加载中...
共找到 14,557 条相关资讯
Operator: Good day, and welcome to the Blackstone Mortgage Trust Third Quarter 2025 Investor Call. Today's call is being recorded. [Operator Instructions] At this time, I'd like to turn the conference over to Tim Hayes, Vice President, Shareholder Relations. Please go ahead. Timothy Hayes: Good morning, and welcome, everyone, to Blackstone Mortgage Trust's Third Quarter 2025 Earnings Conference Call. I'm joined today by Katie Keenan, Chief Executive Officer; Tim Johnson, Chair of BXMT's Board and Global Head of Breads; Tony Marone, Chief Financial Officer; Austin Pena, Executive Vice President of Investments; and Marcin Urbaszek, Deputy Chief Financial Officer. This morning, we filed our 10-Q and issued a press release with a presentation of our results, which are available on our website and have been filed with the SEC. I'd like to remind everyone that today's call may include forward-looking statements, which are subject to risks, uncertainties and other factors outside of the company's control. Actual results may differ materially. For a discussion of some of the risks that could affect results, please see the Risk Factors section of our most recent 10-K. We do not undertake any duty to update forward-looking statements. We will also refer to certain non-GAAP measures on this call. And for reconciliations, you should refer to the press release and 10-Q. This audio cast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our consent. For the third quarter, we reported GAAP net income of $0.37 per share and distributable earnings of $0.24 per share. Distributable earnings prior to charge-offs were $0.48 per share. A few weeks ago, we paid a dividend of $0.47 per share with respect to the third quarter. Please let me know if you have any questions following today's call. With that, I'll now turn it over to Katie. Katharine Keenan: Thanks, Tim. BXMT's strong third quarter results underscore the continued forward momentum across all aspects of our business, including earnings power, credit, investment activity and balance sheet optimization. We reported distributable earnings prior to charge-offs of $0.48 per share, covering the $0.47 dividend and continuing this year's positive trajectory. Book value was essentially flat, reflecting a stable credit backdrop with no new impaired loans. We continued our robust investment activity, looking across channels, originations, portfolio acquisitions and net lease and across geographies to find compelling relative value. And we continue to drive a more attractive cost of capital to enhance our competitiveness, improving terms on both corporate and asset level financing to reflect the strong positioning and track record of our business through this period. BXMT's 3Q performance also reflects our ability to capitalize on the continuing recovery in market conditions. Real estate fundamentals remain strong with demand stable or improving and new supply constrained. Liquidity and transaction activity are increasing with SASB CMBS on track for a record issuance year. This dynamic continues to generate robust repayment levels in our pre-rate hike portfolio, $1.6 billion this quarter and affords us a strong investment pipeline with $1.7 billion of total originations closed or in closing post quarter end, building on the $1 billion of investment activity in 3Q. While spreads have normalized as liquidity has returned to the market, the diversity and reach of our platform's vast sourcing engine are crucial differentiating factors. And with a market-leading capital markets team, we've continued to drive down our cost of borrowing. These advantages on both sides of our business allow BXMT to produce compelling returns on both an absolute and relative basis. I'll turn it over to Austin to speak in more detail about our investments, portfolio and balance sheet. Before I do, I'd like to spend a minute on BXMT's opportune positioning today. Our portfolio is turning over, unlocking earnings from more challenged legacy deals and steadily increasing the proportion of our capital invested in high-quality current vintage assets. Our balance sheet is in fantastic shape, and we remain at the forefront of both structural and cost of capital innovation. And all of this has translated to healthy earnings generation supporting our dividend. The forward trajectory of our business is embedded in this quarter's results, though BXMT's stock price has yet to catch up. Notwithstanding the tremendous progress we have made in the last several years, our stock today trades within 10% of the lows through this period and continues to provide a highly attractive 10.4% dividend yield. This disconnect has created the opportunity for us to repurchase over $100 million of stock so far this year at a meaningful discount to book value. As my tenure as CEO comes to a close, I could not be more excited about the momentum of this business and our highly capable leadership team. I'd also like to express my deep gratitude to the analyst and investor community for your support and attention to BXMT over the years. Congratulations to Tim and Austin on their new roles. And Austin, over to you. Austin Pena: Thanks, Katie. BXMT's strong third quarter investment activity demonstrates the distinct advantages of our platform's differentiated scale and sourcing capabilities as we closed $1 billion of total investments across loan originations, net lease assets and a performing bank loan portfolio that we acquired at a discount. Our loan originations remain concentrated in our highest conviction sectors with 75% in multifamily and diversified industrial portfolios and over 60% in international markets, where we are capturing excess spread relative to comparable deals in the U.S. We continue to achieve attractive net interest margins, setting up investments to achieve a levered spread of more than 9% over base rates or low teens all-in returns. And importantly, credit characteristics remain very attractive with strong cash flow profiles, light value-add business plans and an average LTV of 67%. Investments this quarter include a 90% leased diversified U.K. industrial portfolio and a well-amenitized stabilized multifamily property near Miami. We also steadily grew our net lease portfolio, investing another $90 million across 60 properties in the third quarter, bringing the total portfolio to $222 million at BXMT's share. Importantly, we've maintained a rigorous approach to credit, acquiring assets within durable industries and generating strong EBITDAR coverage, nearly 3x on average and at significant discounts to replacement cost. With another $100 million in our closing pipeline, we continue to expand our presence in the net lease sector. To that end, this quarter, BXMT acquired a 50% interest in a $600 million portfolio of granular loans secured by fully occupied net lease retail assets with a low weighted average origination LTV of 52% and an in-place debt yield over 12%. We were uniquely positioned to evaluate this portfolio, leveraging our experienced net lease and loan portfolio acquisition teams to underwrite and execute this transaction. Acquiring high-quality performing loans at discounts from banks remains one of our top investment themes across our platform. These transactions have a high barrier to entry, requiring bespoke sourcing capabilities, the capacity to underwrite granular portfolios quickly and accurately and the operational wherewithal to onboard and manage hundreds of loans seamlessly. But here at Blackstone, we have invested in building market-leading capabilities to execute, leveraging the scale of our team and our data. And the prize is quite compelling, high credit quality loans with convexity and duration in thematic sectors and with outsized risk-adjusted returns. And with bank M&A accelerating, we see more opportunities like this on the horizon. In total, we expect to close over $7 billion of new investments this year across originations, loan acquisitions and our net lease strategy, diversifying our portfolio and enhancing credit composition through deliberate rotation into the sectors and markets best positioned in the current environment. Turning to the portfolio. Market tailwinds are driving increasing investor demand for assets, large and small and supporting positive credit outcomes. We collected $1.6 billion of total repayments in the third quarter, including 4 loans greater than $200 million, 2 secured by Texas multifamily assets and 2 abroad, a European hotel portfolio and a London office building. We had no new impaired loans this quarter. We resolved 2 previously impaired loans at a premium to aggregate carrying values, and we upgraded 8 loans, including 6 office loans, removing 2 from our watch list. Our loan portfolio is now 96% performing, and our impaired loan balance continues to decline, now at 71% below last year's peak. We expect to complete additional resolutions next quarter with 1 impaired office asset sold last week and others in advanced stages. The real estate recovery, while uneven, is extending to some of the most acutely impacted markets and sectors. In San Francisco, fundamentals are improving, driven by the growth of AI. Multifamily rents are up 10%, office demand is growing and convention hotel bookings are up 60%. Investors are taking note with acquisition volumes picking up across sectors. Altogether, 25% of our REO portfolio today is in the Bay Area, including our largest asset, a fully renovated hotel held at nearly 60% below the prior owner's basis and more than 70% below replacement cost. San Francisco has long been amongst the most cyclical markets in the country. And today, we are positioned to capitalize on the upswing. Amid a strong capital markets backdrop, BXMT has taken advantage, refinancing and extending over $2 billion of corporate debt in the last 12 months. Debt markets have been resilient through recent market volatility with spreads still sitting within 20 basis points of all-time tights. And we continue to see strong demand from our bank lenders, providing opportunities to introduce new facilities, further optimize our financing structures and reduce our marginal secured funding costs. We borrowed over 15 basis points tighter in the third quarter compared to the prior quarter, improving our cost of capital and advancing our overarching goal to generate an attractive, stable stream of current income for our investors. And with that, I will pass it over to Tony to unpack our financial results. Tony Marone: Thank you, Austin, and good morning, everyone. In the third quarter, BXMT reported GAAP net income of $0.37 per share and distributable earnings or DE of $0.24 per share. DE prior to charge-offs, which excludes realized losses related to 2 loan resolutions, was $0.48 per share, an increase of $0.03 from the prior quarter and $0.01 above our $0.47 quarterly dividend. DE benefited from BXMT's continued execution on key initiatives with investment activity, loan resolutions and accretive capital markets executions all contributing to this quarter's strong results. We also recognized $0.02 of default interest from a multifamily loan that repaid in full. Looking forward, we expect our earnings will continue to benefit from capital redeployment and resolutions of impaired loans, including the 2 that closed on the last day of the quarter as we unlock the earnings potential of that capital. For reference, we collected $0.06 of interest from impaired loans this quarter, which were excluded from earnings under cost recovery accounting. We ended the quarter with book value of $20.99 per share, which was largely stable quarter-over-quarter, reflecting strong credit performance, loan resolutions executed above carrying values and accretive share repurchases. When considering the $0.47 dividend, BXMT provided an 8% annualized economic return to stockholders this quarter. BXMT repurchased $16 million of common stock in Q3 at an average share price of $18.69, a significant discount to book value. And so far in Q4, we've accelerated buybacks through recent market volatility, repurchasing another $61 million of stock at even lower levels. In total, we have repurchased nearly $140 million of shares since establishing our program in 2024. And just last week, received Board approval to replenish our $150 million buyback capacity. Our book value at 9/30 includes $712 million, $0.14 -- excuse me, $4.16 per share of CECL reserves, which declined from $755 million, $4.39 per share in the prior quarter as we crystallized $42 million of specific CECL reserves in connection with 2 impaired loan resolutions. As Katie mentioned earlier, these resolutions were executed at a premium to aggregate carrying values, contributing to an $11 million net reversal in our specific CECL reserve and offsetting the modest $10 million increase in our general reserve. Turning to our balance sheet. BXMT remains well positioned to address today's attractive investment environment with debt to equity down to 3.5x, strong liquidity of $1.3 billion and over $7 billion of available financing capacity as of quarter end. And in October, we closed a new $250 million non-mark-to-market credit facility with an international bank who recently established their CRE loan warehousing business targeted Blackstone as one of their first and largest relationships. Another example of our strong position in the market and ability to drive differentiated results for stockholders. We continue to take advantage of the supportive capital markets backdrop to further optimize our cost of capital as we repriced $400 million of corporate term loan during the quarter, reducing spread by 100 basis points and upsizing the deal by $50 million, reflecting strong demand from institutional investors. And just last week, we collapsed BXMT's 2020 FL-3 CLO, which we replaced with balance sheet financing at a lower spread. CLO market remains robust with new issuance nearly tripling last year's total and tracking its strongest year since 2022. We have been a consistent issuer in this market, completing our fifth transaction earlier this year, and we are well positioned to take advantage of the supportive market backdrop. Before opening the call to Q&A, I will turn it over to BXMT's Chairman and incoming CEO, Tim Johnson, for a few closing remarks. Timothy Johnson: Thanks, Tony. First and foremost, I'd like to thank Katie for her dedicated service to BXMT, the Board and our shareholders. Katie leaves BXMT in a tremendous spot with a global portfolio that's delivering for our investors and a team that's poised to capture this exciting investment environment. I've had the pleasure of working alongside Katie throughout her Blackstone tenure, and I'm extremely grateful for all of the hard work, strategic insight and strong execution she's brought with her each and every day. She's been an inspiring partner and leader and will leave a lasting impression on our business. While we'll no doubt miss Katie, we wish her well in her next chapter and are confident the team will step up in her place. Personally, I'm excited to have been appointed CEO of BXMT and to work closely with Austin to continue to build on the momentum our business has today. Austin and I are fortunate to have the strength of the Blackstone franchise behind us, our dedicated team of over 160 real estate credit professionals and the critically important connectivity with our global real estate team. This has always been the backbone of BXMT's investment process. I'm looking forward to working more with all of you along the way. And with that, I'll now ask the operator to open the call to questions. Operator: [Operator Instructions] We'll take our first question from Catherwood with BTIG. William Catherwood: Katie, just first off, congratulations and best of luck in your new role. It's been an absolute pleasure having you in this position. And then second, just wanted to follow up, Katie, on your prepared remarks, where you mentioned a recovery in transaction activity and return of liquidity to the CRE markets. Kind of 2 items around that. First off, can you provide a little bit more color on exactly where you're seeing that? Is that U.S. and Europe? Or is it just pockets that you're seeing that recovery? And then second, if that recovery in transactions is more here in the U.S., which is what it seems like to us, could we see a larger portion of your origination activity pivot back to U.S. loans instead of more Europe loans, which you've been doing so far this year? Timothy Johnson: Thanks, Tom. This is Tim. I'll take that. I'd say liquidity certainly has returned to markets, I would say, both in the U.S. and in Europe. As you pointed out, a bit stronger on a relative basis in the U.S. and mainly driven by a more established CMBS market here in the United States, as Katie referenced, tracking toward an all-time high in terms of liquidity. So I would say it's a little bit further ahead, as you'd expect in the U.S. versus Europe, but both places are continuing to see capital markets open up and be pretty strong. In terms of the U.S. versus Europe on an ongoing basis, what we love is being able to have a platform that can look across all of the regions and establish a view on relative value at any moment in time. So that does shift over time. And I think that the U.S. continues to be the biggest market for us, just a larger transaction market overall. So I think you'll continue to see this be the largest share of our investment activity over a long period of time. But we certainly look at both and play relative value across both. William Catherwood: Appreciate that, Tim. And the second one for me, maybe Austin, in terms of the REO portfolio, can -- first off, can you remind us of the potential earnings uplift as that capital comes back over time? And second, do you need to set aside incremental capital for the New York City hotel that you took on balance sheet during the quarter? Or is that one in pretty good shape already? Austin Pena: Yes. Thanks for the question. I would say, generally, we haven't given specific numbers in terms of the potential earnings uplift. But obviously, the REO assets are not generating our target returns, and we certainly see the opportunity to, as we turn over the portfolio, exit these REO assets over time to drive additional earnings power as we do that. Specifically with regards to sort of CapEx and conditions, I would say, firstly, we have a tremendous amount of insight into kind of the needs across these assets. And we really don't feel that there's a significant component of CapEx needed. To the extent it is needed, we certainly have the capability to do that with over $1.3 billion of liquidity. But I'd say the condition of these assets across the board is pretty good, and we feel comfortable with our position today. Operator: We'll take our next question from Harsh Hemnani with Green Street. Harsh Hemnani: Maybe one on how you're thinking about originating new loans versus buying back into the capital structure. Is there a particular premium or discount to book at which you're thinking that buybacks are perhaps more accretive than new originations? And it sounds like 4Q is stepping up on the origination front, but also on the buyback front. So I'm just trying to understand the relative value math there. Timothy Johnson: Yes. I'd say we continue to look at both in terms of every day, just like we do across loans in the U.S. and Europe, we look at opportunities of where to invest capital, including share buybacks, which, of course, we've been quite active in. So that's -- I'd say that's a pretty dynamic analysis. But we've captured the -- we've taken advantage of the opportunity to buy back when the stock has traded at levels that we think are quite attractive and provide a very high return on investment. So I think that's how we look at it. We continue to look at it dynamically over time. Harsh Hemnani: Got it. And then maybe one on the makeup of the investment portfolio this quarter. It seems like roughly 2/3 of originations this quarter were in sort of the traditional floating rate loan portfolio and roughly 1/3 is in net lease and bank loan portfolio acquisitions. Should we be thinking about these fixed rate loans as sort of being a lever for you to be able to reduce your floating rate exposure ahead of what most are expecting to -- they're expecting to see lower floating rates in the future? Austin Pena: Yes, Harsh, this is Austin. I can take that. I think you're correct in that we really are looking across different channels to deploy our capital right now. One of the things we like about net lease in these bank portfolios is that they do add some duration and create a natural hedge to our sort of traditional floating rate business. The bank portfolios, in particular, as we noted earlier, we're buying those at a discount to par. And that provides some upside convexity to the extent those loans repay more quickly than we underwrite. And we like that as well from a risk-adjusted return basis. And so I think you'll continue to see us look across different types of investments across these channels to really think about the best relative value and really sort of diversify the composition of our earnings. Operator: We will take our next question from Jade Rahmani with KBW. Jade Rahmani: Each earnings season brings its own unique developments, and it seems to me that this earnings season so far has been characterized by AI dominance, but also some pockets of weakness in the economy, whether it be in the consumer and jobs or discrete credit items in the financial space and the C&I lending and also a couple of CRE items. So the commercial mortgage REIT sector also seems to have been caught in this downdraft. And my main question is whether you've seen any spillover effects into the CRE market as yet? And if you're doing anything differently, perhaps more defensively to prepare for any weakness that may unfold. Timothy Johnson: Thanks, Jade. I'd say we're not seeing it in real estate credit. We are in an environment with real estate credit where we've gone through a pretty significant downturn, and now we're quite clearly in recovery mode in terms of coming out of that downturn. So I would say the real estate credit market has been somewhat uniquely tested already and has experienced its challenges, not to say that there might not be other challenges around the corner, but it definitely is more battle tested, I'd say, overall. And so that translates through to what we see on the new origination side of things in terms of credit quality. Generically, you're going to have a more tighter lending market coming out of a cycle like we've been through where credit standards are higher. And so we're not seeing that type of deterioration that's been referenced elsewhere. We're seeing much like what you're seeing in the BXMT portfolio itself, improved credit overall. Jade Rahmani: And in terms of the pace of 3Q investments and originations, notwithstanding the bank loan JV, which I believe would have higher ROEs than the traditional business. Was there anything that drove a more muted pace of originations perhaps it was on the liability management side, putting in place the new repo line, the tighter spreads on the term loan as well as calling the CLO? Was that in preparation of stronger originations and maybe weighed on volume in the quarter? Austin Pena: Yes, Jade, this is Austin. We obviously made $1 billion of total investments this quarter, which we think is a good amount. I would say that we have $1.7 billion in closing as well. So our pipeline of opportunities remains really robust. So I'd say we're actively investing in the environment. I would say there might have been a modest impact seasonally with some of the volatility we saw sort of in the spring around some of the tariffs, which may have impacted certain timings of transactions overall. But over -- but really across our channels, we really see a lot of interesting opportunities both in Europe and the United States. So we feel good about the level of the transaction activity going forward. Operator: We'll take our next question from Doug Harter with UBS. Douglas Harter: Sort of touching on that last point, how do you see the pace of kind of net deployment in the portfolio in the coming quarters? And how do you think about what is the right level of leverage that you guys are targeting? Austin Pena: I'd say I'll take the first. In terms of deployment, I think it's a pretty good indication of what you saw this past quarter where we're having a healthy amount of repayment activity and then turning that directly into new investment activity. So I think we're at a place where we feel pretty good about being kind of at a run rate in terms of repayments and deployment overall. So I think that would remain consistent. Douglas Harter: And on the leverage side, like how are you thinking about what is the right level of leverage to run this business at this part of the cycle? Timothy Johnson: Yes, Doug, on leverage, obviously, we're at 3.5x today, which is right in the middle of the range that we target. And so I think we've always been sort of in that mid-3s over the last quite period. So we certainly have liquidity and capacity to sort of go up a little bit from there. And again, we're seeing good opportunities. So we feel very comfortable with the balance sheet today and where we are from that perspective. Operator: We'll take our next question from Rick Shane with JPMorgan. Richard Shane: I apologize, like everybody, we're bouncing around between calls. So if this has been covered, I apologize. Look, when we look at the implied dividend yield as a function of book, it's about 9%. You guys aren't clear yet. When you think about the path to covering that dividend, which is obviously not only your goal, but your indication by maintaining that dividend, can you walk us through sort of what the different levers in terms of higher yields, reducing nonaccruals, reducing REO, what you think are sort of rank those opportunities, please, and perhaps give us some sense of what the contribution of each is? Timothy Johnson: Yes. Thanks, Rick. I'd say, obviously, it was good to cover the dividend this quarter in terms of distributable earnings ex charge-offs at $0.48 relative to $0.47 dividend. As Tony noted, a couple of onetime small items in there, but pretty close to the dividend ex those. And as you said and as we've said for a while, we set the dividend with a long-term view in mind. And where we really still have earnings left to unlock is in the REO and the impaired loan portfolio, where we can turn those assets into higher returning investments. We're not particularly focused on quarter-to-quarter results as there's always a little bit of variability in terms of the ins and outs of fundings and things like that. But we continue to have confidence that we've set the dividend level at a long-term sustainable position. Richard Shane: Got it. Okay. And is there -- when you think about, for example, funding cost rate outlook, obviously, you're modestly asset sensitive, but there's so much opportunity in terms of recycling capital. I'm assuming that you guys are even in a sharply lower short-term rate environment, confident that you can continue to achieve those hurdle rates given the scale. Timothy Johnson: Yes. I would say that's right. I think the opportunity to redeploy the capital within the REO portfolio and the impaired loan portfolio is a really strong offset to a lower rate environment. Austin Pena: I would also add we only lose [ about 150 basis points ] of rate move. So it's not as drastic as you might be thinking. Operator: We will take our last question from Don Fandetti with Wells Fargo. Donald Fandetti: Can you talk a bit more about what you're seeing in office market fundamentals? I mean I think you had 6 upgrades. And I guess at this point, is it possible that you'll end up being a bit over reserved in your office book? Austin Pena: Yes. Thanks, Don. This is Austin. I definitely would say we are seeing stability and improvement across office. I think you see that, as you noted, in the movements in terms of our upgrades this quarter, 6 office loans upgraded, 2 of them were removed from our watch list. That's really driven by leasing that we're seeing at these assets. And so I definitely think we're starting to see more broad-based green shoots, liquidity coming back into the market. As I noted earlier, we sold one of our impaired office assets post quarter end. So continue to see more transaction activity, more capital coming off the sidelines for the sector. I'd say in terms of reserves, we obviously go through those every quarter. We feel like our reserve levels are appropriate. We feel good about where we set those. It's obviously a detailed asset-by-asset analysis that we do. And so we feel good about where those are. Donald Fandetti: Okay. And then on a follow-up, I mean, you've had another quarter here where there was fairly steady credit migration. How are you thinking about like movement to 4 from 3 in the near term? Do you feel like you're in a steady state? Timothy Johnson: I'd say the direction of travel for credit is clearly positive in the portfolio with the no new impairments. So I'd say we -- the direction is quite clear. Obviously, we're continuing to work through things. But in terms of credit migration, we feel like we've basically resolving 70% of our impaired loans at this point and a good line of sight to a significant amount more. We feel really good about the overall path here in terms of credit performance. Operator: That will conclude our question-and-answer session. At this time, I'd like to turn the call back over to Tim Hayes for any additional or closing remarks. Timothy Hayes: Thank you, Katie, and to everyone joining today's call. Please reach out with any questions.
Operator: Good day, and welcome to the Renasant Corporation 2025 Third Quarter Earnings Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I'd now like to the conference over to Kelly Hutcheson. Please go ahead. Kelly Hutcheson: Good morning, and thank you for joining us for Renasant Corporation's quarterly webcast and conference call. Participating in the call today are members of Renasant's executive management team. Before we begin, please note that many of our comments during this call will be forward-looking statements, which involve risk and uncertainty. There are many factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Such factors include, but are not limited to, changes in the mix and cost of our funding sources, interest rate fluctuation, regulatory changes, portfolio performance and other factors discussed in our recent filings with the Securities and Exchange Commission, including our recently filed earnings release, which has been posted to our corporate site, www.renasant.com at the Press Releases link under the News and Market Data tab. We undertake no obligation and we specifically disclaim any obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. A reconciliation of the non-GAAP measures to the most comparable GAAP measures can be found in our earnings release. And now I will turn the call over to our President and Chief Executive Officer, Kevin Chapman. Kevin Chapman: Thank you, Kelly, and good morning. We appreciate you joining the call and look forward to sharing results for the quarter. Renasant's financial performance in the third quarter reflects good loan growth and profit improvement that keeps us on the path to meet the financial goals of the merger. The integration with The First continues to go well. Systems conversion took place in early August, and I believe we have made great strides in operating as one team. As you know, in July 2024, Renasant and The First announced a partnership that would maximize our strengths and create a high-performing Southeast bank. At that time, we established profitability goals related to return on assets, return on tangible common equity and our efficiency ratio. We knew that the third quarter of 2025 would be an important measuring stick for our progress against these expectations. Q3 results position us to achieve our goals. Additionally, it is very gratifying to see our team despite going through the largest conversion either company has gone through produced loan growth of almost 10% during the quarter. I want to thank all of our employees for their tremendous effort this quarter in completing systems conversion while continuing to understand and meet the needs of our customers. I will now highlight financial results for the quarter. The company's net income was $59.8 million or $0.63 per diluted share. Adjusted earnings, excluding merger charges, were $72.9 million or $0.77 per diluted share. Loans were up $462 million on a linked quarter basis or 9.9% annualized. Deposits were down $158 million from the second quarter, which was driven by a seasonal decrease in public funds of $169 million on a linked quarter basis. Reported net interest margin was flat at 3.85%, while adjusted margin was up 4 basis points to 3.62% on a linked-quarter basis. Our adjusted total cost of deposits increased by 4 basis points to 2.08%, while our adjusted loan yields increased 5 basis points to 6.23%. We look forward to seeing additional profitability improvements in upcoming quarters as efficiency savings are realized. I will now turn the call over to Jim. James Mabry: Thank you, Kevin, and good morning. As Kevin mentioned, we are encouraged by the integration efforts of our employees and the positive impact on results this quarter. Our adjusted return on average assets of 1.09% for the quarter is an improvement of 12 basis points from a year ago, and our adjusted return on tangible common equity of 14.22% for the quarter is an improvement of 296 basis points. From a capital standpoint, all regulatory capital ratios remain in excess of required minimums to be considered well capitalized. We recorded a credit loss provision on loans of $10.5 million, comprised of $9.7 million for funded loans and $800,000 for unfunded commitments. Net charge-offs were $4.3 million and the ACL as a percentage of total loans declined 1 basis point quarter-over-quarter to 1.56%. Turning to the income statement. Our adjusted pre-provision net revenue was $103.2 million. Net interest income growth was driven by the improvement in the net interest margin and loan growth. Noninterest income was $46 million in the third quarter, a linked quarter decrease of $841,000, excluding the gain on sale of MSR assets in Q2. Noninterest expense was $183.8 million for the third quarter. Excluding merger and conversion expenses of $17.5 million noninterest expense was $166.3 million for the quarter, a linked quarter increase of $3.6 million. With systems conversion now complete, we expect modeled synergies to be more evident in our results going forward. Regarding conversion-related expenses, we believe the majority have been recorded through the third quarter with a modest amount expected to come in the fourth quarter. There was a decline in our adjusted efficiency ratio of about 0.4 percentage points, and we expect to see additional improvements in the coming quarters. We are encouraged by the results of the third quarter and the positive momentum going into the fourth quarter. I will now turn the call back over to Kevin. Kevin Chapman: Thank you, Jim. We look forward to closing out a successful year for Renasant. We have come a long way on our goal of improving profitability. The combination of a strong balance sheet plus added profitability puts us in a position to capitalize on opportunities in our vibrant banking footprint. I will now turn the call over to the operator for questions. Operator: [Operator Instructions] And the first question comes from Stephen Scouten with Piper Sandler. Stephen Scouten: Everyone. Really nice quarter here. Loan growth was particularly encouraging. Can you give any color around what you're seeing from a pipeline perspective? And maybe also around specifically the legacy SBMS markets, maybe in and around the Gulf Coast potential strength you're seeing there that's helping fuel the strong growth? Kevin Chapman: It's Kevin. So yes, we -- looking at loan growth for the quarter, I know we've been guiding more towards, call it, the mid-single digits. We've been expecting payoffs to increase. Our production has been all year long. I think for Q1, Q2, we've been more in the 7% range if you look at the net loan growth. Again, this looming potential of payoffs -- can you -- it feels like it continues to be out there. But getting to the current quarter, what I'd tell you what we're excited about is the growth happened all throughout our footprint whether you look at as a breakdown from a geography, whether you look at it from, say, our credit channels, whether it's our small business lending units or our business banking lending units or even some of our larger units like corporate or commercial lending units. All categories, we saw good distributed growth in all of them. And even if you break it down by asset classes, we saw good growth. So going to where we were back in July of '24 when we contemplated merging with The First, one we thought we could do is unlock some potential in both companies. I think Q3 is... [Technical Difficulty] Specific to The First in the Gulf Coast. What we've seen is we've seen good growth there as well. And the opportunities that Renasant can provide to The First lenders with being able to expand relationships now that they have a little bit bigger balance sheet, we have a bigger balance sheet. We have more lending capabilities or the ability to do specialized lending with some of our secured lending lines. That team has immediately gravitated to it, has made referrals, and we've seen immediate successes as a result of, again, the combination. So again, as we look we're excited about what Q3 indicates, how we're positioned. And again, I think we've got the opportunity to continue growth in Q4 and beyond. Stephen Scouten: Great. Appreciate that color, Kevin. Maybe just curious about pace of expense saves from here kind of how much maybe you've been able to extract so far and kind of what we can think about in terms of further expense states from the deal and kind of the path as we maybe look at a good 1Q '26 run rate, that sort of thing? James Mabry: Stephen, it's Jim. So just to touch on Q3 for a second. So you saw in core NIE, we were up about $3 million ex the merger expenses. And our -- and I would say actually, let me comment on the increase and what we saw in Q3. There was -- there were 3 buckets where we saw the increase, and they were about equally weighted. You had an increase in health and life, you had increase in occupancy, and you saw an increase in health and life occupancy in the FAS 91. So 2 of those are sort of uncontrollable, so we'll see how those play out in future quarters. But as it relates more particularly to your question, our sense is that in Q4, we'll see about a $2 million or $3 million decrease in core NIE for Q4 and then another $2 million or $3 million decrease in core NIE in Q1. Stephen Scouten: Okay. Fantastic. That's really helpful, Jim. And then just lastly for me, I really appreciate how you guys broke out kind of accretion in your slide deck. What's kind of a good baseline assumption of the normal accretion expected? Is it around that, I guess, it was $12.4 million. Is that right? Or maybe the interest rate component of that was about $9.8 million, if I'm doing the math right. Is that a good way to think about forward accretion? James Mabry: Well, it obviously is going to vary the accelerated part is going to vary given loan prepayments. So it's a hard thing to predict. But I think that scheduled accretion is going to track pretty closely to what you saw in Q3. Operator: And the next question comes from Matt Olney with Stephens. Matt Olney: I want to ask more about that core margin in the third quarter, saw some good expansion with that. Any more color on the drivers of that expansion? And then I guess if we look forward, I think you mentioned on a previous call that you thought it could -- core margin would maybe flatten out as we got towards the fourth quarter. Is that still the view of the fourth quarter core margin. James Mabry: Matt, this is Jim. So yes, we were pleased to see a little expansion in Q3. Looking forward, I would say, in Q4, probably some modest contraction in the margin in Q4. And then for '26, I would say, modest expansion. So not a lot of change, but that would be a general outlook and that assumes 4 rate cuts. between now and year-end of '26. Matt Olney: Just to clarify, you said that assumes 4 rate cuts between -- including today, I assume, between now and the end of next year. Is that right? James Mabry: That's correct. Matt Olney: Okay. That's helpful. And then I guess switching over to credit quality. We did see criticized loans jump up in the third quarter. Any color on the driver of that jump up of criticized loans? David Meredith: This is David. So it was a broad-based increase for the quarter. There was a little bit of commercial real estate, a little bit of C&I. If we get into the weeds a little bit, we had a single multifamily transaction that does make up about 1/4 of it. that we feel very strong. This is a good asset, just was underperforming relative to our original budget. We expect that loan to pay off the ordinary course probably early '26. We had 2 C&I transactions that made up roughly 1/3 of that number. One of them is the Tricolor credit that we've talked about that made up a large percentage of that asset type. A little bit of migration in our self-storage portfolio and then a little bit of migration in one asset in our senior housing. So it was broad-based within our downgrades to criticized. We don't feel that we have any loss exposure in that increase, but it's broad-based. And Matt, I know you know we do a fairly aggressive job of looking at our loan portfolio from the health portfolio, risk-rating loans proactively to make sure we're identifying risk so we can find those loans and migrate them out of the bank as quick as possible. So I think that's just a testament to our early identification of problem loans so we can manage them proactively. Operator: And the next question comes from Michael Rose with Raymond James. Michael Rose: Just on the new buyback that you guys announced, -- good to see you guys are going to be building capital, but you haven't bought back really any stock since 2021. Just wanted to see where that currently plays in your thought process, particularly given the fact that you've just here recently completed a deal, there's probably other deals out there. It seems like the environment is good. Just wanted to kind of run down the thought process on capital as we move forward. James Mabry: Michael, it's Jim. So the third quarter was an important quarter for us because we obviously got the deal closed, and that was reflected in Q2. And then to go through systems conversion and just see Q3 come out like it did. And of course, Kevin's comments, I thought were spot on. I mean it was just really nice to see all that momentum that we've got and the fact that our teams remain focused. I say that because I think it's important to have that backdrop as we think about capital because we -- I think we feel like we've got pretty good visibility into Q4 and into '26 in terms of the prospects for us to continue to grow that capital. Our sense is that we could grow those capital ratios anywhere between 60 and 70 basis points between now and year-end '26. And so the capital levers, including buyback, are much more in focus for us. And we are putting a lot of thought into that. And I think are mindful of the fact that we're going to have a growing capital base. We've taken a couple of steps here recently. One, notably, right after the quarter, we redeemed $60 million of sub debt. You saw the dividend announcement, the common dividend announcement. So -- and we wanted to think about that authorization. And one of the things -- one of the reasons we increased it is just proportionate. I mean, we're 50% larger in terms of market cap and capital. But also, it's a lever that we're increasingly inclined to think about. So I think whether it's the buyback supporting organic growth, which, of course, has been strong, remains the #1 goal. But we're going to bear down on uses of capital. And I think buyback is certainly high on that list in terms of levers we might pull in the coming quarters. Michael Rose: Very helpful. And then maybe if I can just ask a question on deposits. You guys' loan to deposit ratio is now kind of approaching 90%. It's the highest it's been since basically the beginning of COVID. Can you just talk about some of the deposit growth strategy? I know there's always some seasonality with muni deposits, too, but the general trend has been upward over the past few years. And just wanted to get a better sense of your plans for deposit growth juxtaposed with the rate environment? James Mabry: I think we've been spoiled because I think out of the last 10 quarters, we've had deposit growth that's equal or better loan growth. And so to not have that in a quarter is certainly something that caught our attention. But as you point out, a lot of that was seasonal, had to do with public funds. And our goal is to grow deposits, core deposits in line with loan growth. And that remains a focus of ours and the way we incentivize our teams, what we motivate our teams and so as we go forward in '26, we want that core deposit growth to equal whatever loan growth we produce. As we look to Q4 some of the public outflows that we saw in Q3, there might be just given the seasonality of the way some of the municipalities behave, we could see some of that come back in the latter part of Q4, so we'll see how that plays out. But I would tell the funding loan growth remains a top priority here. And we know we can generate deposits. We've got a great record of doing that, and it's a focus of the company, whether it's this quarter or next quarter or for the next decade. That is a paramount focus at Renasant to grow the deposit base regardless of what loan growth is. Michael Rose: Really appreciate the color. Maybe if I could just sneak one last one in. I appreciate the near-term color on expenses. I know it's something we all struggle with in modeling as we go through a deal, especially at the size. But just as we think about kind of the combined franchise now that systems conversion has happened, are there other areas and levers that you guys can pull to kind of generate the positive operating leverage as we kind of move forward? I'm just trying to better appreciate some of the opportunities, maybe at legacy Renasant now that you have the cost saves from the deal and the accretion from the deal? Kevin Chapman: Yes. Michael, Kevin. So the short answer is yes. right? If we go back 16, 18 months ago, Renasant on a stand-alone basis, The First on a stand-alone basis, both of us were looking at either adding expenses for the assets where we were at or we needed scale for the expenses and infrastructure we have built. So combining both companies unlock potential. And I think we laid out some goals when we launched this of an ROA in the 120s, mid-teens ROE and a mid-50s efficiency ratio. And I think, again, you saw it in Q2, you see it in Q3, we are right on top on path to meet those goals. But as we've talked about or as we've tried to communicate, that's not where we're stopping. There's real momentum in the company, not only around expenses, but driving higher levels of profitability on our expenses. So that operating leverage that's there is going to continue to come in 2 places. It will come from discipline and management on the expense side, but it's also going to be getting the right return on the expenses we have. So we've had probably above average loan growth now for a couple of quarters. We want to have above-average loan growth. It doesn't have to be 20% loan growth. It just needs to be a couple of multiples above the average so that we can get the scale. So we can get the revenue that's generated off those expenses. And that's been an effort that's been ongoing. I know on the Renasant. And now I think you're seeing it on the combined company. But there's still going to be a continued effort to look at our expenses, create efficiencies. Accountability is prevalent all throughout the company and we hold each other accountable, but the expectations for the company internally have been raised, I would say, further than where expectations are for external estimates. And so we really -- the momentum we have around our financial performance and our focus and that leads with profitability that has been embraced by the company, and I think it's unleashed some pent-up excitement, pent-up demand within the company as we start -- as we're achieving the success that we felt we could achieve. So the operating leverages will be not only on the expense side, but it's also going to come on the revenue side. Our provision was elevated this quarter, not because of credit but because we had twice the loan growth we thought we were going to have. So that revenue that's going to come from that above average loan growth is going to be there in the future quarters. And that's what excites us about the past couple of quarters and some of the balance sheet growth that we've had is it's in line with our plan and really kind of reemphasizes what we thought could happen combining both Renasant and The First is unlocking some of that potential that was there. Unlocking it on a -- when we combined as opposed to us not being able to unlock it or struggle a little bit if we remained independent. Operator: And the next question comes from Dave Bishop of the Hovde Group. David Bishop: Kevin, quick question in the preamble. It sounded like maybe you were surprised in terms of the lack of payoffs this quarter? And maybe last, just curious if you have like line of sight into potential payoffs into the next quarter? And if they didn't occur, maybe what's delaying or are there borrowers sort of waiting for lower rates? Just curious if there's any way to ring-fence maybe potential headwinds into the coming quarter or next, if that's possible. Kevin Chapman: Yes. No, it is. To be honest with you, we are -- I am, and I think we are a little bit surprised that payoffs have been a little bit muted. But we've also been -- we've set an indicator that we've been looking at the 10-year. If the 10-year -- as it approached 4% or dropped below 4%, we think the risk of prepayments, payoffs for us increase. Q3, the -- I don't know the exact number on the 10-year, but it was probably in the [ 4% 10s or the 4% 20s ] and didn't really approach the 4% range until we got into October. So as we look at, say, fourth quarter, we are more focused on and ensuring that we have good line of sight into customers, our lenders getting updates as to where potential payoffs, prepayments could occur only because we had set towards the end of last year, beginning of this year, that 4% 10-year is an important benchmark for us that as we approached it or we got below it, that could elevate payoffs in our commercial real estate book. David Bishop: Got it. And then obviously, you're cognizant of the significant amount of M&A activity in your backyard or backyard, so to speak, Just curious how aggressive you think you're going to be in terms of recruiting some of that talent and commercial clients that could dislodge from those acquisitions. And is the opportunity set big enough to -- I know The First merger just closed, but is the opportunity there to sort of replace whole bank M&A with lift out of talent? Kevin Chapman: Yes. So David, I'm not sure it replaces it, but it provides an interesting and unique opportunity for us. And in some cases, there may be opportunity to hire with some of the overlap we may have the opportunity to pick up customers without any additional hires. So I think we find ourselves in a very unique position and we like where we sit with all the disruption. And again, I don't necessarily think this is going to be the last disruption. That's what we've seen, there's going to be further disruption in the Southeast. And I think we sit in a very unique position to potentially benefit from that. And again, it may come in the form of hiring in -- just for example, in Q3, I think we hired 10 new either market presidents or prominent lenders throughout the footprint. We've also been actively hiring in Q4. But again, in some cases, we have the opportunity to pick up potential business and we won't have to hire -- we don't feel like we'll have to hire to do that. So it's going to be -- again, we're excited that we're not in the middle of a conversion. We're not in the middle of approvals. We're not in the middle of anything that we're on the other side of our conversion, other side of our integration and really focus to what we want to do, which is get business and gain market share. And so we're excited about where we stand right now as it relates to that. Operator: And the next question comes from Catherine Mealor with KBW. Catherine Mealor: I want just to circle back on expenses, just to kind of be on maybe looking at the expense trajectory into '26. So if I lower expenses per what you're talking about, Jim, kind of somewhere around $2 million to $3 million each of the next 2 quarters. I'm kind of starting next year at a $161 million base. And if I just annualize that number, basically where consensus is for '26 in expenses, which is $645 million. And so as I'm thinking about that, I mean, do you feel like we're in a position where you're where you're lowering expenses in the next 2 quarters and then were flat? Or should we actually grow a little bit off of that base in the first quarter of '26, just kind of given better revenue growth and opportunities in your markets? James Mabry: Catherine, I would say -- I would guide you towards that consensus number or a touch better for '26. I think that's a reasonable outlook for us. And we sort of got the crosswinds of the efficiencies from the deal. And then the things that Kevin mentioned, we sit in a really good spot right now geographically and just as a company, having gotten the conversion behind us. The integration, still there's work to do, but it's gone really well. And so -- but I think what you laid out, I mean, we'll end up with a Q1 run rate, and I think it will be a pretty clean quarter overall in terms of expenses. There may be some a little noise in there, but I think it will be pretty clean. And then we'll have a merit that will impact our numbers a little bit towards the middle of the year. But I think that consensus number is probably a pretty good number, maybe a touch better. Catherine Mealor: Okay. That's awesome. Very helpful. And then on the deposit side, it was interesting to see deposits up a little bit this quarter. And I know that's the mix change, and now we'll have the benefit of 2 cuts. But we're hearing from a lot of other banks this quarter, the deposit costs are getting more and more competitive. And so just curious on how you're kind of thinking about deposit costs and betas over the next few cuts relative to what we've seen over the past 100 basis points of cuts? James Mabry: Well, certainly, on the deposit pricing side where we've seen the most pressures, I mean the loan side is always competitive, but I feel it's the -- any sort of improvement in the deposit side has been grudgingly so. I mean it just -- it feels really tough there. So I think our betas interest-bearing deposits and loans are probably roughly the same in the mid-30s for '26, between now and year-end '26. And the key variable there is just -- is what we see in the deposit side and people's thirst for that funding. So as you said, we had a little bit of increase in the cost in Q4. I don't think our CD special or 5-month special, I don't think that's changed in pricing in, I don't know, 4 or 5 quarters. And then there's -- and we hope to see that change. But right now, I wouldn't say there's the prospect of that near-term. So we'll just see what the -- we'll see what the market and the competition gives us, but it's been tough to eke out gains on the funding cost side. Operator: [Operator Instructions] And the next question comes from Janet Lee with TD Cowen. Sun Young Lee: Clearly, driving improved returns and increasing profitability, it looks like that is one of the key goals for you, Kevin. In terms of like expectations being raised further on your internally, I guess, for Renasant and leading with that increased profitability. Aside from the expense side on the revenue side, can you just give us like what you mean by that? And like what kind of examples are there that -- is it employees like the bankers bringing in more like low-cost deposits or bringing in more like fee income products? What does that mean? Kevin Chapman: Yes. So thank you. So great question. Let's break that down. So one thing that's weighed on our profitability maybe is really a little bit of a lack of scale. So we made investments, but we didn't quite get the scale that we needed, whether it's our average loan to lender, loan to relationship manager, our average deposit to branch. And so we've been focusing on looking at performance at the individual or the market level to improve that. And so when we see our growth happening all throughout our footprint, that's encouraging to us because we're actually doing it with less headcount right now. But if we look at what the full-time employees were of Renasant and The First before we announced the acquisition and where we are at 9/30, we're down over 300 employees. So we're doing it with less. We're having above-average growth, and we're dealing with less employees. Now some of that's part of cost saves, but some of it is not part of cost saves. It's been the ongoing accountability measures we've had. So when we talk about the need for improvement and improved profitability, it's absolutely on the expense side, but it's also on the revenue side and getting more scale where we should have it. And so whether that's at an individual market level, whether that's in Nashville or the coastal region and Atlanta, where those are good markets where there's opportunity to grow or whether it's at an individual lender level, we're holding everybody accountable for a higher level of expectations to support their cost. And we really focus on the return of the individual, the return of the market to determine our success. And we've increased our expectations and our teams are responding to that. So I don't know if that provides enough color, but that gives a little bit of a glimpse as to what we're talking about as it relates to improving the accountability and improving the revenue growth, the performance that comes along with the efforts to reduce expenses. Sun Young Lee: Got it. And in terms of your -- on the loan and deposit growth. So you mentioned mid-single-digit sort of growth for you guys on a normalized basis. I get that the payoffs were a little elevated -- I mean, not elevated the other way around, were smaller than expected. So do you still think that mid-single digits is sort of a good run rate for you? Or could we expect little bit higher in terms of both deposit and loan growth. Kevin Chapman: Yes. So I think right now, just given -- I'd like to get through Q4 before we set any new expectations just given where the tenure is and where we think that some payoff elevation could happen in Q4. But before we change that. So we're still looking at the mid-single digit which bakes in an uptick of payoffs, prepayments happening in Q4 just due to a lower rate environment, particularly on the 5- and the 10-year spot on the curve. So we're still targeting mid-single digit. But I can tell you, our focus is continue to find every good opportunity we can and find a banking relationship with that opportunity, whether it's on the loan or deposit side. But I think Q4 is going to be interesting, at least for us to see how prepayment speeds react to where we find ourselves in the current curvature of the interest rate curve, current slope of the interest rate curve. Operator: And this does conclude the question-and-answer session. I would like to turn the floor to Kevin Chapman for any closing comments. Kevin Chapman: Thank you. We appreciate your interest in Renasant this morning, and we look forward to continuing our conversations with you throughout the quarter. Thank you. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Operator: Good day, and welcome to the Expand Energy 2025 Third Quarter Earnings Teleconference. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Colby Arnold, Manager, Investor Relations. Please go ahead. Colby Arnold: Thank you, Jonathan. Good morning, everyone, and thank you for joining our call today to discuss Expand Energy's 2025 Third Quarter Financial and Operating Results. Hopefully, you've had a chance to review our press release and the updated investor presentation that we posted to our website yesterday. During this morning's call, we will be making forward-looking statements, which consist of statements that cannot be confirmed by reference to existing information, including statements regarding our beliefs, goals, expectations, forecasts, projections and future performance and the assumptions underlying such statements. Please note that there are a number of factors that will cause actual results to differ materially from our forward-looking statements, including factors identified and discussed in our press release yesterday and in other SEC filings. Please recognize that, except as required by applicable law, we undertake no duty to update any forward-looking statements, and you should not place undue reliance on such statements. We may also refer to some non-GAAP financial measures, which help facilitate comparisons across peers -- periods with peers. For any non-GAAP measure, we use a reconciliation to the nearest corresponding GAAP measure, and it can be found on our website. With me on the call today are Nick Dell'Osso, Josh Viets, Dan Turco and Brittany Raiford, Nick will give a brief overview of our results, and then we will open up the teleconference to Q&A. So with that, thank you again, and I will now turn the teleconference over to Nick. Domenic Dell'Osso: Good morning, and thank you for joining our call. The third quarter marked the first year of Expand Energy. I'm extremely proud of the way our team has come together to collectively drive long-term value through safely reducing costs and efficiently developing our advantaged geographically diverse portfolio. As we demonstrated this quarter, our business continues to deliver and outperform every expectation pegged at merger onset. While there are many ways to measure synergies and their impact, we are clearly spending less for more production, which is the ultimate definition of efficiency. Nowhere is this more evident than in our Haynesville position, which has seen a meaningful step change in both efficiency and performance, enhancing the value of our 20-year-plus years of inventory. Today, we can deliver with 7 rigs, the same production it took 13 rigs to deliver in 2023. Since then, we have reduced well costs by greater than 25%, and year-to-date, our costs are 30% lower than peers based on third-party well proposals. Importantly, our optimized development and completion design continues to lead to improved productivity. Since 2022, our average well productivity was approximately 40% greater than the basin average, a trend we expect to continue. These efficiency gains are sustainable and deliver significant improvement to our breakevens, which today average less than $2.75 across the basin. We have also used our low-cost advantage to attractively -- to add attractively priced acreage to our portfolio, giving us an option to develop volumes in East Texas and reach additional markets. Through the innovative efforts of our team, we are seeing success stories like this across our business, resulting in us delivering 50% more synergies than our original target. These meaningful efficiency gains and savings have greatly strengthened our underlying business and resulting cash flows. Since close, we've eliminated $1.2 billion in gross debt and returned nearly $850 million to shareholders. We now expect to spend $150 million less to deliver 50 million cubic feet per day more of production in 2025 compared to our beginning of the year guidance. These efficiencies will carry forward to 2026, where should market conditions warrant, we are prepared to deliver 7.5 Bcf per day of production for approximately the same CapEx spent in 2025. Looking ahead, we see significant opportunity to expand the value of natural gas by connecting our global scale to growing markets. Consumers need affordable, reliable, lower carbon energy and natural gas will play the largest and most crucial role in answering that call. By the end of the decade, natural gas demand is expected to grow 20%, driven by LNG, power and industrial growth. Expand sits in an advantaged position today, our diverse asset portfolio across 2 premier gas basins with 20 years of inventory, proven operational performance, unique market connectivity and investment-grade balance sheet are clear differentiators as we look to serve customers eager to secure reliable and flexible supply. This is especially true along the Gulf Coast, where there is increasing competition for supply and lower carbon molecules. With NG3 now online, we can track our production from the wellhead to the end user and offer a responsibly sourced, differentiated lower carbon gas, something our counterparties value greatly as was the case with Lake Charles Methanol supply agreement we announced yesterday at a premium to NYMEX. Expand will serve as the sole supplier to this new build industrial facility, which is expected to commence operations in 2030 with global investment-grade offtake already secured. Importantly, we believe this agreement demonstrates our differentiated path to strategically connect our molecules to the highest growth markets at a premium price. This announcement is also a great example of the evolution of our marketing strategy from value protection to value creation. We are intentionally enhancing our marketing and commercial organization to capitalize on our unique position as North America's largest natural gas producer. We see this organization as more than a few commercial transactions, but an opportunity to drive long-term value from our integrated well-connected portfolio. As consumer demand grows, we will be positioned to provide reliable and flexible supply to meet that demand. We have the assets, scale and capital structure to be patient. Our experienced team will continue to ensure we are achieving the best long-term risk-adjusted returns possible in any agreement we enter. We are ready to answer the call of growing demand we see ahead, and we look forward to updating you on our progress. We'll now turn the call over to Q&A. Operator: And our first question for today comes from the line of Matt Portillo from TPH. Matthew Portillo: I wanted to start out on a question that may be focused a bit more on the medium term with the outlook on Page 9. Just curious if you might be able to speak to the evolution of gas demand you're seeing regionally around Texas, Louisiana and Arizona, and if your downstream counterparties are starting to realize the value producers like yourself, might be bringing to the table for contracts that require 10 to 15 years of coverage. I guess to us, it seems like there might be an interesting supply-demand imbalance emerging on the Gulf Coast with the lack of material long-haul pipeline capacity from the Northeast and dwindling inventory from smaller privates in basins like the Haynesville but curious on your thoughts around the regional dynamics. Domenic Dell'Osso: Yes. Great question, Matt. I'll start, and I'm sure Dan will have more to add here. Slide 9 is a new slide, our team created this quarter, and we really like it. It shows the current demand and then the expected growth in demand in each of the interesting growing submarkets of the U.S. And so what we've created here is a way to think about where demand is growing along the Gulf Coast, including onshore Louisiana as well as LNG in Appalachia and then in other key markets like the Southeast and Florida. And I think you're right to point out that as demand for gas is growing and growing in a really tangible way, we have more insight into how gas demand is growing right now than we've had in a very long time. These projects are multiyear projects. They require billions of dollars of capital, and you can see it coming. And so we can plan for this, and we can be ready to help work with our customers to deliver the solutions that they need. I think this is a great -- the Lake Charles Methanol transaction we announced here, is a great case study for how this works. And is evidence of exactly what you just described. This is a project that Lake Charles Methanol is going to be a new demand facility built along with the offtake customers supporting the facility, so requesting the methanol product, it's in need around the world. That offtake has been fully subscribed. They need to lock down the economics of the project to go out and get the project FID-ed. The supply of gas is a really important element of that. They look to us with our depth of supply and inventory to drill, our ability to bring large volumes to South Louisiana, and then for those volumes to have a low carbon intensity. And they were wanting to lock that up for 15 years. And so we were in a position to accommodate that. I think this idea that gas demand, especially new gas demand growth needs to have clarity as to where the supply will come from. The depth of that supply, the characteristics of it, the credit quality of the counterparty providing it, all of those things need to come together in a bundled solution that we're uniquely positioned to do in this transaction, and we believe we'll be in a unique position to do across many transactions in the future. So it's a good example of what we think is plenty to come. Daniel Turco: Matt, you hit on an interesting dynamic at the start of your question that I'll just add to you is that demand is growing in South Louisiana and our portfolio sets up well, especially where our asset base is, as Nick talked about, and our capacity to get there. And you said, where is the supply coming from and the challenge from associated basins? And we agree that there's going to be a lot of supply that comes out of associated basin, especially the Permian. But as you see pipelines being developed, the terminus of those pipelines end up in Texas. And so getting across that border from Texas, Louisiana is a bit of a challenge. It will happen, but it takes a longer time, obviously, with interstate pipelines, it's a longer build to get across that border. And so we set up quite nice to where our demand ends at the end of our NG3 and LEAP pipeline into Gillis. And where customers are looking for that security of supply, as Nick touched about. So it is an interesting dynamic about where demand is growing and how it's actually going to get supplied from the different regions across the basins. Matthew Portillo: Great. And then just as a quick follow-up. Nick, curious if you might be willing to comment on your views around the evolution of mid-cycle gas prices. I guess specifically, as we kind of look at the Haynesville or regionally in Louisiana, you're projecting about 11 Bcf a day of demand growth regionally. And I think most forecasts even with really robust gas prices, I expect maybe the Haynesville can grow 6 to 8 Bcf before starting to face some pretty significant inventory challenges. So you all are kind of in a unique position given the depth of your inventory. I guess, bringing this back to Slide 7, you highlight kind of maximizing free cash flow at a kind of 8.25 Bcf a day production level would require kind of a $4.50 gas price over the medium term. But I think if you go all keep pace with the Haynesville growth moving forward, your corporate production would be in excess of that. So Nick, maybe just specifically curious as you get more comfort around this regional demand growth trend and the Haynesville being part of the production engine that meets that demand, how do you think about the mid-cycle gas price? And is that right-hand side of the chart kind of closer to that $4.50 level, a good place to be thinking about? Or are there other factors that are involved? Domenic Dell'Osso: Yes, it's a great question, Matt. At this point, we're still focused actually on the columns of the chart that we've highlighted there, $3.50 to $4, centering on $3.75. There's so many unknowns to how this will all evolve and we think taking a measured approach to how we set up our supply in the context of the broader U.S. market that is now increasingly connected to the global market is the right answer. I do believe that over time that our view of mid-cycle prices can go higher. I don't think we're quite there yet. I think there's a lot to still happen with the timing of how this demand will grow. You'll see some of the numbers that are on this Slide 9 that we put out today are a bit more conservative than many other forecasters in the market. We're pretty -- I would say, I guess, conservative is the right word around how we think about the pace at which this demand will grow. I think it's important to note, though, that when we talk about all of this stuff, this slide is framing between now and 2030. 