growth somewhat. So surprisingly competitive in the third quarter. And I'd say the same thing I said in my prior answer to Feddie, which is the extent to which we're able -- we give you guidance when you look at Slide 9 and when you look at our outlook for fourth quarter deposit costs dropping from 1.84% to 1.72%, that reflects the intended price cut or deposit rate cuts that we'll be making as the Fed cuts today. And the extent to which we achieve that is a function of those 2 factors. It's a function of how well that's received or tolerated by the deposit base, which in turn is also a function of what the competitive landscape looks like, how do our competitors react. But last point I'd say with respect to -- and so that's why I talked about it, to Feddie's point, it could be choppy quarter-to-quarter. But I do believe as we manage our way through this, we should maintain net interest margin on average over the next number of quarters in this range of about 380 or so. And so to your point, Catherine, about thinking about deposit betas, as I said earlier, I think we've got this [Audio Gap] 2.75% to 3%. We've got deposit cost in that scenario going down to about 1.25%, which would be a beta that's cycled by our calculations of about 40%, which is very consistent with the beta that we achieved as the Fed was hiking during the last cycle. Catherine Mealor: Very helpful color and perspective. And then maybe the other side of it, on just loan yields, can you talk about where incremental new loan pricing is coming on today? Robert Harvey: Catherine, this is Barry. It varies kind of dealing with the categories. I would say, outside of CRE, it's remained pretty consistent. We haven't seen a lot of changes there. I would say within the CRE category, it has gotten more competitive than it was earlier in the year and definitely more competitive than it was last year. And so the good news is there's a lot more deal flow. I was looking at the production for the last 4 quarters relative to the prior 4 quarters. And fourth quarter of '24 through the first 3 quarters of this year, our production is much, much stronger on the CRE side. Having said that, the pricing is more competitive. And so when you think about the spread, when you think about the origination fee, we've been yielding and that industry has really been yielding for quite a while. It is getting more competitive just to the number of players who are, I would say, back in the market that hadn't been previously. And that's been pretty much true for this entire year. There's been a lot more opportunities. We've been pitching on a lot more deals. We probably have landed -- we have landed a few more deals than we did in the previous 4 quarters, but not as much as you would think based upon the number of opportunities. And we are landing those. They are -- the price is thinner on the spread and the price is thinner on the fee within the CRE category. The rest of the categories are pretty similar to the way they've been in terms of the competition and the rates that we're able to yield. Operator: The next question comes from the line of Gary Tenner with D.A. Davidson. Gary Tenner: A lot of my questions have been asked. But I wanted to just follow up on your comments around the recruiting in the quarter. As you think of the kind of producer or producer supporting hires, any kind of particular segment that you're leaning into? I think you talked that it's pretty varied geographically. But from a segment perspective, anything you're particularly leaning into or anything you're particularly focused on the deposit side in terms of the hires you made. Duane Dewey: So in general, I'll say we really are focused geographically. We're focused on the markets that we feel present the best growth opportunity. And I've mentioned those previously, the Houstons, Atlantas, the Birmingham, Huntsville, Panhandle and South Alabama present in our mind and Jackson, Mississippi, frankly, but those present the best growth opportunities. So we're focused on our business lines in those markets. To date, I would say if we're focused in specific categories, we've had pretty good success on the equipment finance team, we've added producers in that, which we've talked about the last several quarters as being -- we're very pleased with the growth experienced in that business and are seeing good opportunity there. And we've had a really, really good approach and really nice team build there, and that's been an area of focus. But I would say of the ones that I've mentioned earlier, 21 new hires, it is pretty evenly spread between CRE, corporate banking, commercial banking. We've even actually in a somewhat challenging market has created some opportunity on the mortgage front. In markets where we have not had a mortgage production side, we've added a handful of mortgage producers. So it's pretty well diversified across all the business lines that we serve with a little more focus on specific growth markets. Gary Tenner: I appreciate the comments there. And then just on the deposit side, given the guide you gave for the fourth quarter, in terms of the public funds deposits, which are 13%, 14% of your total deposits, what's the repricing timing of that segment? Thomas Owens: This is Tom. So with respect to the public fund balances, by and large, those are administered rate or floating rates, even indexed down. It's a really small percentage of those that are bid on some fixed rate for any extended period of time. Operator: The next question comes from the line of Christopher Marinac with Janney Montgomery Scott. Christopher Marinac: Tom, you had touched a little bit on funding in some of the earlier questions, but I kind of wanted to ask at large. I mean, what is your thought about initiatives to fund the balance sheet the next couple of years? Should we expect to see the loan-to-deposit ratio around the sort of high 80s? Do you think it can trend differently? And I guess just is M&A a part of that funding strategy in the big picture? Thomas Owens: So there's a lot there, Chris. It's a great question. I'll start off by saying that, as I said earlier, loan growth had outpaced deposit growth in the earlier part of the year, and we were -- in the first half of the year, and so our loan-to-deposit ratio had floated up to 89%. We really want to keep that in the mid-80s, mid to high 80s. We do not want that floating up into the 90s. And so yes, you should expect us to maintain that type of liquidity. As I said, we were really pleased with the execution of the promotional money market program in the third quarter. And I think we had -- so we had conducted a similar campaign in the third quarter of '24. And then fourth quarter '24 through second quarter of '25, we were not nearly as proactive in terms of promotional deposit campaign activity. So to your point, do we have the opportunity to continue to fund deposit growth to match loan growth. We're very confident in our ability to do that. The way I think about that is going to a more sort of always-on approach in terms of the next promotional campaign, and there's certainly different and more proactive techniques that we can employ. The techniques we've employed have been reasonably conservative in that regard, and so pretty cost effective in bringing on new balances. But we're confident in our ability to fund loan growth cost effectively. And I guess I would maybe turn it over to Duane to address the issue to the extent to which that does or does not play into our view on acquisition opportunities. Duane Dewey: Yes. Just a couple of notes. I mean one thing I did not mention when I was answering Gary's question a minute ago, the other element of that production staff has been on the treasury management side. So we have added treasury management talent. All of our RMs across our entire system have deposit growth goals. And Tom, you may have the number in front of you of commercial growth in the third quarter, but we have experienced solid commercial deposit growth as well, which has been part of that strategy. As we talk about our organic strategy, it's very focused on full relationship, including the deposit side. And like I said, in the third quarter, we're very pleased with progress there. And as we bring on the new talent, that's -- of course, loan growth, deposit growth, they're all part of the strategy. So that's a key part. In terms of M&A, yes, deposits, core deposits, core funding, that's all part of the equation. And as I stated a bit ago, there is a lot of discussion going on out in the market. We're continuing to be very focused and very disciplined executing on our organic strategy and hopefully opportunistic when the right partner presents itself, and we'll consider that as it goes. And I would say, yes, deposits are a part of that consideration. Thomas Owens: And I would just follow up then, Chris, to Duane's point. You look at the $370 million of deposit growth we had in the third quarter, it was pretty evenly balanced between personal and commercial. Commercial was something like $180 million or so. And then of the personal, that was pretty evenly mixed between the promotional campaign that I mentioned and then just fundamental organic growth. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Duane Dewey for any closing remarks. Duane Dewey: Thank you again for the questions, and thank you for being on the call. We look forward to getting back together at the end of the fourth quarter, and hope you have a great rest of the week. Thank you. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the ASM International Third Quarter 2025 Earnings Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Victor Bareño, Head of Investor Relations. Please go ahead, sir. Victor Bareño: Thank you, operator. Good afternoon, and welcome, everyone, to our 2025 Q3 earnings call. I'm joined here today by our CEO, Hichem M'Saad; and our CFO, Paul Verhagen. ASM issued its third quarter 2025 results yesterday at 6:00 p.m. Central European Time. The press release is available on our website. With our latest investor presentation, we remind you, as always, that this earnings call may contain information related to ASM's future business and results in addition to historical information. For more information on the risk factors related to such forward-looking statements, please refer to our company's press releases and financial statements, which are available on our website. Please note that the profitability measures mentioned in this call today will be primarily based on adjusted non-IFRS figures. For the reported results as well as the reconciliation between reported and adjusted results, please refer to the quarterly results press release. And with that, I'll now hand the call over to Hichem M'Saad, CEO of ASM. Hichem M'Saad: Thank you, Victor, and thanks to everyone for attending our third quarter 2025 conference call. First off, I'd like to thank all our investors and stakeholders who joined us for Investor Day last month. It was great to see so many of you. For today's call, we'll be following the usual agenda. Paul will begin with an overview of our second quarter financial results. Next, I'll discuss the market trends and outlook, followed by the Q&A session. I will now turn it over to you, Paul. Paul Verhagen: Thanks, Hichem, and thanks, everybody, for joining our call today. Let me start with revenue. The revenue in the third quarter of '25 amounted to EUR 800 million, up 8% year-on-year at constant currency. And compared to the second quarter, sales were flat at constant currency. This was at the high end of a guided range of flat to down 5%. Equipment sales increased 10% year-on-year at constant currency and were led by ALD followed by Epi. Spares and service sales were up 2% at constant currency. Year-on-year growth in spares and services was lower than in the past few quarters, and this is explained by the accelerated above trend demand in China in the second half of last year. Growth in our outcome-based services continues to be healthy. In terms of customer segments, revenue was led by logic/foundry, followed by memory and then power/analog/wafer. Logic/foundry continued to account for the majority of sales. Advanced logic/foundry sales for the largest part 2-nanometer related were up substantially compared to the third quarter of last year and approximately similar to Q2. Mature logic/foundry sales mostly in China, were up year-on-year and down from the second quarter. Memory sales decreased compared to Q3 of last year and were roughly similar to Q2. of this year. ALD sales for advanced HBM-related DRAM applications represent a larger part of our memory sales. The year-on-year decrease was mainly explained by some lumpy and relatively high sales and orders from memory customers in China in Q2 and Q3 of last year, as we also discussed in previous quarters. Sales in the power/analog/wafer segments were up slightly but still at relatively low levels, reflecting the continued downturn in these markets. Gross margin in the third quarter remained strong at 51.9%, roughly similar to Q2 and up from 49.4% in the third quarter of last year and again supported by a positive mix. As mentioned in the press release, we expect a less stable mix in the fourth quarter, which should bring the gross margin to around 51% for the full year. One of the mix factors was revenue from China, which decreased both year-on-year and compared to Q2 but still represented a solid level in Q3. We still expect China sales in the second half to be lower than in the first half with a more substantial drop in Q4. As discussed in the last quarter, our forecast for the gross margin excludes the impact from potential new U.S. tariffs. Our industry is currently still exempted, but it remains unclear what any new tariffs will be. We have several contingency scenarios in place to help mitigate potential direct impacts including the option of expanding localized manufacturing in the U.S. SG&A expenses were 10% lower year-on-year. This reflects lower variable spend and our continued cost focus. For the full year, SG&A is still expected to be somewhat below prior year. Gross R&D was up 10% in Q3, reflecting ongoing increases in our R&D programs. This increase plus the inclusion of a EUR 4 million impairment was partially offset by a relatively higher increase in capitalized development expenses, leading to an increase of 3% in net R&D expense. At 30.9%, the operating margin continues to be strong, supported by the solid gross margin and the year-on-year decrease in SG&A. Below the operating line, financial results included a currency translation gain of EUR 11 million, and this compares to a currency loss of EUR 60 million in the second quarter and a loss of EUR 48 million in the third quarter of last year. As a reminder, we hold the largest part of our cash in U.S. dollars. Let's quickly switch to ASMPT. Our share in income from investments, reflecting our stake of approximately 25% in ASMPT amounted to a loss of EUR 7 million in the third quarter, which is explained by one-off restructuring costs taken by ASMPT in the quarter. Our net results in Q3 also includes an impairment reversal of EUR 181 million, driven by a recovery in the market valuation, our stake in ASMPT in the quarter. With that, the impairment charge of EUR 250 million that was recognized in Q1 of this year has now been fully reserved. Let's go back to ASM now. Order intake. Our new orders amounted to EUR 637 million, a decrease of 7% compared to the second quarter and a decrease of 7% compared to the third quarter of last year at constant currency. With the Q2 results, we already indicated that book-to-bill would be below one in Q3. As an expected rebound in advanced logic/foundry orders will be offset by a sharp drop in China orders following a very strong first half of the year. In our update last month, we indicated advanced logic/foundry orders would still be up, but not as strongly as previously expected due to very mixed trends per customer and also that power/analog/wafer orders came in somewhat lower than expected. Looking at the breakdown by customer segments, logic/foundry was the larger segments, followed by memory and then power/analog/wafer. Logic/foundry orders decreased slightly year-on-year and compared to Q2. As just mentioned, a solid increase in advanced logic/foundry compared to Q2 was offset by a sharp drop in mature logic/foundry orders mostly in China. Memory orders dropped compared to last year and were relatively steady compared to Q2. And the largest part of memory orders was for advanced DRAM applications. Let's turn now to the balance sheet. ASM's financial position remains in good shape. We ended the quarter with EUR 1.1 billion in cash, up from EUR 1 billion at the end of June. Days of working capital dropped to 37 days at the end of September, down from 43 days end of June. This level is relatively low and also below the longer-term target range. As previously explained, this is due to a relatively high level of contract liabilities for a large part in China, which is expected to gradually normalize over time. CapEx amounted to EUR 38 million in the third quarter due to phasing of investments for our new Arizona facility, CapEx in the fourth quarter will be higher. And for the full year, we still expect CapEx of EUR 200 million to EUR 250 million. During the quarter, we also paid EUR 100 million in earn-outs related to the acquisition of LP in 2022. In total, free cash flow amounted to EUR 139 million in Q3. Excluding the earn-outs, the free cash flow amounts to a stronger level of EUR 239 million in Q3 and EUR 628 million in the first 9 months. During the third quarter, we spent EUR 109 million on share buybacks as part of our EUR 150 million program that was completed on July 25. And lastly, let me recap the 2030 financial targets we shared during the last month's Investor Day. Growth prospects for ASM remains strong on the back of rising ALD and Epi intensity in the logic/foundry and DRAM markets and new opportunities in, for instance, PECVD and advanced packaging and continued double-digit growth in spares and services. We expect the revenue to grow to more than EUR 5.7 billion by 2030, and this represents a CAGR of at least 12% from 2024 through 2030, twice the rate expected for the wafer fab equipment market. We raised our gross margin target to a range of 47% to 51%. And as part of this, we discussed a number of initiatives that will drive efficiency and productivity improvements. One of the key initiatives I'd like to highlight again is the successful launch of a new ERP and PLM systems. We went live 3 months ago and the transition was executed smoothly without any disruption to operations. This milestone lays a solid foundation for future efficiency improvements, including the rollout of real-time analytics and other digital transformation efforts. We will remain disciplined regarding operating expenses. Combined with the operating leverage effects, we expect SG&A to drop to less than 7% of revenue by 2030. We intend to increase R&D investments. This is our lifeline as the opportunities continue expanding in the next nodes. The target is to keep net R&D in a low double-digit percentage range of revenue. This will all lead to solid operating margin of 28% to 32% in the coming years and from 2030 onwards of more than 30%. In terms of CapEx, we expect an annual level of EUR 150 million to EUR 200 million during years of infrastructure expansion and EUR 100 million to EUR 200 million in years without such an investment. Combined with improving profitability, we project free cash flow to increase to more than EUR 1 billion by 2030. During Investor Day, we also reiterated our capital allocation policy. #1 priority remains investing in the growth of our company. That includes R&D and infrastructure investments and also M&A in case of attractive opportunities. In addition, a strong financial position remains important with at least EUR 800 million in cash as we remain committed to our dividend policy and to return excess cash in the form of share buybacks. And with that, I'll turn the call back over to Hichem. Hichem M'Saad: Thank you, Paul. Let's now continue with a review of the market and business trends. Starting with the end market conditions. The overall picture continued to be mixed, similar to the previous quarters. In various parts of the semiconductor market, the recovery continues to be held back by uncertainties around the economic outlook and geopolitics. It's clear that AI remains the bright spot across multiple sectors and markets, adoption of AI is being accelerated as a key driver of innovation and productivity gains. The surging demand has been highlighted by recent strategic partnerships and announcements from industry leaders aimed at expanding AI data center capacity. In terms of wafer fab equipment, the growth in AI is expected to drive significant and structural growth in the advanced logic/foundry and DRAM markets. These strengths play to ASM's strength. If we first look at our advanced logic/foundry business, overall demand continues to be healthy even though trends by customer has been very mixed. As already mentioned, these mix trends had some impact on Q3 bookings and will also impact sales in the second half. For the full year, we still expect a very strong increase in our gate-all-around related sales. The 2-nanometer transition continues to be a strong driver for our company. In the Investor Day last month, we reconfirmed the $400 million SAM increase in the move from FinFET to first-generation gate-all-around. We also reconfirmed that in this transition, we at least maintain our ALD market share and expanded our share of Epi layer accounts from 22% to 33%. Our customers continue to report strong demand for 2-nanometer for both AI and smartphones. We expect this to support continued investment in 2-nanometer capacity expansions in 2026, including new sub nodes, such as the backside power distribution. At the same time, customers continue to progress steadily in the development of the upcoming 1.4-nanometer node. In the second half of 2026, we expect the first 1.4-nanometer pilot line investments, followed by the start of volume production in 2027 and 2028. As also shared in our Investor Day, we expect a SAM increase of $450 million to $500 million in the 1.4-nanometer transition. Based on the intensity and breadth of our R&D engagement, we expect again to at least maintain our market share in the transitions to the next 1.4-nanometer node. We expect new ALD layers in [ backside ] power in NIMCAP and metal ALD layers in the middle-end-of-line. However, the biggest area of increasing ALD intensity continues to be in the transistor area, the front end of line. This is the heart of the chip where the overall device performance is defined by functional materials such as the high-k and electric dipole layers for multi-DC and work function layers. As a percentage of total ALD layers, we expect the number of layers in front end of line to increase from 50% in the 2-nanometer node to 60% in the 1.4 nanometer node. This is an area where our company holds strong market share position. Let's now review the memory business. High-bandwidth memory, HDM-related DRAM continues to be the main driver. Fueled by strong demand for AI data centers, customers are expanding manufacturing capacity for the most advanced DRAM devices for HBM applications. These devices require ALD High-K Metal Gate technology in which ASM has a leading position. Looking at the year-on-year performance, despite the good momentum in high-end DRAM, it's important to note that our memory sales last year included elevated sales from Chinese customers, which are not repeated this year. As a result, we still expect our memory sales to be lower than last year at less than 20% of overall equipment. The outlook for CD NAND, which is the smaller part of our memory business, has been improving somewhat, and we continue to be well placed with our ALD death field solutions with key customers. We expect DRAM investment to further increase in 2026. In the next couple of years, we expect a further gradual increase in the number of ALD layers in advanced DRAM. In the press release, we highlighted new wins in Epi and ALD dipole and work function-related layers in DRAM HBM for most expected to ramp in 2026 and 2027. Starting in 2028, we anticipate a significant increase in our SAM in DRAM driven by 2 major technology transitions. The move to 4Fsquare architecture and the adoption of FinFET in the periphery. In 4Fsquare, the channel structure becomes vertical, and producing a more complex 3D architecture. This shift will require additional ALD layers for gap-fill, oxides and metals and we'll also increase the role of Epi as an enabling technology. Shortly thereafter, the transition from planar to FinFET in the periphery will further increase demand for logic like ALD and Epi layers. At our Investor Day, we quantified the SAM expansion in DRAM at $400 million to $450 million as a result of this multi-node transition. In addition, this presents a compelling opportunity for ASM to grow our ALD shares in the DRAM market and to accelerate the expansion of our memory business. Next, the power/analog/wafer segment continued to experience weak market conditions. While there were early signs of end market recovery at the end of Q2, it became evident over the past 3 months that investment level in this segment will not rebound in the second half of the year. Assuming no adverse economic development, we expect spending in these markets, starting from a low base to gradually improve over the course of 2026. Thanks to innovative products that we launched in recent years, we are well positioned to benefit from this recovery. One example is our Epi Intrepid ESA tool which has helped us secure several new customers and position in 300-millimeter power and wafer applications. It's important to note that our outlook for gradual recovery excludes the silicon carbide market, where market conditions remain more challenging. Looking at China. Revenue was still at a solid level in Q3, but bookings dropped significantly. And as Paul already mentioned, this was the main reason for the sequential drop in our overall bookings. China bookings were still strong and very much concentrated in the first half of the year. On top of this, we incurred some additional impact from the export restrictions that were announced earlier this month. The impact on a total annualized sales is expected to be around 1% to 2% negative. With a stronger drop in Q4 sales, we project sales from China to be lower in the second half compared to the first half. Equipment sales from China will also be lower in the full year of 2025 and expected to account for approximately 30% as a percentage of total ASM revenue. Looking forward, we expect a gradual normalization in China demand in 2026 and subsequent years, in line with our previous view. This follows on a number of years of very strong spending, particularly in the mature logic/foundry segment. For 2026, the contribution from China is projected to remain meaningful, although sales are to decline by double digits. Before moving to the guidance, I'd like to repeat a few more of the takeaways and strategic priorities we shared in our Investor Day. ALD and Epi remains key growth markets for our company. We project a CAGR of 9% to 13% for both markets in the period of 2024 through 2030, which is clearly ahead of the 6% growth expected for the WFE market. This growth is driven by increasing complexity and increasing ALD and Epi layers to address challenges related to more 3D structures and new materials in these nodes, both in logic/foundry and DRAM. Advanced packaging is emerging as a key midterm growth driver for ASM, with the market projected to grow at an attractive CAGR of 15% through 2030. Although it currently represents a smaller portion of our business, upcoming generations of advanced packaging featuring finer pitches will demand more sophisticated solutions were aligned with our strength in chemistry, innovation and surface preparations. We've recently secured new ALD wins for TSV liner applications, and we are currently pursuing initiatives aimed at doubling our served available market by 2030. At the Investor Day, we also introduced growth targets for our spares and services business. For the period of 2024 to 2030, we expect a continued strong CAGR of more than 12%. The main engine of this growth is our outcome-based services, which we target to account for more than 50% of our sales and service sales by 2030. These innovative services deliver guaranteed outcomes to our customers, such as improved tool performance and availability. One example is our new dry cleaning solutions for refurbishing critical tool parts. Compared to conventional cleaning technologies, this approach improves defectivity performance and extended parts lifetimes, thereby reducing costs for our customers. It also contributes significantly to sustainability with a 67% reduction in CO2 emissions versus traditional wet cleaning methods. Another example is the use of automation in services by developing robots to place replacement parts in reactors, we achieved far greater precision than manual placements. This enables customers to operate our tools with action level precision, essentials as geometries shrink and nodes become more complex. Last but not least, we remain focused on driving operational excellence, maintaining a flexible footprint and as Paul also emphasized delivering improved financial performance. Let's now have a look at the guidance as outlined in our press release. For Q4 2025, we expect revenue to be in the range of EUR 630 million to EUR 660 million. For the full year 2025, we continue to expect revenue growth at close to 10% at constant currencies. Despite the projected slow start in 2026, we expect ASM revenues to grow in 2026. In terms of orders, we expect the trend to bottom out in Q4 at a slightly higher level than Q3. And looking at next year, we project quarterly orders to pick up again as 2026 progresses. With that, we have finished our introduction. Let's now move on to the Q&A. Victor Bareño: We'd like to ask you to please limit your questions to not more than 2 at a time so that as many participants as possible have a chance to ask a question. Operator, we are ready for the first question. Operator: Thank you. This is the Chorus Call conference operator. [Operator Instructions] The first question is from Didier Scemama, Bank of America. Didier Scemama: Maybe a first question for Hichem. Can you maybe give us a little bit more color as to what's already in your backlog? Because we've seen, of course, over the course of the last few weeks, a significant improvement in the picture for AI CapEx or logic chips, but also HBM, but also commodity DRAM. We've seen, of course, one of your customers this morning talking about a substantial increase in CapEx next year. So is that already in your backlog? Or is that yet to come and sort of give us confidence that your bookings have to materially improve from here? I've got a follow-up. Hichem M'Saad: Yes, Didier, I'm going to have Paul answer your -- this question, okay? Paul Verhagen: Yes, Didier, thanks for the question. You've seen our backlog, which came down further on the back of book-to-bill below of one, to be precise 0.8. So what's in the backlog, as you know, we have a relatively short-term backlog, if you compare it to let's say, one of our companies here in the southern part of the Netherlands, 3 to 6 months, typically. We also said that we expect a relative soft start of 2026. So not everything that you are referring to is already in our backlog. Of course, some elements are -- I'm not going in detail what is precisely in or out. But given the relative low bookings that we have, which we also guided for after the -- or at the Investor Day, you can imagine that not all of that is in the backlog at this stage. Didier Scemama: Okay. Got it. And I think in the last 12 months or so, commodity DRAM and commodity NAND, which historically are reasonably small part of your revenues, have been very, very low in terms of capital investments. If we were to see greenfield capacity addition for 3D NAND, but also investments in DDR5. Do you think that could become a meaningful driver in '26? Or is your participation in those markets fairly de minimis? Hichem M'Saad: Yes, I can take this question. I think that as DRAM devices will -- will improve, increase, there is more and more ALD layers. And with that, we expect an increase in our business from that point of view. Didier Scemama: I think you said 25% is memory? Is it like a really small sliver of your revenues today that's basically ex-HBM? Hichem M'Saad: So most of the revenue right now is actually in HBM, Didier, okay? That's what... Operator: The next question is from Tammy Qiu, Berenberg. Tammy Qiu: So the first question is on GAA. I remember earlier this year, you were saying that GAA order would be up quarter-on-quarter in 2025. So now we have a little bit of timing-related issues. So going to 2026, would you say that GAA would be still grow year-on-year versus 2025 level? And how should we be thinking about this pattern on the -- from an order perspective? Hichem M'Saad: So we see that 2026 is going to grow in GAA versus 2025. I think in 2026, there's going to be 2 things happening. First 2-nanometer production will continue in gate-all-around. But also, you see the 1.4-nanometer node will also start in pilot production in the second half of the year. The other thing that we see happening is that also there is going to be more customers in a 2-nanometer technology node in 2026 versus 2025, which is also driving some new business, especially in the U.S.A. Tammy Qiu: Okay. And was 1.5 -- sorry, 1.4-nanometer, you mentioned, the first batch of order for pilot line should be starting to be seen in next year. So is that coming from all the customers? Or this is only from one customer? And also, when would you expect the volume kind of ramp-up phase for 1.4 nanometer start to be seen? Hichem M'Saad: So to answer your question. So right now, for the 1.4 nanometer in our numbers, what we looked at is one customer in 1.4 nanometer in the second half of 2026. I think the -- we hope that there's going to be another customer in 2026, then that would be also a better business for us in 2026. Tammy Qiu: And -- sorry, the volume ramp-up time frame? Hichem M'Saad: So the volume ramp-up is going to be very small. It's the pilot production in the second half of 2026. That's what we put in. And we -- the 2-nanometer node that we mentioned is a very long node. So 2-nanometer is going to continue in 2026 and also 2027, it's a very long growth. As you know also the 2-nanometer node has sub-nodes and with different structure -- like different structure like a midcap that backside power distribution and so on and so forth. So for 1.4 nanometer, I think the big production start will be 2027 and 2028. Operator: The next question is from Robert Sanders, Deutsche Bank. Robert Sanders: Maybe a question on the gross margin. You're looking for a double-digit decline year-on-year in 2026. When I plug in a kind of estimate for China gross margin, that means that the consensus gross margin looks too high by quite a big margin. So is there anything that could mean that the gross margin is not well down next year as I think about next year? Paul Verhagen: I'm not sure I understand the question. What you say, a double-digit decline in gross margin? Hichem M'Saad: In China sales. Robert Sanders: You put in your release a double-digit decline in China sales. I look at the consensus. And the consensus is pretty optimistic on gross margin for next year despite the China mix being a headwind. So I was just wondering if there's any reason why the gross margin ex China would improve? Paul Verhagen: Improve compared to what? Robert Sanders: Calendar '25. Paul Verhagen: Yes. Then I think I have to disappoint you because I don't see it improve compared to '25, to be very honest. We have -- I mean, in '25, we have a few things that are very important. One, we have a pretty still strong level of China sales over the full year, with H2 below H1, Q4 below Q3, et cetera. But still, if you look at full year, a pretty strong level of China sales, and we expect to meet a double-digit decline next year, which everything else equal will have impact. Two, we have a very strong product mix, especially with, of course, 2-nanometer ramping to have a lot of leading-edge products and relatively spoken, lower, let's call mature products, power/wafer/analog, et cetera. So next year, when we also expect, of course, still continued growth in leading edge as Hichem just explained, but we also expect growth in, let's say, the power/wafer/analogs are relatively spoken, the rate of that segment will increase a little bit. That doesn't mean that every product in that segment has a lower margin and leading-edge product. But on average, I think it's fair to say that leading edge, we can demand higher margins than in that segment. So if you add it all together, lower China sales and a slightly different mix relatively spoken, you very likely get to a lower margin than in 2025. How much lower? I'm not going to tell you. Hichem M'Saad: But that's also at the end of the day, really, it all depends on customer mixture, and product mixture. And I think that as Paul has mentioned, okay, we have made some efficiency in our business and also our cost structure in such a way that we fundamentally improved our gross margin from previous years. So it's still well -- we're going to see what's going to happen in 2026. But we are very happy with really what we achieved this year. For us, 51% for 2025, this is a record for ASM, really a record. And that's an indication of the -- first, our position in the market, our competitiveness, but also in our cost control and better operational efficiency. And we will continue to really drive that in the future. We're not stopping right now. Paul Verhagen: And maybe to add, Rob, that was also the reason why we have increased our margin guidance during the Investor Day from 46% to 50% to 47% to 51%. So overall, indeed, we see improvements based on everything that Hichem also just once more emphasized. Operator: The next question is from Francois Bouvignies, UBS. Francois-Xavier Bouvignies: So my first question, Hichem, on your new wins in Epi and ALD dipole and what function that you talked about in the DRAM HBM. So can you just provide more details on that design wins? Did it happen in the quarter? Was it competitive? And I mean you said in your remarks that it was for '26, '27 time frame, which I thought it would be more like '27. So is it like earlier than you expected? Maybe these wins and how many layers are we talking about? So I know it's many questions within that, but basically, giving more color on this Epi and ALD dipole design wins you had this quarter? Paul Verhagen: Yes. And we're very excited about the wins that we have made in both Epi and ALD in the last quarter. So this is really work we've been doing with our customer for the past couple of years, and we've been able to become POR for this business. And with starting HVM high-volume manufacturing in 2026 and beyond. As I mentioned, we're really working with many customers and on more and more layers and products. I think what we have seen right now in the industry is really pull-in in a way in some of the high-performance. I think the AI market is becoming super-hot on that point of view. And we see that the customer really want to have a higher performance. So with a higher performance, we see some of these things have been a little bit pulled in. But I think the majority of the business, the bigger business for us really would happen when the move of DLM to FinFET, I think that would be great. But also we see many of the memory customers also very much using advanced packaging. And we're working with many of those right now on some of advanced packaging applications. But I think we see that 2027 and 2028 where things will become much more positive from that point of view. So 2036 will be the start and '27, '28... Francois-Xavier Bouvignies: How many layers did you win specifically for that this quarter? Paul Verhagen: [indiscernible] how many layers, but to be honest with you, we have many customers right now. We're actually working with all the DRAM customers. And you will hear in the next few quarters, more and more wins as those materialize. Francois-Xavier Bouvignies: That's great. And maybe China. I mean China, you forecast double-digit percentage growth. It seems that everybody is seeing the same thing, the double-digit decline, sorry, percentage next year for China business, LAM is seeing the same. [ ASML ] is seeing the same. So how do you build your forecast, I mean, out of interest? Because I mean, my understanding is China is quite low in terms of visibility right now. You had some restrictions that only impact 1% to 2% of your sales, obviously, it's more bigger of your China business. But how do you build this forecast out of interest? Because it's very difficult to know where China is going to be next year. And when I look at the retail imports are increasing significantly in the second half of the year versus H1 this year. I would think that you should see decent year from a deposition and etching point of view. So just wanted to understand how you forecast China? Paul Verhagen: Yes. Let me take that question, Francois. Actually, the very short answer is customer intel. So we have people on the ground. We get, of course, we try to get, of course, as much as we can insights into the plans various customers have into new fabs that are being built or not being built. So every year, we have an idea, but you're correct, there is limited visibility. That's also true for next year. So there's no change from that point of view, but still based on the number of new fabs that you think might start based on inputs in that respect that we get from customers. We had one year, it's maybe higher than the other year. That's an important input for us. Also last year, we had that input for this year. We're actually at the beginning of the year, we were -- I mean we were maybe a little bit prudent. Looking back now, China did a little bit better than what we anticipated but not to the extent that it was better than the year before. So also for next year, I mean, it could be slightly higher, slightly lower than what we currently think. But in any case, what we see based on all the intel that we have is what we guided and what we said in the press release. So that is, let's say, the best guidance we can give you based indeed on the limited visibility we have, but it's still supported by as much as possible customer intel that we can get. Operator: You next question is from Jakob Bluestone of BNP Paribas Exane. Jakob Bluestone: I had a slightly similar question actually. I mean, you say that you expect the order trend to bottom out in Q4 at a slightly high level than in Q3 and then sort of gradual recovery through '26. And I guess, just interested in the sort of broader business, where do you get the confidence from that? Is that what you're starting to hear from your customers? Or was that just sort of more from the various announcements that have been made? So just to get a sense of how concrete is your confidence on that trajectory that you've laid out for the improvement in orders? Hichem M'Saad: So I'd like to -- what Paul has mentioned earlier, we are very close to our customers, especially we are extremely close to our logic customers. Since we're working with all the top larger company, leading edge -- in leading edge logic and foundry. And then so that's the information really we're getting it from them. I think they have their investment plan for 2026. And based on that, okay, we are talking to them, and we know what kind of business we're going to achieve from them. So we feel confident from that point of view, okay? Jakob Bluestone: Understood. And if I can just ask a quick follow-up as well. Just on lead times. Can you comment on whether the lead times, particularly for advanced logic are changing or have they stayed the same? Hichem M'Saad: Lead time for us as a company, we always said that our lead times like used to be 6 months. But as I mentioned during the Investor Day, actually we have made a significant improvement, whereby we can reduce our lead time to about 3 months right now. So we took -- like we mentioned, we have made significant efficiency in our business processes, in our manufacturing and operations in such a way that we can be very fast in really being able to meet customer expectations. Operator: The next question is from Nigel van Putten, Morgan Stanley. Nigel van Putten: I guess another question on your sense of growth into '26. So what are the areas you are seeing the biggest certainty and uncertainty in terms of materiality both on positive and negative. Now my guess is that the advanced foundry is pretty predictable and a strong positive into next year. And it seems to be that maybe more advanced logic and also power/wafer/analog are maybe a little bit more uncertain. Am I in the right ballpark here? And also, do you think that you could still grow if these 2 areas do not show growth next year? That's my first question. Paul Verhagen: Yes. So I think you're directionally correct, Nigel. So I think where we -- as Hichem also said, where we have, let's say, the most reliable -- maybe too strong, but we work the forecast with customers and especially the large customers and especially with the leading edge logic/foundry, the quality of the forecast that we get is better, I would say, than with quite a few other customers. So that's one. So there, we have, I think most confidence. That does not necessarily mean that things cannot change. Things will always change. For sure, pull-ins, pull-outs, et cetera, will always happen. But will also happen next year. But -- and that's the area where we have most confidence. Two, I think in DRAM, given everything that is happening there, if you read all the market intel, I mean there is capacity shortage, I would say, demand is higher than supply. I think we're relatively confident on what we can achieve there. So there, we have quite some visibility. We just talked about China. We do believe China will come down, as we said, there is limited visibility, but it's not that we steer completely in the dark. We have still reasonable customer intel, but not as good as what we have from the logic/foundry customers. And then for the power/wafer/analog, I would say it's maybe most uncertain. That market is now 7 quarters and by the end of the year, 8 quarters in a cyclical downturn. So it is more based on the fact that at a certain moment in time, that market should also start to see a turning point. But there, we do not yet see that in orders coming in, but we do expect that to come in and partially also based on, I guess, on customer intel, but that, I would say, is maybe the most uncertain one, but we would expect that to happen somewhere in the course of next year. Nigel van Putten: Got it. I'm going to use my follow-up then to still maybe press a little bit on sort of the dynamics you've also pointed out this quarter that there is still quite a bit of difference between one and the other. So maybe just for your forecast, are you sort of assuming multiple customers to grow next year in a material way? Or is that not your base assumption at the moment? Paul Verhagen: Yes. Basically if you talk leading edge for customers at this moment. I think 2 of them, and I'll leave it up to you to guess which one. We are reasonably confident that they will grow. One of that is still uncertain, and it's not an important one. But yes, we'll see what will happen there. We have, of course, a certain view baked into these projections that we have given, but at least 2 and maybe 3. Hichem M'Saad: Yes. But I think if I add something to what Paul has mentioned, I mean we see customer concentration has increased in the recent quarter for advanced logic and foundry and we think it will continue in 2026. Operator: The next question is from Stephane Houri, ODDO BHF. Stephane Houri: Yes. Actually, I have a question about 2027. I know you gave -- just gave sense of guidance for 2026, with a very low point apparently and so it means that there is a need for an acceleration in the second half. Overall, we should expect probably a growth kind of low growth next year or mid-single-digit growth, I don't know. But it means that you reach your 2027 target, you need to have a double-digit growth in '27 at least. So what are the pieces of the puzzle we should look at to understand if you're in the good trajectory or not? Paul Verhagen: Fair to say, Stephane, I think firing on all cylinders is the right description here. So one, as I think Hichem already said at the beginning of the call, end of this year or middle of the second half of this year, we expect pilot -- investments in pilot for 1.4 and then going into HVM in '27. That's of course, a big driver. You've seen the SAM increase that goes with it. Two, of course, we would expect memory to continue to be good on the back of, in particular, AI, which now, by the way, is driving both HBM also, let's say, conventional more high performance in DRAM, in particular, which should be good by '27. I mean, if power/wafer/analog by then is still not recovering then, okay, I don't know what is happening there, but we would expect logically that's also there. By that moment in time, you would see a turning point. So -- and also spares and service business will continue to grow as we -- based on outcome-based services, as we said, during the Investor Day. So firing on all cylinders would be, I think, the right description here. Hichem M'Saad: Yes. One thing I would add to what Paul has mentioned is also what we see in 2027 is in logic, you're going to have 2-nanometer continued investment in capacity, but also the capacity increase in 2027 for the 1.4 nanometer node, okay? So you're going to have really leading edge 2-nanometer and 1.4-nanometer significant investment in those 2 technology at the same time. Because 2-nanometer is actually a very strong -- it's a very strong node, it's a very long node. That's what our customers are telling us. And as you know, there's many sub-nodes in 2-nanometer. So investment in 2-nanometer is still going to continue at a very healthy level in 2027. At the same time, you have the 1.4 nanometer expansion in that same year. Stephane Houri: Okay. Okay. And I just wanted to come back on China where you see double-digit decline next year. Are you sure that this is only the market and that you are not facing an increased level of local competition. There is more and more noise about the efforts they are making and the quality they are obtaining. So can you maybe describe the situation there and the sustainability of your market share? Paul Verhagen: That's a good point. I think it's a combination of both things. One, China, we've seen everybody actually also appears to have seen a very high level of investment in the last 2 years or so, 2.5 years. So we've already communicated, I think, end of last year that we would expect this to gradually normalize, whatever that means. Two, with recent, let's say, announced export controls, that also has impacted us to a certain extent, but also our peers, although it's maybe not materialized 1% to 2% of our annual revenue globally, but it's still a few percent, of course, of our China revenue, which again leaves a vacuum for local competition to step in. So yes, local competition will for sure, benefit from this, will get on a quicker learning curve because, yes, the unfortunate reality is that because of all these restrictions, yes, there is a playing field -- an unleveled playing field where local competitors can step in with what we would say inferior products compared to our products, but at the same time, learn at an accelerated pace compared to the situation if they would not have been able to get their products into customer fabs. So it's a combination of these 2 things, I would say. Hichem M'Saad: And one thing I would add to what Paul has mentioned, okay? We think that we are very competitive in China vis-a-vis the Chinese competitor. We don't see our position to be really worse than what it was before. I think our products are very good, and we continue innovation unabated which really gives us an edge from that point of view. In China, what really -- what 2026 shows for us right now, we have really very low visibility on how some of the part of the market is going to materialize. I talked today in my prepared remarks that we have won some significant business in Epi Intrepid ESA in the power/wafer/analog and some of those actually businesses is happening in China. So depending on what that -- so that shows really our competitiveness in that market. And I think if the market -- if the power/wafer market analog recovers, that's going to be also very positive for us in the future. And as you know, in the power/wafer/analog, visibility is very -- it's not very long. That market can go down immediately and go up at the last minute. So that's really a question we're going to find out in 2026, but we are very competitive. We think we can compete very well in that market. And it's an important market which we're going to continue to address. Operator: The next question is from Adithya Metuku, HSBC. Adithya Metuku: I had 2. Firstly, look, when I look at your growth, you've always tended to outperform WFE given the company-specific growth drivers. As I look out to 2026, is there any reason why you will not outperform WFE next year? I just wanted any -- is there any headwind that we should keep in mind? Any color there would be helpful. And then I've got a follow-up. Paul Verhagen: I think on the outperforming the wafer fab equipment, we have mentioned that in our Investor Day that we will outperform the wafer fab equipment when going from '24 to 2030 -- from 2024 to 2030. It doesn't mean, okay, we're going to outperform every year. So still I'm sure about that. I mean we already announced saying that the 2026 for us is actually a growth year, which we are very confident about it. But to answer the -- whether we're going to outperform it in 2026, that's too early to say. But what we can tell you that from 2024 to 2030, we will outperform the WFE market. Adithya Metuku: Got it. Maybe just on that, I mean, if you were to underperform given where you sit today and your visibility into the different end markets that you talked about on this call before, if you were to underperform what would be the reason? I struggle to see what -- I don't see any reasons, but I'm just trying to see if I'm missing something here. Hichem M'Saad: It depends really on the WFE mix. What's the mix of products, memory versus logic versus power/wafer/analog. It's really mix dependent. Adithya Metuku: Okay. Got it. And just as a follow-up. Paul, I just wondered if you could give us some color on OpEx in 4Q. I know you commented on SG&A, but I don't think you commented on R&D. And also if you could give any color on how we should think about OpEx into 2026? That would be super helpful. Paul Verhagen: Yes. So R&D for Q4, I think, there will be similar to Q3 gross R&D and most likely also net R&D. SG&A, Q3, we mentioned that there was relatively low variable expenses, where we made an adjustment based on certain accruals that were made. So I think the Q2 is more of an indication than Q3 going forward and into '26, and we've given guidance in the Investor Day. We will continue to invest in R&D, which is a lifeline. So there, you will see gradual increases compared to this year. And SG&A, we will keep very tight. And as a percentage of revenue, with revenue growth, we would expect that to come down a little bit further. Victor Bareño: Can we have the next caller, please? Operator? Operator: The next question is from Timm Schulze-Melander, Rothschild & Co Redburn. Timm Schulze-Melander: My first one just very big picture, maybe a question for Paul. 2026, do you -- should we expect the aftermarket side of your revenues to outgrow system sales? And then I had a follow-up. Paul Verhagen: I have a view, I'm not going to tell you because it's too early to tell. But what I can say is that we do expect a healthy growth in our spares and service business in '26 compared to '25. It's too early to already say it will be higher or lower. But we do see what we believe will happen is that we will continue to see a very healthy growth in spares and service business. Timm Schulze-Melander: Okay. That's helpful. Maybe just one other one. If we just -- you talked a lot about how important mix is to the outlook in 2026. Could we just when we think about your ALD business, I know you've talked about it being more than half of your system sales, but could you give us a kind of 5% to 10% range kind of what that ballpark looks like for 2025? Paul Verhagen: No, we were not going to give very specific guidance other than what we've given. We've obviously had ALD is more than half of our equipment business, which indeed it still is and maybe this year more so given the ramp-up 2-nanometer. It's also one of the reasons why the margin is where it is. Also given that, again, the more power/wafer/analog market is down. So relatively spoken, a lower percentage of the overall mix. And of course, still China is strong, although below last year, was still strong. So adding that all up, that's what you get, what we have, but we're not going to give specific guidance within a few percentages, what -- where we stand with ALD. Timm Schulze-Melander: Okay. But given your prior comment about power/analog and some of the other mix, then as a percentage of sales, ALD might be flat or down as a percentage of your equipment sales in '26? Paul Verhagen: Depending on what we assume and depending on how much the relative markets grow, there might be indeed relatively spoken, a -- but now we're really talking scenarios, there might be relatively spoken, slightly lower share of ALD compared to power/wafer/analog if -- and it's a big if, if power/wafer/analog will grow more fast or faster than ALD, but that's still to be seen as well. So it's really too early tell. I really don't know. We have, of course, certain scenarios and assumptions, but it's too early to give external guidance on that. Operator: And the last question is from Marc Hesselink, ING. Marc Hesselink: Yes. I have 2. Actually, on 2 bit smaller categories. Firstly, advanced packaging that you also now point out again in the press release, also at the Capital Markets Day spent some time of it. The fact that you're really focusing on it, does it show that this is something that can be material as well over the coming years? And how do you expect that then to ramp into your revenue numbers? Hichem M'Saad: So I think we mentioned -- thank you for the question. I think we mentioned that we have made some wins in advanced packaging the past quarter, which we are really very excited about. We really think that advanced packaging is very enabling. We think that as a company, we can provide meaningful innovation and disruption to the market in the area of new materials and in the area of surface preparations and based on our experience in both ALD and also chemistry. We have a significant engagement in the past actually a few quarters with some key customers in both memory and logic, high-end logic to develop some of those films. We're very excited about this part of the business. And hopefully, we see more and more wins in the next few quarters, and we'll keep you updated of those when time comes. Marc Hesselink: But maybe to add, is it then material? Or is just the first start of something that can be material in the future? Hichem M'Saad: It's really the first start. It's really the start right now. And that's why we're excited about the future of the company, and I think that would be something that, let me say, very excited about it, to be honest with you. I think there's -- we see customers putting in very hard. I think the -- as you know, in both memory and logic, heat generation is a big problem. So we're developing some films that really would reduce the hotspots with higher conductivity capability. We see films in actually the microphotonics area team developing films that can reduce light dispersion. So it's really one area that becomes very important for both the logic and the memory customers. And that's an area that, hopefully, is going to be very accretive to us in the future. Marc Hesselink: Great. And the second question is on -- actually on LPE. So you paid the earn-out in the quarter. So you did hit the milestone for that one. I mean I think in the press release, you can still read that it is very, very weak at the moment and also no recovery into next year. So can you then still talk about the building blocks, why did you still reach the milestones? And when do you -- are you still confident on this one to pick up maybe in the longer term? Paul Verhagen: Simple answer. The milestones are based on 2024. And 2024 was a star year for us with almost, I would say, explosive growth in silicon carbide. So if it would have been -- if the milestones would have been based in 2025, they would not have been met. But yes, the reality is that they were based on '24 and '24 is a very strong year for silicon carbide. Marc Hesselink: Okay. And no visibility on that improving in the beyond '26 period? Paul Verhagen: We, of course, expect that markets to come back at a certain moment in time, not yet for next year, at least we see no evidence for that to start to happen next year. But we still believe that there is a market for us, a good market for silicon carbide that we will start seeing come back, hopefully, also in 2027, but that's as again, it's too early to tell. Operator: Gentlemen, there are no more questions registered at this time. I turn the conference back to the management for any closing remarks. Hichem M'Saad: Thank you all for attending our call today and also on behalf of Paul and Victor. We hope to meet many of you again in the upcoming investor conference and other events. Thanks again, and goodbye. Operator: Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.