2030 being the end of the decade is a point in time that the market has become focused on we don't believe demand growth stops in 2030 by any stretch. And so our view relative to some of the other more aggressive views of demand growth is really a difference in timing more than it is anything. There's a lot of bottlenecks to create all of this demand growth. And so we think while it is big, it is very meaningful and there will be supply constraints to deliver to certain of these markets at certain times, there's going to be a lot of volatility around it. And we're ready for that volatility. I think our business is uniquely positioned with the geographic diversity we have with our approach to being willing and proven to modulate supply up and down. We're, again, really ready to take on the challenge of this volatility and help our customers have the surety of supply that they need with the characteristics of supply they expect. Operator: And our next question comes from the line of Doug Leggate from Wolfe Research. Douglas George Blyth Leggate: Nick, I wonder if I could hit two things. First of all, there's been a lot of moving parts, obviously, in the cash flow capacity of the portfolio. So I'm really focused on where you think your breakeven is trending with the continued synergy delivery. More importantly, you've dropped your sustaining capital by, it looks like $150 million, which that alone is pretty meaningful in your stock. So where do you see your breakeven today? Where do you see it trending? And I guess my follow-up, forgive me for this, I kind of asked it fairly regularly, but you've given a lot of insight into the role or the impact that Dan and his team are having. Where would you see the -- what kind of innings are you in, if you like, in terms of the marketing uplift? And if you can quantify how do you see your realization has been impacted by that, that would be great. So those are my two, please. Domenic Dell'Osso: Okay. Great. I love talking about this, obviously, Doug. So the capital efficiency that our business is showcasing right now is tremendous. And we're beating our own expectations, beating the synergy goals we laid out at the onset of the merger and then, again, making faster progress towards reducing costs and increasing productivity across our entire portfolio. That's driving our breakevens lower. Importantly, we're talking about this morning the fact that our 2026 setup looks even better. We had said at the beginning of this year that we wanted to set up our productive capacity for 2026 to be 7.5 Bcf a day. That is what we are positioned to deliver. We can hold that level of production through 2026 and going forward with a very similar CapEx profile to what we have this year. So $2.8 billion to $2.9 billion in CapEx is the right way to think about what we're setting up for in 2026. Now lots of things could change between now and when we actually go through '26. So what we determine is the right level of activity and the right level of production based on market conditions will undoubtedly change, and that's the flexibility that we've been excited to build into our business and embrace. But that capital efficiency is what we want to highlight by showing that we can deliver that level of production with about the same amount of CapEx that we had this year. So what that means is that these improvements in our cost structure alongside the productivity are sustaining, and we're going to hold those going forward. We're pretty excited about all of that. As to your question about what inning we're in with how we're seeing the uplift of marketing. I guess I would say we're still in pre-game warm-ups to keep the analogy going with baseball here. This is a very newly emerging part of our business that we are putting resources behind and giving a mandate to this team that is a highly effective team that we can let go out and create more value than historically they've been positioned to do inside of a company that was of lower scale and not investment grade. So with the tools that this company has now around what is a talented organization, we can go out and do so much more. And this Lake Charles Methanol transaction is the first example. Douglas George Blyth Leggate: Nick, can I pin you down just on one specific, are you under $3 now in your breakeven? Josh Viets: Yes, Doug, we are. We've made a ton of progress on our breakeven. Of course, the merger was really a key catalyst for that. But we think if we were to go back kind of premerger in 2024 to where we are, as we see the setup for 2026, we're over $0.15 improvement in a breakeven and sitting well below $3. Operator: And our next question comes from the line of Betty Jiang from Barclays. Wei Jiang: I really appreciate all the color that you're laying out, Slide 9 and 10 on just growing the gas marketing opportunity. If I can just ask about what it specifically means for your gas realization over time. The methanol deal is obviously helping in the 2030s and beyond. But the opportunities that you see, do you see your gas realization and this just narrowing over time as you start capturing all these opportunities? Domenic Dell'Osso: Yes, Betty, it's a great question. We do expect to add a lot of margin through our marketing business. There's so many elements of this, and Dan will add to my answer here, but we'll optimize the delivery of every molecule that we sell today across our extensive firm transportation portfolio in all the markets we reach. We'll aggregate supply and create value off that aggregation. And we'll continue to connect to customers that need surety of supply and work with them around the reliability and flexibility that they require. I think you get paid for the combination of all of those things that we bring to the table. Daniel Turco: Betty, thanks for that question. I'd just add to that, the two elements we're really focused on right now is that optimization that Nick talked about. The team has already done a great job this year of being able to optimize our portfolio. We start from a great position with our asset base and our transportation portfolio. And our team is being able to optimize across different markets, across geography and across different time with storage and different assets we have to be able to create realizations that are meaningful. We've already taken tens of millions of dollars -- low tens of million dollars and added that to our realizations and just expect to do more over time. And then that LCM example is a great example of how we can be differentiated, offer customer solutions. You pointed to Slide 10, that gives some of our guiding principles of how we think about these deals and what we're looking to accomplish and different elements of these -- of value chain creation. In LCM, for example, we hit a majority of these elements. And we have a tons of inbounds right now and plenty of conversations going on where we can do a lot more of these deals and create a lot more value for the corporation. Wei Jiang: That's great. Very exciting developments there. And then my follow-up is just on the M&A side, the resource expansion that you highlighted, both the Appalachia and the Western Haynesville. Maybe bigger picture, what are you looking to achieve with these type of bolt-on/small deals? Do you see more resource opportunities and similar type of deal to acquire locations at a low cost? Josh Viets: Yes. Betty, this is Josh. I would maybe characterize the two acquisitions of organic leasehold in two different ways. The acquisition in the Southwest App was purely opportunistic. That's clearly highly synergistic with our existing acreage position. It allows us to extend lateral lengths, almost more than double lateral lengths, which gives us an opportunity to pull forward inventory and simply improve the overall return profile there. And in the Western Haynesville, that's -- we think about that a little bit differently. That's something we've been studying for a number of years now, and have been very thoughtful about what an entry might look like. We wanted to get in at a low cost. We want to ensure there was limited near-term obligations. And we are also looking for a part of the play that we would see as being lower from a geologic complexity standpoint. And we think we've done that with the 75,000-acre position that we've created. And as we think about that going forward, we simply see that as a great option for the company to be able to develop a resource with a tremendous upside in an area where we see growing demand. And so we'll continue to be mindful of these opportunities as they appear. But of course, we're always going to be sticking to our M&A nonnegotiables with any transaction that we evaluate. Operator: And our next question comes from the line of Kevin MacCurdy from Pickering Energy Partners. Kevin MacCurdy: Kind of sticking with the Western Haynesville. I mean, it sounds like you've already drilled a vertical well there, and you did some leasing maybe before this last acquisition. Can you kind of expand on what you saw in that vertical well and what was attractive about this particular area of the Western Haynesville? Josh Viets: Yes. Thanks, Kevin. Happy to address that. We've been, again, studying this for some time. And so we have a pretty extensive data set across the entire region, just given our 1.5 decades of experience here. And so we've been very thoughtful about integrating new production data as that came available from some of the developments further to the west, incorporating that in and calibrating our models. And then with the vertical well, that was, of course, pretty important for us to serve as a good final validation of the resource potential that we saw. And what we found is a thick, very dense shale reservoir that we think presents tremendous upside. It has a lot of characteristics that we're accustomed to developing in areas like the NFZ and our southern portion of the Louisiana play. And that really kind of met all the requirements that we would think about to support future development. But I would just note, though, for the company specifically, this is something that we still see is carrying some level of uncertainty with it. And I think that really goes for the entire Western Haynesville area. Long-term decline is something that we definitely need to monitor. And I think the advantage that we have in the play is that with 20 years of inventory in Louisiana, we can definitely be measured in our approach. We'll drill our first horizontal production well here later in the fourth quarter. But really, we'll need time as we head into 2026 to further assess that. But again, the resource potential is quite high. We like the option that it creates. And again, given the depth of the inventory, we're going to be very measured in our approach to how we develop it going forward. Kevin MacCurdy: Great. I appreciate the detail on that. And as a follow-up, kind of moving back to the core Haynesville, and it looks like a lot of the CapEx savings and even outperformance on the production side has come from the Haynesville. What are the most notable differences between your expectations coming into the year on the drilling and completing of the wells? And you kind of mentioned in your earlier remarks that you think you're doing wells significantly cheaper than peers, without giving away your secrets, do you know what you're doing different that is causing that well cost saving? Josh Viets: Well, one of the things that has helped us, of course, is just putting two teams together, where we've been able to leverage the experience of two companies. And I think the drilling improvements that we've experienced over the last year I think, have just exceeded all of our expectations and really a credit to our employees and to our contractors that help support that. And so we continue to make strides. And I would say the most material cost improvements that we've made and where we see differentiated performance is on the drilling side. But also, I think I would like to talk about completions just for a little bit there because there's really two components to it. Of course, we made an investment in our own sand mine, which I think is a unique opportunity for us because of the scale of program that we run, where we're going to be pretty consistent in running anywhere from 2 to 4 frac crews. And so we can go make that investment. It pays out in just over a year's time and has a material impact on our well cost. And then when you combine that lower source of sand or lower completion cost, that also now presents an opportunity to where we can be a little bit more thoughtful about our proppant intensity on the wells that we're completing. And so through the merger integration, we knew that the two companies had different approaches to completion design in terms of both fluid and proppant intensity. And so through the integration, we landed on what we would consider kind of our Gen 1 as expand completion design, and we quickly put that into place at merger close. And I would say, even through that Gen 1 design, we've seen improvements in productivity in some of our fourth quarter and first quarter of 2025 TILs. So that's helped contribute. We've quickly continued to progress that to a Gen 2 design that we implemented in the earlier parts of the year with those wells coming online in the second and third quarter. Those two have been outperforming our expectations. And we're already now moving on to the Gen 3, where we continue to see kind of outsized performance from these wells. So you've seen the productivity trends. We think there's still more upside to be had within that, and we're very excited to be able to talk more about that in the coming quarters. Operator: And our next question comes from the line of Neil Mehta from Goldman Sachs. Neil Mehta: Yes. And Nick, it's great to see the capital efficiency improvement. And that kind of sets up my question for -- as you think about '26, is it fair to say that the CapEx, all else equal, should be relatively flat '26 versus '25? And what are some moving pieces as you think about the soft guide for next year? Domenic Dell'Osso: Yes. I think that's exactly the right message, Neil, is that you should think about the same CapEx profile for next year, same dollar amount. The moving pieces, of course, are just going to be the market conditions. So again, one of the things we're really pleased within our business is our willingness and ability to be flexible in how we allocate capital and how we view production within a given year. So we're ready for anything the year throws at us. And obviously, gas markets have been pretty volatile through the summer being pretty soft even through the third quarter. Production has been pretty high. The '26 setup is different. It looks like we have some pretty significant structural demand growth that should outpace supply for most of the year. But by the end of the year, you've got some Permian pipes coming on in size, and that will again change the dynamic. So we're ready for that volatility and we're ready to be flexible. Neil Mehta: Yes. Nick, and then the follow-up is just the update on hedge the wedge. The curve looks really good here for 2026 and even into '27. And so how are you thinking about continuing to execute that program? And it backwardates pretty decently as you get it from '28 to 2030, and I know there's less liquidity. So I'm guessing 8 quarters rolling forward is still the right framework, but just your latest thoughts there. Brittany Raiford: Yes, Neil, this is Brittany. And you're right, we're going to maintain that disciplined approach to commodity risk management that includes layering on those hedge positions over a rolling 8-quarter period. And really, that strategy is focused on adding that downside protection, while also affording significant upside participation. And I think this year is a really great example of the effectiveness of that strategy. If you think about the second and third quarters, we had around $165 million of cash inflows from our hedges. So that's really great to see that downside protection in action. And as we look to '26, we're about 47% hedged. Collars are about 75% of that book. And in '27, we've already initiated our position just under 15% hedged. So even with a bullish outlook, we believe it's prudent to continue to layer on downside protection and the benefit that we have is with our fundamentals team. We have great market insight to proactively manage that book once those positions are layered on. So we're going to lean in when we see opportunities in the market and consistently add to that position. Operator: And our next question comes from the line of Zach Parham from JPMorgan. Zachary Parham: First, just wanted to follow up on Kevin's question. You took your D&C costs down in the Haynesville and expect those to move even lower in 2026. Can you just talk about the factors pushing those costs lower? Is that mostly efficiency gains that you factored in, in 2026? Or is there some level of OFS deflation built into those numbers? Josh Viets: Zach, really, this is going to be driven by efficiency improvements. As we assess the OFS market and just think about where activity trends are potentially heading in 2026. We would expect the OFS markets to be relatively stable year-over-year from '25 to '26. And so we're really just thinking about how do we continue to strengthen our business improve our operational performance and continue to build upon all the success that we had in 2025. Zachary Parham: And then my follow-up, just on your macro views in general. You've mentioned flexibility and you've got this productive capacity sitting here. As we sit here today, would you expect to be back at 7.5 Bcfe a day in January? And maybe just talk about the flexibility you have on when you bring those volumes to market and kind of how you think about that? Josh Viets: Yes. So right now, as we look at the setup, as we exit the year, we do have the ability to be at 7.5 Bcf a day, pretty early in 2026. But like we've demonstrated in the past, we're always going to be responsive to market conditions. Our goal is to always be thoughtful about how we shape our production, and that should be in alignment with how we see demand rolling out as well. And so we expect to average 7.5 Bcf a day across 2026, but that doesn't necessarily mean that we're going to simply just be flat. As demand pushes higher or if we happen to see market weakness, we're always going to be in a position to exercise flexibility and push volumes higher or be lower. But again, the target for next year across the year will be 7.5 Bcf a day. Operator: And our next question comes from the line of Charles Meade from Johnson Rice. Charles Meade: I want to ask a question on breakevens and go back to some of the -- I think, your prepared comments. I believe I heard you say in your prepared comments that your -- I think it was your company-wide breakeven is now $2.75. And I'm wondering if you could tell me if I heard that correctly. And also maybe remind us what the other important assumptions in that number are? And I'm thinking just two, off the top of my head, whether that includes location costs and if there's some minimum threshold return that's baked in that number also. Josh Viets: Charles, this is Josh. So the $2.75 that you referenced is, shows up on Slide 12. I mean Nick did reference this in his prepared comments, but the $2.75 refers specifically to Haynesville. And so think about that as just simply an annual free cash flow breakeven for -- specifically for that asset. So obviously, it would include any corporate items such as the corporate dividend. But what I'd like to maybe just comment there, I mean, obviously, with improved productivity, reducing costs, that's a great combination that's going to pull down breakevens. Just as a point of reference, if we were to go back to where we initially guided on the company and specifically Haynesville back in February, we would have been sitting probably closer to $3. So we've seen that much improvements in the business to kind of be able to back out almost a quarter out of our breakeven just across the calendar year of 2025. Charles Meade: Got it. That's great context. And then maybe this is a follow-up for you perhaps. The Western Haynesville horizontal that you're going to drill in 4Q, can you give us some framework for what success would look like there? What would get you more enthusiastic about the play? And perhaps as a follow-on to that bracket, what we should be thinking about for your activity there in '26? Josh Viets: Yes. I mean, first of all, we need to get this first well on the ground and assess the results before we start thinking about what might else occur in 2026. But to your first question, we've confirmed the geologic model. We have a good understanding of what the subsurface looks like. And so with the well, it's really first about kind of fine-tuning our operations of drilling in this part of the state. And then, of course, primarily, this is really centered around productivity and getting some early time data to kind of assess the overall reservoir performance. But obviously, we'll be monitoring this very closely to help better understand longer-term flow characteristics from the reservoir. Operator: And our next question comes from the line of David Deckelbaum from TD Cowen. David Deckelbaum: I wanted to just follow up a bit on some of the color and planning around '26. I'm just curious if you could talk to the appraisal program for the Western Haynesville in '26. And really, I guess, how impactful you could see this asset becoming to your overall program in what time frame? Josh Viets: Yes, David. So for next year, the soft guide that we've provided of $2.85 billion to deliver the 7.5 Bcf a day is inclusive of the appraisal CapEx that we have planned. So we're not, at this point, getting into the specific details of what all is included in that. But I think it's just important to reiterate that all the appraisal CapEx that we think we need is included in that $2.85 billion. And that really just speaks to the overall improvements that we've seen in capital efficiency through the course of the year. And I think at this point in time, it's just way too early to be speculating on what might this do to capital going forward. We're really just in the first inning there. David Deckelbaum: I appreciate that. And then maybe we could revisit just the LCM deal. I know without going into pricing terms, I'm curious just what merits of this deal sort of propelled you or motivated you to sign this one, why this agreement sort of makes sense versus perhaps some others like LNG or power-related contracts. I surmise you're trying to achieve a premium relative to what your forecast might be on 2030, but what was the general thought process or guidelines that you're using right now to sort of engage in some of these offtake agreements? Daniel Turco: Yes. Thanks, David. I think Slide 10 is a great slide to lay out how we're thinking about these deals. And for Lake Charles Methanol specifically, hit -- majority of the elements you see on our guiding principles laid across this page. It was a deal that facilitated new demand and has committed offtake. So a huge win for us. It provides the customer their needs. It provides them reliability and flexibility. The genesis of this relationship is -- goes back to the heritage companies, heritage Chesapeake and heritage Southwestern, where they have a long-standing relationship with the principles of this project, ex-Cheniere guys. And so they understand the reliability and the reputation that we bring. And so they were looking for long-term security of supply. They were looking for a differentiated product. We can deliver the lower carbon intensity score product, and give them that flexibility. We have a baseload sale into them, but we also give them a bit of operational flexibility. So we can really manage their supply. So that leads us to achieving that premium price on that deal. As this deal opposed to other deals, we're taking a huge portfolio approach to this. We're looking at LNG deals. We're looking at power deals. We're looking at more industrial deals. But we're really taking it back to these guiding principles and how do they meet and create value for us as a corporation. So at the moment, we have -- because of our position, because of our portfolio, we have a lot of conversations going on right now. We have something like 20, 25 different conversations going on across the LNG spectrum, across the power spectrum, across industry. And again, it comes back to that value creation and then risk reward of any deal we're looking at. Operator: And our next question comes from the line of John Annis from Texas Capital. John Annis: For my first one, with over 2 Bcf of power and industrial demand growth expected along the Gulf Coast that you highlight on Slide 11. How should we think about the pace of leaning further into supply agreements like the one with LCM and the inbound interest you've noted. Just given you're one of the few with meaningful inventory depth in the Haynesville and with egress from Texas to Louisiana potentially constrained are you contemplating potentially being more patient with entering into future deals to let the gas on gas demand further materialize and accrue to your benefit? Domenic Dell'Osso: Well, we're happy to be patient. And I think we're going to go back to the principles Dan just described in how we think about which deals we want to pursue, which customers we want to align with to provide long-term supply agreements. We're looking for those characteristics, again, that help to deliver a better business for our bottom line, higher revenue, we want lower volatility for our business. We're trying to set up customer relationships where we can help provide a service in addition to the commodity that we're providing in that it's uniquely reliable, flexible, and we can get paid a premium for that. When we think about the overall scope here of long-term agreements, this one is attractive to us because it doesn't require any balance sheet commitments and the price is floating. So if you're thinking about doing transactions, where there are balance sheet commitments associated with the transaction or you're changing your price characteristics, whether it be a fixed price or a collar price, you would think about the impacts those have on your portfolio. Those could be very attractive to you as well. And again, it will be a portfolio approach as to how we think about the balances here. But to put in place a structure like this where you're getting a premium to NYMEX, which, of course, NYMEX being the most liquid natural gas market in the world, we can hedge around that and manage that exposure proactively, we thought was a really good opportunity here. So we could do more of these. And again, we'll continue to look for transactions that have all the right characteristics, but they won't all look the same. In fact, intentionally, we will have a portfolio approach to this. John Annis: Terrific. I appreciate that color. For my follow-up, with your position in the Nacogdoches fault zone, I wanted to get a sense of how similar your position in the Western Haynesville is to the NFZ just in terms of depth and temperature. And do you believe your experience operating in the highest geopressured area of the legacy Haynesville positions you to potentially come down the learning curve more quickly. Josh Viets: Yes, John. So there's definitely some similarities. Of course, as we get into the Western Haynesville, the depths will be a little bit deeper from a total vertical depth standpoint. But as far as will there be learnings, absolutely. Currently, when we think about how we're developing the NFZ area of our play, just as a point of example, we're drilling completing wells there, $1,500 to $1,600 per foot. And today, if you're thinking about wells in the Western Haynesville at around $3,000, I have every bit of expectation that it doesn't take us 2x the well cost to go develop that part of the asset. So we will absolutely carry forward those operational learnings. I think there's a lot of things that we can carry forward into this part of the play, which again is why we simply believe that we're the right type of operator to be operating in a very complex part of the basin. Operator: And our next question comes from the line of Scott Hanold from RBC Capital Markets. Scott Hanold: Just touching base again on the Western Haynesville. Just a couple of questions, just a clarification. Number one, first on -- you spoke about like geological complexities and stuff out there. Do you -- what other kind of facets are important for us to focus on? And then trying to figure out, like is there a greater position for you to build out there? Or do you think you've got a pocket that you like right now? Josh Viets: Yes, Scott, we feel really good about the position that we've built. I mean with 75,000 net acres, of course, the gross acre position is going to be a little bit larger than that. And so we think there's some opportunities to maybe kind of buildup in and around that position, but nothing material. Again, given our overall inventory depth in the basin, we think this is about the right size for us going forward. And then to your comments on the geologic complexity, one of the things that we've observed through our data sets is there is quite a bit of structural complexity as you move across the play, especially as you move further west, you'll get some very steeply deeping beds there that create some complexities in terms of how you drill wells, especially in the lateral section. And so we are very thoughtful about where we want it to be. We like the area that we've got, that it has much less structural complexity within it, which puts us in a position to simply executing at lower cost while delivering outsized production results. Scott Hanold: And my follow-up question is on the Haynesville productivity improvements and the view of seeing it improve yet into 2026. It sounds like some of that is your Gen 1 through potentially Gen 3 design. Could you give us a little bit of color on exactly what you're tweaking within that? And also, is there any facet of the expectation of productivity improvements related to where you're targeting within the Haynesville? Or is it more based on these new generations of completions? Josh Viets: Yes. I mean, first of all, both the Bossier and the Haynesville are very prospective within our acreage position in Louisiana. So we continue to develop both. And especially in the southern portion in and around the NFZ, both zones are highly prolific. And so yes, we continue to optimize exactly where we land the wells within those zones. But really, what we find to be one of the biggest drivers is just simply how we complete the wells. And so exactly that recipe, obviously, we're not going to get into that. But I think the biggest factor is we have a very low-cost sand source that we're able to rely on going forward. That also allows us to control the deliverability of it in terms of ensuring that we have the right sand at the right time. Historically in the basin, especially as we've gotten more and more efficient with our completions, third parties, their ability to keep up with their needs has definitely been lagging. So we can now control our own destiny. We have a lower supply sand source. We can increase our proppant loading and do so more economically than what others can do in the basin. Operator: And our final question for today comes from the line of John Freeman from Raymond James. John Freeman: When I was looking at the full year CapEx reduction by another $75 million, the two biggest drivers of that are the $25 million less allocated to the productive capacity build, which you've been pretty clear kind of highlighting the efficiency gains in the Haynesville that drove that. But the other amount was Northeast App that dropped about $25 million, and I know there's some curtailments. And I'm just trying to get an understanding if that's sort of timing curtailment related? Are there efficiency gains? I didn't see anything in the deck on kind of what drove the meaningful Northeast App drop in the budget. Josh Viets: Yes. So I mean, if you just think about kind of seasonality across the United States, I mean, the majority of the seasonal demand weakness will show up in the Appalachia region. And so when we think about curtailments, we will tend to prioritize curtailments in the Northeast first. And so that's really what's impacted the Q3 number. As you kind of project forward into the fourth quarter, we're obviously carrying forward curtailments into the fourth quarter with those being predominantly in the Northeast. So that's, by and large, what's driving that, John. John Freeman: Okay. And then on the follow-up question, you've obviously made significant progress on debt reduction this year. When I'm looking at next year relative to your capital returns framework that you all have on Slide 14, how should we think about kind of further debt reduction relative to other returns such as buybacks? I guess said differently, in other words, like would you anticipate a similar amount gets allocated to debt reduction next year in that sort of capital returns framework? Domenic Dell'Osso: Yes. John, it's Nick. So last quarter, we said we were going to prioritize debt pay down for a period of time as we recognize that post-merger, our balance sheet is very strong, but we would like to have less debt for the long term. So we're going to continue to do that going into next year. We think we have a lot of momentum to pay down some debt next year, and looking forward to delivering on that. I would just note that this year, we did, both retire $1.2 billion of debt and returned $850 million to shareholders. So we are willing and able to do both. We have the financial flexibility to allocate capital towards shareholder returns in size when we choose to do it. And we'll be ready to do that when the right time hits. So I would say stay tuned. We'll be giving more specific answers as we get into next year and see market conditions set up. But we're totally flexible, capable and willing on all fronts. Operator: This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Nick Dell'Osso for any further remarks. Domenic Dell'Osso: Thank you, guys, for joining the call this morning. We're obviously really pleased with our third quarter results. This puts a great end to the first 12 months of Expand Energy, and we think is such a great setup for where we head next as an organization. The momentum we have around capital efficiency as well as building out our marketing business is very exciting to us. And we think there's an opportunity to create a tremendous amount of value for shareholders going forward and look forward to speaking with you all at each step along the way. Thank you for your time. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Good day, and welcome to the MSA Safety Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Larry De Maria. Please go ahead. Lawrence De Maria: Thank you. Good morning, and welcome to MSA Safety's Third Quarter 2025 Earnings Conference Call. This is Larry De Maria, Executive Director of Investor Relations. I'm joined by Steve Blanco, President and CEO; Julie Beck, Senior Vice President and CFO; and Stephanie Sciullo, President of our Americas segment. During today's call, we'll discuss MSA's third quarter financial results and provide an update on our full year 2025 outlook. Before we begin, I'd like to remind everyone that the matters discussed during this call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, all projections and anticipated levels of future performance. Forward-looking statements involve a number of risks, uncertainties and other factors that may cause our actual results to differ materially from those discussed today. These risks, uncertainties and other factors are detailed in our SEC filings. MSA Safety undertakes no duty to publicly update any forward-looking statements made on this call, except as required by law. We've included certain non-GAAP financial measures as part of our discussion this morning. The non-GAAP reconciliations are available in the appendix of today's presentation. The presentation and press release are available on our Investor Relations website at investors.msasafety.com. Moving on to today's agenda. Steve will first provide an update on the business. Julie will then review our third quarter financial performance and 2025 outlook. Steve will then provide closing remarks and open the call for your questions. With that, I'll turn the call over to Steve Blanco. Steve? Steven Blanco: Thanks, Larry, and good morning, everyone. Thank you for your continued interest in MSA Safety. Before we start, first, I'd like to welcome Julie Beck to MSA. Julie brings extensive experience across all aspects of finance from her previous public and private company experiences. Her leadership and financial acumen will be a tremendous asset to our team, and I'm excited to partner with her in the next chapter of serving our mission of safety for our customers. I also want to extend my heartfelt thanks to Elyse Brody for her outstanding leadership and dedication while serving as interim CFO. Elyse stepped into the role with grace and professionalism and her contributions during this transition have been invaluable. So on behalf of the Board and the executive team, we're deeply grateful for her continued commitment and support. Please join me in welcoming Julie and thanking Elyse for her exceptional work. Now let's move on to our review of the third quarter. I'm on Slide 4. In the third quarter, consolidated reported sales growth was 8% with 3% organic and adjusted earnings per share were $1.94. Our team continued to perform well, delivering a solid quarter despite encountering stronger-than-expected near-term headwinds in the fire service. This was based on sustained strength in detection, along with healthy expansion of industrial PPE driven by fall protection. A decline in the fire service partially offset growth. The M&C TechGroup acquisition contributed $15 million for the quarter. We're pleased with M&C's performance thus far and its integration into the MSA business. Looking at sales by product categories, Detection's 6% organic growth was driven by strength in both fixed and portable instruments. More than half of absolute growth in portables came from connected devices. Organic sales in fire service declined 3% year-over-year. In the U.S., the market dynamics surrounding AFG funding and NFPA standard change had a moderate impact on the quarter, while international markets were mixed. Organic sales of industrial PPE increased 7% with growth across all main categories. Fall protection continued its recent strength with double-digit organic growth. Moving to orders. Order pace across our product categories was encouraging, albeit mixed. Detection orders were up double digits and industrial PPE orders increased mid-single digits. A double-digit decline in fire service orders was principally due to the near-term market dynamics in the Americas as well as the U.S. Air Force comp. I'll address these in more detail in a few minutes. Sequentially, the backlog declined in the third quarter due entirely to timing in the fire service. Overall, backlog remains within normalized levels. Moving forward, we expect to see a near-term negative impact from the fire service order pace in the Americas following the U.S. government shutdown. Our overall book-to-bill was slightly below 1. Turning to Slide 5. I want to provide some notable progress we've made across the pillars of the ACCELERATE Strategy in the third quarter before providing an update on the current dynamics surrounding the fire service. First, we continue to strengthen our leadership in industrial safety technology through customer-driven new product development and continued momentum in these key growth accelerators. I'm pleased to note that we recently introduced the ALTAIR io 6 multi-gas connected portable device and the new H2 V-Gard safety helmet at this year's National Safety Congress. The io 6 is the latest example and addition to the MSA+ platform and is designed for confined space monitoring and sampling solutions. While we do not expect it to provide a significant near-term lift in revenue, we see it as a valuable product that will contribute to the long-term build-out of our connected ecosystem in portable gas detection. The H2 helmet is a Full Brim type 2 helmet that joins our extensive market-leading lineup of industrial safety helmets. And from a growth perspective, we continue to experience the benefits of our investments in our needed now inventory within fall protection, leading to excellent performance in this strategic growth accelerator for the second straight quarter. Centered on customer experience, the organization has been able to decrease lead times and secure new business with better availability. Year-to-date, sales in fall protection are up double digits organically. Second, on the operational and commercial side, we continue to execute our tariff mitigation programs in the third quarter. As a reminder, we are targeting price/cost neutrality in the first half of 2026. We also had another strong quarter for MSA+. I'm pleased to note that not only did we win a sizable competitive tender, but another large customer served as a reference, further emphasizing our solutions benefits and why we remain optimistic about this new customer adoption. Finally, our M&A pipeline remains active, and our strong balance sheet positions us well for growth-oriented deployment and cash returns to shareholders as part of our disciplined capital allocation strategy. Turning to Slide 6. I'd like to take a moment to provide some insights into the current conditions affecting the fire service market in the Americas, including the timing of AFG funding here in the U.S., our largest market for this product category. As we approach year-end, there are 2 dynamics for consideration in this market: the NFPA certification process, which usually occurs every 5 or so years and the annual release of federal assistance to firefighter grants, or AFG, which is typically released in the summer months through September. As we've mentioned, NFPA standard years often see increased short-term volatility as customers decide when to renew their fleets. Nothing has changed here, and we still expect to see approval sometime by early 2026, if not sooner. What is different this year is the timing of the funds release from the AFG program. This program, as always, has been fully funded, but award notifications were issued historically late this year coming at the very end of September. Then the U.S. government shutdown has slowed funding for the awarded departments, creating additional layers of complexity. This had a moderate effect on our revenue in the third quarter. The larger impact is on order timing in the fire service. The delays in receiving the orders will shift some revenue into 2026. Again, our pipeline remains strong. It's a matter of timing. We successfully navigated the approval processes before and seen similar market conditions, and we're fully prepared to serve our customers in the fire service and to deliver the products and solutions they need to keep themselves and our communities safe. With that, it's now my pleasure to turn the call over to Julie to discuss our financial performance in the third quarter. Julie? Julie Beck: Thank you, Steve, and good morning, everyone. We appreciate you joining the call. Thank you for those kind words, Steve, and thank you to the entire MSA team for doing such a great job in my orientation to MSA. This is a wonderful opportunity to work with a company that offers innovative products and solutions, great people with a continuous improvement mindset and a strong balance sheet, providing the optionality to create shareholder value. I am truly grateful for the chance to join MSA and support the mission of safety, which has been a central theme in my career. Anyone who knows me understands I am passionate about what I do, and MSA is a perfect fit for me with a fantastic culture. I see tremendous opportunity to work with the team here, continue MSA's journey and make a meaningful contribution. I have been so impressed with the commitment that everyone here displays for the work they do and the mission we serve. I look forward to meeting all of you over time. With that, let's start on Slide 7 with the quarterly financial highlights. Third quarter sales were $468 million, an increase of 8% on a reported basis or 3% organic over the prior year. M&C added 4% to overall growth and currency translation was a 1% tailwind based on the strengthening euro. As expected, GAAP gross margins continue to face pressure this quarter, declining to 46.5%, down 140 basis points from last year. Gross margins reflect inflation, tariff and transactional FX increases, partly offset by price increases and productivity gains. We are beginning to see the tariff impact become more noticeable in the second half, aligning with our mitigating pricing strategies, and our aim remains to balance this by the first half of 2026. GAAP operating margin was 20.1%, with an adjusted operating margin of 22.1%, which was down 50 basis points from a year ago due to the contraction in gross margins, partially offset by effective SG&A management and variable compensation adjustments. However, our adjusted operating margins increased 70 basis points from the second quarter. We are diligently focused on SG&A productivity, pricing and tariff mitigation plans to counter headwinds. Quarterly GAAP net income totaled $70 million or $1.77 per diluted share. On an adjusted basis, diluted earnings per share were $1.94, up 6% from last year. Now I'd like to review our segment performance. In our Americas segment, sales increased 5% year-over-year on a reported basis or 3% organic as high single-digit organic growth in Detection and low single-digit growth in Industrial PPE was partially offset by a low single-digit contraction in fire service. Currency translation was less than 1% tailwind in the quarter. Adjusted operating margin was 28.3%, down 240 basis points year-over-year. Margin contraction was mainly due to inflation, tariffs and FX, partially offset by price and effective SG&A management and variable compensation adjustments. In our International segment, sales increased by 16% year-over-year on a reported basis with a 7% contribution from M&C, a 5% increase on an organic basis and a tailwind from FX. Double-digit organic growth in Industrial PPE and mid-single-digit growth in Detection was partially offset by a low single-digit contraction in fire service. Adjusted operating margin was 16%, 240 basis points above last year, driven by higher volume, effective SG&A management and the impact of M&C. Now turning to Slide 8. We delivered robust free cash flow of $100 million or 144% of earnings. Quarterly operating cash flow was up 33% from a year ago. As expected, CapEx returned to our normal range following the increase in the second quarter. Year-to-date, free cash flow was $189 million, up $41 million from last year, representing 99% conversion. As for capital allocation actions taken in the quarter, we returned $21 million to shareholders through dividends and invested $12 million in CapEx. Our year-to-date share buybacks offset dilution for the full year. We have $130 million remaining on the current authorization, and we expect to repurchase shares in the fourth quarter following the strong free cash flow generation we have delivered so far this year. We also repaid $50 million of debt in the quarter as net debt was $459 million compared to $532 million in the second quarter. We ended the quarter with net leverage of 1x, and our weighted average interest rate was 4.1%. As Steve mentioned earlier, our balance sheet and ample liquidity of $1.1 billion continue to position us well to invest in our business, and we maintain an active M&A pipeline. Let's turn to our 2025 outlook on Slide 9. We maintain our low single-digit full year organic growth outlook. Overall, our business remains healthy. Certainly, the fourth quarter is impacted by timing in the fire service and the U.S. government shutdown, but the fundamentals there are healthy as we work through current events. The timing of AFG funds being released and approval of the next NFPA standard remain key variables for the balance of the year that are beyond our control. We believe that the AFG timing delay and the ongoing U.S. government shutdown will impact a portion of our fourth quarter sales. However, we expect continued momentum in fall protection and detection as key performance tailwinds. Given some of the moving pieces out there, I'd like to help your modeling a little bit. We have delivered 4% reported growth, including 2% organic growth year-to-date through September and remain on track to be within our low single-digit organic outlook. However, the later-than-normal AFG grant awards and subsequent U.S. government shutdown will impact us in the fourth quarter. While this is dynamic, we now anticipate that the shutdown will take roughly 1% of growth off the full year organic pace we were on, mostly in fire service. In the event of a prolonged government shutdown, we could see additional sales shift from the fourth quarter to 2026. Again, this is simply a timing issue, and we remain confident in our fire service business. In addition to our low single-digit organic growth outlook, we continue to expect M&C to add approximately 2 points to full year revenue growth and FX to be about 1% positive. Our below-the-line items are unchanged from our previous outlook. In conclusion, we remain confident in our business and our ability to navigate macro uncertainty and timing challenges. Our resiliency is truly a strength. With that, I'll now turn the call back to Steve. Steven Blanco: Thank you, Julie. I'm on Slide 10. To close, I'm proud of our team's execution and thank all of our associates for their continued commitment to serving our mission of safety in the third quarter. I remain encouraged that we will continue to deliver strong shareholder value as we execute our Accelerate strategy to drive long-term profitable growth. With that, I'll turn the call back to the operator for Q&A. Operator: [Operator Instructions] Our first question is from Rob Mason with Baird. Robert Mason: Hi Julie, thanks for the additional color around thinking about the fourth quarter. I was trying to do some quick math here. But if I think I interpreted your comments correctly, it sounds like we probably won't see much of the normal seasonal uplift in the fourth quarter. I assume that's all just due to the fire service. Is my math correct? Julie Beck: Correct. That's correct. That's correct. We're relatively consistent between Q3 and Q4, maybe a slight uptick. Robert Mason: Yes. And then, Steve, how should -- so we've tracked the awards coming at the very end of September. Does that -- but the dollars are slower to follow behind that, I guess. Does that preclude your customers from placing orders? Do they wait until they have the dollars in hand? Just -- I'm just curious maybe to parse the timing a little further. Steven Blanco: Yes, Rob. I mean, typically, when FEMA releases these funds, they have up to a year to actually go spend the money. But what usually happens is a pretty large contingent of the fire departments act pretty quickly when they get the funds, when they get the awards. And so they have to -- they go through a process, certainly, and we can walk through that. But they go through the process and then they action that. But with the government shutdown, there's a step they have to take where they have to go in and basically, I guess, you could say, accept the award from the government. So that's a little slower. And plus, I mean, historically, we've always had the funding sooner than this. This was just at the very end of September right before the shutdown. So that really -- usually, what you'd see is you'd see a buildup in incoming, as you know, of the order pace in late Q3 and certainly into early Q4, which was delayed a little bit. Robert Mason: Yes. Okay. And maybe just last question, I'll get back in the queue. Julie, again, nice work and team on the operating expense controls in the quarter. There was the mention around maybe some variable comp adjustments. The thought was maybe we're tracking to $108 million per quarter type SG&A number. It was below that, obviously, in the third. But is that more of a normalized rate? Or have you made some adjustments to that? Julie Beck: Yes. We would expect that our fourth quarter SG&A would return to more normal levels. Operator: The next question is from Ross Sparenblek with William Blair. Ross Sparenblek: Maybe just touching on margins here. FX has recently flipped to a tailwind as you guys called out. Can you maybe just remind us of the cross currents with that transactional risk and then also maybe some of the other moving parts? Julie Beck: Yes. So we had some transactional FX that was negative in the quarter. But really, we've seen some overall inflation in the supply chain as well as we saw a much higher tariff impact in Q3 as the tariffs are hitting the income statement now in Q3. I would say that our costs are up primarily in inflation and tariffs and just a slight bit more in transactional FX. Ross Sparenblek: Okay. And then just on that inflation, I mean, anything specific to call out like steel or... Julie Beck: I would say that when you look at general inflation, you see that overall in the supply chain, wage inflation through the various tiers of the supply chain are causing general inflation to go up. We'd also see some inflation in electronic components. We'd see inflation in metallics and some of those things that are impacting our costs. Operator: The next question is from Saree Boroditsky with Jefferies. Jae Hyun Ko: This is James on for Saree. Kind of going back to fire service here. You noted that pipeline remains strong here. So I believe there are a lot of pent-up demand here. It's just like near-term uncertainties kind of impacting kind of conversion here. So how should we think about like fire service kind of going into 2026 once all this kind of near-term headwind kind of clears out? Steven Blanco: Yes. Thanks for the question. So if you look at it first on the short-term basis, we typically have a really strong end of the year because of the assistance for firefighter grant releases that we talked about earlier. So that typically rolls into fire departments placing orders. And certainly, we want to get the equipment to them so they can do their jobs. So that makes the end of the year typically pretty strong. The nuance here, as we already talked, is that's pushed a little bit, at least for some of it depending on the timing. As you get into '26, I would say you're probably going to have -- excluding when the firefighter grant awards occur, we should have a consistent year with what we'd expect this year to be on -- as far as the demand cycle. Globally, there's some nice things going on in certain regions like we had some international pressure based on some delays in Asia, specifically Mainland China that I think get fixed maybe a little bit in 2026. Certainly, we expect that. North America and our big market, we would expect to be fairly consistent year-over-year. I think what you'll start seeing as we get into the out years, you'll start to see some pace actually, we're really optimistic of the fire service. You get '27, '28, '29, it's going to be -- should be a really good business. Next year should be solid. But beyond that, I think it should be a really good business. Jae Hyun Ko: Got it. Great color. And as a follow-up, I think you guys are still expecting kind of the early 2026 for NFPA approval timing. But are there any risk that this could be further delayed? Or is that pretty -- what is it constant like kind of time line? Steven Blanco: Yes. Our expect -- again, this is a government agency. We don't control when they decide to pull the trigger here. But we certainly have gotten a lot of feedback from the market and others that they expect to really come through with the approval early next year at the latest. It might be yet this year. I think they're lining those things up. And as we've talked before, we've gone through all the process. We're ready -- we certainly know our product is ready. We don't know what the competitive landscape is. But I think there's a relatively high confidence that, that should be taken care of and the approval issued no later than early '26. Again, we don't have control over that, but that's our expectation. Operator: The next question is from Mike Shlisky with D.A. Davidson. Linda Umwali: This is Linda Umwali on for Mike Shlisky. I'll start with this. Should we be concerned about the federal government shutdown? And I know Julie touched on that more broadly affecting your military business or the federal government -- other federal department. Will any of the demand that may be held up by the shutdown eventually be made up once it is all over? And if you could quantify that for us, that would be great. Steven Blanco: We do have some additional impact outside of the fire service, not as meaningful, but some from a detection perspective where we see some delays occurring. I wouldn't say it's something that we're overly concerned, assuming this thing gets settled at sometime in the next few weeks. It's not -- for us, we're managing it. We would expect that then to come through after the fact. But again, from a quantification, it's just a much smaller scale, certainly impactful to the business in the U.S. to some degree, but not significant other than the fire service. So in most of the demand we have, I think we're okay when we come -- when we think about the defense side or government spending. Julie Beck: And just to clarify, we are forecasting that we will have growth -- sales growth in the fourth quarter, and we're forecasting that we will have a slight margin uptick in the fourth quarter as well as sales are up for the whole fiscal year, just to clarify that. Linda Umwali: And then I was wondering if you guys could update us on the MSA+ subscriptions. Has that ramped up through 2025? Steven Blanco: Another strong quarter for MSA+. It continues to be performing very well in the market. We had a few signature wins, which we didn't ship a couple of them in the third quarter, but they came in. Very pleased with that. As we noted, I noted in the prepared remarks, over half of the growth in portable instruments are from MSA+. So it's performing right where we hoped it would. It continues to do really well. I think what's really for us, exciting and really cool is the fact that we have this full portfolio, we have this diversity of capability for the customer. It actually has allowed us and enabled the customer to choose these different options, which then has allowed us to grow share in detection, in the portable gas detection space, not just with the MSA+ connected solution, but with our continued best-in-market traditional solution. So I think that total suite of solutions, the customer gets to see it all from us, and we want them to pick the best solution for their needs, and it's really played out well in both cases. Linda Umwali: Got it. Nice. And then, yes, I wanted to click back on the fire service business. So the Americas portion was -- the organic growth was negative, but the international fire was also negative and the international business did not have a similar NFPA and shutdown issues. Can you provide more commentary on what's happening there? And could it stay negative in the fourth quarter after last year's, I think, double-digit gain? Steven Blanco: So when you think of the international fire service, there's a couple of dynamics that we're playing out -- or we're seeing play out. One is in Asia Pacific, we have seen some delays in order timing especially in Mainland China, they're doing some activities -- have delayed some activity. We expect that to come in probably later in this quarter as well as into 2026. So order pace should improve there, and we expect those orders to start flowing in. And then in Europe, there has been some funding shift from fire to defense for some European countries. Again, really, we see some of that on the larger tenders. So you might see 10-ish percent, 15% fewer units. The interesting thing is it's because they're trying to add investment and funding for defense. So what that means for us is inside the industrial business, if you think of the protective ballistic helmet business, in Europe, that has been very strong, and we're seeing the benefits of that. And a little bit of softness on the international for fire service that the team is going to work through. And that's really the -- I'd say you put those 2 together, that's what you saw in international in Q3. I think Q4, you'll see a little bit, I think, some uptick in international as some of those orders come in we just talked about. And then '26, we're pretty optimistic with. Linda Umwali: That's great. And then one last one. So one area of the 3Q results that were a little surprising was that you did not have many restructuring costs, which were close to 0 after being like $1 million or $2 million a quarter on average for quite some time. Do you have any major restructuring plans for the next few quarters that we should include in our model going forward? Julie Beck: No, thanks for your question. No, we don't have any major restructurings to include in the model. Operator: The next question is from Jeff Van Sinderen with B. Riley. Richard Magnusen: This is Richard Magnusen in for Jeff Van Sinderen. My question goes back regarding the ALTAIR, the detection io 6 that you introduced recently. So the io 6 and io 4 detectors, they address different needs. Are there any other detector applications situations that you're working on where you can give us more detail where you see this MSA+ family going? And maybe can you elaborate on expanding software applications and even how to accelerate subscription revenue growth? Steven Blanco: So thanks for the question. So if I think of io 6, certainly, it will provide nice long-term coverage. It's really a great solution for confined space and the sampling, applications our customers have. Your comment about innovation, absolutely, we continue to innovate in this space. And I think the team is doing a nice job really looking at how we continue to expand capabilities. Nothing to speak of today that we would share publicly on what the next one or when that might be. But the connected solutions we have in portables, we feel really good about, and we think the io 6 will build upon that. When you think of it outside of that space, we have other solutions that allow us to have this expansion in the recurring revenue model. And I think the team is doing a nice job really trying to match the customer with where they're at and their buying behaviors. So that's a focus the team has. And as we talked with our ACCELERATE Strategy, it's a focus that we continue to lean in on. And I think what I like and what we've talked about is we mentioned this during the Investor Day when we launched the ACCELERATE Strategy, but we said, hey, the key categories here where we know we can compete and win very effectively and have the right to really compete is detection, fall protection and certainly, we're going to get through the hump on fire service. That's the communication we had. And you look at the performance the team has delivered, and it's matched that up exactly, right? We've continued to grow the detection business. We're doing that through share growth and addressing some growth in TAM and then fall protection has been a nice tailwind as well, and we expect that both of those to continue. Operator: The next question is from Brian Brophy with Stifel. Brian Brophy: Curious the latest you're seeing on some of your short-cycle businesses, hard hats, anything else to comment on? Curious what you're seeing from that perspective. Steven Blanco: Yes. Thanks for the question, Brian. PPE was strong for the quarter, specifically because of the fall protection I just mentioned, but we're also seeing some growth in the protective ballistic helmets we talked about. The markets are still mixed. Head protection in some areas, pretty solid. Other areas, it's just kind of choppy. It's really been a similar story throughout the year, Brian. We haven't seen that change a heck of a lot yet. It's not down significantly. It's not up significantly. It's just from quarter-to-quarter, we're just seeing it kind of continue on as the employment has been fairly stable overall. And it's market specific. So if you think of the markets we participate in, some markets such as manufacturing, nonresidential construction, a little softer and have been. Energy is okay. It depends on which piece of energy. If you look at downstream, midstream, pretty solid, and we compete pretty well. And then the upstream side, softer, and we don't expect that to change too much. I think the nice thing as we look forward, there's some sentiment that seems to be improving in this regard, and the channel seems to be sharing that as well. So we'll see how that plays out. But it's a continuation of what we've seen really throughout 2025. Brian Brophy: Understood. That's helpful. And then maybe just a little bit more color on how the M&C integration is going and maybe some of your latest thoughts on potentially moving some of that product through your U.S. distribution and when we might start to see some benefits there from some cross-sell activity? Steven Blanco: Yes. So the M&C business, we're really pleased with. They've done a nice job. I think the whole team, it's been a great fit and really pleased with how our team and their team have embraced each other to work together. They're laser-focused on integrating this and looking at opportunities for growth. And we had a nice cross-functional discussion with the team here in the U.S. in the third quarter, and they've identified some really nice growth areas. The third quarter was pretty nice here. U.S., we've unlocked some nice opportunities that the team thinks long term, we can do really well with. I think that's going to be a great business that we'll see continued tailwinds going into the long-term future. Europe, also strong, typically Germany. But as far as growth, I think the Americas is really going to shine there. Brian Brophy: Okay. That's helpful. And then I guess last one for me. Leverage down about 1x, obviously below your long-term target. You talked about some buybacks in the fourth quarter. But just curious how you're -- what you're seeing from an M&A pipeline perspective? Has there been any notable change there? And just kind of curious how active you guys have been there generally. Steven Blanco: Yes. I think we're very -- we remain very active. I would say the pipeline is solid. We were pleased to action M&C in May, and our intent is to continue to look at deals, which we have and continue to evaluate those deals to make sure they're the right fit for MSA and for our strategy. And we've got a great pipeline to do that with. So you talked about the leverage. We gave you kind of as part of the ACCELERATE Strategy, where we think the sweet spot is. So it should give you some idea of what we think we can continue to do, and we expect to continue to move forward with that. Again, timing is -- you got to have the right fit where the seller has the right idea of price that the buyer has and sometimes those don't fit. But if they do, we certainly want to continue to action those. And the pipeline says we can do that. Operator: The next question is a follow-up from Ross Sparenblek with William Blair. Ross Sparenblek: Just back to the price dynamic, can you maybe give us a sense of where the year-to-date price sits across the 3 segments? I mean, has it been broad-based? Or is it more selective? Steven Blanco: Yes. We'll hit this 2 ways. I'll talk about kind of strategically where we're at and then maybe Julie can give some color on the specifics in the pricing side. We really look at the price side. I think, Ross, we did one targeted price increase in the first half of the year in the U.S. and the Americas. We did another one in Asia in the summer and a little bit more broad-based in October based on the sustained visibility to the tariff regime and some of the inflationary environment that Julie talked about. So that's really where we're at. So some of those, you've got to get some flow-through certainly from those tariffs and what's in the inventory and how that processes through and the order book that we have. And then next year, we would expect to get back on the normal cycle where we'd have our January 1 price increase, and we'll manage that. The team also continues to work on efficiencies. I think the nice thing is you saw some of those come through. We did quarter-to-quarter. And sequentially, even with the heavier pressure we had on cost, the team managed that pretty well. And I think we've got a laser focus on how we do that going forward. But maybe, Julie, you can quantify that more. Julie Beck: Yes. I think when you think about our organic growth in the third quarter, it was primarily price. So we're seeing that price hit. We had margin improvement sequentially from Q2 to Q3, and we would expect to have a slight sequential improvement from Q3 to Q4 as well in margins. So -- and part of that will be pricing activities, of course. And so I hope that helps. Ross Sparenblek: That's very helpful. And then just quickly on the fire side, I mean, 1% in the fourth quarter from the U.S. shutdowns the AFG and NFPA slippage into '26 potentially. I mean, can you just give us a sense of what that pipeline looks like relative to the backlog? I mean are we talking a couple of points of growth? Or is it several points of growth going into 2026 when everything straightens out? Julie Beck: Well, it's difficult to say whether it's going to be -- whether some of this stuff will come through in Q4 or Q1 or Q2 of next year into 2026. But we believe that demand is strong and believe in the business going forward. But it's difficult to tell. That's why we gave a range that it may -- the fourth quarter would be impacted, and we would expect that to come back in 2026. Steven Blanco: Ross, if you think about it, that point that Julie referenced, you certainly would -- we see enough pressure there that we think that's a fourth quarter challenge that will push into Q1, Q2, Q3. Now again, you can't -- it all is predicated on when the fire departments, especially with this NFPA standards change, they might -- that might change their thought process of when they want to buy. But it will be sometime in 2026 for that specific point. It's just a matter you can't really lock it down one quarter to the next. Ross Sparenblek: Well, I think -- I mean, instead of just looking at the organic decline this year and taking out some of the large orders for the comps, there's probably some other pent-up demand that's in that pipeline that's just kind of hard to visualize right now. Do you think that's fair? Steven Blanco: Yes. I think the Air Force comp was tough. I think I would look at the demand if I looked at it the way you could think about this is '26 demand-wise is probably going to be similar to a normal year '24, '25 demand, excluding [indiscernible] AFG grant thing. That's how I kind of look at it. You get past '26, you probably are going to start to see a bit different quantified demand curve start to tick up, I would anticipate in the latter half of the decade. But '26 is going to be probably pretty solid and consistent with what we would expect in the '24, '25 demand outside of, as you noted, those extremely large orders. Ross Sparenblek: Yes. That's extremely helpful. And then just one last one on the detection side. Could you help us quantify the split of growth between the fixed and portable? Steven Blanco: Fixed was double digit. Portable was single digit. And again, portable, great strength as we've talked just before the question before is really good growth in the connected space. The fixed business has been really solid. I think what we look at and what we try to come back to on the fixed business, it's another example of the diversity we have. We really like when we get some nice capital investment in some big projects. But even when you don't on that fixed business, you've got this continuation and that's what we're seeing. You see this day-to-day business continue on because we have such a strong, large installed base. So when a customer expands their site and they don't necessarily have a large project spend, we're still seeing the benefit of that. And the fixed is playing out that way. It's a great diverse business that continues to perform very well. Ross Sparenblek: Okay. I mean almost in the sense that fixed has kind of stepped up and structurally higher now. Is that fair or is it just kind of a lumpy project activity? Steven Blanco: I think fixed is -- if you think -- it's certainly the project business is going to be a bit lumpy. And I'll tell you, right now, project business, capital investment-wise, the world is an interesting place. The Middle East is still pretty heavy on some project business, but it's super competitive. In the U.S., the U.S. should be -- we see a lot of things coming into the future on this that I think is going to be good. The rest of the world is a little more challenged. But when you look at the fixed business, it's similar to what we said during the strategy cycle. I think the business is going to be solid. It's going to continue to grow, and we diversified it. You've got the SMC acquisition. You've got the Bacharach acquisition, along with our solutions that are good for mainstream energy as well as clean energy. So I think it's really good. Now add to that, M&C. So it should be a good space. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Larry De Maria for any closing remarks. Lawrence De Maria: Okay. Thank you. We appreciate you joining the call this morning and for your continued interest in MSA Safety. If you missed a portion of today's call, an audio replay will be made available later today on our Investor Relations website and will be available for the next 90 days. We look forward to updating you on our continued progress again next quarter. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, everyone, and welcome to the Littelfuse Third Quarter 2025 Earnings Conference Call. Today's call is being recorded. At this time, I will turn the call over to the Head of Investor Relations, David Kelly. Please proceed. David Kelley: Good morning, and welcome to the Littelfuse Third Quarter 2025 Earnings Conference Call. With me today are Greg Henderson, President and CEO; and Abhi Khandelwal, Executive Vice President and CFO. This morning, we reported results for our third quarter, and a copy of our earnings release and slide presentation is available on the Investor Relations section of our website. A webcast of today's conference call will also be available on our website. Please advance to Slide 2 for our disclaimers. Our discussions today will include forward-looking statements. These forward-looking statements may involve significant risks and uncertainties. Please review today's press release and our Forms 10-K and 10-Q for more detail about important risks that could cause actual results to differ materially from our expectations. We assume no obligation to update any of this forward-looking information. Also, our remarks today refer to non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided on our earnings release available on the Investor Relations section of our website. I will now turn the call over to Greg. Gregory Henderson: Thank you, David, and thank you to everyone joining us today. I wanted to start this morning with highlights on our third quarter and then provide an update on the progress we're making on our strategic priorities. As part of that progress, we're excited to announce the acquisition of Basler Electric. I will speak more about the acquisition and how it fits into our long-term strategy in a few moments, but we look forward to welcoming the Basler team in Littelfuse. Turning to our third quarter. We delivered revenue growth of 10% relative to the prior year, driven by strong Electronics segment growth. We delivered Industrial segment growth despite mixed underlying market demand. Finally, our Transportation segment navigated well through a softer commercial vehicle market in the third quarter. Overall, our third quarter earnings results exceeded the high end of our guidance range, reflecting our team's commitment to operational execution. Looking forward, we expect solid fourth quarter revenue and earnings growth versus the prior year, supported by our third quarter bookings, which were up more than 20% versus the third quarter of 2024. Abhi will discuss specific results and our outlook in more detail shortly, but I want to thank our global teams for their persistent hard work and efforts. Now I want to share the progress we're making on our first strategic priority, which is to enhance our focus on future growth opportunities around the safe and efficient transfer of electrical energy. I wanted to start with the acquisition of Basler Electric. Basler provides essential and innovative electrical control and protection solutions for high-growth power generation and distribution markets. They are market leaders in grid and utility infrastructure and add significant new capabilities to Littelfuse in the areas of high-voltage expectation and very high energy protection. In addition, as data centers have such significant power generation demand, Basler has key exposure to local data center power solutions. Basler has a long history of selling complete solutions to a deeply embedded industrial customer base. They complement our industrial segment portfolio and their addition will broaden our OEM exposure, particularly in grid and utility infrastructure, where Basler is a key partner to industry-leading innovators. We are confident the addition of Basler will deliver long-term value for Littelfuse. Looking forward, strategic acquisitions will continue to be a key priority for us, supported by our strong balance sheet and cash generation. In addition to the acquisition and across Littelfuse, we continue to see meaningful traction in our new business pipeline. Our teams are executing well, converting our growing funnel to future revenue opportunities. Supporting this, our design wins are tracking up double digits year-to-date. As an example of our momentum, in the quarter, we delivered a multi-technology design win for a market leader in a 400-volt battery charging application. This charging solution brings best-in-class safety and protection while delivering an optimized form factor and efficiency. Our solution utilizes our market-leading capabilities of passive and semiconductor overvoltage protection, electromechanical overcurrent protection and our power semiconductor technologies. Combined, our solution enables a more precise and efficient current flow while protecting against potential surges from the power grid. Importantly, this multiyear partnership will start production with revenue contribution in 2026. Our second strategic priority is to provide more complete solutions for a broader set of our customers and to increase our engagement with our key customers and market leaders. To accomplish this, in the third quarter, we formally realigned our sales structure to better serve our broad customer base with our market-leading technologies. As part of this realignment, we established 3 market-facing sales organizations with leaders who bring extensive experience and leadership across our evolving end markets. Our sales leaders will be supported by a realigned sales force that is now market-facing customer-centric and reinvigorated to engage our customers more frequently and with our complete technology portfolio. We see 2 key advantages to this realignment, which is a shift from our historical approach where Littelfuse sales teams were siloed in product-centric roles. One, we can now work more closely with our customers to help better understand and solve their technology challenges with our full product portfolio. Two, we can collaborate more meaningful with our customers on their future technology road maps, which will better inform and ultimately shape our R&D efforts. We believe our sales evolution will enhance our visibility to our end market technology advancements and strengthen our long-term market leadership. While we're in the early innings of our go-to-market evolution, we are beginning to see signs of increased traction with customers. This is best exemplified by our data center go-to-market strategy, where we're early to apply our new sales model. Our data center revenue continues to grow significantly, while year-to-date, our data center design wins are up more than 50% versus the prior year. We are capturing multi-technology wins with leading hyperscaler, cloud and infrastructure customers. We are also deeply engaged with market leaders that are building gigawatt scale AI factories, and we are leveraging strong global collaboration and customer relationships through the data center ecosystem. Further, as we are more strategically focused on the leading customers in the data center market, we are sharpening our R&D efforts and building a strong pipeline around new products. Turning to our third strategic priority. We are focused on driving operational excellence as we grow. Today, I wanted to highlight our power semiconductor opportunity. Enhancing our long-term growth and profitability positioning in this area is a leading priority for our team. Our power semiconductor capabilities are critical to the safe and efficient transfer of electrical energy. Importantly, when combined with our market-leading protection offering, our semiconductor technologies can provide us a unique value proposition. Our long-term goal is to deepen our engagement with power semiconductor customers better utilize our footprint and ultimately drive improved long-term execution. As part of this initiative in the third quarter, we announced the hiring of Dr. Karim Hamed as the new leader of our semiconductor business. Karim most recently served at Analog Devices and brings a wealth of semiconductor industry, technology and operational experience, and we're excited to have him as part of our leadership team. Taking a step back, we delivered a strong third quarter and are well positioned to drive further momentum through year-end. We will continue to execute on our 3 strategic priorities as we aim to scale our company with the goal of delivering long-term best-in-class performance and returns. With that, I will hand the call over to Abhi. Abhishek Khandelwal: Thank you, Greg, and to everyone joining. I want to start by echoing Greg's sentiment as we're excited to announce the Basler acquisition. Today, I will provide some details on the acquisition including financial metrics and the transaction time line. Then I will walk you through our third quarter results, followed by our fourth quarter outlook, and we will end the call with Q&A. If you turn to Slide 7, Basler has demonstrated the leadership in controlling, regulating and protecting mission-critical equipment for evolving power applications over the last 83 years. Their technologies and market position provide a distinct competitive advantage, while their footprint is highly complementary to Littelfuse. The all-cash transaction is valued at approximately $350 million. When adjusted for the present value of expected tax benefits of approximately $30 million, the net transaction value is roughly $320 million. This represents a 13.5x multiple for forecasted full year 2025 EBITDA. At closing, we anticipate our net leverage will be 1.4x versus our current level of 0.9x. We expect Basler will be accretive to adjusted earnings per share in 2026, while we target double-digit returns in year 5 post close. We expect to close the transaction by end of the fourth quarter 2025 and look forward to welcoming the Basler team to Littelfuse. With that, please turn to Slide 8 for details on our third quarter. As Greg mentioned, we delivered strong results with revenue at the high end of the guidance range, while adjusted EPS exceeded the guidance range. Going forward, comparisons I will discuss will be relative to the prior year, unless stated otherwise. Revenue in the quarter was $625 million, up 10% in total and up 7% organically. The Dortmund acquisition contributed 2% to sales growth, while FX was a 1% tailwind. Adjusted EBITDA margin finished at 21.5%, down 20 basis points as solid volume expansion and operational leverage were offset by the impact of higher stock and variable compensation. Third quarter adjusted diluted earnings was $2.95, up 9%. We also delivered strong cash generation in the third quarter. Operating cash flow was $147 million, and we generated $131 million in free cash flow. Year-to-date, we have generated $246 million of free cash flow, and our conversion rate is tracking at 145%, well above our long-term target of 100%. We ended the quarter with $815 million of cash on hand and net debt-to-EBITDA leverage of 0.9x. In the quarter, we returned $19 million to shareholders via our cash dividend. Please turn to Slide 10 for our segment highlights. Starting with the Electronics Products segment. Sales for the segment were up 18% versus last year and up 12% organically. The Dortmund acquisition contributed 4%, while FX contributed 2 points to growth. Sales across passive products were up 19% organically, while semiconductor products increased 5% in the quarter. Within our semiconductor products exposure, protection product sales were strong, while we observed soft power semiconductor demand. Sequentially, we delivered modest power semiconductor growth. Adjusted EBITDA margin of 24% was up 140 basis points, reflecting favorable year-over-year passive and protection volume leverage, partially offset by lower power semiconductor volumes and higher stock and variable compensation. Moving to our Transportation Products segment on Slide 11. Segment sales were flat year-over-year as organic sales decreased 2% for the quarter, but were offset by favorable FX contribution of 2% to growth. In the passenger car business, sales were flat organically, reflecting stable passenger car product demand, offset by sensor declines. Commercial vehicle sales for the quarter decreased 3% organically, as we observed softer end market demand across on-highway, off-road and agriculture markets. For the segment, adjusted EBITDA margin of 16.8% was down 220 basis points. Our Transportation segment margins were negatively impacted by lower volume, higher stock and variable comp and unfavorable tariff timing. We remain pleased with our Transportation segment margin trajectory through a dynamic end market backdrop. Year-to-date, our adjusted EBITDA margin of 18.2% is up 220 basis points. On Slide 12, Industrial Products segment sales grew 4% organically for the quarter. Third quarter sales benefited from solid energy storage, renewables and data center growth. However, we observed softer HVAC demand and continued soft construction volume in the quarter. Third quarter adjusted EBITDA margin was 20.7%, down 310 basis points, driven by unfavorable mix and higher stock and variable compensation. While margins tracked lower in the quarter, we're pleased with the solid year-to-date margin performance, which is up 290 basis points. We will continue to balance profitability with long-term growth investments and remain confident in our long-term Industrial segment growth trajectory. Please move to Slide 13 for the forecast. We entered the fourth quarter with a strong backlog and expect solid growth versus the prior year. We expect typical seasonality given mixed conditions across transportation and industrial end markets. With that in mind, our fourth quarter guidance incorporates current market conditions, trade policies and FX rates as of today. We expect fourth quarter sales in the range of $570 million to $590 million, which assumes 5% organic growth at the midpoint and 2 points of growth stemming from our Dortmund acquisition. We are projecting fourth quarter EPS to be in the range of $2.40 to $2.60, which assumes a 60% flow-through at the midpoint. Fourth quarter guidance also assumes an unfavorable impact from stock and variable compensation of $0.40 and a $0.15 headwind from a higher adjusted effective tax rate. Moving to Slide 15. For the full year 2025, we're assuming $59 million in amortization expense and $34 million in interest expense, 2/3 of which we expect to offset through interest income from our cash investment strategies. We're estimating a full year tax rate of 23% to 25% and expect to spend $80 million to $85 million in capital expenditures. With that, operator, please open the call for Q&A. Operator: [Operator Instructions] And your first question comes from the line of Luke Junk with Baird. Luke Junk: Maybe an apologies, I missed part of the prepared remarks. Maybe if we could start with power semi. I think, Abhi, you mentioned that it did see some growth sequentially despite still being soft year-over-year. Can maybe you just speak to book-to-bill there, kind of the outlook into the fourth quarter in power semi and some of the puts and takes from a demand standpoint and then how you'd expect any improvement to flow to margins as well? Greg Henderson: Yes. Thank you, Luke. This is Greg. Maybe I'll start and then hand it to Abhi to give a little bit more color. But just kind of zooming out on power semi, and we talked about this before, I think our view on the power semi business is that it is strategically important from a strategic perspective as part of our overall portfolio and part of our safe and efficient transfer of energy, actually, in the example I gave on the battery charging solution in the script, that is a protection solution, and it uses our semiconductor protection, our passive protection, but actually also uses power semiconductors as part of the overall customer solution. And actually, Basler also is a customer of Littelfuse today and actually has a lot of semiconductor content in their solutions for protection relays and in their expectation system. So semiconductors is an important part of our business. But I think as we've said before, we have had some issues internally from kind of an execution perspective. So we talk about our strategic priorities as a company on sharpening our focus and improving our go-to-market and improving our operational performance and actually all 3 of those apply to our semiconductor business as well. So we're working on sharpening the strategy, improving our execution. And so this is going to take some time, but we are on the journey. And maybe I'll give it -- hand it to Abhi to give a little bit more specific color. Abhishek Khandelwal: Yes. No, I think Greg covered it, but I think if you kind of think about my prepared remarks, Luke and what I mentioned, if I think about our Q3 performance in our power semi business, Q2 to Q3, we saw sequential improvement, right? Year-over-year, we're still down. But as you kind of think about our performance in Q3 versus Q2, we did see improvement in the quarter. Luke Junk: Very helpful. Just a quick one on the $0.40 stock comp. Is that an outsized impact in the fourth quarter? I know typically, stock comp from a seasonal standpoint tends to be weighted. I think you said 2Q and 3Q this year? Just want to make sure I understand the impact. Abhishek Khandelwal: Yes, absolutely. I can walk you through it, Luke. So there's 2 things here. It's not just stock comp. It's also the impact of variable comp. So if you kind of think about our last year performance and where we ended the year, our teams didn't get paid. So this is a reset back to paying a target. That's majority of the $0.40 headwind. And then a small portion of that is just the year-over-year impact of stock comp. Luke Junk: Got it. So if we -- just to put it in different words as we think into then into 2026 that especially the variable comp piece should kind of normalize. Is that the right way to think about it? Abhishek Khandelwal: That is absolutely correct. If you think about 2026 on a year-over-year basis, '26 versus '25 will be normalized. But given our performance in '24, like I said, we didn't pay the variable comp piece of it. And so you saw a good guide in the P&L. And this year, you're just seeing it being reset back to target. So if you -- just to kind of build on that story then as you kind of think about our Q4 guide, at the midpoint, what you're really seeing is an EBITDA conversion of 60% on our top line growth on a year-over-year basis. Luke Junk: Very helpful. And then lastly, and apologies if I missed any comments on this. But Greg, just be curious to get your kind of incremental update on your efforts in data center, both near-term opportunities hitting maybe things that can move quicker over the next quarter or 2 and then your progress getting designed into sockets on future architectures as well. Greg Henderson: Yes. Thanks, Luke. I think we continue to be excited about our momentum in data center. We continue to make progress. And actually, we talked about in the call this sales realignment that we did across the business. We actually did this a little bit earlier in data center. And we are making progress. Design wins are up more than twice year-to-date. And I would say that data center is -- our growth in the quarter, data center was a meaningful driver of overall growth in the quarter. So we are continuing -- we have meaningful revenue now from data center based on activities that we've had in the past. We have improvement on our go-to-market strategy. Our design wins are up. And with our improved focus from a go-to-market perspective, we're getting closer to our customers. We're working more closely with hyperscalers, with cloud computing companies and starting to work more on our long-term R&D road map around that as well. So I think this is something that is -- the message I would say is it's delivering growth now. And we do believe that with our enhanced focus, it's going to continue over time. Operator: Your next question comes from the line of Christopher Glynn with Oppenheimer. Christopher Glynn: Just want to build on the last question on the data center comment. I think I heard up over 50% and up maybe double just on the last question. about the design wins. So I just want to clarify that. And is that like an account of the design win instances or a dollar value? Just trying to think of what that might imply for growth, what the design in to revenue kind of lead time is like? And maybe if we could clarify what the current scope of the data center business is for Littelfuse? Greg Henderson: Yes. Maybe I'll start with a little clarification. Thank you, Chris, and then I'll hand to Abhi for a little bit more. But just to clarify, right, I think that what we are saying now in the quarter, data center was a meaningful driver of our overall growth. I think that's the first thing I want to say. So that's kind of revenue in the quarter. Design wins being up, it's design wins that are up more 2x on a year-on-year basis. So basically, design wins this year -- design wins year-to-date year-on-year versus a year ago. And we track design wins as when things -- the timing of that varies a little bit, right? So the timing of that varies, so it's a little bit hard to predict just based on that one number. But I would say that data center is one of the faster markets. If you compare to some of our markets like automotive, or industrial, which take longer to go from design win to revenue, data center is probably not surprising, is a relatively faster market. That's what I'll say. And maybe I'll hand to Abhi to give a little bit more color on the relative impact of data center. Abhishek Khandelwal: Yes. So Chris, thanks for your question. I think the best way to think about the data center growth is if you kind of look at Electronics segment performance. It's a good reflection of our data center exposure, and that's where you see the real growth in terms of the segment being up 18%, 12% organic, passive products being up 19% organically, right? Now we haven't quantified the exact impact of data centers for us as a total company, but I would say it's high single digits. Christopher Glynn: Okay. Great. Appreciate that. I'm sure we'll get a further deep dive in February. And then it sounds like the overall company is seeing some good momentum in new business opportunities. How is that funnel looking besides data center? I'm curious, at least especially for industrial, where first half, you had really outsized outgrowth and that moderated a bit. I don't know if there's some noise in any channels or just a real noisy quarter for resi HVAC, which is well known. But curious about the kind of scalability for industrial and NBO funnel there as it pertains to maybe extending the outgrowth that you saw year-to-date. Greg Henderson: Yes. Thank you, Chris. Yes, I think let me just start by, if we zoom out to the Industrial segment, I mean, we had solid growth in the quarter. and actually have had many quarters of solid industrial growth. In the quarter, growth was driven by markets that continue to see strong demand and do well, energy storage, renewables, data center infrastructure and actually some of our industrial business plays into data center infrastructure that continues to see strong demand. That said, as you note, we do have softer residential HVAC demand and the construction MRO continues to be soft. So that's kind of where there's a mixed performance, and that's -- we do have exposure there, which has made maybe a little bit more muted performance on the industrial in the quarter. But if you zoom out from 8 quarters of growth, and this continues to be a significant investment area and growth driver. You mentioned the Basler Electric is an acquisition as well that brings significant kind of industrial exposure and it will be part of our industrial business. Abhishek Khandelwal: And then just to add to Greg's commentary, just one last point I'd point out is if you kind of look at the year-to-date performance for the segment, we're up 12% year-to-date. So that's another positive sign of growth in that segment. Operator: [Operator Instructions] And your next question comes from the line of David Williams with Benchmark. David Williams: Congratulations on the continued progress here. You talked about realigning your sales force and breaking down some of the silos. And just kind of curious if you could provide a little more color there. I mean you talked about be able to engage more deeply with your customers and what that means. But is there a way to kind of quantify what your expectations are and how we can kind of gauge that success? Greg Henderson: Yes. I mean I think it's hard at this point to quantify, but maybe I'll help explain, right? I think historically, our sales organization was basically aligned with our products. And we had kind of these individual product organizations that had individual sales teams and the sales teams were representing our products. Even though as we've talked about, largely, our products are largely about the safe and efficient transfer electrical energy, we often are selling to the same person at the customer, give lots of examples actually in the script, right? The example I gave on the battery charging application had passive overvoltage protection, semiconductor overvoltage protection, power semiconductor solution and passive circuit protection that comes from at least probably 3 of our business units. And so in the past, we would have had 3 different sales teams trying to call on that customer for that solution if they actually even all call on that customer. So 2 things happened. One, we would miss opportunity because we would be selling a part of our solution as opposed to being able to sell the complete portfolio. So in some cases, we're more cases than not, we were missing opportunity because we weren't bringing the full portfolio. But other cases, we're also stepping on ourselves in front of the customer because we have multiple people. So we've realigned to have the -- this is kind of the fundamental change. The sales team is representing our customer, not our products. And we do believe that this is going to bring progress to us. We did this early on some of our e-mobility business and actually also in our data center business. We already see progress from where we had done that early. We've now done this across the sales force. So this is a change. It does -- you have to -- we're in the process of that reorganization. It is a change that's going to take some time, but we believe it's going to bring significant benefits because it puts us, as I said, first and foremost, we get to sell the portfolio we have more effectively. But secondly, it drives our R&D strategy to be more about where the markets are going and making sure that we're developing the right products for where our lead customers are going. And this is really about focusing on aligning with those market leaders to make sure we're in the right position. David Williams: Fantastic color. And then maybe secondly, just on the tariff side, I know you mentioned it in the script. It seemed like it was a modest headwind, but are you seeing anything developing there in terms of do you think that the growth is being tempered by tariffs or any delays? Just any color maybe around the impact of that tariff. Abhishek Khandelwal: Yes, absolutely. I can take that, David. So when I talk about the impact of tariff, what I'm really talking about is if you kind of go back and think about our 2Q call, we had some tariff timing in the quarter where we saw the benefit of -- where we saw the pricing, but the cost hadn't quite flushed through the P&L. That was about a $6 million tailwind in Q2 that was going to be a headwind in Q3. So when I talked about timing of tariffs, that's what I'm referring to. And about $3 million of that hit our Transportation segment, okay? So that's that. Now if you kind of think about where we are today and the guidance for Q4, what we have baked in is a neutral price tariff impact for the quarter. Greg Henderson: Yes. And I'd also say, I think, look, there's still noise that can happen, but I think the market dynamics of this have largely stabilized. We've talked before that we have a diversified manufacturing footprint. We are trying more and more manufacturing close to our customers. So there is some impact, as Abhi mentioned. But broadly speaking, we feel like this is somewhat stabilized in our customer base, and we don't see a major impact from it. Operator: Your next question comes from the line of, again, Christopher Glynn with Oppenheimer. Christopher Glynn: Just on Transportation, I wanted to just ask about the difference between the passenger vehicle fuses up 4% and the sensors down 18% organic. Is the sensors side still engaged in attrition exits product pruning there? Greg Henderson: Yes. Maybe I'll start, and then Abhi can give a little bit more color on the transportation business. But actually, if you zoom out actually in our core passenger products, we have actually had a reasonable quarter given the kind of passenger car builds and so forth. We had a reasonable quarter. But we do continue to have, I would say, lower revenue and profitability of the sensor products. So we talked before in the past about the fact that, that was a business that we were kind of realigning. We continue on that journey. So I would say that if you put aside that sensor which is not really a strategic focus of ours, the core passenger business actually did do pretty well, considering kind of the stable car build and some of the kind of EV slowness that we all see in the market. Christopher Glynn: Okay. Great. And then just back to the power semis and Dr. Hamed joining. So it sounds like you think you can get a lot more juice out of the power semiconductor strategy there, I guess, relative to benchmarking some of the other areas of the business perhaps. But could you comment on that as well as go into what the focus markets are? Is it a middle market strategy and the scope of the -- what you visualize there to kind of bring that up to the standards you envision? Abhishek Khandelwal: Yes. Look, I mean, if you look in 3Q, for example, right, if you look at the performance of our Electronics segment as reported, right, the passive products were 19% semiconductor products were 5%, right? And that semiconductor products is really because the power semis is not performing as well. Our protection semi is actually doing pretty well. So we -- I mean, we have some areas there where we're underperformed. It's really -- like I said before, I think for us, power semis is a microcosm of some of the bigger strategy that we have at Littelfuse, right? The 3 strategic priorities: one, sharpen focus. So where we play and why we win. And again, we want to focus on the high-growth markets. We want to focus on high energy density and growth markets, things like data center grid, utility, et cetera. So that's, I would say, the first thing that we focus on or other areas where we have strong performance, for example, like the medical market in our power semiconductor business. So first, it's about increasing that focus. Secondly, it's about making sure we're focused on the customers. One of the sales realignment benefits we get actually is that we actually have a big pipeline for power semiconductors, but again, some of our sales teams that were representing the other businesses at those customers weren't selling the semiconductor products. So we have opportunity with the sales realignment to improve our semiconductor position to customers. But then it also comes to about execution. We mentioned in the remarks actually about, in Abhi's remarks about using our footprint more effectively. And so this is something that we're going to be focused on as well is optimizing our operational performance in power semiconductors. We believe that ultimately is going to drive both growth and profitability. So it's kind of a microcosm of the bigger picture. But where we want to focus is where we have differentiated value and also where it fits into this broader strategy around safe and efficient transfer optical energy. Operator: There's no further question at this time. I will now turn the call back over to Greg Henderson for closing remarks. Greg? Greg Henderson: Okay. Great. Thank you. I just -- in closing, I have 2 things really. First, I want to just thank our global teams. We did have good performance. And secondly, I'm really excited about Basler. And so I'm really excited to welcome the Basler team and the Basler business and taking significant growth opportunities for us in data center and grid and utilities. And finally, thank you all for joining our call, and we look forward to talking to you more and seeing many of you at the Baird Industrial Conference in Chicago in a couple of weeks. Operator: This concludes today's conference call. You may now disconnect.
Operator: Everyone, thank you for standing by, and welcome to the TE Connectivity Fourth Quarter and Final Results Earnings Call for fiscal year 2025. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, Sujal Shah. Please go ahead. Sujal Shah: Good morning, and thank you for joining our conference call to discuss TE Connectivity's fourth quarter and full year results and outlook for our first quarter of fiscal 2026. With me today are Chief Executive Officer, Terrence Curtin; and Chief Financial Officer, Heath Mitts. During this call, we will be providing certain forward-looking information, and we ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning, and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at te.com. Now please note that we are making a change in our non-GAAP reporting with the start of our fiscal 2026 year. The fourth quarter and full year fiscal 2025 financial results that we will discuss in today's call do not reflect this change. However, beginning in fiscal 2026, we will exclude amortization expense on intangible assets from certain of our non-GAAP financial measures, and this change is reflected in our Q1 guidance. We have recast the financial information of the quarters of 2025 and 2024 to ensure an apples-to-apples comparison of our results going forward, and this is provided in the slide appendix and in an 8-K that was filed this morning. Also, as a reminder, we will hold our Investor Day event on November 20 in Philadelphia with a product showcase the evening before. We're excited to convey opportunities for growth and further value creation for our owners and are looking forward to seeing many of you at the event. Note that we will also have a live webcast for those who are unable to attend in person. And finally, during the Q&A portion of today's call, due to the number of participants, we're asking everyone to limit themselves to one question, and you may rejoin the queue if you have a second question. Now let me turn the call over to Terrence for opening comments. Terrence Curtin: Thanks, Sujal, and thank you, everyone, for joining us today. Before I get into the details on the slides, I do want to reinforce a few key takeaways upfront. First off is that our strong momentum is continuing with quarterly and full year records for sales, earnings and free cash flow in what continues to be an uneven macro environment. We also continue to demonstrate the strategic positioning of our portfolio, benefiting from the secular growth trends in a number of our businesses, and we'll talk about these as we go through the discussion of our results today. We also continue to demonstrate operational resilience with our global manufacturing strategy where we've invested heavily to ensure in-region support of our customers, and we are set up for this strong performance to continue into fiscal 2026. We expect to continue executing on our long-term value creation model, and we'll click down and provide more details at our Investor Day next month. So with that as a backdrop, I would like to get into the presentation, starting with Slide 3, and I'll discuss fiscal 2025 results and our guidance for the first quarter of fiscal 2026. Our fourth quarter sales were above our guidance at $4.75 billion, growing 17% on a reported basis and 11% organically year-over-year. Both segments contributed to our sales being above guidance. We also saw orders increase in both segments to $4.7 billion, and this was an increase of 22% year-over-year, and it was up 5% sequentially. We delivered adjusted earnings per share of $2.44 that was above our guidance due to the strong execution by our teams and increased 25% versus the prior year. Adjusted operating margins were 20%, increasing 130 basis points year-over-year. And lastly, in the quarter, free cash flow performance continued the strong momentum that we've seen throughout the year and was $1.2 billion in the fourth quarter. So let me transition to full year results. Full year sales were a record at $17.3 billion, growing 9% on a reported basis and 6% on an organic basis. In our Industrial segment, we saw 24% reported growth, benefiting from bolt-on acquisitions that we made this year. On an organic basis, segment growth was 18% and capitalized on the strong demand for artificial intelligence and energy infrastructure applications. In Transportation, we continue to demonstrate our strong global position with strength in Asia that drove content growth from increased data connectivity and growth of the electrified powertrain in that region. We achieved record earnings in fiscal 2025. Adjusted operating margins were essentially 20%, expanding 80 basis points year-over-year and adjusted earnings per share was $8.76, increasing 16% versus the prior year, driven entirely by the strong sales and margin performance. We continue to demonstrate the strength of our cash generation model. We delivered free cash flow of over $3 billion with conversion levels of well over 100%. This strong cash generation gave us the flexibility for record capital deployment with over $2 billion returned to shareholders and $2.6 billion used for bolt-on acquisitions during the year. As we look forward, order levels support our outlook for double-digit growth in the first quarter. We are expecting our first quarter sales to be $4.5 billion, reflecting sequential seasonality that we typically see and increasing 17% year-over-year on a reported basis and up 11% organically. We expect adjusted earnings per share to be around $2.53 in the first quarter, and this will represent growth of 23% year-over-year. Now if you could turn to Slide 4, let me get into order details. In the quarter, we saw orders of $4.7 billion with growth year-over-year and sequentially in both segments. On a year-over-year basis, we saw organic order growth across all regions. And on a sequential basis, growth was driven by automotive, digital data networks and energy. Touching on the segment. Transportation orders increased 9% versus the prior year, driven by auto growth in all regions. In the Industrial segment, orders increased 39% year-over-year, reflecting ongoing momentum in DDN as well as our energy and AD&M businesses. Also one thing to highlight in our orders, we did see order rates improve in the general industrial end markets, and we believe this indicates stability. Now let me get into the segment quarterly results. And if you could turn to Slide 5, I'll start with Transportation. Our auto sales grew 2% organically in the fourth quarter, with growth in Asia of 11% being offset by declines in Western regions of 4%. Our growth over market reflects the ongoing regional dynamics that we've seen all year and have impacted our growth over market. As we look forward, we expect global auto production to be 87 million to 88 million units in fiscal 2026, with content growth being driven by key wins for our leading-edge products and technology around data connectivity and electrification of the powertrain. We continue to benefit from our strong global position and localization strategy, which enables us to serve our global customer base. Turning to Commercial Transportation. We reported 5% organic growth, and this was driven entirely by growth in Europe and in Asia, which was offset by ongoing weakness that we see in North America. And in our Sensors business, we saw weakness in end markets in Western regions that were partially offset by growth in Asia. For the Transportation segment, the team delivered 20% adjusted operating margins for the full year as we expected, and the team did a good job of navigating an uneven global production environment. So if you could, let me turn to Industrial Solutions segment, which is on Slide 6. And the segment grew 34% in the quarter overall as well as 24% organically. Digital Data Networks had another outstanding quarter where the business grew 80% year-over-year. We continue to benefit from increasing ramps from hyperscaler platforms. And for the full year, we generated over $900 million in AI revenue, tripling our AI sales versus the prior year, and this reflects our increased momentum. In our Automation and Connected Living business, sales grew 11% organically year-over-year with 3% sequential improvement that we believe reflects stability in general industrial markets. In our Energy business, sales grew 83% and included the Richards acquisition, which enables us to capitalize on strong growth opportunities in the North American utility market. On an organic basis, our sales increased a strong 24%, driven by continued increased investments by our customers in grid hardening as well as renewable applications. In our Aerospace, Defense and Marine business, sales grew 7% organically, driven by growth across commercial aerospace as well as defense applications. And in these markets, we continue to see favorable demand trends, coupled with ongoing supply chain improvement. And in our medical business, sales were roughly flat sequentially as we expected. Turning to margins for the Industrial segment. Our adjusted operating margins expanded by nearly 300 basis points to over 20%, driven by the strong operational performance and benefits of higher volume. I am pleased with the progress our team has made this year, supporting the strong growth that we have in this segment. Now let me turn it over to Heath to get into more details on the financials and our expectations going forward. Heath Mitts: Thank you, Terrence, and good morning, everyone. Please turn to Slide 7. For the quarter, adjusted operating income was $943 million with an adjusted operating margin of approximately 20%. GAAP operating income was $916 million and included $10 million of acquisition-related charges and $17 million of restructuring and other charges. For the full year 2025, fiscal -- I'm sorry, for the fiscal '25, restructuring charges were $113 million, and I expect restructuring charges in fiscal '26 to be roughly at the $100 million level. Adjusted EPS was $2.44 and GAAP EPS was $2.23 for the quarter and included a tax charge of $0.10 related primarily to the increase in the valuation allowance for deferred tax assets. Additionally, we had restructuring, acquisition and other charges of $0.11. The adjusted effective tax rate was 21.4% in our fourth quarter and approximately 23% for the full year 2025. Moving to fiscal '26, we expect our adjusted effective tax rate in the first quarter to be approximately 22%, with the full year being similar to last year at approximately 23%. And importantly, as always, we anticipate our cash tax rate to be well below our adjusted ETR. Now if you can turn to Slide 8 for fiscal '25 performance. We set records in sales, adjusted operating margins, adjusted earnings per share and free cash flow. Relative to our business model, we are delivering on our targets for sales growth, margin performance, EPS growth and cash generation. Sales of $17.3 billion were up 9% on a reported basis and 6% on an organic basis year-over-year with both organic and inorganic growth, driven by our Industrial segment. Adjusted operating margins were essentially 20% for fiscal '25 with margin expansion of 80 basis points year-over-year, driven by strong operational performance. Both of our segments are running at the 20% level for adjusted operating margins, and we would expect further margin expansion as volumes continue to grow. Adjusted earnings per share were $8.76, up 16% year-over-year, driven by sales growth and margin expansion. Now turning to cash. We increased our free cash flow to $3.2 billion in fiscal '25, which was up 14% or $400 million year-over-year. Our free cash flow reflects over 100% conversion to adjusted net income, and we remain committed to this going forward. And keep in mind that our strong cash flow generation and cash conversion in fiscal '25 also included us investing a couple of hundred million of increased capital investments to support the growth in our Industrial segment. So a very good story there. In fiscal '25, we returned roughly $2.2 billion to shareholders through share buybacks and dividends, and we deployed approximately $2.6 billion, aligned with our bolt-on acquisition strategy. Our cash generation and healthy balance sheet gives us continued optionality with uses of capital to support investments for future growth, both organically and through M&A. Now as Sujal mentioned earlier, we are making a change to our non-GAAP reporting. And going forward and beginning with the first quarter of fiscal '26, we will exclude intangible amortization expense from our non-GAAP financial measures, and this change is reflected in our Q1 guidance. You will see the historical impact of the recast materials that we have provided for fiscal '25 and fiscal '24 in the appendix of our materials. And you can assume that amortization impact will be roughly $0.15 per quarter for fiscal '26. Now before I turn it over to questions, let me reinforce that we continue to execute well in both segments to deliver the record results you see for fiscal '25. We have positioned the company to deliver strong performance and value for our owners, and we expect our momentum to continue into fiscal '26 and beyond. We look forward to sharing more about our growth opportunities and our value creation model at our upcoming Investor Day on November 20. Now let's open it up for questions. Sujal Shah: Thank you, Heath. Kate, could you please give the instructions for the Q&A session? Operator: [Operator Instructions] Your first question comes from the line of Scott Davis with Melius Research. Scott Davis: Congrats on a great year. I got to lead in on the AI stuff because it's just a giant tailwind for you, and you're doing a -- seem to be doing a great job of capturing those revenues. But last quarter, I think you were talking about $800 million. You did $900 million. I think last quarter, you said you thought maybe '26 was $1 billion. Can we mark-to-market that forecast? And just as importantly, where are you on kind of the scale impact there where you can get to or above kind of company average margins? Terrence Curtin: Yes. So no, great question, Scott. And you're right on with where we've seen the momentum all year. And in many cases, our customers, on the programs that we win, continue to want more and they want it faster, which is a key element of how you win in this market. And so you are right, we generated over $900 million of AI sales in '25. And remember, in '24, that was $300 million. And this is really the products that we do that go into AI with the GPUs and so forth. So we tripled our revenue in this product set, which I actually think shows the job the team has done to ramp to your question. As we look into '26, the estimates out there is for hyperscale CapEx to grow about 20%. And let's face it, we have strong orders. We have the momentum and we have the design win traction. So we grew $600 million this year alone in AI in dollars. I think that's probably the baseline you have going into next year from a level of dollar growth that you should be thinking about right now. The other thing I want to highlight is while we talk about AI, we also have a lot of growth that's happening outside of AI in our DDN business. And there is business we have that is cloud business that is not AI. That business is running about $500 million right now this year. That doubled versus last year. And then we also -- that's also a real momentum. And then outside of that, where we play in enterprise and telecom over the past 6 months, I would tell you, we have seen increased momentum there where those applications are growing double digit for us. So I know we spent a lot of time on AI and a lot of -- early thing was all the cloud CapEx went to AI. We've seen a broadening out of it. Certainly nice growth in the cloud side as well that is not AI, but also seeing nice growth rates. And all of that comes together to be that nice 80% growth we had this quarter, and we can see that growth momentum continuing. Operator: Your next question comes from the line of Joe Spak with UBS. Joseph Spak: Maybe just to follow on, I mean, you talked about some of the high-speed interconnect and data center. I was wondering if there's also a power element related to AI that's going to help you in '26. And then just for CapEx in '26, like you've been close to mid-5 sales this year to help build out that support. Should we expect similar levels next year to help support that continued growth? Or has most of that investment already been made? Terrence Curtin: No. Thanks, Joe. So first off, let me get into the product sets a little bit that when we talk about our DDN business. Clearly, the bigger driver is what you get around high speed. But we have -- our growth has also been happening around what happens on the power interconnects, certainly, what we do in helping that power be more efficient from liquid busbars and things like that, that we do with our customers. And then also where we do cable connectivity that goes between racks and so forth. So the numbers I quoted to Scott include all of that in those categories, Joe. And we have momentum across all of them because all of them are key building blocks of how this architecture comes together, where you need lower power, no latency, higher speeds, all happening at once. So all of those products are there. I don't think one inflects at a higher point than the other as we continue. I think you're just going to continue to get that good momentum that we've had this year with the ramps that we have going and the program wins that we have. Heath, why don't you take the capital side of it. Heath Mitts: Sure. And Joe, just as a point of reference, and you have the material there. Our capital was up a couple of hundred million from FY '24 to FY '25, and that growth was entirely for some of these AI and cloud programs that we've won both in the past as we're expanding and/or, in some cases, adding new capacity altogether for very program-specific reasons. There will be some pressure to increase that a little bit as we move from '25 into fiscal '26. We don't guide that number specifically, but I would expect it to be kind of in line, maybe just a little bit less than the dollar increase we saw in the prior year. So I still think with the revenue growth and the growth that comes out of these programs, we'd still be at the TE average still in the -- a little over 5% range. And it kind of depends because sometimes with these programs, the revenue that comes out of these programs can lag a fiscal year or lag when you make those investments. So I know where some of the things the team is contemplating for this year is even investments that we'll make in '27 to support programs that we've won for -- I'm sorry, investments in late '26 for programs that will kick into revenue for '27. So there's a lot of great momentum there. The key is for us to get up, get operationalized things, so we're not the ones holding our customers back. Operator: Your next question comes from the line of Mark Delaney with Goldman Sachs. Mark Delaney: I was hoping you can help us better understand trends by end market beyond DDN, including how demand trends have changed over the last 90 days? And any early views you can share for fiscal '26? Terrence Curtin: No. Thanks, Mark. And like we've done already in the script, there's going to be some of this we're going to say, please come to Investor Day, but I'll tell you what we've seen and changed over the past 90 days. Let's build on the orders that we talked about, and you can see the slide. I think one of the things that is a positive is you saw the order growth both year-over-year and sequentially in both segments. So I do think the environment does feel better than 90 days ago. But let me click down a little bit by the segments. First of all, just taking Transportation, orders were up both year-over-year and sequentially in auto. And it is one of the things all in 2025, we dealt with a world where Asia production grew, Western production declined. We do actually think what we're seeing is some stability that they're probably going to be more even between regions, even though auto production is going to stay in that 87 million to 88 million unit range, which is flattish. We also think we're going to continue to deliver content growth over market of 4% to 6% because when you think about what's happening with data needed in the car, what's happening with further comfort things that we all want that drives more electronification in the car as well as just the nonending growth of electrified powertrains in Asia, all of that continue to give us confidence on the 4% to 6%. When you look at industrial transportation versus 90 days ago, Mark, honestly, there hasn't been much change, unfortunately. We continue to see Europe and Asia have growth and North America still having declines in the truck and bus and the agricultural area. So I would say that's one that continues to be uneven that we're actually really looking for signs when can we get a little bit of a North America pickup, but we are not seeing any trends that see that right now. So that's one, unfortunately, probably still feels muddled. And then in the Industrial segment, I will jump over DDN like you asked. But you look across our end markets there, we're seeing consistent growth across them. In Energy, we have -- you saw the organic growth this quarter of 20% with where we position ourselves in North America and what's happening in grid investment in the T&D side by utilities, the hardening, getting it up to current trends and everything, that continues to be very good order momentum there, and we're also benefiting from utility scale renewables like solar. AD&M just continues, I would say, the market continues to move along. You've seen airframers talk about where they're getting their build rates to, and it feels the supply chain continuing to show improvement, which is good signs. And then the one that I know we've been pretty hesitant on in our ACL business, which has general industrial, has a little bit of things that touch the consumer. What I could tell you, the factory automation side, which is the bigger piece of it, we are seeing growth in orders across all regions. The business grew sequentially. The areas where we see weakness is where we have things that go into HVAC, things that go into appliances, that's where we see some weakness there. So it does feel the industrial piece of that, the business side has improved. Certainly, the residential or consumer side has gotten a little weaker. But we did have nice growth. You saw that, and we think the momentum on the more of the industrial side continues to get more traction. So that's a little bit of going around the horn as we think about entering '26. Certainly, you see that in our guide with 17% overall growth and 11% organic growth here in the first quarter. The Industrial segment is still in very good momentum, and it feels like we're getting some stability across the Transportation segment and a couple of markets with questions. Operator: Your next question comes from the line of Wamsi Mohan with Bank of America. Wamsi Mohan: I was wondering if you could talk a little bit about margins in 2 ways. One is when you look at gross margins, just a few years ago, you were in the low 30s, you're squarely in the mid-30s now. How should we think about the potential for gross margins for you and for this industry to actually expand further from here? And if you could comment just on the new basis of accounting, how should we think about the adjusted operating margins for both your segments? And sorry, if I could, does this change in accounting imply any increased appetite around rate and pace of M&A as well? Heath Mitts: Okay. I will tackle -- I think you got 3 questions in one there, Wamsi. Terrence Curtin: Wamsi, you're ignoring Sujal's instructions. Heath Mitts: Yes. But no, I appreciate -- I do appreciate your questions and your interest. So let's talk about margins first. Margins for the year, this is a bit of a journey that we've been on. I think we were very specific with our comments around Transportation going back several years, getting them closer to their margin target of about 20%. Largely, they're there. You're going to have noise in a given quarter that's going to swing you on both sides of that. But for the year, they're at 20%, and we expect good things margin-wise as we go into FY '26. The Industrial business has been more of a story around more rooftop consolidations and so forth and taking advantage where we have scale opportunities, particularly when we have strong programs like we have going on in the DDN business. And we're very pleased with their performance and their jump forward in FY '25. Again, as we go into '26, we're going to be balanced with our investments. We think both of those segments will flow through on revenue growth at 30% or maybe a tad better depending upon the mix. So I think as you do your modeling, depending on what you want to put in there for the growth side, I think 30% is a good flow-through math on that piece of it for the organic growth. In terms of gross margin, a lot of that flow-through math does come to gross margins, and we do get some leverage on our OpEx expense as well. So we're running this past year at about 35% gross margins. The amortization change largely affects the gross margin line. So when we think about it at the TE level, it's about 100 basis points of margin improvement that flows through at the gross margin line. So at 35% in '25 would be kind of a recasted 36%. And that's where some of that flow-through is going to occur. If you think about the split by segments, which is another part of your question, it's in the schedule that we have in there for you that recast it, and it shows the segments recasted by quarter going back to prior 8 quarters. So you can see that relative to what our actual results were. But it's heavier weighted towards the Industrial segment because, obviously, the amortization expense load comes from the acquisitions, and we've simply been more acquisitive on the acquisition front in the Industrial segment over the past few years, inclusive of the Richards deal that we completed earlier this year. In terms of your third or fourth question on M&A, listen, I think we've been trying to be -- we're going to talk more about it in our Investor Day here in about 3 weeks in terms of just overall capital deployment. So I don't want to -- but I'd say it's fair to say that we're excited about our bolt-on opportunities in front of us. Bolt-ons don't always mean small. They come in all shapes and sizes, just as we completed in FY '25. We completed the Harger deal that was a little bit smaller, but then with the Richards deal, which was much larger. And our appetite ranges depending upon the business and the opportunity to create value there. Certainly, the optionality that I commented on earlier about free cash flow and the optionality that, that provides gives us some confidence that in some ways, we can be a little bit more aggressive, but we're going to be smart with the investments that we make. So stay tuned, and I look forward to seeing you in a few weeks. Operator: Your next question comes from the line of Amit Daryanani with Evercore ISI. Amit Daryanani: I just had a couple of questions just on the DDN segment broadly. Terrence, on the AI side, it sounds like $1.5 billion revenue run rate is sort of what you're comfortable with. I'd love to understand, do you see this growth coming more from end demand end units? Or is there a share gain narrative as well as some of these programs are starting to mature, perhaps the share is getting more in your favor? I'd love to just kind of understand the levers behind the growth you see. And then on DDN ex AI, your growth over there actually has been really impressive, north of 40%, I think, in fiscal '25, which is much better than what the end markets are there. So what's driving this growth on DDN ex AI as well? Terrence Curtin: Yes. So twofold one, Amit, sorry. The one time, I guess, you're adding the AI and the cloud piece together. So I just want to make sure where that comes from. And honestly, that's program ramp wins. Like we've always told you, we have a nice position with the hyperscalers. We have to play everywhere there, and these are ramps there. And I think our share has been pretty stable, but really benefiting from the technology and where we're co-designing with our hyperscale customers that, in some cases, have their own GPUs. Outside of AI and cloud, what I would tell you, what we saw and just if you take this past quarter, in enterprise and cloud, we grew about 15%. And on things around the edge and IoT, it was a similar number in the double digits. And what you see is I do think it's the bump down effect that's happening in CapEx. Our product set is very broad. When you deal with high-speed things, they do cascade down over time. So I do think you sort of have -- lines do blur between AI and non-AI. And the key thing, this cloud CapEx that the key element is that's a number we keep an eye on, which is growing 20%, I think is taking that bump effect that cascades down. And if you remember, like a year ago, we all just thought all the cloud CapEx was only going to AI. We're seeing that broaden out. And clearly, as you added some of my numbers together, you have those lines blurring, but it's really created that really strong growth that we've had that not only in the quarter, we grew 80%, but basically, we grew that for the year organically. And it was in the AI, the cloud that's non-AI as well as we're starting to see pick up here in the past couple of quarters on the enterprise, the telco as well as IoT and edge. Operator: Your next question comes from the line of Luke Junk with Baird. Luke Junk: Terrence, I wanted to circle back to Transportation and the orders in particular. You had mentioned that you had seen order growth in all regions this quarter. I'm just wondering relative to auto outgrowth, especially that has been more weighted to Asia and China recently, would you say this might portend to more balanced outgrowth algorithm? And I think you spoke to production being more balanced in the West, but what about some TE-specific dynamics as well? Terrence Curtin: No. Thanks, Luke. And first off, you are right in my comments. We've had this outbalance of production this year, and that has created a little bit of headwind because our mix -- I mean, our content per vehicle is higher in the West. You all know that. So that has created a little bit of pressure where you've seen our content outperformance be a little bit lighter than our 4% to 6%. But as we look forward, as we work through these Western declines and they become more flattish, I do view you're going to see content per growth in every region that contributes above that to get to the 4% to 6%. Certainly, there's different opportunities in different regions. The electrified powertrain is driven out of Asia. Data connectivity is in every region. Certainly, feature sets are different that drive electronics in the vehicle are different by region. But the key thing you have to realize, in every region, all of them are increasing. It's just the rate of increase. So net-net, we do think you'll see content growth over market be more even this year. But certainly, there'll be a little anomalies just due to the trends are very different in region. Operator: Your next question comes from the line of Samik Chatterjee with JPMorgan. Unknown Analyst: This is [indiscernible] on for Samik Chatterjee. So I just wanted to ask on implied margin guidance for F 1Q. So based on my calculation, even after adjusting for the change in non-GAAP calculations, the implied margins are close to 21%, which is a robust expansion relative to F 4Q. Can you please highlight the drivers which are driving that margin expansion there? Terrence Curtin: Yes. Samik, I'm going to have Heath answer that question on where sequential margin goes sequentially Q4 to Q1. Heath Mitts: Samik, first of all, as you know, we don't guide a specific margin target. However, I think it's fair to say with the breadcrumbs that we've given you on various things with tax rate and implied what our EPS guide is and our revenue guide, you can assume that we're going to see an increase in margins modestly sequentially, probably more driven by Transportation, which tends to have the highest auto production number in our calendar -- in our fiscal first quarter each year and neutral or maybe flattish in Industrial. But I don't want to get into guiding margin rates, but I think that would be a fair assumption. Operator: Your next question comes from the line of Guy Hardwick with Barclays. Guy Drummond Hardwick: Terrence, I know you kind of answered the question about the growth in DDN ex AI. But I think I heard you say the cloud business doubled to $500 million. Can you tell me what's driving that? I assume it's cloud companies pushing their on-premise customers to the cloud, and they seem to be growing at 20%. So just wondering how much visibility you have in this business because it potentially could be a multiyear runway. What sort of kind of growth assumption should we assume sort of medium term? Terrence Curtin: Yes. So first off, Guy, you are right. The comments I made in -- to Scott's question really had to do with our cloud revenue, which is in non-AI applications was about $250 million in last year, and it was up to $500 million this year. And I do think it's about the infrastructure being upgraded. And not everything has a GPU, but you do have cloud data center, there's other things going in it that are being upgraded, and we're benefiting from that. So clearly, you have very high-end compute that's happening on the high-end side, but you're going to have cascade down that we're benefiting from our broad product set. And I do think we're going to continue to benefit from that growth trend going forward. It may not have as much content as we have on AI, but it's going to have a nice growth rate to it because certainly connecting GPU to GPU like we do today, and that's more of the AI element, you don't have that product in there, but certainly, you have the high speeds needed in these next-gen servers that the cloud needs. Operator: Your next question comes from the line of Colin Langan with Wells Fargo. Colin Langan: Just a follow-up on the outlook in auto to grow 4% to 6% over market. I mean any way to frame the challenge from EV adoption slowing down in developed markets? Is that sort of going to keep you at the lower end of that range or even below that range given some of the pushbacks in some of those products? Or is that kind of offset by other factors? Terrence Curtin: No. When you look at it, I think, clearly, when you have EV adoption, the biggest driver of it is Asia, and that's full steam ahead. You have less adoption elsewhere in the world. Where you have, you're not going to full EVs. You might be going to a hybrid, which gives us a content increase, but not the total content increase you have in the full electric. The element that you have to remember is I need you to think about what's happened to the content, not only in EV, but outside. Think about the Ethernet connectivity that you need in a car for autonomy, for the sensor suite, for everything else that needs to happen in the car, for software updates over the top. All of that's being put in, and we benefited from that, had really nice growth this year on it, and that's going to be a key driver, almost just as important as what we've gotten out of EV. And then the other thing that come into, the safety features, the comfort features, everything else that's getting added to the vehicle also adds content. So we actually view it's going to be more balanced. And when we're at Investor Day here just next month, we'll spend more time on this to make sure everybody has a clear picture of how we see the content growth going forward. Sujal Shah: Your next question comes from the line of Asiya Merchant with Citi Group. Asiya Merchant: Can you just talk a little bit about the book-to-bill, specifically, I think, in Industrial, given the strong momentum you have, DDN as well as some of the other segments that you talked about, is book-to-bill below 1 here? I think I calculated it to be 0.96. Is that a metric that investors should focus on? And how we should think about that relative to your guide? Terrence Curtin: Thanks for the question. I would say you have to look at order levels and the one element you get always this time of year is we do have sequential seasonality that's very normal. And especially in our Industrial segment, you have factories that shut down around holidays in the western part of the world. So in many ways, and if you look back over time, you will always see we have a step down quarter 4 to quarter 1 due to this factor. It's almost like we have 1 less week of business due to how people leverage their production planning. And the element is $4.7 billion of orders in the fourth quarter against a $4.5 billion guide for the first quarter is very healthy. So I know the book-to-bill takes current quarter, but what's really nice is the trend you see going into a sequentially slower quarter just due to seasonality is really how you should look at it. Operator: Your next question comes from the line of William Stein with Truist Securities. William Stein: I want to first recognize very good results on revenue and earnings and the outlook in the same regard. So the question I'm going to ask is maybe is not quite as optimistic, but I do want to recognize the great results and outlook. On the margins, however, I have this lingering question. You're, again, beating on revenue. You're beating in this new -- partly from this new category of AI, which I would expect carries better margins. The conversion margins are not bad, but I think they were a little bit below consensus. And if you look to the out quarter, if you don't make that amort adjustment, I think it's the same story. Revenue beat and earnings beat, but margins are a little bit disappointing from a [indiscernible] perspective. Is there something dragging on profitability today that you could clarify for us? Heath Mitts: Yes. Will, I'm not -- we've kind of been holding this roughly 30% flow-through here for a while. And so I think when you look at our -- and there are some bridges, I think, in the back, when you look at our operational performance and you look at the fourth quarter or the full year '25, our guide for '26 year-over-year or at least our first quarter guide, I think you would come back into a number that has a 3 in front of it. So certainly, amortization change was not done for any reason other than to better represent kind of our cash profitability of the business. And so you're always going to have a little bit of noise between segments and within a segment, maybe even some mix within a segment, but that noise goes both directions. And so I don't get too hung up on that quarter-to-quarter. But no, from a fundamental perspective, there's nothing that drags on us. I would say in certain pieces of the business that are passing on a little bit more tariff pricing, that tariff pricing and the revenue that comes from that does not include any margin behind it. So when we do see a spike in some of that tariff pricing, some of those businesses struggle a little bit because you might add revenue with no margin, but that's just more of a recovery mechanism. So that can create noise. But I'd say if you look at the schedules that we provided for the quarter, for the full year and certainly for our guide, you'd see a 30% or so in there. Operator: Your next question comes from the line of Shreyas Patil with Wolfe Research. Shreyas Patil: On the AI piece, you're growing very rapidly, run rating at about $1.2 billion. You've talked in the past about this being a 3-player market. One of your competitors appears to be quite a bit ahead on revenue, maybe 3x the revenues that you're doing at the moment. So I guess, as we think ahead, how do you think about the market share dynamics in this space? Do you see an -- should we be thinking over the long run that this will eventually become a more balanced market share across the 3 big players? Or do you see TEL as sort of a firm #2 over time? Terrence Curtin: I think what you have here, and you said it well that when you look at the players, it is a concentrated player because what occurs is who can provide this technology. And when you look at how you have to co-design, ramp to the levels that you've seen us do, it doesn't mean it's going to be a concentrated market. I think we have to continue to look for technology inflections, and they are typically going to be the areas where you see opportunities to gain share. But we got to compete on technology, we got to compete on ramp with the customers and we have to compete plan on the ecosystem. And I think what's really good is that we provide the technology that shows we can provide it, and we're going to compete every day to try to increase share. Operator: Your next question comes from the line of Joseph Giordano with TD Cowen. Michael Elias: This is Michael on for Joe. So previously, you mentioned strong content in busbars and cabling and also previously other quarters, backplane content in particular. Are there any recent order wins you'd like to highlight there specifically? And then what types of customers are you seeing the most order activity with right now between GPUs, custom ASICs, hyperscaleers, stuff of that nature? Terrence Curtin: So first off being the wins that we have are across the product set. And in some cases, we're stronger with certain customers on one product set versus the other. You shouldn't assume you get one product set or all product sets with one customer. We compete individually on each one of those product sets that you sort of talked about. And that's just reality as we work the architecture real time. The bulk of our wins that when you see the revenue traction we have in the ramp are mainly with the hyperscalers. We had wins across the hyperscaler group as well as the semi players. But the element is the bigger driver of growth for us is the hyperscalers that have their custom TPUs and GPUs. Sujal Shah: Okay. Thank you, Mike. It looks like there's no further questions. So we appreciate all of you joining us this morning for the call. And if you have further questions, please contact Investor Relations at TE. Thanks, everyone, and have a nice day. Terrence Curtin: Thank you, everybody. Operator: Today's conference call will be available for replay beginning at 11:30 a.m. Eastern Time today, October 29, on the Investor Relations portion of TE Connectivity's website. That will conclude the conference for today. Thank you for participating. You may now disconnect.
Operator: Good day, and welcome to Blackbaud's Third Quarter 2025 Earnings Call. Today's conference is being recorded. I will now turn the conference over to Tom Barth, Head of Investor Relations. Please go ahead, sir. Tom Barth: Thank you for joining us on Blackbaud's Third Quarter 2025 Earnings Call. Joining me on the call today are Mike Gianoni, Blackbaud's CEO, President and Vice Chairman; and Chad Anderson, Blackbaud's Executive Vice President and CFO. Mike and Chad will make prepared remarks, and then we will open up the line for your questions. Please note that our comments today contain forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those projected. Please refer to our most recent Form 10-K and other SEC filings for more information on those risks. The discussion today will focus on non-GAAP results. Please refer to our press release and the investor materials posted to our website for the full details on our financial performance, including GAAP results as well as full year guidance. We believe that a combination of both GAAP and non-GAAP measures are more representative of how we internally measure our business. Unless otherwise specified, we will refer to only non-GAAP financial measures on this call. Please note that non-GAAP financial measures should not be considered in isolation from or as a substitute for GAAP measures. And with that, let me turn the call over to you, Mike. Michael Gianoni: Thank you, Tom. Good morning, everyone. I'm pleased to say that Q3 was another quarter of very strong results across revenue, EBITDA, EPS and cash flow. Blackbaud generated revenue of $281 million, which is 5.2% organic growth year-over-year and adjusted EBITDA margin of 35.4% up more than 200 basis points year-over-year, non-GAAP diluted earnings per share of $1.10, up 11% year-over-year and particularly strong free cash flow of $125 million. These results continue to demonstrate the power of our people, the importance of our product offerings to our customers and our widening moat as the market leader, providing the most comprehensive suite of purpose-built and mission-critical software for the social impact sector. Our solutions drive revenue and enhance employee efficiency, allowing our customers to spend more time focusing on what matters to them, making concrete improvements in the world through their vital social impact work. And our end markets continue to demonstrate the resiliency. Annual charitable giving in the United States alone is nearing $600 billion, up more than 6% year-over-year. Recent technological advancements have amplified the value we can create for our customers and are changing the way we help them fundraise. AI is quickly becoming a fundraising standard with predictive analytics and personalization now essential for donor growth. Digital-first has become the de facto method of donor engagement with hybrid events, influencers and peer-to-peer fundraising requiring online and off-line solutions. And corporate giving is at an all-time high, making it the fastest-growing nonprofit revenue source over the last 5 years. Blackbaud sits squarely at the forefront of all these market trends. We continue to focus on 3 specific areas: acquiring new logos, driving innovation and as a result, strengthening our customer relationships through selling additional solutions and renewals. On top of these, we achieved higher profitability through operational discipline and efficiencies that continue to yield positive results. In regard to signing new logos, over the past year, I've highlighted a number of significant wins across many of our verticals. Additionally, we continue to see meaningful cross-sell wins. Here are a few examples of why Blackbaud was the right choice for their organizations. St. Mary's College of California is recognized as one of the top 5 universities on the West Coast and was a major new logo win. They have been using another legacy system and after a detailed review of the power and capabilities of Raiser's Edge NXT, they signed a multiyear agreement to meet their fundraising goals. Additionally, Concordia College based in Minnesota was a large cross-sell for us. They signed a 5-year agreement to purchase Raiser's Edge NXT, along with our added analytics capabilities to produce more robust data-driven fundraising campaigns. Concordia's advancement and research team selected us because no other company can provide the depth and capabilities around data to better engage with existing and new donors. Our second primary focus is our relentless pursuit of innovation where we continue to advance the industry standard. Last quarter, I discussed how our Raiser's Edge NXT transformation was in full effect with hundreds of updates in the last quarter alone, along with other key developments and partnerships driving deeper product differentiation and abilities for our customers. This quarter, we continue to deliver even greater innovation. This was showcased in early October at bbcon 2025, our annual customer event. With over 2,000 people in attendance and many more virtually, we began the conference by outlining all of last year's 6 waves of innovation and how we've delivered on those commitments. We then unveiled what's coming next, powerful sector-specific AI capabilities fueled by our unmatched data embedded directly within Blackbaud solutions. Among the 70-plus planned or available AI enhancements are predictive AI that's helping customers identify billions of dollars in untapped giving potential, generative AI-powered acknowledgments that are speeding and enhancing communication with supporters and the ability to chat with Blackbaud AI as a coach and assistant that will unify insights across business offices. At bbcon, we also launched our new agentic AI suite, Agents for Good, to help social impact organizations expand their teams with virtual team members and achieve more at scale. This suite of agents from Blackbaud will turn agentic AI into active teammates that autonomously execute complex high-value work under the oversight of a human manager, freeing up teams across fundraising, finance, corporate impact and more. The first Agent for Good, a development agent natively embedded within the trusted Blackbaud environment will enable teams to identify and steward donors they do not have the capacity to reach today, unlocking new revenue streams at a fraction of the cost possible in the past. A number of early adopter customers highlighted their use of our new development agent to crowded rooms at bbcon. They discussed the great potential for agentic AI in the social impact sector to help customers unlock new levels of effectiveness and deeper connections across critical fundraising operations. The customer reaction to these announcements was positive and energetic. We frequently had standing room-only crowds for our demos and Q&A sessions. We know our customers prioritize value, ease of use and proven outcomes. And we know that the social impact sector as a whole requires solutions that will harness the power of these new technologies to drive their success. Our AI solutions will deliver on both of these fronts. We continue to emphasize our operational rigor to drive increased profitability and strong cash flows, and our Q3 and year-to-date results are a strong testament to that discipline. Additionally, Chad will discuss some investments we've made to support future profitable growth as well as some cash benefits related to tax changes in the One Big Beautiful Bill. Let me conclude by offering what you can expect from Blackbaud in the future. We believe Blackbaud is a sound investment choice that has the potential to create substantial shareholder value, a belief that is supported by our strong 2025 year-to-date performance. As a reminder, the framework we're targeting going forward includes mid-single-digit plus organic revenue growth, EBITDA growth in excess of revenue growth, double-digit diluted EPS growth and driving very strong free cash flow to empower a purposeful capital allocation strategy. Our near-term capital allocation priority remains stock repurchase, especially at current valuations. We expect to remain an active purchaser of Blackbaud stock in the fourth quarter and beyond. We are increasing our stock repurchase target from 5% to 5.2% to 7% for 2025. Chad will provide more of the specifics on our plans across these metrics in his guidance section. But we look forward to continuing this journey and offering our shareholders increasing value in the coming years. With that, let me turn the call over to Chad. Chad Anderson: Thank you, Mike, and good morning, everyone. Blackbaud continues to be well positioned for long-term success, delivering consistent growth and enviable profitability. As Mike outlined, Blackbaud executed well in the third quarter, a strong follow-on to our Q1 and Q2 performance. We remain committed to providing investors an attractive financial model balanced between growth in revenues, earnings and cash flows, along with a prudent and purposeful capital allocation strategy. Mike walked through the high-level Q3 results, which tell a story of consistent mid-single-digit top line growth, improved profitability and strong free cash flow. But to reiterate, Q3 organic revenues were up 5.2% to $281 million, a result of solid contractual recurring revenue growth and continued strength in our transactional recurring revenue lines. Adjusted EBITDA of $100 million was up nearly $5 million with a 220 basis point improvement to margin. Improved revenue and EBITDA margin speaks to the power of the company's 5-point operating plan, which continues to positively impact earnings per share. Non-GAAP diluted EPS increased to $1.10 compared to $0.99 last year, an 11% increase year-over-year. Adjusted free cash flow was $125 million, up from $98 million last year, representing adjusted free cash flow growth of 28% year-over-year. Our strong free cash flow generation gives us confidence to continue significant investment in a number of critical areas like product innovation, stock repurchase and debt repayment. In the third quarter, we repurchased approximately 460,000 shares, bringing our year-to-date total through the third quarter to nearly 2 million shares. Including net share settlement of employee stock compensation, this represents approximately 5.2% of the company's common stock outstanding as of December 31, 2024. This buyback activity continues to demonstrate our strong belief in the value of Blackbaud and as Mike mentioned, we expect to be an active purchaser of Blackbaud stock in the fourth quarter and into 2026. Additionally, leverage decreased to 2.4x in the third quarter compared to 2.7x last quarter and 2.9x in Q1. Before I move to guidance for the remainder of 2025, there are several housekeeping items that I wanted to highlight that may influence our numbers and help you set your models for both the year and upcoming quarters appropriately. Thinking about revenue seasonality, our transactional revenue can create fluctuations from quarter-to-quarter with Q4 typically being our highest revenue dollar quarter. Our annual merit increases for employee compensation went into effect on July 1, so Q3 and Q4 tend to have higher compensation-related costs compared to Q1 and Q2. We continue to analyze the implications of the July tax law changes and believe it will meaningfully reduce cash taxes for the company through 2027. We have updated our 2025 free cash flow guidance to include the anticipated cash tax benefit for this year, and we'll share more on the estimated benefit to 2026 free cash flow when we provide formal guidance in February. We made a number of meaningful incremental investments in the third quarter tied to product innovation and future growth drivers, including accelerated investment in the development of our agentic AI offerings. We estimate these incremental investments will total approximately $7 million between the third and fourth quarters and are contemplated in our full year 2025 guidance. Finally, the company identified a prior period noncash error related to the year-end 2024 calculation of the valuation allowance in accounting for income taxes. The correction of this, along with other immaterial prior period errors resulted in immaterial impacts to our previously filed financial statements. Further information can be found in our earnings press release and in our 10-Q once it's filed. Moving now to guidance for the remainder of 2025. Our guidance for the year assumes no material changes, positive or negative in the current macroeconomic landscape. We are reiterating our guidance across all metrics for 2025 with the exception of increased free cash flow, as I noted previously. Regarding revenue, we are projecting revenue in the range of $1.120 billion to $1.130 billion, representing organic growth at the midpoint of approximately 5% on a constant currency basis. Shifting to profitability. We continue to focus on margin expansion opportunities while at the same time, making investment in the business in key areas like innovation, artificial intelligence and cybersecurity. Therefore, we anticipate EBITDA margins of approximately 35.4% to 36.2%. As a reminder, EVERFI's contribution to our 2024 EBITDA was approximately $10 million to $15 million. After adjusting for the estimated impact of the EVERFI divestiture, the midpoint of our EBITDA margin range implies approximately 7% growth in adjusted EBITDA dollars year-over-year. With the overall revenue and spend configuration I just outlined, we expect 2025 non-GAAP diluted EPS in the range of $4.30 to $4.50. After adjusting for the estimated impact of EVERFI divestiture, the midpoint of our 2025 non-GAAP diluted EPS range implies an approximately 11% growth rate year-over-year. The combination of higher growth and better margin is expected to result in a Rule of 40 at constant currency of 40.5% at the midpoint of guidance for the full year. We continue to focus sharply on driving adjusted free cash flow and returning capital to our shareholders. For the year, we're increasing our adjusted free cash flow guidance to $195 million to $205 million. This increase is directly tied to the anticipated 2025 cash tax savings related to the One Big Beautiful Bill Act and net of the incremental innovation investments mentioned earlier. And as we discussed earlier this year, there are approximately $60 million of onetime items in working capital fluctuations negatively impacting our 2025 free cash flow outlook that we do not expect to repeat in 2026. You can find more details on Slide 24 of our investor deck. Moving to our capital allocation strategy. We continue to prioritize stock repurchase. In fact, since the fourth quarter of 2023, we have reduced our common stock outstanding by 10%. We estimate that we will end 2025 with a weighted average diluted share count between 48.5 million and 49.5 million shares. And to help you with your modeling, when you combine the nearly 2 million shares repurchased year-to-date with the planned future repurchases for Q4 2025 and 2026, we anticipate a preliminary range of 46.5 million to 47.5 million weighted average diluted shares for next year. Regarding longer-term plans, we expect to continue to repurchase shares annually beyond 2026 as well as evaluate debt repayment and tuck-in M&A. We have a lot to be proud of and a lot more to look forward to in Q4 2025 and beyond. As such, we remain focused on providing enhanced value to our customers and shareholders. At this time, I'll ask the operator let's open up the line for questions. Operator? Operator: [Operator Instructions] Our first question is from Brian Peterson with Raymond James. Brian Peterson: Congrats on the quarter. So Mike, I just wanted to follow up on some of the customer feedback post bbcon. I know there's a lot of buzz on AI and agenetic functionality. How do you think about the adoption of agentic AI in the nonprofit space? And as we're thinking about your monetization potential over the next few years, what do we think that could mean to revenue growth? Michael Gianoni: Yes. Sure, Brian, thanks. A lot of our bbcon main stage and breakouts was all about AI. We talked about 70 or so capabilities and products that we've announced, and they're going across the whole product portfolio. So there's a lot of excitement there. We've already released several in our solutions. We have not yet monetize those. Some that we announced, we are going to be cross-selling those in this quarter. So brand-new products like the Development Agent. For example, we have a solution called Prospect Insights and from an adoption standpoint, to your question, about 40% of our customers on that platform adopted it pretty quickly. So there's adoption happening with these capabilities. We're also building the appropriate infrastructure for -- and multi-agent environment. We announced a catalog that we called Agents for Good and the first product is the Development Agent. So there will be multiple new agentic AI solutions that will all be monetized and upsold to the existing customer base and prospective new customers. Operator: Our next question is from Rob Oliver with Baird. Robert Oliver: A question, Mike, it's for you. You called out some of the new logo wins and cross-sells. I wanted to focus on the new logo wins since that's been one of key tenets for you guys for growth over the next couple of years. Some nice logos. So I was wondering if you could provide any color for us on those, particularly around contract size, anything you're seeing on that ACV size? And then you said multiyear engagements, are these coming in at kind of the standard 3 years as well? And then when we might -- and recognizing you guys have a lot of customers at 40,000, but that number really hasn't moved in a few years. So when would we expect to see that these new logo -- this new logo push start to kind of move up that customer count? And then I had a quick follow-up for Chad. Michael Gianoni: Yes. Sure, Rob. Yes, we've got a big focus on new logos. I tend to talk about them on these calls every quarter and name a few. We're doing quite well with larger ARR deals actually. We're seeing the average ARR go up in the last couple of years. We're positioned really well for the mid-tier and enterprise-size customers. Given all the focus on innovation, we're actually adding more capabilities, which gives us an opportunity to drive more ARR with customers, especially when we combine multiple solutions in a single cell, if you will, the minimum is 3 years. We don't do contracts less than 3 years anymore. We started that a couple of years ago with the renewal program, which is also going really well. By the way, we'll be through 90% of that by the end of this year. That's just a normal course of business for us now, and we're still getting our price increases with those renewals that we talked about before. So doing really well, mid-tier and up. ARR is going up. We're doing more deals with multiple modules, if you will. One of the customers I mentioned, I think it was Concordia, signed a 4-year deal on that cross-sell. So we have, I think, about 20% or more of our customers that are 4 years and longer on their contract length now, Rob, as well. So the customer base is accepted quite well, multiyear contracts and we started it several years ago. So we're really pleased with that. Robert Oliver: Okay. Great. Appreciate that color. And then, Chad, you mentioned the tax restatement, we'll run through that. I appreciate you calling that out. There was also some revenue reclassification. So I just wanted to have you walk through what that was? I saw the note in the release, but also kind of the rationale for why to reclass revenue now historically, it would be helpful. Chad Anderson: Great. Thanks, Rob. So just to reiterate, the revision was related to an immaterial noncash error related to the year-end 2024, and that was related to the calculation of the valuation allowance accounting for income taxes. And it's a technical matter related to a limitation on net operating losses associated with deferred tax liabilities than associated with goodwill. So rather complex. The correction of the error increased our income tax provision by the amount that we talked about. The corresponding decrease in '24 was in net income. So the correction of the error along with the other immaterial prior period errors was corrected. The decision to adjust the other immaterial errors kind of best practice, if you will. So whenever you're going through a revision, again, kind of best practice to address those that are considered to be an error. So we adjusted those. For reference, the adjusting amounts related to revenue is somewhere south of $100,000. So immaterial. At the same time, we do take it very seriously and it has been contemplated in all of our guidance as well. Operator: Our next question is from Kirk Materne with Evercore ISI. S. Kirk Materne: Mike, maybe just going back to the first question a little bit on the agents. When do you think monetization of those could start for you? I assume it's sometime in '26. But relatedly, if someone is on Raiser's Edge already and their data is in Raiser's Edge, will their ability to get ROI from those agents be pretty quick, meaning if you -- once you're up and running with it, can you get value out of that pretty much immediately? Or is there data remediation work necessary on the back end? Michael Gianoni: Yes. So we are starting to sell those this quarter. So we'll get some modest revenue. We'll get some bookings and modest revenue next year, but it will ramp up. And again, that's the first agent. We have plans for many agents. That Development Agent, the ROI is pretty clear. It's a fundraising agent. So it's pretty easy to take a look at the subscription cost to that related to revenue or donations raised. So yes, we anticipate that to be a pretty quick ROI for our customers, and we already have early adopter customers using the solution and some of those folks were nice enough to get on stage and speak at bbcon a couple of weeks ago. So we expect to have a catalog of these agents across our different platforms. That's the first one out on Raiser Edge NXT that will be coming out on our enterprise CRM platform as well. We're very excited about it, and so are our customers. And it's a great opportunity for customers to be able to reach donors and drive new revenue for themselves where they don't have the capacity today to do that. I'll give you a quick example. Think of a university that might have 200,000 alumni and a handful of fundraisers that maybe can go after several thousand alumni. So there might be 180,000 untouched alumni. This is an opportunity to drive revenue from sources that are sitting there, but they just don't have the scale and capacity to go after that revenue. This will augment their staff and be able to do that and get new revenue lines for them. So the ROI will be quite clear. And this first agent, the pricing model is a typical multiyear SaaS subscription model. S. Kirk Materne: Okay. And then, Chad, maybe somewhat just relatedly, just gross margins as you sell more agents, is there anything to consider on that front? I realize it's really, really small right now from a revenue perspective, so the mix won't really move. But just how should we think about that conceptually? Chad Anderson: Yes. So I would say that you would have noted within our free cash flow raise for the quarter. So we raised the cash flow guidance by $5 million across the range. That was contributed to the tax legislation, net of incremental investment in innovation and AI. So we're being calculated in regards to the investments. It's still early days relative to what the gross margins will be, but we expect that the gross margin impacts will be favorable. And it's also important to say the opportunity relative to company EBITDA margins will also likely be positively influenced by AI-related investments as well, Kirk. So feeling good on that front. Michael Gianoni: Yes, Kurt, I'll just add since it's a gross margin question. I think we have a long runway to improve gross margins. Not just tied to new products, but just tied to some of our internal initiatives to remove some legacy software that we run the company on in our data centers. We've got a couple of small data centers yet to be closed, which we're working on. We've got -- our build-out of our India office is helpful in that regard. And we have many, many initiatives across the company using AI to run the company. So as a software company, we're both a consumer and a creator of AI. So as a consumer, we have a lot of solutions across pretty much every department that we're using, and we've yet to realize measurable productivity improvements from the use of those AI solutions, but we will. And I think there's great productivity and scale opportunity with those going forward. Operator: [Operator Instructions] Our next question is from Parker Lane with Stifel. Matthew Kikkert: This is Matthew Kikkert on for Parker. To start, I'm curious, after transactional revenue outperformance now continued, what structural drivers are giving you confidence in a higher growth rate for this revenue stream going forward? And to that point, were there any viral giving events in 3Q or that are expected in 4Q? Michael Gianoni: Yes. Matthew, thanks. This is Mike. So we're doing really well across all 3 of our transaction platforms. We're winning new business, we're adding volume. There were no viral events in the quarter. So we had a really good quarter on the transaction platforms, and it's all 3 of them, and they're a little bit different. Two are in Fundraising, one is kind of consumer, JustGiving; the other is donation processing embedded in our Fundraising solutions. And the last one is Tuition Management in our K-12 space. All 3 of them are doing well. We're expanding the footprint of those. We're cross-selling those. And just the fundamentals are doing really well there without having viral events. So we feel pretty good about the performance of those in the quarter and year-to-date and the trajectory of those going forward. Matthew Kikkert: Okay. Great. And then secondly, as you continue to move towards Rule of 45, what are the primary margin expansion levers from here? And how much and when would you expect the Indian office investment to show ROI? Michael Gianoni: Yes. So I think you're going to -- what you can expect from us is sort of our year-to-date results going forward. We're going to keep driving the business to be mid-single-digit plus, higher EBITDA, double-digit EPS. I mentioned earlier, we've got some cost takeout opportunities in infrastructure that we're working on. We've done a good job with that in the last several years. There's more to go there. We're going to have an impact on productivity using AI in the company to run the business. We're coming out with new solutions. This agentic AI development agent I just talked about will be a great add to revenue and bookings in the future. We're doubling down on share repurchase. If you go back 2 years, we repurchased 16% of our outstanding shares. That nets out at about 10% after stock-based comp. That's a big priority for us as well. So I think all those things together make up the profile of the business that also includes a march toward a Rule of 45. Tom Barth: Okay. I think that's it for our questions today. Thank you, everyone, for joining us. We will be attending a number of investor events in November and December around the globe, actually, to include several investor conferences, which are listed on our Events page on our Investor Relations site. We hope to see you and/or speaking with you soon. From all of us here at Blackbaud, we wish you good health and a great day. Thank you. Operator: Thank you. This will conclude our conference. You may disconnect your lines at this time, and thank you for your participation.
Operator: Good morning, and welcome to the Blue Foundry Bancorp's Third Quarter 2025 Earnings Call. Comments made during today's call may include forward-looking statements, which are based on management's current expectations and are subject to uncertainty and changes in circumstances. Blue Foundry encourages all participants to refer to the full disclaimer contained in this morning's earnings release, which has been posted to the Investor Relations page on bluefoundrybank.com. During the call, management will refer to non-GAAP measures which exclude certain items from reported results. Please refer to today's earnings release for reconciliations of these non-GAAP measures. As a reminder, this event is being recorded. [Operator Instructions] After the speaker's remarks, there will be a question-and-answer session. I will now hand over to President and CEO, Jim Nesci to begin. James Nesci: Thank you, operator. Good morning, and welcome to our third quarter earnings call. I'm joined today by our Chief Financial Officer, Kelly Pecoraro. She will provide a detailed financial review after I share updates on our strategy and recent progress. Earlier this morning, we reported a quarterly net loss of $1.9 million and a quarterly pre-provision net loss of $1.3 million. Both metrics have improved compared to the prior quarter. During the third quarter, we advanced our core objectives of growing core deposits, diversifying our loan portfolio to enhance risk-adjusted returns, and expanding our net interest margin. The progress against these strategic initiatives better positions us for continued growth and long-term value creation. Deposits increased by $77.1 million. Loans grew by $41.9 million and net interest margin expanded by 6 basis points. Capital remains strong, and we were able to increase tangible book value per share. Our loan growth was driven by continued expansion in our commercial real estate and consumer loan portfolios. Our commercial portfolio grew by $7.2 million, reflecting strong origination activity of $81.3 million, including approximately $40 million in owner-occupied CRE and C&I offset by $66.8 million in payoffs. Our consumer loan portfolio increased by $38 million in the third quarter, supported by purchases of unsecured consumer loans with credit reserves. This growth allows us to improve yields while maintaining prudent credit risk. Our loan pipeline remains healthy with over $41 million in executed letters of intent, primarily in commercial lending, with anticipated weighted average rates about 7%. Year-to-date, our relationship-driven approach has enabled us to grow core deposits by over 10% and commercial deposits by over 17%. Our net interest margin expanded by 6 basis points to 2.34%, supported by a 9 basis point increase in asset yields and a 4 basis point reduction in the cost of liability. Net interest income was $12.2 million, up $551,000 from the prior quarter. We remain focused on disciplined capital management and enhancing shareholder value. Tangible book value per share increased to $15.14 per share. During the quarter, we repurchased over 837,000 shares at a weighted average price of $9.09 per share, well below our tangible book value. Since instituting share repurchases, we have repurchased 8.65 million shares. Liquidity and capital remained strong. At the end of the third quarter, we had $423 million in borrowing capacity and an additional $178 million in unencumbered securities. Tangible equity to tangible assets stood at 14.58%, and we remain well capitalized with capital ratios among the highest in the industry. With robust capital, ample liquidity and a focus on deepening commercial relationships, we believe Blue Foundry is positioned for continued growth. We expect downward rate movements, which will benefit our funding costs and anticipated repricing in our loan portfolio to have a favorable impact on our net interest margin over time. With that, I'll turn the call over to Kelly for a deeper look at our financials. Kelly? Kelly Pecoraro: Thank you, Jim, and good morning, everyone. As Jim mentioned, we reported a net loss of $1.9 million for the third quarter or $0.10 per diluted share. This compares favorably to the $2 million loss in the prior quarter. This improvement was driven by an increase in net interest income partially offset by an increase in provision for credit losses and an increase in operating expenses. Net interest income increased by $551,000 versus prior quarter to $12.2 million, driven by $693,000 of additional interest income representing an 11.8% annualized increase. The yield on average interest earning assets grew to 4.67%, while the cost of average interest-bearing liabilities declined to 2.72%. These improvements contributed to a 6 basis point expansion in our net interest margin. Non-interest expense increased by $347,000 primarily due to higher compensation and benefit expense and higher professional services expenses. The increase in compensation and benefits is due to day count and the prior quarter having higher forfeitures of equity grants. We recorded a provision for credit loss of $589,000 primarily driven by deterioration in economic forecasts. Our allowance methodology continues to place greater weight on baseline and adverse economic scenarios. The allowance for credit loss was 0.81% of gross loans, up 1 basis point from the prior quarter, primarily reflecting changes in economic forecast. While charge-offs remain minimal at $25,000. Credit quality remained sound overall, and we continue to manage risk with discipline. During the quarter, a $5.3 million multifamily loan was added to nonperforming loans. Currently, we do not believe that there is a risk of loss of principles associated with this credit. Total nonperforming loans was $11.4 million or 66 basis points of total loans on September 30, up from $6.3 million or 38 basis points at the prior quarter end, reflecting the increase in nonperforming loans. Moving on to the balance sheet. We saw total loan growth of $41.9 million for the quarter. We continue to focus on optimizing our portfolio composition and we are encouraged by the growth in owner-occupied commercial real estate and commercial and industrial loans this quarter. Our available for sale securities portfolio with a modified duration of approximately 3.9 years decreased by $10.3 million, primarily due to calls and maturities, partially offset by an improvement in the unrealized loss position. Deposits grew by $77.1 million with core deposits increasing by $18.6 million. Broker deposits increased $50 million, helping us manage funding costs and support loan growth. Borrowings decreased by $42 million as we allow them to roll off and replace them with broker deposits. With that, Jim and I, are happy to take your questions. Operator: [Operator Instructions] Our first question comes from Justin Crowley from Piper Sandler. Justin Crowley: I wanted to start off on the margin here. I saw continued progress with the lag from cuts we got last year. With the cuts that we got late this quarter, very likely another one today and more to follow. Can you talk a little bit about how you've already maybe responded on the deposit side? And just what your expectations are for matching the Fed as rates continue to come down? Kelly Pecoraro: Yes, Justin. So as we look at where the market has been and the rate cuts, we did take advantage during the quarter of putting on another broker deposit. And while we're trying to manage funding costs with that, we were able to swap that and get that into at a lower rate. As we look at customer deposits, as we move forward, a lot in our market is dependent upon competition. We've actively worked with our customers on core deposit growth, deemphasizing CDs from a customer perspective. And we continue to look at lowering those costs that we are paying on deposits, but again, being responsive to market and looking to see where our customers are and what's going on. James Nesci: And to reinforce it a little -- you'll see more shift from the CD to the money market product at Blue Foundry. Justin Crowley: Okay. Got it. And so I guess with the deemphasis of new CDs in terms of the back book and what kind of benefit you could get as stuff comes up for repricing. And I'm sure the book is relatively short. Can you quantify what that might look like over the coming quarters in terms of magnitude and yield pickup? Kelly Pecoraro: As we're looking from a perspective of the customer deposits for the CDs, we do have durations out there of 5 months, some of our specials has been 5-month CD to shorten that life of the CD. So we don't necessarily anticipate a tremendous pickup in Q4 with any rate movement as those will be rolling off a little bit later, probably in January, February, we see more of the roll-off of those. So we see benefit in 2026 from that. Again, we'll be booking from managing the core deposit component of that and lowering those rates as we move forward through the quarter. James Nesci: Justin part of the cycle we've seen is as you get to year-end, the cost of deposit seems to tick up. So we try to position ourselves not to end at 12/31. Obviously, we prefer to have some of that duration go out to January, February to reposition as opposed to just kind of stop at year-end. Justin Crowley: Okay. And then so what would sort of be your near or medium-term expectations just for the margin? I think you've talked before about how multifamily repricing, how that really starts to become more of a tailwind next year. Can you remind us what that looks like in terms of magnitude, yield pickup? And then just anything else on the asset side, and how that could inform benefiting the margin in lieu of maybe deposit costs not coming down as quickly? Kelly Pecoraro: Yes. I think as we look forward from a forecast perspective, we anticipate fourth quarter to be relatively flat given where we are and that we do see that repricing activity pick up, specifically first half of '26. We have probably around $45 million coming in, that's sub-4% from a repricing perspective, maturity and repricing. And then in the latter half, we have about another $35 million, $40 million. That's really [sub-3.75]. That will be repricing. So we really are looking for the 2026 pickup in net interest margin. Justin Crowley: I know it's hard to say, but could that pick up in net interest margin next year, could it look like on a quarterly basis, what you got this quarter? Would your bias be towards greater expansion? How do you see that? Kelly Pecoraro: Yes. I think it's going to be a combination, Justin right? So while we have repricing, we also have new products or new production that we're looking to put on. So depending upon what the market does and how we're able to execute will really drive that. So it's hard to say exactly where as we're going through our strategic planning now and looking at our initiatives. Justin Crowley: Okay. And then on the commercial loan growth, I know it's just 1 quarter, but saw a net growth in multifamily for the first time in a little while and then some solid growth in CRE, including the owner occupied, you mentioned, Jim. Can you talk a little on opportunities you're seeing there, how the pipeline looks, which I might have missed that. And just how you expect that could trend as rates continue to come down? James Nesci: Yes. So obviously, we've tried to deemphasize the multifamily. When we do multifamily, while we're adding multifamily assets, they're usually pretty strategic working with borrowers that we've worked with before. Coupons are attractive to us. So again, I think you'll see us back off of the multifamily a little bit unless there's a strategic reason. The C&I is where we try to focus pulling in the full relationship. So we get the deposit along with the asset. But that's where the team is focused right now. It's really on that business banking side or commercial assets that are really driving that business loan to go through. Kelly Pecoraro: And just to reemphasize... Justin Crowley: Okay... Kelly Pecoraro: Sorry, Justin, just to reemphasize, the pipeline, as we discussed, we have over 41 million letters of intent out there with rates above 7%. In that bucket, there is less than $6 million of multifamily. So really deemphasizing that asset class. And as Jim said, it's really got to be relationship driven for us to be engaged in asset class. Justin Crowley: Okay. And then just one last one quickly for me. On expenses, I'm not sure if I missed it. I'm not sure if you gave a guide for the fourth quarter or not. But between that and just as we look out to next year, and I guess, you'll see the normal merit increases, et cetera, again, between the fourth quarter, but '26 as well. What do you think is a reasonable level of expense growth to expect for the company? Kelly Pecoraro: So I think at this point for fourth quarter, as we look, we're going to be in that high 13% low 14% range. Again, as you noted, expenses were a little bit elevated some on the compensation front. And then also as we look at the professional services, there's all these initiatives that we're doing here. So those don't come in smooth over a time period. It all depends on what we're doing at the institution. And we are not really prepared at this time to give guidance on '26 as we're working through our initiatives and our strategic planning process. Operator: Our next question comes from David Konrad from KBW. David Konrad: Just a couple of quick questions. One on the follow-up, just on the loan growth outlook. You did have some really good loan growth in the kind of the structured consumer loan book. I think you're around 7% of loans. Is 7% to 8% kind of the -- still the range that you're thinking about for that portfolio? Kelly Pecoraro: Yes, David. David Konrad: Okay. And then capital remains really strong. You're trading below tangible book. So real good buyback activity. Is this a pretty good run rate for us to think of going forward? Or how do you think about the buyback now? James Nesci: We had a transaction that we called out in the quarter. So I don't think that's a usable run rate. I don't think you're going to see us put up another number at that level. But, Kelly... Kelly Pecoraro: Yes. And I think as you look at we definitely believe the buybacks have been a very good use of capital as we're looking at our structure here. We did, at the end of the quarter, still have another 730,000 shares under our current plan to repurchase. Operator: We currently have no further questions. So I'd like to hand back to Jim for some closing remarks. James Nesci: Thank you. And thank you for the question, David. Appreciate it. I want to thank all of our shareholders, our employees for dialing in today and all of the communities that listen into our call. We appreciate it, and we look forward to speaking to you again soon in the next quarter. Thank you. Operator: This concludes today's call. We thank everyone for joining. You may now disconnect your lines.
Operator: Thank you for standing by. My name is Danielle, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Commonwealth Financial Corporation Conference Call. [Operator Instructions] I would now like to turn the call over to Ryan Thomas. Please go ahead. Ryan Thomas: Thank you, Danielle, and good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation's Third Quarter Financial Results. Participating on today's call will be Mike Price, President and CEO; Jim Reske, Chief Financial Officer; Jane Grebenc, Bank President and Chief Revenue Officer; Brian Sohocki, Chief Credit Officer; and Mike McCuen, Chief Lending Officer. As a reminder, a copy of yesterday's earnings release can be accessed by logging on to fcbanking.com and selecting the Investor Relations link at the top of the page. We have also included a slide presentation on our Investor Relations website with supplemental information that will be referenced during today's call. Before we begin, I need to caution listeners that this call will contain forward-looking statements. Please refer to our forward-looking statements disclaimer on Page 3 of the slide presentation. For a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Today's call will also include non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our reported results prepared in accordance with GAAP. A reconciliation of these measures can be found in the appendix of today's slide presentation. With that, I will turn the call over to Mike. Thomas Michael Price: Thank you, Ryan. Our performance in the third quarter reflects broad-based momentum across our regions and lines of business. Key highlights include our return on assets improved to 1.34% and our core pretax, pre-provision ROA grew 10 basis points to 2.05%. Net interest margin expanded 9 basis points to 3.92% marking another quarter of improvement. Average deposits increased 4%, reflecting balanced growth across all of our geographies. The cost of deposits declined 7 basis points to 1.84% underscoring effective pricing discipline, balanced with growth. Loans were up $137 million or 5.7% despite some payoff headwinds in commercial real estate. Loan growth saw meaningful contributions from equipment finance, commercial banking, indirect and home equity lending. Mortgage lending provided a headwind to balance sheet growth, although some of that runoff was by design, and the outlook for the business is improving. Geographically, we had strong loan contributions from all markets in Ohio and Pennsylvania. Fee income remained resilient post Durbin, representing 18% of total revenue, a healthy quarter-over-quarter improvement in our wealth business was offset by slower gain on sale income. The third quarter efficiency ratio improved to 52.3% from 54.1% in the second quarter, reflecting good expense control. Tangible book value grew 11.6% annualized on a linked-quarter basis and 9.1% year-over-year. On the credit side, core provision expense increased by $2.4 million quarter-over-quarter, reaching $11.3 million. As disclosed last quarter, we had a $31.9 million dealer floor plan customer who was out of trust. In the second quarter, we set aside $4.2 million in reserves for this relationship. In the third quarter, a receiver was appointed to liquidate the collateral. The out of trust amount and related liquidation costs rose as the process evolved. During the third quarter, $5.5 million was charged off, an additional $3.1 million was added to reserves, resulting in a net provision impact for this relationship of $4.4 million in the third quarter. This recent dealer floor plan fraud is isolated, and we expect it to be largely resolved by year-end. As of September 30, our floor plan exposures totaled $122 million across 21 traditional auto, and RV relationships with individual exposures ranging from $2 million to $18 million. Net charge-offs for the quarter were $12.2 million, primarily driven by the aforementioned $5.5 million dealer floor plan charge-off, and $2.8 million associated with the sale of 5 recently acquired Center Bank loans. This was an opportunistic sale utilizing the allocated loan mark from the acquisition with only $100,000 in provision expense. These 2 items accounted for 34 basis points of the quarter's 51 basis points of net charge-offs. With the dealer floor plan relationship now at $16 million, nonperforming loans declined to 0.91% compared to 1.04% in the prior quarter. Our loan portfolio maintains negligible exposure to private credit funds, equipment finance firms, NDFIs or subprime lenders. Our recent Center Bank acquisition in Cincinnati is exceeding our customer retention expectations. We're grateful for the opportunity that acquisition has given us to accelerate the build out of that region. On the digital front, we see good growth in services and high digital satisfaction and survey results. We continue to add customer-facing features to our platform and to improve productivity through the use of RPA and AI. We are excited about the outlook for First Commonwealth and the confluence of profitable growth, a regional focus leading to better low-cost deposit gathering and higher fee income, coupled with lower credit costs in the future. With that, I'll turn it over to Jim Reske, our CFO. James Reske: Thanks, Mike. This quarter's core results show you what a little bit of NIM expansion and loan growth can do. Pretax pre-provision net revenue or PPNR, was up by $4.3 million over last quarter and nearly every financial metric improved. An increase in spread income overcame a modest decline in fee income, and a negligible increase in expenses, leading to improvements in core EPS, NIM, core ROA, core ROTCE and efficiency. And even though provision and charge-offs were up, as Mike mentioned earlier, the key asset quality measures of nonperforming loans and classified loans improved from last quarter as well. So let's look at the details. Spread income improved by $4.9 million over the last quarter on balanced loan and deposit growth. The net interest margin, or NIM, expanded by 9 basis points from 3.83% last quarter to 3.92% this quarter. The expansion was primarily driven by a 7 basis point decrease in the cost of deposits to 1.84%. Loan yields were largely flat this quarter as a 3 basis point decrease in purchase accounting marks was mostly made up for by a $25 million macro swap that matured on August 25 as well as the continued upward repricing of fixed rate loans. Fourth quarter NIM will feel the full effect of the Fed September cut and potentially today as well as any further cuts during the quarter, offset by the continued upward repricing of fixed rate loans as well as the expiration of $75 million of macro swaps in the fourth quarter. Plus, there's usually a seasonal decline in deposits this time of the year, which we would need to replace with more expensive borrowings if the past predicts the future. These factors could put some short-term downward pressure on the NIM in the fourth quarter. But we expect the NIM to recover in 2026, to roughly the level of the quarter just ended or about 3.9%, give or take 5 basis points as usual. In 2026, the expiration of $175 million in macro swaps and the expected continued upward -- the continuation of upward fixed rate loan repricing helps to blunt the effect of falling short-term rates on loan yields. That projection assumes that we'll have two more rate cuts this quarter and 4 next year, resulting in a steepening yield curve. It also assumes that we continue our mid-single-digit loan and deposit growth, along with projected improvements in the deposit mix that we expect to bring the cost of deposits down in keeping with the projected decline in loan yields. Core fee income, excluding securities gains, declined slightly from last quarter by $261,000. As Mike mentioned, we had lower gain on sale income, which was due to some REO gains in the second quarter and a $400,000 decrease in SBA gain on sale income. These decreases were somewhat offset by improved performance in our wealth division with trust up $0.5 million, and brokerage up $0.4 million from last quarter. We expect fee income to gradually increase in 2026. Core noninterest expense, or NIE, excluding merger expense, was up slightly from last quarter by $350,000, largely due to salary expense, driven by increased incentive accruals based on recent performance and loan growth. Looking forward, we currently expect that expenses will grow by approximately 3% next year. We repurchased approximately 625,000 shares in the third quarter at an average price of $16.81. We had $20.7 million of share repurchase authorization remaining at quarter end, most of which we intend to execute on in the remainder of '25, assuming our share price remains close to current levels. And with that, we'll take any questions you may have. Operator: [Operator Instructions] Our first question is from Daniel Tamayo of Raymond James. Daniel Tamayo: Maybe we just start on the credit side. It seems like the -- everything was kind of ring-fenced for the most part around the credits you referenced, the floor plan and the credits from center. Let me just make sure I have this right. So the floor plan relationship at quarter end is $16 million. You gave some info on the floor plan in total, $122 million, I think, Mike, but the floor plan relationship with the fraud is $16 million now. And then do you have the -- that's right, sorry. Thomas Michael Price: That's correct. It went from $31.9 million to $16 million this past quarter. And $122 million overall floor plan exposure. Daniel Tamayo: Okay. And the, I guess, remaining stress in that particular relationship you expect to be resolved in the fourth quarter? Or did I not hear that? Thomas Michael Price: Yes, largely, we're just unwinding it. Daniel Tamayo: Okay, okay. And what are reserves on that loan now, did you say? Thomas Michael Price: 4.4. Daniel Tamayo: 4.4, okay. And then the relationship from the Center acquisition that is driving these, what are the numbers on that? I don't know if I have those. Thomas Michael Price: Yes, there were 5 recently acquired Center Bank loans, and we had an opportunity to sell those loans with a minimal hit. So I don't know if you want to expand upon that. Brian Sohocki: Yes, sure, Mike. This is Brian. There was 5 loans. They were all marked at our original time of acquisition. And as Mike mentioned, the charge-off of $2.8 million resulted in only provision of just over $100,000 for the quarter. They were PCD loans and the mark did not reduce the carrying value. So you see the charge-off, but you don't see the impact on provision. Daniel Tamayo: Okay. And so those have been sold now and they're gone. Okay. All right. Great. And as it relates to the rest of the portfolio then, back in the kind of historical range for charge-offs? Or do you have any thoughts on where net charge-offs kind of or provision, whatever is easier discussed moves here? Thomas Michael Price: Yes. No change from prior comments from a charge-off perspective, expectation is to operate in the mid- to high 20 basis point range. Last quarter, we said 25 to 30 basis points. And similarly, from a provision basis, that will grow with our loan growth, respectively. Daniel Tamayo: Okay. All right. Terrific. And then I guess just finally on the credit side, and I'll step back here. The NPL is down at 92 basis points of loans. Does that feel like a really relatively comfortable level for you guys? Maybe that's the wrong way to phrase it. Is it -- do you expect kind of stability from there? Do you expect that number continues to come down? Thomas Michael Price: We expect it to come down. And we have a nice slide in our deck, our supplementary deck that really shows historically where credit quality has been. And we really -- if you look on Page 10, bottom left quadrant there, we've just been really quite elevated from third quarter of last year, fourth quarter and first quarter of 2025, where we were between $61 million and $76 million of nonperforming assets. Brian Sohocki: I'll just add to Mike's comment that we'll have the tailwind of the majority of the dealer floor plan wind down in the fourth quarter and then kind of normalization of cleanup of the portfolio from there. Operator: Our next question comes from Karl Shepard from RBC Capital Markets. Karl Shepard: Just a quick one on the floor plan credit. I think you implied this, but as you see it today, no incremental provision from this in 4Q? Thomas Michael Price: That's correct. Karl Shepard: Okay. And then, Jim, I guess, on the margin, I was a little surprised to not see loan yields tick up a little bit higher. So I was hoping you could help us with what the fixed asset repricing was and then kind of what the accretion headwind was? And then just kind of how you see loan yields trending? James Reske: Yes. The fixed asset repricing was still 87 basis points. That is in the third quarter. That was a little bit down from the second quarter, but it's partly reflective of the rate cut. So still positive. That led to a positive replacement yields for the portfolio of about 25 basis points overall. The fixed rate production right now is running about 1/3 of the total production. The 87 basis points of positive on the fixed rate means the whole portfolio is repriced up at about 25 basis points, but the fixed rate repricing -- up repricing hopefully will persist even after there's a few more rate cuts. Karl Shepard: Okay. And then since you gave it, I guess, I'll ask a little bit about the 2026 NIM expectations. In the past, we've talked about your models kind of shooting it up towards 4% or even higher for the margin. Is that still the case, and this is a reflection of maybe a little bit of conservatism or some expectation of competition, or just help us understand kind of -- you're pretty thoughtful about this stuff, but what do you see that gives you that 3.90% number? James Reske: Yes, I appreciate the question. Happy to tell you everything our thinking behind it and then you can make your own judgments as usual. I don't know if a sense of conservatism, but we do have more rate cuts in this projection that we had in the past. So there's 2 this year and then 4 by the end of next year. I would tell you that the pattern is not even in the projection we have, which we get from a third party that is probably the same third-party most banks use. If the rate cuts are quarter-by-quarter next year, 28, 18, 9 and 40. So they're kind of backloaded next quarter. But all that does in the model in that kind of rate scenario is take the yield on loans overall down by 15 basis points. And then because rates are falling, we can take the cost of deposits down by about the same amount, 15 basis points, and that ends up being a picture of NIM stability. So the numbers that we're pushing 4% probably just had a slightly higher rate forecast than we have this quarter. The other thing I just would note, it's not a parallel yield curve shift. It's a steepening curve, which is generally -- that's good for banks. So that helps a little bit. It helps us on the short end. We feel the pay in short end of our loans that are linked to the short-term rates. So we are able to bring the deposit costs down. And if in a mid- to long-end part of the curve stays up or goes up a bit, that helps with the fixed asset repricing. All that's going into the mix, and it's ended up looking pretty stable from here. Operator: Our next question comes from Charlie Driscoll from KBW. Charles Driscoll: This is Charlie on for Kelly. With a lot of the NIM expansion driven by the deposit repricing this quarter and then expecting basic cuts to increase here. Can you kind of flesh out some of the deposit repricing dynamics going forward? Maybe just dive into the drivers behind like the near-term compression and then a little bit of the neutrality from there? James Reske: Yes. I'll just give you a little color on the deposits. This is Jim. A little color on the deposits and what's happening in the quarter. We're really happy to see the deposit balances growing. That was really -- and we kept saying this using this term, that was a nice edge this year to be able to grow deposit balances and simply the cost of deposits down, but we've been able to do that. What's happened is that we have grown this time deposit portfolio and kept that deposit portfolio, the pipelines were relatively short, like most banks. So in the second quarter, for example, we had $400-and-some million of CD maturities. In the third quarter, we had over $800 million. So it's managing those maturities and managing them, being able to reprice that maturity downward while still keeping the retention rate at an acceptable level. The retention rates have been pretty good on time deposits. They always end up being around 80%, which we think is about the industry average anyway. And then if you look at other deposits like money markets, our transaction accounts, our retention rates on those are actually over 90%, which we think is better than the industry average. We kind of track that pretty closely. And then I'll give you one more fact, just if it helps you. On money market accounts, we've been able to reprice those as well. So in the second quarter, money market accounts, 83% of the money market accounts had a yield over 3%. 83% of the money market account balances had a yield over 3%, and now that has gone from 82% to 49%. So we've been able to kind of manage the pricing of that while still maintaining even growing deposit balances. I hope that extra color answers your question, is a little helpful. Charles Driscoll: Yes, that's great color. I appreciate that. Thomas Michael Price: This is Mike. I would just add that for the people in the room, Mike McCuen, Jim Reske, Jane Grebenc, and Norm Montgomery, they monitor this every other week. And they're looking at the loan and deposit volumes that come on, they're looking at the net impact on liquidity and also the impact on margin. This is something that we feel between our fingers every other week, and we make game-day decisions of where we're at and where we're going and how we're going to get there. And I just love the process, and it also just keeps us informed in what's happening in the bank. James Reske: By the way, all of us -- speaking for all of us, supported by great teams of people all read kind of give us data and help us keep our fingers on that policy. Charles Driscoll: I appreciate the insight into the woodworks there. Regarding organic growth, it's come in pretty steady. Can you just speak to the expectations moving forward if payoffs are starting to pick up, maybe sizing up that headwind? And on the talent you got from Center Bank or anything in particular you're focusing on or excited about in terms of growth? Thomas Michael Price: Yes. Some of the payoffs that we've seen are really healthy commercial real estate projects, refinancing into permanent markets, nonrecourse in the 5s. So that's not something we're going to do. And so that's some of the headwind that we see that's continued into the fourth quarter. However, we have a lot of -- we just have a lot of offense between consumer, mortgage equipment finance, indirect auto, our loan growth is going to be more constrained by liquidity versus our ability to go out and execute. So that's kind of -- that's going to be the check rein on all of this. Mike McCuen, anything you want to add? Michael McCuen: I totally agree. Yes, I agree. I think the volumes -- production volumes are good, tempered by some payoffs, but feel pretty good going into next year on production results. Thomas Michael Price: Yes. And our guidance remains mid-single digit. Just a surprising bright spot this past quarter is growing home equity loans, like $15 million or $16 million. And so we just have a lot of ways to get there. Operator: [Operator Instructions] Our next question comes from Matthew Breese from Stephens Inc. Matthew Breese: Jim, you had mentioned that with the Fed cuts, you expect a little bit of near-term NIM pressure. To what extent might we see NIM pressure in the fourth quarter? James Reske: Yes, it's always hard to guess. I mean, even the standard guidance I was giving, I always say plus or minus 5 basis points because it -- every model has been perfect. But it's probably in that range. I don't think we go as far as 5 to 10, Matt. That would be a little extreme for the 1 quarter and then bounce back. So it's probably in the 5 basis point range. Matthew Breese: Okay. Is it possible, let's just say we get a few cuts this quarter. We're down to 5 bps. Is it possible to get down another couple of basis points in the first quarter from bleed over and maybe an additional cut in the first quarter as well before we start to see some stabilization? James Reske: Yes. Absolutely possible. I mean, so much -- we're trying to do a projection based on a rate forecast, which has a ton of rates implied within it. But in our bank, and we've just seen that the reality is there's a lag. So there's -- if there's a rate cut, it hits the prime portfolio and SOFR portfolio right away. And then there's a lag in how we price the deposits. So there's always -- it's never perfect. So you get some effects right away, and then over time, the liability side catches up. And the seasonal change in deposits, I'm just throwing that out there so that people aren't surprised about that. We kind of see this every year. We saw in different categories. Some of this is consumers doing holiday spending. But -- and some of it goes from fourth quarter into the first quarter, commercial accounts as well. So that happens just like it does every year, we'll be borrowing at the marginal rate, and that's a little more expensive. So that recovers early in the year next year. Matthew Breese: And then you had also mentioned that you expect some improvement in deposit mix next year. What's behind that assumption? And maybe help us out with where you think we'll see some of the largest kind of mix shifts? James Reske: Just have a real push towards transaction accounts, and I gave some time deposit numbers a few minutes ago. We've loan time deposits because we had to do some of that just to raise the deposit balances, but we have a deep, deep push towards transaction accounts across the bank, both in consumer and commercial. Jane, I don't know if you wanted to add anything because that kind of your. Jane Grebenc: I can just reiterate it. And it's been grind -- transaction accounts are grinding, and it means we've been grinding the amount for a couple of years now. We're starting to throughput that labor and we'll just keep grinding. Matthew Breese: Got it. Okay. Maybe just a couple more. Securities were down this quarter. We're now below 13% of total assets. It feels on the low side for you. Could we see some growth there in the coming quarters? James Reske: Probably not. I think we're going to hold it about where it is. I mean, our plan right now is to replace the runoff really slow anyway, but replace it and really not grow that portfolio. Part of that thinking is that we just want to use that liquidity -- use that liquidity for loan growth and not leverage up the bank by borrowing money to buy securities. So probably where you see it now is a level we plan to hold it probably through '26. Matthew Breese: Great. And then just on equipment. Equipment finance continues to be a real driver of underlying C&I, is plus 10% a quarter sustainable? Or where do we start to see that revert to the mean? Thomas Michael Price: We're probably about a year away. This is Mike Price. And we've been really pleased. We've been pleased with the yields and also with the credit performance. And -- but we also have a team that's been doing this for about 25 years. So we feel good about that. Mike, anything you want to add? Michael McCuen: No, I think there's some incentives this year when it comes to depreciation and we expected that to impact and benefit equipment finance. At least for the next few quarters, we feel pretty good about that growth. Operator: Our next question comes from Daniel Cardenas from Janney Montgomery Scott. Daniel Cardenas: If could you provide some color on the competitive factors on the lending side right now? I've heard a lot of give on structure and pricing in various markets, wondering if you're seeing the same thing within your footprint? Thomas Michael Price: I do think it depends on the market, Dan, and I'll let Mike take this. This is his, but I think there's a big difference between Columbus, Ohio and rural Pennsylvania, but there's -- Mike, what would you add? Michael McCuen: I would say yields -- margin on the yields has probably dropped 25 basis points over the course of the year. And we really haven't changed much in our structure approach, but that's hurt the yields to your earlier question. I would say the metro markets are much more competitive than the rural markets, as Mike just said. On structure, it's gotten more aggressive. We mentioned the permanent markets, the agency lending. Those are very aggressive right now. It's not something we do, but it does impact our balance sheet. Is that helpful, Dan? Daniel Cardenas: Yes, sir. I appreciate that. And then maybe color on the M&A front. I mean, we've seen activity pick up a little bit here recently. Wondering what you're seeing come across your desk if chatter has picked up, or it's slowed down from last quarter? Thomas Michael Price: I think there's more conversations. I think, for us, we really wanted to help our depository and our liquidity. And we've had -- but a lot of conversations that we're pretty prudent, maybe too prudent at times, as I said last quarter, but we're hopeful that we can grow through acquisition. We've been stuck at about $12.5 billion, and crossing $10 billion, you normally lose a lot of your mojo as it relates to your profitability. We've been able to maintain that really with an eye to realistically get to 140, and we fell a little short this quarter because of credit on the ROA side. It was just -- it's not an excuse. We need to have a great NIM and we need to have a great ROA, irrespective of the size. But certainly, if we had a right acquisition or 2 that could get us down the road a couple of billion dollars more, that would be terrific. Our bias is generally smaller because of the risk better and make sure that it's a good depository that can help our liquidity and help fund the bank. And I don't know if that's particularly helpful, Dan. Operator: That concludes our Q&A session. I will now turn the conference back over to Mike Price for closing remarks. Thomas Michael Price: Yes. Thank you. I appreciate your interest in our company. I would just add that we've really shifted to deliver the bank regionally, and we really expect the payoff of that to be not just to better deliver the mission, the better grow households and low-cost deposits in the depository and then also better grow our fee income. We do feel like we can grow the loans, and the other thing that's kind of interesting and exciting, I think, is as we look at as an executive team, 30 operating plans for our lines of business for our business units for our geographies as part of our strategic planning process, we really feel there's probably 1, 2 or 3 ways that we can continue to get more efficient. Using technology like robotic process automation or AI or just better straight-through processes. So we just have bright people that can look at their operation and make it better. And so there's just a lot of things that we're excited about the company, to move the company forward and make it better. And we just also have a pretty talented team up and down throughout the organization. So thank you again. Look forward to being with a number of you over the course of the ensuing weeks, and just appreciate you. Operator: This concludes our conference call. You may now disconnect.