Operator: Good morning, and welcome to the MGP Ingredients Third Quarter of 2025 Earnings Conference Call. [Operator Instructions] Please also note that this event is being recorded today. I would now like to turn the conference over to Amit Sharma, Vice President of Investor Relations. Please go ahead. Amit Sharma: Thank you. Good morning, and welcome to MGP's Third Quarter Earnings Conference Call. I'm Amit Sharma, Vice President of Investor Relations. And this morning, I'm joined on the call by Julie Francis, our Chief Executive Officer; and Brandon Gall, our Chief Financial Officer. We will begin the call with management's prepared remarks and then open to your questions. Before we begin, this call may involve certain forward-looking statements. The company's actual results could differ materially from any forward-looking statements due to a number of factors, including the risk factors described in the company's annual report filed with the SEC. The company assumes no obligation to update any forward-looking statements made during the call, except as required by law. Additionally, this call will contain references to certain non-GAAP measures, which we believe are useful in evaluating the company's performance. A reconciliation of these measures to the most comparable GAAP measures is included in today's earnings release, which was issued this morning before the markets opened and is available on our website, www.mgpingredients.com. At this time, I would like to turn the call over to Julie for her opening remarks. Julie Francis: Thank you, Amit. Good morning, everyone. As we review our third quarter results, I want to begin by sharing reflections from my time in the business and how it's shaping our priorities and actions. I will then provide an update of our 5 key initiatives before handing it over to Brandon for a deeper review of our third quarter results and updated guidance. These first few months truly have been a whirlwind as I've traveled around the country to visit our distilleries, bottling facilities, manufacturing plants, as well as to meet with our distribution partners and retailers in the market. Most importantly, I've had honest and candid conversations with a broad cross-section of our organization, hosting more than 60 one-on-ones and several town hall meetings. I'm also appreciative of the feedback and conversations I've had with investors and analysts as well. MGP is a company with a proud heritage, strong brands and amazing people who are passionate about our business. What I've seen is inspiring and the opportunity now is to harness that passion with greater focus, performance and accountability to drive meaningful progress. While we fully recognize the challenges facing our industry and our company, we are committed to improving our strategic clarity, taking decisive actions, controlling the controllables and emerging stronger. This will not be an overnight fix. Some initiatives will bear fruit quickly, while others will take a bit longer, but the work is already underway. While it's too early to get into specifics, let me share a few highlights. First, we are conducting an exhaustive strategic review of our business and using a thorough approach that takes the time to ask these hard questions. What capabilities will differentiate us in the future? How do we allocate resources that ensure both growth and discipline? Where can we create the most value? This is not just a planning exercise. It's about execution and a data-driven approach to ensure that we are making the right choices, establishing clear priorities and setting ambitious targets and ensuring accountability for results. Another key component of the strategic work is a more active portfolio management of our spirits brands. While having a branded portfolio spanning across all price points and categories is an undeniable strength, we believe that the opportunity ahead lies in being more precise and focused, prioritizing the brands with the greatest potential, distinctive positioning and scalable growth while trimming persistent underperformers. The goal is clear: a streamlined, more balanced portfolio that drives sustainable growth and delivers higher margins. As part of these plans this morning, we announced the appointment of Matias Bentel as our Chief Marketing Officer; and Chris Wiseman as Senior Vice President of Operations. I am confident that Matias' strong expertise and deep experiences in building and growing brands at Brown-Forman and other leading alcoholic beverage companies will be instrumental in accelerating our branded growth agenda. Strengthening operational execution is another key component of our strategic agenda. Chris' appointment to lead our operations underscores our commitment to and deliberate focus on strengthening operational reliability, agility and efficiency across the enterprise. To fuel growth, we are focusing on unlocking additional cost savings. MGP has always been an efficient operator and our current initiatives are delivering excellent results. As we look ahead, we are developing scalable and repeatable processes that promote a continuous improvement mindset, foster cross-functional collaboration and build a robust pipeline of projects designed to unlock additional productivity and savings. I am encouraged and energized by the enthusiasm and alignment I see across the organization and look forward to sharing the strategic road map for the next phase of our growth with you early next year. Now turning to our third quarter results. We delivered another strong quarter and are seeing early signs of progress across many parts of our business. The environment remains challenging, but our results continue to reflect the strength of our brands, the resilience of our businesses and the focus of our team. We are leveraging MGP's unique capabilities to navigate the near-term while positioning the company for better results ahead. There's more work to be done, but the foundation we are building is solid and gives us confidence in MGP's long-term potential. For the third quarter, consolidated sales declined 19% as the continued growth in our premium plus portfolio and higher specialty ingredient sales were offset by the expected declines in brown goods and mid- to value brands. Adjusted EBITDA declined to $32 million, while adjusted basic earnings per share reached $0.85, both above our expectations, reflecting favorable mix improvements, pricing discipline and productivity initiatives. Our solid cash flows continue to be a key highlight with year-to-date operating cash flows up 26% for the same period last year to $93 million. With another quarter of solid delivery, we are confident in finishing the year ahead of our previous expectations. Brandon will provide greater detail on our updated guidance shortly, but we are raising our full year 2025 adjusted EBITDA and adjusted earnings per share guidance to the range of $110 million to $115 million and $2.60 to $2.75 of EPS, respectively, while tightening our sales guidance to a range of $525 million to $535 million. This has been a period of transition for our company, our customers and the broader alcoholic industry. Despite these challenges, our team continue to advance our 5 key initiatives for 2025, which are: sharpen our commercial focus; strengthen key customer relationships; improve operation execution; fortify our balance sheet; and drive greater productivity. Let me provide brief highlights of our progress on each of these initiatives. Beginning with our focus initiative, Branded Spirits, which we believe is the main engine of growth and value creation for MGP. Our decision to focus our A&P investments behind the most attractive growth opportunities continues to deliver results as our premium plus portfolio once again outperformed the overall category. The most tangible example of this focused approach is Penelope Bourbon as it continues to exceed expectations. According to Nielsen dollar sales data for the past 52 weeks, Penelope now ranks among the top 30 premium plus American whiskey brands in the country. Even more impressively, it has been the second fastest-growing brand in this group over the last 52 weeks and the fastest-growing over the past 13 to 26 weeks. Our team's relentless focus has fueled Penelope's remarkable growth since acquisition. We are applying that same discipline to elevate other brands in our portfolio, new tools, including brand health dashboards and advanced analytics are enabling smarter A&P decisions, sharper insights and stronger brand equity across the portfolio. Innovation is central to our growth agenda as it enables us to meet consumers where they are in terms of quality, price points, occasions and convenience. Our exciting new product launches in the fast-growing ready-to-pour cocktail segment demonstrates how we are applying our deeper understanding of consumer insights and category trends. The Penelope Black Walnut Old Fashioned launched during the third quarter is off to a strong start, building on the success of Penelope Peach Old Fashioned that launched earlier this year. We also introduced 3 new cocktails under the Yellowstone brand to further expand our presence in this fast-growing segment. With their beautiful presentation, approachable price point and desirable alcohol proof, these new products are directly addressing consumer need for high-quality, affordable and convenient crafted cocktails, making them an especially attractive entry point for females and new to whiskey drinkers. The year-to-date results in our distilling business show that our second initiative to strengthen partnership with key customers is working. Though sales and profits declined during the quarter, they came in ahead of our expectations, reflecting disciplined pricing, operational efficiencies and better aged whiskey sales. Throughout the year, we have maintained a close engagement with our key distilling customers to align on their production needs. While some customers have paused their near-term whiskey purchases as they rebalance their inventories, most have expressed their commitment to a continued long-term strategic partnership with MGP. Our commercial teams are working closely with them to develop innovative solutions that leverage our unrivaled scale and aged whiskey inventories as well as our high-quality and flexible production capabilities to offer premium gin, white spirits, specialty grain distillates in addition to brown goods. Importantly, our customers recognize our differentiated value proposition. And last month, Diageo North America named MGP as one of its distinguished suppliers, a meaningful acknowledgment of our strong partnership and contribution to the success of their brands. I'm also pleased to see that the broader domestic whiskey industry continues to recalibrate to the current environment. According to TTB data through June of 2025, total U.S. whiskey production is down 19% over the prior 12 months, down 28% over the prior 6 months and down 32% over the prior 3 months. While inventories remain high, this trend is encouraging signal that the market is working through its imbalance. We believe this rational behavior by the broader industry, combined with our strong partnership with strategic customers, will position MGP to emerge stronger once brown goods supply and demand dynamics normalize. Turning to our Ingredient Solutions segment. We are pleased with the ongoing top line momentum in this business. However, operational execution fell short of our expectations and pressured segment margins. This resulted from an unanticipated equipment outage and lower operational reliability, elevated waste starch disposal costs and higher start-up costs in our textured protein business. This critical equipment outage pressured our third quarter performance and is expected to remain a headwind in the fourth quarter, which is reflected in our revised full year outlook. We are taking decisive actions to strengthen operational reliability. We've increased plant staffing, raised maintenance capital and engaged an external engineering firm to partner with our operations team for a comprehensive review of plant performance. Together, we are addressing critical process dependency, restructuring key workflows and implementing predictive analytics and enhanced preventative maintenance protocols to identify and resolve potential issues before they impact production. I am confident that the addition of Chris Wiseman to lead our operations team will further strengthen and accelerate these initiatives, enabling us to return to our targeted level of performance in the coming quarters. While the newly operational biofuel plant is expected to mitigate our waste starch disposal costs, these costs were higher than expected during the quarter due to operational challenges during start-up. Learnings from that start-up are already helping us refine our processes. And as production ramps up, we expect the biofuel plant to provide greater relief on waste starch disposal costs over time. And lastly, our extrusion protein business is gaining traction as we expand our portfolio beyond wheat to soybean and pea-based proteins to compete more effectively across the full extrusion segment. During the quarter, we secured a large new customer, underscoring the potential of this expanded platform. While start-up costs associated with this commercialization effort temporarily pressured margins, we expect these costs to moderate as volumes ramp up and the businesses scale. Even as we make steady progress on these operational challenges in the Ingredient Solutions segment, commercially, we continue to have a clear right to win in this segment. Consumer demand for high fiber and high-protein foods continues to accelerate, and we are well positioned to capture this growth. The specialty starch and protein categories are expected to post mid- to high single-digit growth over the next 5 years according to industry reports. Our flagship Fibersym and Arise brands are already category leaders, and our R&D teams are partnering with a growing number of leading food manufacturers to incorporate our specialty ingredients into their new existing products. We also continue to collaborate with leading university and research institutions to expand the functionality and application of these ingredients. With these commercial strengths and ongoing progress towards restoring operational excellence, we believe that we're well positioned to deliver solid top line and margin growth in our Ingredient Solutions business over the next several years. Our last 2 initiatives to fortify our balance sheet and drive productivity savings remain firmly on track. Brandon will provide additional details on these 2 key initiatives, but I'm pleased with our financial strength and our team's efforts to drive efficiencies throughout the enterprise. Let me close by saying that we are doing what we said we will do, controlling the controllables and being transparent about what's working and what's not working. This balance between accountability and opportunity guides how we view our businesses and how we communicate about them. While the path ahead is unlikely to be linear, it's increasingly becoming well defined. As we look ahead, we are continuing to build on the strength of our differentiated customer value propositions across each of our businesses. I see greater alignment, stronger commercial execution, a clear view of where we can win and a growing sense of confidence and optimism across the organization. With that, let me hand it over to Brandon for a review of our quarter and updated guidance. Brandon Gall: Thank you, Julie. For the third quarter of 2025, consolidated sales decreased 19% to $131 million compared to the year-ago period. Within our segments, third quarter sales for the Branded Spirits segment decreased by 3%. Our premium plus sales posted a third consecutive quarter of positive growth, driven by the continued momentum of the Penelope Bourbon brand. However, premium plus performance was more than offset by the expected softness in the rest of this segment, including a 7% collective decline in the mid and value brands. Distilling Solutions segment sales declined by 43% compared to the prior year period. Although our brown goods sales decreased by 50%, our year-to-date sales and margin are trending above our initial outlook, reflecting higher aged whiskey sales and the success of our proactive partnership approach with key customers. Given that, we now expect 2025 Distilling Solutions sales and gross profit to be down 46% and 55%, respectively, from prior year relative to our previous outlook of down 50% and 65%. Ingredient Solutions sales increased by 9% compared to the prior year quarter, primarily due to higher specialty and commodity wheat protein sales. Third quarter gross profit, however, declined by 36% due to equipment outage and other operational reliability issues that Julie mentioned earlier. While we have a good line of sight to resolving these issues, they'll remain a headwind in the fourth quarter. As a result, we now expect Ingredient Solutions segment sales and gross profit to be down mid- to high single digits and approximately 40% for the full year, respectively. Consolidated gross profit decreased 25% to $49 million, primarily due to lower gross profits in the Distilling Solutions and Ingredient Solutions operating segments. Gross margin declined by 300 basis points to 37.8%. Third quarter SG&A expenses increased by 10%. But on an adjusted basis, this increase was reduced to 4%. It's important to note also that when removing the impact from the reinstatement of the incentive accrual in 2025, adjusted SG&A was down 9% due primarily to our productivity initiatives. Advertising and promotion expenses declined 31% as we continue to realign our spending behind our most attractive growth opportunities. For the full year, we continue to expect Branded Spirits A&P to be approximately 12% of Branded Spirits segment sales, largely in line with the year-to-date trends. Adjusted EBITDA decreased 29% to $32 million, primarily due to lower gross profit. Net income declined to $15 million, primarily due to lower operating results. On an adjusted basis, net income decreased 36% to $18 million. Basic earnings per common share decreased to $0.71 per share, while adjusted basic earnings per share decreased 34% to $0.85 per share. Year-to-date cash flows from operations increased 26% to $93 million as we continue to prioritize strong cash generation by managing our working capital, including barrel inventory putaway. Our year-to-date barrel putaway reduced to $16 million, and we continue to expect the full year net putaway to be in the $16 million to $20 million range relative to $33 million in 2024. Capital expenditures were $7 million during the quarter and $25 million year-to-date. We continue to expect full year 2025 CapEx of $32.5 million, a reduction of more than 50% from last year as we continue to streamline capital expenditures in the current environment. Our balance sheet remains healthy. We remain well capitalized to support the Penelope contingent consideration payment, and we'll be prudent in our support of ongoing operations, long-term growth investments and future capital structure considerations. We ended the quarter with total debt of $269 million and net debt leverage ratio of 1.8x. Given the encouraging year-to-date results, we are raising our full year adjusted EBITDA and adjusted EPS guidance while tightening the guidance range for sales. We now expect 2025 sales to be in the $525 million to $535 million range, adjusted EBITDA to be in the $110 million to $115 million range and adjusted basic earnings per share to be in the $2.60 to $2.75 range. For the full year, we continue to expect average shares outstanding of approximately 21.4 million and an effective tax rate of approximately 25%. For the final quarter of the year, our focus remains on staying close to our customers, keeping tight control of costs, maintaining financial discipline and allocating capital carefully to the areas that we believe create the greatest value. I'm proud of how our teams are navigating this period and confident that the foundation we are building today under Julie's leadership will support durable, profitable growth in the years ahead. With that, let me now hand it over to Julie before opening for your questions. Julie Francis: Thank you, Brandon. As we look ahead, our focus remains on delivering results with the confidence and credibility. We're working to create a more resilient business model, one that can weather industry cycles and still deliver sustained growth. That means making the tough decisions, prioritizing the highest return opportunities, driving operational excellence and supporting our businesses with the right level of investment. There is still work ahead. But what encourages me most is how aligned our team has become around the company's direction and purpose. That alignment, combined with our strong balance sheet, differentiated capabilities and growing brand momentum gives me confidence that MGP is on a stronger, steadier path towards creating lasting value for our shareholders, customers and organization. Thank you. Brandon and I will now take your questions. Operator: [Operator Instructions] And our first question for today will come from Sean McGowan with ROTH Capital. Sean McGowan: First question is, I guess, a broad one on industry trends. You talked about the reduction in production, but what are you seeing? What are you hearing from your customers regarding channel inventory and how much further work needs to be done? Brandon Gall: Yes. Thanks for the question, Sean. What we're hearing from our customers is really the need and the willingness to stay close. There's a lot of changes going on in the industry. There's still elevated inventory. There's obviously reduced production, as you mentioned. There's also distilleries that are closing their doors or furloughing employees. And the general response that we're seeing from our customers is increasingly wanting to communicate and have open dialogue. But what we're also seeing, Sean, is a lot of our historically indirect customers that usually purchase from third parties, our product want to deal directly with MGP. They want to have that relationship. They want to be close to us because they know that we're committed to the space and going to be there over the long term. Sean McGowan: Okay. Maybe that ties into a follow-up. A lot of the numbers in the quarter were a little better than I had thought. So congrats on that. But the gross margin in distilling was especially strong. Is that kind of related to what you just mentioned of staying close to the customer? Or can you talk generally about how you were able to hold up those margins? Brandon Gall: Yes. The margins definitely came in even better than our expectations in the quarter. And there's really 2 reasons for that. A larger volume of aged sales than we had anticipated. Again, it's the customers working very closely with the team. And we're seeing orders from customers who predominantly historically have only purchased new distillate. But like everyone else in the space, they're looking for ways to innovate and to differentiate further on the shelf. And we're getting calls from customers like those that want to buy aged for the first time. They want to put out a new limited time-only product on the shelf, maybe at a different price point from their core portfolio. And we're really well set up for that, as you know, due to the breadth and scale of our aged offerings and our ability to help them innovate, whether that's through blending, through picking out the right match fill or the right age profile. So it's things like these that are really improving our aged performance over our initial expectations. The second thing, Sean, is the team operationally is doing a tremendous job in managing the cost structure of the facility. That's a top 4, 5 volume-producing bourbon facility in the United States. So while ramping up is difficult, like we've had to do in previous years, ramping down is even more complex. And the team has done a really nice job from a productivity initiative point of view in executing the cost side. Operator: And our next question will come from Robert Moskow with TD Cowen. Seamus Cassidy: This is Seamus Cassidy on for Rob Moskow. Julie, you mentioned in your prepared remarks sort of more active portfolio management around the Branded Spirits portfolio. Since the Luxco acquisition, MGPI has focused its ad spend and acquisitions on more premium brands. And you've said you're comfortable letting mid and value decline as a result of this. So I guess my question is, could you walk us through some of the pros and cons between sort of trimming some of these lower-performing brands? Because while they may be slower growing, I imagine they still add scale to your portfolio and provide positive cash flow. Julie Francis: Yes. Thanks for that question. I appreciate it. Listen, Branded Spirits certainly is our true north on our strategic growth platform. We're certainly pleased with the premium plus performance, focusing on those core 3 Penelope, El Mayor and Rebel certainly have been paying off. We're up 4% on the premium plus versus a category that's not showing the same results. And then Penelope is certainly growing very fast. But I think your point is interesting because the mid- to value, certainly, we are heavily weighted still in that area. So I would tell you, and I think as I've talked to analysts throughout the first few months that I do think there's an opportunity for us to be -- take some of the core focus that we've had in the premium plus and be precise in the mid- to value because there are some brands, as you know, that have some pretty good density, and there are some regional and channel opportunities that we certainly could bed out a little bit more with some flavor innovations with some regional brands that may make sense. So I'd tell you that we are reevaluating that because I do see some strong brands in there that we could certainly provide a little bit of ignition to and to help us offset some of that mid- to value decline. But again, if you look at it, we're certainly focused on mid first, and I think you're seeing some progress there and value we should start looking at very shortly into 2026. Operator: Our next question will come from Marc Torrente with Wells Fargo. Marc Torrente: I guess first on billings, with the larger customers that have paused their purchases you've referenced this call in the past, have there been any incremental pauses or maybe even restarts out of those customers? And then how is planning progressing with those customers? Any, I guess, additional commentary on your visibility into 2026? Julie Francis: Marc, it's Julie. Thanks for the question. A couple of things. I think we've said in the past, and we still feel this way that our large multinationals certainly have communicated with us that they're paused. We do expect to hear more about 2026 near spring of next year. But we're staying close. And I think you saw -- you heard in the prepared comments that we were acknowledged by Diageo as they -- one of their more distinguished suppliers. So I think you're seeing our customers and our team's ability to engage and stay close. We've been really accommodating to the crafts. They're certainly going from kind of like just-in-case to just-in-time buying, where cash really is and availability of cash really is playing in a role into how they're purchasing and when they're purchasing. But we've also seen, as Brandon said, it's been interesting to see some craft customers that have only been in new distillate come to us for aged whiskey because that certainly is where the demand is. And we're known for our unique mash builds, our variety, our master distillery. So that certainly has been an area that we were pleasantly surprised with. And it goes back to the approach the team took probably 6 months ago where we went to really engaging with our customers, being accommodating, showing agility and most importantly, the larger folks certainly know we're here to stay. The Distilling segment is extraordinarily part -- important part of our business. You probably recall that Penelope started in that area, right? They're a customer of our Ross & Squibb distillery. We noticed that they were putting out some good juice, choosing some good juice and they're very innovative and coming together and acquiring Penelope in 2023, certainly, we're very pleased with those results. But we do expect the headwinds into the first half of 2026 with hopefully some moderation in the back half. Marc Torrente: Okay. Great. Appreciate that. And then on the ingredients side, it sounds like there's a combination of headwinds in the quarter, sales perhaps a bit lighter versus expectations, but then also some execution issues. Maybe just some more color on the recovery timing here. It sounds like would be ongoing impact into Q4. Will this all be contained in 2025? And you also started to report some biofuel sales. Maybe any other detail on the expected ramp there and cost offsets? Julie Francis: Yes. Thanks, Marc. First, obviously, we're not satisfied with the results we saw in Ingredient Solutions, both from a year-to-date and then in particular, in Q3. I tell you, first, it's important to note that it's not a commercial demand issue. These are platforms that are in high demand, and we've ramped up our R&D department, which really is paying off dividends. We've got some large customers that have come on board that are expanding their products. So the demand is there. And where we fell short, we're in a few different areas. One, there was an equipment outage, and I'll take full responsibility for that. As I've got in the business, Marc, it became clear that one of our more important dryers had had significant operational reliability issues, downtime, yield, waste. And in my experience, it was best for us to take that equipment offline, rebuild it. It did come offline a couple of months ago, and it will be online by the end of this month and we will see better performance. So that is a discrete event, but I did want to make sure that people understood that our expectation is for it to have headwinds into Q4. But after that, we certainly will be on a better path to full productivity coming out of that dryer. But we have had continuous operational reliability across the plant as we closed down that Atchison distillery. And we've taken a few discrete decisive actions. One, I did bring in a project engineering team, boots in the plant, I'd like to say. They're well-known for working alongside management and leadership to bring a plant back to performance. We've invested 15% more in adding staffing. We're increasing maintenance CapEx. And also, we're bringing back predictive analytics and some of the enhanced preventive maintenance that we are known for. And then certainly bringing in a leader that has extensive operational turnaround experience that's led manufacturing, production, engineering and also some of the other key safety and quality metrics, bringing Chris on board is an important part. So we do believe and expect to see continuous improvement heading into next year. And the teams are working really hard. So I'm going to turn it over to Brandon on biofuel. But I do want to say one area we're pleased to see is our ProTerra line in extrusion. We did get online our larger customer that we've been talking about. A little bit higher start-up costs, which could be expected with all the different R&D and test runs that you do. But that is starting up mid-November with salable product. And so, we're pleased to get that online. And now I'll turn it over to Brandon for biofuel. Brandon Gall: Yes. Before I get into biofuel, all these actions, Marc, that Julie just listed, and there's a lot of very positive actions that she and the team are taking. We do not expect it to be fully contained. Maybe the dryer will be that specific discrete issue. But when you're hiring new people, when you're investing capital, when you're building in new processes, that does take a bit of time. So we do expect to return to our historical high level of performance, but probably not until the first part of next year or the first half of next year. So more to come on that, Marc. But yes, to your question around biofuel. So that project was commissioned in the quarter. Proud to say that the team shipped out their first tanker biofuel in September. You saw some of that in the numbers. But these things do take time. And so, whether it's getting it efficiently started up, whether it's hitting customer spec, rebuilding the customer network for this type of facility and a couple of other things, they do take time. But over time, we do expect this to offset a large part of the disposal costs we're currently incurring in addition to some of the other initiatives we have going to dispose of some of the other byproduct. So while Julie said very well, we're not pleased with the performance to date. We do believe that we're doing the right things to correct that going forward. Operator: And our next question will come from Ben Klieve with Lake Street Capital Markets. Benjamin Klieve: First, I want to see if you guys can double down a bit on the success of Penelope of late. I mean, it seems quite impressive that, that growth is accelerating even as that business has really, I think, developed some scale. I'm wondering if you can kind of isolate any of the variables behind this growth. I mean, is it -- are you guys seeing any accelerated growth from greater velocity, increased household penetration, distribution gains? Anything to specifically call out behind the growth numbers over the last 6 months or so? Julie Francis: Ben, it's Julie. I appreciate the call. Yes, Penelope certainly is performing quite nicely. We're pleased to say we're the second fastest-growing brand out there in the last 52 weeks. So we're pleased on that. But I would tell you this, if you think about Penelope and the positioning, it's kind of like an [ unbourbon bourbon ]. So it's attracting a broader range of folks across the spectrum. It's a brand that's built on innovation. So we're very purposeful on sending out innovation. It's also very tight on the releases. I was out in the market the last couple of weeks and talking to retailers and how the excitement that they generally have around Penelope, and they definitely said that our approach to limiting the number of cases with each launch. One guy was saying that he's got 60 people on his bourbon list and a lot of the releases are sold out and don't even come on to shelf. So we think that's a key part of it. And then knowing our consumers. We just launched the Penelope Old Fashioned line. We started with Peach, which was highly successful. We're just out with Black Walnut. And some of the brand insights that we saw there was that we had an opportunity to engage with females. Females who were curious about bourbon and entering into this category, and they were looking for a lower proof, attractive price point. And also, they're about image and visual appeal. So if you've ever seen that bottle, it's a beautiful bottle. So we think that that hit on bringing in new consumers. And then certainly, from a distribution standpoint, our independents certainly are doing a great job of launching Penelope and having a significant number of average items. Our opportunity still does lie with a national footprint across on-premise and national accounts. So we do feel bullish that there's some upside on getting more distribution across the nation, in particular, in some of those national accounts. Benjamin Klieve: Great. That's all very helpful. And then for my follow-up, I'm curious, Julie, about one of the comments you made about the dynamic where your Distilling Solutions customers are shifting from just-in-case to just-in-time. In that context, how are you guys -- how was that context contemplated within your updated full year guidance? I mean, are you banking on some just-in-time orders still here to come in, in the next month or 2 that you have real visibility of? Or is this something that you're kind of looking for given historic conversations with customers that don't really have locked in yet? Julie Francis: No. I would just say in Q4, you've heard us talk about our guidance. And so, we certainly are confident on what we reaffirmed and where we took some of the levels. And listen, the biggest thing we did was in the past 8 months is go out there and truly engage the customers, right? And we're only a phone call away, and we're very accommodating. And so, as they have money availability, we're willing to take any order that they're willing to give us. So I think that's important. But our -- we've been pretty tight to hitting our forecast the past few quarters. So we believe that the planning and the forecast that we have out there represents the demand. And certainly, if there's these intermittent customers coming to us, that's just a slight net positive upside. But understand these are craft customers where the number of barrels that they're taking are on the lower end. Brandon Gall: Yes. And what I'd add to that, Ben, is this is -- we're now approaching 1,000 customers that have bought whiskey from us over the years. And the just-in-time versus just-in-case, what that means is, they're not willing to necessarily contract out. So it does limit visibility to a specific customer necessarily. But because of the breadth and size of our book of customers, what we do see, especially at the craft level is the market effect, which is, we can see the overall trend that they're moving toward -- more toward this. And we are seeing greater demand for aged, which is obviously a positive. So while it's hard to really visibly measure when a certain craft is going to purchase, the breadth and size of the number that we serve gives us that added confidence that as a collective, these trends are taking place, and we expect to continue. Benjamin Klieve: Very good. I appreciate that from both of you. Congratulations on a good quarter here and a healthy outlook for the rest of the year. Operator: And our next question will come from Mitch Pinheiro with Sturdivant. Mitchell Pinheiro: So when you look at the data, both for Branded Spirits and even the TTB data, we see inventory, both barrels and also in the retail side and the distributor level kind of full, still full. But pricing data is still much better than I would have expected, holding up. You might expect to see more discounting and pricing actions, but we're not. And I'm just curious as your view on this. Is it saying something larger about the category? Is it saying anything about consumer preferences and/or consumer value? Julie Francis: Mitch, Julie, thanks for the question. First and foremost, we certainly believe strongly as most folks, American whiskey and tequila, our really strong long-term outlook is really healthy. And as we talk about the pricing environment, yes, it's largely remained rational across all core categories. And certainly, there are pockets, regional pockets of greater competitive intensity. And we're certainly seeing in the nonpremium end some investment and some pricing in the value brands in particular, but nothing that causes us concern. And as you called out, it's been pretty rational. So I think that to me, it shows that people are bullish on the strength of the categories and the health of the categories for long-term value, and they don't want to do anything rash to destroy any of the value that they can capture. Mitchell Pinheiro: And I guess then just sort of a follow-up. So you've always talked about your revenue in the Distillery Solutions business being 1/3, the multinationals, 1/3, your larger regionals or nationals and then 1/3 craft. Is that still there? Or with the sort of decline, it seems like there's a greater decline in craft. Is that now a smaller portion of your business? And yes, let's leave it at that. Amit Sharma: And Mitch, you were breaking up in the middle. Can you repeat that, please? Mitchell Pinheiro: I was just curious about your Distillery Solutions sort of revenue breakdown. It was typically 1/3, 1/3, 1/3, multinational, but your larger regionals or nationals and then your craft. And I'm curious if that's changed. Brandon Gall: Yes. I'd say, Mitch, I'll start on that one. We are seeing, generally speaking, a larger proportion of aged sales relative to new distillate than we had expected coming into the year. And so, broadly speaking, like you said, it's typically 1/3, 1/3, 1/3. Age customers tend to skew much more towards the craft. So -- and that is where we're seeing the incremental demand, and that is where we're seeing the improved performance as the year has gone on. So a lot of those larger national, multinational customers that typically buy new distillate, a lot of them still are, but some of them have paused, and we've talked about that. And so, because of that pause the proportionality of our sales mix has moved in that direction. Operator: And our next question is a follow-up from Sean McGowan with ROTH Capital Partners. Sean McGowan: A quick question first. What is your expectation for the margin profile on the biofuel? And then more broadly, again, I'm a little surprised with this deep into the call and the word tariff hasn't come up. So could you give us your latest thoughts on that? Brandon Gall: Yes. I'll start on the biofuel. Margin -- gross margin profile, we're going to maybe get a little further along until we share our expectations there. But generally speaking, we believe that the biofuel facility, once it's fully ramped up, once it's efficient and selling at the prices that we think it will hit and get all the tax accreditations that are going to come with it over time. We expect that to offset a large part of the disposal costs we're currently incurring. And -- but let us get a little bit further in, let us see what the market pricing is, where the expectations are for next year, and we'd be happy to share more. And on the tariff front, yes, we are seeing some tariff pressure, not to the extent of probably some of our peers. That's the benefit of being mostly domestic. So a lot of the tariffs we're seeing are mostly on dry goods, some of the product and other materials that we're bringing in. But what's harder to quantify, Sean, is the impact it's having on some of our customers that do have more of an international business. We can see the export data. It's been very volatile this year, especially in terms of American whiskey specifically going out of the country. And so, we do think that it is causing some near-in volatility in patterns as it relates to that. Amit Sharma: And it's included in our guidance. Brandon Gall: Yes. Great point. And the incremental tariff exposure that we are experiencing is contemplated in our full year guide. Operator: And with that, we will conclude our question-and-answer session. I'd like to turn the conference back over to Julie Francis for any closing remarks. Julie Francis: Thank you, Joe. I'd like to thank everyone for joining us today on our quarterly earnings call. I look forward to engaging with all of you in the very near future and playing a much more active role in the next earnings call. So good luck, everyone, and we'll talk soon. Cheers. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Operator: Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gates Industrial Corporation Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Rich Kwas, Vice President of Investor Relations. Rich, the floor is yours. Richard Kwas: Greetings, and thank you for joining us on our third quarter 2025 earnings call. I'll briefly cover our non-GAAP and forward-looking language before passing the call over to our CEO, Ivo Jurek, who will be followed by Brooks Mallard, our CFO. Before the market opened today, we published our third quarter 2025 results. A copy of the release is available on our website at investors.gates.com. Our call this morning is being webcast and is accompanied by a slide presentation. On this call, we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliations of historical non-GAAP financial measures are included in our earnings release and the slide presentation, each of which is available in the Investor Relations section of our website. Please refer now to Slide 2 of the presentation, which provides a reminder that our remarks will include forward-looking statements within the meaning of Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward-looking statements. These risks include, among others, matters that we've described in our most recent annual report on Form 10-K and in other filings we make with the SEC, including our Q2 quarterly report on Form 10-Q that was filed in July of 2025. We disclaim any obligation to update these forward-looking statements. This quarter, we will be attending the Baird Global Industrial Conference, the UBS Global Industrials and Transportation Conference and the Goldman Sachs Industrials and Materials Conference and look forward to meeting many of you. Before we start, please note all comparisons are against the prior year period unless stated otherwise. And now I'll turn the call over to Ivo. Ivo Jurek: Thank you, Rich. Good morning, everyone, and thank you for joining our call today. Let's begin on Slide 3 of the presentation. Gates posted solid third quarter results with positive core revenue growth of almost 2% on the macro industrial demand conditions that remain subdued. Our replacement channel grew low single digits, supported by mid-single-digit growth in automotive replacement. Our OEM sales were relatively flat. At the end market level, industrial was mixed. Globally, Off-Highway realized positive growth with stabilizing demand in construction, offsetting incremental weakness in North American and European agriculture. Commercial On-Highway declined mid-single digits, impacted by decreasing production rates in North America. Personal Mobility generated another strong quarter of growth, exceeding 20% year-on-year. Our adjusted EBITDA margin increased nicely year-over-year to 22.9%. We generated record adjusted EBITDA dollars and margin for a third quarter. Our net leverage ratio declined to 2.0x, a 0.4x reduction compared to last year's third quarter. With that, we are on pace to reduce our net leverage to under 2x by year-end. We have updated our 2025 guidance, raising our adjusted EPS midpoint to $1.50 per share. We have maintained our full year 2025 adjusted EBITDA midpoint of $780 million, while slightly lowering our core sales growth outlook at the midpoint. Brooks will provide more color and comments about our updated guidance assumptions later in the presentation. Additionally, our Board recently approved a new $300 million share repurchase authorization that will expire at the end of 2026. The new authorization replaces the prior authorization, which had over $100 million remaining. On Slide 4, we have heard from a number of you on the call that you would like to see an update on what is occurring in the end markets. So we have laid out an updated view of our underlying end markets and how they have progressed during 2025. Coming into the year, we did not anticipate a broad macro recovery, but we have continued to see uneven end market performance since we set our initial expectations for the year in February. We did, however, enter the year with some expectations that the PMIs could begin to recover in the second half of 2025. That has not emerged to date. Industrial Off-Highway demand trends have continued to languish and softened a bit relative to our expectation during the third quarter in certain geographies on reduced build rates and dealer inventory destock. Additionally, in the On-Highway end market, the North American commercial truck production levels deteriorated as the third quarter evolved. Despite some of these near-term headwinds, we are still outperforming our underlying markets and believe that many of our challenged end markets are troughing or are close to troughing. Our Automotive Replacement and Personal Mobility business continues to grow nicely, while our data center opportunity set continues to expand. As such, we are optimistic that demand in the majority of our end markets will be more stable to improving at some point in 2026. Please turn to Slide 5. Third quarter total sales were $856 million, which translated to core growth of 1.7%. Total revenues grew 3% and benefited from favorable foreign currency. As I have highlighted earlier, the end market performance was mixed in the quarter. Personal Mobility continued to trend nicely higher with its year-over-year growth rate accelerating compared to the second quarter. Off-Highway grew mid-single digits with growth in construction and agriculture globally. However, ag declined incrementally in both North America and Europe. Diversified Industrial and Energy were both down slightly and On-Highway demand was soft. Automotive grew low single digits with solid growth in auto replacement more than offset a slight decline in auto OEM. Our key growth verticals, Personal Mobility and Auto Replacement contributed to the performance. Our revenues from data center also continues to increase, although from a small base. And we see the liquid cooling opportunity in early stages of more broad-based adoption. Adjusted EBITDA was $196 million with adjusted EBITDA margin coming in at 22.9%, an increase of 90 basis points and represented a record third quarter margin rate for the company. Our adjusted earnings per share was $0.39, an increase of approximately 18% year-over-year. Operating performance contributed $0.02, while a lower tax rate and consolidated mix of other items each contributed $0.02. We believe we are effectively managing the enterprise across all aspects. On Slide 6, we will review our segment highlights. In the Power Transmission segment, we generated revenues of $533 million in the quarter and core growth of 2.3%. Most industrial end markets realized growth. Personal Mobility continues to be a strong contributor with growth exceeding 20% in the quarter. At a channel level, replacement grew with automotive and industrial channel core growth each growing low single digits. OEM sales also grew low single digits with industrial sales growth more than offsetting a decrease in automotive. We continue to invest in our strategic sales initiatives and innovation to help drive potential outgrowth in the future. Our mobility opportunity pipeline is staying robust. In the Fluid Power segment, our sales were $322 million, representing core growth of just under 1%. Many of our key end markets in Fluid Power continued to experience various levels of demand pressure, but our teams have held its own. Commercial On-Highway sales decreased mid-teens as industry inventories are elevated. Off-Highway grew with positive construction trends offsetting a low single-digit decline in ag. The agriculture performance year-over-year was worse, impacted by incremental OEM production cuts to better align our customers' inventory levels heading into the year-end. We believe the underlying ag market is troughing and should be better positioned for recovery sometimes in 2026. Replacement demand was strong, driven by double-digit growth in Automotive Replacement globally with broad-based growth across regions. Industrial OEM sales declined mid-single digits on a core basis, driven by soft demand trends in agriculture and commercial truck. Our data center opportunity pipeline exceeds $150 million and design-in activities remain robust. With respect to profitability, both segments expanded adjusted EBITDA margins at a similar rate. I will now pass the call over to Brooks for further comments on our results. L. Mallard: Thank you, Ivo. I'll begin on Slide 7 and review our core sales performance by region. The majority of our geographic regions generated core growth in the quarter, highlighted by EMEA's return to growth. In North America, core sales were about flat. The incremental demand weakness experienced in Agriculture and Commercial On-Highway during the quarter was primarily concentrated within the North American region and led to a low double-digit decline in industrial OEM sales. Industrial Replacement sales were also down slightly. Industrial was offset by growth in automotive as Automotive Replacement sales increased high single digits, supported by year-over-year growth contribution from our new channel partner. Automotive OEM sales grew low single digits. In EMEA, core sales grew 2.6%. Industrial end markets were mixed. Construction returned to growth and more than offset weak demand in agriculture. On-Highway grew while energy and diversified industrial saw declines. Personal Mobility was very strong, growing almost 75%. At the channel level, OEM sales grew high single digits, supported by Construction, On-Highway and Mobility, partially offset by lower automotive OEM. Sales into replacement channels increased slightly. East Asia and India posted approximately 5% core growth. Most industrial end markets grew. Automotive OEM sales decreased slightly, which was more than offset by high teens growth in Automotive Replacement. China core sales expanded 6% year-over-year with growth across all channels and most end markets. South America core sales declined low to mid-single digits. On Slide 8, we show the key components of our year-over-year change in adjusted earnings per share. Operating performance contributed approximately $0.02 per share, driven by core growth and higher adjusted EBITDA margin. A lower tax rate contributed $0.02 per share. Other items, including lower interest expense, lower share count and other income together generated about $0.02 per share. Slide 9 provides a summary of our cash flow performance and balance sheet metrics. Our free cash flow was $73 million and represented 73% conversion to adjusted net income. Our restructuring cash outflows have increased, which impacted our free cash flow conversion. Our net leverage ratio declined to 2.0x at the end of the third quarter, which was an improvement on a year-over-year and sequential basis. During the quarter, we paid down $100 million of gross debt. We expect our net leverage to be under 2x at calendar year-end 2025. Our trailing 12-month return on invested capital was 21.6%, an improvement sequentially as improved operating performance helped offset the impact from internal investments in high-return projects. On Slide 10, we provide our updated 2025 guidance. We have trimmed our core revenue growth midpoint to 1% and narrowed the range from 0.5% to 1.5% to reflect current macro conditions for the balance of the year. In addition, we have maintained our $780 million adjusted EBITDA midpoint and narrowed the range to $770 million to $790 million. We have raised our adjusted earnings per share guidance to the range of $1.48 per share to $1.52 per share, the upper half of our previous range. The $1.50 per share midpoint reflects a $0.02 per share increase relative to our prior guidance. Our guidance for capital expenditures is unchanged. We have lowered our free cash flow conversion outlook to a range of 80% to 90% from 90% plus as a result of increased restructuring cash outlays as part of our footprint optimization and restructuring initiatives. Turning to Slide 11. We want to provide an update of our ongoing restructuring plans as well as the strategic system conversion that we have been working on and that we expect to be complete by the middle of 2026. Beginning late in Q4 2025 and finishing by the end of Q2 2026, we expect to close multiple factories, complete a labor realignment and go live with an ERP conversion for most of our European footprint. As we complete these activities, we will be focused on providing continuity and service for our customers and our affected team members. We expect to incur additional costs and other onetime operational impacts from these projects in the first half of 2026. From a financial perspective, we anticipate an unfavorable year-over-year impact of 100 to 200 basis points to our adjusted EBITDA margin in the first quarter and a more modest unfavorable effect in the second quarter, ranging from 25 basis points to 75 basis points year-over-year. In the second half of 2026, as we look towards completion of these various projects, we expect operations to normalize and realized favorable impact to our adjusted EBITDA margin from our restructuring activities of 75 to 125 basis points year-over-year. Excluding volume considerations, we expect our footprint optimization, restructuring and material cost-out activities to generate 0 to 25 bps overall adjusted EBITDA margin improvement year-over-year for the full year 2026. We anticipate being at a 23.5% adjusted EBITDA run rate in the second half of 2026 in a volume-neutral environment. As I said, we have not taken volume impacts into this analysis and plan to update those assumptions as well as provide further insight into our restructuring activities when we initiate our formal 2026 guidance in conjunction with our Q4 earnings call in February. I will now turn the call back over to Ivo. Ivo Jurek: Thank you, Brooks. Moving to Slide 12. This is our illustrative update on our walk towards the midterm stated adjusted EBITDA margin target of 24.5%. In 2025, we have experienced a highly fluid business environment and continuation of prolonged negative PMI prints, resulting in constrained volume performance. With that as a backdrop, we now anticipate to complete our initial phase of the committed footprint optimization projects by mid-2026 and still expect that those projects will achieve 100 basis points of savings from the footprint optimization program exiting 2026. Coupled with our ongoing focus on material cost savings and 80/20, we estimate that our adjusted EBITDA margin will be nearing 24% on a run rate basis exiting next year. Most importantly, this does not assume any margin benefit from a potential broad volume recovery in our industrial end markets. While the end market volatility has not been supportive, we are very pleased with our execution and performance to date. We believe the prospects for incremental improvement over the midterm are positive, especially as the end market conditions begin to potentially inflect. With that, let me summarize our views on Slide 13. We believe we have executed well, delivering solid results given the lackluster demand environment we have encountered throughout this year. We generated record third quarter adjusted EBITDA margin rate and achieved our highest quarterly core growth rate since Q2 2023. For the year, we are on target to deliver adjusted EBITDA margin expansion and earnings growth in a muted demand backdrop. We continue to make progress with our Personal Mobility and data center strategic initiatives and believe we will encounter a better industrial demand landscape in 2026. We continue to adjust our structural cost base, and we expect our savings to begin to compound during the second half of '26 and anticipate our adjusted EBITDA margin rate to be approaching near 24% exiting next year. With that as a baseline level, we would expect any volume improvement to be additive to our margin performance. Lastly, we believe we now possess a strong balance sheet that can be utilized to support various potentially value-creating capital deployment options. Our Board recently approved a new $300 million share repurchase authorization. Separately, debt reduction continues to be an option. We just repaid $100 million of debt during the third quarter. And of course, at this juncture, our ability to execute bolt-on M&A transactions is increasing as we move towards our midterm financial leverage target. Before taking your questions, I want to thank the approximately 14,000 global Gates associates for their diligence and commitment supporting our customer needs. With that, I will now turn the call back over to the operator for Q&A. Operator: [Operator Instructions] Your first question comes from the line of Nigel Coe with Wolfe Research. Nigel Coe: I just wanted to maybe clear up some questions around Slide 12. So it's very clear that the 24% for 2027 is -- should be viewed as more of a floor here, right? I mean if we continue to just bump along the bottom here, 24% is where you see margins and then volume gives us some upside. I just want to make sure that, that's the case. And then maybe just kind of dig into some of these kind of costs you're flagging for the first half of the year? And what sort of benefits you see from this ERP implementation? Ivo Jurek: Yes. Thanks, Nigel. Let me take the first part of your question, and then I'll pass it off to Brooks on the ERP side and some of the other attributes of the cost question that you've had. But thinking about Slide 12, right? So that margin walk was created, if you think about it, more to provide you with an opportunity to model the impacts of the transitory costs to be incurred as a part of our restructuring program restart. And that program is intended to significantly improve our cost structure, all else equal, right? So not representative of growth forecast for our top line in '26. So to your point, this is kind of a foundational floor. We do expect growth in '26. The margin impact for the full year in our presentation deck, however, excludes any benefit from revenue growth. Frankly, because we are not providing you an updated guidance for '26 yet, as you know, we will do that at the conclusion of our Q4 fiscal year, we'll do that in January, right? So we -- look, we certainly believe that many of our end markets are at trough or close to troughing, as I said in my prepared remarks, and we believe that they will turn positive in '26. In addition, we are excited, and I said it on a number of these calls over the last couple of quarters, we are quite excited about the strategic revenue generation initiatives for next year, and we certainly expect them to contribute nicely to our growth trajectory in 2026. With that, Brooks, if you want to take the second part of the question, please? L. Mallard: So there's several things that we expect from a onetime cost perspective. Relative to the restructuring and the headcount alignment as we do the restructuring, there'll be -- we expect some additional freight costs, expediting costs, redundant labor costs and productivity costs as we move through some of these relocations, and that's normal course of business. We do expect, to Ivo's point, I want to remind everyone, a lot of the backdrop for the reason we're doing a lot of these footprint optimization activities is to support our future growth. And so yes, we're going to get a cost benefit. But even moreover, we're going to have additional capacity, both from a machinery and equipment perspective, but more importantly, more capacity from a labor perspective to ramp through the cycle. From an ERP perspective, we're replacing a fairly antiquated system with a new system that's going to provide us much more capability in terms of warehouse management, in terms of managing the front end of the business to the back end of the business. But we really haven't built any of those benefits into our outlook. We've been very neutral on building those benefits in, but we definitely expect to improve our efficiencies and capabilities and again, support the strategic initiatives of the company with the ERP. But it does take -- we do think it will take us the first half of the year to get that all lined out, which is why we wanted to be transparent and provide you an update of the cost and the impact associated with those activities. Nigel Coe: Yes, we definitely appreciate that. Just wanted to double-click on growth. You mentioned growth about 4x or 5x there. What kind of tailwinds or visibility do you have right now on some of the structural growth vectors like data center, Personal Mobility. I'm guessing you're going to have some price carryforward for next year. But more importantly, when you talk about the bottoming in some of these Off-Highway, On-Highway markets, how much visibility do you have on production schedules for your OEM partners? And do you have any visibility on maybe kind of a turn in production for those end markets? Ivo Jurek: Yes, sure. So look, great question, Nigel. Thank you for asking that. Very, very optimistic, as you probably noticed over the last couple of earnings calls about some of the growth vectors such as Personal Mobility and liquid cooling and data centers. The Personal Mobility, I think on the last call, we suggested that we anticipate kind of over the next 3 years. And again, while that's not going to be every quarter, I want to kind of remind everybody that things are not always linear, right? But if you kind of take next 3 years, Personal Mobility, we anticipate Personal Mobility to grow kind of 30% year-on-year compound annually between kind of '25 and '28, right? And there will be time that it's going to grow 22% to 25%. There will be time that it's going to grow 35%. But on aggregate, we believe that, that's going to grow about 30% compound annually. And we have that confidence because of the design wins that we've been talking to you about over the last couple of years. The destock post-COVID has occurred. And obviously, we are delivering a real nice acceleration to the growth trajectory, and that will continue into the next couple of -- 2 to 3 years. So we are quite positive about that. We've talked about the accelerated adoption of liquid cooling. And while I'm not ready to give you a forward-looking revenue forecast for '26 today, and I'll do more of that on our next call, we are seeing tremendous amount of activities out there. And there are some real positive attributes because what we are realizing is there's more cooling that's required, not less in the projects that we are involved with. And we are seeing pretty substantial growth across the various customer base in the design-in activity. And that's a really good precursor into what will be occurring over the next 12, 24, 36 months. So think about it kind of in a similar vein as when we were discussing Personal Mobility. So we believe that over the next 1 to 2 quarters, we're going to be giving you some more tangible attributes associated with the dollars and cents about what that's going to represent in '26 and '27. But so far, quite optimistic about what we see there. Our Automotive Replacement market, while we don't necessarily talk about it as necessarily a growth torque, we have been growing that market quite substantially and quite nicely over the last couple of years, provided a great deal of stability for our revenue generation, and we believe that, that's going to continue as we move into '26, '27 and '28. There's still plenty of opportunity, plenty of firepower left to be able to continue to grow that market in that kind of 2% to 3% range, which is rather nice for kind of more mature type level of applications. So put that aside from kind of the incremental over and above, if you would, growth trajectory to kind of your standard base. Then when I take a look at some of our more traditional end markets, look, we certainly believe that the auto OE business, while it does not represent a significant size of our business, that's stabilizing, and we believe that we will start seeing more additive growth rates in North America and ultimately in 2026 in Europe. So we believe that those markets are stabilizing post Liberation Day announcements as these companies are starting to -- different countries are developing different agreements with our administration, and I think things are starting to stabilize there. I think people are becoming a little more optimistic about that end market. We see some positive, I would say, formation of green shoots in certainly in commercial construction end market, and we are starting to hear more positive news about what our customers expect there. Ag is still challenged, and I talked about ag actually got incrementally worse for us in Q3, while we have delivered maybe a positive core growth overall in ag, it got a little bit worse than what we've anticipated, but we do believe that, that's troughing. And that while it's not going to go off to the races in '26, it's going to be significantly less bad than it has been over the last 8 quarters. And so we are somewhat positive about that. And then ultimately, the diversified industrial market, we've talked about it being kind of more kind of bottoming out over the last couple of quarters, and we certainly believe that that's bottomed out and that should start being more accretive in 2026. So I don't want to give anybody an idea that we have come out and we have given a forecast that we will not anticipate to have an organic growth rate in 2026. We're actually quite optimistic about it, but we just wanted to give you a visibility on modeling of certain structural cost removals that are going to be going in and out over the first half of the year and resetting our cost structure, becoming more competitive and giving ourselves the opportunity to actually support the growth rate, which we are very optimistic about. Operator: Your next question comes from the line of Deane Dray with RBC Capital Markets. Deane Dray: I wanted to circle back on Slide 12 again. I know you've given this as a margin walk. But -- and I don't know if you provided this previously, but can you give us some dimensions of the restructuring? Like how many plants, where are they? What kind of headcount reduction, the dollar amount being invested and the dollar kind of payback cadence? I know you're providing it as a margin, but it would be helpful if you provide that dimension to it as well. Maybe you're restricted. I know if it's outside the U.S., you've got some works council, but maybe if you could start there, that would be helpful. L. Mallard: Yes. So look, Deane, it's fairly complicated because it's a combination of -- if you remember when we said we were doing the restructuring, it was mostly around North America and EMEA, right? So we'll kind of leave it at that we're closing multiple factories, and there'll be hundreds of affected employees. I would say the payback generally ranges from 1 to 2 years, depending on the amount of severance, the amount of move, the amount of investment that we need to make. When we talk about the headwinds, just to kind of size it, we talked about the 100 to 200 bps and 25 to 75 bps that's kind of a $30 million to $35 million onetime expectation for the first half of 2026. And that also includes the system conversion and all the costs associated with that. And so from a -- I would say the other part, if you think about our increased capital spend over the past couple of years, that's part of the investment as well, right? And so if you look at what we spent over the past couple of years, you could say maybe $20 million last year, $20 million this year. So that's part of the investment as well. So when you calculate all that up, that kind of gives you that 1- to 2-year payback, again, depending on the timing of when the projects get implemented and when the savings come through. And as I said, we feel as we exit the second half of '26, that the first part of all that restructuring will be complete, and you'll see the flow-through in the second half. But let me also say that we're still working on additional projects. And there's still money that we're spending right now that's kind of part of that group that investment I talked about that we haven't put into our run rate yet that we haven't disclosed yet, right? Because we -- when you think about the back half of the year, there's probably $5 million per quarter, so $10 million in the back half of the year of savings, which will also roll over into the first half of '27. So that's kind of $20 million or half of the $40 million. So we're still working on the other half. And those projects will be implemented, and we'll disclose those here over the next year or so. Hopefully, that kind of gives you enough color in terms of how all those things are working. Deane Dray: Yes, it really did. I appreciate that additional color. And then as a follow-up, I was hoping you could take us through kind of the tariff impact, pricing? And do you see any -- and it sounds like there could be some volume falloff because of some demand destruction, but just kind of where does tariff stand on a net basis? L. Mallard: So let me take the cost piece, and I'll let Ivo talk about the volume piece. So from a cost basis, we're okay in terms of the total EBITDA impact. What I would say, though, as you look at some of the gross margin dilution in the back half of 2025, and that will fall through to EBITDA dilution. We're probably seeing 30 to 40 bps of dilution because we're not getting anything in terms of bottom line add from the tariffs, right? We're just kind of holding our own and making sure that we don't cost ourselves money. So the impact from a profitability perspective is kind of 30 to 40 bps, $0 from a total EBITDA dollars perspective. And then I'll pass it over to Ivo to talk about the volume piece. Ivo Jurek: Yes, Deane, I think that that's -- I'm not sure whether I would call it volume destruction or what have you, but I think I would probably call it more of a short-term transitory growing pains. I believe that there's probably some impact to ag in particular. Certainly, the trade environment has gotten more challenging, particularly for farmers. And that's kind of what we have seen in terms of probably delayed recovery in ag overall. And as I said on the call, ag in Q3 got slightly worse than what we've anticipated at the beginning of Q3 around the edges, but we do believe that, that market will also start normalizing as we enter '26 and sometimes during '26, it should start getting a little less negative. So around that, I think that you're starting to see more stabilization around the auto businesses. Overall, I think you start seeing forecast maybe getting a little more positive in terms of production output by the carmakers. So I think that some of those transitory headwinds are probably abating. And as we enter '26, I think the environment should be more stable. Operator: Your next question comes from the line of Julian Mitchell with Barclays. Julian Mitchell: Maybe just the first question, trying to drill into perhaps a little bit the sort of exit rate from 2025. Just looking at the fourth quarter, for example, you mentioned Ivo was sort of firming of the industrial environment in the prepared material. But I think the revenue guide seems to embed sort of fairly normal seasonality for the fourth quarter. Just wondered if you could clarify that? And then similarly on kind of the EBITDA rate in the fourth quarter, often down sequentially. I think this time, it's sort of flat to up. Just wondered if there was anything to call out there in terms of enterprise initiative benefits or mix or something. Ivo Jurek: Yes. So look, Julian, I think that you said it correctly. I mean we -- if you think about our Q4 revenue, it really is kind of taking exit rate Q3 environment, applying normalized seasonality. So there really isn't anything peculiar. I wouldn't say that we have baked in any further recoveries. We're obviously very cautious around ag but we're taking that present environment, and we say you're probably not going to really see any tangible change in Q4 and taking into account that many of these end markets, many of our customers have had somewhat challenging years. I don't see anybody trying to preposition themselves for 2026. And that, in a way, I would say, is positive that folks are not prepositioning themselves. I think that people are now focusing more on '26. And we are seeing -- or we are hearing certainly more kind of an optimistic outlook about '26 in certain segments of our business. So that being said on the on the demand. And I'll let Brooks chime in on the EBITDA for Q4. L. Mallard: Yes. So from a Q4 perspective, we're still seeing some -- we're seeing some of our initiatives roll through around material costs. That's sort of -- that's offset by some of the tariff dilution and kind of normal seasonality in terms of Q4. We're pretty -- I think we're pretty happy with where our inventories are in terms of service and then building -- being ready for some of these activities in Q1. So we're not building significant inventories as we head into the end of the year. So all in, nothing -- some puts and takes, right, in terms of things working in our favor, other things that we're taking on and making sure that we're able to deliver EBITDA growth year-over-year, but nothing structurally different as we end the year. Ivo Jurek: But Julian, we are also executing rather well, right? I mean we had 18% EPS growth in Q3, record level of margins in a reasonably muted end market environment. So I think that the organization is doing a good job in managing during some of these challenging times and frankly, delivering differentiated operating results. Julian Mitchell: Great. And then just one quick follow-up on the sort of cash conversion. I think you walked down the guide a bit there. There's some higher cash restructuring. Should we expect much improvement in conversion next year? Or no, because of the EMEA and North America restructuring charges will sort of weigh on next year? L. Mallard: Yes. We'll have to take a look at that. I mean I would think that the bigger part of what's affecting us in 2025 is the restructuring charges that get -- that are an add-back to adjusted EBITDA and adjusted net income, but flow through the free cash flow and then the higher CapEx as well. I would say that we're going to continue to spend CapEx, although I would imagine it starts to dial down just a tad in 2026. And we'll probably see some small headwinds related to the restructuring cash out versus how it shows up in adjusted net income, but probably not as much as we do this year. And again, we called out the headwinds. Those are going to show up in the numbers and show up in the cash. And so that won't really affect the overall cash conversion number because those will be in both places. So we'll update that, and we'll make sure that we call that out specifically when we update our guidance for 2026. But again, that's really just a kind of -- it's in one number. It's not in the other number. And so it's a little bit out of balance. We need to make sure we call that out in our cash conversion. Operator: Your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Jeffrey Hammond: Appreciate all the color. So just to kind of put a bow on this noise around margins and the margin bridge because I think that the message is getting confused that next year is a transition year and maybe your long-term target is getting pushed out. It seems like to me, you had said to get to your margin target, you needed 100 to 150 basis points from volume, and that hasn't played out. And it seems like you've maybe outperformed on internal execution, material savings and the volume has been the whole, but maybe just level set me on that. Ivo Jurek: I think, Jeff, you said it perfectly. We've actually -- we're actually delivering on our midterm targets without getting any help from the underlying macro. And we feel really good about that, right, because it's really tough to execute in such negative PMI environment. And so I think that there was the point of delineation where we wanted to ensure that we communicate to the market that the company is executing well. We certainly believe that the volume is going to inflect. We all certainly know that we -- none of us are very good at being able to call the inflections in the macroeconomics, taking into account that there are so many different moving pieces associated with trade policies and industrial policies and kind of the global behavior of these end markets itself. But I think all of us would anticipate that after 36 months of negative PMI, we would be on a verge at some point in time to see some inversion. And when that occurs, obviously, that's incremental to what we have described in our presentation. Jeffrey Hammond: Okay. Great. And then just on capital allocation, I sense a little bit of a tone change where you've kind of been saying before, hey, we're just going to buy back our stock. The market doesn't appreciate what we're doing here and the multiple hasn't expanded relative to our peers. But now it seems like you're maybe talking a little more about bolt-ons. And so am I reading that right? Or do we lean in on a day where our stock is down 6% and the market is confused? Ivo Jurek: Yes. Look, I mean, our stock is -- I think our stock is inexpensive. It's trading at a valuation that is not akin to the performance that the company is delivering. So we'll certainly lean into buybacks. The Board authorized $300 million of buybacks. So we'll certainly be utilizing what we can. But the company as well is generating tremendous amount of free cash flow. So I think that we can do all of the things that have been outlined as plausible outcomes for capital deployment. We've bought back -- I mean, we've paid down some more debt. We will be strategic about buying back our stock, but we also believe that as our balance sheet is trending towards below the 2x leverage that we have kind of put in a place as a demarcation point for us. And so hopefully, I won't have to be talking about leverage in the future. We believe that we can use all 3 levers for capital deployment, and we will be leaning more aggressively towards bolt-on M&A. Operator: Your next question comes from the line of Andy Kaplowitz with Citigroup. Andrew Kaplowitz: You've been talking about accelerating footprint optimization and doing 80/20 since your Investor Day 1.5 years ago. But obviously, your growth since then has been somewhat slow. So I'm just trying to figure out if you're accelerating or enhancing any of your restructuring plans versus when you updated us at that Investor Day. And then maybe can you update us on how 80/20 is impacting Gates as you go into '26 and beyond? If you do organically grow, can you do core incrementals over 40%? Ivo Jurek: Yes. Look, I think that we've -- I want to kind of be fully transparent, right? So as Liberation Day came forward in April, we kind of took a little pause to try to understand what will the new mercantile regime look like? And how do we think about our overall operating structure as a company. And obviously, we have been in region for region for a long time. So we just wanted to reassess and get a better sense of what is happening in the world. I think that as we got more comfortable with what we are seeing and how we are organized, we've come to a conclusion that our original plan was the right plan. As Brooks indicated, we need to be capable of having an access to labor that will give us an ability to flex up and down as these cycles occur. We believe that we are on the verge of an up cycle. So we've got to be positioned well to support the growth that we anticipate over the next upcoming up cycle. And so we are really just executing on our original plan, Andy. Nothing really has dramatically changed around what we have anticipated vis-a-vis our footprint optimization and restructuring. So we are -- I think we are in a very, very good shape, and it also validated that our plan was the right plan. We just needed to hit a pause for a couple of quarters. So that's kind of beyond us, and we are moving forward. As to 80/20, look, 80/20 material cost reductions and driving a better operational focus has been really the attributes that have given us the opportunity to outperform what we've anticipated during our Capital Markets Day in 2023 and still deliver on our midterm targets without the growth. So it's a very powerful tool. We again believe that we are very early innings. We take a look at somebody like ITW that has been doing it for over a decade plus, and they continue to deliver good margin expansion. We believe that we not only have the opportunity for a very certainly intermediate future to continue to support 80/20 as the key attributes of our enterprise initiatives to add to our profitability, but also grow our franchise through our strategic growth verticals. So we think that we can do both, and we think that 80/20 is going to be very additive to us. And if you exclude the benefits from restructuring, and again, I want to be very specific. If you exclude the benefits that we have described on Slide 12, we still believe that in a normalized growth environment that we anticipate kind of in '26 and beyond, we should be generating 30% to 35% incremental over and above the benefits that I described on that page. Andrew Kaplowitz: Ivo, that's helpful. And then just in terms of growth by region, I think you explained what's going on in North America well. But you also mentioned EMEA returned to growth, which is interesting, and China continues to put up durable growth for you guys. So maybe you could sort of click on or give us a little more color about what you're seeing. Ivo Jurek: Yes. Look, I mean, I think that North America has been probably most challenged from kind of agriculture end market exposure that got slightly worse. And remember, we -- it wasn't a ton of dollars that we -- that it got around the edges less supportive than what we've anticipated. So it's just around the edges, less supportive there. The other end markets, look, I mean, automotive overall grew nicely. Automotive Replacement grew really well for us in North America. Our Industrial Replacement market is growing. So the things are not -- they're not bad in any form of imagination. They're kind of around what we've anticipated with maybe slightly worse behavior in the ag environment. South America has been tough last quarter, but it's been predominantly tough after extraordinary several quarters or maybe 6 quarters of significant growth. So it's kind of a more normalization. And we again anticipate that South America is going to start moving into the growth phase as we kind of exit '26 -- I mean, '25 into '26. Yes, I mean, Europe has been a little bit surprising to us, right? I mean it's behaved a little bit better than what we've kind of envisaged with positive core growth. I would say that the auto markets are quite negative in Europe. I don't think I'm telling you anything that has not been already communicated, but our AR business is performing well. Our industrial first-fit, particularly around the commercial construction segment and mobility has been performing quite well. And IR has been stabilizing and starting to perk up a little bit in Q3. So maybe around the edges, more green shoots than less. And China has been okay. Automotive has been doing quite all right for us in China. Industrial Replacement has been doing quite all right for us. So China has been behaving more or less as we have seen over the last several quarters. And then East Asia and India is growing. I mean we are growing nicely. Our Automotive Replacement business in India. The industrial first-fit business is doing well. I mean I think that India is poised to continue to be on a trajectory of nice growth with the overall economy evolving nicely and becoming a real alternative to China over the midterm. So we are quite optimistic about what we can see out of India in particular. So overall, we're actually reasonably tending to be more optimistic than less. And we believe that '26 should be more positive than perhaps might have been taken out of our release today. Operator: Your next question comes from the line of Tomo Sano with JPMorgan. Tomohiko Sano: I'd like to ask about the data centers. And of the $322 million in Fluid Power revenue this quarter, how much was related to data center sales? And what is your expectations for 2025 data center revenue and the conversions of your $150 million plus pipeline in 2026, please? Ivo Jurek: Yes. We are not going to be addressing exactly the revenue flows because it's still reasonably a small size of revenue that is growing rather nicely for us, but from a very, very small base. So I don't think it's worth to -- at this point in time to spend time yet on the sizing of this. It's in the millions, not in the tens of millions yet. Our design-in activities remains very, very robust. I mean, we see a significant number of new customers that are coming to us, and we are working with on new design-in opportunities. And we will be providing you with some additional color in January or early February on our Q4 earnings call. But we do continue to be quite optimistic that the data center growth as a vertical is going to ramp up rather nicely. And we still feel that, that $80 million to $200 million, $100 million to $200 million by 2028 is certainly -- doable for us as an intermediate target for us over the next 2 to 3 years. We also incidentally are going to be at the show Supercompute next, I think, 2 weeks from now in St. Louis. So we would invite anybody to still buy and have a conversation with us about some of the new products, innovation, and we can provide additional color on what we are working on from a technology perspective there as well. Tomohiko Sano: And a follow-up on pricing perspective. Could you talk about how effective you have been in passing through cost inflation in Q3? And what is your pricing strategy for 2026, please? L. Mallard: Yes. Well, look, I mean, we've -- going back, I mean, we've always been, I would say, as effective as anybody in terms of passing pricing through from an inflation perspective. We -- when the tariff -- all the new tariffs came out, for the most part, we're able to cover that with pricing. I mean there are certain regions that are a little bit more pricing challenged, particularly in Asia, where we're able to offset it more operationally than through pricing. We've always been very transparent in terms of we're going to cover material utility inflation on a yearly basis with pricing. And then the 80/20, when we implemented 80/20, we added a value pricing lever to our pricing kind of tactical approach. We make hundreds of thousands of SKUs, right? And so some of these SKUs, you want to be more competitive on. Some of them, you're the only ones that make it and you can price those based on the value you bring because you may be the only one that makes that particular part. And so we continue to use our 80/20 playbook to optimize pricing. And in the aggregate, we're always going to make sure that we use pricing to cover our material and utility inflation. Operator: That concludes our question-and-answer session. I will now turn the conference back over to Rich for closing comments. Richard Kwas: All right. Thanks, everyone, for joining. If you have any further questions, feel free to reach out. Otherwise, have a great rest of the week. Take care. Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the TETRA Technologies Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Kurt Hallead, Treasurer and Investor Relations. Kurt, please go ahead. Kurt Hallead: Thank you, Tiffany. Good morning, and thank you for joining TETRA's Third Quarter 2025 Earnings Call. The speakers for today will be Brady Murphy, Chief Executive Officer; and Elijio Serrano, Chief Financial Officer. Before we begin, I'd like to call your attention to the safe harbor statement in our Form 10-Q. Some of the remarks we make today may be forward-looking and are subject to risks and uncertainties as outlined in our SEC filings. Actual results may differ materially from those expressed or implied. In addition, we may refer to adjusted EBITDA and other non-GAAP financial measures. Please refer to our press release for reconciliations of GAAP to non-GAAP measures. These reconciliations are not a substitute for GAAP financials, and we encourage you to refer to our 10-Q that was filed yesterday. After Brady and Elijio provide their comments, we will open the line for Q&A. I will now turn the call over to Brady. Brady Murphy: Thanks, Kurt, and good morning, everyone. Welcome to TETRA's Third Quarter 2025 Earnings Call. Late last week, our colleague and good friend, Elijio, announced that he will retire at the end of March next year. As part of TETRA's succession planning process, Matt Sanderson will replace Elijio as CFO. Matt is currently Executive Vice President and Chief Commercial Officer, having joined TETRA in November of 2016. Through the end of March 2026, both executives will continue in their existing duties and responsibilities to deliver and execute on the company's One TETRA 2030 objectives. Upon his retirement, Elijio will continue to serve in an advisory capacity for the company. Since I became CEO in May of 2019, Elijio has played a key role in working with me and our Executive Team to refocus the company on our core fluid chemistry expertise and the results speak for themselves. From guiding the company through arguably the industry's most challenging period during the COVID-19 pandemic through the divestiture of our general partnership in CSI Compressco and shaping our One TETRA 2030 strategy, Elijio has been a strong contributor to our current success and future outlook. I, the Board of Directors and the rest of the Executive Team are very grateful for his contribution and are pleased he will continue to serve in a non-executive advisory role. Fortunately, we have a strong Executive Team that many of our investors had the chance to see and hear from at our recent Investor Day at the New York Stock Exchange in September. And as part of our succession planning process, Matt is well-prepared for the transition to CFO. The recent addition of Kurt Hallead as VP of Investor Relations, FP&A and Treasury, along with Katherine Kokenes as CAO, has significantly strengthened our current and future financial organization. I'm confident there will be a smooth and seamless transition. Now I'll summarize some highlights for the quarter, provide an update on our strategic initiatives before turning the call over to Elijio to provide some more details about the financials and our guidance. Our employees delivered a very strong third quarter results against the backdrop of an ongoing challenging industry environment. Our third quarter, combined with our first quarter year -- first half year results, allowed us to reach the highest revenue of $484 million and adjusted EBITDA of $93 million in the past 10 years. Mainly driven by chemicals and deepwater completion fluids, this 10-year record is further highlighted by the fact that the overall deepwater rig count is 40% lower than it was 10 years ago, emphasizing the significant deepwater market penetration we have achieved. For the quarter, we achieved revenue of $153 million and adjusted EBITDA of $25 million with adjusted EBITDA margins of 16%. This represents an 8% year-over-year increase in revenue and 7% rise in adjusted EBITDA, driven by continued strength in our offshore completion fluids and industrial calcium chloride business. Third quarter Completion Fluids & Products revenues increased 39% compared to the previous year period, with adjusted EBITDA margins rising by 6.9 -- sorry, adjusted EBITDA rising by $6.9 million. Through the first 9 months of the year, Completion Fluids & Products adjusted EBITDA margin reached 34.5%, a 500 basis point improvement compared to the same period in 2024. This was driven by a successful completion of three TETRA Neptune wells in the Gulf of America, increased demand for high-density zinc bromide completion fluids, strong contributions from Brazil deepwater projects and robust calcium chloride results in Northern Europe. For full year 2025, we believe completion fluids may reach a 10-year high. As highlighted at our recent Investor Day, the long-term outlook for the Completion Fluids & Products business remains strong, driven by deepwater completion activity, exceptional performance in our industrial chemicals business and a material increase in battery electrolyte revenue as our customer ramps up deliveries from its first automated production line. Water & Flowback Services revenue declined 2% for the second quarter and 18% year-over-year. Adjusted EBITDA rose 18% sequentially due to better cost controls but fell 33% from the same period last year on lower activity. Sequential adjusted EBITDA margins improved by 200 basis points to 12%, driven by higher utilization of our patented automated TETRA SandStorm and Auto-Drillout units, efficiency gains and cost controls. This performance was achieved despite a 12% sequential decline in U.S. frac crew count and a 27% decrease compared to the second quarter of 2024. Despite a muted outlook for the U.S. frac crew count, we expect our onshore testing and flowback business to benefit from three industry trends: longer laterals, increased sand and water usage and a continuous rise in overall volumes of produced water. Outside of the U.S., we are seeing the benefit of material increase in overall unconventional activity in Argentina and the Middle East. We are currently 100% utilized with our Automated SandStorms units in Argentina and have recently been awarded TETRA SandStorm work in the Kingdom of Saudi Arabia. In Argentina's Vaca Muerta region, we've been awarded five contracts related to production testing, SandStorms and two production facilities, one of which is now operational and the second is expected to go live in the first quarter of 2026. These recent wins in Argentina, utilizing the technology we've developed in the U.S. on conventional shale plays are expected to almost double our revenue next year in Argentina, helping to minimize the uncertainty in the U.S. onshore activity. With respect to our Arkansas bromine plant, we've generated $58 million of base business free cash flow and invested $28 million in the project through the first 9 months of this year. We are on schedule and under budget for Phase 1 of the project and remain confident that the plant will be fully operational by the end of 2027. The plant will have the capacity to process 75 million pounds of bromine per year, which is more than double that of our current long-term third-party supply agreement. This will also enable TETRA to generate between $200 million to $250 million in additional revenue and between $90 million and $115 million of adjusted EBITDA, as noted in our definitive feasibility report. Adjusted EBITDA target contribution is underpinned by lower input costs and additional volumes for the battery electrolyte and deepwater completion fluids business. At our Investor Day on September 25, 2025, we unveiled One TETRA 2030, a strategy focused on leveraging our core fluids chemistry expertise into new high-growth end markets, notably delivering battery electrolytes for long-duration energy storage as well as oil and gas produced water desalination solutions. Our goal is to more than double revenue to over $1.2 billion and triple adjusted EBITDA to over $300 million by 2030. We're very appreciative of the attendance and the interest in our Investor Day presentation. The feedback has been overwhelmingly positive and supportive of the strategy and the Executive Team that will deliver the One TETRA 2030 targets. On the electrolyte front, we're encouraged by the progress Eos Energy continues to make in automating their first manufacturing assembly line and its recent announcement that it will expand its manufacturing capacity in 2026. As the AI push continues to drive increasing energy demand, the importance of power stability through zinc bromide long-duration storage systems appears to be gaining traction, mainly due to its safety, scalability and domestic sourcing. To account for that, we have completed the installation of our bulk delivery system, which will significantly increase electrolyte volumes in 2026. Moving to Water Treatment & Desalination; the U.S. Oil and Gas industry is facing increasingly urgent challenge in managing produced water, particularly in the Permian Basin, where over 6 billion barrels of wastewater are injected into saltwater disposal wells annually. This traditional underground injection method is becoming less feasible as downhole formation pressures keep increasing and storage pressure -- storage [ core ] pressure fills up. With the commercial launch of TETRA Oasis and the engineering design of the industry's first 25,000 barrel per day produced water treatment and recycling facility, TETRA is well-positioned to lead in solving this problem. The front-end engineering and design has been completed and the estimated capital and operating expenses are within our initial projections for the project. This step is facilitating commercial discussions with multiple customers, and we remain confident that we could sign our first commercial contract in the coming quarters. We have a strong free cash flow generating base business and our One TETRA 2030 strategy will enable us to leverage our fluids chemistry expertise into new high-growth end markets. We believe this transformation will enable TETRA to generate over $100 million in annual adjusted free cash flow by 2030 and drive meaningful cash returns for our shareholders. Now I'll turn it over to Elijio to discuss the financials. Elijio V. Serrano: Thank you, Brady, and thank you for the kind words. I'm not going anywhere nor slowing down between now and next March. We've got a job to do. We ended the third quarter with $67 million of cash on hand and net leverage ratio of 1.2x. Throughout the year, our focus has been on generating free cash flow from the base business to maintain a strong balance sheet and to self-fund as much of the bromine project as we can. We have accomplished this through aggressive cost reductions in our onshore business, carefully scrutinizing all capital expenditures and remain very focused on managing our working capital. Working capital was $113 million at the end of September, an increase of only $4 million from year-end. As a comparison, third quarter revenue of $153 million was $19 million higher than the fourth quarter, yet working capital was only up $4 million. DSO has improved two days from the fourth quarter. This highlights the focus we have on generating cash from the base business by managing inventory and receivables. Since the end of September four weeks ago, our liquidity has further improved, increasing $10 million from $208 million to $218 million, inclusive of the $75 million delayed draw feature that is available to TETRA for the bromine project. In an effort to further reduce our cost structure and reduce corporate G&A expenses, we are expecting to relocate to a new corporate office later this quarter. The new office is a short distance from the current office in the Woodlands. Compared to our current lease, we expect to reduce lease expense by approximately $2 million per year. We updated our 2025 guidance. Income before taxes will reflect a fourth quarter noncash charge as we early terminate the existing lease and move into a new lease with significant lease concessions for the first two years. With respect to the outlook, total year projected EBITDA is now expected to be between $107 million and $112 million. This compares to our prior total year estimate of between $100 million and $110 million. And this takes into account the stronger-than-expected third quarter that benefited once again by strong offshore activity. The fourth quarter is expected to see continued weakness on the onshore side. The timing of deepwater projects in the fourth quarter will dictate whether we are near to the lower or the higher end of the guidance range. Recall that as deepwater activity improves, some projects moving between quarters can have a meaningful impact on this or the next quarter, and some of these projects are hard to predict exactly when they will be completed. U.S. onshore remains challenging, but we continue to leverage automation, technology and strong cost control to keep our margins in the double-digit range. The wins in Argentina will be a tailwind for us next year and are expected to improve our onshore margins. Eos and the deepwater market will also be a tailwind for us next year. Let me close by summarizing what I believe to be the items everyone should focus upon. First, the third quarter was another quarter where we outperformed with stronger-than-expected revenue, EBITDA and cash flow. We like the cadence that we are on. Second, we continue to win work both offshore and now with the significant wins in Argentina that Brady mentioned. The base business is performing in a challenging market environment. Third, the immediate milestones we laid out as the road markers toward 2030 are materializing. Eos volumes are increasing and Eos is launching the build of their second line. The bromine plant remains on schedule and within budget, all self-funded. The front-end engineering study for the first desalination facility was completed on schedule and confirm our CapEx and OpEx numbers. Now we are changing terms and pricing with customers. And we are expanding our business internationally with the Argentina wins that Roy mentioned during the Investor Day as a goal. The journey towards One TETRA 2030 remains on schedule. Brady, let me turn it back to you for closing comments. Brady Murphy: Thanks, Elijio. Despite the ongoing macroeconomic and energy market uncertainty, we have strong conviction in the longer-term outlook, our ability -- proven ability to differentiate in the markets in which we operate and our One TETRA 2030 strategy. With that, we'll turn it open for questions. Operator: [Operator Instructions] Your first question comes from the line of Bobby Brooks with Northland. Robert Brooks: And I want to congrats Elijio on an incredible career. Just first on the Oasis commercial engineering. It's great to hear you completed the FEED study, but I just wanted to understand, are there any further engineering work that needs to be completed or just maybe more broadly, what are the next steps there? Brady Murphy: Yeah. No, certainly, Bobby. Yeah. No, the FEEDs is an important milestone because it validates what we had estimated in terms of the CapEx and the OpEx and the overall financials for our desalination technology. 25,000 is still a relatively small-scale commercial plant. We expect, in fact, the discussions we're having are much larger facilities where the economics will even get improved from there as we get higher volumes. But the next steps are really socializing, discussing these -- the economics financials with the customers that we're engaged with. As we've mentioned before, we've got 7 NDAs in place. Those customers have been waiting for us to get to a point where we could have commercial discussions and those discussions are initiated. So as far as additional engineering, we have enough confidence in the engineering that's been done to this point to enter into commercial discussions and a contract. But there is still detailed engineering that has to be done in order to construct the final plant. So that will be part of the next steps. Robert Brooks: Would that detailed engineering to then construct the final plant would -- is it reasonable to think that that would be kicked off once a commercial agreement was signed or would that maybe come before that win? Brady Murphy: Yeah. We'll most likely -- I mean, we have high confidence in commercializing this technology. And so we're already getting a proposal together from the engineering firm that we're working with to start the detailed engineering ahead of any commercial contracts. Robert Brooks: Very helpful color. And then just on the CFP sales, so a step down about [ $90 million ] sequentially, but obviously, it's more importantly up $15 million year-over-year. And obviously, a big factor on the sequential step down is the absence of Neptune jobs and the seasonal industrial calcium chloride sales. What I was hoping to get a little bit more color on is thinking about that $90 million step down, is that all essentially the absence of those two factors? And then reversely, looking at the $15 million year-over-year increase, could you maybe break down what were the different -- break down what were the different factors that drove that growth? Brady Murphy: Elijio, do you want to take that one? Elijio V. Serrano: Yeah. So Bobby, the vast majority of it was the European calcium chloride seasonality. And recall that we also had a Neptune -- a well and a half of Neptune that we completed in the second quarter. So it was those two partially offset by the ramp-up in activity in Brazil that we've been talking about. Operator: Your next question comes from the line of Martin Malloy with Johnson Rice. Martin Malloy: Elijio, best of luck with your future endeavors upon retirement. First question I wanted to ask about was just in terms of the offshore market. It seems like it's been strengthening for you all. And when you look at the subsea tree orders for the industry, they've been trending up. Can you maybe talk about your confidence as you look forward to '26, '27? And any early indications as to whether Neptune projects are a possibility in '26? Brady Murphy: Yeah, sure. Thanks, Marty. Look, we have -- we see the same thing you do with the offshore activity from our customers' discussions as well as the subsea tree orders. So yes, we have a strong confidence in '26 and '27 and beyond, quite frankly. We think the deepwater market is going to be on a pretty nice long run, certainly as the U.S. shale play starts to plateau. But in terms of Neptune, I think our pipeline is as strong as it's ever been. So I would say we have a fairly high degree of confidence that we will be executing work in 2026 and beyond with Neptune. Obviously, we don't want to give any specific information on that until we have the well defined, the project awarded and then we can give more detail, but we have a high confidence level. Martin Malloy: Great. And for my follow-up question, I wanted to ask about on the desalinization side and very encouraging to see that you expect a first commercial project in early 2026. Can you remind us of the capital cost for one of these standard facilities and maybe your outlook for initial couple of commercial projects, whether they're going to be owned by the customer, the facilities that is -- are owned by TETRA, how that breaks down? Brady Murphy: Yeah. I'll answer the commercial model, Marty, that we are utilizing. First of all, the core technology within the plant will always be owned by TETRA. We have a couple of different commercial models. One is a licensing model -- a long-term licensing model, but TETRA will continue to maintain ownership. We have a shared capital -- project financials as well as one where the customer funds the capital if they have a lower cost of capital and they prefer to do that. So we have a couple of different models with that type of flexibility. But in either case, TETRA will maintain control and ownership of the core technology within the plant itself. As far as the CapEx goes, I think general industry numbers that are out there are $1 million of CapEx for every 1,000 barrels of desal. I would say that those numbers are relative to the core technology that we bring to the equation. There's also civil works and depending on where power is derived for the project that would be addition to that. But those are order of magnitude type numbers that we're confident in. Operator: Your next question comes from the line of Stephen Gengaro with Stifel. Stephen Gengaro: I apologize if you touched on this earlier, but at a high level, when we think about '26 versus '25 and we think about the first half of '25 in the fluids side, can you outline the puts and takes into '26, maybe even off the back half of '25, if it's easier given what we know about the deepwater fluids business in the first half? And then maybe along with that, you did mention confidence in the deepwater business. What's the timing look like? Because it sounds like the ramp recovery in deepwater is kind of a mid-'26 event based on what some of the larger cap service guys are playing. And how does that kind of fold into the timing of your product sales? Brady Murphy: Yes. I'll take that first, Stephen, and then Elijio will let you add some additional comment. So as we look forward to 2026, there's a couple of really strong growth pieces of our business. We mentioned Argentina. The awards that we've recently received, as I mentioned, we should double our revenue in Argentina in 2026 over 2025. Even the Middle East with the recent SandStorm awards, that will be some additional growth for us. Eos will be -- is anticipated to be a very large material ramp-up from us. Eos activity for us in 2025 is well up over 2024, but it's still -- I would say it's not really -- has not been a material part of our business so far. It will -- we believe it will be very much so a material business for us in 2026. As far as the deepwater work, the markets that we're strongest in, the Gulf of America, Brazil, North Sea, particularly on the Norway side, we have good visibility into the projects and our customer plans for those markets in '26. And so we -- that's why we have a confidence level because of those markets and those customers for us in '26. Now the Neptune can move the needle for us, as you well know. Our confidence level, as I've mentioned, is high for 2026. Now whether those come in the first half of the year or second half of the year, we'll give a little more color as we get into the start of the year, a little bit visibility on that. But those are all contributing factors to what we think will be a pretty strong 2026 for us on the deepwater side. Elijio, did you want to add anything? Elijio V. Serrano: Yeah. Stephen, you referenced an interesting point just on rig activity. Look, as you know, right, the rig count doesn't necessarily -- it underrepresents what our opportunity set is from the completion side. So I would not necessarily take what you're hearing from the drilling contractors about a little bit of a lull in contracting activity and suggest that there's any direct correlation to our outlook for the completion side of the business. And Stephen, to add, if you want to sequence the second half of this year to the first half of next year, Brady mentioned Argentina. We got a ramp-up occurring there. Obviously, we expect yield continues to increase volumes. Every second quarter, we see around a $15 million increase in our Europe calcium chloride business. And the Brazil market continues to perform quite nicely for us. So there's quite a few tailwinds that I think are going to benefit us in the first half of next year compared to the second half of this year. Stephen Gengaro: I don't know if you'll answer this, but if we exclude Eos, does fluids grow '26 over '25? Elijio V. Serrano: We believe so because of the deepwater market and the activity that we're seeing out there. Operator: Your next question comes from the line of Tim Moore with Clear Street. Tim Moore: Congratulations Elijio for his retirement plan, and he will be well missed. So just maybe starting out on desalination. Can you maybe provide us with an update on the beneficial reuse ag growing season for Eos? I can't remember if that needed maybe two growing seasons. And then just on the topic, you talked about FEED study and progress and everything. Can you just maybe remind us of any remaining regulatory-related milestones that that first customer might have to do in Texas to get signed off to really start the construction? Brady Murphy: Yeah. I think that the regulatory side of that equation is -- has really been constructive, Tim, over this past year. I mean we're -- again, a reminder that we're not the ones that apply for the permit. Our customers are. So they're the ones who will still own the water and will be responsible for the permitting. But all of the information that we have tells us that that is being well-facilitated by the regulators these days. So no real concerns on that side of it. As far as the program we have with EOG, we do have an NDA in place on that project. And so we're limited to the details that we can give. We can say it's going very smoothly, very successfully. And we're very encouraged by the progress of the pilot. It is a grassland studies as we -- is actually a grasslands growth project. But that's really as much detail as we can share at this point other than it's going very well. Tim Moore: Understood Brady. That was helpful color. And then just switching gears to Eos Energy. They hold their quarterly earnings call next week on the 6th. Can you just give us a sense of maybe TETRA's lead time visibility on rolling orders? I mean, is it kind of a rolling 60- or 90-day advanced planning period for you to get the solutions ready for PureFlow Plus and electrolytes? I'm just kind of thinking about that as we model out the fourth quarter and that probably ramps up for them and you benefit. Brady Murphy: Elijio, you want to take that one? Elijio V. Serrano: Yes. So we're in constant dialogue with Eos on a weekly basis between our manufacturing team and their procurement team at the executive level, appears to be almost like a weekly or every other week call. Once we get purchase orders, we can turn it around quite quickly. As you know, we're producing the electrolyte out of our West Memphis facility. That facility is producing the zinc bromide that is either used for the offshore market or we further purify it and increase the purity levels there to meet the Eos demand. And all the incremental products that we buy are available on short notice. So we can turn around purchase orders within 30 days from Eos. Tim Moore: Great. That's really helpful color, Elijio. And then my last question is because most of the others already asked and my favorite theme in the last few years has been desalination, but you don't get asked a lot about your calcium chloride business, and we know there's seasonality drop in the third quarter every year. But how would you kind of quantify maybe that overall business 9 months year-to-date? Does it grow more than 5% this year, the industrial calcium chloride? Elijio V. Serrano: So Brady, I'll take that one. One of the things that we joke about is the leader for our calcium chloride business, Tim Moeller, every time he gets in front of the Board, he talks about a record quarter. And they literally have been achieving a record quarter with the calcium chloride business. They have found additional applications for the calcium chloride. They continue to expand and gain market share. So that business is one of our little crown jewels that probably isn't recognized and appreciated as much as it should. And they've been outperforming the Consumer Price Index by a nice factor. Brady Murphy: And if I could just add to that, Tim, if we look -- as we laid out in our Investor Day, that business tends to outpace the growth of GDP by something north of 300 basis points. Tim Moore: No, no. Yeah. It's pretty familiar, but I think investors just really haven't caught on the last few years. I mean it was something like I calculated 35% to 40% of your EBITDA last year, the year before. So I'm always curious of how that's going. It seems like it's going great. So that's it for my questions. Elijio V. Serrano: Tim, I will add that we updated our investor deck and posted it on our website this morning to reflect Q3 numbers, and it includes TTM Q3 calcium chloride revenue and the trend. I encourage you to take a look at it to appreciate how that business is performing. Operator: Your next question comes from the line of Josh Jayne with Daniel Energy Partners. Joshua Jayne: First, just as we think about offshore opportunities into next year, you've hit on it a little bit. Maybe you could just talk through your key markets, Brazil, Gulf of America and North Sea. And in the event that we've seen this over the last couple of years, things can slip to the right when thinking about offshore projects. Could you discuss which of those markets you may expect to hold up better than others in the event operators become increasingly cautious and just talk through those opportunities a bit more. Brady Murphy: Yeah, sure, Josh. I mean, I think keep in mind, the Brazil awards that we were awarded, we've really only seen a half a year of benefit from Brazil this year. So next year, we're expecting to see a full benefit and not really anticipating any change to that program. I would say the same for the Gulf of America. We've mentioned in our Investor Day as more and more operators start moving out to the lower tertiary, these wells have significant productivity. And even in a lower cost environment, we anticipate those projects to continue to move forward. So no real change in our outlook for Gulf of America. And then North Sea, I'd say the same. Equinor and the businesses in Norway continue a very strong pace. Again, we're not anticipating much change there. Now keep in mind, the rest of the markets, even though we may not have a strong service operation in a lot of other deep markets around the world, we do sell our completion fluids through the major service providers. Since again, they don't manufacture their own completion fluids. They buy them from companies like TETRA. So we actually have a pretty strong market presence around international markets around the world, but through the service providers. That can probably be a little bit more volatile than the three key markets that I've mentioned, and we'll see as we get into the 2026 planning process with our customers. But again, everything we're hearing about the deepwater market is a multiyear growth story for us. Elijio V. Serrano: Josh, the other thing I would add is if you look at our investor deck and our historical results for the Completion Fluids & Products segment, those margins hold up in almost any cycle. During COVID, we saw margins improve in -- during the two COVID years over the prior year. So that business has strong resilient margins even during slower periods. Joshua Jayne: Absolutely. And then as a follow-up, I just wanted to -- maybe you could talk about SandStorm and opportunities in Saudi just as a -- how do you see that evolving as potentially a multiyear opportunity? Could you speak to that a bit more? And is that the type of product and business that is ultimately going to consume more of your capital over the next two to three years? Brady Murphy: Yeah, absolutely. Yes. I mean it's a very exciting opportunity for us. I mean we're starting to really see unconventional activity outside of the U.S. ramp up. As I mentioned, our Argentina growth, which really was fueled by SandStorm and our production testing capabilities is going to double next year compared to this year -- is anticipated to double compared to this year. Now Saudi, we're not seeing that type of growth yet, but having our first award with SandStorm is a great start because it typically leads to the growth of other pieces of our business as we've seen in Argentina. So yeah, we're very excited about getting a foothold into that market with such a key piece of technology that will be a catalyst for growth for us. Operator: There are no further questions at this time. I will now turn the call back over to Brady Murphy for closing remarks. Brady Murphy: Thank you. I appreciate everyone joining us for the call today. Again, despite the current macro and energy market uncertainty, again, we have very strong convictions in our base business performing to the levels that it is as well as the future outlook, again, related to our One 2030 strategy. So thank you very much for your participation. We'll conclude the call. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Thank you for standing by. My name is Kathleen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Donnelley Financial Solutions Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mike Zhao, Head of Investor Relations. Please go ahead. Michael Zhao: Thank you. Good morning, everyone, and thank you for joining Donnelley Financial Solutions Third Quarter 2025 Results Conference Call. This morning, we released our earnings report, including a set of supplemental trending schedules of historical results, copies of which can be found in the Investors section of our website at dfinsolutions.com. During this call, we'll refer to forward-looking statements that are subject to risks and uncertainties. For a complete discussion, please refer to the cautionary statements included in our earnings release and further details in our most recent annual report on Form 10-K, quarterly report on Form 10-Q and other filings with the SEC. Further, we will discuss certain non-GAAP financial information, such as adjusted EBITDA and adjusted EBITDA margin. We believe the presentation of non-GAAP financial information provides you with useful supplementary information concerning the company's ongoing operations and is an appropriate way for you to evaluate the company's performance. They are, however, provided for informational purposes only. Please refer to the earnings release and related tables for GAAP financial information and reconciliations of GAAP to non-GAAP financial information. I am joined this morning by Dan Leib, Dave Gardella and other members of management. I will now turn the call over to Dan. Daniel Leib: Thank you, Mike, and good morning, everyone. Our third quarter results offered further validation of our strategy, including the continued shift toward a favorable sales mix driven by double-digit growth in our SaaS offerings, strong year-over-year growth in adjusted EBITDA and adjusted EBITDA margin expansion. In addition, we continue to make great progress in modernizing and expanding the adoption of our offerings in the marketplace, highlighted by the launch of our new Venue Virtual Data Room product. Against the backdrop of an improving but still soft capital markets transactional environment, which resulted in an 8% reduction in our event-driven transactional revenue, we delivered solid results, which once again demonstrated the resiliency of our operating model across various market conditions and the sustainability of our performance as our business mix continues to transform. Specific to our third quarter performance, I am pleased with the continued strong demand for our software offerings, where we delivered year-over-year net sales growth of 10.3%, an improvement compared to the growth rate we achieved in the first half of the year. Software Solutions sales represented approximately 52% of total sales in the quarter, a positive proof point of our transformation into a software-centric company. On a trailing 4-quarter basis, Software Solutions sales reached approximately $350 million, growing 8.5% from the third quarter 2024 trailing 4 quarters and accounted for 46.5% of trailing 4-quarter sales, an increase of approximately 640 basis points from the third quarter 2024 trailing 4-quarter sales. This continued positive mix shift positions us well to achieve our long-term target of driving approximately 60% of total sales from Software Solutions by 2028. A major driver of the third quarter software growth was the performance of our recurring Compliance software products. ActiveDisclosure and Arc Suite, which posted approximately 16% sales growth in aggregate, marking the third consecutive quarter of double-digit sales growth across these 2 products. The growth in our recurring Compliance software offerings is led by ActiveDisclosure, which delivered third quarter net sales growth of approximately 26%, an acceleration in growth compared to recent trend. We are encouraged by the continued growth in ActiveDisclosure subscription service packages. In addition, as I discussed previously, we are serving additional use cases via a hybrid model that combines our software solution with an unmatched service offering. Within this context, ActiveDisclosure has been increasingly chosen by our clients for their IPO registration and proxy statement needs, which historically were managed in a traditional model. In the third quarter, we saw higher ActiveDisclosure sales associated with IPO registrations being completed on the platform compared to last year's third quarter. In the case of Arc Suite, the growth rate in the third quarter, approximately 10% was more modest than the past few quarters as we overlap the benefit associated with the tailored shareholder report solution, which was introduced in July of 2024. As I commented previously, we expect the growth profile of Arc Suite to be more modest during periods outside of regulatory changes, while over the longer term, still exhibiting the double-digit growth we have delivered historically based in part on a dynamic and evolving regulatory environment. For the fourth quarter, on a year-over-year basis, in addition to overlapping the TSR uplift, we will also overlap a contract renewal with a strategic client during last year's fourth quarter that produced favorable economics since the renewal. These factors combined to create a tough comparison versus the fourth quarter of last year when Arc Suite grew 23% year-over-year. I am encouraged by the continued adoption of Arc Suite among investment company clients as we build on the sales momentum and positive market response since launching our TSR solution. As it relates to Venue, we delivered improved year-over-year sales performance in the third quarter, increasing by approximately 3% compared to the third quarter of last year. We remain encouraged by Venue's performance, which benefits from stable demand from both announced and unannounced deals across public and private companies alike. To further solidify Venue's market position as a leading virtual data room for M&A due diligence, we launched a new version of Venue during the third quarter following a comprehensive rebuild. The redesigned Venue delivers a highly intuitive user experience, empowers clients to manage complex transactions more efficiently, streamlines collaboration within deal teams and safeguard sensitive information throughout the deal life cycle. Following the rollout, we have received very positive client feedback. Venue's modern architecture positions us well to efficiently add further capabilities as needed. We expect the new product launch will strengthen Venue as the data room of choice for corporate transactions. In addition to introducing new Venue, which serves our capital markets clients, during the third quarter, we released for broad adoption ArcFlex, the newest module within Arc suite, designed specifically to meet the needs of investment companies focused on alternative investments. ArcFlex is a purpose-built financial and regulatory offering tailored for a wide range of private investment institutions, including hedge funds, private equity and business development companies. By leveraging the foundational capabilities within the DFIN platform, ArcFlex builds on existing services to provide enhanced solutions customized for private fund clients. Coupled with DFIN's deep domain and service expertise, ArcFlex is well positioned as the leading end-to-end financial and regulatory reporting solution serving the growing private funds market. New Venue and ArcFlex are the latest in a series of new software introductions made possible by our focused investments to accelerate the modernization, innovation and growth of our software portfolio. Over the past several years, these investments have enabled us to launch or modernize a majority of our software products. Our investments have enabled us to increase development velocity, bring new solutions to market more efficiently by leveraging the platform capabilities of our single compliance platform and empower our clients to adapt quickly to an evolving regulatory environment, all while incorporating the most modern technology. Before turning the call over to Dave, I'd like to comment on the U.S. government shutdown and the related impact on our outlook for Capital Markets deal activity. Since the shutdown began on October 1, the SEC's Division of Corporation Finance has been unable to review or accelerate registration statements, issue comment letters or provide interpretive guidance. As a result, the SEC's ability to declare registration statements effective has been curtailed, impacting IPO activity as well as other capital markets transactions so far in the fourth quarter. While some transactions, including select IPO pricings are taking place within a limited window without SEC comment, most of the planned transactional activity has been paused. Overall, the shutdown has delayed the positive momentum in capital markets deal activity over the last 2 quarters. Based on what we experienced during the previous government shutdown, the shutdown represents a shift in the timing of when transactions complete as most deals that were paused during the previous shutdown were reactivated when the SEC reopened. While the duration of the shutdown remains uncertain, we continue to support our clients in preparing transactions so they remain ready to move quickly when regulatory operations at the SEC resume. DFIN's strong client relationships and market leadership position us well to capture the latent demand when activity level normalizes. Before I share a few closing remarks, I would like to turn the call over to Dave to provide more details on our third quarter results and our outlook for the fourth quarter. Dave? David Gardella: Thanks, Dan, and good morning, everyone. Before I discuss our third quarter operating performance, I'd like to recap one housekeeping item. As detailed in our press release issued on October 23, during the third quarter, we successfully completed the termination of our primary defined benefit pension plan, which had been frozen and closed since 2011. As part of this transaction, we made a $12.5 million cash contribution in the third quarter to fully fund the plan, which was recorded as a use of cash within the operating activities section of the statement of cash flows and settled the plan obligations through a combination of lump sum payments to certain plan participants and the purchase of a group annuity contract from a third-party insurer. In addition, as a result of the planned settlement, we remeasured the plan's assets and obligations and recognized a noncash pretax settlement charge of $82.8 million or $60.3 million on an after-tax basis resulting in a negative EPS impact of $2.20 per diluted share due to the recognition of unrealized accumulated planned losses previously reported within accumulated other comprehensive loss on the balance sheet. Finally, the settlement of the plan resulted in the removal of approximately $10 million of net liability from our balance sheet comprised of approximately $200 million of plan obligations and approximately $190 million of plan assets. We are pleased with this outcome, which will further enhance our financial flexibility and reduce future administrative and financial volatility associated with the legacy pension plan. Now turning to our third quarter operating performance. As Dan noted, we delivered strong results within the backdrop of an improved operating environment, highlighted by an acceleration in Software Solutions growth and year-over-year increases in adjusted EBITDA and adjusted EBITDA margin. We posted approximately 10% growth in our Software Solutions net sales, including approximately 16% sales growth in our recurring compliance software products, all while continuing to drive operating efficiencies and expanding adjusted EBITDA margin to 28.2%. On a consolidated basis, total net sales for the third quarter of 2025 were $175.3 million, a decrease of $4.2 million or 2.3% from the third quarter of 2024. Third quarter net sales were at the high end of our guidance range was driven by lower volume in our Compliance and Communications Management segments, which declined $12.7 million in aggregate with Compliance revenue across the capital markets and investment companies businesses accounting for $8.3 million of the decline. The reduction in Compliance revenue was mostly reflected in lower print and distribution volume related to both the ongoing decline in this area, consistent with recent trend as well as the timing impact of certain investment companies print volume that shifted from the third quarter into the fourth quarter this year. In addition, total event-driven transactional revenue declined by $4.4 million year-over-year primarily a result of the lower volume for foreign issuer transactions on U.S. exchanges, partially offset by stronger U.S. IPO volume. These declines were partially offset by growth in Software Solutions net sales, which increased $8.5 million or 10.3% compared to the third quarter of last year. Third quarter adjusted non-GAAP gross margin was 62.7%, approximately 100 basis points higher than the third quarter of 2024, primarily driven by higher Software Solutions net sales, the impact of cost control initiatives and price uplifts, partially offset by lower capital markets transactional volume. Adjusted non-GAAP SG&A expense in the quarter was $60.5 million, a $7.1 million decrease from the third quarter of 2024. As a percentage of net sales, adjusted non-GAAP SG&A was 34.5%, a decrease of approximately 320 basis points from the third quarter of 2024. The decrease in adjusted non-GAAP SG&A expense was primarily driven by the impact of cost control initiatives, a reduction in selling expense related to lower sales in certain areas and lower bad debt expense, which continued to normalize in the third quarter, partially offset by higher health care expense. Our third quarter adjusted EBITDA was $49.5 million, an increase of $6.3 million or 14.6% from the third quarter of 2024. Third quarter adjusted EBITDA margin was 28.2%, an increase of approximately 410 basis points from the third quarter of 2024, primarily driven by higher Software Solutions net sales, cost control initiatives and lower selling expense as a result of the decrease in sales volume, partially offset by lower capital markets transactional volume and higher health care expense. Turning now to our third quarter segment results. Net sales in our Capital Markets - Software Solutions segment were $59 million, an increase of $5.7 million or 10.7% from the third quarter of last year, primarily driven by ActiveDisclosure, which was up $4.7 million year-over-year. During the third quarter, ActiveDisclosure sales grew approximately 26%, an acceleration of the stronger growth trend we experienced over the last 3 quarters, primarily driven by the continued adoption of ActiveDisclosure subscription service packages and the ongoing migration of certain activities historically performed on our traditional services platform. The migration to a hybrid model enables clients to leverage the combination of ActiveDisclosure and DFIN service model. Specific to the shift of traditional activities to ActiveDisclosure, during the quarter, we experienced an increase in the volume of IPO activity taking advantage of the hybrid offering with clients using ActiveDisclosure for the drafting and filing of S-1 documents, resulting in higher usage of ActiveDisclosure for certain IPO transactions. We remain encouraged by ActiveDisclosure's solid foundation for future revenue growth, part of which will be influenced by the amount of event-driven transactional activity taking place on the platform. Net sales of Venue increased approximately $1 million or 3% compared to the third quarter of last year when Venue grew approximately 27% year-over-year. A resilient level of underlying activity taking place on the platform, coupled with our recent launch of new venue creates a strong foundation for future sales growth. Adjusted EBITDA margin for the segment was 34.9%, an increase of approximately 1,010 basis points from the third quarter of 2024, primarily due to the increased sales, cost control initiatives and lower bad debt expense. Net sales in our Capital Markets - Compliance & Communications Management segment were $57.2 million, a decrease of $6.3 million or 9.9% from the third quarter of 2024, driven by lower transactional revenue as well as a reduction in compliance volume, part of which was related to lower print and distribution sales consistent with recent trend. In the third quarter, we recorded $41.8 million of capital markets transactional revenue, which exceeded the high end of our expectations, yet was down $3.5 million from last year's third quarter. Following the second quarter, when we experienced sequential improvement in transactional revenue as the quarter progressed, the uptick in the level of capital markets deal activity, especially the market for new equity issuances in the U.S. strengthened in the third quarter with the number of regular way IPO transactions that raised over $100 million, exceeding last year's levels. As such, we realized approximately 25% year-over-year increase in our transactional revenue related to U.S. IPO activity. However, the improvement in U.S. IPO activity was more than offset by the soft market for foreign issuance transactions and large public company M&A deals, which remained a headwind on a year-over-year basis and combined to more than offset the growth in IPO revenue. With the outlook for capital markets transactional environment is uncertain, in part due to the impact of the government shutdown, DFIN remains very well positioned to capture future demand for transactional-related products and services when market activity resumes. Capital Markets Compliance revenue decreased by $2.8 million or 15.4% compared to the third quarter of 2024, driven primarily by lower volume of compliance work, including the related printing and distribution, consistent with the trend from the first half of the year. In addition, we continue to experience lower market demand for certain event-driven filings such as 8-K and special proxies associated with corporate transactions. Adjusted EBITDA margin for the segment was 34.3%, an increase of approximately 260 basis points from the third quarter of 2024. The increase in adjusted EBITDA margin was primarily due to cost control initiatives, lower selling expense as a result of lower sales volume and lower bad debt expense, partially offset by lower sales volume. Net sales in our Investment Companies - Software Solutions segment were $31.7 million, an increase of $2.8 million or 9.7% versus the third quarter of 2024, driven by growth in subscription revenue. As expected, the growth rate in the third quarter was more modest compared to the levels we delivered in the last several quarters as we started to overlap the uplift in software revenue as a result of the tailored shareholder reports regulation, which became effective in July of last year. As Dan stated earlier, we expect a tough comparison against last year's fourth quarter as we overlap uplifts associated with both TSR and the strategic contract renewal, which benefited our performance last year. Adjusted EBITDA margin for the segment was 36.6%, an increase of approximately 580 basis points from the third quarter of 2024. The increase in adjusted EBITDA margin was primarily due to operating leverage on the increase in net sales, price uplifts and cost control initiatives, partially offset by higher service-related costs associated with the tailored shareholder reports offering. Net sales in our Investment Companies - Compliance & Communications Management segment were $27.4 million, a decrease of $6.4 million or 18.9% from the third quarter of 2024, primarily driven by lower print and distribution volume, which accounted for $4.1 million of the year-over-year decline and lower compliance revenue. Third quarter print and distribution revenue within this segment was impacted by the timing shift of certain volume related to tailored shareholder reports for the variable annuity market from the third quarter into the fourth quarter of this year as well as the ongoing impact of lower page counts related to tailored shareholder reports for the mutual fund industry. Going forward, we expect a broader secular decline in the demand for printed products, which we expect in the range of 5% to 6%, will continue to result in lower print and distribution revenue within this segment in addition to any future regulatory change-driven impacts. Adjusted EBITDA margin for the segment was 34.7%, approximately 450 basis points higher than the third quarter of 2024. The increase in adjusted EBITDA margin was primarily due to lower selling expense and cost control initiatives, partially offset by the impact of lower sales volume. Non-GAAP unallocated corporate expenses were $11.8 million in the quarter, an increase of $2.6 million from the third quarter of 2024, primarily due to higher health care expense, partially offset by cost control initiatives. As it relates to the increase in health care expense, the variance was driven by a single outsized claim, a portion of which is eligible for reimbursement through a stop-loss insurance policy. The company received a $2.8 million reimbursement this week in accordance with that policy. And as such, we will record the $2.8 million recovery in our fourth quarter results. Free cash flow in the quarter was $59.2 million, $8.1 million lower than the third quarter of 2024. The year-over-year decline in free cash flow was primarily driven by unfavorable working capital and the onetime cash contribution related to the pension plan settlement, partially offset by lower cash tax payments, higher adjusted EBITDA and lower capital expenditures. We ended the quarter with $154.7 million of total debt and $132 million of non-GAAP net debt, including $43 million drawn on our revolver. As of September 30, 2025, our non-GAAP net leverage ratio was 0.6x. Regarding capital deployment, we repurchased approximately 659,000 shares of common stock during the third quarter for $35.5 million at an average price of $53.79 per share. Year-to-date through September 30, we've repurchased approximately 2.3 million shares for $111.6 million at an average price of $48.35 per share. As of September 30, 2025, we had $114.5 million remaining on our current $150 million stock repurchase authorization. We continue to view organic investments to drive our transformation, share repurchases and net debt reduction as key components of our capital deployment strategy and will remain disciplined in this area. As it relates to our outlook for the fourth quarter of 2025, we expect consolidated fourth quarter net sales in the range of $150 million to $160 million and adjusted EBITDA margin in the range of 22% to 24%, which at the midpoint represents an increase of approximately 300 basis points compared to last year's fourth quarter, where we posted adjusted EBITDA margin of approximately 20%. Our fourth quarter adjusted EBITDA guidance reflects the stop-loss reimbursement of approximately $2.8 million received this week, as I noted earlier. In terms of our revenue guidance, the midpoint of $155 million implies a reduction of approximately 1% compared to the fourth quarter of last year as lower print and distribution sales and lower capital markets transactional sales are expected to more than offset growth in Software Solutions. I'll also provide a bit more color on our assumptions for the capital markets transactional sales. Due to the impacts of the government shutdown and the resulting increase in uncertainty around timing of deal completions, our expectations for capital markets transactional revenue reflect a temporary softening relative to the recent trajectory. Our estimates assume capital markets transactional net sales in the range of $30 million to $40 million, which at the midpoint is down approximately $2.7 million from last year's fourth quarter and represents a sequential decline of approximately $7 million from the third quarter of this year, solely due to the government shutdown. This guidance assumes transactions that were approved before the shutdown will proceed in the normal course of business. As it relates to new transactions, in line with what we have seen thus far in October, we expect some deals such as IPOs currently in the pipeline to be completed during the fourth quarter based on guidance provided by the SEC, though we expect most in-process deals will be delayed. Conversely, our guidance assumes a continuation of the year-over-year growth trend we've seen in Venue driven by the new product release and further supported by an improvement in underlying market activity. With that, I'll now pass it back to Dan. Daniel Leib: Thanks, Dave. The execution of our strategy continues to deliver positive results and further demonstrates DFIN's ability to perform well in varying market conditions. Our solid financial profile provides us with the foundation to continue to execute our strategic transformation. While the government shutdown has injected uncertainty into the capital markets transactional environment, the combination of our strong market position and deep domain expertise positioned DFIN well to capitalize on the return to a more normalized level of activity. We are in the midst of preparing our 2026 operating plan and extending our long-range plan through 2030. In 2026, we expect to build on the positive momentum in growing our software solutions portfolio, including accelerating the shift of our traditional compliance activities to SaaS, continued operational transformation and the execution of our strategy. Through the planning period, we expect continued progress in delivering higher value for our clients, our employees and our shareholders. Consistent with past practice, we expect to provide an update on 2026 and our long-range projections in February. Before we open it up for Q&A, I'd like to thank the DFIN employees around the world. Now with that, operator, we're ready for questions. Operator: [Operator Instructions] And your first question comes from the line of Charles Strauzer of CJS Securities. Charles Strauzer: Maybe we can just pick up on the government shutdown discussion. And when you look at the -- thank you for giving us the quantification in your guidance for Q4 for revenue. But any metrics you can give us around the impact to margins in Q4? David Gardella: Yes, Charlie, I'll talk about that. I think we've contemplated the margin impact of the lower transactional revenue in our range. As we talked about margins in the quarter, we -- even at the midpoint at 23% for Q4, expect to be up about 300 basis points relative to what we delivered last year. And again, I think that's in line with the margin expansion we've seen so far this year. Obviously, that has a bit of a negative impact in Q4. But the piece that we have going the other way, right, we talked about the outsized health care. We're going to get a recovery on that in Q4. We've actually already received the cash for that recovery. And so when you look at the 300 basis points of margin expansion, again, that's at the midpoint of our guidance. About half of that is driven by this health care recovery. And then I would say the other half just kind of in line with our ongoing margin expansion. As you saw this quarter, to the extent that capital markets transactional revenue comes in higher, we would expect to outperform that just like we did in Q3. And that was a big driver. That will be the swing factor, I guess, in any quarter but certainly as we face the government shutdown here in Q4. Daniel Leib: Yes. And then just to add, and maybe Craig can also provide some context to past shutdowns and impact. But the impact of the shutdown, as we said, is primarily in our capital markets transactions area, all of the compliance activities that run through the SEC continue during the shutdown other than those that are associated with transactions, but minimal impact to venue, and Craig can speak to both venue and then what we've seen from past shutdowns. Craig Clay: Yes, Charlie, to build on Dave and Dan's comments, the SEC posted guidance that provides a path forward for companies seeking to IPO. So unlike past shutdowns, the IPO market is frozen for most but not all. It cannot -- the SEC cannot declare a registration statement effective. But instead, they've instructed companies to file a completed statement and wait 20 days. So there are companies that are pressing ahead. As we look at October, we have 5 listings that have completed, 4 are traditional IPOs greater than $100 million, 2 of those are DFIN deals. We've also completed one very large direct listing this month, Obook, which closed up 480% a DFIN deal. And then you look forward, according to Renaissance Capital, 6 companies intend to price in the next few weeks using the SEC's 20-day guidance. DFIN is working with 5 of those 6. And then if you look at the total number of publicly companies on file at the SEC to price, including the 6, that is a total of 13 with a $50 million or greater placeholder. These are publicly filed but not priced. A DFIN supported deal joined the list yesterday, Medline could be the largest IPO of the year and their public filing signals that despite the shutdown, the IPO market continues to move forward. DFIN's share of these 13 deals is 69%. We have a robust pipeline of companies who file confidentially. -- as well as an IPO pipeline of RFPs. So it is definitely impacted. It has slowed, hasn't completely stopped given the 20-day rule. And then to build on some of the M&A comments that Dan talked about, we're really fortunate at DFIN to have a business that delivers M&A support from deal ideation through the process to announce transactions that require public disclosure. With Venue, it's a really optimistic look as Dan and Dave stated, Q3 results show progress. We're seeing increased activity in Venue, and we have a new product. Clients are loving it. Venue's architecture will provide us great leverage going forward. And we expect the product launch to strengthen Venue as the data room of choice, and we look forward to those accomplishments in future quarters. But M&A in the traditional side, is impacted. It is already a complex regulatory environment and the government shutdown has exacerbated this. So we expect deals that were to close in Q4 to be pushed to 2026 due to regulatory bottlenecks. While we know the government will open, we can't predict it. And we've been here before. These delayed transactions will get completed but it likely could be 2026. It's going to take a beat for the market to catch up once the government opens. And then we're working against the holidays here in November and December. So it's going to open. The underlying activity is strong and DFIN is at the ready. Charles Strauzer: Great. Shifting gears a little bit to the talk about SEC reporting frequency from quarterly to potentially semiannual. How are you thinking about that? And any knowledge you could share with us? Craig Clay: Yes. Great question. So we're closely monitoring the developments related to the proposal to reduce the frequency of corporate reporting. At this time, many, many questions are outstanding. So will the proposal require more disclosure for a semiannual report than a current 10-Q? What will the XBRL tagging requirements be? Another option is for the SEC to continue to require quarterly earnings 8-Ks. These could be larger. And does it expand the 8-K disclosure that would require XBRL tagging. We're also analyzing what happened in Europe. Companies here will be given a choice. Most European countries -- companies, sorry, when given the choice did not reduce the frequency of reporting. So we really don't know what the adoption rate will be here in the U.S. So given these unknown aspects, we're continuing to build models and to follow it. But I think the most important point to make is the vast majority of our 10-Qs are on ActiveDisclosure, which operates as a subscription business with long-term contracts. So this subscription model insulates DFIN from most of the public change that would be associated with this. As the subscription is priced not on a per filing basis but on a software delivery basis. So following it closely, we have some insulation to the impact. Operator: And your next question comes from the line of Pete Heckmann of D.A. Davidson. Peter Heckmann: I wanted to follow up on this resurgence of SPAC IPOs that we've seen. Over the last, what, 4 to 6 quarters, when we think about DFIN's participation there, I guess, how much of DFIN not getting retained on some of these deals is the company's choice and worries about potentially those deals not getting done? And how much of it is just a more competitive set of competitors kind of on these lower-end IPOs? Eric Johnson: Yes. DFIN is selective in our SPAC go-to-market. And as you're familiar with the reasons why risk of liquidation, delisting, merger terminations, there is an increase in the quantity and there is a few quality deals, and those are the ones that we play at. Our share in this increased market has declined, but it's declined because 58% of the year-to-date deals are nano microcap companies, 25% are trading below the $5 per share, 33% are international. Most of those have an international provider. And 50% of the SPACs have been public for over 3 years, so they're struggling to find a target. So we continue to be selective due to these reasons. We're aware of the activity levels and remain really diligent on reviewing the opportunities. We are participating in quality SPAC and de-SPAC deals with Tier 1 deal teams. And the issuers that use a competitor for a SPAC merger and have completed it, we're attacking those clients and winning their future '34 Act reporting on ActiveDisclosure, so contracted revenue. So some of these companies, when they get through, we're able to upgrade them from the lower-end providers. Peter Heckmann: Okay. That's helpful. And then just in terms of Venue in October, I'm not sure if you can give us too much insight there. But just thinking about, we have seen an uptick in larger M&A deals in the bank sector and some other sectors. I guess, are you seeing the benefit of that? And to the extent that there is a slowdown in government reviews that slowed down M&A -- the process of M&A towards closing. Would you expect to see that October, November? Kind of what do you think is the timing there? And then in prior shutdowns, I guess, how fast does the catch-up occur? Craig Clay: Go ahead, Dave. David Gardella: Craig, I'll start and then you can jump in. I think certainly, the momentum that we saw in Venue in Q3, it's embedded in our guidance in Q4 as well. I think the underlying activity still remains and regardless of the shutdown and deals getting completed. It's one of the great things, and we've talked about this in the past that if you look -- describe the market as the number of completed deals, you may get a very different answer than the activity that's going on underneath the waterline, so to speak. And we feel really good about how we're positioned with Venue, especially with the new product in the market and the acceptance that we're getting thus far. Go ahead, Craig. Craig Clay: To build on that, Dave, thank you. We're playing in the formal process of deals coming to market. So before they're announced, certainly before they close. So as Dave said, excited by that opportunity. We have pitches that are up, opportunity creation that is up, so all moving in the right direction as we see what you see. Given that we have this broad application serving both announced and unannounced, we have a lot of activity there but certainly, the government shutdown is worsening an already complex regulatory landscape. So I think you're probably referencing the antitrust. You have health care technology energy deals that are delayed. They already were delayed given the HSR Act updates, which has added time and complexity to the process. The government shutdown exacerbated this. So again, likely to see these deals that had anticipated to close, close later potentially in 2026. So what we expect to see is a government that opens. It will take a while to get moving again. One of the things that's been eliminated during the shutdown is the Trump administration have been able to terminate the waiting period. But with the shutdown, they don't have the staff to do it. So we would anticipate a build. It likely will be in 2026. Operator: Your next question comes from the line of Kyle Peterson of Needham. Kyle Peterson: I wanted to start off, the tax rate this quarter. It looks like you guys had a pretty big kind of onetime benefit. Is that related to the pension plan settlement and everything like that? Or were there any like discrete items or anything that skewed the tax rate around this quarter that we should be mindful of? David Gardella: Yes, Kyle, I think we talked about the pretax pension charge of just over $80 million, the post-tax at $60 million. So certainly, the pension tax component of that weighed on the GAAP tax rate. I think in the non-GAAP tax rate, a little bit different story there where we exclude it but some small dollars of adjustments there related to different tax legislation, et cetera, can impact that rate. Kyle Peterson: Okay. Okay. That's helpful. So even though it's -- you guys settled the pension formally in the fourth quarter, it was a tax noise item in the third quarter. David Gardella: So we -- Kyle, just to be clear, that was -- we settled in the third quarter. Kyle Peterson: Okay. You announced it in the fourth quarter, at least but yes. Okay. all right. That is super helpful. And then I wanted to kind of follow up on Venue, and I realize it's probably a little hard to answer. But is there any way you guys could maybe tease some or parse out some of the momentum that you guys are seeing in Venue? Like what's -- if there's any way you guys could separate the benefits from the redesigned product versus activity potentially picking up, like which one you feel or whether it's qualitative feedback or anything like that, like what do you guys feel has been the bigger driver of the better performance and everything there? And how should we think? Or in past product refreshes, like how long has it taken to get more traction and such, that would be helpful. David Gardella: Yes. I'll start and then, Craig, if you want to jump in. I think when you look at Venue, obviously, we showed the growth this quarter. But if you take a longer-term view of Venue, we grew in the mid-20% range last year. we were overlapping a quarter in Q3 that was right along those growth rates. So I would say sales execution has been the key component to driving the growth that we've seen. That team has done a really nice job in terms of, as Craig talked about, generating new opportunities and converting those opportunities. With respect to the new product, I would say it had a very, very modest impact in Q3. We would expect more of an impact in Q4 and then certainly, the bulk of the impact of the new product to start to hit in 2026. So I think the impact of the new product, the better days due to that product are on the horizon here for us. Craig? Craig Clay: Yes. I will build on the Horizon part, which is our results to date are based on execution. The earlier results in the year were a function of Liberation Day, which sort of froze the market. Now we see that have absorbed and the M&A opportunities are certainly increased. When we launched the new version of Venue, it launched in the first weeks of October. These launch events continue today. So the perspective look is that what you're seeing is primarily a result of execution prelaunch. Certainly, we have a product that we think is the most purpose-built based on decades of experience. Again, clients are loving it. We expect this new product launch is going to strengthen us as the data provider -- data room provider of choice. It will be in future quarters. Our Venue team is going to continue to deliver excellence given the nature of Venue, we're going to focus on what's got us here, sales execution, taking share, price and then now we're supported by a great new product. Kyle Peterson: Okay. That's super helpful. And then if I could squeeze one last one in here. Are you guys thinking about capital allocation at this point, you guys have taken a lot of the uncertainty or volatility out of the pension liability at this point. Cash flow continues to improve, at least the market doesn't seem to be giving guys credit for at least like a strong pipeline and whenever the shutdown gets resolved, we'll have a resurgence in activity. But I guess, like how are you guys kind of thinking and kind of rank to order like uses of excess cash flow between buybacks and other uses? Any color there, I think, would be helpful for everyone on the call. Daniel Leib: Yes, sure. Thanks, Kyle. So no change relative to what we've been doing historically. We've said often the #1 priority is having the financial flexibility to execute the transformation and our strategy. To your point, we are -- have quite a bunch or quite a bit of financial flexibility and capacity. And yes, we -- as evidenced in the last quarter, as evidenced back in April, we've been very aggressive in buybacks at the appropriate times. And we think about priorities, it's the strategy, it's maintaining that financial flexibility, being opportunistic around share repurchases and disciplined and then we're looking at ways of accelerating organic or inorganic investment in the business, but only to accelerate the strategy. Operator: [Operator Instructions] And there are no questions at this time. I will now turn the conference back over to Dan Leib for closing remarks. Daniel Leib: Great. Thank you, and thank you, everyone, for joining, and we look forward to speaking with you soon. Thanks. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Thank you for standing by. Good day, everyone, and welcome to The Boeing Company's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised this call is being recorded. The management discussion and slide presentation plus the analyst question-and-answer session are being broadcast live over the Internet. [Operator Instructions] At this time, I'm turning the call over to Mr. Eric Hill, Vice President of Investor Relations for opening remarks and introductions. Mr. Hill, please go ahead. Eric Hill: Thank you, and good morning. Welcome to Boeing's quarterly earnings call. With me today are Kelly Ortberg, Boeing's President and Chief Executive Officer; and Jay Malave, Boeing's Executive Vice President and Chief Financial Officer. This quarter's webcast, earnings release and presentation, which include relevant disclosures and non-GAAP reconciliations are available on our website. Today's discussion includes forward-looking statements that are subject to risks and uncertainties, including the ones described in our SEC filings. As always, we will leave time at the end of the call for analyst questions. With that, I will turn the call over to Kelly Ortberg. Robert Ortberg: Thanks, Eric, and good morning, everyone. Thank you for joining today's call. I'd like to take a moment to welcome our new CFO, Jay Malave. It's been great to have Jay on board and officially welcome him to his first quarterly earnings call for Boeing. So now let's take a closer look at our business as we enter the final quarter of the year. Our sustained focus on safety and quality is driving better performance across the enterprise, and we are reearning the trust of our stakeholders, including customers, regulators and employees. Our focus on culture change continues to energize our teams and improve how we work together. By August of this year, we have delivered more commercial airplanes than all of last year. Our defense business is well positioned in the current geopolitical environment, and our service business continues to deliver in a robust aftermarket. Across all of our market segments, we continue to see strong demand, which is reflected in our growing backlog. We marked important milestones in our recovery as the operations generated positive free cash flow in the quarter for the first time since 2023. And earlier this month, we jointly agreed with the FAA to increase 737 production to 42 airplanes per month. While we're turning the corner, we're well aware of the work ahead of us to fully recover our performance, particularly on our commercial development and certification programs. We'll talk more about our status but I want to emphasize that we're exploring every lever to deliver better performance on all of our programs. Now turning to the businesses. Let me start with Boeing Commercial Airplanes. We're making meaningful progress in line with our safety and quality plan and our investments here continue to improve the health of our factories. Notably, we've seen 75% reduction in traveled work on our 737 and a reduction of 60% across all airplane programs. Supported by greater stability, we successfully ramped up the 737 production to 38 airplanes per month as we had planned. We then focused on enablers such as improved quality, training and workplace coaches to help stabilize at that rate and demonstrate that all of our key performance indicators are healthy. Once we are satisfied with the sustained health and stability of the production system, we then presented our disciplined plan to the FAA to increase production to 42 airplanes a month. We continue to be guided by our safety and quality plan and we'll monitor our performance against these 6 KPIs as we methodically move to higher rates. As a reminder, we expect rate increases beyond 42 per month, will go in increments of 5. And while rate increased breaks won't be earlier than 6 months apart, we will remain disciplined and we won't move to higher rates until we achieve stability and readiness. Also in the quarter, the FAA announced it will allow delegation to Boeing to issue airworthiness certificates for some 737 MAX and 787 airplanes. Our team continues to work under the oversight of the FAA in building safe, high-quality commercial airplanes that comply with all airworthiness certification requirements, and we appreciate the FAA's confidence in Boeing and earning limited delegation authority is a responsibility we take very seriously. On the 787, the team is performing well, and the program continues to work towards demonstrating stability at rate 7. As we previously shared, we'll be guided by our KPIs before we transition to planned higher rates and aim to move to 8 per month in the near future, having recently completed a successful rate 8 Capstone review with the FAA. At the same time, we're investing in the expansion of our South Carolina site to ensure we're prepared to meet exceptional market demand, and we look forward to an exciting future for the 787 program. Turning now to our development programs. On 777X, as we announced earlier this morning, we have delayed our expectations for certification and first delivery, resulting in a $4.9 billion noncash charge during the quarter. As we've previously said in the third quarter, completion of our certification program is taking longer than expected. We have worked to understand the implications to our go-forward plan and now we anticipate first delivery of the 777-9 will occur in 2027. Jay will provide further details on this in his prepared remarks. We've accumulated more than 4,000 flight hours, more than double a typical flight test program. And so far, there are no major technical issues on the airplane or on the engine. In the quarter, we completed critical testing of the airplanes brakes, engines, takeoff performance and aerodynamic performance. However, we still have a significant portion of the Flight Test Certification Program to go and our team is executing plans to complete this certification as part of the schedule we shared today. The airplane and the engine are performing well. Demand for the airplane remains strong, and we remain confident that the 777X will be the next flagship airplane for our global customers. This is obviously a disappointment, but we just need more time to complete the certification process. With this charge, we now have a higher confidence that we'll complete the certification within the financial estimate. Better news on the 737-7 and -10 programs. With more than 3,000 hours of lab testing and analysis, we now have a final depth of design changes to permanently address the engine anti-ice issue. This effort remains on the critical path, and we're now following the lead of the FAA as we work to certify the suite of design updates. As we previously shared, we anticipate certification for the 737-7 and the -10 to happen in 2026. Looking now at our Defense business. We continue our active management approach, and we're making progress to derisk our development programs. We again demonstrated stability on our EACs in the quarter, and our BDS team is working hard every day to earn trust of our customers. We also continue to proactively engage with our customers and suppliers. In many cases, we've been able to revise contract baselines to lower execution risk and create win-win outcomes for the customer and for Boeing. We still have work to get these programs through the development phase and as I've said before, you're never done until you're done, but we clearly are making progress. In the quarter, BDS had several notable milestones, including delivery of the 100th KC-46 tanker across our combined U.S. Air Force and global customer base. We're proud our platform continues to provide unique value and capability to our customers. We also secured key contract awards in the quarter. The U.S. Space Force awarded Boeing a $2.8 billion contract for the Evolved Strategic Satcom program, solidifying our position as a leader in the national security space. More recently, we signed multiyear contracts valued at $2.7 billion to produce additional PAC-3 seekers, leveraging the advanced investments we've made to ramp up quickly and meet the demand. In St. Louis, we are executing our contingency plan as our IAM representative workforce remains on strike. While of course, we prefer not to be in this position, the team continues to work in support of our customers. We are building JDAMs without IAM workforce at about the same production rate as before the work stoppage and the team is progressing on our MQ-25 and T-7A development programs. We'll continue to manage through this with focus on supporting our customers. Now moving on to Global Services. BGS had another strong quarter, delivering exceptional performance for our company as they support our defense and commercial customers. The U.S. Navy awarded Boeing contracts totaling more than $400 million for the repair of the F-18 landing gear and outer wing panels. We're still on track to close the sale of Jeppesen and the other portions of our digital business later in this quarter. At the same time, BGS team continues to secure deals for the digital capabilities that we'll retain related to fleet maintenance, operations and repair. A good example, we recently announced an agreement with EVA Air that includes digital diagnostic tools and advanced analytics to improve efficiency and maintenance operations. Now lastly, I'll share another update on our company's culture change. This remains a topic of interest and conversations with many of our stakeholders. I'm pleased with how the employees have embraced culture change. You'll recall that we use feedback and direct employee input to help shape our new values and behaviors earlier this year. Since then, as I've traveled around the company, I'm excited to see how many teams are using the values and behaviors to effect change in their daily work. For example, I have come across production teams that are using their daily tier meetings to call out which values and behaviors help them work better with each other. And during my recent visits in Miami and some of our global sites, teams told me how championing our values around safety and quality is strengthening our relationships with our customers. I'm confident that with our new values, behaviors and the processes we're putting in place with performance management, leadership development and new training opportunities will continue to see positive culture change. Before we close out the year, we're also going to do another voice of employee survey like we did back in February. We'll get a feel for how we're doing on the culture change and get feedback on the areas that are working and where we still need to improve. All this work is going to take time to really take hold and while I don't expect overnight improvement, we'll continue to listen to our people and use the values and behaviors. Now before I finish my prepared remarks, I'd like to say thank you to our employees for their dedication to safety and quality and enabling another quarter of improved performance. While we're all disappointed with the 777X delays, it shouldn't overshadow the progress we're making. Our customers are giving us great feedback on the quality and delivery performance. We're increasing production rates. We turned cash positive in the quarter, and we're winning in the market. We're well positioned to build on the momentum, delivering on our more than $600 billion backlog and restore Boeing to the company, we all know it can be. Now let me hand it over to Jay to further discuss our operating results. Jay? Jesus Malave: Thanks, Kelly, and good morning, everyone. Let me start by saying that it has been an honor to join Boeing at such an important time in the company's history, and I'd like to thank the team here for the warm welcome these last few months. Throughout my career, I've always been impressed with Boeing's people, products and services and iconic legacy. I'm very excited to partner with Kelly in support of our continued recovery and delivering for our global customers and stakeholders. Boeing is in a much stronger position than it was a year ago. It's my job to help Kelly and the leadership team build on that progress. I'd also like to thank Brian West for his role in getting us to where we are and for his support throughout this transition. Now let's start with the total company financial performance for the quarter. Revenue was up 30% to $23.3 billion, primarily driven by improved operational performance across the business, including higher commercial deliveries and defense volume. The core loss per share of $7.47 primarily reflects the $6.45 impact of the $4.9 billion charge on the 777X program. which I'll discuss in more detail shortly. Free cash flow was positive $238 million in the quarter, primarily reflecting higher commercial deliveries and working capital that improved compared to both the prior year and the prior quarter. Importantly, this was the first positive free cash flow quarter since the fourth quarter of 2023 and serves as an important progress point in our company's recovery. These free cash flow results were better than expectations in July, driven by higher commercial deliveries as well as the potential DOJ payment shifting to the fourth quarter. Turning to BCA on the next page. BCA delivered 160 airplanes in the quarter, the highest quarterly delivery total since 2018. Revenue was up nearly 50% to $11.1 billion primarily reflecting higher deliveries compared to last year. Operating margin of negative 48.3% was impacted by the charge on the 777X program. BCA booked 161 net orders in the quarter, including 50 787 airplanes for Turkish Airlines and 30 737-8 airplanes for the Norwegian group. Backlog in the quarter ended at $535 billion and includes more than 5,900 airplanes with the 737 and 787 both sold firm into the next decade. Now let's click down to the commercial programs. The 737 program delivered 121 airplanes in the quarter, including 41 in September. On production, the factory stabilized at 38 per month in the quarter. Importantly, we jointly agreed with the FAA in October to increase to 42 per month and the program is now focused on continuing to drive a stable production system as they transition to this new rate. Spirit continues to deliver fuselages with improved quality and flow, which sets us up well for both our future production ramp and the planned reintegration. That transaction is still expected to close this year. The quarter ended with approximately 5 737-8s built prior to 2023, down 15% from the second quarter. Importantly, we completed the rework on the last of these airplanes and shut down the shadow factory in the third quarter. On the -7 and -10, inventory levels were stable at approximately 35 airplanes. As Kelly said, we have made good progress on the suite of engine anti-ice design updates over the past few months and continue to work with the FAA on the certification path for these programs. On the 787, we delivered 24 airplanes in the third quarter and ended with approximately 10 787 airplanes in inventory that were built prior to 2023, down 5 from last quarter. We still expect to deliver these airplanes through 2026, which is aligned with our customers' fleet planning requirements. Finally, on 777X, during the quarter, we recorded a $4.9 billion loss provision net of a cost-based extension benefit to reset the development and production schedule on the program with first delivery now expected in 2027 versus the prior expectation of 2026. To provide more background and color, we received approval to begin the second phase of certification flight testing in early 2025 and had anticipated authorization to start the next major phase of certification play testing in the third quarter. However, this authorization has been delayed as Boeing and the FAA work through the supporting analysis that enables the next phase of certification flight testing. Given this delay and our assessment of the time line to enter future certification phases, we have shifted our flight test and production schedules to reflect these learnings. We now expect the next major phase to start later this year or early 2026. The certification program delay, coupled with our reassessment of production costs constitute the basis of the incremental loss provision this quarter. The charge amount includes additional customer concessions, the cost of incremental rework on build aircraft, learning curve adjustments and the carrying cost of production operations spread out over a longer period of time. On a comparable basis to last year's total charges on the program, the costs are higher due to rework on build aircraft, incremental production disruption and learning curve adjustments. As far as the cash profile, we see 2 impacts. The first is related to delivery timing, where we expect headwinds of about $2 billion in 2026 as deliveries move to the right. This converts to a tailwind later in the decade as we deliver delayed units. Second, the cash roll off of the $4.9 billion accounting charge is expected to be spread into the next decade. While disappointing, the reset allows us to operate to a higher confidence plan and allows our customers to manage their operations accordingly. As Kelly mentioned, this confidence also stems from our completion of dry run flight tests. While we have not received certification credit with the FAA for those flights, we have obtained important verification data to support technical risk burn down. Okay. Let's shift over to BDS on the next page. BDS delivered 30 aircraft and 2 satellites in the quarter and revenue grew 25% to $6.9 billion on improved operational performance and higher volume. Operating margin of 1.7% was up significantly compared to last year, also reflecting the better operating performance in the third quarter. These results also included immaterial impacts associated with the IAM work stoppage as we continue to execute our contingency plans. BDS booked $9 billion in order during the quarter and backlog grew to a record $76 billion. Overall, we continue to make progress stabilizing our fixed price development programs even with minor cost updates on a few programs, such as for the tanker, which absorbed additional Everett shared costs from the 777X update. We have seen benefits from our active management approach and retiring risk and developing win-win opportunities for both us and our customers. We remain focused on delivering these important capabilities to our customers and met several important milestones in the quarter. For example, on a T-7A program, we achieved 4 additional customer milestones under the MOA and started assembly on the first production representative test aircraft. The remainder of the portfolio continues to benefit from exceptional demand supported by the global threat environment confronting our nation and allies. Performance on these programs also continue to stabilize and build on the improved operational performance that began earlier this year. Overall, the defense portfolio is well positioned for the future as evidenced by our record backlog, and we still expect the business to return to historical performance levels as we continue to drive execution and transition to new contracts with tighter underwriting standards. Moving to Global Services on the next page. BGS continued to perform well, again delivering strong financial results in the quarter. Revenue was up 10% to $5.4 billion, primarily reflecting improved commercial and government volume. Operating margin was 17.5% in the quarter, up 50 basis points compared to last year, unfavorable commercial volume and mix. Both our commercial and government businesses again delivered double-digit margins. The business also received $8 billion in orders with a year-to-date book-to-bill of 1.2. Okay. Shifting to cash and debt. Cash and marketable securities ended at $23 billion and the debt balance ended at $53.4 billion. The company also maintains access to $10 billion of revolving credit facilities, all of which remain undrawn. We remain committed to strengthening the balance sheet and supporting our investment-grade rating. Regarding cash flow, we still expect the fourth quarter to be positive before any impact from a potential DOJ payment. This outlook continues to assume significant capital expenditures for future products and growth, particularly in St. Louis and Charleston. This ramp-up was seen in our third quarter CapEx spend, which we now expect to be closer to $3 billion for the year. Net-net, even with the higher CapEx, our better-than-expected performance year-to-date supports updating our 2025 outlook to a free cash flow usage of about $2.5 billion, barring the impact of a prolonged government shutdown. Okay. Let's sum it all up. Another quarter of progress in our recovery. While the 777 reset was disappointing, our overall performance continues to trend favorably. This includes receiving limited FAA delegation to issue 737 and 787 airworthiness certificates, transitioning to higher 737 and 787 production rates, delivering improved performance across the company as well as generating positive free cash flow in the quarter. Broadly speaking, the markets we serve continue to be significant and our backlog of more than $600 billion demonstrates the strength of our portfolio. Long term, these fundamentals underpin our confidence in managing the business with a long-term view built on safety, quality and delivering for our customers. With that, let's open up the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Myles Walton from Wolfe Research. Myles Walton: Jay, what is the negative cash flow in 2026 on the 777X in totality or versus this year? And as you look out, how soon after first delivery can that program get to a neutral position from a cash perspective? Jesus Malave: Sure. Thanks for the question, Myles. So as I mentioned before, it's a headwind relative to our prior expectations of $2 billion. So I'd expect the overall absolute cash flow to be usage. It's a little bit higher than that. As far as how we get to call it, I'd say, breakeven neutrality type of free cash flow, we've talked about this a little bit in the past. So next year will be a heavy use year. The year after that will be better in 2027. And then we would expect ourselves to get closer to neutral in 2028. And that's all on the back of improving payments from aircraft deliveries and advances. So again, next year, we'll build up inventory. There'll be limited advances and delivery payments. But in 2027, we'll start to see those benefits and those will continue to ramp up in '28 and beyond. So I would expect, starting in 2029, neutrality will go to a benefit of positive free cash flow for the program. And so look, all told, next year is going to be a little bit heavy, but it will continue to improve from year-over-year from that point. Myles Walton: Okay. And sorry, just to clarify one thing. Is that 2026 usage of cash on 777X, so it's about similar to 2025 usage when all is said and done? Jesus Malave: Yes, that's a good way of looking at it, but perhaps maybe a little bit higher, but in that zone. Operator: Your next question comes from the line of Ron Epstein from Bank of America. Ronald Epstein: So maybe back on the 777, certainly you're going to get bombarded with these, so apologies for that. But what's driving this now? Like what changed from like just 2, 3 months ago to reevaluate what's going on with the program. Yes. So I guess that's the question. Like what changed to really make the focus on this now? Robert Ortberg: Yes. So Ron, first of all, let me reiterate what I said in the prepared remarks. There's no new issues with the airplane itself or the engines, the test program. Ironically, we have more hours and the maturity of this airplane is probably higher than any other airplane we've been through the test program. The issue is solely around getting the certification work complete. We had anticipated getting TIA approval. That's what's needed to actually get cert credit when we fly those particular tests. We have not been able to achieve the certification credit and that's because we haven't gotten the TIA approval. So look, we've taken a step back. We very much underestimated how much work it was going to take for us to get the TIA approvals and for the FAA to have the opportunity to review all the data submissions that are required. So we stepped back and we've rebaselined this program to incorporate those learnings as Jay said. And the philosophy I want here is I don't want this to be a continuous quarterly issue for us to make sure we have a solid financial estimate here that we have a high level of confidence that we can get this certification work done. Now recognize that some of this is still not in our control. We're working very closely with the FAA. I'm hopeful that there's opportunities for us to improve upon some of this. I think I've talked to the administrator Bedford. And I think he also agrees that we need to look for ways to streamline the process. But in effect, this is a result of us realizing that the plan we had in place to get the certification approvals just was not realistic going forward. Ronald Epstein: And just one clarification, if I may. On the TIA, what's really slowing that down? Is it on the FAA side? Or is it that there was something that you guys didn't understand about what would be... Robert Ortberg: It's a little of both, Ron. I would say it's that this is the first airplane that we've gone through this incremental TIA process like this. And I think there was learning in what analysis and data we had to have complete and submitted to get the TIA approval. So some of that's for us. And I think it's taken longer as well for the FAA to go through those submittals and get the approval. So I'm certainly not throwing the FAA under the bus with this. This is a learning collectively for the both of us in terms of what it takes to get through the new process. And again, as I said, we've tried to do our best to put a conservative estimate here in place that accommodates us continuing having a slower process than what we had originally planned for these TIA approvals. Now I don't anticipate because of the maturity of the airplane. Once we get the approvals, I think the flight testing should go reasonably quickly. But again, it's the analysis, the paperwork to submittal and the approval process is really the big learning here. Operator: Your next question comes from the line of Robert Stallard from Vertical Research. Robert Stallard: Welcome back, Jay. I hate to do follow-up on the 777X here. The charges of $4.9 billion is perhaps larger than was anticipated. So wondering if you could maybe work through some of the moving parts here. And then probably for Kelly, in conjunction with that, how are you expecting to manage the 777X supply chain given this delay? Jesus Malave: All right. Let me start with the magnitude of the charges to build upon the comments that I made during the prepared remarks. With the delay in the certification, we had to revise our production plans on the program with a focus on mitigating additional precertification airplane builds and provisioning for a higher confidence long-term production plan, the primary driver of the charge. And when you kind of break that down, the scheduled delay simply had a broad impact through the elements of the production system. The longer period of performance or holding period, however you want to describe it, combined with a slower ramp rate, it adds substantial carrying cost to the program. It also affected the learning curve with the slower ramp. And even the aircraft that are going to be reworked are also going to be held for a longer period of time, adding cost to them. So as we mentioned, we have a higher confidence plan from a schedule and cost perspective on here so that we've got ourselves protected. If you compare this to other charges, particularly those that we had last year, as I mentioned during my prepared remarks, we are carrying higher provisions for the built aircraft require rework, the production disruption and the learning curve, all of which are simply better informed by current experience. So as you would expect, the team is just not going to sit here and take this lightly and hasn't taken it likely. They're going to -- they're all focused, we are all focused on doing everything we can to improve the long-term productivity on this program, while also working to mitigate the total delay impact to our customers the best we can. But this baseline puts us in that position to be able to not only beat it, but potentially beat it. Robert Ortberg: Yes. And Rob, let me just talk a little bit about the supply chain. I think the answer is we just have to flow the new revised schedule out to our suppliers. And then we're going to have to negotiate on a case-by-case basis the impact that has to the various suppliers. And depending on the commodity, the impact might be significant or might be fairly insignificant. So we're going to have to work through that. I'll just say that the revised estimate and the charge here contemplated the impact of the supply chain as well. Operator: Your next question comes from the line of Noah Poponak from Goldman Sachs. Noah Poponak: Kelly, Jay, could you speak a little bit more about the 737 ramp from here? And I guess, do the remaining months of this year have 42 production units? Or is there some spacing before we actually see that for any reason? And then as you go higher, on the one hand, it's not easy and supply chain is still tough, but on the other hand, I think you're intentionally holding inventory for that reason. And it seems like you have a lot of buffer in the stations at 42 to break to 47. Then I think beyond that, you start to layer in a new line. So I guess, that 6 months you've spoken to you, Kelly, should we all be assuming that for the 42 to 47 to 52? Or is each of those breaks? Or is that too aggressive of an assumption? Robert Ortberg: Okay. So let me start with the first