Operator: " Kyle Kelleher: " Jugal Vijayvargiya: " Shelly Chadwick: " Philip Gibbs: " KeyBanc Capital Markets Inc., Research Division Michael Harrison: " Seaport Research Partners Dan Moore: " CJS Securities, Inc. David Silver: " Freedom Capital Markets David Storms: " Stonegate Capital Partners, Inc., Research Division Operator: Greetings, and welcome to the Materion Third Quarter 2025 Earnings Conference Call. [Operator Instructions] And please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Kyle Kelleher, Director, Investor Relations and Corporate FP&A. Sir, the floor is yours. Kyle Kelleher: Good morning, and thank you for joining us on our third quarter 2025 earnings conference call. This is Kyle Kelleher, Director, Investor Relations and Corporate FP&A. Before we begin our remarks this morning, I would like to point out that we have posted materials on the company's website that we will reference as part of today's review of the quarterly results. You can also access the materials through the download feature under earnings call webcast link. With me today are Jugal Vijayvargiya, President and Chief Executive Officer, and Shelly Chadwick, Vice President and Chief Financial Officer. Our format for today's conference call is as follows: Jugal will provide opening comments on the quarter. Following Jugal, Shelly will review the detailed financial results for the quarter in addition to discussing expectations for the remainder of 2025. We will then open up the call for questions. Let me remind investors that any forward-looking statements made in the presentation, including those in the outlook section and during the question-and-answer portion, are based on current expectations. The company's actual performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of factors. Those factors are listed in the earnings press release we issued this morning. Additionally, comments regarding earnings before interest, taxes, depreciation, depletion, and amortization, net income, and earnings per share reflect the adjusted GAAP numbers shown in Attachments 4 through 8 in this morning's press release. The adjustments are made in the prior year period for comparative purposes and remove special items, noncash charges, and certain discrete income tax adjustments. And now I'll turn over the call to Jugal for his comments. Jugal Vijayvargiya: Thanks, Kyle, and good morning, everyone. I'm pleased to be with you today to discuss our third quarter results and to provide an update on what we are seeing across our businesses and end markets. We achieved a couple of very important milestones in the quarter, including all-time high EBITDA margins of 27% in Electronic Materials. This reflects the power of our improved cost structure, strong operational performance, and new business initiatives as the semiconductor market continues to recover. In addition, the transformation of Precision Optics is tracking ahead of our expectations, and we saw a return to double-digit EBITDA margins with a significantly better cost structure and a nice step-up in sales. At the company level, our sales were up roughly 1%, with a strong Electronic Materials and Precision Optics results partially muted by some equipment downtime challenges that limited shipments in Performance Materials. These challenges are being addressed, and we anticipate more normalized production levels as we finish out the year. Despite the shortfall in Performance Materials, we delivered 21% EBITDA margins for only the second time in our company's history. Our team is making great progress towards our new midterm target margins of 23%. In addition to our strong financial performance in the quarter, we are also pleased with the step-up we're seeing in incoming order rates across the company. Overall, our order rates are up more than 10% sequentially, and with the key markets of semiconductor, defense, space, and energy up 20% year-to-date. These markets are seeing strong secular demand growth, and we are developing products and partnerships to supply the materials that are critical to their performance. Semiconductor has long been a leading market for us, where we have made strategic organic and inorganic investments to develop the right footprint and material set. We are starting to see a cyclical recovery taking shape, led by the proliferation of AI. Excluding China, our semi business is up 7% year-to-date, with sales into high-performance memory applications increasing more than 30%. In our ALD portfolio, we have developed molybdenum-based products that are in high demand given their performance in smaller node chips. We are seeing significant interest in this product set and are working with new and existing customers as our production ramps. Energy demands are increasing at a rapid pace, and this trend is closely related to the proliferation of AI. The number of data centers is expected to double in the next five years, with each center's energy usage also doubling. Combined with other drivers of energy usage, it is fair to say that energy is going to continue to be a great market for Materion. We continue to have a strong position in traditional energy, and we have exciting opportunities to grow with new energy that will bring about the higher volumes of energy required to supply tomorrow's demand. In the past year, there has been a step-up in the market's interest in nuclear solutions. Small modular reactors enable regional energy independence and efficient nuclear space propulsion as well as remote battlefield autonomy for defense applications. We work with a number of customers on these types of applications and expect to see continued growth. We are also partnering with companies that are aggressively developing breakthrough technologies to expand the total energy supply. Our partnership with Kairos Power to supply materials to produce FLiBe, a molten salt coolant critical to the performance of safe vision reactors, is progressing well. Additionally, we announced an exciting new supply agreement with Commonwealth Fusion Systems, the leading and largest commercial fusion energy company, to provide beryllium fluoride for their breakthrough fusion energy technology to be used in their ARC power plants. We will begin shipping product this year. Defense is another important area for our company, and our materials play a critical role in national security for the U.S. and its allies. The current U.S. administration has put a pronounced focus on defense spending and has outlined its priorities, including the Golden Dome, space, maritime, and nuclear microreactors for portable energy use. In addition, as geopolitical tensions persist, the U.S. is looking to replenish and expand its stockpiles and as a result, has increased budgetary spending to almost $1 trillion for next year. Outside the U.S., many allied countries are also increasing their defense budgets and have committed to certain spending in the U.S. as part of trade agreements. As a result, we are seeing record defense bookings this year, up roughly 40%, and we're currently working a total of about $150 million of RFQs that should result in meaningful new orders. The commercial space sector represents exciting opportunities for Materion as this market is influenced by a number of the macro trends impacting our other markets, including AI, connectivity and defense technologies. The number of satellite launches has increased exponentially with more than 260 launches last year. We have secured meaningful wins with space proposal applications and are winning new applications as well. We have a number of products being introduced at our large space customer, and we have relationships with the smaller players looking to grow in this market. Our sales in the space market have increased fivefold in just 3 years, and we see strong opportunities as we move forward. As we look to the balance of 2025, we expect to finish the year on a positive note, driven by our strong order book and improved operational performance. I would like to thank our global team for their relentless focus on satisfying our customers' needs and driving our company forward. Now let me turn the call over to Shelly to provide more details on the financials. Shelly Chadwick: Thanks, Jugal, and good morning, everyone. During my comments, I will reference the slides posted on our website this morning, starting on Slide 10. In the third quarter, value-added sales, which exclude the impact of pass-through precious metal costs, were $263.9 million, up 1% organically from prior year. Electronic Materials experienced 7% organic growth, led by strength in semiconductor and Precision Optics was up 21% with new business wins. This growth was partially offset by lower volume in Performance Materials, where we experienced some temporary equipment downtime at our largest facility, limiting sales by roughly $10 million in the quarter. When looking at earnings per share, we delivered quarterly adjusted earnings of $1.41, flat with prior year and up 3% sequentially. Moving to Slide 11. Adjusted EBITDA was $55.5 million, down 2% year-over-year. This decrease was driven primarily by lower volume related to the equipment downtime within Performance Materials, partially offset by higher volume and favorable price/mix in Electronic Materials, along with the improved performance in Precision Optics. Despite the muted shipments in PM, we achieved 21% EBITDA margins for the second time in the company's history, demonstrating good progress towards our new midterm target of 23%. Moving to Slide 12. Let me review third quarter performance by business segment. Starting with Performance Materials, value-added sales were $157.1 million in the quarter, down 4% year-over-year. This decrease was driven primarily by equipment downtime and shipment timing in Defense and Energy, partially offset by higher hydroxide shipments and growth in space. Adjusted EBITDA was $38 million or 24.2% of value-added sales, down 18% compared to the prior year. This decrease was driven primarily by lower volume and operational performance, partially offset by cost management. Looking out to the fourth quarter, we expect to see significant top line improvement with more normalized production volumes. We also expect strong sales into Defense and Energy as a result of both market seasonality and new business initiatives. With the higher volume and improved operational performance, we expect to see significant bottom line improvement from the third quarter results. Next, turning to Electronic Materials on Slide 13. Value-added sales were $79.7 million, up 2% from the prior year and up 7% organically. This increase was driven mainly by non-China semiconductor sales as power and data storage device demand continues to improve. EBITDA, excluding special items, was $21.6 million or a record 27.1% of value-added sales in the quarter, up 38% from the prior year with 700 basis points of margin expansion. This record margin and year-over-year increase was driven by higher volume, strong price/mix, improved operational performance and some favorable onetime operating-related items. As we look out to the fourth quarter, we expect top line improvement driven by the continued upturn in the semiconductor market as this market continues to recover and benefit from favorable macro trends led by AI and global connectivity. Turning to the Precision Optics segment on Slide 14. Value-added sales were $27.1 million, up 21% compared to the prior year and up 11% sequentially. This year-over-year increase was driven largely by new business wins, primarily in aerospace and defense. EBITDA, excluding special items, was $3.2 million or 11.8% of value-added sales in the quarter with almost 1,000 basis points of year-over-year margin expansion. The increase was driven by higher volume, favorable price/mix and the impact of the structural cost changes. This quarter marks the third consecutive quarter of improved bottom line results and a return to double-digit EBITDA margins. We expect this trend will continue as new business initiatives advance, and the transformation continues to unfold. Moving now to cash debt and liquidity on Slide 15. We ended the quarter with a net debt position of approximately $441 million and approximately $214 million of available capacity on the company's existing credit facility, with leverage slightly below the midpoint of our target range at 2x. While no share buyback activity occurred during the quarter, I'm pleased to share that the Board of Directors authorized a new $50 million stock repurchase program during the quarter. While organic initiatives remain our top capital allocation priority, it is important we have this tool available to us. As we look out to the remainder of the year, we remain on track to deliver free cash flow of roughly 70% of adjusted net income with strong cash generation year-to-date and fourth quarter cash initiatives on track. Lastly, let me transition to Slide 16 and address the full year 2025. With our strong performance year-to-date, increasing order rates and new business initiatives on track, we remain confident in our ability to deliver $5.30 to $5.70 per share and are affirming our prior full year guide. This concludes our prepared remarks. We will now open the line for questions. Operator: [Operator Instructions] Our first question is coming from Phil Gibbs with KeyBanc. Philip Gibbs: So with regard to the full year outlook, you've maintained the range. But just curious in terms of now having better visibility with a couple of months left and you've got 10 months effectively behind you. Maybe give us some flavor why you didn't narrow the range? It's pretty wide for the implied fourth quarter results. So just trying to hone in on that a little bit better. Shelly Chadwick: Yes, I'll start, Phil. Thanks for the question. So we're looking forward to a strong Q4. As you know, we always have kind of a nice end to the year with the strong defense orders, and we believe we're on track for that. When we think about why we didn't narrow the range, there's still some uncertainty for us around China. Hopefully, we will see that settle down in the coming days and weeks. But right now, that's not certain. And with the government shutdown, that could impact the timing of some of the orders that we're waiting on. And so when we thought about that, we said, why don't we leave the range where it is, but we are on track for the midpoint. Philip Gibbs: And then in terms of the new arrangement with Commonwealth, any thoughts you could provide us in terms of what that could mean you all financially and when some of these shipments step up more materially? Jugal Vijayvargiya: Yes. Phil, I mean, we're very, very excited to have this agreement. As you know, a number of years ago, I think it was in 2020, we had signed an agreement with Kairos Power as they were working on new energy initiatives. Now we are excited to announce this agreement with Commonwealth Fusion. We've been working with them actually for a number of years, but we were able to get that into -- an agreement here in the last couple of months. We are going to be supplying material to them starting this quarter in Q4 and then into next year. We expect it to be a few million this year, and then I would say more of an annualized run rate next year. So this is very exciting for us because now we've got Kairos Power on the vision side, CFS on the Fusion side. So we've got sort of both sides covered. And I think they're clearly the two leading companies in the world on this new energy initiatives. Shelly Chadwick: Yes, I think you also hit on what can we expect to see from that Phil. And as Jugal mentioned, we will start shipping on that this year, expect to say maybe a few million to contribute in Q4. And then as we look to next year, you can think about that sort of annualizing. So good sized impact on the next couple of years. As you can read in their release, they're still in development phases. So that could be a very large step-up as you get into kind of 2030 time frame. But right now, it's a nice win for us, and we look forward to working with them. Philip Gibbs: And then just one more follow-up, if I could. The onetime items that helped margins in EM in the quarter in terms of the timing, maybe just highlight the size of that impact so we can have a better bridge to what maybe more normalized margins there are. Shelly Chadwick: Sure. Sure, Phil. So we were really pleased with the EM performance in the quarter, and it was a strong mix. The volume was good. The cost structure is really contributing in terms of being where we wanted it to be. But yes, we did get a little bit of a bump up from some onetime items that are all operating related. So in our precious metals process, we refined some of the leftover material. And some of that we send out, some of it we do in-house. When we got that material back, it had a higher concentration of precious metals than we were estimating. And so there was a pickup, call it, $1 million or so around that number that we got to record in Q3 that helped, but really should be in our year-to-date results anyway. Jugal Vijayvargiya: Yes. But I think, Phil, just to add, I think, to what Shelly was talking about, I mean, this business has improved significantly throughout the year with all the improvements that it's driven in the cost structure over the last 18, 24 months. As you know, then [suddenly] market was down. So now for the last 2 quarters, it's been 20-plus percent EBITDA margins, so I mean, almost 24% in Q2 and now 27% in Q3 from the historical 20% or less margins that it used to deliver. So a really, really nice step-up for this business. And clearly, we have high expectations of this business as we go forward. Operator: Our next question is coming from Mike Harrison with Seaport Research Partners. Michael Harrison: I was hoping we could address a handful of questions I had around the equipment downtime that you mentioned in the Performance Materials segment. Can you give us a little bit of additional detail on the nature of the outage or what kind of product line it was affecting? And is the outage or downtime resolved now? Or if not, when do you expect to resolve it? Jugal Vijayvargiya: Yes. Mike, we had a couple of pieces of equipment in our largest plant where we process both beryllium and non-beryllium materials. The equipment downtime issues that we had are mainly resolved. We're back up and running. And so we expect to be able to catch up a majority of the sales into Q4 and perhaps a little bit into Q1. But for the most part, we're going to be able to do that here in the Q4 time frame. As you know, we've got a fully vertically integrated value chain all the way from the mine into the finished material. So any type of a hiccup that we have on 1 or 2 pieces of equipment ends up resulting in a fairly impactful delivery issue. And it was around $10 million in Q3. I mean, at a company level, it's about 4 points of growth. I mean, you can look at it that way, that I think that impacted. We are -- to your point, we are back up and running on both as we got that addressed. And like I said, we expect to be able to make up the sales mostly in Q4 and perhaps some in Q1. But it's something that the teams have been able to resolve. Michael Harrison: All right. And just to follow up on that. It seems like maybe this disruption was not as impactful as what you guys had happened in the first quarter of 2024. But this is the second time in a couple of years that you've had a disruption or an unplanned outage in your Performance Materials segment. So I'm curious, is this just part of doing business in kind of a mining and conversion type of market that you guys serve? Or are there actions that you think you can take that might help you improve operational reliability? Jugal Vijayvargiya: Yes. So, to your point, it is a lesser of an impact than the first quarter of '24. Like I mentioned, when we're vertically integrated, smaller equipment issues that we have end up impacting kind of our overall production schedule. So it is something that, because we're fully vertically integrated, I think it tends to impact this business maybe a little bit more than some of the other businesses that we have. At the same time, I can tell you that we are very, very focused on making sure that we're making the type of improvements that we can on the equipment. Some of the equipment is legacy equipment, so that we can minimize these or even eliminate them as we go forward. So it is a focus area for us, both on finding the right type of capital improvements that we can drive into the business, along with just general maintenance and upkeep of the equipment. But it does tend to be a little bit more in this business than clearly our EM business or our optics business. Michael Harrison: All right. Very helpful. And then I was hoping to also ask kind of a broader question about 2026 outlook. I know it's a little bit early, but when you talk about the order books that you have and some of the backlog in your key growth markets, presumably, we see some improvement in semiconductor, presumably, we see some improvement from the Precision Clad strip customer. And obviously, you've taken a lot of cost actions. It seems like there is really good earnings momentum into next year. And I was hoping you could just give us maybe some initial thoughts on how we should think about the top-line and bottom-line growth in 2026. Jugal Vijayvargiya: Mike, maybe I'll start a little bit, and then Shelly can jump in and talk more as well. We are very excited about some of the key markets, the high-growth markets that we're engaged in, and the portfolio that we have. We've included a slide this time that talks about our activities in semiconductor and energy and defense, and space, and how order rates for those key growth markets are up approximately 20% on a year-to-date basis. We've got the right type of portfolio across those four areas -- of portfolio that goes across all 3 of our businesses. We talked about the Commonwealth Fusion announcement, for example, that goes across energy. We've got over $150 million of open RFQs that we're engaged in on the defense side. You'll recall in the last earnings call, we mentioned it was $100 million. So that's actually increased from $100 million. And by the way, some of that we closed, new RFQs got added in. And now on top of that, we have another $50 million of RFQs that we've added. So we have more than $150 million of open RFQs in defense and so on and so on. So we're very excited about those high-growth markets, I think, as we enter into '26 and into '27, and we look at the sort of the midterm outlook in those areas. We certainly have challenges that we need to be addressing. China, as a market for us, is a challenge. We've highlighted that, I think, in the last couple of calls that we have. Our sales into China are down on a year-over-year basis, just based on all the geopolitical issues that are going on. We expect to continue to see pressure on our China business. But what our goal is, is to offset those pressures with these high-growth markets that we're focused on in the U.S. and the rest of the world. So I think in total, our business is moving forward. We've demonstrated that, I think, throughout this year. Our expectation is to move it forward again in Q4 and then continue to do that over the next 2, 3 years with the portfolio set that we put in place. So in general, I mean, I'm not going to address '26, of course, in particular, just because there will be a time when we do address '26. But I think when we look at the overall midterm time frame, we're very excited about where the business is. You mentioned Philip Morris. We're actively engaged with them on understanding what's going to happen next year. And as we get a better understanding of that this quarter, we'll be able to model that into our '26 and go forward. We are, of course, monitoring with them what the FDA approval is. So far, they have not announced the FDA approval. So we don't know if they have received it or have not received it yet, and we'll obviously have to wait and see what they say about that. But certainly, the later that goes, of course, it would impact the sales into '26 and perhaps push those out into '27. Of course, the sooner they're able to get that, then that could have a potential sales uptick in '26. So we'll have to see kind of where that -- the Philip Morris business settles out at. But I think in total, when you put everything together, we've got a lot of upside opportunities that can help address some of the challenges that we have, whether it's China or some other areas that are going on. So, I think we've got good momentum in the business this year that we've demonstrated, and I expect that momentum to continue into '26, '27 and into our midterm outlook of 23% EBITDA margins. Operator: Our next question is coming from Daniel Moore with CJS Securities. Dan Moore: Start with similar to Phil's question, but on Precision Optics. You're back to double-digit adjusted EBITDA margins, a big jump year-on-year. Can you just give a little more granularity on cost and operating improvements that have been made? And are double-digit margins sustainable as we look to '26 and beyond? Jugal Vijayvargiya: Yes. We are very pleased, I think, with the progress that, that team has made in a very short time. I would say our results are tracking sort of ahead of the expectations and sort of the time line that we had established for ourselves. So very pleased with that. We're seeing a good uptick in a number of different markets, the more traditional markets that this business operates in, such as aerospace and defense and industrial, life sciences, et cetera. But also, we've entered and are making a bigger progress, I think, in some markets that perhaps we weren't focused on in the past, such as semiconductor. We've made inroads into that market. And so, I think from a top line standpoint, we're making good progress. We've made really good progress from the cost structure side with a number of different actions that we've taken over the last 12 months. And I would say, still are looking at actions that we can be taking here in Q4 and into next year. We've made sequential progress this year, all 3 quarters. Our goal is to continue to make sequential progress in this business. So having double-digit EBITDA margin is a good start. And I think it's tracking ahead of expectations, but that is not where we just need this business to be. We need this business to contribute to our 23% midterm EBITDA margin target. And so, we're going to continue to focus on that, Dan, and continue to push forward. Dan Moore: Very helpful. Following up on Mike's question, obviously, great detail on the areas, semi, defense, others where you're seeing nice pickup in orders, nice strength, little uncertainty in China. Are there any pockets where you could see maybe detractors in terms of year-on-year growth being negative in terms of difficult comps or pieces of the business? Just trying to kind of conceptualize a lot of the arrows pointing toward anything that could be a drag on that growth as opposed to more neutral as we think about next year? Jugal Vijayvargiya: Yes. Well, I think the auto market, we've talked about this, I think, in the last call as well, right, continues to be a very challenging market for us. In general, I think it's a challenging market. I mean the EV rollout has slowed down quite a bit. I think the growth in China OEMs has been substantial. The Western OEMs have had a very challenging environment in the last 1 or 2 years. So, we continue to look at the auto market as perhaps a bit more challenging market for us as we move forward and a bit more opportunistic, I would say, as we put a lot more focus on these key high-growth markets. So, our portfolio adjustments are real time and our customer adjustments are real time. And so, we're going to do everything we can to make sure that we're capturing these high-growth markets. And in some cases, if we have to go and be a bit more opportunistic in other markets, then we'll do that accordingly. Dan Moore: Helpful. Appreciate the color on the Commonwealth acquisition. Just going back to Konasol, just talk a little bit about what you're seeing since it's been a few months since you closed that acquisition. And just remind us kind of the timeline in terms of what the incremental contribution could like either '26 or over the next 2 to 3 years? Jugal Vijayvargiya: Yes. No, that's been a very good pickup for us. Our teams have fully gotten involved, integrated the business into our Materion family. We are working with our customers and being able to talk to them about the capability that we bring forward. We have a number of different qualifications that we are involved in with the customers. Our expectation is to go through those qualifications here the rest of this year and into '26 with the objective of being able to start to see some sales in '26 and then into '27 and beyond. So we are, I would say, on track and in some cases, perhaps even a little bit ahead of track on that acquisition. Dan Moore: And then lastly would be just in terms of capital allocation, nice to see the authorization. Just how do we think about where buybacks potentially could fall in terms of rank ordering priorities? Growth has always been a key priority. Balance sheet is down to 2x and generating strong cash. So, you've got flexibility. But just help us think about how you're kind of rank ordering that as we look out to '26 and beyond? Shelly Chadwick: Yes. Thanks. I'll take that one. So, I think our priorities remain the same. We've been very focused on growth and organic growth. We continue to be very focused on organic growth. The areas that Jugal highlighted will continue to need some investment and provide, as you know, very, very good returns. When we think about the share buyback, it is a very opportunistic tool for us. We had not done share buyback in a number of years. But when we kind of looked at where the stock was in Q2, it was the right time to go ahead and buy a little bit back, and that proved to be a worthy use of our capital at that time. And we had run the current authorization down to a very small amount. So, it was just the right time to re-up with our Board of Directors. So, we have that tool in our tool belt, but it is not one that we are actively pursuing. Operator: Our next question is coming from David Silver with Freedom Capital Markets. David Silver: So I have a scatter of questions. I'll just warn you. But first, I'd like to hone in a little bit on your comment about sequential order growth of double digits or better, I believe, in all 3 of your segments. And I was just wondering from your perspective or would you characterize this sequential -- kind of across-the-board sequential growth. Would this be reflective of maybe some, I don't know, some deferred activity on the part of your customers, maybe over the last quarter or two in response to the tariff issues and some other things. Or would you characterize the bulk of the new orders as reflective of kind of pure organic growth? I mean, how do you think about the kind of broad-based trend of significant sequential pickup in your order book? Jugal Vijayvargiya: Yes. I think I would look at this as primarily, I think, good organic growth that our teams are driving, new business activities that our teams are driving as well as, I think, the overall market growth and market trends that are there. Certainly, there could be some, David, as you mentioned, of some orders that perhaps have been held back and that got released. But in general, we see continued uptick and improvement in our order rates in most of our markets, and in particularly in the high-growth markets that we've indicated. David Silver: Next question would be kind of your take on tariff impacts on your financial results. So if I recall correctly, I mean, you highlighted maybe a $0.10 to $0.15 per share negative impact in the second quarter and then up to $0.50 or more for the back half of the year. And I know that, that initial forecast has been tempered a bit, but we're kind of 6 months into it now. How do you assess the overall effect on your financial results or operations, however you look at it of the of the tariff issues to date? I mean, how much of that has flown through what might be remaining, what that might not be offset by price or other actions? And what should we think about, maybe heading into 2026 on a year-over-year basis? Shelly Chadwick: Yes, David, as you know, what we've been talking about the most has really been the impact to our China business. And so we think about that more commercially, and what is that doing both with customers reserving orders, but also maybe looking for suppliers that are outside the U.S., right? There's a bit of sort of a tone that, hey, we would rather have suppliers that are outside the U.S., given the volatility and the tone of how things are going in negotiations there. So right now, when we look at our China business, it's down about 20% year-on-year, year-to-date, and that's meaningful to us. The other side of that, of course, would be raw materials that we are incurring on material being brought in. That's a smaller number, call it, $3 million, $2 million, $3 million in that range. Some of that we're able to bill out through price. Others takes a little bit of time to settle in with customers and work through contracts. But the part that gets most of our attention is China and how that will shake out if some agreements are reached. David Silver: I would like to ask a question about the margin progression, in particular in Electronic Materials. So 27% is -- the high—not only is it, well, whatever -- it's the highest I have in my model going back as many years as it does. And I know that in general, Electronic Materials can often be a very high incremental margin business on incremental sales. But I don't know, I'm not thinking that, that's the case at least just yet. So, whether it's product mix or cost savings or whatever, but what went into this record margin performance this particular quarter? And should I assume that it can continue to go higher, maybe as sales growth continues to progress? Jugal Vijayvargiya: Yes. Maybe I can start on this, and then Shelly can jump in as needed. This business, as you know, has gone through a downturn for the whole semiconductor market over the last couple of years. The recovery has now started, particularly in the data center business, the high-performance computing memory business, high-performance logic business, et cetera, those have been recovering at a very good rate, and some of the other areas are starting to now catch up. We took the time over the last year, 1.5 years, 2 years to really make the adjustments to our cost structure and to the business so that as the recovery happens, we can make sure that the margins are improving. We've talked about making those adjustments. I think when the volumes were at a peak level, it was hard to get some of those adjustments done. But now, having done those adjustments, I think, has allowed us to deliver the type of margins that we're delivering. In addition to that, of course, our mix is much stronger than the mix that we've had in the past. Certainly, the power segment and the data storage segment gives us a lot more of what we call precious metals mix business, which is a great business for us. The fact that the China business is a little bit lower, I mean, certainly, those margins were not as good as some of the other businesses that we have. So, the mix is certainly a helpful item. But in total, I think we've really made the right type of changes for this business so that it can be a much stronger business going forward. If you take the 27% that we have here in the quarter that we delivered, I mean, even if you adjust for the sort of that $1 million or so that Shelly talked about earlier, I mean, you're looking at about a 25% type of EBITDA margin compared to the 24% EBITDA margins that this business delivered in Q2. So we think that it's the right type of margin profile. Our goal is going to continue to be able to deliver those types of margins as we move forward and to contribute positively to our midterm target of 23%. I believe we're well-positioned to deliver these good margins. David Silver: And then maybe just the last one, but you did mention your efforts in molybdenum very much kind of a leading-edge material for thin films and whatnot. I was just thinking, and I don't recall exactly your wording, so I apologize. But is this the type of product where maybe you've developed it in close collaboration with a single customer, and therefore, maybe that customer might have an exclusive access to your technology? Or is it more something that Materion has developed on their own or proprietary basis, and therefore, it could be ultimately available to a large number of your semiconductor-based customers. Just – if qualitatively, if you could just discuss the nature of that development, and I guess, by extension, the marketing potential down the road? Jugal Vijayvargiya: Yes. So in some cases, you're right. I mean, we develop our products with collaboration with the customer and perhaps have some sort of a arrangement with the customer. I think in this particular case, ALD in general is a product set that we started working on 7, 8 years ago. We started to do organic development of that. We have a number of different materials that we have developed in this area. Molybdenum is one of those materials. We've done that with our investments and, of course, in working with a number of different customers. So we are selling this product to our customers. We will be marketing it more so as we continue to go forward. We think this is an exciting, exciting product set as we move forward, as it replaces some of the tungsten use that's in the semiconductor market. So we're well-positioned, I think, to take advantage of this across a number of different customers and as we continue to get the pull and as we continue to, of course, push. Operator: Our next question is coming from Steve Storms with Stonegate. David Storms: Just want to start by maybe getting a little more commentary around the timing impacts on defense. With the quarter closing on 9/30, were any of these timing issues related to the government shutdown? And one way or another, how much more impact could we see here from the government shutdown? Jugal Vijayvargiya: Yes. So in our case, for the third quarter, we didn't have any, I would say, government shutdown related impacts for defense in the third quarter, but we certainly could have impacts of that here in the fourth quarter. We do have a number of contracts that we're working on with the government. We have a process where we actually work on projects well in advance of actually receiving the contracts. That's a normal process that we have in our defense market. And then, as we receive the contract, we make the shipment or we do some sort of recognition. In this case, we are waiting on a few of those agreements. And we will have to see how those things play out over the next couple of months. But no impact in Q3, could have impact in Q4. Again, from our operational side, we're fully ready. It's just a matter of being able to get those contracts and closing them out. David Storms: That's very helpful. Turning, maybe, to the impact of China. I know this may be hard to estimate, especially without a deal being reached. It was mentioned earlier that China may be impacted by 20% or so. Is there any sense of how much of that would be recoverable, given some resolution here that removes some of the uncertainty? Jugal Vijayvargiya: Yes. And like you said, I mean, it's hard to know, right, what the customers are thinking for the out years, '26, '27, midterm time frame. But I think in general, I mean, what we are hearing and seeing from our customers is that they want to make sure that they're able to purchase from locations where they have more reliability or more stability. And so if there are some temporary measures that are reached, I mean, we don't know if it's going to be permanent, temporary, some sort of pause. It's hard to know, right? And hard to know what the customers are going to do as a result of that. But I think in general, I would say our business in China has seen pressure this year. And we are planning as if the pressures will continue as customers look for ways to purchase outside of the U.S. Now we are actively involved in a number of ways that we can actually be that supplier, though outside the U.S. We announced this Konasol acquisition last quarter. And so we're looking at any and all ways that we can continue to supply these materials, just do it from outside the U.S. if that's what's necessary. David Storms: Understood. That's great commentary. One more for me, if I could. I would just love to hear your thoughts on maybe the volume of opportunities in the energy sector, similar to the Commonwealth agreement. Is this an opportunistic one-off that we'll continue to see once every couple of years? Or do you expect to see more opportunities like this come into the market? Jugal Vijayvargiya: Well, like we've indicated, we've got the agreement with Kairos Power. We've had that for a while. And now we have announced the agreement with CFS. We are working with a number of different partners in all types of new energy areas. So certainly, if there is additional announcements or additional agreements that we reach, we will certainly talk about that. But we're very excited about having agreements on both vision and fusion for new energy applications. Operator: Our next question is coming from Phil Gibbs with KeyBanc Capital. Philip Gibbs: You had mentioned in your prepared remarks about the government potentially looking to stockpile certain resources. Do you think beryllium will be one of those materials? I'm just trying to think of whether or not you expect any pickup in that dynamic. I know that's something that tends to happen to the company from my experience, maybe once a decade, but I know it does happen from certain cycle to certain cycle. So curious to hear your thoughts on that. Jugal Vijayvargiya: Well, I think when we look at the overall defense market with the U.S. defense spending approaching $1 trillion for next year, the NATO countries increasing their spending to 5% of their GDP by the end of the decade, and then Japan and Korea increasing on an annual basis. I think that drives, I would say, an increased usage of beryllium. I mean many of the defense applications are beryllium-based applications. And so we are actively involved in a number of discussions with various groups on making sure that we have the right level of beryllium and we can produce that and be able to provide that to them. Now, whether that's done in some sort of a stockpile form or whether that's done in actual materials that are used in various applications, like we indicated the different things that I think the defense department is involved in, we're prepared and ready to do that. So we do have a lot of active discussions, I would say, underway with different entities about how to support in the right way, all the defense needs, which, of course, a big part of that is beryllium-based materials. Operator: As we have no further questions on the lines at this time, I'd like to turn the call back over to Mr. Kelleher for any closing remarks. Kyle Kelleher: Thank you. This concludes our third quarter 2025 earnings call. Recorded playback of this call will be available on the company's website, materion.com. I'd like to thank you for participating in this call and for your interest in Materion. I will be available for any follow-up questions. My number is (216) 383-4931. Thank you again. Operator: Thank you, ladies and gentlemen. This does conclude today's call. You may disconnect your lines at this time, and we thank you for your participation.