part of the question, which is just when do we get to 42 here for the balance of the year. So recognize, Noah, when we say we're at a 42 rate, that's a rate that we flow in the factory. Not every month, depending on the number of days in the month, the number of workdays in the month, would that necessarily equate to a rollout of 42. And just recognize that for the -- we've got the holidays coming up in both November and December. We are, as we speak, rolling at the 42 rate. So we've, as you know, we test our supply and our own processes before we actually go to that rate, we do some pretesting. So we've gone ahead and we're loading now at the 42 rate. So I'm planning that we will exit the year very soundly at the 42 a month rate. So that's our plan, and I think we're in good shape to do that. As you mentioned then, we'll go to the next would be the 47. I mentioned in the prepared remarks, not earlier than 6 months because we need time to go to the new rate, demonstrate stability. And then as we did this time, test ourselves at a higher rate. And in many cases, when you test yourselves at the higher rate, there's actions you have to take to go improve and ensure that we're ready to go. So we don't think we can do that faster than 6 months. And I will just reiterate what I said when we started this campaign here a year ago is it's way more impactful for us to move when we're not ready then to hold off and wait until we're ready. And we will not go to the next rate until we show the maturity in the system. I'd much rather be a month late, then go a month early in this process. And I think we've clearly demonstrated that if we are deliberate, do the right thing, make sure we're meeting our key metrics, we can actually move faster than we planned. So in terms of the follow-on cadence, I think you're right, Noah, in that we've got a significant inventory right now, and that's clearly boosting us from going from 38 to 42. Will also still help us when we go 42 to 47. But at that point, I think we start to get more, I'll say, aligned with the supply chain in terms of inventory balances and their expectations. So we'll have to watch that. That will be -- the rates above 47, I think will be as much on how is our maturity looking, but also how is the supply chain ramping up. We've got time to work those things. I don't see anything right now that tells me we can't do that. But that's how I kind of look at that. So if you were doing -- if you were pegging these all in 6-month increments, I'd say the first 6 months are going to be easier than the following rate increases in terms of hitting that 6 months exactly. Noah Poponak: Okay. And how will the process with the FAA compare going to 47 and 52 compared to when you did getting to 42? Robert Ortberg: Yes, we're going to use the exact same process. In fact, when we did the 5 to 7 on the 787, we use the same metrics and the same Capstone review process that we used just now moving from 38 to 42. I think both sides will understand the process and think it's a good process. So we just use that same one as well on this mini break up rate 8 on the 787. So I feel pretty good that the process is in place. I don't think getting through that, it might have taken a little bit longer with this first approval with the FAA, but they did a good job in moving pretty quickly. They have to coordinate with a lot of stakeholders as well. So I think -- I don't think the process is going to be an impediment in the future. I think it's more are we ready? Is the supply chain ready? And when that happens, then I think we have a good process to go get approval. Operator: Your next question comes from the line of Peter Arment from Baird. Peter Arment: Welcome, Jay. Kelly, maybe could you talk a little bit more about the -- what's left for certification on the -7 and 10? It sounds like you've got a lot of confidence around it. But what are the milestones or the way we should be thinking about what's left here just given the enormous amount of testing hours and things that you've done here? Robert Ortberg: Yes. So we've got -- as I mentioned, we've got a significant number of hours of testing on this anti-ice design. So what we've got to do is go make modifications to the test aircraft and they're both hardware and software modifications and then we go through the process, the certification of those steps with the FAA. It's pretty straightforward. And the anti-ice is still the critical path, is still the critical path for both certifications. Now if you take the engine anti-ice out of it, there is still work to be done to complete the certification. Probably a little more work on the -10 than the -7 but not near the magnitude of what we're experiencing with the 777X program. So we think it's pretty straightforward to get through the certification of the design. We've got a lot of test data, a lot of analysis that will help us move quickly through that. And as I said, we're still planning on getting that done here in '26. Operator: Your next question comes from the line of Seth Seifman from JPMorgan. Seth Seifman: I wanted to ask about the 87. You mentioned the recent Capstone review and how we can think about kind of the way you went through the 37, the flow of rate increase is coming on the 87 and what some of the kind of key things you're watching are there, whether it's internal or whether it's in the supply chain, having to do with structures or engines or anything like that? And then also, whether you've kind of burned through some of the concessions there and starting to get to a better place of cash profitability on that program? Robert Ortberg: Yes. So the cadence of production increase is a little bit different story than on MAX. Obviously, the -- we weren't shut down on MAX. And so we didn't -- on 787 through the strike. So we didn't -- we don't have the level of inventory that we have on the MAX program. So our next rate increase will be from this 8, which we should be at 8 by the end of the year and then we'll move to 10 next year. I do think on 787, the move from 8 to 10 will be more challenging for us with the supply chain, particularly seats. We're continuing, as I've mentioned in previous calls, we're continuing to struggle with seat certifications. I think that's going to be with us for a little bit longer. We are making progress on that. But I think seats will continue to be a constraining item for us. And then just the general supply chain on 787 because we don't have the buffer. We want to make sure that we're stable here at 8 a month rate before we go to 10. So we're planning to do that sometime next year. I'm not going to put a month on that yet. Maybe as we get to some stability at rate 8, we'll fine-tune that. Operator: Your next question comes from the line of Sheila Kahyaoglu from Jefferies. Sheila Kahyaoglu: The Q3 free cash flow number was solid. And Jay, you mentioned positive core free cash flow in Q4 pre the DOJ payment. So curious what BCA rates are underpinning that positive free cash flow. And just albeit a modest Q4 free cash flow exit rate, just a modest number, how do we think about 2026? Is it breakeven? Is it some low to mid-single-digit inflow of cash? Is that still doable? Jesus Malave: Okay. Thanks, Sheila. Let me just kind of baseline you on our discussions and our update for 2025. If you recall last quarter, we talked about a usage of $3 billion for the full year. As I mentioned in my prepared remarks and what you just indicated as well, Sheila, is that's better by $500 million to about $2.5 billion based on the better performance year-to-date. Let me -- what I'll do is I'll bridge you from the third quarter into the fourth quarter, so $200 million. When you go from that number, we expect a nice inflow based on seasonality, particularly at BDS with the tanker award. And so we'd expect an uptick there about in excess of $1 billion from BDS. Partially offsetting that is BCA volumes. Right now, we're holding anywhere to slightly down from the third quarter in terms of deliveries to maybe flat. But more importantly, in there, even if we're flat, we will see lower receipts because we've got a kind of just a mix headwind where we're expecting lower 777 deliveries in the fourth quarter. So that will be somewhat of a headwind. The next is interest expense or interest payments. Again, we have a seasonality aspect to it. So the payments in the fourth quarter will be more similar to what we saw in the second quarter. So it's about $900 million plus in the fourth quarter, and that's a step up in outflow of about $600 million. And then finally, we've got the DOJ payment. We've talked about that in the past, which is about $700 million. So when you reconcile all those items before the potential DOJ payment, you're in the range of positive $500 million. With the payment, that would swing us into a negative net-net. But again, operationally, we'll see better performance in the fourth quarter relative to the third and a pretty good exit rate as we think about next year. As I think about next year, look, it's encouraging what we've seen so far. The performance has improved throughout the year. We see that particularly in the free cash flow on an operating basis. But it's early for me to really make a strong kind of call on that right now. I'm still going through the planning process. There's a lot more that I need to get into in terms of the puts and takes on the full year basis for next year. And I'll give you just a lot more color on that in January. But as I mentioned, things are trending favorably, and we're bullish on our outlook. Operator: Your next question comes from the line of Scott Deuschle from Deutsche Bank. Scott Deuschle: Just a follow-up on that last question, Jay. I was wondering if you could share your perspective on this $10 billion free cash flow target, the company set out there for a while. And just more specifically, is that a target that you're willing to endorse? And if so, do you think the business is on the trajectory to achieve it in the next handful of years? Jesus Malave: Thanks, Scott, for the question. Just maybe taking a step back in the 2.5 months that I've been here. Overall, as I mentioned in the prior question, we've made great progress this year. We still have plenty of runway to go as we stabilize the business and complete the development programs. Right now, my observation is the foundation is in place, and that will lead to steady and gradual improvement over the upcoming years and I expect the financials to flow. Again, just like for next year, it's really a little early for me to comment on a specific long-term framework, but I'm confident in the underlying cash generation capability for us to return historical levels that you've seen before. You've got a great backlog and operational excellence will be the key to unlocking our cash flow potential. Over the coming months, I plan on assessing our operating plans and the cash flow drivers to develop the framework and I look forward to presenting that to you at the appropriate time. But it's just a little early for me to do that right now. Operator: Your next question comes from the line of Kristine Liwag from Morgan Stanley. Kristine Liwag: Kelly, you mentioned that the Jeppesen deal is closing next quarter. You also received approval from the EU for the Spirit deal 2 weeks ago. Taking a step back, can you share your thoughts on how you think about the Boeing portfolio today, your priorities for M&A? And also any color on the effect of these 2 items and free cash flow next year? Robert Ortberg: Well, look, I think the 2 items here that we've got imminently in front of us are our focus from an M&A perspective here right now. Getting through the Jeppesen close, we're pretty close on that. I think that's likely going to close a little bit before the Spirit transaction. And as you said, we've got EU approval on Spirit, but we're still waiting for the U.S. approval with Spirit. We don't see any showstoppers here, but we expect to get that done. And then we're on to the integration phase. We have to de-integrate the Jeppesen business from our digital business. We've got great plans to do that and then the reintegration of our Spirit business and that will be -- come over the next couple of months after we get into the close. So look, that's our focus right now. I don't have any other areas to point you to in terms of M&A for us right now. Operator: Your next question comes from the line of Doug Harned from Bernstein. Douglas Harned: Kelly, at the beginning, you talked a little bit about investment in Charleston. And on the 787, though, our understanding had been that you can really go from 7 to 10 a month in Charleston without that much material CapEx adds, but going to 12 and 14 will require more and an expansion of the facility. So when you're looking at Charleston right now, what needs to be done to go to 12 to 14 a month? And then the investment you're discussing today is that related to the 10 a month? Or are you already making steps toward going to those higher rates? Robert Ortberg: Yes. We're already making steps for the higher rates. You're right, we could probably -- if we thought capping at 10 was as far as we go, we would not be investing in expanding Charleston. So we're going to have a formal groundbreaking. But essentially, what you're going to see if you've been to Charleston, we're going to double the footprint, the manufacturing footprint. Now we don't need double, but it also gives us a lot more flexibility for some storage space as well. So a major expansion of the Charleston facility, and it's all around getting to rates higher than 10%. We think that the market demand will allow us to get to rates in the teens and that's what we're focused on putting the capital in place, getting the facilities in place. Obviously, if the facilities come online, they'll help us at rate 10, but we don't need that. And I think we're looking at really 2028 before we're really utilizing that expanded facility. Douglas Harned: Can you dimension at all the CapEx trajectory you're talking about for this? Jesus Malave: We expect that to increase next year, Doug. Again, I think in the -- when we kind of give you the '26 framework in January, we can provide more color, but there will be some higher CapEx in '26 related to both this as well as the growth in expansion in St. Louis. Operator: Your next question comes from the line of Gautam Khanna from TD Cowen. Gautam Khanna: Welcome, Jay. Kelly and Jay, I know you touched on seat certification as a potential constraint on 87 production hikes. I was just wondering more broadly, if you can talk about where you see the pinch points in the supply chain today and kind of across the programs as you move forward in rate, where are you most concerned that bottlenecks may emerge? Robert Ortberg: Yes. So again, I made a few comments on this already. I think you do need to break down between the 737 supply chain and the 787 or the widebody supply chain because we have this excessive amount of inventory. So look, I think in general, I would just comment that the supply chain is doing well. We do have constraints still around seating, but we know what those are. We've got specific actions with the suppliers. And some of that is on Boeing to get the actual seat installations certified on the aircraft. So we're working through those. There's nothing else I would highlight. I mean we have to watch the continued demand on the engines in both the forward fit and the aftermarket and the durability upgrades that are going on in the market. So that will be an area that we'll continue to work with GE and CFM on. But there's nothing I would particularly focus on. But this really is one of these things where that could change tomorrow. We have to keep tabs on all of our supply chain we need all the parts. But I think in general, we're doing well. I think people also are gaining confidence in our ability to meet our production output. So the fear of people discounting our production in the supply chain, I think, is diminishing going forward as well. Eric Hill: Rob, time for 1 more question here. Operator: Certainly, your final question comes from the line of Scott Mikus from Melius Research. Scott Mikus: Jay, you've been at the company for 2.5 months now. Just curious, what are your early observations? What are your priorities? And given that the company will end the year with about $33 billion of cash after Jeppesen is sold, how are you thinking about the balance sheet and what you want to do with that cash balance? Jesus Malave: Yes. Let me then Scott kind of work maybe backwards here. On the cash balance sheet, I think with the completion of both transactions, we'd expect the cash balance to be closer to probably in that $28 billion range, so high 20s, not as high as $33 billion. As far as observations, look, I've come in here, there's been a lot of enthusiasm. As I mentioned in my prepared remarks, the team has embraced me with open arms. It's made my transition as seamless as it can be. There's a fair amount that I need to get up to speed on in the company and again, everyone is helping me do that. As far as some of the culture changes that we've seen, as Kelly mentioned, I see a lot of enthusiasm. I see a lot of excitement about the recovery that the company has embarked on. People are committed. They're dedicated and they want to be part of the improvement. So it's easy to walk in, at least easier for someone like me to walk in cold to an environment like this where everyone is really operating and working on the same direction. Overall, in terms of what I need to focus on and my priorities in the short term, it's really getting up to speed so I can put myself in a position to be a valued contributor. It's maintaining the focus on fully restoring the health of our balance sheet. It's enabling and driving the planned improvements of our recovery and ensuring that they are sustainable. And finally, it's keeping an eye on the future while maintaining the focus on the short-term and medium-term recovery. So again, first things first, get up to speed and then contribute and drive us and be a participant in this recovery. And again, we're on a good path here. So I'm very excited to be here. Operator: That completes The Boeing Company's Third Quarter 2025 Earnings Conference Call. Thank you for joining. You may now disconnect.
Operator: Good morning, and welcome to the Camping World Holdings conference call to discuss financial results for the third quarter ended September 30, 2025. [Operator Instructions] Please be advised that this call is being recorded and the reproduction of the call in whole or in part is not permitted without written authorization from the company. Joining on the call today are Marcus Lemonis, Chairman and Chief Executive Officer; Matthew Wagner, President; Tom Kirn, Chief Financial Officer; Lindsey Christen, Chief Administrative and Legal Officer; and Brett Andress, Senior Vice President, Investor Relations. I will turn the call over to Ms. Christen to get us started. Lindsey Christen: Thank you, and good morning, everyone. A press release covering the company's third quarter ended September 30, 2025 financial results was issued yesterday afternoon, and a copy of that press release can be found in the Investor Relations section on the company's website. Management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These remarks may include statements regarding our business plans and goals, macroeconomic, industry and consumer trends, future growth of our operations, capital allocation and future financial results. Actual results may differ materially from those indicated by these remarks as a result of various important factors, including those discussed in the Risk Factors section in our Form 10-K, Form 10-Qs and other reports on file with the SEC. Any forward-looking statements represent our views only as of today, and we undertake no obligation to update them. Please also note that we will be referring to certain non-GAAP financial measures on today's call such as EBITDA, adjusted EBITDA and adjusted earnings per share diluted, which we believe may be important to investors to assess our operating performance. Reconciliations to these non-GAAP financial measures to the most directly comparable GAAP financial statements are included in our earnings release and on our website. All comparisons of our 2025 third quarter are made against the 2024 third quarter results, unless otherwise noted. I'll now turn the call over to Marcus. Marcus Lemonis: Great. Thanks, Lindsey. Leading our company on today's call are Matt Wagner, our President; Lindsey Christen, Chief Administrative and Legal Officer; Brett Andress, Senior Vice President of Corporate Development; and Tom Kirn, our Chief Financial Officer. On today's call, we're going to cover both the operational and financial highlights of the quarter, while providing some initial insights on the year ahead. Look, our mandate remains clear: improve revenue and earnings, while improving net leverage. I'm encouraged by our company's financial performance in the quarter, growing adjusted EBITDA by over 40% to $95.7 million. The team drove record volume on a year-to-date basis and sold nearly 14% of our new and used RVs in North America. This sales milestone further intensifies and proves out our thesis that consumers are focused on value and affordability across every single segment in the RV industry. Consumers build their monthly financial models around monthly payments, period. We anticipate entering 2026 with consumer sentiment and labor markets uneven and OEM new pricing rising on like-for-like models. While we see signs of resistance on the new side of the business, with our proven track record to address affordability and on used, I believe we can have another record year of combined new and used unit volume growth. I'm extremely confident in our ability to once again outperform the RV industry in 2026 and grow our earnings, thus reducing leverage. Our business has made tremendous strides on improving our net leverage position over the last several quarters, reducing net leverage by nearly 3 turns since the beginning of the year. We accomplished this through a combination of debt paydown, earnings improvement and cash generation. As we plan our cash flow for 2026, I believe it is appropriate to set expectations conservatively. Our company will continue to rely on our market-leading used sales, service and Good Sam businesses as our differentiators. Look, it's still early in our forecasting, and we see another consecutive year of earnings growth with an adjusted EBITDA floor of around $310 million. Now, this floor deliberately does not incorporate several sources of cost takeouts upside, used unit upside, M&A upside or upside that could come from our conservative new unit forecast. Now, I'm going to turn the call over to my teammate, Matt Wagner. Matt Wagner: Thanks, Marcus. While I appreciate the conservative approach to our 2026 outlook, we certainly have a plan to exceed this starting point through 3 -- through 4 sources, excuse me, of upside: SG&A, used RV sales, dealership acquisitions and new RV sales. Over the last 12 months, our team has made meaningful improvement to our cost structure, but we constantly reevaluate efficiency opportunities. We see $15 million of additional cost takeout opportunities next year through marketing technology, the launch of 2 additional CRMs and implementation of agentic AI across portions of our business. This estimate is not included in our preliminary models. The second potential driver of upside is used RV sales. I remain the most optimistic about the capabilities and scalability we've built into our used RV supply chain. Model year 2026 prices have a direct positive impact to our used industry outlook. If our used business exceeds our high-single-digit outlook, we expect to yield roughly $6 million of adjusted EBITDA for every 1,000 additional used units sold. We also see potential upside in the dealership acquisition space. While we are driving record volumes with fewer, more productive rooftops, we know there still exists significant white space in the North American RV market, and we are seeing a pipeline of activity percolating that we intend to pursue. We conservatively do not have any M&A activity embedded in our preliminary models. Finally, we are purposely modeling a conservative outlook on the new RV market, given the OEM prices passed along to dealers. Our track record of developing exclusive products tailored to consumer preferences and desired monthly payments suggest that we may yield additional upside beyond the current outlook. These 4 idiosyncratic sources create clear path to upside in 2026, but our long-term objectives remain clear. Our used RV sales, Good Sam and service businesses remain the bedrock of our company, and we believe they will enable us to achieve our mid-cycle adjusted EBITDA target of $500 million on today's store base. I'll now turn the call over to Tom. Thomas Kirn: Thanks, Matt. For the third quarter, we recorded revenue of over $1.8 billion, an increase of 5%, driven by unit volume increases in used in excess of 30%. New ASPs improved sequentially to just under $38,000, a decline of roughly 9% year-over-year, better than our initial expectations. ASPs benefited from a richer mix in the quarter, while this weighed slightly on our gross margin percentages. On a GPU basis, we were pleased with our gross profit performance. Within Good Sam, the business continues to post positive top line growth with the organization positioned for margin improvement in 2026 as we continue to make additional investments in our roadside business. Within product services and other, our core dealer service revenues and our accessory business continued to show stable margins. We reported adjusted EBITDA of $95.7 million compared to $67.5 million last year. SG&A as a percentage of gross profit improved 360 basis points year-over-year as we start to fully realize more of the run rate savings from earlier in the year and the sequential improvement in new ASPs. Lastly, as we think about the remainder of 2025, we expect our fourth quarter to experience impacts from the previously mentioned new unit trends, and we will be lapping a couple of important items to call out from last year. These include Good Sam loyalty breakage benefits of [ $4 million to $5 million ] experienced in Q4 of last year and [ $4 million to $5 million ] of F&I actuarial benefits that we experienced last year. That said, we ended the quarter with stronger unit sales per rooftop, improved fixed cost leverage and $230 million of cash on the balance sheet. We also have $427 million of used inventory owned outright, another $173 million of parts inventory and nearly $260 million of real estate without an associated mortgage. I'll now turn the call back over to Marcus. Marcus Lemonis: Thank you. We'll turn into the Q&A section. But before we do that, I think it's important to just sit with the improvement on the balance sheet in 2025. As we started the year, improving our cash position and deleveraging our business was really key initiatives for our management team. And as we head into 2026, continuing to improve our net leverage through performance, through operating efficiency, through improved sales is absolutely the focus for our team. So we'll turn it over for questions. Thank you. Operator: [Operator Instructions] Our first question comes from Joe Altobello with Raymond James. Joseph Altobello: First question, I guess, on new RV demand. Marcus, you talked about rising prices weighing on that. And I think at least some of the industry data during the summer seemed to indicate that retail was stabilizing. What have you guys seen so far, maybe September and October, that would indicate that that's starting to soften again? Matt Wagner: Joe, this is Matt. I would argue the fact that, yes, we saw some stabilization so much as we are seeing high-single-digit declines in the new RV industry up until that summer time frame, but we are still seeing declines year-over-year. So while it's not nearly as severe, we've obviously been outperforming this, and we feel like we've had more of a purview and line of sight into what's happening real time within the marketplace. And we've been speaking with all of you over the last few months suggesting that we had a line of sight on the 5% to 7% price increases on invoice prices. And we knew that there could be some opposition from consumers to be able to absorb that. However, we know through our very creative mechanisms of our exclusive products, brands that we oftentimes are able to buck trends that exist in the broader RV industry. And that's where we've been able to yield material market share gains over the last 2 years, leveraging that strategy. But as we sit here today and we think of the exit rate of new sales in September and we think of what's happening currently in October, there's a couple -- or a few factors really that have weighed on the consumer perhaps a little bit more than we anticipated. And when I think about them, the evolving job market that we're seeing more and more headlines, which naturally will just bleed into the psyche of different consumers, really the uncertainty resulting from the government shutdown, and then finally, when we think of the general inflation environment out there, we're seeing within certain price points, there's a dispersion of activity and customer demand where consumers are able to yield whatever they need in terms of a product and a relating price point to ultimately be able to afford this lifestyle. The RV lifestyle is alive and well, and we know that consumers want to participate in this lifestyle. And that's really where our used strategy has continued to take hold. Our September used results were very good, perhaps amongst the best comps year-over-year on a used same-store sales basis. That trend has also continued within October. So while we're very cautious and cautiously optimistic on our strategy on the new side of the business, we know that the used side of the business will continue to be our buoy, whereby we could satisfy consumer demand that still exists out there. Marcus Lemonis: Joe, the one thing that I think Matt and the team have done very well in acknowledging the potential resistance on the new side is, if you look at the stocking of used, we've become far better at that side of the supply chain. And part of the really intentional conservatism for '26 is that we really start to build out our cash flow and our inventory positions. And when we think about placing orders 3, 6, 9 months in advance on the new side, it was more judicious for us to build that model with a lower expectation, knowing that if we wanted to take on more new at any time, if we were wrong about our calculus, that would be easy to get inventory. But I think what I really appreciate about our strategy is, if we are right about our strategy, if the new is going to have a little bit of resistance, we're not going to be kicking the can on new aging into the next 12 to 24 months. And when we look back on what happened over history, we may have gone into the years with just because we were outperforming everybody else, a little bit of a delusion about what was happening, and we would go for it on the inventory side and then find out 18 months later that we have to discount our way out of stuff. So what you're hearing from us today is just a more tempered approach to stocking and to forecasting and that we know that if we outperform like we always do, it's easy for us to get more inventory. It's really hard to get rid of inventory that we miscalculated. Joseph Altobello: Very helpful. Maybe just a follow-up on that. If you look toward '26, the more bullish view was that lower rates would help to drive unit growth. It sounds like what you're saying is that the price increases we're seeing would offset any impact from lower rates and basically, affordability doesn't get any better next year. Matt Wagner: So Joe, a good way to think about it is, our combined average sale price is roughly in the range of about $36,000. If we're to add about $1,000 of cost and the interest rate drops for a consumer about 50 basis points, that would actually create the same exact monthly payment. So yes, there is the opportunity for consumers to be able to absorb more cost or more features with -- while paying the same money or less, depending upon the pricing and segment. However, we're not quite seeing that take hold just yet where the retail lending rates have really not materially changed in any capacity. But next year, there is a possibility that they could come down, in which case, this could be a more conservative outlook in the new space [ what ] we believe a very pragmatic view. Marcus Lemonis: Yes. When we look at -- Joe, when we look at the lack of predictability around what the Fed is going to do compared to previous years and decades and the lack of predictability on the tariff side, that's probably the 2 most imposing factors that are causing us just to be really conservative just because we don't know. When we went into '25, we never would have expected Liberation Day. And while we were able to make a lot more money by reacting to different things in the market, we just want to go in and set the expectation low and hope that our performance and our -- I guess, our track record of idiosyncratically operating comes to fruition. I think our track record proves that. We don't want to have any missteps. Operator: Our next question comes from James Hardiman with Citi. James Hardiman: So I like the sort of framework that you've given us with respect to 2026. I just want to make sure we're on the same page from a starting point perspective. The Street is at about $280 million for this year with 1 quarter left. I don't know if you'd sort of disagree with that number meaningfully. But that would sort of assume, call it, a $30 million expansion, right, to get to that $310 million floor that you've laid out. If that's all right, sort of how are you thinking about the building blocks of getting there? It sounds like overwhelmingly sort of the used business driving that extra $30 million. And then, I don't know, maybe order of magnitude of the 4 upside drivers that you laid out, like which of those are you really -- I guess, the $15 million of cost saves are pretty straightforward. But which of those are you most excited about? At the end of the day, the Street is looking at more like, I don't know, $100 million of EBITDA growth, which it sounds like is not all that realistic as we sit here today. Marcus Lemonis: Well, we're hopeful that we can have that sort of upside growth. But as we mentioned earlier, we just really don't know what's happening in the macro, and I think that's caused it. When I think back over the 20 years, the fourth quarter, quite frankly, has rarely, if ever, been a quarter where we've made money. And in this particular year, we're still dealing with high floor plan rates, and we're still dealing with other tariff issues around pricing. I will be candid with you and tell you that the optimistic nature that I have on the fourth quarter is that we will still grind hard to try to get anywhere close to breakeven, which would be really a big size improvement over like even the last decade of averages. It's a little early in the quarter for us to predict where things are going to land. As Matt mentioned earlier, we have seen resistance on the new side. Nothing that alarms us, but it is a resistance where we're starting to comp year-over-year-over-year growth. On the used side, we're continuing to see performance there. I have sort of laid down the gauntlet with the team on wanting to make sure that we're going into 2026 with, again, clean inventory, no excuses in 2026. So I've been a little bit more aggressive in pushing them to liquidate out of inventory, and that's probably a little dangerous of a word, liquidate, sell-through a little inventory just to make sure we go in a little cleaner. Thomas Kirn: This is Tom as well. We also noted a couple of laps as well. We had -- last year, we had kind of a onetime benefit on the Good Sam Club side. It was our first year really with experience on the new loyalty program, and we had some adjustments that were in that [ $4 million to $5 million ] range in the fourth quarter. And then, on the F&I side, we always go through with our actuaries and review cancellation rates and estimates on certain products and all the products we sell. And in the last couple of years, we've had a benefit from that because we've seen continued utilization of those products. And when we looked at things in the third quarter of this year, we started to see a little bit of an uptick in those cancellation rates. And so, [ that's where ] we called out the benefit that we got last year in the fourth quarter. I don't know that we'll necessarily see that same benefit this year. Marcus Lemonis: Yes. Again, we're taking that conservative approach. But on the upside... Matt Wagner: I mean, just as well, James, when we're thinking of Q4, this is really a setup time period for us where there could be some additional OpEx that has to flow through our balance sheet -- our income statement really to set the stage nicely for next year to truly yield those 4 upside opportunities that I laid out in the prepared remarks. Most specifically, we're making quite a bit of investments in different agentic AI functions, as well as enterprise AI functions, which we do view this as an opportunity for us to yield even greater cost savings potentially than the $15 million that I laid out earlier. And that's really going to be by means of just looking at different components of our business that will not only help the consumer experience, but really our employees to yield more efficiencies of actually being able to get to a customer quicker, be able to sell them quicker and be able to be much more intelligent about all of these complicated products that we sell throughout our entire industry. And that's really been, in many ways, a handicap of this industry at large. We don't necessarily have as much insight as we need to in the product, the repair event cycle time. So we have been aggressively and quietly pursuing this in the background, and we haven't spoken as boldly about all of these different AI initiatives because this has been a test-and-see environment. We know that all these AI implementations can quickly spiral out of control in terms of AI actual usage and different advancements in what we're going to be pulling on these LLMs. So by means of that, we've been setting the stage nicely. We know that we'll be able to make some nice implementation guidelines set out here pretty quickly, and we know we'll be able to take advantage of this opportunity that's before us. Marcus Lemonis: Over the next several years -- and I really applaud our team's very aggressive and progressive approach to looking at how AI can create staffing efficiency, and that's really top to bottom. And when you think about the efficiency that AI has already started to create in portions of our business, where we're able to spend a little less and convert a little better, we're able to take care of our customers a little faster and avoid other things. But I think the next 12 to 24 months could create significant, maybe more than I've seen in 20 years, significant upside to staffing efficiency and more importantly, a better customer experience through all of the learnings that we have over 2 decades. When we compare what we have that nobody else has, that is lots of data. And as Matt puts that data to work in the way that he is exceptionally skilled for, I think the SG&A upside opportunity plus the revenue and conversion opportunity could be unmatched to anything we've seen in years past. James Hardiman: Got it. That's all really good color. And then -- so if I think about -- it sounds like if you did, at best, flat EBITDA in the fourth quarter, so we're maybe looking at closer to, I don't know, $269 million, $270 million number, and then -- for this year, and then, call it, $310 million for next year, how do we think about leverage in the context of year-end '25 and '26? And then, specific -- maybe more specifically, there was some discussion about reengaging M&A. Sort of what's the decision criteria around that in the context of leverage? Marcus Lemonis: As a management team, we talked about it in our prepared remarks that we've seen a significant improvement in our overall net leverage. We have not seen the kind of cash on the balance sheet that we showed at the end of third quarter in a long time. And as we continue to sell properties and sell down the mortgage and use some of our free cash flow to pay down debt, we know that those are parts of the building blocks to deleveraging the business. As a team, we want to get back into the neighborhood of 4 and below. And so, as we think about capital allocation in 2026, yes, we are investing a significant amount in AI. That's going to unfortunately partially go through OpEx, but there is some CapEx associated with some of the things that we're doing as well. And as we look at the capital allocation, our goal would be to get into that 4 or below neighborhood by the end of '26. That's a very lofty goal, but it's a goal that we're committed to. And we know that when we do that, we have to make tough choices about staffing, about acquisitions, et cetera. And so, the only acquisitions that we're truly looking at are ones that we believe are going to be accretive, ultimately accretive to not only the earnings profile, but the leverage. In looking at small dealerships, we know that we can buy dealerships at 1x, 2x, 2.5x, clearly accretive to our business. But as we start to look at other bolt-ons inside the RV industry, any kind of bolt-on, we are probably going to have to be a little more aggressive, still staying inside of the dilution versus accretion. We think it will still be accretive. But we need to start to build a bigger business with bigger tentacles reaching different parts of the industry. Operator: Our next question comes from Patrick Scholes with Truist. Charles Scholes: My first question concerns market share. I know year-to-date, you were tracking 13.5% and you had previously given a medium-term target of 20%. For next year, 2026, do you have a target to reach for market share percentage? Marcus Lemonis: Just for clarity's sake, we have been very clear over the last 2 years that 15% was our goal. Charles Scholes: I'm sorry. Okay. Marcus Lemonis: That's okay. But because we started to accelerate from the 11.3%-ish that we were a year ago, we moved our own goalpost, and maybe that's our greed in just wanting to dominate the space more. Matt Wagner: That's certainly a fair observation. Well, Patrick, it was really about 4 months ago, we woke up and realized that we were on a clear-cut trajectory to hit that 15% a lot quicker than we anticipated. I would anticipate over the next year that a very realistic goal is to achieve another 50 basis points to 100 basis points of market share improvement on a combined basis. And a lot of this is really going to hinge upon the creativity that we're able to deploy on the new side of the business to yield even more market share gains, which has been compounding substantially over the last 2 years. But we're trying to be as realistic as possible, understanding that market share gains on the new side could continue to be a little bit more difficult, whereas on the used side of the business, we see a very clean and clear path for us to continue to achieve that compounded growth. Marcus Lemonis: As a reminder, the used business is essentially double the size of the new market. And when we look at our own penetration of used, the amount of white space that we believe exists, not only in the affordable categories, but all the way up through motorhomes, is unbelievable. And we've been very thoughtful in how we've allocated capital in the last 12 months to growing that used business, and quite frankly, don't see any barriers of any kind that would prevent us from continuing to grow that used business as much as high-single digits to low-double digits every single year for the next several years. Yes, we are very good at it, but B, the market is much bigger. And if the consumer is going to continue to be under pressure for the foreseeable future, we will absolutely allocate the bulk of our working capital towards where we know that business will take us and the margins that come with it. Charles Scholes: Okay. And then, a follow-up question related to where you talked about setting the stage for a return to measured and accretive M&A, certainly laid out improvements in your business and wanting to add stores and a better balance sheet. Regarding potential M&A targets, with those targets, are you seeing some financial stress in potential targets where they might be more willing sellers at this juncture because of that financial stress? Brett Andress: Yes, Patrick, it's Brett. So what I would say is, it's a bit of a barbell when you think about how that pipeline is unfolding. I think we have several opportunities on the distressed end, as you can imagine, in this industry backdrop over the last couple of years. And on the other end, there's still a good amount of, I'd say, high-quality, very good performing opportunities out there. So we feel good about that. I would tell you that when we talk about the word measured on the M&A, I think the bite size and the priority is going to be at least on that smaller end and where the white space is very, very clear to us, given the consolidation that we've done in the footprint in the last 12 to 18 months. Charles Scholes: Okay. And just one -- I got a question from an investor right now. You didn't put out any guide points that we kind of think about -- you talked about sort of flattish EBITDA. But with those... Marcus Lemonis: No, no. We didn't say flattish. Charles Scholes: No, no, no. I apologize. You didn't. But sorry, I think you said -- well, anyway, with those guide points not provided anymore, would there be -- if you were to give them, excuse me, guidepost, any material changes or updates in those -- from those previous guideposts as we think about the rest of the year? Marcus Lemonis: What we decided to do rather than providing guideposts and having people sort of figure out what the calculus was, we established the most conservative, what we believe, number that we could hurdle of $310 million on the EBITDA side. And then, Matt outlined and outlaid all of the building blocks, those 4 specific building blocks, and certain numbers attributable to those that he believed we would be able to achieve on top of that floor. I think there's one thing that we want to make sure that everybody takes away from this. The single biggest driver in us having a very ultra-conservative approach is our reluctance to be aggressive on the new side. And so, when we think about the outcome of new in 2025, the band of possibilities in 2026 on the new side is wide. And we happen to be stocking and forecasting towards the lower end of that band, knowing that in a matter of 60 to 90 days, if things pan out the way we hope they do, that we'd be able to stock more inventory. We want to set an expectation that we know we can hurdle, that we can build our cash flow around and we can build our leverage targets towards. And I think that's probably a bit of a shift for us. That shift largely happens because when we entered 2025, we did not expect this administration to create the kind of unpredictability around the economy that we dealt with. And we don't know what next year looks like. We don't know if there's a new Liberation Day of some kind. And that's why we just are sitting in this number hoping that it doesn't look like that. Brett Andress: And Patrick, I think I believe part of that question related back to 2025 and the guideposts that we had previously out there. I would point back to Tom's commentary around 4Q, our evolving view on the new market going into the year-end. I would tell you the biggest change, while we didn't formally update those, would be to that kind of that new volume assumption that we had made for that full year for 2025, and that would be the biggest driver, I would say, as you think about 4Q. Operator: Our next question comes from the line of Craig Kennison with Baird. Craig Kennison: I wanted to start on price. Can you just remind us of the average price increase that OEMs have pushed through for model year 2026? Matt Wagner: So Craig, on average, it's panning out to about 5% to 7%. There's a handful of outliers that exist out there just as well, as there's a handful that we're able to keep prices down. But across the blended portfolio or bag of goods, it's roughly that 5% to 7% price increase. Craig Kennison: Is that a like-for-like comparison? Or is there some change in content? Matt Wagner: That's like-for-like. Great question. And so much as we look at a specific basket of goods that we've been tracking now for going on 15 years, where we modify those goods based upon the like-for-like nature of it, so if there's something that materially changes from year-to-year, we extract that altogether. So we feel this is the most clean pure view of roughly where we're settling in. However, just as well, I mean, there's always going to be certain segments where, for whatever reason, there's going to be a chassis price increases in certain segments that are just going to be unavoidable or where there's going to be a chassis change altogether, which might significantly modify features and price points. So sometimes we have to remove these assets from our basket of goods. We're still playing a game, though, where we have roughly like 10% to 12% of the consumers that exist out there, up and down all the different [ types of ] price point segments. So we tried to distill it down to a very simple number, but in reality, it's far more complex. Marcus Lemonis: Yes, Craig, as we built out our conservative model, we anticipated that those 5% to 7% increases would stick for 12 months. But you and I have been around this industry for 20 years, and the manufacturers are going to need to spur demand. And if they feel like the price increases aren't going to do that, it wouldn't surprise me if, in the spring or the summer of 2026, there tended to be some reprieve on that. We're not factoring that into any of our assumptions, but it's highly possible. The offset to that, and Matt talked about all the data that we've been collecting for several decades, is that when those price increases happen on the new side, they do bolster the value of used units, not only the inventory we have in stock, but our ability to meet the customer where they want to be on a monthly payment. And so, as we're very scientifically and surgically issuing certain marketing tactics to drive the purchase of used, we're going to identify those segments on the new side that are maybe experiencing the most friction and lean into that on the used side to help mitigate that floor plan or that segment in our business so we can outperform everybody else. Craig Kennison: And maybe just following up on contract manufacturing, you've been able to lean into that strategy to keep your prices in check. I'm curious what your mix looks like for model year '26 versus model year '25. Matt Wagner: As of this moment, we're leaning in a little bit more for '26 compared to '25, and we'll probably end up 2025 with all of our new sales, about 40% or so being derived from our exclusively branded products and contract manufactured products. We are going to have additional segments roll out that we believe satisfies different consumers that have either been avoiding to buy in the short term because of price increases or that we believe we're offering different feature sets floor plans we'd be able to induce additional consumers to actually come into the lifestyle. So we still feel very confident. However, we're really tempering back expectations because there's a lot of unknowns. Marcus Lemonis: I think Craig, Matt misses sometimes patting himself on the back on the innovation side. And I want to make sure that the market doesn't believe that the only reason that our market share on new has grown and the only reason that our unit volume has grown is because we're just selling cheap products. That's just not the case. And we saw a nice ASP improvement in Q3 and hope to see it again in Q4. I think the real reason that we've been really outhustling everybody is, the contract manufacturing opportunity provides a sandbox for innovation, provides a sandbox for testing out new segments, new floor plans and new ideas. And when you look at 2025's results, a giant portion of the outperformance on new came from the innovative ideas across the board. I actually think that what's happened is that's now accelerated. And in '26, you could expect more of that from our company. Private label started as a way to advertise the same kind of floor plan as everybody else at a lower price. It's turned into something much different. And the R&D side of that part of our business has evolved into something that has given us the ability to outperform everybody else, not just on price. Operator: Our next question comes from Noah Zatzkin with KeyBanc Capital Markets. Noah Zatzkin: I guess, first, I know this has been touched on, but maybe if you could kind of rank order the size of the 4 opportunities above and beyond kind of the $310 million floor? And within that, if you could just maybe touch on how you're thinking about M&A? Is it possible that you kind of get back to the 10 to 15 kind of run rate of acquisitions? And if so, like how meaningful could that be within the upside? Matt Wagner: No, I tried to thoughtfully rank those 4 in sequential order in terms of either order of magnitude or order of opportunity in terms of additional upside. However, embedded with each one of those 4 between the cost savings that exist between different implementation of marketing technology and agentic functions between our used RV sales, M&A activity or new RV sales, there's obviously going to be some additional elements that could come into play here over the next few months that would lend itself to this order of events or magnitude to actually shuffle out of order one way or the other. But we do feel confident in these numbers that we laid out here that they're relatively conservative. So when we say $15 million of cost savings in terms of SG&A, there's always the opportunity for more, depending upon the opportunity of these different agentic functions, marketing technology, CRM launches, et cetera. Brett Andress: Yes. And Noah, I would say, on the M&A pipeline, our confidence and our line of sight into returning to that 10-plus door growth per year, I would say, the activity in the pipeline would support that today. I would also note, it's probably going to lean at least initially a little bit smaller on the door size, just given the opportunity set. But you're normally looking at an EBITDA opportunity anywhere from $500,000 incremental to $2 million. It really depends on the size. I mean, every dealership is different, but I would [ err ] towards the smaller size just initially in the modeling. Noah Zatzkin: Got it. Really helpful. And then, maybe if I could just touch on -- new gross margins in the quarter were maybe a bit softer even with the kind of maybe better-than-expected new ASPs. So just what kind of happened there? And then, how should we think about new gross margins going forward? Matt Wagner: Purely a byproduct of mix where -- we've spoken about this previously, but as average sale price goes up historically, our gross margin typically will be a little bit more pressured, which is why we saw that gross margin figure remain relatively elevated or at least in a nice suitable range as the ASPs came down. And it's just the very nature of the RV industry. If you think about -- and you're a consumer that's shopping for a $120,000 Class A gas, you're going to have a higher willingness or likelihood to travel outside of your local area to buy that asset to yield perhaps $5,000 of savings, in which case, the higher-end price points in the RV industry are generally much more competitive, where you're competing much more on a national or regional at a minimum level, in which case, there's going to be more people that will actually compete for that same deal. Whereas in the travel trailer space, that consumer largely remains within a 50 to 75-mile radius and lives within a 50 to 75-mile radius of the dealership from which they'll actually transact with, where as I said a Class A gas, that could be upwards of about 150 to 175 miles. So the dealer management areas just become totally different scale size. So when you look at our ASPs improving, part of that comes to the detriment of that gross margin profile, albeit it was still very healthy, [ plus ] sitting right around or just shy of 13% front-end gross margin on the new side, while coming out of season and while generating a higher ASP, we felt very good with that number. Operator: Our next question comes from Tristan Thomas-Martin with BMO Capital Markets. Tristan Thomas-Martin: I think you guys have kind of mentioned a couple of times the bands of your assumption of new RV retail demand next year. Can you maybe -- maybe I missed this -- let us know what those are in terms of the industry and kind of your own expectations, what's embedded in that $310 million number? Matt Wagner: Tristan, we believe it's conservative to estimate that as the RV industry has trended this year, low-to-mid single digits down year-over-year, that we anticipate that trend line and that slope to continue at the relatively same rate heading into next year. So, as such, given the material market share gains that we've been able to post over the last 2 years, we're also suggesting that new on our side could be potentially down low-to-mid single digits. As we've maintained, though, if you look at the collective sum of new and used sales combined, we are still very confident that we'll post additional gains and another record volume year when you look at the summation of the 2. I don't want to go too far down this rabbit hole of the new side, but we also know that this is a big portion of our business, but we know that used has become an even more material portion of our business. In fact, for the first time over the last 2 months, we were able to hit a 50-50 split between new and used sales. So when we think of the amount of gains that we made on the used side, we're really just setting the stage to offset any sort of new shortcoming or shortfall next year by means of continuing to pump the used business. Marcus Lemonis: Tristan, the silver lining in all of this, because we always try to find it in our own business, is that we don't control the OEMs pricing and we don't control the rates in the environment. But nobody really cares because we have an obligation to make more money and sell more units and delever our business. And the silver lining for me is that as we look back at the violent swings that have happened in this industry over the last 10 years, we know that for investors to continue to want to be invested in our business, we have to take out some of those swings. And our used business, our service P&S business, our Good Sam business provide that road map. We aren't just leaning into used because we're concerned about the new. We're leaning into used because we want to eliminate these wild swings in earnings, and we believe that the trough of earnings is behind us. Every single time that we can grow our used business, we further substantiate a floor in our business, and that's kind of the theme of this call. We have to give people a floor. Matt also mentioned on the call that mid-cycle at $500 million-plus isn't something that's outlandish. It is something though that will require the new business to be more stable. What does that mean? You need interest rates to be lower than they are today, and you need pricing to really settle out at a payment range that people can afford. This move to used is structural. It's not temporary. It's philosophically, I think, what our management team believes makes sense. Tristan Thomas-Martin: Okay. Got it. And then, just because you mentioned the $500 million-plus mid-cycle target, I think it's on the same store count as today. Can you maybe just go over some of the other building blocks that gets us from the $310 million to $500 million? Brett Andress: From $310 million to $500 million, it really has to do with increased industry volume, right? So I think if you think about the $500 million, you're looking at an industry that's in the 400,000 range. That's down previously from prior estimates of 425,000 to 450,000, and that's really a testament to our market share gains. And then, from there, there's a slight increase in assumed ASP over the next, call it, 1, 2, 3 years, whatever you want to pick for your mid-cycle time frame, that would drop down to really SG&A percent of growth in that mid-70s. Those are really the building blocks outside of it, and really it's based on historical trends and not any assumptions that we haven't built in the model before. Marcus Lemonis: And the math model is pretty simple. If it goes to 400,000 and we maintain some level of market share, we'll be selling north of 80,000 new units. And I don't know where that is in terms of like is it 82,000 or 84,000, just north of 80,000 units. Those things help because everything else flows with it. Service flows with it. P&S flows with it. And so, as we see that new business stabilize, we'll be in pretty good shape. Operator: Our next question comes from Scott Stember with ROTH Capital. Scott Stember: Can you talk about what you're seeing on the financing front? Have you seen rates coming down, given the recent drop in short-term rates? And what does the credit profile of the consumer look like? Has it deteriorated at all? Brett Andress: Scott, it's Brett. So when you think about where the 10-year has been really over the last 1 to 1.5 months, it's kind of been hanging sustainably below that 4%. We've seen a handful, a select handful of retail bank moves within them. But when you think about -- and this just goes back to the conversations that we always have with our lenders, thinking about their appetite and their propensity to take advantage of those lower rates and pass them on to the consumers. This time of year, I think you're possibly going to have a little bit more of a time lag, I would expect, as you get into a more retail-heavy period like 1Q, January, February, March, April. I think that's when we'll start to see the fruition of a lot of the rate cuts that are out there. So right now, I think the setup for retail lending rates to come down is very constructive. It's just a matter of does it happen in November or does it happen in January, February around show season. Scott Stember: Got it. And the credit profile? Brett Andress: Yes. No, credit profile has been very stable for us when we think about our F&I trends over the last couple of months, couple of quarters. The consumer credit profile has been stable and so have the approval rates. And that's really how we judge credit availability in those 2 contexts. Scott Stember: Got it. And then, just last question, just putting some finer points to '26. What would you predict the new and used margins or the ranges should be for '26? Matt Wagner: I would anticipate that our new margins should be within that historical range still that we suggested earlier of like that 13% to 14% range even. And then, on the used side, I would factor in somewhere within that like 18% to 20% range. I mean, there's going to be some months, some quarters where we might have to get a little more aggressive, in which case, we could veer towards the lower end of that spectrum. And then, once we're in peak periods and we feel like we've optimized certain inventory levels, we could push it closer to 20%. But I would say throughout the summation of the year, I mean, that's obviously somewhat of a wide band. But when you look contextually and historically, it's really pretty tight, 18% to 20% on the used side. Operator: Our next question comes from Bret Jordan with Jefferies. Patrick Buckley: This is Patrick Buckley on for Bret. Looking at the parts and service decline versus the continued momentum in used, I guess, is there a goal or target moving forward for what customer pay service growth and margin should be? Thomas Kirn: I think what we're seeing -- this is Tom. I think what we're seeing right now is kind of that trend that we saw in Q2, where as we build used inventory, we have to reallocate that technician time to reconditioning the units and getting it frontline ready. So, as you've seen that sequential increase in new vehicle inventory on our balance sheet quarter-to-quarter, we've had to allocate more of that time to the internal work that doesn't necessarily flow through that PS&O line. It bolsters rather our used volume and our used margins. So I think heading into next year, I do believe that at this point, we see that -- we feel like we have a lot of initiatives out there to continue to grow. And Matt talked about use of agentic AI and some other things that we're thinking about in service. When we think about some other programs that we're looking at in the online marketplaces and trying to kind of continue to bolster our margins with some other programs on the parts and accessories side, I do think that we have some upside opportunities there to grow from where we are today. Matt Wagner: And Patrick, we'll be the first to acknowledge that there's been a lot of noise in that revenue line item over the last few years, more than a few years, even at this point, of either divestitures or different acquisitions or different movements in different categories. However, we believe that we're at a point now where we have a nice, clean baseline. And the entire focus of this line item now is to really induce more usage of RVs. And we could oftentimes do that by means of obviously, service and the reconditioning to ensure that people have assets that are ready to be on the road again, but more importantly, having all the retail products and install items that these consumers need to actually enjoy this lifestyle more and more frequently. And as Tom referenced, we obviously are diving quite deeply into the Amazon marketplace. We've been very effective at working with different partners like [indiscernible] and Lippert and Dometic and Camco, where those are the 4 largest names within the RV aftermarket space. And it's through those relationships, partnerships that not only do we think we could gain more market share in the parts business, especially, but also yield that additional upside when we actually install those items within our service channel. Marcus Lemonis: I do want to have one big takeaway on the P&S. It really does prove out how strong the base of our business is. And while it may go up or down 1% or 2%, the same consumer pressures that people may feel on price, they feel on any money leaving their wallet. And what I'm really proud of what this team has been able to do is to hold the line on that revenue line in the face of a consumer saying, I can't afford things. They're still able to induce people to come in for the proper maintenance and all the other items. But in certain cases, much like a lawyer may have to, you sometimes have to discount rates to make it affordable for people. When you look at the stability and the strength of that particular segment, regardless of what's happening in the macro, it really is that and Good Sam are the 2 differentiators of our business that nobody is able to or nobody will ever be able to penetrate. And that for me is what we're trying to do on the used side as well, just to build a very strong foundation. So the P&S business is just fantastic. It's just resilient. Patrick Buckley: Got it. That's helpful. And then, on the Good Sam Club, it does seem like there's been a bit of a slowdown there. Is that decline at all related to less usage? Matt Wagner: No. So, a few things to note, Patrick. We had announced maybe about 1.5 years ago that we were migrating our Good Sam memberships to a loyalty program. By means of that introduction, we actually created a whole new free tier, and we don't report the free tier in those numbers because we've only historically reported a paid membership. So we didn't want to mislead people by means of bolstering this free tier. But we do have nearly 1 million additional members that are part of our free tier that are not reported in numbers. I call attention to that because through a free tier, you're also earning points when you shop at our facilities, however, not as many points compared to the paid memberships, never mind, an elite membership. And if you look quarter-to-quarter at this line item, we've actually seen a stabilization where we're able to actually offset now any sort of detraction or any sort of depression of that membership growth. And we do believe now we're at this inflection point of being able to stack on gains now because we've been able to stabilize it. Never mind the gains that we yielded within the free tier of the loyalty program. Marcus Lemonis: I think that's the remainder of our questions. Operator: Yes. This concludes our question-and-answer session. And I would like to turn the conference back over to Marcus for any closing remarks. Marcus Lemonis: Great. Thank you so much. We hope you heard the confidence in our ability to deliver these results, and most importantly, as Matt laid out, the building blocks for a much better performance than the floor we've set out. So we look forward to delivering better results and talk to you soon. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to the Stepan Company Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded on Wednesday, October 29, 2025. It is now my pleasure to turn the call over to Mr. Ruben Velasquez, Vice President and Chief Financial Officer of Stepan Company. Mr. Velasquez, please go ahead. Ruben Velasquez: Thanks, Jecita. Good morning, and thank you for joining Stepan Company Third Quarter 2025 Financial Review. Before we begin, please note that information in this conference call contains forward-looking statements, which are not historical facts. These statements involve risks and uncertainties that could cause actual results to differ materially, including, but not limited to, prospects for our foreign operations, global and regional economic conditions and factors detailed in our Securities and Exchange Commission filings. In addition, this conference call will include discussions of adjusted net income, adjusted EBITDA and free cash flow, which are non-GAAP measures. We provide reconciliations to the comparable GAAP measures in the earnings presentation and press release, which we have made available at www.stepan.com under the Investors section of our website. Whether you are joining us online or over the phone, we encourage you to review the investor slide presentation. We make these slides available at approximately the same time as when the earnings release is issued, and we hope that you find the information and perspectives helpful. With that, I would like to turn the call over to Mr. Luis Rojo, our President and Chief Executive Officer. Luis Rojo: Thank you, Ruben. Good morning, and thank you all for joining us today to discuss our third quarter 2025 results. I plan to share highlights of the quarterly performance and we will also share updates on our key strategic priorities, while Ruben will provide additional details on our financial results. We delivered 9% adjusted EBITDA growth through the first 9 months of 2025, bringing year-to-date adjusted EBITDA to $165 million. These results were restrained by the significant increase in oleochemical raw material prices, which continues to impact Surfactant margins and by higher start-up costs related to our new Pasadena, Texas facility. We remain focused on gradually recovering our margins and keeping a healthy balance between volumes and margins. Third quarter adjusted EBITDA was $56 million, up 6% year-on-year. Specialty Products adjusted EBITDA increased significantly, driven by favorable order timing within the pharmaceutical business. Polymers delivered volume growth across rigid polyols and commodity PA, while EBITDA was slightly lower due to unfavorable mix and margin pressures. Surfactant adjusted EBITDA declined versus the prior year, driven by higher Pasadena start-up costs, oleochemical raw material cost inflation and lower demand within our global commodity consumer products end market. Total company sales volumes grew 1%, with Polymers up 8% and our NCT product line up 26%, while Surfactants volume declined 2%. In Surfactants, we continue to experience double-digit volume growth within the crop productivity business and mid-single-digit growth in the oilfield end market. This growth was offset by lower demand within the global commodity consumer products end market. North America Rigid Polyol and commodity PA volumes were both up double digits, while European Rigid Polyol volumes continue to be impacted by macroeconomic uncertainties and low construction activity. Despite a very challenging environment for the chemical sector, we remain encouraged by the volume growth across several of our key strategic end markets. We finished the third quarter of 2025 with $10.9 million of adjusted net income, down 54% versus the prior year, largely reflecting a higher effective tax rate, higher interest net and higher depreciation, none of which had cash impact. Free cash flow was positive at $40 million during the quarter, driven by reduced working capital and disciplined capital spending. During the third quarter of 2025, the company paid $8.7 million in dividends to shareholders. Our Board of Directors declared a quarterly cash dividend on Stepan common stock of $0.395 per share, payable on December 15, 2025. This represents a 2.6% increase in our dividend. Stepan has paid and increased its dividend for 58 consecutive years. Ruben will now share some details about our third quarter results. Ruben Velasquez: Thank you, Luis. My comments will generally follow the slide presentation. Let's start with Slide 4 to recap the quarter. Third quarter 2025 adjusted net income was $10.9 million or $0.48 per diluted share versus $23.7 million or $1.03 per diluted share for the third quarter of last year, a 54% decrease. The decrease was primarily driven by a higher effective tax rate resulting from the recently enacted U.S. tax law, lower capitalized interest income and higher depreciation due to Pasadena plant start-up. These 3 net income unfavorable drivers had no cash impact. Consolidated adjusted EBITDA increased by $3.1 million or 6% compared to prior year. This growth is attributable to strong specialty product results and the non-recurrence of expenses associated with the external criminal social engineering fraud event in 2024. Significantly higher oleochemical raw material costs continued to impact surfactant margins, coupled with softer demand in global commodity consumer product end markets. Earnings growth was also impacted by higher start-up expenses at our new alkoxylation facility in Pasadena, Texas. Cash from operations was $69.8 million for the quarter and free cash flow was positive at $40.2 million, driven by reductions in working capital. We will continue prioritizing free cash flow generation going forward. Slide #5 shows the total company net income bridge for the third quarter of 2025 compared to last year's third quarter and breaks down the decrease in adjusted net income. Because this is net income, the figures noted are on an after-tax basis. We will cover each segment in more detail, but to summarize, we delivered operating income growth in Specialty Products, fully offset by lower operating results in Surfactants and Polymers. The third quarter results were impacted by a higher effective tax rate. The company's effective tax rate was 23.8% in the first 9 months of 2025 versus 18.9% in the first 9 months of 2024. This increase was primarily associated with the recently enacted U.S. tax law. We are forecasting that our returning -- we are forecasting returning to our normal effective tax rate range of 24% to 26%. Slide 6 shows the total company adjusted EBITDA bridge for the third quarter compared to last year's third quarter. Adjusted EBITDA was $56.2 million versus $53.1 million in the prior year, a 6% increase. We delivered adjusted EBITDA growth in Specialty Products, partially offset by lower earnings in Surfactants and Polymers. Adjusted EBITDA results also benefited from lower corporate expenses compared to previous year. Slide 7 focuses on the Surfactant segment results. Surfactants net sales were $422.4 million for the quarter, a 10% increase versus the prior year. Improved product and customer mix and the pass-through of higher raw material costs contributed an 11% to sales growth. Sales volume declined 2% year-over-year due to lower demand within the global commodity consumer product end markets, mainly offset by double-digit growth within the agricultural segment and a strong growth in oilfield. Net sales benefited 1% from foreign currency translation. Surfactants adjusted EBITDA decreased $6.2 million or 14% versus the prior year. This decrease was driven by the 2% contraction in volume, higher Pasadena site start-up expenses and the significant rise in oleochemical raw material prices. This was partially offset by improved product and customer mix. Moving to Slide 8, Polymers net sales were $143.9 million for the quarter, a 4% decrease versus the prior year. Selling prices decreased 14%, primarily due to the pass-through of lower raw material costs and competitive pressures. Sales volume increased 8% in the quarter. North America Rigid Polyol volume grew double digits and our commodity Phthalic Anhydride business continued to deliver strong growth. Global Specialty Polyols volume grew mid-single digits despite the continued challenging overall environment. European and China Rigid Polyols volume was impacted by softer demand across their respective regional end markets. Foreign currency translation had a positive impact of 2% on net sales during the quarter. Polymer adjusted EBITDA decreased $1 million or 4% versus the prior year, primarily due to lower unit margins and unfavorable mix, which was partially offset by the 8% volume growth. Finally, Specialty Product net sales were $24 million for the quarter, a 68% increase versus the prior year, primarily due to higher sales volume. Specialty Products adjusted EBITDA increased $5.9 million or 113%. The increase in adjusted EBITDA was primarily due to order timing fluctuations within the Pharmaceutical business as orders was moved from the second to the third quarter of the year. Next, on Slide 9, free cash flow was positive at $40.2 million for the third quarter, up $44.2 million year-over-year, driven by working capital reductions and disciplined capital spending. We remain optimistic about our ability to deliver positive free cash flow for the full year 2025. During the third quarter, we deployed $29.6 million against capital investments and $8.7 million for dividends. Now on Slide 10 and 11, Luis will update you on our strategic priorities and capital investments. Luis Rojo: Thank you, Ruben. I will focus my comments on our strategic priorities. Our customer will always remain at the center of our strategy and innovation efforts. Our Tier 1 customer base remains a solid foundation of our business. Continuing our new customer acquisition within Tier 2 and Tier 3 customers remains a key priority. This is an important and profitable growth channel within our Surfactant business. For the third quarter of 2025, our volume grew low single digits year-over-year, and we added over 350 new customers. Our end market diversification strategy remains a key focus area. For the third quarter, we continue to see a strong growth in our crop productivity and oilfield businesses. We are pleased to see our North America Rigid Polyol business continue to deliver year-over-year growth. This growth was enhanced by our new product introduction in the growing spray-foam end market. Our supply chain operation and resiliency continue to improve, and we delivered another solid quarter in all our key operational metrics. Thanks, Rob, we continue making investments in our Millville site to improve operational reliability. Moving to Slide 11, we are proud our new Pasadena site is fully operational and is currently ramping up production. We have made 41 different products to date. We expect that the full contribution rate of the plant will be achieved in 2026. Our commercial team continues to develop and deliver new business opportunities and specialty alkoxylation volumes continue to grow double digits in the third quarter. Looking forward, we remain focused on accelerating our business strategies through enhanced operational excellence, improved product and customer mix and accelerated free cash flow generation. We believe our Surfactant business will experience continued growth in our key strategic end markets, and that polymers demand will continue improving as we get more market certainty and we execute our innovation and growth plans. Our Pasadena facility is operational, and this should enable us to deliver volume growth in our alkoxylation product line and supply chain savings going forward. We remain on track to close the sale of our site in the Philippines in the fourth quarter of 2025, and we are analyzing opportunities to optimize our global footprint and asset base. Despite the ongoing current market and tariff uncertainties, which change every day, we remain optimistic that we will deliver full year adjusted EBITDA growth and positive free cash flow in 2025. This concludes our prepared remarks. At this point, we would like to turn the call over for questions. Jecita, please review the instructions for the questions portions of today's call. Operator: [Operator Instructions] Our first question comes from Mike Harrison at Seaport Research Partners. Michael Harrison: I was hoping we could start out with a couple of questions on surfactants. First of all, where are we right now in the process of recovering the oleochemicals cost run-up in surfactants? Do you expect that, that impact could be fully offset by Q4? Or could it take a little bit longer to recover? Luis Rojo: Good question, Mike. So let me start with some background information here. So as you all know, you can track this, it's public information: coconut oil prices. If you think about the first 9 months of 2025, the average is $2,500 per metric ton, that's a 7-0 percent increase versus 2024. So 2024 average was $1,500. We are at $2,500. The peak was $3,000 as we talked last quarter. The prices are coming down. That's the good news. Prices are coming down from the peak of $3,000 per metric ton. So we have recovered a lot of the 70% increase, but we are still catching up. We had another price increase in North America in October 1. And that's the objective. The objective is 2026, we have -- we will recover the margins that we saw on coconut oil prices, which again were significant and the prices are still -- are now coming down, which is the good news. Michael Harrison: Just to follow up on that, if we are seeing some of that raw material costs come lower, I guess, does that make it more challenging for you to get the pricing you need? And does that mean that at some point, we could see you give some pricing back if that trend continues? Luis Rojo: No. Look, one thing that I was very clear on my prepared remarks was that we will continue driving the right balance between volumes and margins. This is an asset-intensive business. We need volume through our reactors. We will not lose share. We will be competitive in the market. We will be competitive in the market and balance volumes and margins to maximize net income to maximize return for the company. And again, that's the balance that the team is delivering. I'm pleased with what they have done in the last few months, and we need to continue that effort in the future months, continue managing that balance between volumes and margins. Michael Harrison: All right. So that kind of leads into my next question, which is just about the overall margin performance of the Surfactants business. Obviously, still a lot of moving pieces with the Pasadena facility starting up, and we're probably not yet seeing the full benefit of bringing some of that alkoxylate production in-house. But do you have longer-term goals for where the Surfactants segment margin could reach over time? Historically, operating margin in that segment got into the double digits, and it was pretty consistently there for a few years. And I'm just wondering if that type of double-digit operating margin could be achievable as we look out 2 or 3 years? Luis Rojo: Great question, Mike, and that's, of course, our belief as well. Look, EBITDA margins are restrained. I mean, call it, close to 10% now because all the investments in Pasadena and still the impact on oleochemicals, but we believe this business as we continue growing in our functional markets, agrochemical, oilfield, construction and industrial solutions, as we continue growing in Tier 2, Tier 3, we believe this is a healthy double-digit EBITDA margin business going forward. And of course, we have made investments. We have made investments and everybody knows that. So on an operating income, with all the depreciation of Pasadena of low 14%, people can see that in the numbers. But on an EBITDA basis, this business will continue performing at a decent margin level, and that's what we are focusing on, growing our high EBITDA margin businesses, as we continue growing those. Michael Harrison: All right. And then over on the Polymers business, just a couple of questions here. First of all, do you believe that there is pent-up demand in the commercial roofing and commercial insulation space? And I'm curious, do you think that lower interest rates could help to stimulate some additional activity there? Luis Rojo: [ Fully aligned ] Mike. There is -- we believe there is a lot of pent-up demand from all the construction that happened in the early 2000. I mean if you look at all the construction that happens in industrial construction, warehousing, plants, flat roofs in early 2000, which was a huge peak a lot of those buildings need renovation in the next 5 years. We're aligned 100% with the belief from some of our customers that all that reroofing needs to happen. It's not going to happen overnight, but it needs to happen and PIR insulation is the preferred choice for all those flat roof projects coming up. And you are 100% right that, I mean, we should see another interest rate reduction today, 98% probabilities now of an interest rate reduction in December Fed meeting. So we believe 2026 will give us some upside on the construction activity if the interest rate continues the way they are and inflation rates continues the way they are, right? I mean we need shelter and rental inflation to keep coming down so we can achieve -- so the Fed can achieve their 2% inflation target. Michael Harrison: All right. And just to follow up on Polymers. From the margin side, I believe you mentioned that unit margins are down, the pricing was down quite a bit. You referred to some competitive dynamics that are challenging. Is your expectation that if we started to see some recovery in demand that we would also see some recovery in unit margins as well? Luis Rojo: Look, I mean, we're happy -- look, we always can improve our margins, right? But if you look at the first 9 months of the Polymers business, we were able to grow EBITDA modestly, very little, but modestly, we were able to grow despite sales down. So EBITDA margins are improving slightly in the Polymers business despite everything that is going on in Europe and especially in Europe, which is a very tough situation. So we believe we want to grow the top line. We want to grow the volumes, and we need to keep inching up the margins as we drive scale. I mean, the benefit of higher volumes and scale should improve our margins, but we are not planning a significant increase. But we're happy with the margins that we have, and we need to continue inching those up as we grow our business. And we had a negative impact on margin as we grow PA and as we grow in some of the other markets because those are typically a mix impact to the overall Polymers business. Michael Harrison: All right. And then my last question is, you mentioned the Philippines asset sale, and it sounds like maybe you're contemplating some other actions to help optimize your footprint. Can you give us any sense of what those actions might involve? Are they other just one-off smaller facilities? Or could there be some larger pieces of business that you might be targeting for divestment over time? Luis Rojo: Great question, Mike. And look, we are committed to deliver a balanced EBITDA and net income growth going forward between productivity and asset rationalization and top line growth, right? The industry needs both. You have seen a lot of announcements from other companies in the past 6 to 12 months. We have made the announcement on the Philippines. We will make more announcements in the future. We need a balanced approach between top line growth, productivity and asset rationalization. We all know the chemical industry is overcapacity, and we need to -- and we all need to make decisions on that overcapacity. And we will make those announcements whenever we are ready to make those. Operator: Our next question comes from Dave Storms at Stonegate. David Storms: I wanted to start, you mentioned on the call, spray foam has really been a nice driver for you in the Poly section. Could we -- I guess my question is, how much more room for growth do you think there is there? And could we maybe see a second wave of growth if the European environment improves? Luis Rojo: Great question, Dave. Look, we have talked about spray foam in the past few quarters. We're serious about this end market. We have developed great technologies and products to serve the high-growth margin, and we started this year. So I'm pleased with what the team has delivered and with the benefits that we are starting to get. This is very early. And it's a good market. It's a good market that has a lot of potential to grow not only in the U.S., eventually in Europe in the future. But we are happy with our participation, and we need to grow more share. We are starting. We are starting from almost 0 share, and we are committed to continue investing and developing this business. And when you think about Europe, of course, we had higher expectations of our European region to start growing more on the construction activity. And when you think about the war in Ukraine and all of those things, the reality is that construction activities are very muted still in the European region. Now as interest rates come down, as they keep focusing on energy conservation, which is a huge issue in Europe and the biggest opportunity is to consume -- is to reduce the consumption of energies in the buildings. So we believe the market trends are there for the future. It's not going to happen in the short term for sure. But we believe this is a good industry for the next 3 and 5 years, and we are committed to continue investing and to continue growing our European Polymers business. David Storms: That's great commentary. Switching to the Surfactants segment. Just would love to ask about maybe the end user there and what you're seeing from a demand perspective. It was noted that you're seeing lower demand in the laundry and cleaning end markets. Is this maybe early indications of a substitution effect? Or maybe is this more onetime in nature? Any commentary there would be great. Luis Rojo: No, great point, Dave. And of course, we continue seeing a lot of changes in the consumer piece in terms of active levels, switching down to lower active products. So this continues to be an evolving situation. But at the end, we believe going forward, again, I mean, you need certain levels for the products to work, right? And at the end, those active levels are getting, I mean, up to the point where you cannot go significantly lower. So we feel good about the cleaning and the laundry business going forward. There is going to be always a mix between high active, low active products, consumer brands versus private label brands. But we believe we are in a decent spot now thinking about 2026 and 2027. David Storms: Understood. And then one more, if I could, Specialty has shown 2 quarters of strong year-over-year improvements. It seems like a lot of this is predicated on volume growth. Would just love to hear your comments about how sustainable you think these potentially new volume levels are. Luis Rojo: Look, we are extremely pleased with the performance of our Specialty Products business. Kudos to Jamil and the Maywood team for everything that they have done over the last few quarters, excellent performance. We still have opportunities to grow. We love our MCT product line. As we said in the remarks, 26% volume growth, and we are extremely happy with this business and with the performance. And it's a high-margin business. So we will continue investing. We will continue investing to make sure that we maximize the return that we can get. It's a small part of the company in terms of revenue, but it's a huge part of the company in terms of operating income and EBITDA, and we're extremely happy with what the team has done, and we'll keep working on ideas for the next 3 years. Operator: This concludes the question-and-answer session. I would now like to turn it back to Mr. Rojo for closing remarks. Luis Rojo: Thank you very much for joining us on today's call. We appreciate your interest and ownership in Stepan Company. Have a great day. Operator: Thank you very much for joining us on today's call. We appreciate your interest and ownership in Stepan Company. Have a great day.
Operator: Thank you for standing by. This is the conference operator. Welcome to the Centerra Gold Third Quarter 2025 Conference Call. [Operator Instructions] The conference is being recorded. I would now like to turn the conference over to Lisa Wilkinson, Vice President, Investor Relations and Corporate Communications with Centerra Gold. Please go ahead, ma'am. Lisa Wilkinson: Thank you, operator, and good morning, everyone. Welcome to Centerra Gold's Third Quarter 2025 Results Conference Call. Joining me on the call today are Paul Tomory, President and Chief Executive Officer; David Hendriks, Chief Operating Officer; and Ryan Snyder, Chief Financial Officer. Our news published yesterday outlines our third quarter 2025 results and is complemented by our MD&A and financial statements, which are available on SEDAR, EDGAR and our website. All figures are in U.S. dollars unless otherwise noted. Presentation slides accompanying this webcast are available on Centerra's website. Following the prepared remarks, we will open the call for questions. Before we begin, I would like to remind everyone that today's discussion may include forward-looking statements, which are subject to risks that could cause our actual results to differ from those expressed or implied. For more information, please refer to the cautionary statements in our presentation and the risk factors outlined in our annual information form. We will also be referring to certain non-GAAP measures during today's discussion. For a detailed description of these measures, please see our news release and MD&A issued last night. I will now turn the call over to Paul Tomory. Paul Botond Tomory: Thank you, Lisa, and good morning, everyone. In the third quarter, we sustained robust margins and generated nearly $100 million of free cash flow, driven by strong operational performance at OÖit and elevated metal prices. Gold and copper production in the quarter was almost 82,000 ounces and 13.4 million pounds, respectively. Our cash balance increased to over $560 million in the quarter, demonstrating our ability to fund the Thompson Creek restart project while returning $32 million of capital to shareholders through disciplined share buybacks and our quarterly dividend. We also continue to deploy capital strategically through our equity investment in Liberty Gold, reflecting our balanced approach to growth and value creation. Our self-funded growth strategy continues to advance across multiple fronts. We published the Mount Milligan pre-feasibility study, which I'll come back to, and we also expect to publish a preliminary economic assessment for Kemess in the first quarter of 2026. Together, these assets form a robust pipeline of long-life gold and copper projects in British Columbia. In Nevada, development has advanced at the Goldfield project, which provides Centerra with additional exposure to future gold production. In the quarter, engineering progressed as planned, early mobilization efforts progressed on site, and we are building out a dedicated project execution team. These early actions mark important steps towards project readiness and position Goldfield for disciplined and efficient execution. Each of these growth opportunities as well as the Thompson Creek restart project in Idaho can be funded using our existing liquidity and cash flow from operations, positioning Centerra to deliver sustainable low-risk growth while maintaining our strategic approach to capital allocation. In September, we announced the results of the PFS for Mount Milligan, extending the life of mine by approximately 10 years to 2045. This is supported by an optimized mine plan, delivering average annual production of 150,000 ounces of gold and 69 million pounds of copper from 2026 to 2042, followed by the processing of low-grade stockpiles from 2043 to 2045. The study outlines disciplined nonsustaining capital expenditures of approximately $186 million, most of which are not required until the early to mid-2030s, all fully funded from available liquidity and future cash flow. Key investments include $114 million for a second tailings storage facility to be spent across 2032 and 2033 and providing the potential for future raises, which could add multiple decades of storage capacity beyond the 2045 life of mine. $36 million for ball mill motor upgrades and flotation cells in 2028 to increase process plant throughput by about 10% to 66,000 tonnes per day and increase recovery by approximately 1%. And lastly, $28 million for 5 new haul trucks to support longer haul distances, higher material movement rates and stockpile development. Proven and probable reserves increased significantly to 4.4 million ounces of gold and 1.7 billion pounds of copper, representing a 56% and 52% increase, respectively, from year-end 2024. Recent drilling confirms mineralization remains open to the west of the current resource pit and Centerra continues to advance exploration aimed at expanding the mineral resource and assessing opportunities to extend the mine life beyond the updated plan. The PFS reaffirms Mount Milligan's strong economics with an after-tax NPV of approximately $1.5 billion at $2,600 per ounce gold, which increases to over $2 billion at $3,500 per ounce of gold. Mount Milligan remains a strategic cornerstone asset in Centerra's portfolio with 20 years of mine life, meaningful gold and copper production, strong cash flow and a significant opportunity for future exploration potential in a top-tier mining jurisdiction. Now I'd like to share an update on our sustainability initiatives. As part of our climate change strategy and commitment to sustainability and operational innovation, we're advancing a renewable diesel pilot project at Mount Milligan. This initiative will establish clear reliability metrics, account for seasonal variations and evaluate performance analytics across our fleet. By exploring renewable diesel, we aim to meaningfully reduce greenhouse gas emissions at Mount Milligan and move towards lowering Centerra's overall carbon footprint. At the same time, Mount Milligan's life of mine extension marks a major milestone in advancing Centerra's gold growth strategy and reaffirms our commitment to social responsibility. This includes the launch of the eighth pre-employment training and education readiness program, which supports unemployed and underemployed First Nations members in local communities through skills training, followed by direct employment opportunities. Between 2023 and 2025, we've also achieved double-digit growth in our local spend with First Nations owned and affiliated businesses. That same commitment drives our work at Oksut, where our community initiatives [indiscernible] focus on education, sports, environment and social development. Through these programs, we are proud to have supported more than 13,000 students, helping to build stronger, more resilient communities where we operate. And with that, I'll pass the call over to Dave to walk through our operational performance highlights. David Hendriks: Thanks, Paul. Slide 8 shows operating highlights at Mount Milligan for the third quarter. Mount Milligan produced over 32,500 ounces of gold and 13.4 million pounds of copper in the quarter. In 2025, mining operations encountered zones with more complex mineralization, the impact of which were incorporated in the recently published PFS. Year-to-date and full year gold and copper production remains in line with the PFS. In the third quarter, all-in sustaining costs on a byproduct basis were $1,461 per ounce, 14% higher than last quarter due to an increase in sustaining CapEx and lower ounces sold in the quarter. Full year 2025 costs are expected to be near the low end of the guidance ranges. Slide 9 shows the quarterly operating highlights at Oksut, reflecting another period of strong performance. Third quarter production was 49,000 ounces, better than planned due to higher grades resulting from mine sequencing. As a result, we have reaffirmed our 2025 production guidance at Oksut with production expected near the upper end of the guidance range. In the third quarter, all-in sustaining costs on a byproduct basis were $1,473 per ounce, which is 16% lower compared to last quarter, driven by higher ounces sold and lower sustaining CapEx, partially offset by higher royalty expenses due to elevated gold prices and new royalty rates in [ Turkey. ] Full year 2025 cost guidance is expected to be near the low end of the range, benefiting from expected higher sales and continued strong operational performance. We have initiated a life of mine optimization study at Oksut to evaluate the asset's full potential, including the incremental production potential of residual leaching of the heap and expanding the pit to pursue additional mineralization. The study will explore options to extend gold recovery from existing leach pads through improved solution management, which will enhance residual metal extraction efficiency. The study is expected to be completed by the end of 2026 and will support updates to the mine's long-term reclamation and site management plans, ensuring the operation continues to maximize metal recovery and cash flow in a safe and responsible manner. The restart of Thompson Creek is advancing with approximately 29% of the total capital investment complete. In the third quarter, we invested $31 million in nonsustaining capital expenditures, bringing total investment spend since the September 2024 restart decision to $113 million. We have reaffirmed our 2025 guidance for nonsustaining CapEx at Thompson Creek. The project remains on track and first production is expected in the second half of 2027. I'll now pass it to Ryan to walk through our financial highlights for the quarter. Ryan Snyder: Thanks, David. Slide 11 details our third quarter financial results. Adjusted net earnings in the third quarter were $66 million or $0.33 per share, which benefited from strong production from Öksüt and elevated metal prices. Key adjustments to net earnings include $194 million related to the noncash impairment reversal at Goldfield, $27 million of unrealized gain net of taxes on the financial assets related to the additional agreement with Royal Gold and $16 million of unrealized gain on the remeasurement of the sale of the Greenstone partnership in 2021, among other things. In the third quarter, sales were over 80,000 ounces of gold and 13 million pounds of copper. The average realized price was $3,178 per ounce of gold and $3.73 per pound of copper, which incorporates the existing streaming arrangements at Mount Milligan. At the molybdenum business unit, approximately 3.1 million pounds of molybdenum was sold in the third quarter at the Langeloth facility at an average realized price of $24.42 per pound. Consolidated all-in sustaining costs on a byproduct basis in the third quarter were $1,652 per ounce. We expect consolidated all-in sustaining costs on a byproduct basis to be near the low end of the guidance range for both Mount Milligan and Oksut in 2025. Slide 12 shows our financial highlights for the quarter. In the third quarter, we generated robust cash flow from operations of $162 million and free cash flow of $99 million, driven by strong operational performance at Oksut and elevated metal prices. In the third quarter, Mount Milligan generated $64 million in cash from operations and $45 million in free cash flow. OÖü generated $139 million in cash from operations and $134 million in free cash flow. The molybdenum business unit used $16 million of cash in operations and had a free cash flow deficit of $54 million this quarter, mainly related to spending on the Thompson Creek restart and a working capital increase at [ Langeloth, ] partially due to high molybdenum prices. Returning capital to shareholders remains a key pillar in our disciplined approach to capital allocation. In the third quarter, we repurchased 2.8 million shares for total consideration of $22 million, and we continue to believe that repurchasing our shares is an accretive high-return use of cash. Our Board has increased the approved level of share repurchases through the NCIB in 2025 to $100 million, and we have repurchased $64 million year-to-date. We also declared a quarterly dividend of $0.07 per share. Year-to-date, we have returned over $95 million to shareholders through dividends and share buybacks. As part of our commitment to returning capital to our shareholders, we expect to remain active on the share buybacks subject to market conditions. At the end of the third quarter, our cash balance was $562 million, bringing total liquidity to over $960 million. We also hold an additional $85 million in equity investments. This strong financial position gives us the flexibility to fully fund our organic growth projects at Mount Milligan, Goldfield, Kemess and Thompson Creek while continuing to return capital to shareholders. I'll pass it back to Paul for some closing remarks. Paul Botond Tomory: Thanks, Ryan. We're proud of the continued progress in advancing our internal self-funded growth strategy. The recently published Mount Milligan PFS represents a major step forward in unlocking additional value from this cornerstone asset and provides a clear view of the mine's long-term potential. Alongside this, we continue to advance the Kemess study, which is expected to be completed in the first quarter of 2026. These efforts reflect our disciplined approach to capital allocation and our commitment to enhancing shareholder value through a robust pipeline of self-funded growth opportunities supported by a strong balance sheet. And with that, operator, I'll open the call to questions, please. Operator: [Operator Instructions] And your first question today will come from Luke Bertozzi with CIBC. Luke Bertozzi: On the solid quarter. It's great to see higher commodity prices flowing right into free cash flow. I noticed gold recovery at Mount Milligan was a bit low compared to prior quarters and the recent technical report. Can you provide a bit of color on what drove the lower recovery in Q3 as well as your expectations for Q4? David Hendriks: Thanks very much for the question. This is Dave. On the recovery piece, we had remodeled the entire deposit. And one of the things that we did when we put the PFS out was looking at the ratio of the pyrite to the Kao pyrites. And that ratio has been more pyrite in the last quarter than we had modeled in there, and that has led to the low recoveries. What we have done through the end of the year is we will be able to get through to our ounces for guidance based on moving a little bit more higher material. And so we're able to satisfy ourselves that we understand the piece of the pyrite tocalcopyrite ratio, which is impacting our recovery. Operator: And your next question today will come from Don DeMarco with National Bank. Don DeMarco: Congratulations on the strong quarter. I'll start with Oksut. So I see that during the quarter, you had 1.5 million tonnes stacked at a grade of 1.82 grams per tonne. So considering heap leach residence times and so on, does this suggest that we might see another strong grade quarter in Q1 '26 after the production normalizes in Q4? Paul Botond Tomory: Yes. I think what we'll see going forward there, Don, is that through the end of the year, again, we reaffirmed our guidance number. We're pretty confident that we'll get there. And then we should see some good strong production going into next year as well. 100%, that will impact us going into Q1 of 2026. As Don, this is a bit of a segue into the longer-term study we're launching at Oksut. This mine has reconciled positively since day 1. And we're pretty confident that there's a lot more gold in those heaps than our previous metallurgical models showed. And so what we've kicked off here is looking at how we might be able to exploit those accumulated inventories in that heap. So as we said in our release and in Dave's prepared remarks, we've initiated a study on how to access what we believe are significant accumulated inventories of gold in those heaps. But this asset continues to perform extremely well on reconciliation, and that's what you're seeing in those stacked ounces and in accumulated inventories. Don DeMarco: Okay. And for my next question, U.S.-based assets have been trending favorably under the current administration. So I've got 2 parts to this question. Is there a read-through to improving optics for the MBU? And given that moly is a critical mineral with applications in defense and aerospace and so on, is there a potential for a strategic deal with the U.S. government? Paul Botond Tomory: Okay. So on your first question, there is no doubt that the whole mining and metal space has become a more favorable place over the last year. And particularly for molybdenum, we are a U.S.-based mine feeding a U.S.-based roaster, principally selling refined molybdenum products to domestic U.S. steel mills. And we've seen increased confidence in that sector in the U.S. steelmaking sector. Molybdenum, as you know, goes into high-performance steels that are used in everything from pipelines to nuclear power to defense, aerospace, shipbuilding, all sectors that are seeing an uptick in potential steel demand. So yes, the whole U.S. minerals and mining space, particularly what we have fully permitted in-flight project certainly has become more attractive. In terms of a U.S. government deal, it's something that we monitor. We don't need funding. We were fully funded right through the build. The project is on track, as we said in our prepared remarks. And at this stage, we're going to continue to monitor the situation with the government, but there's nothing to report. And other than to say that it's -- as I said in the previous comment that it's a very favorable environment right now. Operator: And your next question today will come from Frederic Bolton with BMO Capital Markets. Frederic Bolton: Just a couple of questions from me. I just want to follow up on Luke's first question about Mount Milligan. There's mentioned that there was a mention of the grinding circuit being impacted during the quarter. Can you just expand on that and whether that's an issue that's been resolved? And my second question relates to Oxford. If the life of mine optimization study that concludes towards the end of 2026, if that results in an expansion of the pit, would that require additional permitting from the Turkish government? Or would that require a new [indiscernible] Paul Botond Tomory: Okay. So let me take the Oksut question first. So the mine life -- the current reserve life ends in 2029. So that will be -- and we still anticipate at this point that, that will be when the last tonne comes out of the pit. What this optimization study looks at is the accumulated inventories on the heaps because the mine has reconciled positive, we believe, and we're going to be proving this up with Sonic drilling and other means over the next little while, we believe that there's significant accumulated inventories. This can be done in the context of the current footprint. There would have to be permit modifications for residual leaching, but there's broad understanding what that might look like. So the principal focus of the study is how to manage what we believe are accumulated inventories, better solution management with the cyanide solution. And lastly, as part of the study, we will also evaluate whether or not there might be a sulfide inventory below the current oxide -- beyond the current oxide boundary at depth. It's still very early to say what that might look like. And of course, if there were more material that would require permanent modifications, but it's early days, and we're going to be assessing the study as is principally residual leaching, but secondarily, whether or not there are potential extensions to the pit into the sulfides. So that's the Oksut point. On Mount Milligan. So as Dave said, the purpose of this PFS, of course, was to extend mine life, but it was also to reset our understanding on grade recovery and throughput fundamentally, how do we mine a plan that has an optimal blend of the various characteristics so that we're not impacted on recovery. This year, we're still dealing with, in effect, having mined ourselves into a corner on some of this material. As Dave described, we've been impacted by high pyrite and chalcopyrite, which depresses recovery. In the PFS, what we've done is we've created a mine plan that blends down the pyrite so that we can get back up to the recoveries that we intend to be at. And same, by the way, goes for grade. So the PFS, one of its major objectives was to create a mine plan that provides for a more optimal feed source and feed blending into the mill. So we expect to start working our way through that. It's not something you can turn around overnight, but it's something we expect to work our way through certainly starting in the first quarter of next year. Did I answer your question? Frederic Bolton: Yes, thank you. Operator: And your next question today will come from Brian MacArthur with Raymond James. Brian MacArthur: Paul, just so I'm clear on this Oksut, I think you've answered this. But assuming we don't do the sulfides and we just do the residual leach, are we just talking about -- are we removing material again from leach pad to leach pad? Or are we just going to be able to reuse the current leach pads and get more material out? So effectively, my real question goes to this, the capital for this is very, very little, and there's no mining involved, assuming we don't go to the sulfide. Is that right? Paul Botond Tomory: Yes, it would be a very low CapEx spend. Both Dave and I have a lot of experience with this type of stuff in Nevada. Dave, why don't you describe what we're going to be looking at here a scope on the residual work? David Hendriks: Yes, there's a couple of different pieces. One of the studies we'll look at is certainly reshaping the heaps will be a big part of this. So that's just dozer time and everything else. So it takes a little bit of capital to get that done. But that gives us a big opportunity to be able to get in there. And then we'll look at our solution flow and decide, is it best to just go with a straight piece? Do we want to try and up the fig grades by going through the areas a couple of different times and having some -- maybe an additional pond or 2 to do things. And so it's just a piece of what we'll look at is what's the best way to get the gold out in the -- an appropriate time line and leaving us in a good position for closure. So whether that ends up being a little bit more capital, it will only be more capital from the standpoint that we'll be able to get a lot more ounces out. And that's just something that we will plug away at, and it will continue to evolve over the next few years. We'll have a study published at the end of next year that will give us a good level of confidence. And whatever we put in there, I'm sure we'll beat that as well. There's a lot of opportunity taking ounces out of old heaps. We've done it a bunch of times, and we look forward to initiating that work in Turkey. Brian MacArthur: It makes great sense and great return on capital. So just with that, though, as you get this information, is there any opportunity to get better recoveries in the later part of the current mine life? Like obviously, the study is done in 2026. We start to get benefit even in '28 or '29? Or is it -- or do you just have to -- I mean, I haven't been there for a while, just reconfiguring things, how you actually do this. David Hendriks: A lot of it comes down to how much solution that we have and how we're able to put it through the heaps. So are we going to just run it through one at a time? Do we try and build the preg right up by going through a couple of different areas? And that's the study we'll look at. So my expectation is that we would be able to increase the grades going to the plant and get more ounces early, but continue to get ounces late. But that could take 18 months, 2 years to get that up and running because it would require probably some additional pumping. Therefore, we need to do some minor modifications to permitting and everything else. So it's an iterative process and expect that we would be able to do very well with it over the next period of time. And you are 100% correct, very low capital for the return that we would get out of it. Operator: And your next question today will come from Steven Green with TD Securities. Terence Ortslan: I think you answered my questions on Oksut. But just to finish that off, do you have any oxide targets in the project area and or potentially regional opportunities just to take advantage of your position in Turkey at the end of the mine. David Hendriks: Yes. One of the pieces of this optimization study is really a 360 around the site and exploration 360 around the site, bringing in some different people to take a look at what we've been doing there for the last 10 years and give us an opportunity to make sure we're not leaving something behind. And then also working with the deposits in the area. So that is part of the work that we will continue to do, and that will be a part of the life of mine optimization study. Operator: Seeing no further questions, this will conclude our question-and-answer session as well as today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.