Operator: Good day, and welcome to the OneSpaWorld Third Quarter 2025 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Allison Malkin of ICR. Please go ahead. Allison Malkin: Thank you. Good morning, and welcome to OneSpaWorld's Third Quarter 2025 Earnings Call and Webcast. Before we begin, I'd like to remind you that certain statements and information made available on today's call and webcast may be deemed to constitute forward-looking statements. These forward-looking statements reflect our judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting our business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our third quarter 2025 earnings release, which was furnished to the SEC today on Form 8-K. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, the company may refer to certain adjusted non-GAAP metrics on this call. An explanation of these metrics can be found in our earnings release issued earlier this morning. Joining me today are Leonard Fluxman, Executive Chairman and Chief Executive Officer; and Stephen Lazarus, President, Chief Operating Officer and Chief Financial Officer. Leonard will begin with a review of our third quarter 2025 performance and provide an update on our key priorities. Then Stephen will provide more details on the financials and guidance. Following our prepared remarks, we will turn the call over to the operator to begin the question-and-answer portion of the call. I would now like to turn the call over to Leonard. Leonard Fluxman: Thank you, Allison. Good morning, and welcome to OneSpaWorld's Third Quarter 2025 Earnings Conference Call. It's a pleasure to speak with you all today to share our record third quarter results, which were delivered at the high end of guidance, marking our 18th consecutive quarterly period of year-over-year growth in total revenues and adjusted EBITDA. Our sustained rates of growth demonstrates the power of our complex global operating platform and our team's unwavering commitment to deliver exceptional experiences for our guests and outstanding performance for our cruise line and destination resort partners. In addition, our execution of our asset-light business model continues to generate strong free cash flow, enabling us to create significant value for shareholders through an increasing quarterly dividend, share repurchases, accelerated debt paydown and strategic investments across our operations. Turning now to the highlights of the quarter. Total revenues, income from operations and adjusted EBITDA represented all-time records and net income was a third quarter record. Total revenues increased 7% to $258.5 million compared to $241.7 million in the third quarter of 2024. Income from operations increased 5% to $26.3 million compared to $25 million in the third quarter of 2024. Net income increased 13% to $24.3 million compared to $21.6 million in the third quarter of 2024, and adjusted EBITDA increased 6% to $35 million compared to $33 million in the third quarter of 2024. At quarter end, we operated health and wellness centers on 204 ships with an average ship count of 199 for the quarter. This compares with a total of 196 ships and an average ship count of 195 ships at the end of the third quarter of fiscal 2024. Also at year-end -- at quarter end, sorry, we had 4,466 cruise ship personnel on vessels compared with 4,204 cruise ship personnel on vessels at the end of the third quarter of fiscal 2024. The quarter marked meaningful progress in our key priorities. Let me share some of those highlights. First, we captured highly visible new ship growth with current cruise line partners. We continue to solidify our market leadership during the quarter, introducing new health and wellness centers on board for new ship builds during the quarter, Royal Caribbean Star of the Seas, Virgin Brilliant Lady, Princess Cruises, Star Princess and Celebrity Xcel. For the year, we remain on track to introduce health and wellness centers on to 2 additional new ships commencing voyages in the fourth quarter, giving us a total of 8 new ship builds in 2025. Second, we continue to expand higher-value services and products. These higher-value services, including MedSpa, IV therapy and Acupuncture to name a few, helped to grow sales productivity with strong double-digit increases in the quarter. We continue to introduce these services to more ships and expand offerings with the latest innovations in adding to our growth. In addition, we continue to elevate the innovation in our medi-spa services with the expansion of our rollout of next-generation technology with the Thermage FLX and CoolSculpting Elite, which offer improved results and reduced treatment time by up to 50%. These new technologies generated between 40% and 60% growth for these treatments in Q3 versus last year. In addition, Acupuncture remains in high demand with equally strong growth rates. The adoption of LED light therapy within this service remains a high conversion add-on treatment. At quarter end, Medi-Spa services were available on 150 ships, up from 144 ships at the end of the third quarter last year. We continue to expect to have Medi-Spa offerings on 151 ships this year. Third, we focused on enhancing health and wellness center productivity. This is best reflected in the delivery of across-the-board increases in key operating metrics, including revenue per passenger per day, weekly revenue, pre-cruise revenue and revenue per staff per day. Without a doubt, our unsurpassed ability to identify, onboard and retain staff is leading to this performance. In fact, staff retention remains a key contributor to our consistent gains in operating metrics as experienced team members are driving incremental revenue through more effective customer recommendation. The quarter saw a 5-point increase in staff retention versus Q3 2024 with experienced staff generating significantly higher revenue per day versus first contract staff. We continue to take pride in being a desired employer and strive to create an environment that fosters retention. In addition, we continue to invest in best-in-class training and have recently redesigned our talent management processes to further support productivity and long-term growth in our operating metrics across all of our staff members. Our enhanced sales training continues to fuel increases in the number of guests using the spa, service frequency, service spend and retail and average guest spend per guest. Fourth, we possess a strong and durable balance sheet, which, combined with our ongoing successful growth, enabled us to advance each of our capital allocation objectives in the quarter. These are to invest in future growth, return value to our shareholders and reduce debt. To this point, in the third quarter, we were active on our stock buyback. We paid our quarterly dividend and reduced outstanding debt. Additionally, as Stephen will share, the Board approved a 25% increase in our quarterly dividend payment to $0.05 per share, which reflects our company's consistent after-tax free cash flow generation and positive long-term growth prospects. As we close out the year, we remain confident in our outlook with our business continuing its favorable momentum at the start of the fourth quarter. In addition to the introduction of 2 new health and wellness centers beginning voyages through year-end, we are also excited by our developing initiatives employing emerging AI technologies to enhance our unique global positioning toward delivering increasing exceptional experiences for our guests and service to our partners. We believe this, along with the continued discipline with which we execute our asset-light business model, positions us well to deliver strong results for our stakeholders and shareholders in the near and long term. As Stephen will share momentarily, we have increased our 2025 guidance at the midpoint of our previous ranges for annual revenue and adjusted EBITDA. With that, I will turn the call over to Stephen, who will provide more details on our third quarter results and guidance. Stephen? Stephen Lazarus: Thank you, Leonard. Good morning, everyone. We are pleased with our third quarter performance, which included record results in total revenue and adjusted EBITDA and continued strong and predictable cash flow generation. We continue to expand our innovation, products and services and leverage our strong operating platform and technology enhancements to deliver strong revenue and profit growth while employing our balanced capital allocation strategy to reduce capital to shareholders. Fueled by our strong cash flow generation, driven by our capital-efficient asset-light business model that generates predictable strong free cash flow, we returned $4.1 million to our shareholders through our quarterly dividend payment and $17.6 million from the repurchase of 816,000 common shares during the quarter, while repaying $11.3 million on our term loan facility. Also reflecting our positive long-term outlook, we opportunistically returned an additional $15 million to our shareholders from the repurchase of an additional 722,000 common shares thus far in the fourth quarter. And our Board approved a 25% increase in our quarterly dividend payment to $0.05 per share. Before I provide details on our third quarter results, I would like to provide additional perspective on our AI initiatives. These initiatives are expected to deliver measurable improvements across key areas of our business with actions in place to enhance revenue, create operational efficiencies to drive greater profitability as we grow while increasing the speed of our decision-making through automation and streamlining of our business processes. Here are some highlights of each initiative. First, as it relates to revenue enhancement, we have implemented a machine learning-powered project designed to optimize yield and revenue, which is actively being tested on 40 vessels. By leveraging advanced recommendations and algorithmic optimization, this initiative aims to unlock additional revenue by optimizing utilization. Second, operational efficiency. In this regard, we are seeing early success with our automated problem resolution and inquiry tool, which has now been deployed across 180 vessels. This technology has led to dramatic improvements in response times and reduce the need for help desk hours. Third, automation and streamlining, which is part of our broader efficiency initiative to continue to explore and develop automation solutions to reduce manual work and streamline operations. Although still in the early stages, these efforts are expected to enhance productivity and operational scalability over time and are expected to further increase our key operating metrics. Overall, our AI initiatives demonstrate our commitment to leveraging cutting-edge technology to strengthen our market position and deliver value to our shareholders. Turning now to a review of the fourth quarter -- third quarter. In total, for the third quarter, total revenue increased 7% to $258.5 million compared to $241.7 million for the third quarter of 2024. The increase in service revenue and product revenues were driven by a 4% increase in average guest spend, fleet expansion due to 2025 new builds and a 1% increase in revenue days, which positively impacted revenues by $7.8 million, $6.8 million and $3.2 million, respectively. Contributing to the increased volume and spend was $2.7 million in increased prebooked revenue at health and wellness centers on board, and this was offset by a $1 million decrease in our destination resort revenue, partially due to the close of hotels where we had previously operated. Cost of services increased $12.5 million attributable to the $13.6 million increase in service revenue compared to the third quarter of 2024. Service margin was a healthy 17.3%, up versus both the first and second quarter of 2025, but marginally below the same quarter a year ago, simply due to mix. Cost of product increased $2.7 million attributable to the $3.2 million increase in product revenue. Salary, benefits and payroll taxes were $8.4 million compared to $8.6 million in the quarter prior year. Net income was $24.3 million or net income per diluted share of $0.23 compared to net income of $21.6 million or net income per diluted share of $0.20 for the third quarter of 2024. The change was primarily attributable to a $1.3 million increase in income from operations and a benefit from a $1.1 million decrease in net interest expense. The $1.1 million decrease in net interest expense was primarily due to lower debt balances and lower effective interest rates. Adjusted net income was $30.4 million or adjusted net income per diluted share of $0.29 as compared to adjusted net income of $27.3 million or adjusted net income per diluted share of $0.26 for the third quarter of 2024. And adjusted EBITDA was $35 million an improvement from $33 million in the third quarter of 2024. Moving on to the balance sheet. We continue to possess a strong balance sheet at quarter end with total cash of $30.8 million after giving effect to the repayment of $11.3 million in debt, repurchasing $17.6 million of our common shares and paying $4.1 million in support of our quarterly dividend. In addition, we had full availability of our $50 million revolving line facility, giving us total liquidity of $80.8 million as of September 30, 2025. Total debt was $85.2 million at September 30, 2025, compared to $98.6 million at December 31, 2024. Also, at quarter end, we had $57.4 million remaining on our $75 million share repurchase authorization. And post quarter end, we repurchased an additional 722,000 outstanding common shares, returning another $15 million to shareholders. Therefore, as of today, we have $42.4 million remaining on that $75 million share repurchase program. We continue to expect the disciplined execution of our growth initiatives and strong cash flow generation driven by our asset-light business model to enable the payment of ongoing quarterly dividends while evaluating opportunities to repurchase our shares and retire debt. We believe this positions us well to create long-term value for our shareholders. Turning now to guidance. As we look ahead, we are excited about our business and continue to expect total revenue for fiscal 2025 to increase in the high single-digit range, reflecting our strong year-to-date performance and our positive outlook as well as the addition of 2 new health and wellness centers on cruise ships beginning voyages during the fourth quarter. Adjusted EBITDA is now expected to increase by 10% at the midpoint of our guidance range as we deliver increasing productivity from our enhanced products and services. For the full fiscal year 2025, we expect total revenue in the range of $960 million to $965 million, which represents an increase of 8% at the midpoint versus fiscal year 2024 and adjusted EBITDA is expected in the range of $122 million to $124 million, which represents an increase at the midpoint of 10% versus fiscal 2024. For the fourth quarter of 2025, we expect total revenue in the range of $241 million to $246 million and adjusted EBITDA is expected in the range of $30 million to $32 million. And with that, we will open up the call for questions. Bailey, if you could please do that. Operator: [Operator Instructions] Our first question comes from Steven Wieczynski with Stifel. Steven Wieczynski: So Leonard or Stephen, I'm wondering about how we should think about the benefits from some of this AI technology you guys have been implementing. And what I mean by that is, if we look at margins in the second quarter, they were up about 70 basis points year-over-year. And in the third quarter, they were down about 20 basis points. So not sure if you can help us think about maybe the cadence of how margin expansion or contraction should look moving forward as you kind of go through and implement some of this technology. Stephen Lazarus: So as we talked about last quarter when we started talking about some of these initiatives, we've mentioned then and we continue to say today that it's likely the second quarter of next year when we start to become more specific about one of -- what those expected improvements will be. We are encouraged with what we see thus far, but frankly, it's just too early to commit to specific increments, et cetera, but we hope to be able to do that by the second quarter of next year. Steven Wieczynski: So as we think about the fourth quarter and the first quarter, basically assume nothing is in there, correct? Stephen Lazarus: That would be a good assumption to assume that it's consistent with the cadence that it's been tracking at and then improvements thereafter. Steven Wieczynski: Okay. And then, Leonard, I don't know if this is for you or still, Stephen, but I want to understand maybe spend patterns a little bit more on board. Maybe if you could give us some more color on what you're seeing more so in real time in terms of guest spending. I'm wondering if you've seen any changes through October, whether that's through attachment rates, a difference in spending across land-based versus maritime or really any kind of change in demand for higher-end services versus traditional treatments. Just you're just trying to understand and get a feel if guests are starting to change their behaviors at all. Leonard Fluxman: Yes, Steve, I'd tell you our PPDs, our revenue per passenger per day, everything is positive. The spend is up, attachment rates are consistently good, pre-cruise revenue consistently staying strong. I mean we have not seen any kind of material reduction in spend. I mean we also look at what we're deploying in terms of marketing tools, discount rates, additional incentives, and it's very consistent with what we've seen over the past few quarters. So in short, we haven't seen anything materially change for our business so far. Operator: Our next question comes from Sharon Zackfia with William Blair. Sharon Zackfia: I think you mentioned that service margin was down a little bit on mix. Could you kind of clarify what's happening with the mix? Stephen Lazarus: Yes. It's really just a function, Sharon, of where -- which cruise lines are generating slightly different revenue and the agreements that we have with those cruise lines. It's not something that was necessarily unexpected to us and nor is it something that we think based upon what we're seeing in October flows through into October. So we would expect to see margins continue to be strong. And as you know, right, I mean, 17.3% was very healthy. That was versus a second quarter of 16.6% in the first quarter of 17%. So I think we should focus on the positive there, which is that it is higher than both of those quarters, although just marginally down versus the third quarter of prior year. Sharon Zackfia: Yes. I just wanted to clarify that you weren't seeing passengers kind of shift down into kind of lower price point services, but it sounds like it's ship mix, not necessarily the actual... Stephen Lazarus: We're definitely not seeing them shift down. And remember, our model provides us with a degree of insulation in that we're only servicing a small proportion of the customers on board to the extent that those customers that want to spend money, enjoy their vacation and experience the spa, we're still absolutely seeing that. Sharon Zackfia: Great. And then I wanted to ask a follow-up. We've been getting a lot of questions on the global minimum tax. Can you kind of talk about OneSpaWorld and how or if you will be impacted by that beginning next year? Stephen Lazarus: Our expectation remains that we will not be impacted. We are still finalizing and are very deep in the process of doing some reorganizational changes to make sure that, that happens. But upon successful implementation of those changes, at this point in time, we continue to believe that we would not be impacted by global minimum income taxes. Operator: Our next question comes from Max Rakhlenko with TD Cowen. Maksim Rakhlenko: Nice job in the quarter. So first question, in the release, you noted that you saw a noteworthy increase in guest counts, frequency as well as average spend. Just what do you attribute that to? And then is there a way to think about the magnitude of the step-up that you may be seeing? Leonard Fluxman: We -- say that again, Max. We saw an increase in traffic, which is the amount of passengers we saw, which is a function of some of the newer ships coming into service in the fourth quarter, obviously. And then the penetration rate actually moved up positively as well from the second quarter. So that just meant we were getting more of that traffic on the ships into the spas and the penetration rate increased moderately, which is a good sign. But we're also focusing the staff on facility utilization, as we mentioned on our last call, last quarter, which is how do we better utilize not only our staff, but the facilities themselves on sea days, port days, what we can do to take and try-train staff to fill in the gaps and get better utilization. So where we see the demand remaining high, we see the utilization maxed out, we will go to the cruise lines and have a discussion not just on real estate, but more importantly, on getting an extra birth, which is never an easy discussion, but something that sometimes yields an increase. And if it does, obviously, and we show them where the demand comes from, it will be a great thing to have. So now we have the data to support the facility utilization. And as I mentioned before, it's a metric that we will produce at some point in the future, probably at the end of second quarter next year. But it's something that we're focusing on internally to improve that metric itself. Maksim Rakhlenko: Got it. That's really helpful. And then, Stephen, how are you thinking about the right level of cash to hold on the balance sheet in the context of likely continued declines in interest rates? Should we assume that you're going to put more cash to work as what we saw both in 3Q and quarter-to-date? Or what's the plan ahead? Stephen Lazarus: We'll continue to have a balanced capital allocation strategy. We like to keep $25-or-so million of cash on the balance sheet. But as you know, we do have a $50 million availability on the line of credit. And so I think the way we think about it is continued optimization of the capital allocation strategy for the near term, share repurchases would remain at the top of that -- on the top of the list. Opportunistically, though it's not programmatic, then the dividends, which, as you know, we increased by 25% now to $0.05 a quarter. And then if it makes sense, we'll pay down a little bit more of the debt or more over time, but that's the order of prioritization. Operator: Our next question comes from Gregory Miller with Truist. Gregory Miller: I thought I'd start off on a question on staffing. You mentioned in the prepared remarks that you redesigned the talent management process. Could you elaborate on the kind of changes you're implementing? Leonard Fluxman: Yes. So we're focusing clearly, obviously, around solution selling. We're putting people into different modalities and not just sort of pinning them to one modality. So there's much more of a shared philosophy around where staff can be used, where before they'd be only used for one type of modality, which is allowing us, as I mentioned before, Greg, to get the better utilization out of our facilities. So the focus is not limiting staff just to one type of service where before we thought that might have maxed out the benefits of each of them just specializing. We see that it's better to use them across different modalities, so enhancing our facility utilization overall. Gregory Miller: And then I'd like to shift over to the AI front. If I heard correctly, the revenue enhancement projects are on 40 vessels, which is an impressive ramp-up already compared to the piloting you were doing previously. But if I heard correctly, the operating efficiencies have been launched on 180 vessels so far. So I'm curious what's driving the disconnect of more focus at this stage on the AI implementation on the operating efficiency side versus the revenue enhancement side. Stephen Lazarus: It's not a matter of more focus, Greg. It's a matter of the simplicity of rolling out one versus the other. The revenue enhancement is -- has more complexity and requires specific training for the managers on board, whereas the operational efficiency is rolling out apps, which are much simpler and can be shown how to use much more easily. So it's simply a matter of what is easier to be done. Operator: Our next question comes from Drew May with Northcoast Research. Andrew May: So a little bit of a calmer-than-expected hurricane season this year, but one saw a little more itinerary changes and extra sea days. Was there any tangible headwind or benefit you guys call out from storm activity during the quarter? Stephen Lazarus: No, nothing tangible or material, Drew. Andrew May: Okay. Got it. And then next question was a little bit of a step-up in the CapEx this quarter. Was that kind of related to the AI initiatives? Or is there anything else you guys could call out there? Stephen Lazarus: No, those are related to the AI initiatives. We have talked about CapEx being at a slightly elevated rate this year and potentially next year as well as we make investments in those projects. So that was a big piece of it. There was a smaller piece related to rolling out some of this additional Medi-Spa equipment on board, but the majority is related to these projects. Operator: Our next question comes from Assia Georgieva with Infinity Research. Assia Georgieva: Leonard, I wanted to follow up on your comment about adding an extra birth. I imagine with adding more staff, we might see the productivity metric come down in Q2, but that would be because of the structural change as opposed to actual productivity coming down. Is that fair? Just wanted to clarify. Leonard Fluxman: Yes, it should not depress that metric. The only reason we would go to a cruise line and ask for an increased birth would be because we're not getting to the right level of penetration or productivity that we could if we had that staff member. So it would be purely accretive if we added it, not for the sake of just having it. Assia Georgieva: Correct. And again, I was trying to understand, so I don't overly focus on the metric, and I understand having more bodies, obviously, would be helpful to the overall revenue generation and penetration rates. My second question is, some of your banners seem to be making sort of a deployment shift not only in 2026, I imagine it will be in '27 and beyond to shorter voyages, including in Europe and the shift to more ships in the Caribbean and the Bahamas and also shorter voyages there. It seems that shorter voyages typically are a good thing for you. Is that the correct interpretation still? Leonard Fluxman: They always -- they've always been very decent. And we try and look at 3, 4 as a 7. So we stagger it that way. We market it that way. We know on the 4-day, we've got a little bit extra time. So even though it's separate cruises, we try and structure that for the high demand periods or the at-sea period. So yes, I wouldn't say there's a material difference today than it was before. It's still -- they still prove out to be quite decent for us, yes. Assia Georgieva: So you don't see any net-net impact at this point? Leonard Fluxman: Not really, no. I haven't seen anything so far, nor do we expect to see anything material. Assia Georgieva: And sort of related to that, with the further development of private island destinations, is that an opportunity to further build out your infrastructure on these private islands, basically the marquee ones? Can you discuss that a little bit? Leonard Fluxman: Yes. No, we definitely are looking at it very seriously. We're talking to 1 or 2 of the banners who have additional islands that they're building out. I think there's an opportunity for us to do something alongside them. I think with the existing operations, we're looking at where we can add or improve the facilities on some of the older sort of islands. So we think there's tremendous opportunity for us to participate more so when these ships are calling at these fantastic slots in the islands, Mexico for Royal Caribbean. I mean all of them have a very nice island experience today and some are enhancing it, as you've seen with NCL and others, Royal announcing Santorini yesterday. I mean it's just very exciting because you see they're combining both the land and sea vacation and are meeting that expectation very well. Assia Georgieva: Santorini sounded really good when I heard that yesterday. So yes, it did catch my attention. And lastly, and I'll let you go. In terms of prebooked services, has that rate moved? I know it has been difficult sometimes to be fully integrated within the banner's internal prebooking engine, but they themselves seem to be doing a great job of increasing penetration, and I'm hoping that you are benefiting from that as well. Is that the case? Leonard Fluxman: Well, I think it's encouraging certainly that prebooking is getting mentioned on particularly yesterday's call, I think they mentioned that it's close to 50% and continues to grow. For us, it's a high focus item. We talk about it in all of our business reviews. We have some initiatives that we're looking at in terms of AI for next year to help enhance the prebook. So I think for us, there's equally a stronger focus on the prebook because we know they spend up to 30% more than somebody who doesn't prebook. And I think prebooking is just going to continue to get stronger, not only for the cruise lines, but for us as well over time. Assia Georgieva: What is your current rate roughly, if you don't mind sharing? Leonard Fluxman: It's about 22% of service revenue, which excludes Medi-Spa. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Leonard Fluxman, Executive Chairman and CEO. Leonard Fluxman: Right. Thank you all for joining us today. We look forward to speaking with many of you at our upcoming investor conferences, meetings and when we report our fourth quarter results in February. Thanks, everybody. Have a good one. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Q3 2025 BXP Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Helen Han, Vice President, Investor Relations. Please go ahead. Helen Han: Good morning, and welcome to the BXP Third Quarter 2025 Earnings Conference Call. The press release and supplemental package were distributed last night and furnished on Form 8-K. In the supplemental package, BXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G. If you did not receive a copy, these documents are available in the Investors section of our website at investors.bxp.com. A webcast of this call will be available for 12 months. At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although BXP believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in yesterday's press release and from time to time in BXP's filings with the SEC. BXP does not undertake a duty to update any forward-looking statements. I'd like to welcome Owen Thomas, Chairman and Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the Q&A portion of our call, Ray Ritchey, Senior Executive Vice President, and our regional management teams will be available to address any questions. [Operator Instructions] I would now like to turn the call over to Owen Thomas for his formal remarks. Owen Thomas: Thank you, Helen, and good morning to all of you. Our financial results for the third quarter demonstrate a continuation of BXP's positive momentum. FFO per share was $0.04 above our forecast and $0.02 above market consensus, and we raised the midpoint of our earnings guidance for the full year 2025 by $0.03. This past quarter, BXP also completed a very well attended and successful Investor Day, during which we provided a detailed execution plan on how we intend to increase FFO per share, fund development costs and deleverage over the next 2.5 years. This morning, I will provide a reminder of the action steps in our plan as well as an early update on our progress. Our first goal is to lease space and grow occupancy given the modest rollover exposure BXP faces over the next 9 quarters. In the third quarter, we completed over 1.5 million square feet of leasing, 39% greater than the third quarter of 2024, and 130% of our last 5-year average leasing for the third quarter. Year-to-date, we've leased 3.8 million square feet, which is 14% greater than the first 3 quarters of 2024. As we have explained on prior calls, leasing activity is tied to both our clients' growth and the use of their space. As a proxy for BXP's client base, over 87% of the S&P 500 companies that have reported earnings this quarter as of last Friday are beating estimates. S&P 500 earnings have been growing for 9 straight quarters and for 2025 are projected to grow around 11% to 12%, up from single-digit estimates last quarter. Return to office mandates continue to grow and take effect, though the West Coast lags the East Coast on this measure. Placer.ai just released their office utilization data showing a material uptick in office utilization from a year ago. In September 2024, office utilization was 34.8% below 2019 levels, and last month's utilization was 26.3% lower indicating a 13% increase in office utilization over the last year. This data captures a large set of office assets across the U.S. and though premier workplace utilization in gateway cities is higher, the overall trend is relevant. Our second goal is to raise capital and optimize our portfolio through asset sales. During our Investor Day, we communicated an objective to sell 27 land, residential and nonstrategic office assets for approximately $1.9 billion in net aggregate sale proceeds by year-end 2027. We are off to a strong start. So far, we've closed the sale of 4 land assets for total net proceeds of $57 million, have under contract 9 assets for total net proceeds of approximately $400 million and are in the market with 10 additional properties for estimated total net proceeds of $750 million to $800 million. In total, we have 23 transactions closed or underway with estimated net proceeds of roughly $1.25 billion. Dispositions completed for 2025 could aggregate approximately $500 million to $700 million in net proceeds. Office transaction volume in the private market continues to improve as more equity investors get constructive on the sector and financing becomes more available at scale, particularly in the CMBS market with tightening credit spreads. In the third quarter, significant office sales were $12.9 billion, up 6% from the second quarter of '25 and up 55% from the third quarter last year. Relevant transaction activity that took place in the third quarter is as follows: in New York City, Park Avenue Tower, a nearly fully leased 620,000 foot office building located at 55th Street is under agreement to sell for $730 million or approximately a 6% cap rate and nearly $1,200 a square foot. Another 5% interest in One Vanderbilt located adjacent to Grand Central Station in New York City sold for over $2,800 a square foot and presumably a very low cap rate. In Boston, 399 Boylston Street, a 245,000 square foot office asset that is 90% leased with relatively short weighted average lease term is under agreement to sell for $124 million or just over $500 a foot and an 8.3% cap rate. In Beverly Hills, Maple Plaza, a 290,000 square-foot office asset that is 75% leased sold for $205 million or $713 a foot and a 6.5% cap rate. And lastly, in Redmond, Washington, One Esterra, a 250,000 square foot office building fully leased to Microsoft on a long-term basis sold for $225 million or a 6.5% cap rate and over $900 a square foot. Our third goal is to increase our portfolio concentration of premier workplace assets in CBD locations in our core gateway markets. As a backdrop, the premier workplace segment, defined as roughly the top 14% of space and 7% of buildings in the 5 CBD markets where BXP competes continues to materially outperform the broader office market. Direct vacancy for premier workplaces in these 5 markets is 11.7%, 5.7 percentage points or 22% lower than the broader market and asking rents for premier workplaces climbed to a 55% premium over the broader market. Over the last 3 years, net absorption for premier workplaces has been a positive 10.3 million square feet versus a negative 9.2 million square feet for the balance of the market, nearly a 20 million square foot difference. For BXP, we continue to reallocate capital to premier workplace assets in CBD locations. We recently launched new developments at 343 Madison Avenue in New York City and 725 12th Street in Washington, D.C., and most of the office and land assets we are selling are in suburban locations. There are an increasing number of higher quality office assets in our core markets available for acquisition, some on an off-market basis. We evaluate everything, pursue deals selectively, but are being disciplined about quality, pricing and the resultant leverage and earnings dilution impact. The fourth goal is to grow FFO through new development more selectively with office given market conditions and more actively for multifamily, which we'll do with a financial partner. For office, we are allocating capital more to developments and acquisitions because we are finding very high-quality development opportunities with pre-leasing that we believe will generate over 8% cash yield upon delivery, which are roughly 150 to 200 basis points higher than cap rates for debatably equivalent quality asset acquisitions. An additional advantage is new buildings generally have longer weighted average lease term and limited near- and medium-term CapEx requirements. The trade-off is timing as developments obviously take several years to deliver. For multifamily, we are selling 4 properties totaling over 1,300 units, have 3 projects with over 1,400 units under construction and are in various stages of entitlement and/or design for 11 projects totaling over 5,000 units, 2 of which could commence in 2026. We expect to capitalize new development starts with financial partners owning the majority of the equity. We continue to advance our development pipeline. This quarter, we delivered 3 office projects: 1050 Winter Street, Reston Next Office Phase II. The office component of both these assets are fully leased and 360 Park Avenue South, currently 38% leased and experiencing accelerating leasing activity. We have 8 office life science, residential and retail projects underway, comprising 3.5 million square feet and $3.7 billion of BXP investment. We expect these projects will deliver strong external growth, both in the near term with the delivery of 290 Binney Street midway through next year and over the longer term. Our Washington, D.C. team is also working on another premier workplace build-to-suit opportunity. A final goal is to introduce a financial partner into our 343 Madison development project, which is under construction. As we have described, 343 Madison is a leading premier workplace new development project in New York City given its location with direct access to Grand Central Terminal and state-of-the-art amenities and design. We are finalizing a lease commitment with a financial services client for 30% of the space in the middle bank of the building. We are also in discussions with several other large users for the balance of the space in the project. Our financial goal is to introduce an equity partner for a 30% to 50% interest in the property. While we are in very preliminary discussions with a small number of investors who have expressed interest, we believe the value of the asset will appreciate given our leasing progress and the accelerating market rent growth in the Midtown office market and do not expect to finalize an investment until sometime in 2026. In conclusion, our clients, in general, are growing, healthy and more intensively using their space, creating increasingly positive leasing market conditions concentrated in the premier workplace segment of the market. New construction for office has virtually halted leading to higher occupancy and rent growth in many submarkets where BXP operates. Debt and equity investors are becoming constructive on the office sector, resulting in more availability of capital at better pricing. BXP is very much on track executing our business plan as outlined last month, which we believe will deliver both FFO growth and deleveraging in the years ahead. Let me turn it over to Doug. Douglas Linde: Thanks, Owen. Good morning, everybody. So it's been 6.5 weeks since we made our presentations at our Investor Day, and I'm going to begin my comments this morning by affirming our expectations relative to our same-store leasing, occupancy growth and bottom line contribution to future earnings. As you probably noticed, our beat this quarter came directly from better operating portfolio performance. We have entered a 30-month period of very light lease expirations, 60% of the historical annual average over the last 10 years, and we've now reduced our '26 and '27 expirations by another 8% from 6/30/25. So the total expiring square footage on our 49 million square foot portfolio is 3.8 million square feet. During 29 of the last 39 quarters, we executed leases in excess of 1 million square feet with this quarter's 1.5 million square foot performance added. We will surpass our goal of 4 million square feet for 2025. Mike says to say confidently. As I described in my remarks in September, leasing vacant space improves occupancy and delivers the highest contribution to revenue growth. During the first half of '25, we leased 810,000 square feet of vacant space. And this quarter, we leased an additional 490,000 square feet of vacancies, making this the seventh consecutive quarter of between 400,000 and 500,000 square feet of vacancy leasing. Post 10/25, so at the beginning of the fourth quarter, we had 1.8 million square feet of leases in negotiation, which is where we began the beginning of the second quarter. So we have continued to replenish the pipeline. The space under lease negotiations includes 650,000 square feet of currently vacant space, 71,000 square feet of known '25 expirations and 450,000 square feet of '26, '27 expirations. In addition, we have active dialogue on other space that's not yet in lease negotiation totaling about 1.1 million square feet, and that includes more than 125,000 square feet on buildings that we delivered into the portfolio this quarter, aka 360 Park Avenue South. Last quarter, on our call, we called out the delivery of the 3 development properties in our portfolio that would occur this quarter and result in an estimated 70 basis point reduction in our occupancy from the portfolio additions. I'm happy to report that the in-service occupancy as of 9/30/25 decreased by only 40 basis points to 86%. BXP's totaled sequential same-store portfolio occupancy, excluding the portfolio additions. So looking back to where we were at the end of the second quarter, actually increased by 20 basis points and ended the year -- the quarter at 86.6%. The largest lease starts and expirations this quarter all came in the Urban Edge portfolio of Boston. We had 160,000 square feet expiration at 1000 Winter Street, which, by the way, is a building that we are considering for a potential conversion to residential. We executed and delivered 104,000 square feet at 153 Second Avenue and the full building lease at 1050 Winter Street for 162,000 square feet commenced this quarter. We placed 350 Park Avenue South, Reston Next Phase II into service, and we added 130,000 square feet of occupied space and 405,000 square feet of vacant space, of which 120,000 is leased but not yet occupied. BXP's total portfolio percentage leased for the quarter was 88.8%, a decline of 30 basis points. Excluding the impact of placing the 3 development properties in service. So again, going back to 6/30, the lease percentage increased by 10 basis points to 89.2%. The difference between the leased and occupied square footage has grown again this quarter and now sits at 1.4 million square feet. 300,000 square feet is expected to become occupied in '25, about 1 million square feet that's going to commence in the back half of '26 and another 100,000 square feet in '27. Owen described the magnitude of the operating assets being actively marketed for sale. As we dispose of assets, we will disclose the incremental impact of occupancy from the changes in the portfolio. Looking forward, we project that the current in-service portfolio, which includes the recent development deliveries to end '25 at approximately 86.2% occupied and '26 at 88.3% occupied, a 210 basis point increase with most of the improvement in the second half of '26. We are reaffirming our guidance from the Investor Day, adjusted for the 70 basis points of impact from the Q3 new deliveries, which we also disclosed at that time. The overall mark-to-market on leases signed this quarter on a cash basis was up almost 7% with a 12% increase in Boston, a 7% increase in New York, flat results in D.C. and a 4% decrease on the West Coast. This quarter, we executed a number of larger leases, including 5 that were each over 75,000 square feet. 60% of the square footage involved renewals or extensions and 40% was either new clients or expansions from existing clients. Existing client expansions encompass 84,000 square feet of the activity. The second-generation rents in the leasing statistics this quarter represent about 523,000 square feet and are down on a gross basis about 4%. The L.A. statistics had a whopping 1,300 square foot lease and San Francisco included 117,000 square feet with 74,000 square feet, so about 2/3 coming from our Mountain View properties. I want to pivot my remarks now to the market conditions and the activity we're capturing. Our leasing this quarter came from 79 transactions, 398,000 square feet in Boston; 795,000 square feet in New York; 191,000 square feet on the West Coast; and 140,000 square feet in D.C. In the BXP portfolio, Midtown, New York City; the Back Bay of Boston and Reston, Virginia continue to have the tightest supply and, therefore, the most landlord favorable conditions. What this means is that net effective rents are increasing due to either higher rental rates or flat or decrease in concessions or both. The big accomplishments in Boston this quarter took place in our Urban Edge portfolio, where we completed over 200,000 square feet of leasing to life science clients. This included 104,000 square foot lease with a drug development and medical device research services company and 5 -- counted 5 additional pure office leases with life science organizations. Our remaining first-generation life science availability in the Urban Edge is now limited to 70,000 square feet at 180 CityPoint and 112,000 square feet at 103 CityPoint. So that's a total of 180,000 square feet. That's our life science first-generation exposure. Demand for wet lab space continues to be tepid. There are a few lab users actively touring but the requirements from very early stage clients continues to be limited. In the Boston CBD, we continue to complete renewals in the Back Bay portfolio. This quarter, we completed about 140,000 square feet. And as you can see from our property occupancy tables, availability is very limited, net effective rents are improving. In New York, our executed leasing activity was focused on the Midtown East portfolio. The underpinning of this demand is the growth of clients in a variety of asset management strategies. I described a series of client-initiated early extensions under negotiation last quarter, while 500,000 square feet were executed this quarter, with the largest being at 399 Park Avenue. There have been many unconfirmed press reports about our lead tenant for 343 Madison. If that client were to come from one of our Midtown assets, there would be strong demand for the space at either 601 Lexington Avenue, 599 Lexington or 399 Park Avenue. The average in-place fully escalated rent is under $110 a square foot, which is significantly below market. This quarter, while our executed leases were primarily in Midtown, the new client inquiry story was focused on 360 Park Avenue South, where we have our largest availability in Manhattan. Activity at the building has grown substantially, and we executed 2 leases during the quarter. There are a few AI companies in the mix, but much of the activity is being driven by financial service and asset management organizations, the heart of New York City. We have 56,000 square feet of leases in negotiation and letters of intent discussions on more than 125,000 square feet. All of these leases would commence in '26. With the tightening of availability in the Park Avenue and now the 6th Avenue submarket, we're also seeing stronger activity at Times Square Tower where we are in lease negotiations with over 100,000 square feet of new client demand. And down in Princeton, we completed over 160,000 square feet of leasing with 8 clients totaling -- including a 134,000 square feet renewal with a life science client, again with no lab infrastructure. In San Francisco, the demand from organizations that describe themselves as AI business continues to accelerate. The bulk of this demand is concentrated south of Mission Street. The majority of these requirements are looking for inexpensive, fully built and furnished space with short-term commitments. To date, these criteria have been available in either sublease situations or with landlords that have direct space that was vacated by tech companies over the past 3 years. These opportunities in medium-sized blocks, 25,000 to 100,000 square feet are quickly shrinking. The result has been a dramatic pickup of activity at our 680 Folsom, 50 Hawthorne assets, which are south of Mission between Foundry Square and Mission Bay. We have had multiple tours every week and are exchanging proposals with tenants ranging from a single floor to over 200,000 square feet. During the first 6 months of the year, we had 11 unique tours at the property. In the month of July, we had 7; in August, 9; in September, 10; and so far in October, 14. That AI demand has not translated into a commensurate pickup in ancillary professional services growth in the high-rise assets in San Francisco. While San Francisco is unequivocally the financial capital of the West, the organizations that are growing assets under management in San Francisco are not expanding at the same levels we are experiencing in our New York and Boston portfolios. There's clearly been a pickup in activity, and the premier buildings are gaining market share, but it's just nothing like the client growth from the AI companies south of Mission where CBR reports that there are 36 AI active tenants with aggregate growth of 1.5 million square feet in the market right now. In our towers, we completed about 100,000 square feet of transactions this quarter. The rest of the West Coast activity came from Mountain View, where we signed 30,000 square feet and Seattle, where we completed the 54,000 square feet of vacant space leasing. Activity in D.C. continues to be concentrated in Reston Town Center. This quarter, we executed a 51,000 square foot lease on space that was vacated by Meta in June of this year as well as a handful of smaller office and retail leases. The government shutdown has had minimal impact on government contract or leasing activities. The private sector clients that have space needs are all still active in the market. Before I conclude my remarks, I want to update our construction activities, particularly because we are in the process of establishing our GMP for 343 Madison. Subcontractors are actively bidding the job after taking into consideration the tariffs associated with nondomestic suppliers and the most recent country agreements. We expect to purchase our steel from U.S. manufacturers, and we are within our expected budgets with all include anticipated savings relative to our last GC estimate. Given the overall slowdown in construction activity in our markets, there is enough subcontractor interest to provide savings in spite of all the tariff increases. Remember, construction is a composition of labor cost, material cost and profit. And let me hand the call over to Mike. Michael LaBelle: Great. Thanks, Doug. Good morning. Today, I'm going to cover some of our activity in the capital markets as well as our third quarter earnings results, an update to our full year guidance and some updates on our expectations for 2026 since our Investor Day in early September. The debt markets have been steadily improving throughout 2025, and this quarter, we opportunistically and successfully accessed both the secured and unsecured markets. In late September, we closed on $1 billion of 5-year unsecured exchangeable notes at a 2% coupon. If you include closing costs, the interest costs we will record for GAAP is 2.5%. This will refinance $1 billion bond issue that expires in February of next year and carries a GAAP yield of 3.77%. The notes include a conversion premium at a stock price of $92.44 per share. So if our stock trades above the conversion premium during the term, our diluted share count will increase. We also acquired a capped call to increase the conversion premium to 40% or $105.64 per share, to reduce the dilution from the increase in our share price. The capped call has no impact on our P&L or our diluted share count during the term. It settled at maturity. The market demand for our deal was exceptionally strong, and we were 5x oversubscribed. That allowed us to price the security in the low end of our expected pricing range and upsized the deal from the $600 million initially offered to $1 billion. We also closed a $465 million mortgage refinancing on our Hub on Causeway office and retail complex that we own in a joint venture where our share is 50%. This loan was executed as a single asset securitization in the CMBS market, and it priced at a 5.73% fixed rate for a 5.5-year term. This is approximately 50 basis points lower than the floating rate on the prior loan. The pricing equated to about a 200 basis point credit spread for a premier quality secured mortgage with a 55% loan-to-value ratio. There have been about a dozen single asset securitizations completed on office buildings in the past 6 months, and that demonstrates the CMBS market is supportive of financing high-quality large office assets on competitive terms, and credit spreads have been consistently improving. We expect this will help lead to a healthier sales market, as Owen described. Overall, we continue to have very strong access to all the capital markets to finance our business. This includes the debt markets as well as the asset sales environment where we expect to be increasingly active. Now I would like to turn to our earnings for the quarter. Last night, we reported funds from operations for the third quarter of $1.74 per share, which is $0.04 per share above the midpoint of the FFO guidance range we provided in July. All of the outperformance came from better-than-projected same-property portfolio NOI due to a combination of the straight-line rent impact of completing early renewals at higher rents and lower net operating expenses in the portfolio. Our occupancy came right in line with our expectations. As Doug described, occupancy in the same property pool increased by 20 basis points from last quarter. We grew occupancy sequentially in Boston, New York City, Reston and Princeton. The improvement showed up in our top line lease revenues that increased $4 million this quarter. In our leasing activity this quarter, we executed 4 early renewals totaling 500,000 square feet at 399 Park and 200 Clarendon Street with future starting rents nearly 15% higher than our in-place rents. We are locking in future rental rate increases and a portion is straight-lined into the current period and improving 2025 revenues. Our portfolio revenues exceeded our guidance for the quarter by approximately $0.02 per share. On the expense side, we experienced lower-than-anticipated repair and maintenance expenses this quarter, and that contributed $0.02 per share to our outperformance. I anticipate that we will give some of this performance back in the fourth quarter as our teams complete R&M projects that were budgeted for Q3, but not completed in the quarter. We also recorded $212 million of impairments this quarter related to assets that are part of our strategic sales program we announced on our Investor Day. The accounting guidance requires that we recognize impairments to fair value when we shorten our whole period and prior to an asset sale actually closing. On the flip side, gains on sale are not recorded until the sale closes. So if you look at our sales program as a whole, we anticipate that the aggregate gains less impairments will total nearly $300 million. We expect gains will be recorded in future quarters as we execute our sales strategy. Looking at the rest of 2025, we've increased our guidance range by $0.03 per share at the midpoint, and we expect full year 2025 FFO of $6.89 to $6.92 per share. Our increased guidance includes a $0.07 increase in the low end of our range, reflecting outperformance from the third quarter, some of which was incorporated into our guidance range we provided last quarter. Sequentially, we expect Q4 funds from operations to be higher than our Q3 actual FFO from higher portfolio NOI and lower net interest expense. With respect to changes in our guidance, the outperformance in our same-property portfolio is expected to add an incremental $4 million to our full year NOI assumption. That equates to about $0.02 per share of improvement. We've reduced our net interest expense projections for the full year 2025 by approximately $6 million or $0.03 per share. The improvement is from our new $1 billion exchangeable notes offering, where we're recording interest expense at 2.5%, and we're actually earning over 4% on the proceeds until we repay our expiring bonds on February 1 next year. And we also improved the interest rate with our Hub on Causeway refinancing, and we're projecting several asset sales to occur in the fourth quarter that will reduce our debt. These increases to our FFO are anticipated to be partially offset from the reduction of about $0.02 per share of NOI from asset sales that we expect will close in the fourth quarter. If you include the associated changes in interest expense, our fourth quarter asset sales are projected to be dilutive by $0.01 per share. So to summarize, we've increased our guidance range for 2025 FFO by $0.03 per share at the midpoint, $0.02 of higher same-property NOI, $0.03 of lower net interest expense offset by $0.02 of lower NOI from asset sales. At our investor conference last month, we provided some insights into our expectations for FFO growth in 2026. Doug described our active leasing pipeline that we expect will lead to higher occupancy primarily in the back half of next year. We are off to a strong start on our refinancing plan with our exchangeable notes deal pricing with a GAAP yield that is 75 basis points better than we anticipated. The impact is about $0.04 per share of lower interest expense in 2026 than we described at our Investor Day. We still have $1 billion bond issue expiring October 1 next year that has a 3.5% yield. We currently project that we will refinance it with a 10-year unsecured bond where we could issue today at approximately 5.5%. The other factor that is fluid and will have an impact on our 2026 results is the timing of our asset sales. As we stated at our Investor Day, we expect the program to be slightly dilutive in 2026. We are seeing good response to date, which could accelerate some of our sales. We will continue to update you every quarter on the success of the program as it evolves. That completes our formal remarks. Operator, can you open the lines for questions? Operator: [Operator Instructions] And I show our first question comes from the line of Steve Sakwa from Evercore ISI. Steve Sakwa: Owen, I guess I wanted to go back to maybe some of the comments you made about reallocating capital into the premier locations. And as you're looking at deals, how are you thinking about some of your smaller markets like a Seattle and L.A. where you haven't had the success in scaling those markets? And a, are you seeing the opportunities to buy high-quality assets in the submarkets that you want to be in? Are you finding development opportunities? And like, I guess, how do you think about those markets long term if you aren't able to scale? Owen Thomas: So you're asking about L.A. and Seattle, where they are smaller markets for us now. We have a toehold, a couple of assets in each. They're on the West Coast. So they -- those markets from a leasing standpoint are weaker in general than our East Coast markets. I don't think there are development opportunities in L.A. or Seattle at the moment. I don't think there are any in San Francisco either because those markets are weaker. The leasing is not as strong. The vacancy is higher. So I certainly don't see any near-term development opportunities. And if an acquisition opportunity presents itself in those markets, we would certainly look at it. But acknowledge that those markets are smaller at this juncture. Operator: And I show our next question comes from the line of Anthony Paolone from JPMorgan. Anthony Paolone: On a call yesterday, one of the other office names talked about just having done enough leasing in '26 at this point that what's remaining just may have a lower retention rate. And so just wondering how you're thinking about what's left for you all in '26 given you've done so much this year and just any risk around or confidence level around a couple of hundred basis points of pickup in occupancy you've outlined? Douglas Linde: Tony, this is Doug. We are working as quickly and as thoughtfully as we can to renew as many of our clients that as we would have in the portfolio if we can accommodate their growth and if they're able to continue to want to be in business. I would tell you that our available set of tenants with expirations has dramatically decreased. So there's not a lot there in sort of the aggregate, right? I said 3.8 million square feet of space over 2 years, and we're a 48 million to 49 million square foot portfolio. So that's about 7%. Do I expect we're going to renew 50% of that? Yes. Do I expect that we're going to renew 60% of that? No. We are leasing about 1 million square feet per quarter if we're able to maintain that velocity, which I don't see any reason why we shouldn't. We will be able to meet or exceed the expectations that we outlined when I sat in front of you all in September, which is about a 200-plus basis point increase in occupancy by the end of 2026 and another 200 basis points of increase in occupancy at the end of 2027. Those are our projections. We're confident in them today, and that's what we're sort of sticking with. Operator: And I show our next question comes from the line of John Kim from BMO Capital Markets. John Kim: I wanted to ask about the recovery in San Francisco. It sounds like, Doug, from your commentary that your high-rise product is not where AI demand is currently, and I'm wondering if that's something you plan to address. And also I wanted to see if you had any early thoughts on Salesforce's $15 billion commitment into the city and what that could mean for job growth and office demand? Douglas Linde: Sure. So let me start, and then I'll ask Rod Diehl to make some comments. The AI demand is not a tower business right now. Although companies like Salesforce, I guess, are calling themselves AI companies now, so maybe that's slightly different. But the AI growth relative to infrastructure companies or VC-backed companies is really a low-rise south of Mission Street demand pool, obviously, with AI and anthropic sort of headquartered in either Mission Bay or in Foundry Square, right? That's kind of the world where I'd say the nucleus of that is. And it's unlikely that you're going to see an AI company taking a 25,000 square foot piece of space at one of the buildings in Embarcadero Center or at 535 Mission Street or at Salesforce Tower if there was availability, as opposed to going into, as I described, what they would like to go into today, which is shorter-term, cheaper, less expensive furnished space, right, which is really in what I refer to some of the buildings that were occupied by technology companies from call it, 2015 to 2019 during that sort of booming period of time. I don't think there's much we can do to position our properties differently. The demand for Embarcadero Center in particular, is really professional services, administrative services. That's not to say that there aren't a couple of small start-ups that have a couple of thousand square feet in a suite here or there, but it's hard for us to imagine a large growth component there, very different at 680 Folsom Street. 