Operator: Hello, and thank you for standing by. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Aena Third Quarter 2025 Results Presentation. [Operator Instructions] I would now like to turn the conference over to Carlos Gallego, Head of Investor Relations. Please go ahead. Carlos Gallego: Good afternoon, everyone, and welcome to our 9 months 2025 results presentation. This is Carlos Gallego speaking, Head of IR. It's a real pleasure being with all of you today. Our Chairman and CEO, Maurici Lucena, will host the call together with Ignacio Castejón, CFO; and myself. As usual, we are going to cover the main topics explained in the results presentation, and we will finish with a Q&A session. [Operator Instructions] without further ado, I give the floor to Maurici Lucena. Thank you. Maurici Betriu: Thank you very much, Carlos. Good afternoon, everybody, and thank you for joining us to our 9 months 2025 results presentation. As usual, I will try to go through the key highlights of the period. Then I will give the floor to our CFO, Ignacio Castejón. And as always, we will conclude the conference call with a Q&A session. I will start with traffic as usual. As you can see in the information we have conveyed this morning to the market, traffic volume across the Aena Group grew by 4.1% year-on-year. In Spain, the increase was 3.9%. And I would like to stress clearly that we do confirm our 2025 traffic guidance of 3.4% year-on-year. So this increase in the first 9 months of the current year have confirmed our guidance, in other words. And if I jump to our international activity, in Luton, the increase in the 9 first year -- first months of the year, excuse me, was 4.8%. In Brazil, in the -- or BOAB, as we call it in Spanish, concession, the increase was 5.5%. And in Aena's ANB, the increase was 5.3% in traffic volume. If I move to our financial performance, total revenue in the first 9 months of 2025 reached almost EUR 4.8 billion, EBITDA EUR 2.9 billion, and the EBITDA margin stood at 60.2%. If we exclude the impact of the IFRIC 12, the EBITDA margin would be 61.9%. And net profit reached almost EUR 1.6 billion. And in this sense, I would like to highlight that the commercial activity really performed very well. Sales grew by 8.7%. And I would like to remind you that the tenders awarded in the first 9 months of the current year in specialty shops, they guaranteed minimum annual guaranteed rents in 2025 and 2026 that are 33% and 40% higher than in 2024. And in the case of food and beverage, the growth rates are 19% and 20%, respectively. You know as well that Aena has launched the tender for 98% of the food and beverage business in Barcelona. And I would like to say that we are very optimistic on the results -- on the eventual results of this tender. And I now move to the real estate business. Total revenue grew by 13.7%. And as you well know, we have launched simultaneously the tender process for the first hotel developments in Madrid and Barcelona airports, and we are also optimistic on the results. And finally, the contribution of the international EBITDA to the consolidated figure was in this first 9 months, EUR 307 million, which represents an increase of 23.3%. However, you know that I don't usually join you for the financial results presentation of the first 9 months of the year. And actually, the reason why I have joined you today is because I wanted to be crystal clear on 3 elements that are very important for Aena and for our financial results presentation and are important messages that I would like to convey to our shareholders, to analysts and in general, to investors. So I would like to make a few comments. Firstly, on the ownership of Aena's assets of Aena's Airports. Secondly, on DORA III and what we expect in principle of DORA III. And thirdly, on dividends and the way forward, let's say. So I will start with ownership. And you know that in the last months, there have been too many, I would say, statements made by some political representatives from some regions in Spain regarding airports owned by Aena. We were convinced a few weeks ago that the moment had come to issue -- I think it was a very clear communication to the market through De la Comisión Nacional del Mercado de Valores, the CNMV. And within this communication, we stated that Aena has been undertaking a very intense advocacy activity, at least since the summer of 2024. I'm completely convinced that the current legal and constitutional framework, and because this is also very important, Aena's shareholder structure, the combination of private and state-owned shareholder structure, both this constitutional framework and our shareholder structure provide a very strong protection to the airport system and specifically to Aena, to our company. And I think that this preservation of the current model is especially important when we have announced, as you know, a very strong volume or very high volume of investment in the coming years. You know that we are going to embark on a period of major investments contained within DORA III. And you know that this investment that we announced a few weeks ago will culminate in the modernization and the expansion of many Spanish airports, which aside from Aena are essential to Spain's economic development in the coming decades. So that's why we are so convinced that this investment is good, both for Aena and both for our country or the country where Aena was born and where Aena has its main activity. So in other words, I would like to paraphrase a very well-known central banker. And I would like to state that the Aena is ready to do whatever it takes to preserve its model and its net asset value. And believe me, the combination of the constitutional framework, our shareholder structure and our determination will be enough. This is my conviction, and I would like to convey it very clearly to the market. Now I move to the second important point, DORA III. You know that on September 18, we announced our CapEx proposal for the third DORA -- for DORA III with a total amount of almost EUR 13 billion, of which almost EUR 10 billion corresponds to the regulated activity. You know that the aim of the investment related to DORA III in Spain is to add significant capacity, deliver better service and comply with regulatory requirements in Spain. And again, I would like to say very clearly that the top management team of Aena that I lead since 2018, I think, that deserves very much credit when I say clearly that we expect a technically reasonable WACC for DORA III. In other words, I think that the investment proposed by Aena will be technically very well -- or not very well, reasonably remunerated. This is what I would like to stress in this message because I've read many things. And at present, I'm completely convinced that the WACC will be reasonable. We don't ask for anything else than reasonability in the building of the WACC for DORA III investment by Aena. And thirdly, and finally, concerning dividends, you know that our current payout is 80% of the net profit. And again, I would like to be crystal clear. At this moment, when I look to the future at this moment in time and with the information that I have in front of me, I don't see reasons to change our current dividend policy. This is the end of my brief presentation. I now will give the floor to our CFO, Ignacio Castejón. And of course, I am at your disposal to answer any questions at the Q&A session. Thank you very much. Ignacio Hernandez: Thank you very much, Maurici. Hello, everyone. Good afternoon. This is Ignacio speaking. I'll try to be brief so that we have time afterwards for our Q&A session. On traffic, I would like just to share and highlight the important growth -- strong growth of the international traffic in our Spanish platform. International traffic grew by circa 6%, 5.7%, in particular, while the domestic traffic remained flat, as all of you know. In this regard, I would like to also to remark the important and the positive performance of the long-haul markets. You know that this is a market that is still smaller than our European and our Spanish market. But looking at the growth rates that we are delivering for Africa, Middle East, Far East and LatAm, I'm convinced that this is an important trend and a market that we will keep working on them. The company recently confirmed the capacity that we are seeing as of today for the winter schedule that happened last week with the information that we have now. And this is around 3.5% growth compared to the latest information that we have for the real seats delivered in 2024. I'm going to move directly for the purpose of being conscious of time to cost because I have read some comments on cost this morning. When I look -- and I'm referring to Slide 7, total operating expenses of the group grew at around 10%. And basically, this has been affected because the accounting rules that are applicable in Brazil, IFRIC 12. If we were excluding the increase in our cost related to IFRIC 12, that 10% would be around 5%, 5.5%, if I am accurate. And when we look at the Spanish network that I also read some comments this morning, the total operating expenses are growing at 6.6%, reaching EUR 1.5 billion. Let's have a short discussion on this item. Mainly the increase is explained by a couple of things, 10.9% rise in personnel costs, basically is the result of higher payrolls, additional headcounts, the improvement of the variable retribution schemes in the company and a number of other things. This is something that is just the result of our collective agreement, our collective scheme and also adding more people so that we are prepare for DORA III and also reacting to the increase in activity that we have seen in the last 24 months of the company. When we look at other operating expenses that are amounting EUR 996.7 million, I would like to share with all of you 3 things. This is for the first 9 months of the year. And I was also having a look at some of your views about the third quarter, and I think it's important that we address your comments. As you know, the third quarter of the year is the most active and the most intense quarter that this company had from a traffic standpoint. Secondly, as we have been sharing with all of you, we are seeing a trend in many of the contracts that we are awarding to our suppliers and providers. That is a trend that is confirming that the most of our costs related to security, maintenance, cleaning, PRM services are going up. They are not going down. And this is basically as a consequence of inflation trends, as a consequence of new salary rules applicable in Spain being impacting many of these costs, also new regulations applicable to Aena and also to our subcontractors. So there is a trend there that is basically impacting us and is impacting the whole sector and many activities in the country. And finally, there are a couple of things that are affecting the comparison of this quarter with the performance of the other operating costs that we saw in the first 6 months of this year. Many of you were stating this morning -- or some of you, sorry, that the increase in cost in this third quarter was higher than the trend in the first 6 months. Well, there have been a couple of things explaining why -- or there are a couple of things explaining why that has happened. In the first 6 months of 2024, we recorded a significant provision because of the Chapter 11 of one of the real estate company that we have operations with. And therefore, the cost increases that we have that year, so in 2024 was material in the first 6 months of 2024. So when we compare the first 6 months of 2025, the comparison was a very light increase. The provision, if I remember well, that we marked at that moment in time was circa EUR 15 million. On top of that, there have been some costs that in the past we incurred in the first 6 months of the year -- in the first part of the year that in 2023 -- 2025, sorry, are happening on the second part of this year. For example, advertising, that's something that we will incur in the last 6 months of the current year. Let's move to commercial that I think is where we have a very good news, I think as usual in the last quarters that we are sharing with you. And I would like -- the Chairman and CEO have already highlighted the significant growth in sales. I would like to share with all of you more than data that you already have in the presentation. The reasons why we think we are delivering this performance, there are a number of reasons. I think, first of all, the progress in the remodeling works, refurbishment works in most of the units awarded to our tenants. Secondly, we are adding commercial surface. We are adding more and more space, for example, in duty-free. When we awarded the last contract -- the current contract of duty-free, we said that we were going to increase the space for this activity, and that's happening. We have added around 10,000 square meters to this business line. The works are progressing. Madrid and Barcelona, we are almost done. We are introducing new business concepts. So as we discussed in the results presentation back in July, we have more and more hybrid concepts where in the duty-free areas, you can have F&B experiences and you can buy other products. We are introducing new brands that are fitting more and more with the passenger profile. We are, of course, taking into account and enjoying the consequences of having better conditions in our contracts that the Chairman was referring to the awards of the first 9 months of the year. So MAGs are going up, and that's resulting into better performance. And let me finish just with the strong performance that we are seeing in the mobility-related services. So car rental activities. We have the new contract, but also we are seeing more and more transactions at a higher average transaction value in the car rental business. And finally, the VIP activities that the company has been devoting a lot of work and activity is performing extremely well with a delivery of around 30% of growth, mainly explained by the increase in prices. We are adding services. And of course, we are attracting more and more passengers. The growth rate in passengers -- in users, sorry, is much higher than the growth rate that we are seeing in the traffic through our facilities. And let me finish on the international front. The Chairman has referred to the growth in the international EBITDA contributed to the whole group. I would like to basically highlight on Luton. I would like to share with all of you that in the third week of September, the Luton team successfully delivered the parking lot -- the construction for the parking that had a fire a couple of years ago was properly delivered and that facility is already up and running, and therefore, we are collecting revenues. And secondly, the insurance related to this fire, we managed to deliver a settlement -- we managed to reach a settlement with the insurance provider. And therefore, we shouldn't expect any kind of claim or litigation in this matter. That has been settled, and we have received what we were expecting to receive. And on Brazil, I would like to highlight the strong operational improvement that we are seeing in local currency. When we look at the growth in EBITDA in our Brazilian assets, the Recife portfolio and the Congonhas portfolio, we are seeing growth in Brazilian reais of around 20% of our EBITDA in those 2 assets, which are very good news and confirm our views that we would be able to attract traffic growth, but also perform positively on the OpEx front and increase the commercial performance in these 2 assets. On Congonhas, I would like to highlight with all of you that the construction activities have already -- are progressing materially. That's why you are seeing in the slide that you have in front of you that CapEx for the first 9 months is around EUR 150 million. The goal and our obligation according to the contract signed in that country is that by mid of 2028, we should have done all the CapEx activities in that airport. And without further delay, I would like to stop there so that we have all the necessary time for your Q&A. Operator: [Operator Instructions] Our first question comes from the line of Cristian Nedelcu with UBS. Cristian Nedelcu: It's a 2-part question, if you allow me. A lot of investors are trying to understand a little bit better this incremental CapEx of EUR 3 billion to EUR 4 billion that you've announced a couple of months ago, but trying to understand if it's good or not so you're spending that, what type of returns you can get on the nonregulated side. Could you give us a bit more granularity? There are some information on Slide 11. Can you tell us a bit more how much of this CapEx is for growth? How much is for maintenance, security or other? Could you talk about any metrics incremental retail space or any other metrics that will allow us to better judge the return on capital employed you'll get in this asset? And the second part, if you allow me, you've shown in your slides a lot of the projects in this CapEx plan -- are in planning mode. So from the perspective of the time line, how much CapEx do you think you'll spend in '27, '28? Is it fair to assume that CapEx is more back-end loaded? Maurici Betriu: This is Maurici Lucena. I would just like to make a very brief introduction to your first question. And then I will give the floor to Ignacio Castejon to our CFO. I was honestly very surprised when the day we announced our CapEx proposal, which, of course, is a proposal because we have -- you know that we have a period which is defined by law in which we have to discuss our proposal with airlines. We need also reports from the CNMC, we can marginally modify specific aspects of our proposal, then there's the profile of the airport charges and so on. So -- and eventually, it is the government, which in its role as a regulator decides what the final DORA III investment will be, but I was a little bit surprised or very surprised by the market reaction by the decrease of our share price, the day we announced this because as a professional economist, when I think about what is Aena's business from the regulatory perspective, it is almost everything about the wrap, and of course, if we were another company, I could understand some of the, I don't know, of the doubts, but I think that our track record, our delivery, it has been very good in the last decade. I say the last decade because it is in -- it was in 2015 when we went public, and we became a listed company. And I think that we are a reliable company. So I think that, of course, there are risks when I know, when you project such a high amount of CapEx, but this will be good for the company. This will increase our RAP, will improve our airports, will improve our -- the quality of the services we offer to our customers, to our clients. And in the end, this will be -- how would you say that -- it will -- sorry, because the words came in Spanish, and I wanted to be very precise. This, in the end, the increase of the RAP with such a hike volume of investment will generate value for the company without doubt. So this would be my first, but I would say, important reflection. And I now give the floor to Ignacio. Ignacio Hernandez: Thank you very much, Maurici. And thank you very much for your don't know, super question or 100 questions in one question, Cristian. I think as the Chairman was explaining, we are at a very early stage of the consultation process. It has just started. I think this is the second or the third week of the consolidation process. The teams internally have been working very hard in order to have this proposal. And of course, we have a massive amount of internal information that is being discussed. The nature of the consultation process in Spain, as all of you know, is confidential. And therefore, we cannot go now publicly, assuming that we were interested in doing so and start setting all that information. Having said all that, because I will not be able to address all your queries, unfortunately, Cristian. But what I can say with you, trying to react to some of your points on the schedule, I think, this is going to be partially back ended. It's difficult for any company launching so many projects for that value being able to deliver from day 1, proportionally that amount of CapEx. So please assume that in the first years of DORA #3, the CapEx that we'll be able to execute will be lower than the CapEx that hopefully we'll be able to deliver in the second part of DORA #3. That's basically -- is a result of the of physical preparation, design, permits, et cetera, and also being up and running in a number of those projects that are in some regards, are not 100% controllable by the company. You were also raising the point on nonregulated investments, that is basically around circa EUR 3 billion. I would like to highlight a couple of things, Cristian, in this regard. I think the first one is around 2/3 of this amount is just the result of the mechanical cost allocation, in this case, CapEx allocation that is applicable to this company when we execute CapEx. So if this company is executing CapEx related to a terminal, part of that building will be allocated to regulated CapEx and part of that building will be allocated to nonregulated CapEx. So it's not that we can entertain a discussion about, are we investing in exotic extraordinary nonregulated activities that are not growth or will not deliver revenue. It's not -- it's our scope, it's our day-to-day activities, but every time that this company invests one penny in a building that is providing regulated activities given that, that building will also be providing partially some nonregulated activities, we have to allocate part of that investment to nonregulated assets. And rounding up, that is around 2/3. If we look at the other 1/3, that is 100% nonregulated activities, Cristian, I would say that no surprises here. This is going to be mainly new car park buildings, that are given that we are expanding the terminals and hopefully, there will be more traffic based on our numbers in our facilities in the next decade, there will be a need for new car park. And that's basically explaining a significant part of the 100% nonregulated investments. And this is what is behind the EUR 3 billion figure that we sell with the market in mid-September. You were also asking on a breakdown about what is behind the EUR 13 billion. I think the company has been disclosing figures related to the main projects that we are willing to start in the next DORA III. I'm referring to Madrid, I'm referring to Barcelona, I'm referring to some airports of the Canary Islands, and also other ones in the Mediterranean Coast. So I would say that around 50% of the total number of the EUR 13 billion refers to these big initiatives, transformational initiatives. The other 50% refers more to infrastructure, technology, safety and security, sustainability, innovation, planning, recurring maintenance, et cetera. So that's the kind of breakdown that I'm happy to share with all of you at this moment in time. I hope that I have been able to address your question. And I would like to finish just with another comment following up on the statements from the Chairman and also other statements related to DORA III that I have heard, and I think you were alluding as well in your question, Cristian. This company this year, next year, the very first year of DORA III, from a cash flow standpoint, is not materially changing. I think we are going to have a need to raise debt in order to invest in all this CapEx mainly in the last years of DORA III. So I would like to share this message with you in order to reduce the level that I have seen in some of you about the uncertainty or materially changing in the company, in the credit profile of the company or in the cash flow quality of the company. 2025, you are seeing the figures today as of September. I don't -- we should expect that 2026, very similar to 2025. I'm not giving you guidance. We are not providing guidance today of 2026, but it's the last year of the current DORA and you have all the information on DORA II in front of you. And as I was saying at the beginning of my answer, DORA #3, the CapEx is a bit back-ended. And if you look at our debt maturity profile, there are no material debt repayments coming in the next year and especially in the first years of DORA III. So the questions related to, can the company afford these CapEx investments, the Chairman has already confirmed the point on capital allocation with respect to dividends. And I also would like to share with all of you as CFO, that we see that this company will remain having a strong credit rating in the next years despite this proposal of DORA III, that is on the table, and we are willing to deliver. And sorry for my long answer, Cristian, but given your total and big question, I thought that was necessarily a long answer. Operator: Your next question comes from the line of Tobias Prohme with Bernstein. Tobias Prohme: I also have a question regarding CapEx. I guess some investors and the staff had also worried that CapEx will be higher for longer spilling into DORA IV as well given that not all of the projects can be finalized in DORA III. When you look at Slide 12 and the projects in planning stage and the pre-project stage, and then combine that with comments of the Spanish Minister of Transport, that construction for Barcelona won't start before 2032. Can you maybe comment or give us a little bit more color on your capital expectation for DORA IV. Maybe some comments on: a, what do you think for Barcelona and the Barcelona comment? And then b, sort of which other projects are likely to require CapEx beyond DORA III that is not captured in your current proposed CapEx? Ignacio Hernandez: Thank you very much for your question, Tobias. This is Ignacio speaking. I'll be very straightforward Tobias. We have just started the consultation process for DORA #3. So start talking today in the results presentation for the 9 months of 2025, about DORA #4, I think would be a wrong approach from the company. And that's message #1. And with respect to my message, the other message that I wanted to share with all of you, some of our projects in our DORA III, of course, are longer from a construction standpoint than the 5-year period of DORA #3. So there will be some of our projects that will be totally completed in DORA #4. That's a consequence of the size and the importance of these projects that will allow the company to provide capacity for the next 20 to 25 years of traffic growth in Spain. Thank you, Tobias. Operator: Your next question comes from the line of Elodie Rall with JPMorgan. Elodie Rall: We talked a lot about the CapEx and that you think they are good CapEx, and you've mentioned that the WACC will be reasonable. Could you give us maybe a bit of color about what kind of tariff increase this will all translate into in the next door. I think you said in the past that you would aim to get something around low single-digit tariff increase that you view that as a good outcome. Is that something that you are still comfortable into pushing forward to? And for next year, tariffs was obviously already announced -- how secure is that? And when will we have the final confirmation? Ignacio Hernandez: Thank you very much, Elodie. This is Ignacio speaking. I think as you know, the process, we will not have our proposal being discuss and hopefully approved by our Board until March of next year and will be subject to further approvals coming from the cabinet and regulators after summer of next year. So any indication from my side could be premature. Having said all that, I think we see reasons why there might be a tariff increase in the next years. If we look at the CapEx investments that we were discussing in the -- previously, this is a significant investment. Two, if we look at OpEx, OpEx of the company is likely to go up. There are many reasons for that in the context of a significant construction activity, expanding our terminals, bigger footprint of our terminals, more activity coming on the commercial front. So all that, I think this company will get bigger. And therefore, the OpEx of this company as a consequence of that, is likely to go up. And finally, from the remuneration standpoint, as the Chairman was referring, we think that we'll get an adequate and attractive, a reasonable WACC. And if I look at many of the inputs that are taken into account in order to estimate WACCs, what I see now is a scenario in which risk-free rates are higher, cost of debt for Aena will be higher than the one used for DORA II. So there are reasons there to defend a higher remuneration for this company in the context of DORA III than the ones that we had through the consultation process of DORA II, and that would be my answer, Elodie. Operator: Your next question comes from the line of Nicolo Pessina with Mediobanca. Nicolò Pessina: About the governance rights that many local authorities had has in the last couple of months, I understand Aena's view to preserve the current model. However, I wanted to understand better what the objective of the local authorities in asking these governance rights is. What would they like to do differently? And is it technically possible to give them a role in the decision or process of a single assets, maybe giving them voting rights for a single asset while retaining the economic rights? Maurici Betriu: This is Maurici Lucena speaking. Well, I think that for the reasons why local authorities or certain local authorities ask for more involvement in the management or regulation of airports. I think that you should ask them the reasons because I don't know. I mean I cannot be abstractly in their place to think why they ask it. You know that the political world is complex. And I think that the best approach is to ask them directly. On the second issue, you mentioned again, I want to be crystal clear. We think that it's stronger than we think. We are convinced that the constitutional framework and the part of the Spanish constitution that refers to airports along with, and this is very important, along with the shareholders structure of Aena, which is a hybrid state-owned and private and listed, provides a very strong protection of the model. And in other words, Aena will and can only decide things that -- to put it simply, that are in harmony with a business case with this profitable for the company. So why the company would be interested in sharing the management of the company being the most efficient company in the airport sector, probably in relative terms in the world. Why? So this is why I say that we consider our model, which is, by the way, the model defined by law in Spain of airports and of the company of Aena very solid. And at present, I consider it impossible to modify anything in the line that has been mentioned by some political actors. Operator: The next question comes from the line of Andrew Lobbenberg with Barclays. Andrew Lobbenberg: Can I ask about external activities. And I know you're always limited on what you can say about where you're looking and what you're doing. But as we are focused on the scale of CapEx. And as Maurici spoke about how you recognize the importance of shareholder returns to investors, and you reiterated your expectation of sustaining the 80% dividend payout. I mean, how are you thinking in terms of the flexibility to participate in further external opportunities given that potentially Luton is on the table and then press reports have you looking at the CCR and assets and indeed Catania as well. How are you balancing this? Maurici Betriu: Thank you, Andrew. I will be very sincere because your question is a question that -- on which I have been reflecting, I would say, a very long period of time because, yes, I will be very clear. I think that to the extent that the current information allows us to, let's say, reflect on this, I think that it is comparable so far for Aena to invest enormous volumes of money in the coming years to defend a very high payout of our net profit. And that's why I say, I said that I don't see at present any reason to change our payout policy in the coming years at present. And thirdly, the potential of M&A projects. I think that these 3 elements, investment, a very generous dividend policy and potential M&A projects are comparable. And this is why I wanted to be clear when I said what I said on the dividend policy. And specifically, in M&A, I've said this many times, we look at everything. We look at everything because this is a sort of not very wide market. I refer the one that offers new international opportunities. So we look at everything, but actually, we are interested in very few projects because the combination of the quality of the asset price, regulatory risk, the country, culture, culture, I mean, culture proximity to express it clearly. The combination must be a very specific one. And when this combination takes place, so we can then be very concrete in being interested in a specific project. But this happens very few times. Operator: Your next question comes from the line of Dario Maglione with BNP Paribas. Dario Maglione: I agree with the Chairman. The group CapEx makes sense. I think the regulated WACC should be reasonable for the next quarter. I'm more concerned about the execution. So Aena, how will Aena manage the construction risk? If I think about the construction, Aena has not done a lot of CapEx over the past 15 years. And of course, EUR 13 billion is a large number. So if there are delays, cost overruns in 1 project, what happens? Can Aena transfer some of these risks to subcontractors how would the regulator look at this for the next order? Maurici Betriu: This is Maurici Lucena, again. Well, all that I can say at present before I give the floor to Ignacio Castejon is that as CEO of the company, I consider the company very well prepared for this very -- it's true, stressful period of an enormous amount of investment, but if it was otherwise, I would not have proposed this volume of investment to the Board and then convey it to the government for each analysis. And it's a final decision in the coming year in next year. So I think that we will be prepared. You are right when you say that it's not the same when in Spain, you invest, well, this year, we will be investing in Spain from a regulatory perspective, EUR 750 million. And this is very different from the volume that we will face in DORA III, but I consider the company very well prepared. And if there are any doubts, I would kindly ask you that you analyze what we have just done in Brazil. In Brazil, it's first time ever, and this has been said by the Brazilian authorities that an airport company complies with everything related to all the construction that was associated to the concession. And I'm very optimistic as well on the success of the construction in Congonhas, which is very challenging, of course. So -- but I think that this is a very good precedent to assess the, let's say, the probability that Aena in Spain will complete successfully the new DORA III. So again, I'm very confident that we'll do it. And now we'll give the floor to Ignacio Castejon. Ignacio Hernandez: Thank you, Maurici, and thank you for the question, Dario. The 2027 to 2031 investment plan, of course, will be a challenge. I think one of our main aims, Dario, is maintaining and that's why it's an important challenge. It's maintaining airport capacity during the construction activity. So while the works are underway. The most significant works will begin in DORA III, and our plan in order to have them being executed and delivered, is that they will be gradually put into service. So it will be a phasing -- a phased approach, sorry. I would also like to highlight or to underline that we will tender out the projects, the construction projects when they are already designed, already completed. So when they are tender out by us, there won't be very little, I would say, very limited room for potential deviations or changes that mitigates -- that materially mitigates risk, at least from our perspective. I think the Chairman referred to Congonhas, to Recife. We also have in front of us, the example in Palma, where we are delivering the project one year ahead of schedule in 2027. Also, thank you to the investment approved by the regulator that we -- that gave us more room to finish this project next year. So I think it's a transformational phase for the company, but we think we have the right resources, tools, processes and our approach to tender contracts will help us to mitigate the risk that you were pointing out. Operator: Your next question comes from the line of Marcin Wojtal with Bank of America. Marcin Wojtal: I just wanted to ask about the regulatory process and the time line. So you mentioned that you have until 15th of March 2026 to submit your DORA plan to the regulator. Are you going to make it public? Are you going to perhaps organize some sort of presentation, explain your assumptions and giving us more detail? And then what happens later? Are you expecting the regulator to issue maybe like a draft determination, preliminary determination before the summer? Or we have to wait literally until September 2026 to get further visibility. Ignacio Hernandez: Thank you for your question, Marcin. I think with respect to what the company may communicate in -- after March of next year. We haven't made an internal decision about it. So we will make that decision at that moment or in the following months if we think it's the best for the company, the shareholders and the process. If I understand well, during process -- during the process of DORA #2, there was some privileged information being disclosed by the company with some with a summary or the main elements of the proposal of the company being shared with the market. That happened in DORA #2. I think let's make a decision, let's make the call about DORA III at that moment in time, if we finish the best course of action, always taking into account our regulation and the Securities Exchange Commission regulation. With respect to your question #2, I think it's unlikely that they publicly revert to us before summer, but I don't have -- that's a question for them, not for us how they will make progress before summer with all our information. Operator: Next question comes from the line of Harishankar with Deutsche Bank. Harishankar Ramamoorthy: Maybe one around the tariff increase that you're talking about for DORA III, what would be a reasonable WACC behind your assumptions for a slight increase in tariffs? And on the tangent, if you do land a tariff increase under DORA III, what's the risk that airlines start pulling out more capacity. Are you worried about that? Ignacio Hernandez: Thank you for your question, Hari. We -- of course, we are working with numbers internally and we have been working for a while. We haven't even presented to our Board those final numbers. And in the consultation process, discussions about WACC will happen later on. So it would be, I would say, it wouldn't be the right approach from our end, setting that information with you at this moment in time. Apologies for that, Hari. I'm sure that in the future, we'll be able to have this conversation, but not now. Harishankar Ramamoorthy: No, I completely understand that. And any thoughts around what might happen to airline capacities and whether you would be worried about that, in the event of a tariff increase, I mean. Maurici Betriu: I didn't get your question, Hari, sorry. Harishankar Ramamoorthy: Sorry. So you've seen some reports on how certain airlines have been looking at taking capacity on the back of tariff increases. So given your projection for slight tariff increases, are you worried about any capacity changes from airlines? Ignacio Hernandez: Sorry, I didn't understand your question initially. Apologies for that, now I got it. I think that those have been comments from one specific airline with respect to a specific season, prior to DORA #3. So what we see is a market that is one of the largest touristic markets in the world that according to ACI is going to be a top 5 market in aviation, a very important activity sector like tourism accounting for around 15% of the Spanish GDP. So we believe that there will be appetite and demand from airlines to be present sorry in this kind of market, Hari. Operator: And the last question for today comes from the line of Jose Arroyas with Santander. José Arroyas: Yes. Thank you for the clarifications. They were very helpful. I wanted to ask you on the Barcelona food and beverage contract. What are, in your opinion, reasonable expectations for the market increase in that contract? I can see that there is a 30% more square meters than in the previous contract, and I can see that in Madrid, a similar contract was awarded in 2023 with more than 40% increase in MAG. So I wanted to make sure my expectations that we might see the MAG rising by more than 50% in that individual contract is not out of kilter. And whilst we are on that topic, I wanted to check with you if there is any other large tender outside Barcelona food and beverage that we should have in mind during 2026. Ignacio Hernandez: Thank you, Jose Manuel. This is Ignacio speaking. I think we are very excited about the F&B tender in Barcelona. The commercial team has been working really hard in that matter and the feedback that we are receiving from the market is that I would say it's very strong. And we are adding a space. We are trying to have a very attractive and appealing approach to this contract in terms of tenure, in terms of layout, in terms of concepts, with respect to expectations... [Technical Difficulty] Operator: And that is the end of our Q&A session. Ladies and gentlemen, that concludes today's conference call. You may now disconnect your lines. We thank you for your participation.
Operator: Good day, and welcome to the Ryerson Holding Corporation's Third Quarter 2025 Conference Call. Today's conference is being recorded. [Operator Instructions] At this time, I'd like to turn the conference over to Justine Carlson. Please go ahead. Justine Carlson: Good morning. Thank you for joining Ryerson Holding Corporation's Third Quarter 2025 Earnings Call. On our call, we have Eddie Lehner, Ryerson's President and Chief Executive Officer; Jim Claussen, our Chief Financial Officer; and Molly Kannan, our Chief Accounting Officer and Corporate Controller. A recording of this call will be posted on our Investor Relations website at ir.ryerson.com. Please read the forward-looking statement disclosures included in our earnings release issued yesterday and note that it applies to all statements made during this call. In addition, our remarks today refer to several non-GAAP measures. Reconciliations of these adjusted numbers are also included in our earnings release. I'll now turn the call over to Eddie. Edward Lehner: Thank you, Justine. Good morning, and thank you all for joining us to discuss our third quarter 2025 performance and our announced merger agreement with Olympic Steel. I would like to start our call today with an abbreviated version of our prepared financial comments before asking Rick Marabito, Chief Executive Officer of Olympic Steel, to join us to discuss the announced merger agreement, its strategy and the benefits we believe it will yield for our stakeholders. So turning to our performance first. The third quarter market backdrop continued to be difficult as we now find ourselves rounding out a third year of contractionary conditions. The quarter can be summed up as a continuation of industry recessionary conditions characterized by falling industry shipments year-over-year and sequentially with notable carbon steel margin compression with manufacturing activity well below mid-cycle levels. Supply side tariffs and trade policy have placed to some extent floors under bellwether industrial metal commodity prices. However, demand in the aggregate remains stubbornly depressed. We have often said the supply side sets the price. However, our customers set the discount. And through the third quarter, customers continued quoting less and buying less. Within our OEM book of business, especially the contract business, we have actually seen activity come in well below our OEM customer forecast and historical mid-cycle trends. As we are in the late stages of this counter cycle that is in its 13th quarter and has been of longer duration than is typical of historical counter cycles of between 4 and 6 quarters, the OEM side of the commercial portfolio should eventually inflect positively. The offset to that is the very encouraging trend of Ryerson growing its transactional business as recent investments continue to operationalize, stabilize and scale throughout our network. This shows up in our service center fundamentals metrics of shorter lead times, higher service levels and improved on-time delivery. As long as we keep on keeping on with improving the customer experience while optimizing our service center network productively and safely, our performance will continue to improve. As the market navigates the many dynamic factors currently in play around trade policy, investment, interest rates and geopolitical commerce volatility, we continue to drive what we can control, building earnings quality and earnings leverage by being excellent operators of our business with sunrise consistency. We understand that decades of offshoring take time to unwind just as deleveraging, asset modernization and optimization have required long-term vision and commitment. We will persevere through this market environment working safely and passionately throughout and come out stronger on the other side. I can't wait for Rick to join me on the call. But before we get there, I'll turn the call over to Jim Claussen to provide more details on our financial results and our outlook. Jim Claussen: Thanks, Eddie, and good morning, everyone. During the third quarter, we achieved adjusted EBITDA, excluding LIFO, at the low end of our guidance range with revenue and shipments in line with expectations. Looking ahead to the fourth quarter of '25, we expect volumes to soften during the quarter by 5% to 7%. This aligns with typical seasonality patterns as our customers slow production around the holidays, and it also reflects our anticipation that the current demand challenges will persist at least through the close of the year. From a pricing perspective, we anticipate that the current tariff structure will continue to be nominally supportive, leading to what we expect to be flat to 2% higher average selling prices, resulting in revenues in the range of $1.07 billion to $1.11 billion. We expect that gross margins will continue to be under pressure in the fourth quarter, given elevated input prices and the recessed demand environment. In all, we forecast fourth quarter adjusted EBITDA, excluding LIFO, in the range of $33 million to $37 million and net loss per share in the range of $0.28 to $0.22 per diluted share, given projected LIFO expenses and depreciation higher than normalized go-forward CapEx of $50 million to $55 million. We expect LIFO expense to be between $10 million and $14 million in the quarter and net CapEx to finish the year within our target range of $50 million. Turning to the balance sheet and cash flow highlights. We ended the third quarter with $500 million in total debt and $470 million in net debt, which represents a decrease of $10 million and $9 million, respectively, compared to the prior quarter. As a result of incremental improvements in both our net debt and trailing 12-month adjusted EBITDA, excluding LIFO, our third quarter leverage ratio came in at 3.7x, moving us closer to our target range of 0.5 to 2.0x. As we progress through the fourth quarter, we expect cash flow generation to continue moving our leverage ratio back towards our target range. From a global liquidity perspective, the company's profile remained healthy during the third quarter, and we ended the period with $521 million of liquidity compared to $485 million at the end of the second quarter. Third quarter operating cash use of $8.3 million was primarily driven by the net loss generated. We ended the quarter with a cash conversion cycle of 68 days, which compares to 66 for the prior quarter as our higher-value inventory added 2 days of supply, while our payables and receivable cycles remain consistent. I'll now turn the call over to Molly Kannan to discuss our financial performance highlights for the third quarter. Molly Kannan: Thanks, Jim, and good morning, everyone. In the third quarter of 2025, Ryerson reported net sales of $1.16 billion, a decrease of $7.8 million or less than 1% compared to the second quarter with average selling prices up 2.6% and tons shipped down 3.2%. Due to the rising price environment, we recorded LIFO expense of $13.2 million, which was consistent with the prior quarter. Gross margin and gross margin, excluding LIFO, both contracted during the third quarter by 70 basis points to 17.2% and 18.3%, respectively, as we experienced price pressure amidst the soft demand environment. Warehousing, delivery, selling, general and administrative expenses totaled $201 million for the third quarter, a decrease of $3 million compared to the second quarter. Despite decreased expenses and top line metrics within our guidance ranges, gross margin compression contributed to our third quarter net loss of $14.8 million or $0.46 per diluted share. This compares to net income of $1.9 million and diluted earnings per share of $0.06 for the prior quarter. And finally, our adjusted EBITDA, excluding LIFO generation for the third quarter was $40.3 million, which, as Jim mentioned, was within our guidance range and compares to $45 million generated in the prior quarter. And with this, I'll turn the call back to Eddie. Edward Lehner: Thank you, Molly. I would like to conclude our prepared comments by thanking the Ryerson team for their tremendous teamwork and passion for getting better every day. This quarter was another street fight. However, we continue executing our self-help principles and focusing on what we can control while continuing to bring our investment cycle to return and improving our financial performance through the cycle. And with that, I am delighted to invite Rick Marabito to join me as we share an overview of the announced merger of our companies. Richard Marabito: Thank you so much, Eddie. Really appreciate being invited to be part of this call. And maybe before we begin, I just had just an opening comment to make. And just want to say how excited I am, how excited the Olympic team is for this combination of two great companies and really for the opportunity to work together with Eddie and his team at Ryerson. We're looking forward to closing so we can get to work and deliver on the benefits of the merger and really unlock the value that this combination brings to shareholders, our customers, our employees and the communities where we all live and work. And I know I speak for you, Eddie. We're engaged. We're energized and committed to deliver the compelling value proposition in front of us with shared values and a shared vision for success. And so with that, maybe we'll get right into the slide presentation, and let's start with the big picture. I think the combination, as you see, solidifies and enhances the new company's presence as the second largest metal service center in North America. Together, we'll have over $6.5 billion of revenue, and we'll serve our customers from an expansive North American network of over 160 facilities, providing new breadth, new depth of products and processing services as well as a greater ability to offer our customers customized metal solutions and improve speed and efficiency. Together, we expect to realize $120 million of synergies, and that will be phased in over 2 years, which is obviously a compelling contributor to the future margin enhancement and value creation. Eddie is going to provide some more details on the synergies in a moment. So combined, our new company will have a stronger financial profile as the merger is an all-stock transaction. Greater free cash flow and a stronger, more flexible balance sheet only provide more opportunities for future growth than I think we'd be able to accomplish separately. So Eddie, I'll turn it over to you for the next slide. Edward Lehner: Rick, thanks so much. And really, you spoke so beautifully at the outset. And I too want to welcome all of our stakeholders. I want to welcome everybody from Olympic and Ryerson that are on the call this morning. And to really continue why we think this is such a compelling and attractive merger between our two companies with a combined 255 years of experience in the service center business, hard won experience in the service center business. When we look at the transaction and within the next page of our presentation, I want to go right to synergies. And I want to give you two examples of synergies because I think they're powerful examples. And we've renamed this room Synergy Central or prospective Synergy Central. So I want to share just a couple of things with you because I know synergies are really at the root and core of where we can derive multiples of value. So if you look at Ryerson and you look at what's happened since September of 2022, just looking at Ryerson for now, 25% of our mix is in stainless, okay? So when we look at Q2 revenue, about 25% revenue in stainless, 25% revenue in aluminum and 50% revenue in carbon, and what's important to realize is we are underweighted the market in carbon when we look at MSCI numbers. The industry is 67% carbon and it's 33% nonferrous roughly. So when you look at the industry, you look at Ryerson being underweighted carbon, but overweighted stainless and aluminum, just look at stainless. I mean, stainless was a wonderful gift horse in '21 and '22, and I don't want to punch a gift horse in the mouth. But in '23 and '24 and even in '25, think about what happened in the stainless market. MSCI shipments in stainless are off 22%. Nickel prices are down by more than 50%. So we endure that going through a very large investment cycle to modernize our company, improve our company, but we take brutal compression in shipment declines over that 3-year period. And the story in aluminum from a shipments perspective, even though price, there's been a lot of volatility in aluminum price. And even though it's downward gradient has not been as extreme, shipments in the MSCI for aluminum are down more than 20% since September of 2022. But carbon prices have been about on average, even though there's been a lot of modulation in the price, in general, in September of '22, carbon prices were $850 a ton, and that's kind of where they are today in that neighborhood of $850 a ton. But what's even more provocative in this example, the synergy is that carbon shipments in the industry only fell by 5% in that period. So if you were overweighted carbon, in general, you did better in the industry than if you were overweighted nonferrous. So when you think about the combination of Olympic and Ryerson, Olympic has more carbon exposure, more carbon exposure in tube, more carbon exposure in plate. And so that's a natural synergy when we look at being very complementary when we look at our footprint and we look at what we do, certainly on the commodity mix side, that's a really, really strong synergy as we look forward in this transaction. Let me share another one with you. It's no secret that since the pandemic, we've all had to look at things that maybe were not as prolific before the pandemic. And one of the things that's happened is the demographics in our industry, it's no secret that they skew older. When you look at the voluntary rate of attrition in this industry, just folks that just leave on their own and people that retire, in this industry, it's between 5% and 15%. So I want that number to sink in for a second, 5% to 15%. Nothing the company does whatsoever. It's just people that retire or they decide they want to try something new. So if you take the natural rate of attrition in this industry, you can see where we can create a really powerful synergy and efficiency just given the natural rate of voluntary attrition in this industry, you can take the combined employee census, you can take the average comp that we published per the MD&A. And you can do that math and you can model it and you can see how we create a synergy right in line with what we're bringing to our stakeholders and what we're articulating to our stakeholders. So when we look at this, everything on this slide is true, presence, highly complementary match, opportunities for margin expansion, the synergies that I just spoke about, and there's many more, and we'll talk more about some of those other ones as we go through the presentation, accelerated growth, really the combination of talent pools. I mean I've known because we've competed against Olympic for the entire time that I've been here over the last 13 years. And Olympic has incredible talent in their organization. They've got a great brand, a great culture. And I'd like to say that I'm proud of what Ryerson is and what we've been and where we're going over our 183 years. And so when you look at the talent pools that we're combining in this merger, it is very unique, and it's highly accretive and valuable. And then we have an opportunity to deleverage. There's a lot of collateral in this deal, a lot of collateral in this deal that gives us the optionality to deleverage both on a combined basis, but also in terms of the asset quality that we have in working capital, property, plant and equipment. And then we have better access to the capital markets. And we also have better share flow. There's more liquidity in our combined equity than we have now. So with that, I'm going to kick it back over to Rick, and then I'll be back with you in just a minute. Richard Marabito: So thanks, Eddie. We can go to the next slide, please. And really, let's review the details of the transaction. So as we said, the merger is structured as an all-stock deal, and Eddie just talked about that in terms of strengthening the balance sheet and giving us really the strength and power to go forward and grow. Closing of the transaction is targeted for the first quarter of 2026. Olympic shareholders in terms of an exchange ratio will receive 1.7105 Ryerson shares for each Olympic share. And what that equates to is Ryerson shareholders owning 63% of the combined new company and Olympic Steel shareholders owning approximately 37% of the combined company. And as we stated earlier, 2024 combined revenue, $6.5 billion with pro forma adjusted EBITDA margins approaching 6%, and that would include a phase-in of the forecasted synergies. And Eddie just talked about the synergies, $120 million, assuming about 1/3 of those synergies are completed at the end of the first year after closing and then 100% phased in completely at the end of year 2. And we do -- as Eddie said, we do have high conviction in terms of achieving those synergies. I think as you look at all the opportunities, and Eddie just gave you a couple of examples, but there's quite a long list of potential opportunities and synergies. And I'll tell you, that's -- we're going to be quickly engaged on realizing those synergies. In terms of leadership, the Board is going to broaden its talent by expanding to 11 Board members, and the Board will welcome Michael Siegal as Chairman of the Board. I think as most of you know, Michael is currently the Executive Chair of Olympic Steel. And then Olympic will also appoint three other directors to the Board, obviously, mutually satisfactory to the Board. And that will result in four Board members from Olympic and seven from Ryerson to round out the new Board. And then in terms of executive leadership, Eddie will continue to serve as the Chief Executive Officer of the new company, and I'm very excited to serve as President and COO. And the Olympic executive team, I can tell you, is enthusiastically looking forward to continuing with the new combined company. And again, since the merger is all stock in nature, the combined company will really benefit with reduced leverage. As we model that out as synergies take hold, we're looking at leverage of approximately 3x post close. And then the credit profile of the combined company should also be enhanced through scale, diversification, improved margins and profitability and obviously, greater cash flow. So a lot of positives here. So Eddie, why don't you take us through the next slide? Edward Lehner: Thanks, Rick. So when we go to the footprint, when we look at the footprint, and I think a picture really is worth a thousand words or more. But when we go under the hood of what does the prospective combined -- what do the respective combined companies look like. If you look at this graphic, you can see and what always doesn't show up in the financial statements because you really have to drill down and you have to look at the drivers of what create the financial statements for respective companies in our industry. Think about the importance of selection, availability, lead time and on-time delivery. I mean we have great brands. But really, when the customer calls or e-mails us for a quote, if we have it on the floor, it sells. If we can create short lead times, it sells. If we have wider selection, it sells. We can buy out from one another, makes it easier to make that sale. If we can use each other's outside processing network, it makes it easier to create that sale. So when you look at this graphic, you have density and you have points to the customer that are closer to them, relying great -- I mean -- and we can realize greater reliability and consistency in how we make those connections with our customers. When you look -- if you go West, we have an opportunity to take more of the combined company West, and we also have more of an opportunity to go to Mexico together where we already have a presence. And Olympic, I'm sure, has customers that are looking to get to Mexico in a more meaningful way. So when you look at the footprint and the commercial synergies that are attainable in this transaction, I think the picture truly is worth a thousand words. Rick? Richard Marabito: Yes. The next slide, this is something -- I tell you, I get -- this is an area I get really excited about. So if you look at the top there, the two companies combined over the last 3 years have invested a massive amount back into the company, $480 million, and I think the title of this slide is exactly right, Primed. I think we're Primed. So the vast majority of the money on the current investments in CapEx, our portfolio has already been spent, and so what that means is we are both now primed to reap the returns on these investments, and I think the benefit of a merger is we're going to get there faster through a larger combined platform, and then let's not even mention what Eddie talked about earlier, and that's the opportunity for a power boost or a multiplier effect from tailwinds in the metal market. So demand has been off for several years. We get demand back to a normalized demand scenario with $480 million recently invested, and I think that is a very, very strong indication of what we can do together. Briefly, I'll touch on Olympics side of the equation in terms of what some of the investments were, and then I'll have Eddie talk about Ryerson's recent investments. But Olympic, I like to refer to our capital spending over the last 1.5 years to 2 years as the Big 5. So it includes a new cut-to-length line in Minneapolis, and we're targeting their carbon growth, coated carbon growth specifically. A new white metals cut-to-length line in Chicago, a high-speed specialty stainless slitter at Berlin Metals. Berlin is right outside of Gary, Indiana. The biggest of the five is in Chambersburg, Pennsylvania. That's one of our plate processing hubs. And in Chambersburg, we've got a massive automation project, which includes all new lasers and plasma processing equipment and capacity, coupled with material handling automation. So a lot of our movements are going to be touchless. So we're really excited about that one. And then finally, we've expanded down south in Texas, in the stainless area through Action Stainless's expansion in Houston. So all these projects, they're poised for returns on the Olympic side for '26 through '28 time frame. And I'd say that's perfect upside timing for the merger. Eddie, you want to talk about from the Ryerson side, your investment? Edward Lehner: Yes. No, thanks, Rick. When I started with Nucor in 1992, Ken Iverson, legendary CEO of Nucor, stopped by my office and was just talking about the story of Crawfordsville. And he was saying that when they built Crawfordsville in '87, they were losing $1 million a week on the project and they were asking, Ken, how he slept, and he said, he slept just like a baby, he woke up at the night and cried every hour. When you do CapEx and you do greenfields and you do big projects to modernize your company, they all don't go beautifully, and you have to grind through it, but it's worth it, and certainly, as we've gone through this downturn, which has lasted for 3 years, I think Rick said that we're due for some tailwinds, for the last 3 years what we've had is space burn. So when you look at the CapEx investments we've made, we made record CapEx investments to invest in our future. And as we see upside operating leverage and opportunities for the cycle to inflect and certainly, with the combined Olympic and Ryerson, when you look at University Park, 900,000 square feet of modern service center space for long products and tube primarily when you look at Shelbyville, which was a fantastic investment in our nonferrous franchise that's located so close to the bread basket of nonferrous supply in the United States. You look at the release of ryerson.com 3.0 as we go further and further into digital commerce. So that's a synergy between Ryerson and Olympic as we go forward to bring a lot of the digital investments we've made and to actually put those in at scale in a very thoughtful way as we go forward as a combined company, and we have the Atlanta tube laser center. We've made significant investments, and we've gone from nothing in 2016 to more than 10 work centers in Norcross, which has been a wonderful success story, and if you pair that up, for example, with Chicago Tube & Iron, which is in the Midwest, you could see a powerful synergy in that franchise of high value add between tube lasering and sheet lasering. And then, of course, we took a big swing on ERP integration. We've mentioned this before. In our South region and in Texas, we were on legacy systems for 40 years, and we finally had to bite the bullet, we finally had to convert and get on a uniform ERP system. I mean that is a 2- to 3-year trail of tears. But once you come through it, once you come through it, all of a sudden, everybody knows that language and they find possibilities and capabilities they didn't have before within that system to create a better customer experience. So we are on the other side of that. As you see restructuring and rework costs come down and we do the cleanups from a 3-year investment cycle coming through this downturn with the investments we've made. As you look at a combined Olympic and Ryerson, I think you can really start to see the potential of how those investments, they don't just pay off as individual organizations, but when you bring them together, the payoffs are very, very attractive. And that takes us to, again, the compelling synergy opportunity. So I spoke to two very powerful synergies a couple of minutes ago, and I want to put a spotlight now on procurement and supply chain. So you go from 2 million tons to, say, 2.9 million to 3 million tons of combined purchasing spend and you pick up scale, and if you really break this down into math, metal on any given day is between 70% and 95% of our cost depending on the pound that you're quoting and the pound that you sell, 70% to 95%. So if you don't buy well, it's really hard to operate your way out of suboptimal buying, but when you look at the combined scale that we generate now going to that supply chain marketplace, to that procurement marketplace, we're talking about $14 a ton over 2.9 million tons is what we're talking about, and we are highly confident that we know how to get $14 a ton in supply chain synergies, not the least of which follow through to fuller truckloads that we receive from our suppliers. So we pick up savings, not just on the freight, but obviously, the main course is the metal, and now you've got greater optionality of how you purchase that, how you combine that spend and where you direct it through a more dense network to bring down your overall procurement costs. Rick? Richard Marabito: Thanks, Eddie. Next, let's just talk about our profile in terms of pro forma mix on end markets and products here, and Eddie touched on it already, but really excited about, a, the growth markets and customers benefiting from our combined new mix. Obviously, we've got a lot of potential growth happening in the United States in terms of infrastructure reinvestment, reshoring, outsourcing of fabrication and then, of course, the massive data center demand build-out where we're seeing significant growth. I think as you bring the two companies together, you look at the product mix, it's enriched. Eddie talked about the balance of the specialty and the carbon, but you look at really the overall mix now, a great balance across flat and long, stainless and aluminum, carbon, especially coated carbon and then the increased value-add processing and fabricating capabilities I think fantastic, and then combine that with Olympic Steel's recent growing focus on end product manufacturing, wow, these are all margin enhancers. So I think in summary, the combined company is going to be more diverse. We're going to have more high-margin processing capabilities. We're going to have a richer mix of metal products, and that's going to really provide a powerful and expansive one-stop solution for our customers. And when I look at that altogether, I think all this, what it means is it contributes to an improved and less cyclical earnings stream for the combined company going forward. Eddie? Edward Lehner: Thanks, Rick. So when we look at moving up the value chain and what does this industry look like as you start to visualize margin accretion, on the pick, pack and ship side, it's a speed game, right? You quote fast, you quote short lead times, you have the inventory on the floor, you get it to the customer. You need to do that with running water like consistency. But as you move that up and you pick up margin points when you do that, but the key there is consistency and scale. But as you move up through processing and finished parts and kits and assemblies and value add, our value-add franchises combined, I mean, individually, they're significant, but combined, there is another force multiplier when you look at going up that adjacency curve and going to every next step of service capability and value-add capability. And then you get to end products where I'm highly complementary of the work that Olympic has done, forging a path into manufactured products and end products, and Rick is going to speak to that in just about a few seconds here. But you can start to see another very complementary fit as we go up that curve to getting more margin on that consistency for transactional spot build material business, the menu of offerings that you can take to a program account or an OEM and then all the way through to manufactured products. Rick? Richard Marabito: Yes. Thanks, Eddie. And some of you may or may not know about Olympic strategy the past 5 or 6 years to acquire and integrate end product manufacturing into our mix. So for example, we make inside of Olympic, we make industrial hoppers. We make stainless steel bollards. We make metal canopies. We've got many different end products that go into HVAC applications. And as I spoke before, the end product, it carries a higher margin and return profile than traditional service center business. And then the end products are also countercyclical to distribution margins. So for example, when metal pricing declines kind of the depression in the cycle of metals, service center margins tend to come under pressure, while end product margins have the offsetting effect. In those types of declining price environments, end product margins typically expand. So the other beautiful thing about it is end products through our internal purchasing, through fabricating capabilities, which I think about Olympic and now triple that, given the newco size, we're able to provide synergies to the end product manufacturing companies that our competitors at the end market level just don't have. So I think the new combined company is going to really be able to better leverage those synergies across the end product portfolio that we have, and then if you go right into the next slide, we also talk about stronger capital structure, wow, the ability to continue to invest at a faster pace in the areas that expand our margins. So you could see on this slide, really, the summary is, on the left side, when you look at the margin profile, immediately accretive. Synergies give us the boost to earnings that Eddie talked about, improved EBITDA returns, getting to 6%, and then on the right side, you look at the capital structure and the balance sheet and you go, wow, stronger, more flexible balance sheet, synergies drive cash flow generation. So more cash flow, reduced debt, reduced leverage, that's a beautiful thing for being able to fund future growth in the areas that give us higher returns and more profitability. So I think -- and it ties in with the slide we talked about before on having spent a lot of