680 Folsom Street is a mid-rise building with 35,000 square foot floors, with 16-foot clear glass with availability today and more availability coming in as the macys.com lease expires, it's a perfect setup for an AI company from a growth perspective. And Rod, maybe you can comment on the Salesforce initiative relative to their contributions into the city. Rodney Diehl: Yes. Thanks, Doug. On Salesforce, I mean it was great to hear that news. And that was a fantastic bit right in front of their Dreamforce event, which happened last week, and it was very well attended, which is great for the city. So we haven't heard more specifics on what exactly that investment is going to look like. But I think being the largest private employer in San Francisco, making a commitment like that is pretty meaningful. And -- so we're eager to see where it leads. And as Doug said, I mean, the other activity in the buildings that's kind of driven by this AI push, we're seeing it as 680 Folsom. We're very encouraged by that activity. And just the overall just optimism that a lot of that brings to our city. So it's positive. Douglas Linde: Yes, I just want to make one other comment on that, which is there have been a lot of articles and news reports about the reduction in jobs, white-collar jobs over the past, call it, 3 or 4 days in particular. And San Francisco is sort of the opposite of that, right? We are seeing growth from these companies in terms of the amount of space they are looking to lease and obviously, the number of people they are hiring. And you sort of see these tongue-in-cheek articles as well about the intensity of which people are working and the fact that they are working in premises all of the time. I mean that is sort of what we are experiencing from the technology companies in San Francisco as we sit here today in 2025. Operator: And I show our next question in the queue comes from the line of Richard Anderson from Cantor Fitzgerald. Richard Anderson: Can you talk about the percentage of the portfolio of -- let me say it this way, that leases that were signed pre-pandemic that have yet to have been addressed at this point? And just how with the passage of time your experience has been with tenants in terms of their willingness to take more or less space, space per worker, square feet per worker? How are those dynamics changed? And sort of what's left pre-pandemic that is still sort of -- has to be addressed by you guys? Douglas Linde: So Rich, it's a really, really hard question to answer in a specific way. So let me try and answer it in a more general fashion. BXP traditionally has been leasing space on a long-term basis with an average lease length today of about 8 years, but all of our new leases that we generally do are between 15 and 20 years. So there's a lot of "pre-pandemic leasing" in our portfolio, right? It's just -- that's just matter of how we compose the portfolio. The fundamental important fact, however, is that if you look at who our clients are and we go through all kinds of disclosure in terms of who our top clients are, all of the growth that we are seeing is coming from clients who were pre-pandemic occupants taking additional space as the world has changed post-pandemic. And quite frankly, because so much of our clients are in the financial services, professional services, administrative services business, what is going on relative to those industries is much more important relative to the sort of composition of our portfolio and the growth than what is going on with companies that may or may not have taken additional space during the dot-com growth in 2000 or in the post-GFC or in the years leading up to the pandemic because that's just not what our portfolio is comprised of because we're -- again, we are -- that's not who we are. And as Owen has said, and you'll see it as we move forward over the next couple of years, we're reducing our exposure to what I would refer to as less of those types of buildings and those types of customers and clients in terms of the kinds of things that we are going to be disposing of. So I don't think it's an issue of any significance relative to how much "growth" there was during the pandemic relative to the Amazons of the world that was described in a couple of those articles in the last few days relative to sort of their pickup in the number of people that they had hired because we didn't experience that within our portfolio. Michael LaBelle: Doug, the other thing I would add is just -- and we've mentioned it, we just don't have a lot of rollover, and the rollover we have is very granular, right? There's no really large tenants. I mean there's no tenant over 150,000 square feet that expires in the next 2.5 years. So we just aren't exposed to some big vacancy coming. And the other thing I would note that Doug described in his comments is -- and this has been the case for the last few quarters, more of our tenants are expanding than contracting when they renew. So this quarter, Doug mentioned, we had 85,000 square feet of net expansion by clients that we did deals with where they stayed in our portfolio. Operator: And I show our next question comes from the line of Nicholas Yulico from Scotiabank. Nicholas Yulico: So I know, Doug, you gave a lot of detail on leases in the third quarter and even some leasing in the works to address vacancy. But as we think about that occupancy build that you had at the Investor Day and the component there that is leases that address vacancy, given that the build-out could take some time, is it right to think that like by next quarter, you guys should be in a position to sort of maybe declare victory on the vacant space piece of that equation that gets the occupancy benefit by year-end next year? Douglas Linde: I guess I don't think about this on a quarter-by-quarter basis. Our projections were done on an annual basis. We -- again, we have 1 million square feet of current leases that are signed that are going to be starting in 2026. And so clearly, that will -- that's the driver of a lot of our confidence relative to 2026. I also said that the activity that our team and I'll let Hilary describe it at 350 Park Avenue is above our expectations. Again, I think that -- all that activity will lead to leasing in '26 and occupancy in 2026. So 200 basis points is a pretty meaningful increase, right? And another 200 basis points is another meaningful increase. So we're comfortable and confident that we will be able to achieve those numbers based upon the conditions that we're seeing now in the economy and in our marketplaces. And Hilary, maybe you can sort of describe what's going on at 360? Hilary Spann: Sure. So at the moment, we have 6 floors leased, and in discussions with proposals out, we have covered every other floor except 1. So to the extent that we were able to secure all of the tenants that we're currently in negotiations with, we would have 1 floor available at 360 Park Avenue South. So the tour activity has increased really dramatically. And as Doug noted earlier, the clients that are coming to see the building and asking us for these lease proposals are not just tech and media, but also more traditional asset managers and financial services firms that are just looking for great space and due to the tightness in the market are seeking out Midtown South, perhaps from Midtown or seeking to upgrade their space from existing locations in Midtown South. Unknown Executive: One quick note for Boston in terms of the speed of delivery of recent leases, there is a portion, and Doug and Mike could probably respond to this afterwards, but a portion of the activity that Doug mentioned in the Urban Edge is in existing products, and they are spaces that don't need as much build-out. So we would anticipate at least 150,000, 200,000 square feet that could be delivered in that zone next year. Operator: And I show our next question in the queue comes from the line of Seth Bergey from Citi. Seth Bergey: I think kind of at the Investor Day, you had outlined $0.09 to $0.04 of kind of dilution from asset sales. It sounds like pricing and the debt market is coming a little bit and ahead of your expectations. How should we think about kind of that impact? And I think you also mentioned potentially bringing some more assets to market. So just kind of what are the puts and takes there? Michael LaBelle: I think -- as I mentioned in my notes, I think this one is harder to judge because it's based upon the timing. So we estimated timing for the transactions that we have under our asset plan at our Investor Day. And now we have started to execute on that timing, right? So we now have more assets under contract than we had at that time. And we have more assets in the market than we had at that time. And we do feel like we're getting pretty good demand from people, pretty good response from people on this. So I think we're going to be successful in that. And so the timing of when these things sell will impact the range that we provided. And if it was significantly earlier than that, could it be slightly more diluted? Yes, it could be slightly more dilutive. But it's hard to provide a better answer than that at this moment in time. I think as we go through the next quarter or 2, we will have more and more information, and we'll provide it to you. Operator: And I show our next question comes from the line of Alexander Goldfarb from Piper Sandler. Alexander Goldfarb: Just a question on -- as you guys have tightened up the strategy since the Investor Day, just want to understand better on the investment side, how much of that -- when you guys think about the investment pool or more likely when the regional people come to you to submit proposals, how much the criteria have tightened up, meaning have yields been raised that, hey, all deals now need to be 100 basis points higher or some degree higher? Just trying to understand how it's gotten -- how you guys have tightened up again, just thinking about some of the legacy deals like a Platform 16, et cetera, [ that obviously I don't ] want to repeat, but you have the 343. So just trying to understand how the investment criteria has tightened up and how many deals got kicked out of discussion because of the new higher thresholds. Owen Thomas: We've talked about this on prior calls. Our threshold deal that we're looking at for developments as we've repeated over and over again, has been about 8% or higher. And really before interest rates went up and of course, some of the diminution in demand that we saw from COVID, we were developing, depending on the market and the asset between 6% and 7%. So the yield requirement for office development has gone up 100 to 200 basis points. You combine that with the elevation in construction costs, it takes significantly higher rents to support development. And as we said on Investor Day, what does that mean? That means we're going to be a more selective office developer. But we are developing. We've launched $2.5 billion, a little bit under that, $1 billion of new development projects in office just in the last 6 months. So that's the increase that you saw. And then as I just said in my remarks, we are looking at acquisitions. There hasn't really been much to look at up until the last 3 to 6 months. There's a little bit more today. And the issue has been, we feel like we can get higher yields developing, albeit -- and we'll have a new building and it will have lower CapEx and longer WAULT and all those things, but it takes several years to deliver the development, that's the trade-off. So again, we're going to continue to look at acquisitions. And as I said in my remarks, we're going to continue to be disciplined, and I think cap rates are probably 150 to 200 basis points right now in the market below our development yield threshold. Douglas Linde: Yes. And I just add one thing just to sort of give you a reference point. The development at 343 is, call it, $2 billion development. The development at 725, 12th Street is a $300 million development. Knock on wood, Jake and Pete are working really hard at lining up a client who desperately needs a new building with a potential purchase of a piece of ground or an existing building to build another building. Let's assume that's another, call it, $300-plus million. So we're talking about having $2.6 billion of developments that the company is going to be executing on. That's a pretty significant amount of external growth. And so I would say that the appetite for buying a building at a 6% NOI yield where the cash flow yield is probably 150 basis points lower than that, and there is rollover in 3 to 4 years, it's just not as enticing as those other opportunities are today. And so that's, I'd say, the frame of reference that we're sort of looking at as we think about "acquiring" new assets. Now if a fabulous building at an 8% cash return came up "off-market" and we thought it had great upside, of course, we would be really thinking about doing something like that. But these broker-initiated investments for "core assets" and CBD locations are -- they're interesting, and we're going to study them, but it's going to be hard for us to rationalize utilizing our dry powder for that. Operator: And I show our next question comes from the line of Michael Goldsmith from UBS. Michael Goldsmith: In the press release, you called out 89% of BXP's rents come from the CBD portfolio. Given the outlined dispositions are focused in the suburban markets, what percentage does that take CBD in the near term? And then long term, is the goal to just to be 100% or completely CBD? Michael LaBelle: I can't give you an exact percentage. I would agree that we want it to grow. There are certain suburban markets that I think we will maintain exposure to where we feel like we have a good sense of place where we can build an amenity-filled environment and where we think that it's got a mature and dense demand profile. So there are suburban markets that I believe we will stay in. I do believe though it's not going to go to 100%, but it's definitely going to grow because our -- both our asset sales focus, which is suburban, but also our new investment focus is more urban. So we're going to be adding assets that are CBD and detracting assets that are suburban. Operator: And I show our next question comes from the line of Jana Galan from Bank of America Securities. Jana Galan: Congrats on the progress you've already made on the priorities laid out at the Investor Day. On the dispositions, can you talk to the pricing you're seeing on land, residential and office relative to kind of initial expectations? Owen Thomas: I'd say that we're achieving pricing that is in line, if not a little bit better than our expectations. I mean it's very hard to say pricing for land because it depends on what the new user is doing. I think the real opportunity that we've had with land is that we have -- our regional teams have done a great job very successfully re-entitling many of these land parcels that were previously set up for office into residential. And as we all know, there's a housing shortage in this nation and many communities that were against housing in the past are for it today and that has allowed us to create a lot of value. The 17 Hartwell investment that I described last quarter is a great example of that. So it's a little bit hard to talk about "pricing for land." I think on the residential assets, we are seeing cap rates below 5%, which we think is very attractive. And on the office, it all depends on the location and the quality. Operator: And I show our next question comes from the line of Floris Van Dijkum from Ladenburg Thalmann. Floris Gerbrand Van Dijkum: Clearly, it looks like your office markets -- your core office markets are inflecting. Office underlying growth was positive. It was down though in the hotel and residential. I think -- maybe remind us, there was a big occupancy decline apparently in D.C. in the residential side. Could you maybe talk about that? Douglas Linde: I'm going to -- Mike is going to quickly look through the supplemental. The only thing I can imagine is that we brought 100% of Signature is in service, and then we brought Skymark into service. And Skymark is probably not 98% leased yet, although my guess is that we're going to be stabilized, which I think is, call it, in the 93% to 94% this quarter, which is extraordinary given the amount of units that we had delivered there. So I'm guessing that's sort of what happened. But I wouldn't -- I would not take that as anything other than a change in portfolio composition, not activity in our actual assets. Michael LaBelle: Yes, that's what it is, because this is a year-over-year concept. It's not a sequential concept. So in September of '24, the Skymark building was under development, right? And now it's leasing up, and it's actually leasing up quite well. It's, I think, around 90%, and it's leased up better than we expected. The occupancy in the stabilized portfolio that has been in service for a while has been very strong and stable and rents have continued to go up. Again, our residential portfolio is located in pretty tight markets. And so places like the urban Boston market and Reston, we've seen good fundamentals with our residential. Douglas Linde: And it's going to get smaller in 2026 before it gets bigger again. Operator: And I show next question comes from the line of Ronald Kamdem from Morgan Stanley. Ronald Kamdem: Just on same-store NOI. I think you talked about sort of the occupancy inflection point, obviously improving '26, '27. Just can you tie that back to what the expectations are as you think about same-store NOI? Should we expect sort of similar 100, 200 basis point sort of acceleration? And what are the puts and takes there? Michael LaBelle: So we're not going to provide guidance for 2026 or 2027 today. I think that most of our growth is going to come from occupancy, and we've talked about that. I think the mark-to-market in the portfolio is improving because we're seeing rents go up in many of our marketplaces. So I think that situation will -- is improving and will continue to improve. And I think we will see positive same-store NOI growth as the occupancy climb. So yes, we will -- it will follow. It makes sense to follow and should. Operator: And I show our next question comes from the line of Upal Rana from KeyBanc Capital Markets. Upal Rana: Could you provide some color on the current state of what you're seeing in terms of demand for life science leasing and supply across your markets, given some softer commentary from another one of your peers. You mentioned a few things related to Boston and Urban Edge, but maybe you can broaden that out a little bit and maybe what your outlook is for that industry? Douglas Linde: So our life science exposure at BXP is comprised of 2 places. It's the Urban Edge of Boston, which I described. And again, we have 180,000 square feet of first-generation space available. And then it's our joint venture with another public RIET ARE in South San Francisco, where we have a large building that was developed a few years ago that is available for lease where, again, I think I described the demand for wet lab space being pretty tepid. Not much has changed on a relative basis there. We are seeing "some inquiry," but we're not, what I would describe as, close to any major transactions at that building at this time. Operator: And I show our next question comes from the line of Dylan Burzinski from Green Street. Dylan Burzinski: Owen, I think you mentioned seeking or going out to market and seeking a capital partner for 343 Madison sometime in 2026. But I guess just given the tight availability that you're seeing in New York, especially in the submarket, the 343 Madison is in and likely continued net effective rent growth. Why not sort of put the brakes on reaching out and getting the capital partner given that sort of backdrop? Owen Thomas: Yes, it's a good question. I think as I tried to describe in my remarks, we're just being patient. We've had some inbound inquiry. We know of some investors that are interested in the project. We're having preliminary conversations. As I mentioned in my remarks, we're not in a hurry. This asset is appreciating. We're having leasing success. Markets are improving, as you suggested. And I think this will happen sometime in 2026. We do want to match to some degree, a commitment of capital to raising the capital. And so far, the development draws and spend on the project have been reasonably modest, but they do start to accelerate next year. So I do think 2026 will be an appropriate time. Douglas Linde: And Dylan, just remember, as Owen said at the outset, we have 3 objectives, right? Our objectives that we outlined at our Investor Day were we want to grow our earnings and that's mostly through occupancy and deliveries of developments that are currently underway, we want to fund 343 Madison and we want to reduce our leverage. And so I think that our objectives in finding a partner sort of meet all of those requirements. Operator: And I show our last question in the queue comes from the line of Blaine Heck from Wells Fargo. Blaine Heck: Owen or Doug, I was hoping to get your latest thoughts on the New York mayoral race and any sort of impact you've seen, any commentary you've heard from tenants and just your general thoughts on whether it could or will have a notable impact on the New York office market. Owen Thomas: I would suggest that the significant negative rhetoric that's in the press and the media about the impact of the administration of Mayor Mamdani, I think it's just overblown. I'm not suggesting that there are impacts that we need to be conscious of and aware of. As we've described before, there are controls and guardrails that exist for the mayor in New York. The state has a lot of approval powers over things like public transit and increasing taxes. And the state has indicated so far, there's not a lot of appetite for increasing taxes in New York. So that's something that we are concerned about. And again, our success as a company in any city is capped at the city's success. And so we want to do what we can to work cooperatively with the city and ensure that there are -- that it's a constructive environment for business, there is safety and security for the citizens. And those are the kinds of things that we're very focused on. The potential Mayor Mamdani has indicated that he wants to hire Jessica Tisch, who's the current head of the New York City Police Department. I don't know that she's agreed to do that yet, but we all think that's a great step because I think she received high accolades for her performance and success to date. So again, something that we're monitoring. But we are, I think, a little bit more constructive than what the media has been outlining on this change. Operator: And I do show we have one question in the queue from Brendan Lynch from Barclays. Brendan Lynch: I'm just interested in your view on the new office tower above South Station in Boston and how that might impact leasing dynamics in the market? Douglas Linde: So I'll give you a couple of comments, and I'll let Bryan give you his perspective. So the building that is currently open and has been available for the last number of months is a gleaming tower, and it's, I'm sure, going to be successful from an occupancy perspective at some point. There is a conversation, as I understand it going on with a large financial institution to relocate there, not necessarily grow, but relocate there. The building hit the market at the absolute wrong time, and there's a bunch of availability in the financial district that it had to compete with. And so the economics of the investment are different than what I would tell you, the success will be from an occupancy perspective because of just the nature of what's going on. I think it's unlikely that another building in the financial district will be started for quite some time. So if the market is able to continue to sort of absorb space, I think the [ financial ] market downtown will continue to recover. We have an opportunity to build a building at 171 Dartmouth Street, which is in the Back Bay, and there are obviously significant opportunities from a tenancy perspective because we have very, very, very tight supply in the Back Bay. So I think there's a higher -- much higher probability of something going on there. We would obviously not start that building unless we had a major commitment from a lead anchor tenant, as Owen sort of described earlier in terms of -- and he said what our development yields were. So I think that's sort of what I'd say my general views are on that development. Bryan? Bryan Koop: Yes. So I'd comment on what's the impact to BXP portfolio. And as Doug mentioned, as you look at the Back Bay as the submarket, there's very little transfer of tenants that leave this market, and it's highly desirable. We look at our competitive set of the buildings we compete against daily, and it's a 3% vacancy. So it's extremely tight, as Doug mentioned. And in fact, we're actively asking tenants if they'd like to give back space because we've got growth in those sectors that Doug mentioned earlier. And then when you look at the downtown market, our buildings are leased up and tucked away for quite a few years now with limited, limited space at 100 Federal and the same is true at Atlantic Wharf and also Hub on Causeway. Operator: That concludes the Q&A session. At this time, I would like to turn the call back to Owen Thomas, Chairman and Chief Executive Officer, for closing remarks. Owen Thomas: No further remarks from us. Thank you all for your interest and your time and your interest in BXP. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Brock: My name is Brock, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Fortive Corporation's third quarter 2025 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star 2. I would now like to turn the call over to Ms. Christina Jones, Vice President of Investor Relations. Ms. Jones, you may begin your conference. Christina Jones: Thank you, and thank you everyone for joining us on today's call. I am joined today by Olumide Soroye, President and CEO, and Mark D. Okerstrom, Fortive Corporation's CFO. As a reminder, we successfully completed the separation of our precision technology segment, now operating independently as Ralliance, on June 28, 2025. Today's call marks Fortive Corporation's first quarterly results under our new structure. During today's call, we will present certain non-GAAP financial measures. Information required by Regulation G is available on the Investors section of our website at fortive.com. We will also make forward-looking statements, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks, and actual results might differ materially from any forward-looking statement that we make today. Information regarding these risk factors is available in our SEC filings, including our annual report on Form 10-K and the subsequent quarterly reports on Form 10-Q. 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. Our statements on period-to-period increases refer to year-over-year comparisons unless otherwise noted. Our results and outlook discussed today are on a continuing operations basis unless otherwise noted. With that, I'll turn the call over to Olumide Soroye. Olumide Soroye: Thank you, Christina. Let me begin on slide three with a few key messages. Q3 was our first quarter as a new company following our successful spin-off of Ralliance. We are now a simpler, more focused company with a clear strategy, poised to create meaningful shareholder value. Our Q3 results offer a waypoint along our path towards creating exceptional returns for shareholders in the years ahead. Four highlights I would like to call out. First, our teams are executing very well, with laser focus on driving profitable organic growth with the power of our Fortive Business System. This drove solid results ahead of our expectations, including core growth of roughly 2%, adjusted EBITDA growth of 10%, and adjusted EPS growth of 15%. Though we aspire for much better, as we continue executing our growth strategy, we're pleased to see acceleration in the business. Second, we are raising our full-year adjusted EPS guidance. We now expect to deliver between $2.63 and $2.67 per share, reflecting our adjusted EPS overperformance in the third quarter, the impact of incremental Q3 buybacks, and our otherwise unchanged view on Q4. Third, we deployed capital in the quarter in accordance with our new approach, anchored in delivering the strongest relative returns for shareholders. During the third quarter, we deployed $1 billion to share repurchases, retiring approximately 21 million shares or 6% of our fully diluted share count. Finally, the financial framework we outlined at our June Investor Day remains fully intact, and our fully accelerated strategy is now in execution mode. We are focused on delivering benchmark-leading shareholder returns by leveraging FBS to accelerate profitable organic growth, allocating capital intelligently to optimize shareholder returns over the medium to long term, and rebuilding investor trust. It is early days, but we couldn't be more excited for the road ahead. Before we dive into our Q3 results, let me highlight some examples of the progress we are making in executing our Fortive Accelerated strategy. On Slide four, our strategy to drive faster organic growth is built around three core levers: innovation acceleration, commercial acceleration, and recurring customer value, all powered by our amplified Fortive Business System and enhanced by our disciplined capital allocation approach. We made meaningful progress in advancing our strategy in Q3. Starting with innovation acceleration, our new product introduction velocity continues to accelerate as a result of our renewed focus on customer-centric innovation. During the quarter, we had several notable product launches, including ServiceChannel's SaaS, which introduces AI-powered work order insights and streamlined payment solutions. Additionally, Fluke continued its innovation momentum with the GFL 1500 solar ground fault locator. This marks a further foray into the high-growth solar operations vertical and increases customer productivity by reducing troubleshooting time and decreasing hazard exposures. In the quarter, we also launched a new innovation studio in Nashville, Tennessee, and opened a new customer experience center at ASP's headquarters in Irvine, California, both purpose-built to foster collaboration, accelerate innovation, and deepen customer relationships. Turning to commercial acceleration, we further intensified our commercial focus on faster-growing end markets and regions. And though it is early, we are starting to see green shoots in several areas. In our iOS segment, for example, we have begun to put in place a series of commercial initiatives in North America to enhance our focus and deploy more resources towards high-growth verticals like solar operations, distributed energy, data centers, and defense. We are seeing the early signs of impact in North America Q3 performance. We also recently stepped up our efforts in South Asia, including India, as that region continues to see exceptional economic growth. We saw significant acceleration in the region across both segments, and we are confident that our enhanced regional presence will drive strong momentum in this high-growth region in the years to come. Moving on to recurring customer value, we remain focused on increasing recurring revenues. Here again, we are early in our journey and have meaningful runway ahead of us. In the quarter, Fluke continued to make great progress on increasing its percentage of recurring revenue through enhancements to our maintenance software and further expansion of our service plan offerings. And in general, we saw recurring revenue growth continue to outpace our consolidated growth. Finally, disciplined capital allocation is an integral component of our Fortive Accelerated strategy. Our capital deployment priorities for new Fortive include investing in organic growth, pursuing accretive bolt-on M&A, returning capital through share repurchases, and maintaining a modest growing dividend, all with a focus on best relative returns and maximizing medium to long-term shareholder value. Consistent with these priorities, we repurchased about 21 million shares in the third quarter, reflecting our belief in the attractive relative return of share buybacks at the valuations we saw in the quarter. We have also revamped our M&A funnel and process to reflect our different M&A strategy going forward, focused on accretive smaller bolt-on M&A which meet our stringent strategic and financial criteria. With that, I'll turn it over to Mark to walk through our financial results for the third quarter. Mark D. Okerstrom: Thanks, Olumide. I'll begin with slide five. In the third quarter, we delivered total revenue of just over $1 billion, up roughly 2% year over year on both the reported and a core basis. While market conditions remain dynamic, we were encouraged to see growth in both iOS and AHS and modest outperformance versus our expectations in both segments. In iOS, resilient customer demand drove better than expected results at both Fluke and our facilities and asset lifecycle software businesses. In AHS, healthcare customers continue to exhibit caution as they navigate recent changes to healthcare reimbursement and funding policy. However, we saw sequential improvement in demand for healthcare equipment and consumables and continued strength in healthcare software. From a geographic perspective, North America showed solid growth, improving sequentially from Q2, driven by strengthening demand trends for professional instrumentation and healthcare equipment. Europe was down year over year and worsened modestly driven by weakening macro conditions in the region. Rest of world was mixed. Adjusted gross margin in the quarter was down about 60 basis points driven by tariff-related costs partially offset by pricing actions and supply chain countermeasures. Adjusted EBITDA was $309 million, up 10% year over year, with growth accelerating from Q2 levels. Adjusted EBITDA margin expanded approximately 200 basis points to 30%. This strong operational performance was driven by operating leverage, deliberate organizational streamlining, and an overall sharpened focus on corporate cost discipline. We delivered adjusted EPS of 68¢, up 15% year over year, a meaningful acceleration from Q2, driven by growth in adjusted EBITDA, favorable interest expense on lower debt balances, and the positive year-over-year impact of share repurchases. We estimate direct tariff costs net of countermeasures created a roughly $0.01 headwind to adjusted EPS in the quarter. We generated $266 million of free cash flow in the third quarter, and our Q3 trailing twelve-month free cash flow grew to $922 million. Our Q3 trailing twelve-month free cash flow conversion on adjusted net income remains comfortably north of 100%. Moving to our segment results starting with Intelligent Operating Solutions on Slide six. Revenue for the segment grew just over 2.5% on a reported basis, with core revenue growth of 2%, slightly ahead of our expectations. Growth was driven by demand for facility and asset lifecycle software, resilient demand for professional instrumentation despite tariff volatility, and strong growth in gas detection products. At Fluke, we saw an improvement in customer purchasing patterns drive modest growth, with particular strength in North America, partially offset by continued softness in Europe related to macro conditions. While the acceleration is encouraging, ongoing volatility in global trade policy remains a source of uncertainty. Our facilities and asset lifecycle software businesses performed modestly ahead of expectations, supported by strong demand for multisite facility maintenance and marketplace software in North America. However, tighter fiscal policy and constrained funding continue to pressure government demand for our procurement and estimating solutions. Our gas detection business is growing nicely, with strong demand for our hardware as a service model to ensure worker safety, with particular strength in North America and Latin America. Adjusted gross margin in the segment declined by just over 90 basis points year over year to 65.7%, primarily due to tariff cost pressures partially offset by pricing and supply chain countermeasures. Adjusted EBITDA grew 7% to $242 million, accelerating from the more modest growth we saw in Q2, driven by operating leverage and reduced costs associated with flattening and rationalizing segment-level organizational structures. Adjusted EBITDA margin grew to 34.6%, up from 33.3% in the prior year period. Moving to our Advanced Healthcare Solutions segment on Slide seven. We delivered total revenue of $328 million. Revenue grew approximately 2% year over year, just over 1% on a core basis. As we noted last quarter, we continued to see reimbursement and funding policy changes impact the AHS segment, specifically the deferral of US-based hospital capital expenditures on healthcare equipment. However, demand trends in North America improved from Q2 levels, driving sequential improvement in capital performance, as some customers executed on deferred orders for sterilization and biomedical test equipment. Consumables demand also improved sequentially across most regions. Encouragingly, our software products in the segment continued to deliver solid growth, fueled by strong execution and structural advantages from resilient SaaS-based revenue models. Our adjusted gross margin of 58.4% in the AHS segment was similar to last year. Adjusted EBITDA grew approximately 7% year over year. Adjusted EBITDA margin expanded from roughly 27% to 28%, driven by operating leverage, flattened organizational structures, partially offset by modest incremental R&D investments. Turning to Slide eight. As noted earlier, we deployed just over $1 billion of capital to share repurchases in the third quarter, reflecting confidence in our ability to deliver on the core value creation plan represented by our Fortive Accelerated strategy and the attractive valuation we saw in the quarter. We funded these repurchases with a combination of the remaining proceeds from the Ralliance spin-off dividend, cash on hand, and increased commercial paper issuance in anticipation of continued strong free cash flow generation in the quarters ahead. As previously highlighted, our free cash flow on a trailing twelve-month basis was $922 million. Moving to Slide nine. We are raising our full-year adjusted EPS guidance to $2.63 to $2.67 per share. Our guidance reflects Q3 results ahead of our expectations, the impact of incremental buybacks in Q3, and otherwise no change to the view we held on Q4 as at our last earnings call. This outlook also assumes a continuation of the market dynamics we experienced as we exited Q3. It also reflects current or known future tariff rates expected to go into effect through the end of the year, with tariffs net of countermeasures not expected to be material in the quarter. Let me provide a few additional modeling considerations. Based on what we see today, we are expecting overall core growth to moderate in Q4, with AHS core growth broadly in line with Q3 levels and very modest core growth at iOS. We continue to expect a full-year adjusted effective tax rate in the mid-teens and a Q4 tax rate in the single digits due to discrete tax items in the quarter. We also expect a sequential increase in net interest expense in Q4, reflecting our cash and debt levels at quarter end. As a final note before turning it back to Olumide for closing remarks and Q&A, in our first quarter post-spin-off, we took important first steps to demonstrate our steadfast commitment to unrelenting execution on the Fortive Accelerated three-pillar value creation plan that we outlined at our June Investor Day. We have much work left to do, but change is underway, and we are energized by the exciting work ahead of us. I'll now turn it back over to Olumide. Olumide Soroye: Thanks, Mark. I'll close out our prepared remarks with a few reflections from my first quarter as CEO and offer a bit more color on the changes we have catalyzed at Fortive Corporation in the past one hundred days. First, our thesis behind the creation of New Fortive as a simpler, more focused company is showing promising early outcomes. We are seeing the benefits of simplification in our day-to-day operations, enabling us to be notably more customer-centric. With fewer operating brands, we've been able to simplify our organization model and processes. That is freeing up more time across our team to focus on the source of growth: our customers. Personally, I have really enjoyed spending significantly more time with our customers across both segments, as we deepen relationships and uncover additional opportunities to accelerate growth. We have also flattened out our executive leadership team to ensure that business leaders in closest proximity to our customers have a stronger voice at the top of our company. With 100,000 customers across our portfolio, I am energized by the impact our enhanced customer-centric approach will have on our growth trajectory. Second, we are taking deliberate steps to accelerate growth. We are giving our 10 operating brands more growth oxygen and encouraging them to freely and frequently surface the next best organic growth opportunity that may have been underexploited in the past. We have transformed our strategic planning process into a more aggressive growth-focused engine, and we are emerging from our recent strategic planning cycle with a robust pipeline of investable growth opportunities. We are regearing our annual financial planning, forecasting, and governance processes to enable in-year reinvestment into growth. We are making great progress in evolving the mindset, cadence, and tools of FBS to better support growth, not just by integrating our AI center of excellence directly into our FBS team, but also by evolving and enhancing existing tool sets and best practices around innovation, commercial acceleration, and creating recurring customer value. Finally, our new approach to capital allocation is very different from what it was in the past. Our dynamic and disciplined capital allocation approach has one singular purpose: maximizing medium to long-term shareholder returns. We have demonstrated our commitment to this approach in our first quarter as New Fortive. We are pleased with our results this quarter, but we are not satisfied. We are driving hard towards our ambitious agenda and look forward to demonstrating continued and accelerated progress in the quarters and years ahead. Thank you for your continued interest in Fortive Corporation. I especially want to thank our shareholders, our 100,000 customers, and all our Fortive employees around the world who do a tremendous job every day to deliver strong results and build enduring advantages in our businesses. With that, I'll turn it to Christina for Q&A. Christina Jones: Thanks, Olumide. That concludes our prepared remarks. We are now ready for questions. Brock: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1. You may press 2 if you would like to remove your question. For participants using speaker equipment, it may be necessary to pick up your handset. Our first question today comes from Nigel Coe of Wolfe Research. Please proceed with your question. Nigel Coe: Oh, thanks. Good morning. Afternoon, a long day. Thanks for the details. Obviously, you know, the margin performance was for our to our mind the real highlights. And it seems, you know, when I look at your sort of implied four Q guide, it looks like you're not assuming much of a sequential pickup in EBITDA margins. I mean, back into something in the range of about 31% EBITDA margin for the fourth quarter. So just curious, is there any sort of was there a sort of stars aligning kind of quarter on margin and you're not assuming that repeats? Any kind of details there around some of the tariff offsets you expect in 4Q? Mark D. Okerstrom: Hey. Hey, Nigel. How are you? Thanks for the question. So if you think about the overperformance we delivered in Q3, a part of it was revenue performance. As you called out, a big chunk of it was cost. And you can see that show up in the numbers both in unallocated corporate costs and also in the segments. Most of that was actually discrete actions that we took in the quarter really to start to free up resources for us ahead of annual planning. So that we could deploy against some of the initiatives that, you know, we're starting to see as part of the Fortive Accelerated strategy, accelerate growth into 2026. So we do expect to redeploy some of the resources we've freed up in the fourth quarter. There were a few little one-timers, incentive compensation, some increased capitalization of software development that happened in the quarter. We're going to maintain our cost discipline through the fourth quarter to be sure, but we are going to reinvest some of it as we look forward here. Nigel Coe: Okay. That's a good color. And then my follow-on is really around the government shutdown. I think we hit the fourth week today. You called out some government funding pressure within Gordian. Just curious how that's impacting performance in October? Olumide Soroye: Yes. Thanks, Nigel. So the government's business for us is mostly state and local government agencies. So in that sense, the federal government shutdown is not a big factor. Our direct exposure to the federal government is relatively small, just a little bit in our Fluke business and AHS. So it really just hasn't been a major factor for us right now. It's difficult to predict, you know, the duration of a shutdown and second-level impacts of a prolonged shutdown. But we feel good about the guidance based on what we know today. And again, given it's not a big direct exposure to the federal government for us, we feel good about what we've laid out. Brock: That's great to hear. Thank you. Thanks. The next question is from Deane Dray of RBC Capital Markets. Please proceed with your question. Deane Dray: Thank you. Good day, everyone. How are you doing? I was hoping just to circle up on capital allocation. That was a sizable buyback in the quarter. Just kind of give us your thinking about the decision-making on doing buybacks. You know, is there intrinsic value calculation you're doing internally? And then just the setup for M&A because you had been through this moratorium on deal-making leading up to the spin. Where does that stand in priorities? Thank you. Olumide Soroye: Yeah. Thanks for the question, Deane. So we were quite pleased to be able to deploy a billion dollars towards share repurchase in Q3. And that reflected just our strong free cash flow, the Ralliance dividend proceeds, and just the attractive valuation we saw for our shares in the quarter. And like we've mentioned with respect to Fortive going forward, share repurchases will be a big part of our capital allocation option set. So anytime we see conditions like that, we'll continue to do that. To the extent that M&A is still part of a formula, we've been quite clear that we are not looking at transformational M&A. We're looking at smaller bolt-on acquisitions that can accelerate the go-forward growth of our existing businesses. So it's a very different playbook on M&A. We are going to be more balanced across share repurchase and these bolt-on M&A acquisitions that we do. Like we mentioned at our Investor Day, the formula we laid out for shareholder value creation in three years does not require us to do M&A. So from our point of view, we're going to take the path that offers the lowest risk to create value. And that for us does not include big M&A. So we continue to cultivate our funnel of proprietary bolt-on assets that are smaller and can help our existing businesses. But that's how we think about it. We do the analysis to your point of what gives us best relative returns between share repurchase and the M&A options that we have, and in the third quarter specifically, the case was very clear just given where the stock price was to deploy that heavy billion dollars to repurchase. Deane Dray: That's really helpful. And just as a second question, was hoping to get some color on Fluke in the quarter. It's such a good indicator of short cycle demand. So anything about the sell-in versus sell-through channel inventory would be helpful. Thanks. Olumide Soroye: Yeah. No. Thanks, Deane. So we were quite pleased with Fluke in the quarter and having it return to growth. In the quarter, all these fundamental metrics that set up the future looked really strong. We had order growth, POS continues to be really strong, especially in North America and stable in the rest of the world. Book to bill for the year continues to track north of one. Channel inventory outside of North America, we've said all year, has been elevated, but that's been improving over the course of the year. So we're in a much better place than we were at the beginning of the year. And then on top of that, our team continues to accelerate product innovation. We talked about a couple of those in the prepared remarks. And also commercial execution, there's some markets both verticals like data center and defense that are doing really well right now, and also geos like India that are doing very well. The team continues to put a lot more horsepower behind those markets. And then we're driving more recurring revenues at Fluke with maintenance software enhancements and additions to our service plans. So both by reason of how we did in Q3 at Fluke, the underlying metrics of the health of the business, and then the actions the team's doing to really continue to accelerate growth, we feel quite good about the setup for the next three years at Fluke. Deane Dray: That's really helpful. Thank you. Brock: Thanks. The next question is from Scott Davis of Melius Research. Please proceed with your question. Scott Davis: Hey, guys. Hi, Scott. Congrats on the first full quarter. It was pretty clean. Hey, guys. One of your competitors has been getting a lot of attention in the radiation test business, and I haven't heard you all talk about Landauer in a while. Can you get us up to speed on the outlook there and what you're seeing? Olumide Soroye: Yeah. Thank you, Scott. So you're right. You know, there's a lot of excitement in the Landauer business for us. As you know, it's one of the highly recurring parts of our AHS segments, so we like that attribute of the business. And, you know, we've said the recurring part of the company, Fortive Corporation overall, has been growing faster than our fleet average. And Landauer is a great example of that. So it's continued to grow really strongly, and that comes from the fact that our customers really rely on us for this mission-critical radiation monitoring. It's a very stable need for customers. They're looking for really the number one brand that they can trust, and that helps joint commission reviews and other regulatory requirements they have to meet. It'd be much easier to meet. So we see a lot of strength in that business. The thing that I find exciting for us is the work that our team's doing on innovation, and that includes finding add-on services that we can tag on to our existing customer base. We have tens of thousands of customers in that business. And so the idea of thinking about that business like a software business that you can add on to existing customers besides price and expansion to other... Scott Davis: Sorry. You're breaking up. I can't hear you. Brock: Are you there, though? Olumide Soroye: Yes. Can you hear us? Scott Davis: It's breaking up. It could be our phone. It could be you guys. I don't know. I'll pass it on because I don't want to be disruptive to the call. Christina Jones: Brock, are you hearing us okay? Brock: Yes. You're coming through loud and clear, and we'll move on to the next question. Pass it to Julian Mitchell of Barclays. Please proceed with your question. Julian Mitchell: Hi. Good afternoon. Maybe just wanted to follow-up on the demand trends in AHS. Maybe help us understand sort of what's happening in terms of the equipment demand versus consumables. And you mentioned the policy in funding change headwinds. Kind of how have you seen those play out affecting customer demand in the past couple of quarters? Just trying to understand if that headwind is getting worse or it's holding steady and what does it mean as we're going into next year, please? Olumide Soroye: Yeah. Thanks, Julian, for the question. So the AHS segment overall, just maybe to break it down, the software part of the business is really strong, continues to do really well. So we're quite pleased and excited about that acceleration in that part of the business. With respect to capital equipment in the AHS segment, we talked last quarter about, to your point, the reimbursement and funding policy changes and how that's causing some of these US hospitals to defer capital purchases. What we've seen since then is it's been encouraging, which is sequential improvement in demand for healthcare capital in North America, based on just more certainty around legislative conditions that they're operating under. They're still working through the full kind of long-term effects of the OB3 act, but we certainly see improvement in the demand patterns, significantly in September especially, because we have a funnel of deals and we know what things were deferred. And we began to see more and more of those get funded in September, and we expect that trend to continue through the rest of the year. So the sequential improvement in that capital equipment purchase, we quite like. And we see the same sequential improvement in consumables as well. And our biggest markets continue to grow in consumables. So overall, I'd say software doing well, the capital equipment piece, we're seeing sequential improvements, and that's quickening in September and into October as well. And then the consumables continue to be solid. Julian Mitchell: That's great. Thanks, Olumide. And maybe one for Mark, just very much a CFO type question, so apologies for that. But the tax rate outlook, you know, I think this year's sort of overall adjusted P&L tax rate is maybe 14%, something like that. I just wondered, is that sort of a normal run rate in future, kind of best view on the next sort of year or two, any perspectives on that you could provide? Mark D. Okerstrom: Happy to, always happy to answer your CFO question. I think it's a good framework to think about. You know, right now, mid-teens. The pillar two proposals that are out there, you know, there is some risk that to the extent that the US is not excluded from that, which is current thinking, although it's not written into law, that we could see something drift higher. But right now, from what we see, I think mid-teens is a good way to model the tax rate through 2026 at least. Julian Mitchell: Great. Thank you. Brock: Thank you. The next question is from Steve Tusa of Morgan Stanley. Please proceed with your question. Steve Tusa: Hey, good afternoon and congrats on a solid quarter. Good execution. Olumide Soroye: Thanks, Steve. The software business, the Fluke business, what are you guys seeing in the other businesses? I mean, I think you mentioned some of the construction, I guess, related drags. But are you seeing, you know, how are your customers kind of treating your part of the budgets there? From an IT spending perspective, what are you guys seeing there? Olumide Soroye: Yeah. Thanks, Steve. So far overall, we like, we continue to see growth in Fluke, so we quite like that. And the components of that, the ServiceChannel brand's really great pull-through. We talked about Snowbee AI-powered work order insights we add into that platform, which is an expansion for existing customers. They love that. I think for customers, they view Fluke software as a good way to scale the impact of AI because we have real networks built around this business. So the IT spending around that, to the extent that we're helping them capture the value of AI, is really, really strong right now. So we quite like that. And then the Gordian software part, which is really around planning, facility planning software, also continues to do really well. We talked last quarter about the new products we launched, assessment and capital planning. The order growth in that business has been terrific. Separate from the procurement part of Gordian, that's been a terrific story for us from a software point of view. And then, you know, Coriant continues the arc of improvement that we've talked about over several quarters now. So overall, I think just given the nature of what our software does for customers and, you know, the fact that in the grand scheme, it's a small spend with very high return on investment, that helps them on AI monetization and getting real value out of AI use cases. It's been a strong part of our story, and that's why we said the recurring revenue part of the company has been growing much faster than the fleet average. Steve Tusa: Got it. So Fluke grew what in the quarter? Was Fluke above the, like, what was the organic at Fluke in the quarter? In total? Olumide Soroye: Yeah. So Fluke grew in total in the quarter. I can think about it as helpful to the fleet average. Steve Tusa: Okay. Got it. Thank you. Christina Jones: Thanks, Steve. The next question is from Andy Kaplowitz of Citigroup. Please proceed with your question. Andy Kaplowitz: Morning, everyone. Good afternoon. Olumide Soroye: Good morning, Andy. Andy Kaplowitz: So I think one of the primary goals you have or had as you split it to simplify your overall business. So, obviously, the first quarter out of the gate with good margin is a good signpost for that. But maybe talk about where you are in terms of that self-help. I know it's early, but, you know, should we get increasing impact from that simplification as we go into '26? Olumide Soroye: Yeah. No. Thank you. I mean, I think the short answer is yes. If you think about what we've laid out as our plan here, the plan is we have the simpler company in the stand brands, which means, frankly, we can simplify how we run the company, free up more time to spend with customers and to spend on growth. And like Mark mentioned, we've also created space in our P&L, as you saw with the big margin expansion in Q3, so we can actually put some more investment behind this growth idea. So all of that's in motion right now. We'd expect that to keep building momentum for growth as we come out of this year. And then I'd say, secondly, the other thing that's been quite important in this change with the company is the capital allocation strategy. So not only are we going to grow the company faster and the seeds we're planting around products, commercial, and client value, we explained through on that. But we are also going to significantly shift how we think about capital allocation. And you saw that with the share repurchase that we did in Q3 here. And as we go forward, you're going to see that balance continue to play out and show, you know, we're one quarter in or barely a hundred days into the journey, and I would expect that the best is still ahead of us here. Andy Kaplowitz: Helpful. And then could you give us a little more color on what you're seeing in demand by region? I think you mentioned Western Europe maybe downshifted a little. China, like, what are you seeing across your year and markets by geography? Olumide Soroye: Yeah. No. I think you have it generally right. I'd say the star of the show continues to be North America. Really strong performance in North America. I think part of that's the market. Part of that's our team really have pushed hard from an innovation point of view in some of the best end markets, you know, data centers and so on in the US especially. But also, you know, also just the market conditions have been more favorable for us. And then on the other hand, you know, let's say Western Europe, especially, it's been the softest market for us. And that's been the case most of the year. Q2 got a little bit better in Western Europe, but then that didn't really sustain in Q3. So we're not expecting anything to get dramatically better in Western Europe for the rest of the year. So we kind of find that plan that in here, and anything better will be upside for us. And then the rest of the world was just mixed. And generally stable, I would say, China and mixed everywhere else. So North America really did well, Western Europe really soft, everything else in between. Andy Kaplowitz: Appreciate the color. Thanks. Brock: The next question is from Jeff Sprague of Vertical Research Partners. Please proceed with your question. Jeff Sprague: Hey. Hello, everyone. Thank you. Just want to get a little bit better sense of maybe the margin trajectory. First off, can you just elaborate a little bit more? You said there were some one-timers in the quarter, and I don't know if it was a change in capitalization policy or something. Did that all run through corporate? And then essentially, you're saying that you're using that quote-unquote benefit in Q3 to spend for growth in Q4? Just put a little bit more color or detail around that. And correct me if I'm wrong there. Mark D. Okerstrom: Yeah. Sure. Happy to, Jeff. So there were a few one-timers in the quarter. There were two primary drivers: one was just increased capitalization rates at some of our software companies as they were building new products that were not yet deployed into live production. So that was one impact that basically lowers R&D and then ultimately will come back in the future as that's amortized in. The second was that we did have some adjustments to incentive compensation. And that was a good guy as well. Those items hit a combination of the segments and the corporate costs. The expectation, even though we are actually making direct cost reductions to actually fund growth, is that overall OpEx will step back up in the fourth quarter. As we don't repeat some of these one-timers, as we start to pull in some of the investment ideas that we've got as part of the strategic planning exercise and annual planning exercise that Olumide laid out. But we're going to maintain this discipline, and we expect to still have a strong margin profile. But overall, OpEx should pop back up. Jeff Sprague: I'm trying to triangulate between what you gave us and making an educated guess on interest expense and everything and the share count. It looks like you're sort of guiding segment-level margins, I don't know, kind of flat-ish in Q4 on a year-over-year basis. Is that correct? Mark D. Okerstrom: I think you're in the zone. You're in the zone. You're going to get year-over-year base out of the corporate or year-on-year expansion out of the corporate cost. But you're broadly in the zone. You'll see some pressure in gross margin, particularly in iOS. But then it's largely offset sort of below the gross margin line. Jeff Sprague: Right. Right. Okay. Thank you for that help. Appreciate it. Brock: The next question is from Joe O'Dea of Wells Fargo. Please proceed with your question. Joe O'Dea: Thanks for taking my questions. Wanted to just get a little bit more color on comments around giving brands more growth oxygen, which sounds like an exciting initiative. You know, we saw the Q3 R&D down, but maybe that's a little bit more non-repeat. I'm just curious in terms of what exactly is encompassed in sort of resourcing the growth oxygen for your 10 operating brands and how to think about the timing of that sort of flowing through to organic growth kind of impact? Olumide Soroye: Yeah. No. Thanks for that. So maybe just describe what it is that we've done. So what we've done in the first hundred days here is we've gone through our strategic planning process with each of our 10 brands. And the nature of that is really digging deep to find the best ideas for organic growth acceleration. And maybe we've under-leveraged so far. And it may be really compelling enhancement products for customers. It could be commercial capacity expansion in attractive markets like data center or India. It could be expansion to add-on services or software offerings for customers that we just haven't had the space in our P&L to get to. So we went through a process to really assemble all of those ideas across our brands. And I'm just incredibly impressed by the slate of pragmatic and actionable ideas that came out from that process. So we now have this funnel of terrific ideas that we're getting after very aggressively. And what we've then done is to say, look, we are going to be very disciplined in assessing which of those have the highest confidence and the best return potential. And for those ones, we'll make space in the P&L. That's what we mean by growth oxygen, to fund those and to get them done. So some of the margin expansion we got in Q3 that we talked about, we are going to save some of that to invest over the course of Q4 here to really think about it as a surge in getting those great ideas executed faster. So as we go into '26, they're having a lot of impact. Keeping in mind that some of them are short time to impact things like commercial capacity adds, some of which are marketing demand gen adds. So we feel quite good about the setup and the space we've created in the P&L to get after this and really give these businesses more, as I call it, growth oxygen than maybe they've had historically. When we've been really tight across the board, but we're just really being intentional in planting seeds that will power the growth. The case that we've made is faster growth, and so we're planting the seeds for that. Joe O'Dea: And then on organic growth, composition and sort of thinking about the price and volume piece and volume kind of slightly down in the quarter. Is it the setup that you think the volume decline rate is actually a little steeper into the end of the year? Is that primarily comps? And then just any color on where you see the best opportunity for volume to get a little bit better, maybe areas that you're watching most closely? Olumide Soroye: Yeah. So again, a few ways to think about that. One is we like what we're seeing from pricing this year because I think in many ways that's a reflection of the value of this brand. And some of it has been the benefit of tariffs and covering that. But underneath all of it, it's been an affirmation that we can get price in this business. So we expect that to continue. And the exciting thing for us is a lot of the growth ideas I talked about are really about volume. And I would say across our businesses, we see real upside from volume and how you think about our biggest brands in Fluke and the AHS segment. Those are areas where we have very specific ideas that can help with volume growth over the next year here going into '26. So we certainly expect the price strength to continue to be a big contributor to our growth. And the volume piece of the math will get better over the course of our journey here in the next year to three. So that's what we would expect. Joe O'Dea: Thank you. Olumide Soroye: Thanks. Brock: The next question comes from Chris Snyder of Morgan Stanley. Please proceed with your question. Chris Snyder: Thank you. I wanted to follow up on some of the Q4 commentary. And I think you guys said you expect organic growth to moderate in Q4 relative to Q3. I mean, is that just a function of a more difficult comp? Or did some of the Q2 disruption get pushed into Q3 revenue? So maybe that was a little bit overstated versus demand? Any color there would be helpful. Thank you. Mark D. Okerstrom: Sure. Happy to answer that, Chris. You know, there are a few things that are happening. One is that in Q4, we do have a little bit of a tougher comp. If you look at the script commentary for last year, you know, we talked about some pull forward from Q2 into Q4. Because it was particularly acute in the iOS segment. There was, I think, a little bit of a snapback in Q3 in terms of just some of that $30 million coming back. I would just say, though, overall, the trends that we're seeing across the iOS segment and the AHS segment are broadly consistent, you know, they're encouraging. I think as Olumide said, we've got lots of optimism for better volume growth as we step into 2026. But we do have some timing-related impacts that are sort of shifting things from Q2 to Q3 and then... Chris Snyder: Thank you. I appreciate that. And then maybe just to follow up on AHS. You know, from the outside looking in, you know, it's very difficult, you know, to kind of have a sense for, you know, the performance versus the healthcare policy and funding challenges that could be coming or maybe leaving the market? You know, based on the policy. So I guess you know, it seems like you guys think AHS will have another pretty solid quarter here in Q4, but you know, I guess, what gives you guys confidence that, you know, the North America healthcare spend, you know, can be supportive or resilient, you know, through a kind of a choppy, hard to predict policy backdrop. Thank you. Olumide Soroye: Yeah. No. Thanks for that. I mean, overall, we like the AHS part that's set up here. So think about it, you know, this time last year, the AHS segment grew 9%. Organic growth in '24, 6% for the year overall. And so we know what the capacity of this business is. Despite the choppiness of 2025 with all the healthcare-related policy changes, our businesses continue to do the right things for our customers. The depth of customer loyalty, customer support, and I've experienced this personally just being out with a lot of our customers in that segment, is incredibly strong. So we like our setup. We like what we're doing with respect to innovation. We like what we're doing with respect to kind of the commercial engagement with customers and recurring value that we're adding to those customers across all our brands. So that piece we really like. And then if you think about the fundamental kind of spend and demand profile of healthcare in the US, whatever is going on in the end, it still comes down to the basic fact that we've got aging demographics, we've got increasingly sophisticated healthcare options and intervention options for these aging demographics, a lot of which have, you know, two or more chronic conditions. And we continue to have a shortage in provider capacity. That means the kinds of solutions that we bring to drive productivity and safety are going to be incredibly supported by this tailwind over the next three to five years. So irrespective of the choppiness of policy decisions in '25, we like what we're doing on innovation, on commercial, and recurring value. And we like the underlying sustained secular trends that make this healthcare and especially the industrial part of healthcare that we focus on a good market to be in. So that's, you know, that's kind of where we forecast is play for what's going to create value beyond quarter-to-quarter noisiness in the space. We really like the business, and we think we're well set up. Chris Snyder: Thank you. I appreciate that. Brock: Thanks. The next question is from Jamie Cook of Credit Suisse. Please proceed with your question. Jamie Cook: Hi. Good afternoon, I guess. A couple quick questions. One, acceleration, like, all these opportunities to embed any of that in your guidance. So just wondering if there's opportunity for upside, you know, on the top line as some of these initiatives go through. And then just my second follow-up question, the $63.6 million in other on the adjusted operating profit. What, I mean, that's usually trends, I guess, in the low thirties. Can you just break apart, like, what was in that number and then what's implied for the fourth quarter? Thank you. Olumide Soroye: Great. Thanks for the question. I'll take the first part and then I'll help Mark take the second one. So, you know, the way we think about it is we laid out at our investor day in June our financial framework for the two-year period 2026-2027. And that, you know, the premise of that is the company we now have is going to be three to 4% organic growth, and then after 2026-2027, get better than that. And then we'll have, you know, margin to 100 basis points, and then adjusted EPS growth. That's a high single-digit plus growth. So that, you know, that financial framework benefits from all of these Fortive Accelerated initiatives. That's what gives us confidence that that financial framework remains intact. And so that's where you're going to see the impact of it. With respect to the guide for this year, we feel good about the way we've reflected the macro conditions and all the forces at work across the three areas we've talked about and on tariffs and healthcare spending and state and local government spending. And that's all reflected in the guide for this year. But the way to think about our Fortive Accelerated strategy and the impact of that is it really is what gives us complete confidence in the financial framework that we laid out for 2026-2027. And then I'll let Mark touch on the second part of the question. Mark D. Okerstrom: Yeah. I think, Jamie, we'll get back to you about it. I think you're referring to that other operating income in the AHS segment. So just give us a bit, and we'll circle back with you on that. Maybe we can go to the next question. Brock: The next question is from Joseph Giordano of TD Cowen. Please proceed with your question. Joseph Giordano: Hi. Good afternoon. This is Chris on for Joe. You'd called out the growth, the double-digit growth in recurring revenue. And you noted that it was outpacing the overall average. Where do you see recurring revenue potentially ending up as a percent of total in the longer term? And what are some key levers that you have in both segments to sustain that above corporate average trajectory? Olumide Soroye: Yeah. Thanks for the question. So we like the recurring revenue percentage continuing to go up, and we've deliberately not set a ceiling on our high dose. So we expect it to continue to grow with no limits on what's possible over time. The second thing I'd say is, you know, if you think about the pieces of our company today that are still not recurring, and then you think about how quickly those can change, we still do have some incredibly powerful professional instrumentation offerings at Fluke. That's the biggest chunk of our business that's nonrecurring. Now that business was almost 0% recurring ten years ago. And if you go back five years ago, it was probably five, 6% recurring. Today, it's 15% recurring. So the biggest lever for us to keep driving recurring revenue is continuing to attach more recurring things at Fluke. And, you know, we also have some examples from businesses that were mostly transactional, like in industrial, scientific, ten years ago, and we've shifted those to more hardware as a service recurring offerings. And again, that gives us a little bit of a template of some of the things we could do for some of our offerings at Fluke as well. It's shifting them to more of a hardware as a service offering. So that's probably the single biggest bucket of revenues that will move the needle the most as we shift more of the company towards that. Towards recurring. Now we're going to be intentional, it's one of our three pillars for the accelerator that is driving recurring customer value. Mark D. Okerstrom: Great. Sorry. Operator, maybe I'll just circle back on Jamie's question. That incremental expense was predominantly related to separation-related stock compensation matters. So fair market value adjustments as well as the acceleration of certain executive compensation associated with the transition leadership. Brock: Thank you. The next question is from Andrew Buscaglia of BNP Paribas Asset Management. Please proceed with your question. Andrew Buscaglia: Hi. Good afternoon, everyone. Brock: Good afternoon. Andrew Buscaglia: You know, you guys, there's a lot of noise on the margin side, Q3 to Q4, but I'm looking high level into '26. How volume depends margins, and can we count on some of these savings helping you expand in a lower volume environment? And then another question is on any update on are there incremental stranded costs we'll see fallout in '26, or where do we stand with that side of the story? Mark D. Okerstrom: Yeah. Thanks for the question. You know, at this point, I would just turn your attention to the financial framework we laid out at investor day. You know, which was again three to 4% revenue growth, 50 to 100 basis points of adjusted EBITDA margin expansion, and high single-digit plus adjusted EPS growth. We're in the middle of annual planning right now, and really, we're just trying to strike the balance between driving the appropriate amount of margin expansion along with accelerating growth. And we'll be able to give you a little bit more color on that, obviously, on our next call. You know, in terms of stranded costs, we're almost there. You know, we took some other actions as you saw in the third quarter. There's some stock comp related stranded costs that will be sort of working out. A lot of that sits in the segments. But we're almost there. We'll probably, you know, six to twelve months, we'll have the rest of it out. And as a reminder, I think we said we had $25 million that was out, and there was $25 million left to go. Probably half of that remaining for us to take out over the course of the next six to twelve months. Brock: Okay. Great. Thank you. Andrew Buscaglia: You're welcome. Brock: This now concludes our question and answer session. I would like to turn the floor back over to Olumide for closing comments. Olumide Soroye: Thanks, Brock, and thank you all for joining us. We really appreciate your interest in Fortive Corporation. We could not be more excited about the journey we're just starting here. And it's still early. We realize that some of you know us and some of you are new to us, but we are incredibly excited. And we have a simple playbook here. We've got a great portfolio. We believe we're going to drive faster, profitable organic growth from this portfolio. We are going to continue to be very disciplined in terms of leverage down the P&L and our cost discipline. We have FBS helping us through that. And our capital allocation approach is going to be intelligently positioned to balance share repurchase and smaller bolt-on M&A. And we believe that that formula and us doing what we said we'd do on that and building trust and maintaining trust will do incredible things for shareholder value creation in three years. So that's exciting for us. We hope it is for you as well. Thanks for joining. I will see you next time. Brock: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.