capital, too. So we're entering into this from really a position of strength where we don't have big CapEx needs, so we can really focus on growth, whether it's M&A or whether it's on the internal investment side of the equation. So I just think it's another exciting piece of the way the two companies are coming together at this point in our history as well as the structure of the deal, again, by being an all-stock transaction. Eddie? Edward Lehner: Thanks, Rick. And just to follow up on some of the points that Rick made. When you look at things like and avoidance is maybe not a great word, but we'll stay with it. When we look at CapEx avoidance, when you come through two investment cycles that Ryerson and Olympic have had over the last 3 years, given the quality of the assets, given the magnitude of the assets, now we have the opportunity even to think about how do you move things around, how do you beneficiate assets, how do you repurpose assets. So one of the things you noticed in our earnings release was our depreciation expense is about $19 million in the quarter. If you think about what our normalized CapEx run rate is, depreciation should really be between $13 million and $14 million in the quarter, which is about $0.16 to $0.18 EPS. So one of the ways that we envision EPS accretion is, we don't have to spend as much CapEx as a combined organization, not just gearing down from the CapEx we've had over the last 3 years, but really looking at what is really -- what is the right normalized rate of CapEx going forward as a combined organization and how much depreciation then do you book over time against that CapEx as you add to the balance sheet, but you also optimize the asset footprint that you have. So moving then to the benefits of scale and scope, and I think Katja in her note, I mean, I think she summarized it really well. It's scale and scope within a highly fragmented space. I mean, trivia question for everybody, can anybody remember what the last transaction was of any significance. You'd have to go back to 2013 for the Reliance Metals USA transaction. And then a better trivia question that I won't give you the answer to, even though I know it, is go back and find the three largest transactions of significance before that. But I'll tell you this, over the last 21 years, 4 transactions of any significance in the space. So when you look at the combined company at $6.5 billion in revenue, it speaks to the benefits of densification of the network and creating a better customer experience because that's what I want to bring it around to. Creating a better consistent customer experience is really how you win in this industry. When you get past all the big terms and all the business speak, there's a customer on the other end that just wants a consistently high-level experience from low touch to high touch from pick, pack and ship to finished part, and they want a reliable, dependable, professional and enjoyable experience with that supplier, with that partner. So those are the benefits of increased scale and scope, availability, selection within this proposed merger. Rick? Richard Marabito: Thanks, Eddie. And really, the next two slides, I'm just going to touch on briefly, and it's really for those of you who may not be as familiar with Olympic Steel, and I'll tell you, most of the next 2 slides, we've already covered in our conversation, so I'm not going to go in depth. Just wanted to make a couple of points here. So we talked about at Olympic moving down the values -- up the value stream, higher returns, less cyclicality and all the things that we're trying to do there. So I'll point out a couple of things here. 8% of our revenue mix is now from manufactured products. I'd say roughly 20% of our mix is from multi-process fabricating work. Again, you combine those two, we're pushing 25% to 30% of our mix is of the kind of the highest end of the margin returns that we see for service centers. Touch really quickly our Specialty Metals segment. Specialty metals for us is aluminum and stainless. That's really been a growth engine for us, 10% compound annual growth. Really excited about our aluminum opportunities and the growth there. We've seen enormous growth year-over-year for now 2 years in aluminum. So excited about that and excited about the opportunities when the two companies combine on aluminum. If you look at the bottom of the slide, that's just how we report publicly. We report in three segments. We break it out by product. The carbon is really the traditional Olympic steel, and we've got a high degree of investment going into that in terms of the branded end products and some of the high-margin fabricating equipment. Specialty metals, I talked about already. That's been a growth engine for us, and then, of course, the pipe and tube business, which is highly tilted to tube, and we do a lot of highly intricate value-add work on the tube. So it's really a higher EBITDA segment than the others when you look at it as a percentage of revenue. So -- and then the next page is really just a lot of what we've already talked about. So I'm not going to repeat ourselves. So Eddie, back to you. Edward Lehner: Thanks, Rick. Appreciate it. So as we conclude our run through the presentation, I want to speak to this in summary because I think you've heard a lot of really good things, and really, I think you can really envision now the potential and possibilities of the merged company, and it really goes to the heart again of the spotlight on synergies. And look, we're going to get them all. And I'm going to share with you briefly, again, a couple more because I want to put down these bread crumbs. I want to put down these nuggets. When you look at investments we made over the last 4 years, for example, in nonferrous polishing and buffing and grinding and you look at Olympics franchise in specialty metals, there really is another really excellent synergy between those two capacities. When you look at slitting, for example, Ryerson has a lot of cut-to-length lines. We don't really match that cut-to-length capacity with as much slitting capacity as we need. Olympic has wisely made those investments in slitting both on the carbon and nonferrous side. So that's another really good fit as we look at creating better customer solutions over that horizon, really long, long, long into the future between our combined companies. So with that, we'd like to go ahead and open it up to your questions and look forward to answering them all. Operator: [Operator Instructions] And our first question will come from Samuel McKinney with KeyBanc Capital Markets. Samuel McKinney: Congratulations, guys. Just want to start with one Ryerson-specific question. Fourth quarter, typically a strong cash flow quarter for you guys. Given the earnings guidance and the normal year-end working capital release, fair for us to expect some more solid cash generation again to close the year? Edward Lehner: Yes. I mean, Jim has been silent the entire call. So I'm going to go ahead and let him answer that question. Jim Claussen: Yes, you're correct on the cash generation, and we typically see somewhere between $70 million and $80 million of working capital release in the fourth quarter relative to volumes and natural release. So I expect again in this fourth quarter to get a decent working capital release and cash flow there from operations. Edward Lehner: Yes, Sam, I can't resist to put another breadcrumb out there. So for all you modeling home gamers out there, when you look at traditionally the revenue that it takes, the working -- the net working capital it takes to generate an incremental dollar of revenue, you take the combined net working capital of both companies and look at that on a go-forward basis, post close. You can also see where some of that free cash flow opportunity is really significant around optimizing the working capital of the combined companies, if you work with a ratio that we've been solidly in over my 13 years here, which is usually about $6 to $7 of revenue generated per dollar in net working capital. So I'll let you all go at it and model that, but it's a good result. Samuel McKinney: Okay. And then moving to the merger presentation. You call out driving market share growth, whether it's the recent multiyear CapEx cycle at Ryerson or the high-margin in-product businesses at Olympic, where is it that you see the greatest opportunities to win incremental pro forma market share as a combined company? Edward Lehner: I guess I'll just make some opening comments, and then I'm going to kick it over to Rick. But I really think when you look at cross-selling and upselling opportunities over a shorter distance to the customer, I think that's the key. I mean, if you look at Ryerson's customer count, which we do share with the stakeholder public, it's about 40,000 active accounts. Olympic is about 8,000 to 9,000 active accounts. When you look at the fragmentation of the industry and the ability to go to market from a cross-selling and upselling perspective, again, with greater selection, greater value add, but really getting closer to the customer, day-to-day as those quoting opportunities come in, it really is a function of I have it, I can do it in 1 day or 2 days. I can give you the value-add solution you want or on the contract side, we have a menu of value-added options for you to select from, not just supply chain design, but risk management, scrap management and a whole bunch of other things that we can bring to the table when we're trying to create a better customer solution, Rick? Richard Marabito: Yes, I couldn't agree more. I think, Sam, if you look at that map, I get excited at Olympic. You can see our dots are pretty much in the eastern 2/3 of the country. So while you look out West and the footprint of Ryerson, certainly great opportunities for new geographies for Olympic. I think Eddie said it right, when you overlay all the products and capabilities of the combined companies, I think a much greater ability for one-stop shopping for customers, and it gets back to that cross-selling opportunity that Eddie just talked about. So yes, I think we're not even touching on Mexico where Olympic has a very small presence, and so I see a lot of growth opportunities, at least on the Olympic side of the equation of what we do and where we are. So really excited about it. Samuel McKinney: Okay. And then last one for me. Currently, Ryerson generally reports the whole company, while, Rick, you touched on earlier, you guys provide results for carbon, specialty and pipe and tube. Are you planning for this merger to be a complete roll-up with no segments? Or are you going to provide some segments to the business? Edward Lehner: We don't know. So we're going to figure out though because we're not... Samuel McKinney: Okay. Edward Lehner: Because Sam, that's -- those are all the things you have to do between signing and close. So that goes into that category. But I'm sure Rick and Rich can give you some good color on that, too. Richard Marabito: Yes. I mean I think we'll sit down and map that out and obviously do what we think is best for shareholders and potential shareholders to best understand the company and where we're going. Edward Lehner: Yes, the guiding light experience. Operator: [Operator Instructions] Our next question will come from Alan Weber with Robotti & Company. Edward Lehner: Alan, what took you so long? Alan Weber: So can you talk first about are there cash costs to get the synergies? And I just want to make sure that the synergies that you're talking about are under current market conditions, not based upon improved business cycle, et cetera. Edward Lehner: Yes. Alan, again, I'm going to kick it over to Rick here in just a second. But look, all we've known for the last 3 years of the current conditions, and so we have to really go way back to remember better conditions. So the synergies are really founded and premised on current conditions and how we get them, and when you -- again, to me, I take great comfort. When I look at the combined book value of both companies, there's really a strong underpinning for those synergies if this environment were to unfortunately continue for an unprecedentedly long time. Certainly, any upturn we get, we'll have a chance to really show off that operating leverage as a combined company, but the synergies are really premised on where we live today. Rick? Richard Marabito: Yes, I agree 100% with Eddie, at least how we thought of it on the Olympics side in terms of synergies. Synergies are basically not -- in my opinion, synergies are not, oh, the market is going to improve, so we're going to call that a synergy. The synergies in terms of how we thought about it are real enduring synergies based on our existing model and the model going forward. So I agree 100% with Eddie on that. And then you did ask about some costs that would be incurred to realize those synergies. And yes, obviously, there'll be some costs. I think on one of the slides, we talked about potentially that being up to $40 million. Alan Weber: Okay, and then I guess the last question is, when and if the markets do improve, how do you think about incremental EBITDA margins starting from your pro forma EBITDA? Richard Marabito: Well, I'll start on that. I mean, certainly, again, what we've got in the deck and what we've talked about our pro forma margins using sort of the environment we're in and then looking on a pro forma basis and modeling out what that would be. You know if you go back 2 or 3 years in terms of what the EBITDA margin profiles were for our sector, for Ryerson, for Olympic and for others, it was several points higher. I tend to think of if you can get in that 6% to 8% quartile consistently, on the distribution service center side of the business, that's pretty good. Obviously, given the depressed market we've been in the last couple of years, the current margin profiles for really all of us in terms of service centers is depressed from that. So we've got a 6% pro forma in here, but you get market tailwinds and more of a normalized market, and I can see that going to 6% to 8%. Alan Weber: Okay. Edward Lehner: Alan, when we look at it historically and you go back and look at, again, the last 20 years, and you can certainly spotlight years like 2014, 2018, 2021. And conversely, you can look at years like 2015, '09, 2020 and even the last several years of 2024 and even '25 year-to-date. And you kind of -- you traverse that continuum of years. And here's what I would tell you, we're in the bottom quartile now. And so that feels like a 2% to 5% EBITDA margin. As you get to that second quartile, that feels like a 4% to 6% EBITDA margin. You get to that third quartile when you start to see mid-cycle trends and better, that gets you to 6% to 8%. And then when you get to that top quartile, we start to see 8% to 10% EBITDA margins, which is really a function of being able to sweat the assets to a greater extent, your demand is going up, you get some holding gains in inventory, but you also get more value add because at that point, when the economy is doing better, you also get more outsourcing of manufacturing where some of our customers bring things in-house during times like this. As everybody gets busy, they need to go out to variable resources to go ahead and service that demand and so you get incremental margins on top of that. So really, as we've studied it over the years, it really looks like that 2% to 5%, 5% to 7%, 6% to 8% and 8% to 10%. So I hope that helps. Alan Weber: It does. And I guess my last question is, can you talk about assuming market conditions are flattish next year or similar to this year, kind of working capital for the combined company for next year, whether that will be a source of cash or... Edward Lehner: Yes. Alan, I try to give a little bit of insight into that in terms of what we've seen over time where how much net working capital does it take for us to really finance an incremental dollar of revenue. And I think if you look at that in reverse, if conditions were to stay the same, depending on where price goes, but if conditions were to stay the same in a combined company scenario, there's certainly working capital there to be had and there's working capital release and free cash flow there. More to come as we get through this signing to close period and as we really start to really enumerate that. But again, I want to kick it over to Rick, and I know he's got some thoughts around that as well. Richard Marabito: No, I agree. I think, Eddie, you said it well. I think in a normal market, if we just stayed in the same market conditions, so let's not talk about the price side of the equation. There's big opportunity on working capital turnover, specifically on inventory, inventory sharing, improving inventory turns, absolutely will have a positive cash flow and a working capital release just from being more efficient. Alan Weber: And I guess my last question is, have you gotten any customer comments, good or bad or concerns? Edward Lehner: No. But I mean it's early, but no. Alan Weber: Right. Edward Lehner: Everything -- I have to say, I mean, so far, everything has been overwhelmingly positive, notwithstanding maybe the initial reaction of the market, but it's been overwhelmingly positive. Richard Marabito: Same on our end, Alan. Operator: And that does conclude the question-and-answer session. I'll now turn the conference back over to you. Edward Lehner: Well, I really want to give the last word to Rick, and I'm going to do that. I just really want to thank everybody for tuning in with us today. We couldn't be more excited and more enthusiastic and optimistic about what lies ahead for our combined companies. And I really look forward to being with you on future calls as you start to see the realization of the vision we have for the combined companies. Everyone, have a great holiday season, and I know we're going to see you out there on the road. Rick? Richard Marabito: Yes. Thank you, Eddie. Really appreciate the time and ability to talk to everybody about what I think is an incredible and exciting transformational opportunity for the two companies. And I'm not going to repeat what I said in the beginning. I'll just leave you with this. I truly believe the best is yet to come, and what I will tell you is you've got a combined committed and engaged new combined team that is going to work really hard to make it happen. So thank you all. I appreciate your participation. Edward Lehner: Thank you. Operator: Thank you. That does conclude -- I'm sorry, go ahead. Edward Lehner: No, no, no, nothing, thanks. Operator: Thank you. That does conclude today's conference. We do thank you for your participation, and have an excellent day.
Operator: Welcome to the Avnet First Quarter Fiscal Year 2026 Earnings Call. I would now like to turn the floor over to Lisa Mueller, Director of Investor Relations for Avnet. Please go ahead. Lisa Mueller: Thank you, operator. I'd like to welcome everyone to Avnet's First Quarter Fiscal Year 2026 Earnings Conference Call. This morning, Avnet released financial results for the first quarter of fiscal year 2026, and the release is available on the Investor Relations section of Avnet's website, along with a slide presentation which you may access at your convenience. As a reminder, some of the information contained in the news release and on this conference call contain forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict. Such forward-looking statements are not a guarantee of performance, and the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in Avnet's most recent Form 10-Q and 10-K and subsequent filings with the SEC. These forward-looking statements speak only as of the date of this presentation, and the company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this presentation. Please note, unless otherwise stated, all results provided will be non-GAAP measures. The full non-GAAP to GAAP reconciliation can be found in the press release issued today as well as in the appendix slides of today's presentation and posted on the Investor Relations website. Today's call will be led by Phil Gallagher, Avnet's CEO; and Ken Jacobson, Avnet's CFO. With that, let me turn the call over to Phil Gallagher. Phil? Philip Gallagher: Thank you, Lisa, and thank you, everyone, for joining us on our first quarter fiscal year 2026 earnings call. We are off to a solid start in the new fiscal year. In the first quarter, we achieved sales of $5.9 billion, above guidance, and adjusted EPS of $0.84, near the high end of guidance. Our performance was led by strength in Asia and Farnell, which both had double-digit year-on-year growth. Sales in our Americas region grew year-on-year for the first time since fiscal 2023. While sales in our EMEA region were flat with the year-ago quarter, they did grow better than seasonal on a sequential basis, as did all of our regions. From a demand perspective, in the quarter, we saw strength in certain key vertical segments, most notably transportation, compute and communication. Overall, semiconductor lead times and pricing continue to be stable for most technologies. That said, we do see extended lead times and price increases in memory storage and certain interconnect products, particularly those supporting data center and AI build-outs. On the IP&E side, lead times also continue to be stable. Our book-to-bill ratio improved globally, led by Asia and the Americas, and all regions were above parity. Our backlog is growing, and we continue to see customers placing orders within lead times, which is a sign of strengthening market. Cancellations have remained at normal levels. In the quarter, we had a modest increase in inventory to support sales growth in Asia and certain supply chain opportunities, although we did see improvement in days of inventory on hand. We remain focused on balancing these growth opportunities with reductions in the near term and optimizing the inventory we have on hand. Now turning to our Electronic Components results. At the top line, our Electronic Components sales increased on a sequential and year-on-year basis due to a generally improving demand environment led by Asia and the Americas. In Asia, sales grew sequentially and year-on-year and now represent just over half of EC sales. This marks our fifth consecutive quarter of year-on-year sales growth in the region, driven by strength across the communication and transportation end markets. The Americas are showing signs of recovery, with sales growing both sequentially and year-on-year. Sales were strongest in the industrial and communications end markets, followed by transportation and consumer. In EMEA, sales were basically flat year-on-year and higher sequentially, which is better than seasonal for the region. Bookings improved as the region returned from its summer slowdown. The industrial and communications end markets showed year-over-year growth, while compute grew both sequentially and year-on-year. We are optimistic about continued modest improvement in Q2. We continue to see healthy design win activity and momentum in demand creation. We recorded solid increases in demand creation revenues and gross profit dollars for the quarter. We are also pleased with progress on our IP&E product sales. As we mentioned in the past, IP&E is one of our higher-margin businesses. Sales have been steady with improving margins and doing particularly well in Asia. Now turning to Farnell. Farnell delivered sequential and year-on-year growth and experienced similar sales trends to EC with strengthening in Asia and the Americas. Operating margin remained stable sequentially due mostly to increased sales of the on-the-board components, offset by higher sales of single-board computers and test and measurements, which tend to be a bit lower in margin. The team continues to execute on their strategy, including enhancing digital capabilities and leveraging Avnet's core ecosystem for new and additional opportunities. While there is still plenty of work to do, we are pleased with Farnell's progress, especially given its improved performance, while the macro environment in Europe, its largest region, has yet to fully recover. To conclude, we are encouraged by the increasing number of positive signs in our business. We feel good about the recovery in Asia Pac and progress in the Americas. Conditions in EMEA are stabilizing and modestly improving. While geopolitical and market uncertainties remain, we believe our strong supplier line card and diverse customer base and the strength of the end markets they serve position us well as the market recovers. During the quarter, I spent some time with the leadership teams from several of our supplier partners, both in the U.S. and Europe. Most recently, I attended the Electronic Components Industry Association, ECIA, Conference in Chicago. Consistent with our views, our supplier partners are also seeing several positive signs, including lead times extending in certain technology and discussions on actual or potential price increases. Maintaining and strengthening our supply relationships through these challenging times has helped us navigate the market, which also translate into increased value for our end customers. It is times like these that I'm especially thankful for our dedicated and experienced team across our whole organization who have led us through this prolonged market cycle. I want to thank them for their efforts that continue to reinforce Avnet's position at the center of the technology supply chain, helping our customers and suppliers navigate complexity and unlock new opportunities. With that, I'll turn it over to Ken to dive deeper into our first quarter results. Ken? Ken Jacobson: Thank you, Phil, and good morning, everyone. We appreciate your interest in Avnet and for joining our first quarter earnings call. Our sales for the first quarter were approximately $5.9 billion, above the high end of guidance of our range, and up 5% both year-over-year and sequentially. Regionally, on a year-over-year basis, sales increased 10% in Asia and 3% in the Americas. Sales in EMEA were flat year-over-year and were down 6% in constant currency. From an operating group perspective, Electronic Components sales increased 5% year-over-year and sequentially. Farnell sales increased 50% year-over-year and 3% sequentially. For the first quarter, gross margin of 10.4% was 42 basis points lower year-over-year and 15 basis points lower sequentially. The year-over-year decline is primarily driven by declines in the Western regions, partially offset by improvements in Farnell. The sequential decline in gross margin is primarily driven by a decline in Europe, partially offset by improvements in the Americas, Asia and Farnell. The sequential gross margin declines in EMEA were primarily driven by a less favorable product and customer mix compared to last quarter. The regional mix shift to Asia also had a negative effect on EC gross margin year-over-year and sequentially. Sales from the Asia region represented 49% of first quarter sales in fiscal 2026 compared to 47% in the year-ago quarter and 48% last quarter. Farnell gross margin increased both sequentially and year-over-year, in part due to improved product mix of on-the-board components. Turning to operating expenses. SG&A expenses were $464 million in the quarter, up $26 million year-over-year and up $13 million sequentially. Foreign currency negatively impacted operating expenses by approximately $5 million sequentially and $11 million year-over-year. The expected increase in sequential SG&A expenses was primarily driven by the additional sales volume and from higher salary expenses due to employee raises that took effect in the first quarter of fiscal 2026. As a percentage of gross profit dollars, SG&A expenses were flat sequentially at 76%. Overall, first quarter operating expenses were as anticipated. As we move through fiscal 2026, we expect expenses to be well controlled, but would expect modest increases with sales growth as the market recovery unfolds. For the first quarter, we reported adjusted operating income of $151 million, and our adjusted operating margin was 2.6%. By operating group, Electronic Components operating income was $159 million, and EC operating margin was 2.9%. The sequential decline in EC operating margin of 11 basis points was primarily due to higher SG&A expenses. Farnell operating income was $17 million, and operating income margin was 4.3%. Operating income margin was up approximately 375 basis points year-over-year and flat sequentially. Turning to expenses below operating income. First quarter interest expense of $60 million decreased by $5 million year-over-year and was up $1 million sequentially. Our adjusted effective income tax rate was 23% in the quarter, as expected. Adjusted diluted earnings per share of $0.84 was at the high end of our expectations for the quarter. Turning to the balance sheet and liquidity. During the quarter, working capital increased $160 million sequentially, primarily driven by $176 million increase in receivables. The increase in inventories of $185 million was offset by a corresponding $201 million increase in accounts payable. Excluding the impact of currency, working capital increased by $198 million sequentially. Working capital days decreased 4 days quarter-over-quarter to 95 days. Inventory days decreased by 3 days sequentially to 92 days. Our return on working capital increased 36 basis points sequentially from higher operating income. The increase in inventories and corresponding increase in accounts payable was primarily driven by increases in the Americas to support supply chain services engagements and increases in Asia to support overall growth. Overall, the quality and aging of our inventory continues to improve. We remain focused on reducing inventory levels where elevated, noting that we also want to ensure our Electronic Components and Farnell businesses have the right inventory in our distribution centers to position ourselves appropriately as the market recovers and as lead times extend for certain products. Our increase in working capital led to an increase in debt of $323 million. We used $145 million of cash for operations in the quarter, primarily due to the increase in receivables to support the growth in Asia revenues. From a cash flow perspective, increases in inventory were offset by increases in accounts payable. With regards to our capital allocation, we have a consistent, disciplined approach. We continue to deploy cash in a manner that generates what we believe will have the greatest long-term return on investment for our shareholders, prioritizing reinvestments in the business and returning excess cash to shareholders. During the quarter, cash used for CapEx was $25 million, within our expected quarterly levels. We ended the quarter with a gross leverage of 4.0x, and we had approximately $1.7 billion of available committed borrowing capacity. We will continue to prioritize lowering our leverage to appropriate and historical levels in order to maintain a strong balance sheet, which we continue to believe is an important aspect of having a sustainable and profitable distribution business. We anticipate reducing our leverage to approximately 3.0x over the next year. We increased our quarterly dividend by approximately 6% to $0.35 per share. We have increased our dividend in each of the last 12 fiscal years. We have more than doubled our dividend in the past 10 fiscal years, which is an average annual dividend increase of more than 10%. In the quarter, we repurchased approximately 2.6 million shares totaling $138 million, including $100 million of shares repurchased in connection with our convertible debt issuance. We repurchased 3% of outstanding shares in the first quarter and have repurchased 8% of outstanding shares over the past 4 quarters. Book value per share decreased to approximately $57 a share. Turning to guidance. For the second quarter of fiscal 2026, we're guiding sales in the range of $5.85 billion to $6.15 billion and diluted earnings per share in the range of $0.90 to $1. Our second quarter guidance considers the uncertainty that continues to impact the market and implies a sequential sales increase of 2% at the midpoint. This guidance assumes sequential sales growth in the Americas and Asia, with flattish sales in Europe. This guidance also assumes similar interest expense compared to the first quarter, an effective tax rate of between 21% and 25% and 83 million shares outstanding on a diluted basis. In closing, our team continues to execute well against the areas we can control, and we still have opportunities for improvement. Given today's rapidly changing market conditions, our team continues to demonstrate the value we bring to our customers and suppliers. We remain confident our approach through this market downturn will benefit our stakeholders in the long term. With that, I will turn it over to the operator to open up for questions. Operator? Operator: [Operator Instructions] And our first question is from William Stein with Truist Securities. William Stein: First, I wanted to ask, Phil, you mentioned revenue in the data center, I think, AI application category. I suspect your exposure there is still relatively small compared to the overall sales. Can you just bring us up to speed on that metric, please? Philip Gallagher: Sure can. Thanks, Will. I appreciate the question. Yes, so it is relatively small. So our exposure to the hyperscalers is, on a grand scheme, I don't know, maybe in Asia, 7% of our business, give or take, Will, of Asia Pac, where most of that's happening right now for us. But the reason I bring it up is it's well beyond the GPUs and even the FPGAs. The opportunities we're seeing in storage, connectivity, power, cooling, connectors, that's where we're seeing the opportunity for us right now. And really, I think the big value for where we sit in the technology supply chain is as it's going to enable, let's say, the really downstream opportunities are going to be massive in particularly in our MCU/NPU area. You're going to get the applications out on the edge, and that's where our customers, that's a sweet spot for us, whether it be predictive maintenance, smart wearables, smart agriculture, smart security, surveillance, et cetera. So we're talking about AI. We're playing in it today. We're selling into the data center, into the hyperscalers. But today, our customers are also selling into the hyperscalers. So as we're calling on anybody in power, power management, et cetera, and you're seeing some guys announced in the EMS provider space, some nice growth here, well, we're going to participate in that as well, right? So I hope that answers the question. We're excited about it. William Stein: Yes. So it sounds like 7% of your Asia sales. As a follow-up on a different topic, inventory days in the quarter were flattish. I think you called out down a couple of days sequentially, but my model is roughly flattish. It's not a huge difference anyway. But we expected this number to be down more meaningfully. Maybe I just got a little bit ahead of myself, but that drove cash flows negative in the quarter. And you talked about investing for future growth and other things. Maybe I'm just hoping you can help set expectations going forward a bit here. Should we expect this relatively higher number of inventory days to persist for longer term, maybe even perpetually? Or should we expect inventory days to come down over time? Philip Gallagher: I'll let Ken answer that. Ken Jacobson: I think -- first, I think you kind of calculated end of quarter inventory. We use an average inventory, so there's a little bit difference in terms of how we measure the inventory days. But I think we're continuing to see a trend of declines in the EC business. We're down roughly 10 days year-over-year. Inventory went up a little bit, partially in Asia. And that's -- we don't have all the right inventory to service where the growth is, right? So you're investing in certain inventory, but there's still opportunities, including in Asia, where we need to get inventory down, which will help the days as well. And then for the supply chain services, we're actually seeing that business come back a little bit. It was down in FY '25, and we're seeing that come back a little bit. And again, some of that is going to turn this quarter. So there's still opportunity to go after inventory where it's in excess and to kind of drive the inventory down a little bit at the same time as the sales grow, that they should improve. So I think the expectations are still there. It was a little higher than we had anticipated coming into the end of the quarter. But there's nothing of concern or anything in terms of a longer-term trend that we would see because of what happened towards the end of the quarter. Philip Gallagher: I'll add to that, Will. The quality of the inventory is good, okay? The aging and the quality is good. So we have no concerns there. And our longer-term goal will get back into the 80s. So we know we want to continue bring it down a little bit while still making investments, right? We still need to do that. Inventory is not a bad thing in distribution, it's actually a good thing. And to get the days down into the 80s as we continue to drive the top line up. William Stein: Just one follow-up to that quantification. 80s like, in a year, in 3 years? Any sort of trajectory you can give us would be helpful. Ken Jacobson: I think when we talk about 8 in front of it, I think, by next quarter, we exited the quarter at roughly 91, 92 days. We think we'll be with an 8 in front of it next quarter, and then kind of gradual trajection down. Operator: Our next question is from Joe Quatrochi with Wells Fargo. Joseph Quatrochi: You called out EMEA being better than seasonal in the September quarter and then -- thinking that it could be flattish for December. I can appreciate the seasonality is a little bit difficult to kind of call right now, but like, how do we think about, I guess, the demand profile of that for the December quarter and kind of your visibility relative to seasonality in EMEA? Philip Gallagher: Yes. So I'll go first. Thanks, Joe. Positive. I mean -- but modest. I think we used the word modest. December quarter is usually not a growth quarter sequentially in Asia Pac, to your question on seasonality. This quarter, we're expecting modest growth. And why is that? Well, we believe Europe is about hitting the bottom. It's been a tough several years in Europe, as you know. But we're seeing the bookings positive now for a couple of quarters, backlog is building. So based on that, we think we'll see some modest growth in September to December in Europe. Joseph Quatrochi: Got it. And then just trying to think about now that the total business has returned to year-over-year growth. How should we think about just incremental margins for the business? Appreciating obviously, the geographic mix matters, but the Americas turning to year-over-year growth, I think, is a positive. Ken Jacobson: Yes, Joe, I think it's a positive in terms of that will start to give some more operating leverage there and kind of start to expand the operating margins. How we look at it is the guidance implies flat gross margin year-over-year, which we think is good. There's still some things we want to do in terms of mix, but as well as -- EMEA had gross margin down this quarter, but I think flat year-over-year, at least is holding our own in gross margin. But I think in the next quarter, we should see a seasonal mix shift, right? So part of it depends on what the Lunar New Year looks like for Asia. But just seasonal growth in the West should have a nice impact to gross margin, which should then have some operating margin impact, all things being equal. So not ready to talk about third quarter yet, but book-to-bills are healthy right now. Joseph Quatrochi: Maybe just one last follow-up. In the prepared remarks, you talked about suppliers seeing potential for price increases. Just wondering if you could maybe provide any more color on that front and just any additional details? Philip Gallagher: Yes, without getting too specific, Joe, it's in certain technologies because lead times overall are, overall, pretty unchanged. I mean, you have some modest increase in lead times. But for sure, some of the, let's call it, the interconnect and maybe the power type of products going into the data center and hyperscalers starting to see a little inflation. And for sure, with memory, right? With HBM taking off, there's definitely some lead time issues in memory. I believe we'll start seeing price increases there as well. And then some selective higher-end technology suppliers have been calling out potential increases as well, which is called in the higher-end MCU space. Ken Jacobson: And the only other thing I'd say, Joe, is that input costs are still high. So it's -- overall, ASPs are holding up pretty well. Operator: Our next question is from Ruplu Bhattacharya with Bank of America. Ruplu Bhattacharya: I want to ask a couple of more questions on margins. So if I look at core segment margins, they were down 10 bps sequentially on $250 million higher sales sequentially. And look, from the guide, it looks like the trends are the same with Asia growing and America is growing as well, whereas Europe is flat. So Ken, when we think about core business margins, I mean, how should we think about that over the next couple of quarters? And what needs to happen for the margins there in the core business to get above 4%? And do you think that can happen in fiscal '26? And then I have a follow-up. Ken Jacobson: Yes. Ruplu, I'm not sure that I would want to call fiscal '26 core margins. I guess it's possible depending on where the mix shifts in the fourth quarter. But I think what I would say is, again, we're managing gross margin at the business unit level, trying to drive that a little discipline in where the EMEA margin was at. But we understand it's a few different things going on there, but nothing to be concerned with in terms of a longer-term deterioration of the gross margin in Europe. We should see some improvement in gross margin as we have a seasonal mix shift. But I think again, if Asia is going to be 50% of our business, right, it's going to take a little longer in terms of growth with the West to kind of get the operating margin to that 4% level. So we'll continue to kind of focus on each business and making sure they're being consistent with their gross margin. But we would expect, going into the second half of the year, we're at least going to get the seasonal mix shift that would occur, absent Asia continuing to reach record levels, right? The guidance implies record sales in Asia. Ruplu Bhattacharya: Okay. Yes. No, that makes sense. Can I ask the same question on margins for Farnell? If Europe remains flat from a revenue standpoint, can you still see Farnell margins continue to grow 50 bps, I think you were targeting? Is that -- does it depend on overall revenue? Or does it -- is it more dependent on mix? I think you called out some mix impacts this quarter. So again, how should we think about Farnell margins going forward? Ken Jacobson: Yes. From a gross margin perspective, Ruplu, I would think about Farnell being a little different than the core business, that they -- regionally -- EMEA still has the best margin, but that's more because they sell more semiconductors and IP&E products, right, relative to the U.S. and Asia. But in general, each region has a pretty healthy gross margin there. So regional mix isn't as impactful to Farnell, but product mix is impactful. So there's still some runway to go on Farnell gross margin as the broader market recovers and the mix improves in on-the-board components. We saw a little bit of uptick here, but I think there's still some runway there to go. And again, going into the third quarter, in the March quarter, you would have seasonality impacting Farnell as well because most of their business is in the West, so they would still have that kind of seasonality in terms of sales demand. Philip Gallagher: Yes, Ruplu, just to build on Ken's point to reemphasize it. Their mix is both regional, not as big a deal though. The tailwinds that we were kind of counting on for Farnell in the September quarter out of Europe didn't come. September kind of just didn't happen like we had expected, so that dampened it a little bit. And then you got to Ken's point that on-the-board components, semis, IP&E run at a higher margin than the test and measurement MRO, and there's a mix issue there. We're starting to see it improve, but as the on-the-board components increases, that runs a higher margin business. That all said, our expectation is to continue to grind it out at Farnell and continue to see modest improvement sequentially quarter-on-quarter, whether through revenue, profit or OpEx. Ruplu Bhattacharya: Got it. Can I sneak one more in for you, Phil? You've mentioned demand creation revenues and IP&E. What are those each as a percent of revenue? And are -- I'm assuming these are higher margin businesses. I mean, what is the margin delta with the core business? And can they be meaningful drivers for margin upside over the next couple of quarters? Philip Gallagher: Yes. The -- I'll give you a range, Ruplu. I think as what we typically do in the IP&E, so it's, call it 15% to 20% of our total components business, roughly. And the demand creation in the 28% to 33%, depending on the quarter, demand creation revenue. And call it, 300, 400 bps incremental margin. But keep in mind on the demand creation, to get that 300, 400 bps, we also have more costs, right? So we had FAEs and the technical support, things along those lines. So it's not -- it doesn't all drop because we've got to make investments for the suppliers with the technical front end. Operator: Our next question is from Melissa Fairbanks with Raymond James. Melissa Dailey Fairbanks: I wanted to start off first with some questions around the transport business. Phil, I think you highlighted that as being one of the areas where you saw some favorable trends. Was that across all geographies? Or was it kind of more limited to the areas where you saw growth in Asia and the Americas? Philip Gallagher: It was -- depends on year-on-year or Q-on-Q, it was up in both in Asia Pac, right? And the Americas, we saw it up sequentially, down a little bit year-on-year. And Europe, negative in both, as you might imagine. Melissa Dailey Fairbanks: Sure. Yes. Do you have any kind of visibility into what your exposure to either pure EV or hybrid versus kind of that traditional supply chain for ICE vehicles? Philip Gallagher: I don't have that off the top. It will definitely be higher in the EV in Asia. Asia will be heavier EV, Americas will be higher combustible and Europe will be somewhere probably in between. Melissa Dailey Fairbanks: Okay. Yes, that was a bit of a trick question. I didn't expect you to... Philip Gallagher: It's fine. Melissa Dailey Fairbanks: Maybe one quick follow-up on the data center business. Especially as you're getting deeper into some of these higher value components, whether it's the memory, the storage, the FPGA, the interconnect. Is there any change in linearity with either how the bookings come through for that business? Or is it still just kind of book and ship and you see turns in the quarter? Philip Gallagher: Yes. No, it was -- most of those will be a supply chain arrangement, Melissa. So for the most part, we're going to see -- it would probably, for the most part, show up as a turn in the quarter because we're managing forecast. And then when the forecast flags the shipment, we kind of book and bill at the same time. You know what I mean? So we don't -- a lot of that, we don't show on the bookings -- long-term bookings. That kind of happens same day, almost. Frankly, once they pull it -- in other words, it's not really -- it's not inflating the bookings unrealistically. Operator: Thank you. There are no further questions at this time. I'd like to hand the floor back over to Phil Gallagher for any closing comments. Philip Gallagher: Great. Thank you. And I want to thank you and everyone for attending today's earnings call, and I look forward to speaking to you again at our second quarter fiscal year 2026 earnings report in January. Have a great holiday. Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning, ladies and gentlemen, and thank you for standing by. My name is Kelvin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Provident Financial Holdings First Quarter of Fiscal 2026 Earnings Call. [Operator Instructions] I would now like to turn the call over to Donavon Ternes, President and Chief Executive Officer. Please go ahead. Donavon Ternes: Good morning. This is Donavon Ternes, President and CEO of Provident Financial Holdings. And on the call with me is Peter Fan, our Senior Vice President and Chief Financial Officer. Before we begin, I have a brief administrative item to address. Our presentation today discusses the company's business outlook and will include forward-looking statements. Those statements include descriptions of management's plans, objectives or goals for future operations, products or services, forecasts of financial or other performance measures and statements about the company's general outlook for interest rates, economic and business conditions. We also may make forward-looking statements during the question-and-answer period following management's presentation. These forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from those discussed today. Information on the risk factors that could cause actual results to differ from any forward-looking statement is available from the earnings release that was distributed yesterday, from the annual report on Form 10-K for the year ended June 30, 2025, and from the Form 10-Qs and other SEC filings that are filed subsequent to the Form 10-K. Forward-looking statements are effective only as of the date that they are made, and the company assumes no obligation to update this information. Thank you for participating in our call. I hope that each of you has had an opportunity to review our earnings release that we distributed yesterday, which describes our first quarter fiscal 2026 results. In the most recent quarter, we originated $29.6 million of loans held for investment, a 1% increase from $29.4 million that were originated in the prior sequential quarter. During the most recent quarter, we also had $34.5 million of loan principal payments and payoffs, which is a decrease of 18% from $42 million in the June 2025 quarter. Real estate investors have been cautious as uncertainties remain in the market, although we have seen an increase in activity as mortgage interest rates have declined. We will continue to make prudent adjustments to our underwriting requirements, within certain loan segments to encourage higher loan origination volume. Additionally, our single-family and multifamily loan pipelines are moderately higher in comparison to last quarter, suggesting our loan origination volume in the December 2025 quarter will be within the range of recent quarters, which has been between $28 million and $36 million. For the 3 months ended September 30, 2025, loans held for investment decreased by approximately $4 million, with a decline in multifamily and commercial real estate loans, partly offset by an increase in single-family loans. Current credit quality continues to hold up very well, and you will note that nonperforming assets were $1.9 million at September 30, 2025, an increase from $1.4 million from June 30, 2025. Additionally, there were no loans in the early stages of delinquency at September 30, 2025. We continue to monitor commercial real estate loans, particularly loans secured by office buildings but are confident that based on the underwriting characteristics of our borrowers and collateral that these loans will continue to perform well. We have outlined these characteristics on Slide 13 of our quarterly investor presentation which shows that our exposure to loans secured by various types of office buildings is $36.9 million or 3.5% of loans held for investment. You should also note that we have just 9 CRE loans that totaled $3.8 million maturing in the remainder of fiscal 2026. We recorded a $626,000 recovery of credit losses in the September 2025 quarter. The recovery recorded in the first quarter of fiscal 2026 was primarily attributable to a decline in the expected life of the loan portfolio due to lower mortgage interest rates. The allowance for credit losses to gross loans held for investment was 56 basis points at September 30, 2025, a decrease from 62 basis points at June 30, 2025. Our net interest margin increased 6 basis points to 3% for the quarter ended September 30, 2025, compared to 2.94% for the sequential quarter ended June 30, 2025. The net result of an 8 basis point increase in the average yield on total interest-earning assets net of a 1 basis point increase in the cost of total interest-bearing liabilities. Our average cost of deposits increased to 1.34%, up 1 basis point for the quarter ended September 30, 2025, while our cost of borrowing also increased 1 basis point to 4.59% in the September 2025 quarter compared to the June 2025 quarter. The net interest margin was not impacted as a result of net deferred loan costs associated with loan payoffs in the September 2025 quarter compared to the average net deferred loan cost amortization of the previous 5 quarters in contrast to a 4 basis point negative impact in the June 2025 quarter. New loan production is being originated at higher mortgage interest rates than the weighted average rate of the existing loan portfolio. The weighted average rate of loans originated in the September 2025 quarter was 6.62% compared to the weighted average rate of 5.20% of our loans held for investment as of September 30, 2025. In addition, our adjustable rate loans are repricing at interest rates that are higher than their current interest rates. We have approximately $107 million of loans repricing in the December 2025 quarter to an interest rate that we currently believe will be 18 basis points higher to a weighted average interest rate of 6.89% from the current interest rate of 6.71%. However, in the March 2026 quarter, we have approximately $104 million of loans repricing to an interest rate that we currently believe will be 32 basis points lower to a weighted average interest rate of 6.70% from 7.02%. Many of these loans are already in their adjustable phase of the loan term with rate resets every 6 months. I would point out that there is an opportunity to reprice maturing wholesale funding downward as a result of current market conditions, where interest rates have moved lower across all terms. Excluding overnight borrowings, we have approximately $104.7 million of Federal Home Loan Bank advances, brokered certificates of deposit, and government certificates of deposit, maturing in the December 2025 quarter at a weighted average interest rate of 4.61%. Additionally, we have approximately $109 million of Federal Home Loan Bank advances, brokered certificates of deposit and government certificates of deposit maturing in the March 2026 quarter at a weighted average interest rate of 4.15%. Given the current interest rate outlook, we would expect to reprice these maturities to a lower weighted average cost of funds. All of this currently suggests that there continues to be an opportunity for net interest margin expansion in the December 2025 quarter. Our FTE count on September 30, 2025, was 164 compared to 157 one year ago. We continue to look for operating efficiencies throughout the company to lower operating expenses. You will note that operating expenses were $7.6 billion in the September 2025 quarter, unchanged from the June 2025 quarter and represent a normalized run rate. For the remainder of fiscal 2026, we expect a run rate of approximately $7.6 million to $7.7 million per quarter. Our short-term strategy for balance sheet management is more growth-oriented than last fiscal year. We believe that disciplined loan growth of the loan portfolio remains the best course of action at this time as we recognize that the Federal Reserve's Federal Open Market Committee has adopted a looser monetary policy and the inverted yield curve has begun to reverse back to an upwardly sloping curve. We were partly successful in execution of this growth strategy in September 2025 quarter with consistent loan origination volume, but the originations were offset by loan prepayments. As a result, the composition of total interest-earning assets and interest-bearing liabilities were consistent with the prior quarter. We exceed well-capitalized capital ratios by a significant margin, allowing us to execute on our business plan and capital management goals without complications. We believe that maintaining our cash dividend is very important. We also recognize that prudent capital returns to shareholders through stock buyback programs is a responsible capital management tool and we repurchased approximately 67,000 shares of common stock in the September 2025 quarter. For the first quarter of our fiscal year, we distributed $921,000 of cash dividends to shareholders and repurchased approximately $1.1 million worth of common stock. Accordingly, our capital management activities represented a 117% distribution of the September 2025 quarter's net income. We encourage everyone to review our September 30 investor presentation posted on our website. You will find that we included slides regarding financial metrics, asset quality and capital management which we believe will provide additional insight on our solid financial foundation, supporting the future growth of the company. We will now entertain any questions that you may have regarding our financial results. Thank you. Kelvin? Operator: [Operator Instructions] Your first question comes from the line of Frank Williams of Piper Sandler. Frank Williams: So you guys mentioned that balance sheet growth is going to be a short-term area of focus. And I just kind of wanted to walk through some of the challenges that you guys may be seeing and maybe discuss the loan growth trajectory going into calendar year 2026. Donavon Ternes: Sure. So currently, as we think about multifamily and commercial real estate other than multifamily, there still seems to be some hesitancy by borrowers with respect to new activity as a result of higher mortgage rates than we've seen maybe 3 and 4 years ago. Although I would also describe that mortgage interest rates are coming down a bit, which should present more opportunity for potential purchasers of multifamily and commercial real estate. Additionally, there's some opportunity with respect to refinance activity that we see as a result of mortgage interest rates coming down. But one of the things we also see as a result of what is going on in the market is an elevated amount of prepayments that we are experiencing in our loan portfolio. And even though our origination volume has been relatively steady over the course of the last 4 or 5 quarters, we're also seeing refinance volume prepaying out of our loan portfolio at about the same amount, such that loan growth has been difficult to come by. Now one of the things that we have been doing over the course, really, of the last year or so, we have been loosening some of our underwriting standards, particularly in multifamily back to what we would consider pre-COVID underwriting characteristics. And that seems to have opened up the pipeline a bit more with respect to activity. But nonetheless, when you look at what our origination volume has been, what our payoff volume has been, it has been difficult to grow the portfolio in a meaningful way over the past year or so. Operator: [Operator Instructions] And your next question comes from the line of Timothy Coffey with Janney. Timothy Coffey: So based on your commentary, is it a reasonable expectation to think that margin might expand this next quarter at a similar level to the calendar 3Q? Donavon Ternes: Yes, I think that's a reasonable expectation. If I go back to the low of our net interest margin, the low was June 30, 2024, and our net interest margin was 2.74%. And fast forward now to September 30, 2025, our net interest margin is 3%. So over the course of that window, we've grown net interest margin 26 basis points. And then considering what occurred in the September quarter, in contrast to the June quarter, we were up by 6 basis points from June 30 at 2.94% to September 30 at 3%. And all of the factors are relatively similar today, as they were at June 30, I'd have to go into my conference call text for June 30, but my recollection is when we were describing what our expectations were with respect to loan that would be repricing upward. It was very similar to what we're expecting in the December quarter. I guess one of the major differences between that June quarter and this September quarter, we would expect to see our interest-bearing cost of liabilities declining a bit more perhaps than what they did because of what has occurred with the Fed and their action of a 25 basis point reduction in September and what is probably going to be another 25 basis point reduction today. So all of this, in our mind, adds up to a conclusion that we expect modest or moderate net interest margin expansion as we look down certainly in the December quarter and as we move through our fiscal -- 2026 fiscal year. Timothy Coffey: Okay. And then I wonder if we could unpack something that you talked about pretty early on in your prepared remarks, in terms of the impact of lower interest rates have on the average life of the loan portfolio and how that might correlate with changes in the allowance. Donavon Ternes: Sure. So if you think about what our loan portfolio is comprised of, it's essentially 30-year mortgage loans, whether they're single family, multifamily, I guess, commercial real estate, we have 25-year mortgage loans, but they're essentially relatively long mortgage loans. And when interest rates either increase -- mortgage interest rates either increase or decrease, we can see a material impact with respect to the average life of that loan portfolio because there's such a long duration loan in the first place. And so as a result of that, when we see interest rates this past quarter come down in the Freddie Mac PMS 30-year fixed rate, I think from June 30 to September 30, that interest rate moved down by 47 basis points. Well that 47 basis point move downward increased the proposition of refinance activity and shortened the average life of that loan portfolio to such a degree that the recovery from credit losses was pretty significant. And by the way, we see the reverse of that occurring as well. I think the most recent quarter that we saw that occur was the September 2024 quarter to the December 31, 2024 quarter. I don't recall specifically how mortgage interest rate rose during that period. But my recollection is they rose and as a result of that, we actually put in a provision for loan losses in that quarter, again, primarily because of what the weighted average life of that loan portfolio looks like. Timothy Coffey: Okay. So all else equal, if mortgage rates continue to come down, are you -- is the allowance too big right now? Donavon Ternes: Well, all else being equal and no deterioration in the credit quality of the loan portfolio or no significant growth in the loan portfolio where provision would be necessary. Yes, we would argue as interest rates come down, loan prepayments will increase, refinance activity will increase, and that will shorten the estimated life of our loan portfolio and it could have an outsized impact in a recovery of credit losses in contrast to a provision. But those are a number of caveats, Tim. No loan growth, no deterioration in the portfolio and interest rates coming down significantly. Timothy Coffey: Okay. All right. I understand. Yes. And then the rest of my questions were previously answered in your prepared remarks. Operator: There are no further questions at this time. And with that, I will turn the call back to Donavon Ternes, President and CEO, for final closing remarks. Please go ahead. Donavon Ternes: Thank you, Kelvin. I appreciate everybody's attendance on the call this morning, and we look forward to our call in January. Goodbye. Operator: Ladies and gentlemen, this concludes today's call. We thank you for participating. You may now disconnect.