Operator: Good day, and welcome to the Prosperity Bancshares Third Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To withdraw your question, please note this event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please go ahead. Charlotte M. Rasche: Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares Third Quarter 2025 Earnings Conference Call. This call is being broadcast live on our website and will be available for replay for the next few weeks. I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares. Here with me today is David Zalman, Senior Chairman and Chief Executive Officer; H. E. Tim Tamanis Jr., Chairman; Asylbek Osmonov, Chief Financial Officer; Eddie Safady, Vice Chairman; Kevin Hanigan, President and Chief Operating Officer; Randy Hester, Chief Lending Officer; and Mae Davenport, Director of Corporate Strategy. Bob Dowdell, Executive Vice President, is unable to join us today. David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmonov, who will review some of our financial statistics, and Tim Timanis, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for purposes of the federal securities laws and as such may involve known and unknown risks, uncertainties, and other factors which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward-looking statements. Additional information concerning factors that could cause the actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q and 10-Ks and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now let me turn the call over to David Zalman. David Zalman: Thank you, Charlotte. I'd like to welcome and thank everyone listening to our third quarter 2025 conference call. In the third quarter, we signed a definitive merger agreement with Southwest Bancshares Inc., the parent company of Texas Partners Bank headquartered in San Antonio, Texas. We are excited about this transaction as it significantly expands our San Antonio Metro footprint with four additional branches and increases our deposit market share, bolstering our presence in the Texas Hill Country and adding an experienced C&I lending team. I would also be remiss not to mention how excited we are about our pending merger with American Bank Holding Corporation in Corpus Christi, Texas. The combination will strengthen our presence and operations in South Texas and the surrounding areas and enhance our presence in Central Texas, including San Antonio. Combined with the Texas Partners acquisition, we will have 10 banking centers in the San Antonio area. I am pleased to announce that the Board of Directors approved increasing the fourth quarter 2025 dividend to $0.60 per share from $0.58 per share that was paid in the prior four quarters. The increase reflects the continued confidence the Board has in our company and our markets. The compound annual growth rate in dividends declared from 2003 to 2025 was 10.7%. We continue to share our success with our shareholders through the payment of dividends and opportunistic stock repurchases while also continuing to grow our capital. Prosperity reported net income of $137.6 million for the quarter ending 09/30/2025, compared with $127.3 million for the same period in 2024. Net income per diluted common share was $1.45 for the quarter ended 09/30/2025, compared with $1.34 for the same period in 2024, an increase of 8.2%. Our earnings were primarily impacted by a higher net interest margin. The net interest margin on a tax-equivalent basis was 3.24% for the three months ending 09/30/2025 compared with 2.95% for the same period in 2024. As mentioned in previous calls, our net interest margin should continue to improve over the next 24 to 36 months with interest rates either increasing or decreasing 200 basis points. Prosperity continues to exhibit solid operating metrics with an annualized return on tangible equity of 13.43% and a return on assets of 1.44%. Our loans, excluding the warehouse purchase program loans, were $20.7 billion at 09/30/2025 compared with $20.9 billion at 06/30/2025, a decrease of $160 million or 77 basis points. We continue to work through credits acquired in previous mergers and we are experiencing borrowers using their own cash to pay down balances or not drawing on their lines. It is also an extremely competitive lending environment with aggressive terms and conditions being offered, and in some cases, we've just elected not to participate. Deposits were $27.7 billion at 09/30/2025, an increase of $308 million or 1.14% annualized from the $27.4 billion at 06/30/2025. We are encouraged that the core deposits have grown. Importantly, Prosperity does not have any broker deposits. Our nonperforming assets totaled $119 million or 36 basis points of quarterly average earning assets at 09/30/2025, compared with $110 million or 33 basis points of quarterly average interest-earning assets at June 30, 2025. There is a slight increase in NPAs; however, credit remains strong with some isolated incidences. The allowance for credit losses on loans and off-balance sheet credit exposure was $377 million at 09/30/2025, compared to the $119 million in nonperforming assets as of 09/30/2025. We remain focused on completing our pending acquisitions of American Bank Holding Company and Southwest Bancshares Inc. We also continue to have conversations with other banks considering strategic opportunities. We believe that higher technology and staffing costs, funding costs, loan competition, succession planning concerns, and regulatory burden all point to continued consolidation. We remain ready to move forward in the event a transaction materializes and will be beneficial to our company's long-term future and will increase shareholder value. As of October 2025, Texas boasts one of the world's strongest and most diverse economies, ranking as the eighth largest globally with a GDP of approximately $2.7 trillion in 2024. The state produces 9.3% of the US GDP and continues to outpace national growth in many metrics. Although the economy is showing some signs of moderation, influenced by factors such as tariffs and immigration policies, we believe Texas remains the best place for business with a pro-business attitude and no state income tax. This is evidenced by major corporations continuing to move their operations to Texas and Oklahoma. As of October 2025, Oklahoma's economy is demonstrating resilience and modest growth, outpacing national averages in key areas like unemployment and population expansion despite broader US slowdowns from tariffs and policy uncertainties. Charlotte M. Rasche: Thanks again for your support of our company. Let me turn over the discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss the specific financial results we achieved. Asylbek? Asylbek Osmonov: Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended 09/30/2025 was $273.4 million, an increase of $11.7 million compared to $261.7 million for the same period in 2024, an increase of $5.7 million compared to $267.7 million for the quarter ended 06/30/2025. Fair value loan income for 2025 was $2.9 million compared to $3.1 million for the second quarter of 2025. The fair value loan income for the fourth quarter of 2025 is expected to be in the range of $2 million to $3 million. The net interest margin on a tax-equivalent basis was 3.24% for the three months ended 09/30/2025, an increase of 29 basis points compared to 2.95% for the same period in 2024, an increase of six basis points compared to 3.18% for the quarter ended 06/30/2025. Excluding purchase accounting adjustments, the net interest margin for the three months ended 09/30/2025 was 3.21% compared to 2.89% for the same period in 2024 and 3.14% for the quarter ended 06/30/2025. Noninterest income was $41.2 million for the three months ended 09/30/2025, compared to $43 million for the quarter ended 06/30/2025, and $41.1 million for the same period in 2024. Noninterest expense was $138.6 million for the three months ended 09/30/2025, and for the three months ended 06/30/2025, compared to $140.3 million for the same period in 2024. For the fourth quarter of 2025, we expect noninterest expense to be in the range of $141 to $143 million. The efficiency ratio was 44.1% for the three months ended 09/30/2025, compared to 44.8% for the quarter ended 06/30/2025, and 46.9% for the same period in 2024. The bond portfolio metrics at 09/30/2025 have a modified duration of 3.8 and projected annual cash flows of approximately $1.9 billion. And with that, let me turn over the presentation to Tim Timanis for some details on loan and asset quality. Thank you, Asylbek. Tim Timanus: Our nonperforming assets at quarter-end 09/30/2025 totaled $119,563,000 or 54 basis points of loans and other real estate, compared to $110,487,000 or 50 basis points at 06/30/2025. This is an increase of $9,076,000. Since 09/30/2025, $1,121,000 of nonperforming assets have been removed as a result of the sale of homes. The 09/30/2025 nonperforming asset total was made up of $105,797,000 in loans, $16,000 in repossessed assets, and $13,750,000 in other real estate. Net charge-offs for the three months ended 09/30/2025 were $6,458,000 compared to net charge-offs of $3,017,000 for the quarter ended 06/30/2025. This is an increase of $3,441,000 on a linked quarter basis. There was no addition to the allowance for credit losses during the quarter ended 09/30/2025. No dollars were taken into income from the allowance during the quarter ended 09/30/2025. The average monthly new loan production for the quarter ended 09/30/2025 was $356 million compared to $353 million for the quarter ended 06/30/2025. Loans outstanding at 09/30/2025 were approximately $22,028,000,000 compared to $22,197,000,000 at 06/30/2025. The 09/30/2025 loan total is made up of 36% fixed-rate loans, 34% floating-rate loans, and 30% variable-rate loans. I will now turn it over to Charlotte Rasche. Charlotte M. Rasche: Thank you, Tim. At this time, we are prepared to answer your questions. Our call operator will assist us with questions. Operator: We will now begin the question and answer session. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, at this time, we will pause momentarily to assemble our roster. Our first question comes from Catherine Mealor with KBW. Please go ahead. Catherine Mealor: Thanks. Good morning. Good morning. Wanted to start maybe with your outlook for loan growth. Kevin J. Hanigan: Hey, thanks for the question. This is Kevin. I'll take the first cut at that. I think for the fourth quarter, first of all, year to date for the fourth quarter loans are down slightly maybe $40 million to $45 million. And as David said in his lead-in comments, we're seeing some structure and pricing aspects that are not favorable in terms of what the way we're thinking about credit. Still maybe on an accelerated basis, so between that and some elevated payoffs in the fourth quarter, I think this is gonna be a flat quarter which I know is disappointing, but I think that's really where we're gonna kinda come out of this. Going into next year, we feel a little bit better about it, in that we've got a bunch of construction deals that we have approved over the course of this year that have not funded up yet, we're still waiting for all the equity to go into those deals. So just off of a steady state book, I would say low single digits for next year. And as you know, expect to have both of the acquisitions that we have announced closed and on the books in the next year, probably by the end of the first quarter of next year. Which will help out obviously for just the total volumes. Only thing I would caution out of all of what I've said is once we buy a bank a couple of banks like that, there's typically some loan runoff even for a good bank. And these are both pretty good credit quality banks. So one of the headwinds for overall next year, not just organic off of today's balance sheet, will be any payoffs we get out of those two acquisitions. I think that's probably a fair summary, David or Tim may wanna add to that. David Zalman: Well, I would just remind everybody that when you're in a market that's very aggressive in terms of pricing and terms, and that's what we have had for some time now, you just simply have to be careful and prudent. And there are still loans to look at out there. We have active loan committees. But we don't wanna make a mistake and end up having a problem with our net interest margin because we priced too low and things of that nature. And we see a lot of that going on in the market. So we just need to be careful and prudent and things will be fine. Kevin J. Hanigan: Yeah. The last thing I probably should have mentioned is it's not lost on you or us. But that the competitive landscape in Texas has taken on some major changes over the last couple of months. And I would expect some of the new out-of-state players who bought banks here to be aggressive. Into this market. Offsetting that aggressiveness, and maybe this isn't as prevalent as it's been, you know, fifteen, twenty, thirty years ago. There's a fair amount of Texas-based businesses that wanna bank with the Texas Bank. So just the fact that you've got an out-of-state competitor taking over a local institution, there'll be more than a handful of clients who say, you know, we're Texans and we wanna bank with a Texas bank, somebody we can look in the eye in terms of the top decision-makers. So I think they'll net-net that probably plays out on a positive basis for us. Yeah. That's a very real aspect. Catherine Mealor: And so how should we think about if because I think you're right. I think the competitive landscape I mean, if you see stress and structure and pricing that you don't think are acceptable today, my gut is just given all the M&A that you've seen in Texas, that's only gonna get worse next year. But I appreciate the comment on Texas, one of the banks with other Texas banks. So that helps that. But in the scenario where we don't see a pickup in loan growth next year, how I mean, I was excited to see the buyback activity this quarter and the new authorization. Like how aggressive do you think you can get on this buyback given where your stock is trading and the slow growth? I mean, is it appropriate for us to incorporate this entire 5% buyback into our estimates over the next year? David Zalman: I'm going let David take that one. I'm going say that's going to price dependent. And my goodness, we sure wish we could have been buying more in the previous quarter. We were blacked out for a good part of the period and when we got S4s out there on acquisitions. So I do expect very soon we'll be active again. David Zalman: Kathryn, I would say that I've read a lot of the analysts' things that came out this morning. I think once the herd gets into a certain motion, they all run in that same motion. They all focus on the net interest income, but the bottom line is our balance sheet, we reduced our balance sheet in size and that primarily came from borrowings that we had at the Fed or Federal Home Loan Bank. If you look a year ago, we were probably borrowing about $4 billion and today we, you know, you might we might have closed at $2 billion, but we probably average about a billion in borrowings a day. So we maybe a billion and a half to billion 8. So we really lowered our balance sheet. The things that every that I don't I guess you're missing. I don't know. Maybe I just need to bring it up. If I told you a year ago, that we're going to increase our earnings by 15%, and we're going to take our net interest margin from 2.95 to 3.24 in one year I think everybody would be ecstatic. Well, that's what's happened. Our earnings from nine months last year to nine months this year has grown over 15%. Our net interest margin went from 2.95 to 3.24. I mean, that's just magnificent. And the beautiful part about that is based on y'all's projections, you have that to look forward to for 2026 and 2027 double-digit growth. So yes, we're very excited about the quarter. And yes, at the low prices that we're at right now, we're going to back up the truck. There's no question. With the earnings we have, and the price that it's at right now is ridiculous. I noticed you've noticed some other bank sales that have gone through like the First Bank deal in Colorado. I mean, that bank is similar to us. I think we're better, however, but a lot of the same good core deposit structures went for 15 times earnings. Anybody take your earnings next year, $6 or something, multiply that times that that's our real price. That's the real value of our bank, you know, $90 to $100 a share. So where we're trading at today is just absolutely ridiculous, and we will be buying and we will be buying strong. Catherine Mealor: Great. Love to hear that. Thank you. Operator: The next question comes from Michael Rose with Raymond James. Please go ahead. Michael Rose: Hey, good morning. Thanks for taking my questions. Maybe just following up on the loan growth discussion, just given the amount of dislocation that we're going to see. And I know it's competitive, but I think one maybe one area that you guys haven't talked up as much over the years and others have is just hiring efforts and hiring more lenders. Bringing more bodies on staff. You guys have a great efficiency ratio. But any thoughts given to being a little bit more active on the hiring front to really bolster that loan growth potential? Because certainly appreciate the margin expansion, the fixed asset repricing, but it's kind of price times volume, right? And I think we'd like all like to see some greater earning asset growth really reap the benefit of that margin expansion. David Zalman: Yes. We're constantly looking at people that potentially can come in and help to grow our bank. I've approved three or four just within the last month that we think have a very good opportunity with us. So that's something we're constantly focused on. Likewise, if we have somebody that's just simply not performing, and enough time has gone by, where that should not be the case. We typically look at those people and try to determine, you know, should they still be with us or not. So there are two sides to that coin. But we absolutely are looking at bringing people in and we have approved a fair number here over the last year really. And some recently. So we're active in that regard. Michael Rose: Okay. Helpful. Kevin, maybe I could if I can just ask quickly the kind of the warehouse question and kind of expectations for the next quarter. It looks like we're going to get a rate cut here in a couple of hours. Just wanted to see what you guys are seeing. Thanks. Kevin J. Hanigan: Yeah. Thanks for the question, Michael. First of all, I have to say after six or seven year run of really hitting the nail on the head on our thought process about a forward look in this space. I missed it this quarter. I said $1.25 billion. We averaged $1.21 billion. So the record is broken. You know, Michael, quarter to date, through last night, we're averaging $1.222 billion. So basically flat to the average of last quarter. Typically, the warehouse is decent, in October, and November and December are relatively weak months. In fact, it wouldn't surprise me if we saw a week or two at below a billion or below $900 million before the year is out. Now, all that's rate dependent, but I would say the quarter, we probably averaged $1.1 billion. Yeah. The only helpful thing you could say, I saw some numbers today, I don't know if they're accurate or not, where we refinancings are up 111% over last year. Simply because right believe it or not, you know, there's another mini refi boom going on. Michael Rose: That's good to hear. I'll step back. Thanks for taking my questions. Operator: The next question comes from Dave with Cantor. Please go ahead. Dave: Hey, good morning, guys. Maybe if I could just start on margin I know that's continuing to trend higher. What's the medium-term outlook on that or the one-year view on that expansion you're looking for? And then maybe the more normalized margin that you expect given your rate outlook. And then if you could just quantify or update the number that you're seeing in terms of fixed-rate loans that are going to be repricing over the next year or two, that'd be great. David Zalman: Can probably start on the margin also, if that's I mean, we as we said last year, we really felt the margin, I think, we gave numbers like we'd end up at 3.25 or 3.30, I think, at year-end. This year, we feel comfortable. I think we've hit the I think we've got really close to what we said right now. We still see margin increasing over the next twelve, twenty-four, and thirty-six months. I mean, sometimes these models that we have, they look too good, so I don't want to give you these numbers because I think that our rates are lower example, like on a money market, if you have a million dollars with us, may be 3%. At our bank, if you're at one of the other banks, we're maybe making 4%. So as interest rates come down, we may not go down as much as some of the other banks go down right up front. I mean, what the exception rates absolutely will go down on those. But the overall rates, we probably won't see as much rate going down. As the other banks are. So but having even said that, time is on our side. It's just that they will go up. It's just maybe not as fast we would like them to go up with their interest rates going up or down. So we still see margin improvement for twelve, twenty-four, and thirty-six months. I mean, it looks really good for us. I mean, there's no question. You've got a $10 billion portfolio of bonds that little over 2%. That's with a three-point something year duration. So as those are maturing, I mean, it's I mean, it's just it'll be a home run for us. Asylbek Osmonov: I agree. And that what we're discussing now, the security and the fixed loans will be tailwind for us that continue to reprice for several years. That's why we see expansion of the margin continue to do. And specific to your question, how much of fixed loans we have. If you look at loans without warehouses, 39% of the loans is fixed-rate loans. Dave: In terms of just what's rolling over the next year or two, any sense for dollar amounts there? Asylbek Osmonov: I think just if you look at it, it's rolling off probably from a repricing standpoint, of course, that you know, floating and variable will be faster than fixed one. But I think it's we'll have a good value volume of repricing it. If you look at them big picture, we have about $5 billion of loans gets repaid or paid down every year that for opportunity to out of that $5 billion about $3 billion has opportunity to reprice because a $2 billion is already at the floating rate. David Zalman: So that's get another two billion of our security. Asylbek Osmonov: Exactly. So that's we have about $5 billion in repricing opportunity between loans and securities. Dave: And I would point out that some of the fixed-rate loans that we think will reprice were made back when loans were made at quite a bit lower rates. 3 and a half to four and a half to 5%. So we'll see what rates are at the time that that repricing occurs. But I expect a pickup in the rate on those loans. David Zalman: So we'll see. I agree. Yeah. It should be pretty decent. Dave: Where are your new loans pricing now? Kevin J. Hanigan: Oh, I'd say between $6.50 and 7 in a quarter. David Zalman: That's correct. Once again, we see some competitive pricing at 5% or even below. We've tried Those we aren't doing. We've tried to stay away from those. Kevin J. Hanigan: That's correct. Yeah. Yeah. I think the worst one we chased is probably six and a quarter. Maybe. David Zalman: If we went that low, it was only because the customer had as much in deposits as we had in loans. But for the most part, we're I mean, we're seeing some people pricing thirty days off for plus two. And, I mean, we just haven't gone to those kind of levels. You know? Dave: Yeah. Okay. Appreciate the color. Maybe just switching to expenses real quick. Appreciated the 4Q guide there. How are you thinking about the step up in that run rate as we get into next year? I know sometimes you've had a little bit of a step up in the first quarter and then you've got merit and other stuff kicking in for 2Q. And then, anything lumpy that you're expecting over the next year or so just in terms of platform enhancements or anything like that that we should be aware of? Thanks. Asylbek Osmonov: Yeah. I think the guidance that what I gave you for the fourth quarter in the first quarter, yes, it usually goes up because of the merit situation. But in longer term, I think I don't see significant increase in the expenses. It's going to be normal if inflationary increase we see throughout. I know we're working on the plus change for next year, and we kinda looked at it in numbers. It provides about additional one and then to one and a half percent additional expense for the run rate I provided. So that's gonna be baked in starting next year. But, overall, I think we have pretty good expense management, and we'll continue to do that next year. Dave: Okay. Great. And if I could just sneak in one more. Just on the M&A picture in general. Obviously, a lot of eyes are on Texas, a lot of big bank eyes are on Texas. And I know you've been a strong acquirer for a long time. You're very well known in the market. As a buyer of banks. But I'm just curious how you guys would feel an inbound call from one of these larger bank CEOs who loves your footprint, your lower cost of deposits, you got stellar credit quality, you know, what would you look for in one of those combinations potentially? And are you starting to see any of that interest come your way at all? Kevin J. Hanigan: You got a future in politics, the way you phrased that. David Zalman: I really think that's what the market's missing. I mean, again, our bank's not up for sale, but at the same time, what is the real value of our bank when you look at the banks that have sold like First Bank Colorado and they're I mean, they're 15 times earnings. I mean, just take that multiple where we're at and what's out there in the market. You can see how underpriced that we are today. So we'll always do what's right for the shareholder. I mean, we probably wouldn't be bullied in one way or another depending on one hedge fund on the stock or another hedge fund on the stock, but we're always gonna do right by the shareholder and we always have in the past, and we'll continue to do that. But I think that the market's really missing the optionalities that we do have. Kevin J. Hanigan: Our scarcity value is increasing. Yeah. Yeah. I mean, we're the second largest bank based in Texas right now. So I mean, it one of the best growing states in The United States. So I just think people are really missing the boat here. Dave: Yep. Totally agree. Thanks, guys. Appreciate it. Operator: The next question comes from Manan Gosalia with Morgan Stanley. Please go ahead. Manan Gosalia: Hi, good morning all. So just a follow-up to your comments that things are looking a little bit frothy on the loan side and competition is only increasing from here and you have to be careful. Is there anything that you can do to drive loan growth within your return parameters? Maybe increasing branches or investing in your product set or hiring more? Is there anything else that can be done here? David Zalman: No. That's out of hiring people and lowering rates. Structurally, we're not gonna bend. But again, it's again, analysts are on one always on one side. They're always focused just on loan growth. I mean, bottom line is, guys, we have an 80% loan to deposit ratio. Don't wanna be a 100% loan to deposit ratio. A lot of our growth depends on our growth on deposits, and that's where your real money is really made. Not in deposits that you're paying 45% for. It's core deposits. And that's why when some people ask, why did you pay so much for this bank compared to this bank? Because banks are completely different. And so deposits are the most important thing. We'll take those deposits as they come in. And we will put those into loans. But you know, we may we may the same kind of return when we were 60% or 65% loan deposit rates as we are now is 80%. But, again, we're focused on it, and we're gonna continue to make loans. But, again, to make loans in a market where it's not profitable, there's too much risk, it's good for the short term because everybody's impressed with the net interest income growth. But if you're a long-term shareholder like I am, I'm not looking one year out or six months out. I'm looking five and ten years out. Asylbek Osmonov: And just give us some statistics. I know Tim mentioned what the average month production was for third quarter was $356 million and our production for the second quarter average was $353 million. But if you just compare what we had a year ago and same periods, the average was in the second quarter of last year was $255 million and the third quarter was $260 million. So if you look at just period to over period, our production up almost $100 million. So the production is there. Like I think Kevin mentioned that some of those real estate, they need to put their money first before they start taking out. So from that statistic, you can see that we are. David Zalman: If you look at the increase, if you look at the amount of loans that we decreased this time, the majority of the loans were in the category of one to four family residential home loans. And, again, people the home prices were higher. Interest rates were higher. Again, we were trying to get out of those more and sell more of those to the market. Where we could keep more of those, and we could you know, we can easily bill our loan to deposit ratio we want, but we're really focusing not just on loan growth or your net interest growth. We're focusing on earnings per share growth. We're focused on capital growth. I mean, we're focused on the whole bank, not just on one particular area. Manan Gosalia: Got it. That no. I appreciate that. But I guess just on maybe on the product side, is there are there any gaps that you might want to invest in there? David Zalman: I think so on the product side. We've never redlined necessarily very many products, if any. We're willing to look at anything that's reasonable. Asylbek Osmonov: So David Zalman: I don't think there's an obvious gap products anywhere. I don't know. I mean, we're really we're we offer just about any type of loan that you could want. I mean, we're one of the biggest ag lenders in the in the state of Texas in The United States, really. We're in construction lending. We're in commercial and industrial. We're there's there's probably enough. We're in middle market lending. We're in oil and gas. I mean, I can go on and off. There's not many areas that we don't touch. So we touch almost all the areas that are out there, actually. Manan Gosalia: Got it. Very clear. And then, maybe a follow-up on the buyback comment. You noted that you would have liked to be more active in the quarter and that you won't because of M&A. And you've obviously spoken in the past a lot about M&A being a strong part of your growth strategy and you're typically in multiple conversations at different stages. And then I guess you also noted that you will be buying back more aggressively at these prices. So should we take that domain that you are pivoting away from an M&A strategy to a buyback strategy in the near term while your stock is at these prices? David Zalman: I think that we'll always look at M&A, but based right now where our stock price is, we're really focused on getting our stock price up and we weren't able to buy. I will admit, I'll say that we just heard during this meeting that we have gotten all of our approvals on the American Bank in Corpus Christi. So we're excited about that. We're excited about putting the two banks in San Antonio and Corpus together. It would definitely give us from Victoria all the way to Corpus Christi, it will give us a dominant market share along what we call the Gulf Of America there. So we're excited about that. But again, our main focus right now will be to get our stock price up. We think it's terribly undervalued. And again, you can never say no to M&A because if it's, you know again, if it's a cash deal, it really doesn't matter. It's only stock that if we give our stock and it's too low away, that's what matters. So we'll still continue to look at all opportunities, but our main focus right now is to get our stock price up. Manan Gosalia: Great. Thank you. Operator: Next comes from Peter Winter with D. A. Davidson. Please go ahead. Peter Winter: Thank you. Kevin, I wanted to follow-up with comments that you made earlier about as you closed the deal with American Bank and Southwest that there'll be some runoff in the loan portfolios to meet your standards. But do you have a sense of how much runoff you'd be expecting from those portfolios? Kevin J. Hanigan: Not nearly as much as we experienced this year with the Lone Star acquisition. First Capital. First Capital. I mean, Lone Star has been fine, I'm sorry. They're both first of all, they're both pretty high-quality credit banks. I mean, we did a deep as we do on all acquisitions, we did a deep deep credit dive on both of these American Bank is gee, it's one of the cleaner banks we've seen, ever. So I think know, it's gonna be muted compared to what we've experienced here more recently. There's always gonna be some. But I think it'll be muted compared to what we have seen in the past. I think Tim and David could probably Yeah. Well, Peter, both both of those banks, did due diligence on both of them. You know, they're I don't wanna say clean as a whistle because there's always issues that come up. But, again, nothing like, you know, on our first capital deal that we did, in West Texas, we probably outsourced over $460 million in loans. We don't expect anything like that with these two deals right here. Nothing like that. So Kevin J. Hanigan: Let's just say I'd be really disappointed if we're talking about a year from now, we lack loan growth due to runoff in those portfolios. David Zalman: And our experience, along that Gulf Coast right there, our experience with Victoria, we paid a lot for that bank. Which we paid a lot for the American Bank at the same time. But both banks are very similar. With very core deposits. And, really, those banks grew. I mean and I don't think there's any question with the core deposits that American Bank has and that market share that we'll own from along that Gulf Of America side down that coast. It'll just be I think it's gonna be a really a good good deal. Peter Winter: Got it. That's helpful. Thank you. And then just, if I could go back to the margin, I mean, clearly, it's been a good story. It's been progressing the way you guys had thought it would. But just I was just curious with the third curve suggesting more rate cuts. Are you still comfortable with kind of a 3.35 NIM in the fourth quarter and 3.40 by the middle of next year? Asylbek Osmonov: Yes. I think those little bit maybe ticked down because the numbers what we provided was that static balance sheet and the no rate cuts. So if you're looking twelve months, twenty-four months, our margin showing that with 100 down being still higher than what we projected for average for this year. So I will continue to grow the margin. It's going to be ticked down a little bit lower. David Zalman: But, again, even even at a 100 basis points down, it may be slower as accomplished, but the twelve months from now, I hate to give these numbers out because then if we're not accurate, but, you know, we're still showing close to what you said, I think, at 3.38. So Mhmm. Peter Winter: And so I'm sorry. Just to follow-up. So when you say Asylbek tick lower, tick lower from the 3.40, Asylbek Osmonov: Yeah. So what we just said on the our model showing 100 basis point down twelve months, we're showing 3.38. David Zalman: We're 3.48 with no in a static market. Peter Winter: Got it. Okay. Thank you. Peter Winter: The next question Pietra as you go out twenty-four months and farther, we do still pick up pretty significantly even with interest rates going down. 100 basis points. Asylbek Osmonov: And that was just to clarify, that was standalone not including American or partners. Right. Correct. Peter Winter: My lost contact. Asylbek Osmonov: Hello? Hello? Are we ready for the next question? Peter Winter: Yes. Yes. Okay. Operator: Great. Wonderful. Our next question comes from Jared Shaw with Barclays Capital. Please go ahead. Jared Shaw: Hi, good afternoon. Maybe just on the margin for the deposit costs, should we or what are you expecting in terms of beta with that broader rate backdrop. Asylbek Osmonov: Yeah. For our model on the deposit betas, that's non-maturity deposit, we use 13 basis points beta. Jared Shaw: Pretty low. Okay. And then looking at the you know, I hear what you're saying about the buyback and appreciate all that. But when you look at the M&A environment here, for smaller deals, the consolidation that we've seen more recently, does that make it easier for you from a competitive standpoint to maybe get some of those deals with fewer competitors or maybe the inverse where there's more eyes on Texas that actually makes it harder? David Zalman: Candidly, we have more deals than we have money. Quite frankly. It's just a matter of what we really wanna do. Jared Shaw: Okay. Thank you. Operator: The next question comes from David Chiaveroni with Jefferies. Please go ahead. David Chiaveroni: Hi, thanks. So wanted to follow-up on the deposit question. Can you talk about deposit competition? You mentioned about the 80% loan deposit ratio. Are you comfortable at that level? And can you talk about the extent to which these kind of out-of-state competitors are coming in and potentially pressing on the deposit pricing front? David Zalman: Yes. I mean, we're at 80%. We probably would go to 85%. Our loan to deposit ratio at that limit, probably stop. We were still focused on core deposits. We don't have any broker deposits. And really when we go out, we really try to go you know, we're really trying to get a total deposit relationship, not just the certificate of deposits to build to build up deposits. And so I mean, that's what we're focused on. We do see the people coming in, especially you know, I may take a different stand because a number of these banks that have bought other banks out in the state they weren't able to get into the state. And because of that, they've raised their interest rates so much on money they pay here compared to where they pay somebody else because they haven't been successful at building market share especially in deposits. I'm almost thinking since now they're making headway into the state and they really have some market share, they may not be under so much pressure to show their other people in the other states that they're having to grow those deals. And I think it may become easier for us quite frankly. I don't know. That's just another that's another spin on it anyway. Asylbek Osmonov: Yeah. And if you look at it, we always had a competition, so it's nothing new for us related to the deposits and I know we well, we have grown this quarter in the core deposits. I mean, that's all relationship, you know, and that's what brings it not just just the rate, but the relationship we have with our customers. David Zalman: We really focus on relationships. I mean, Kevin kind of alluded to it a while ago. I mean, people wanna bank with the Texas Bank. And they and I think where we're at in this state and with the other guys coming in, that the amount of opportunities we have are just it's unbelievable and the kind of customers that we have are unbelievable customers that know, have been around their daddy and their daddy's generation have had businesses and they're coming to us and again, we're getting to handpick those again. We're not we're not here showing you 810% loan growth, but what we are putting on is really quality stuff and really building a really quality organization. David Chiaveroni: Thanks for that. And then shifting over to credit quality, still very strong. We did see the NPA uptick. Can you talk about the drivers behind the uptick? And are there any pockets or areas you're keeping a closer eye on? Tim Timanus: I think I can give you some color on that. Out of the a little over $119 million in nonperforming assets, about $57 million of it is single-family homes. And those NPAs with respect to the homes are a result of pressure that we got from a regulatory standpoint to make loans in minority areas, etcetera. And we did not get the down payments that we would normally want. Etcetera. And this is the result of it. It's not surprising. The good news is there's a market for the homes. It takes a while to go through the foreclosure process and get them back. But we've been able to sell them as we get them back. Some at a profit, some breakeven, some at a very small loss. But the point is we've been able to sell them. So yes, if you didn't have those homes, you could take $57 million away from the nonperforming. But, again, we were required under fair lending. We had to get a certain amount that we can. We would be we would be eliminated from doing M&A. So we were kinda forced into this making loans with no money down, very low interest rates, and even give them money for closing costs. That's exactly right. So it was a regulatory issue. It was a regulatory issue. Tim Timanus: And please don't misunderstand what I'm saying. I'm not implying that we don't have good relationship with the regulators. No, sir. But the facts are what they are. And during the last two or three calendar years, there was very significant pressure from the regulators to address these markets that they felt were underserved. And we understood that. But when you don't require a down payment, and you make loans to people that barely have enough cash flow to make the first payment, you're going to have trouble. And what we see right now is the clear evidence of that. Well, the challenge is all banks, it's not just us, all banks are required to do this. So there's just a certain number of these customers that everybody's trying to get and everybody's fighting for these customers, and that's just one of the things that happened, really. Right. Tim Timanus: Now we have we have discontinued some of those aggressive programs. We discontinued them a few months ago. So we're not putting any more of those on the books. And we'll just deal with what's there and as I say, we're able to sell these homes. I don't think that's gonna change dramatically. I think we'll be able to continue to sell them. So in another year or so, I think that part of the non will be effectively gone. Kevin J. Hanigan: Yeah. And in terms of any pockets we're looking at, we look at the you know, our credit history is pretty good. We look we're looking at the entire portfolio. And as we look across the entire portfolio, I'd say there's maybe one deal we think has got the potential for some stress. David Zalman: Shared national credit. It's shared national credit. We don't have a lot of shared national credits but it's a shared national credit we've got our eye on. It's still performing. Right. It's making its payments, but it's one we got our eye on. And it's $35 million. Right. Outside of that, the portfolio looks pretty good. Right. And I did pull up our shared national total. I think we've got a whopping total of $270 million in Shared National Credit. So it's not a field we play a lot in, and of that you know, of that number, $153 million of that is stuff we agent. Kevin J. Hanigan: So, know, a lot of that is structured and sold by us. David Chiaveroni: Very helpful, thank you. Operator: The next question comes from Ben Gjerlinger with Citi. Please go ahead. Ben Gjerlinger: Hey, good afternoon or good morning. I guess, in Texas. Kevin J. Hanigan: Kansas City, New York? Ben Gjerlinger: Yeah. I'm in Georgia. So south. When you guys think about the two pending deals, I think you said David. Just got regulatory approval while we're on the phone here. Can you find the potential close dates these two? Charlotte M. Rasche: Yeah. I think we're probably looking around fourth quarter this quarter to close probably the end of the year, the American deal. And 2026 for Southwest. Ben Gjerlinger: Gotcha. Okay. That's helpful. Yeah. But financial impact, gonna be more on the next year, not this year. We'll probably roll the American back into the first first month of Right. Next year. Yep. Right. Gotcha. Okay. That is helpful. And then also, like, you've done a really good job of taking a chainsaw to the expense base of the banks that you guys pick up. Is it fair to assume it's going to be kind of business as usual? Is it tracking the savings? Or is there anything kind of long-tailed associated with them? I'm you think about it might bleed into two or three q next year? Asylbek Osmonov: Yeah. I mean, definitely, when you do mergers with other banks, you know, there's always cost savings regardless. So we always strive to get the cost savings just by acquiring banks. And I think it also depends on the system conversion. We're gonna get some benefit early on, you know, because there'll be some departure, but, an additional cost will be like, second half of the year, I would say. But, overall, we'll get some cost savings in 2026, but most all of it, get in '27 and beyond. Ben Gjerlinger: Gotcha. Alright. I appreciate the help. And then just wanted fine-tune the buyback comment to backing up the truck. Does that mean you have to wait until the second one closes and then you could just be there the next day? Or is there something else doing that? David Zalman: You know, I we really we had this, and I think we had an S4 filed and I know there's probably been some other little people shortages with doing some complete thinking that we won't be able to buy back. But I think we should be able to start buying back next week. Next week. Yeah. So we should we should be out there buying. Ben Gjerlinger: Gotcha. I appreciate the help. Thank you, everyone. Operator: The next question comes from Matt Olney with Stephens. Please go ahead. Matt Olney: David, can you clarify your commentary about the current balance of the borrowings? I think it was around $2.4 billion at 09:30, and I thought you I thought I heard you say it was below that. David Zalman: Well, I think on the last day or so, couple days, we put pull if if you look a year ago, we were at with $3.9 or $4 billion. Asylbek Osmonov: Yeah. $3.9 billion, and we ended at $2.4 billion in the 09:30 but we were able to reduce some from that for in October month. So we're running. If you average for the month, you probably near the 2.4. No. No. We're much lower. What do you think the average was probably? For the For that month? But I haven't hear you're looking at a quarter, but, again, we started reducing it. So we started reducing it. As our bonds started maturing, we started we're just reducing our cash instead of buying back, you know, And, again, we'll get we're gonna get back into the bond buying business. Too. There's no question. We're not letting the balance sheet we always carried about $2 billion in leverage, and I think we let it maybe get down a little too far I know I've asked our guys to buy, and they didn't. But we're not going to we're not gonna we're we're we're still gonna keep about $2 billion of leverage on the deal, and we're so we're not going the other way. But my point is a lot of it is you just had a a lot of the the net interest income just came from a smaller balance sheet. We let it get too too small in my opinion. And the comment what we made right. Asylbek Osmonov: Currently, have $1.8 billion borrowing, but like I said, we're going to buy some securities. So we want to carry about $2 billion leverage little bit historically done. Matt Olney: Got it. Okay. Well, thanks for clarifying that. And then on deposit growth, I think the fourth quarter can be a more favorable quarter for deposit growth seasonally. Any color on what you're seeing so far, ex expectations for the fourth quarter? David Zalman: Yes. Again, I think you can read us. We're very transparent what we say. It happens in our we're pretty consistent. Our fourth quarter has always been pretty consistent, and I think you're probably looking at at least another $200-$300 million gain in deposits probably. Yep. I agree. Asylbek Osmonov: Our seasonality of public funds, and we should get it's just a normal big customer deposit. And big customer deposits. From the commercial side. Getting ready for commercial side. Yeah. Yep. Matt Olney: Okay. That's helpful. Thank you, guys. Operator: The next question comes from Janet Lee with TD Cowen. Please go ahead. Janet Lee: Hello. Dialing into deposits a little, so I believe there was about $150 million of run offs from Lone Star acquisition on the deposit side as well through June. Do you expect any sort of deposit run offs from the two acquisitions as well heading into 2026? David Zalman: The American Bank, acquisition is very solid. I mean, their deposit is made up of they're probably as close to us as you could get. So I don't we don't expect anything there. The Texas Partners Bank, their deposit makeup is different. And, probably the difference, because you saw in the prices, they have a big treasury department with a lot of a lot of commercial accounts. That it's just a bigger part of their it's a bigger part of their deposit makeup, and so there is more risk. Again, we don't we're not anticipating a lot, but you never know. It could be. It's not rate driven. It's really based on their treasury product that they have. I think that we have I think our treasury product is as good and probably the guy that's running their treasury department will be end up running our treasury department. So that's good. But again, there's a bigger portion of their deposits are a bigger portion of their deposits are in this in this treasury area, so there is more risk in that. For sure. Janet Lee: Got it. And fee income came in a little stronger than you guide it to before I believe that range was, like, 38 to 40. How do you feel about the fee income? Is that there an updated view on where the fee income could be over the next coming quarters? Asylbek Osmonov: Janet, I think I'm gonna stick to the, you know, the guidance I gave, 38 to 40. I know this quarter, we were a little bit higher, but sometimes we do have one-off items happen. But, you know, if we come in higher than that, that's good. But I would say 38 to 40 the guidance I would still continue for fourth quarter. Janet Lee: Thank you. Operator: The next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead. Jon Arfstrom: Hey. Thanks. Good morning. Good morning, Jon. Hope I hope I'm last. Just, David, I put back up the truck in my Excel model on the share count on get in. So I guess the question for you is do you have an optimal capital target in mind? For the company? I think one of the valuation issues is the returns have gone down your capital has gone up. So I'm just curious how far down you'd like to take your capital ratios? David Zalman: We were saving a lot of our capital because we had aspirations of the you know, we were bidding on a bigger bank. We didn't get the bigger bank, and we thought we would have needed the cash. As part of the deal. We didn't get it. With our stock being this low, I think we have a lot of room. I mean, if you you can do them for what, 11% plus leverage ratio right now. So Mhmm. I mean, you can do the math yourself and what the earnings we make. Even if we spent $500 million it still wouldn't change the needle very much where we're at. So, I mean, we have a lot of bullets, I think. Jon Arfstrom: Yep. Okay. One of the things If he if he fell down even 8%, you still have three or 4% of capital. I mean, you we got a lot of money. I mean, we really do unless something goes wrong, but we got a lot of bullets. Jon Arfstrom: Yep. Okay. Okay. Well, we'll look forward to that. The and then one other thing I wanted to ask about, you talked about moderation slight moderation in Texas activity. What are you seeing there? Is it a change in tone, or am I misreading that? David Zalman: No. You're good. You know me too long. You've been around me too long. I think when again, when Kevin was talking about the loans, that's fine. You know, normally normally, we see just tons of business out there and you know, coming in. You know, we're just taking care of it. We're not we're not out there trying to underprice something. It's just coming in. We sorta noticed when we have our management meeting the tone in the room from the area managers that were out there. They see a little bit of a moderation from the type of customers we have. I don't I don't wanna say it's from the tariffs or the maybe the change in policies, and they don't know where they're going. But they're definitely feeling that a little bit. Having said that, again, I don't think there's any other place in The United States that you would rather be, but there's definitely a tone of a moderation, I think, right now. But, again, again, the economy is still overall very good. You still see gosh, you got you have JPMorgan. Chase has more employees here than they have in New York City. You just had Wells Fargo open up one of the biggest operation centers in the other side. I think it was Irving. Everybody's moving to this deal. So I say moderation, there is I think there's a slight moderation. I think it'll change. I think what Kevin said earlier, you'll see you'll see a pickup, I think, in probably the first quarter of next year. And so Texas, I think, is still gonna always be good. But, again, compared to where it was, I do feel a little bit of moderation. Jon Arfstrom: Okay. Okay. That's very helpful. Yeah. Yeah. That's helpful. I appreciate that. Thank you. Operator: This concludes our question and answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks. Charlotte M. Rasche: Thank you. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate your support of our company, and we will continue to work on building shareholder value. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Thank you for holding. Your conference will begin in two minutes. Thank you all for your patience. Welcome to the third Quarter 2025 Phillips 66 Earnings conference call. My name is Breeka, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Sean Maher, Vice President, Investor Relations. Sean, you may begin. Welcome to Phillips 66 earnings conference call. Sean Maher: Participants on today's call will include Mark Lashier, Chairman and CEO, Kevin Mitchell, CFO, Don Baldridge, Midstream and Chemicals, Rich Harbison, Refining, and Brian Mandell, Marketing and Commercial. Today's presentation can be found on the Investor Relations section of the Phillips 66 website along with supplemental financial and operating information. Slide two contains our safe harbor statement. We will be making forward-looking statements during today's call. Actual results may differ materially from today's comments. Factors that could cause actual results to differ are included here as well as in our SEC filings. With that, I'll turn the call over to Mark. Mark Lashier: Thanks, Sean. Before we begin the call, I'd like to take a moment to recognize Jeff Dietert, our Vice President of Investor Relations since 2017. After a long and successful career in the energy sector, Jeff announced his decision to retire at the end of this year. On behalf of the entire management team, I want to extend our deepest gratitude to Jeff for his invaluable contributions to the company. We wish him all the best in retirement. During the quarter, we continued to execute on our strategy and delivered strong financial and operating performance. Refining's results demonstrated our commitment to world-class operations. Midstream, along with marketing and specialties, delivered another consistent contribution providing a strong foundation for our capital allocation framework. Chemicals generated solid returns despite a challenging market, operating above 100% utilization. Year to date, adjusted chemicals EBITDA is $700 million, reflecting the unique feedstock advantage of our assets. During the quarter, the Dos Pico's two gas plant became fully operational and the first expansion of our Coastal Bend pipeline was successfully completed. These milestones enabled us to achieve record NGL throughput and fractionation volume. Since quarter end, we processed the final barrel of crude oil at the Los Angeles refinery. We sincerely thank our Los Angeles refinery employees for their exemplary dedication to safely operating the assets as we progress the idling process. Earlier this month, we also closed on our acquisition of the remaining 50% interest in the Wood River and Borger refineries. This transaction simplifies our portfolio and enhances our ability to capture operational and commercial synergies across the value chain. The further integration of the Wood River, Borger, and Ponca City refineries will create a system that offers opportunities to capture margin across our assets. An example is the recently announced open season for Western Gateway. This refined products pipeline will ensure reliable supply to Arizona, California, and Nevada from Mid Continent refineries. This proposed project is one of many opportunities that will drive greater shareholder value. Aligned with our focus on continuous improvement and dedication to operational excellence, we're excited about the future. Rich will now provide more context on our progress and the future in refining. Rich Harbison: Thanks, Mark. Slide four highlights another strong quarter for refining, a clear reflection of our commitment to operational excellence. We achieved 99% utilization, the highest quarter since 2018, and above industry average. Our year-to-date clean product yield of 87% is a record, underscoring our ability to maximize value from every barrel processed. Our third quarter adjusted cost per barrel of $7.07 was impacted by $0.40 per barrel due to a $69 million environmental accrual related to the Los Angeles refinery. Since 2022, we've reduced our adjusted controllable cost by approximately $1 per barrel. We have built our improvement strategy on five pillars of excellence: safety, people, reliability, margin, and cost efficiency. Our greatest asset is our people. Training them well and sending them home safely each and every day is our top priority. Reliable operations improve nearly every metric. Our team is focused on a world-class reliability program that will sustain our strong operating performance. We are seeing excellent progress in utilization and uptime, and we're not done yet. We've made some tough but impactful decisions that are paying off as we lower our cost structure and improve our flexibility and optionality to capture changing market conditions. Excellence in all five pillars maximizes earnings and value creation. Moving to slide five. Since early 2022, refining has been on a journey. We have been making structural changes to the portfolio and organization that will continue to drive long-term shareholder value. We've rationalized our refining footprint while strengthening our position in the Central portal. The full ownership of the Wood River and Borger refineries creates additional high-return organic opportunities. We've also transformed the organization by centralizing support functions and operating the assets as a fleet, versus independently. We have a list of low-capital, high-return projects in the queue going through our standard review and approval process. The ones we've already executed have improved yields, product value, and flexibility. We've increased our optionality to switch between heavy and light crudes and between finished product mixes. I look forward to implementing the next phase of organic growth opportunities. Lastly, we're focused on driving efficiencies which will further improve our cost profile. We're targeting an adjusted controllable cost per barrel to be approximately $5.50 on an annual basis by 2027. We are positioned well for the future. Now I will turn the call over to Kevin to cover the financial results for the quarter. Kevin Mitchell: Thank you, Rich. On Slide six, third quarter reported earnings were $133 million or $0.32 per share. Adjusted earnings were $1 billion or $2.52 per share. Both reported and adjusted earnings include the $241 million pretax impact of accelerated depreciation and approximately $100 million in charges related to our plan to idle operations at the Los Angeles refinery by year-end. We generated $1.2 billion of operating cash flow. Operating cash flow, excluding working capital, was $1.9 billion. We returned $751 million to shareholders, including $267 million of share repurchases. Net debt to capital was 41%. We plan to reduce debt with operating cash flow and proceeds from the announced fourth quarter European retail disposition. I will now cover the segment results on slide seven. Total company adjusted earnings increased $52 million to $1 billion. Midstream results decreased mainly due to lower margins, partially offset by higher volumes. These results include $30 million of additional depreciation related to the retirement of assets associated with our Los Angeles refinery. Chemicals improved on higher margins and lower costs, which were largely driven by a decrease in turnaround spend. Refining results increased on stronger realized margins partially offset by environmental costs associated with the idling of the Los Angeles refinery. Marketing and specialties results decreased due to lower margins, primarily driven by more favorable market conditions in the second quarter. In renewable fuels, results improved primarily due to higher margins including inventory impacts and international renewable credits. Slide eight shows cash flow for the third quarter. Cash from operations excluding working capital, was $1.9 billion. Working capital was a use of $742 million primarily due to an inventory build. Debt increased primarily due to the issuance of hybrid bonds, which was partially offset by a reduction in short-term debt. We returned $751 million to shareholders through share repurchases and dividends and funded $541 million of capital spending. Our ending cash balance, including assets held for sale, was $2 billion. Looking ahead to the fourth quarter on slide nine, in chemicals, we expect the global O&P utilization rate to be in the mid-nineties. In refining, we expect the worldwide crude utilization rate to be in the low to mid-nineties. Turnaround expense is expected to be between $125 and $145 million. The utilization and turnaround guidance reflects 100% ownership of the Wood River and Borger refineries and removal of Los Angeles. We anticipate corporate and other costs to be between $340 and $360 million. Now we will move to Slide 10 and open the line for questions. After which Mark will wrap up the call. Operator: Thank you. We will now begin the question and answer session. As we open the call for questions, as a courtesy to all participants, please limit yourself to one question and a follow-up. If you have a question, please press star, then one on your touch-tone phone. If you wish to remove from the queue, please press star then 2. If you are using a speakerphone, you may need to pick up the handset before pressing the numbers. Once again, if you have a question, please press star, then 1 on your touch-tone phone. Steve Richardson from Evercore. Please go ahead. Your line is open. Steve Richardson: Great. Thank you. Regarding WRB, I'm interested if we could just dig a little further there. Very clear what looks to be a really attractive acquisition price, and you've got a clear synergy target out there. But could we talk a little bit about beyond this inside and outside the fence line, some of the other benefits and just address what a 100% ownership of these facilities opens up in terms of some of the organic growth that Rich mentioned? Mark Lashier: Sure, Steve. I think this falls in the category of our strategy and action. Several years ago, we identified that the Mid Continent's central core was core to our business, and we would focus and make strategic decisions around that. Since then, we've made the decision to idle LA and redevelop the land there. We announced our increased ownership of WRB, that you referenced here. And now we push that on with the open season of Western Gateway. Now the first step is that really it opens up the frontier to integrate more freely WRB, Ponca City, and Border together into one system that creates a lot of optionality, a lot of opportunity. And I'll let Rich and Brian dive into the details on that. Rich Harbison: Alright. Thanks, Mark. I'll start and then pass it over to Brian there for the commercial side of the business. So, you know, when I think about this, Steve, you know, we've added 250,000 barrels a day of processing capacity for us. And what is our most competitive portfolio in the Center Mid Continent area there as you indicated, we got it at a very attractive price. Not diving into the cost synergies, but really, this deal opens up some organic growth opportunities that will allow us to increase our crude processing optionality and flexibility. With our previous arrangement in the JV, we were somewhat locked into a desired crude slate and investments to open up that flexibility were generally not looked upon favorably. So now we have the opportunity to really open up this flexibility inside this system as well as on the product slate side of the business too. So we see lots of opportunity there, which will help us increase our market capture opportunity. But most importantly, from my perspective, it's our ability to operate Wood River, Borger, and Ponca City as a regional system. Actually interconnected with a very good pipeline system operated by our midstream assets. And this will allow us to really optimize the use of intermediate products between the sites. And what that leads to is higher utilization of these downstream units, these units downstream of the crude operation. And that will also allow us to increase utilization of these conversion units and make additional products. All that leads to more commercial opportunity, and I'll kick it over to Brian to expand a little bit on that. Brian Mandell: Hey, Steve. From a commercial point of view, we have currently a cross-functional team looking at synergy opportunities, everything you can think of, and currently have 30 plus initiatives in the pipeline. We're generating new initiatives every single week maybe just to give you a few examples of some flavor for what we're looking at. We've been able to improve our integrated model between Wood River and Ponca City on butane blending and optimize the two plants which are highly integrated with our midstream assets. Another example is we've updated our variable cost economics on proprietary pipelines to incentivize shipping on Phillips 66 assets versus third-party pipelines. We're utilizing some of the marine assets that were previously dedicated to WRB for other higher netback service. And also, we're using Borger and Wood River Coke and blending it with coke from other refineries to generate more volume to be placed in the anode coke market. So those are just a few examples. It's early days. A lot more opportunity to go. Kevin Mitchell: Hey, this is Kevin. Just one other point of clarification I'd like to make because I think there's been a little bit of confusion out there. In terms of impact on capital. So we increased our guidance on capital budget to $2.5 billion or approximately $2.5 billion from what was previously $2 billion, and that has been attributed to WRB. That's a little bit of an overstatement of the impact. The reality here is if you look at 2025, the capital budget was $2.1 billion. WRB capital budget at a 100% level was $300 million. And so our net addition is $150 million relative to that. And that $300 million is a reasonable run rate to assume. And so, really, we're saying that $2.1 billion goes to $2.4 billion on a 100% consolidated basis, but we already had 50% of that uplift reflected in our operating cash flow because of the way that flows through the distributions from the equity method accounting. So I just wanted to put some clarity around that point. Steve Richardson: Appreciate the additional color there, particularly on the CapEx. If I could just quickly follow-up and fear of sounding like I'm leading the witness. But fair to assume that a lot of these benefits we just talked about, both on the refining side and the marketing side, are capital efficient and we're gonna see some of those benefits relatively near term. I mean, it's the one point we'd like to probably bring is when do we start seeing some of those things? Mark Lashier: Yeah. I think you will see capital-efficient additions there. There are capital opportunities. It'll add to Rich's list of low capital, high return opportunities, but the kind of synergies we talked about and the commercial opportunities that freeze us up those things are happening as we speak. Steve Richardson: Wonderful. Thank you. Operator: Thanks, Steve. Theresa Chen from Barclays. Please go ahead. Your line is open. Theresa Chen: Hello. Thank you for taking my questions. I wanna dig deeper into Western Gateway. Now that we are we can change into the binding open season. Can you talk about the rationale behind this project and why it's important for Phillips 66? How does it stack up versus one of competing pipeline projects? And if built, how do you think this pipeline will change? How do you flows as well as margin capture for your Central Corridor assets? Mark Lashier: Yeah. Theresa, that's a great question. When you step back and think about our mission to provide energy and improve lives, and when we looked at the evolution of refining capacity out west, impacting both California as well as Arizona and Nevada. And we saw an opportunity along with the alignment of Wood River, Ponca City, and Borger to really make something special happen. And in essence, the ability to bring our midcontinent strengths, midcontinent advantages to the West Coast, Saint Louis all the way to Santa Monica. And we believe there's great opportunities there. Less refining capacity in California, growing demand in Arizona and Nevada, all those things combined to get us interested in this opportunity. Brian and Don can dig into the details of those and address the specifics of your question. Don Baldridge: Sure. Thanks, Mark. And, Theresa, we do think it's a unique and compelling opportunity. And if you think about just the framework of the project, our gold line really operates like a supply header that's gonna be able to access the Mid Continent refineries bring that volume to help fill the Western Gateway pipeline. It's gonna take product along the new pipeline all the way to Phoenix, you know, that will help satisfy that market, that area. And then the balance of that volume being able to go all the way to Colton, California where it can access the broader California and Nevada market. We think that's a compelling opportunity. It certainly early days in the open season, or having a constructive and active conversation with interested parties. So more to come on that. I think the project and how we have it set up is something that's resonating quite well with the market. Brian Mandell: And maybe just from a commercial perspective, you know, the way I think about it is PADD five is gonna look very similar to PADD one. Where you have a short market, you have a pipeline that brings in domestic volumes like Colonial does to PADD one, and then you have barrels coming from overseas, waterborne barrels as well. So it'll be set up very similar to that market. And as you know, a pipeline is the most reliable way to move volume won't be susceptible to dock restrictions or lack of logistics, demurrage, or weather issues. And assuming only our pipeline gets built, we estimate probably about half of the volume will end up in the Phoenix market with reversal of Kinder Morgan and the rest will end up in California, which makes sense as Mark mentioned, as you see, there were closures of California refineries. But California will continue to be a waterborne import market, and at Phillips 66, we'll continue to import barrels by the water. And from our commercial perspective at Phillips, the pipeline will allow us to move products, as Mark said, from our Mid Con refineries for likely better than Mid Con netbacks, and all our Mid Con refineries can make Arizona grade gasoline and California grade gasoline. So we see the pipeline as a great opportunity for California, for Arizona, for Nevada, and for all the potential shippers. Mark Lashier: Yeah. As far as the comparison of our project to OneOak's project, I think they have different target markets or target sources, Gulf Coast versus Mid Continent. And I think that the ultimately, the market will determine if one or either of the projects go forward. So we believe we've got a strong ability to bring midcontinent volumes all the way to California in with Kinder Morgan really provides a lot of strength for this option. And we have full faith that we'll move forward with this. Theresa Chen: Thank you for that comprehensive answer. And as a follow-up, from a cost perspective, what kind of CapEx should we anticipate for Western Gateway given the substantial greenfield component? And how will the cost be split between the partners since Kinder is contributing its existing pipeline infrastructure? Don Baldridge: Sure, Theresa. So the partnership is fifty-fifty with Kinder Morgan. And so that'll be at the end of the day. But how the balance works. And then in terms of the overall CapEx, you know, we haven't disclosed that number. And part of that is because as we talk through with shippers and different supply connections, we're still working through, you know, what some of that connection cost might entail. And how all that will flow from a volume standpoint. And that will drive some of the infrastructure needs and capital requirements. But safe to say this is a consistent midstream type return investment that we're looking at in concert with Kinder Morgan. Kevin Mitchell: And probably also worth highlighting that the capital spend wouldn't be in the next couple of years either. You're sort of looking at 2027, 2028, 2029 time frame. So no near-term impact on capital budgeting. Theresa Chen: Thank you very much. Operator: Neil Mehta with Goldman Sachs. Please go ahead. Your line is now open. Neil Mehta: Yes. Good morning, Mark and team. Wanted to keep on pushing on this midstream point. And you've talked about $4.5 billion in EBITDA by year-end 2027 as the run rate. Do you annualize Q3? You're close to $4 billion. And so maybe you could just talk about bridging that $500 million and if oil prices languish, how sensitive is the EBITDA to that? And so giving us confidence around that incremental $500 million would be great. Mark Lashier: Absolutely, Neil. I'll kick it off and then turn it over to Don. But you know, first of all, I think you have to look at our track record. We've grown that NGL business from $2 billion to $4 billion over the last several years. And as you noted, we're just under a billion dollars this quarter. So the $4 billion is in line of sight. This is all the result of the concerted effort based on our strategy we aligned on several years ago with our board. To establish this wellhead to market presence in NGLs. And we've done disciplined, accretive, inorganic, and organic things to do that to get to where we are today. And we see the next increment another $500 million largely from organic. I mean, we've got line of sight on organic opportunities. The inorganic opportunities were facilitated by noncore asset dispositions, so we've been able to reallocate capital and free that up. And most importantly, the organic opportunities quite often are unleashed because of the inorganic opportunities. So this has all been a relentless pursuit of higher ROCE in the midstream business as well as building competitive on top of competitive advantage. And I'll tell you that it was a great visit. We had the Sweeney last week. We've done some things around the fracs there. The operations have been incredible. And the operators pointed out that they found our fifth frac. We have four fractionators at Sweeney. They found enough capacity through some debottleneck projects they've done. So in essence, they've added an additional frac through very low capital opportunities. So much like refining, we're looking at ways to be more efficient, to grow more aggressively, in midstream and more accretively. And Don's got another list of opportunities that he's gonna go after. Don Baldridge: Sure. Thanks, Mark. And definitely the platform that we have developed over the years, it just lends itself to a lot of organic growth opportunities. And that's what's really driving this growth from $4 billion to $4.5 billion. A lot of those projects are publicly announced and are in execution phase. If I look at the gas gathering and processing business, we got plant expansions in the Permian with our Dos Pico gas plant that came on just a few months ago. That's it will fill up by 2026, and then Iron Mesa gas plant that we announced, it's under construction. That'll come online in early 2027 and fill up. So our footprint, you know, that plus the commercial successes as well as the higher NGL content in the production, that's really driving a lot of the volume growth that's coming through our system. That's, again, all fee-based type margin. So very limited sensitivity to the underlying commodity price. That volume drives what happens downstream in our NGL pipeline business. You know, we just completed the first phase of our Coastal Bend expansion. We're running that full. We've got a next phase of capacity, a 125,000 a day of additional capacity will come on later in 2026. As well as the restart of our Powder River pipeline that will pull in barrels out of the Bakken. So those volumes that capacity, and the volumes that will flow through there, again, help drive this earnings growth that will take us to that $4.5 billion run rate by 2027. So we've got a well-defined organic growth plan that we're executing. The other thing I would just say is that now our asset footprint definitely is in a position where it creates additional growth opportunities that are high return, low capital, that we continue to pull together and execute on. So really see, like, we've got some great momentum within this part of the business and are executing it on a day-to-day basis. Neil Mehta: Thank you, Don, and thank you, Mark. So the follow-up is just crude and transit. A lot has been made of the 1.4 billion barrels that appear to be on the water. But today's DOE is the view that they aren't finding their way into US shores or into a lot of OECD pricing nodes. And I wanna make get your perspective of or do you guys have visibility to that crude actually manifesting its way over here? And if not, what do you think is driving that you think it's the sanctions, whether it's Iran, Venezuela, and now Russia contributing to that difference between what appears to be a visible build in inventory on the water but not on land. Brian Mandell: Yeah. Neil. It's Brian. Hey. We do see a very large build on water, a barrels. It's a function of what those barrels are, and it's not clear if those are Russian barrels and they don't get to end users. They may sit there for a while. If they are other barrels maybe Saudi barrels or OECD barrels that will get to market. And that will probably put pressure on Saudi OSPs. And benchmark crudes. And so we're kind of waiting to see what those crudes are, and it's not it's not clear. But it is clear that there is a lot of crude on the water now. Neil Mehta: Okay. Thanks, Brent. Operator: Justin Jenkins from Raymond James. Please go ahead. Justin Jenkins: Great. Thanks. I guess one of the common questions we get from longer-term investors is on the debt side, the pathway to your 2027 targets. And Kevin, you touched on it a bit in your remarks, but maybe I'd ask if you could give your thoughts on the bridge to that $17 billion debt target by '27? Mark Lashier: Hey, Justin. This is Mark. I just wanna context it a little bit that we've clearly been using both our balance sheet as well as asset dispositions to drive the inorganic transactions as well as the organic opportunities midstream as well as in refining while sustaining our commitment to return at least 50% of our cash from operations to shareholders. And so we've been able to do that quite effectively. We're making a more proactive shift now towards intently focusing on the debt level and then that debt reduction is a clear priority, and Kevin is well prepared to walk you through the math going forward. Kevin Mitchell: Yeah. Thanks, Mark. So we still have that same $17 billion debt target. That has not changed. You will have noticed that in the third quarter, our debt level increased to $21.8 billion. Now that increase was a combination of some debt issuance and some short-term debt reduction. But also had a corresponding increase in cash balance. So on a net basis, we were essentially flat during the third quarter. But as we look ahead to the next over the next the fourth quarter and the next couple of years, and you look in the at the third quarter, actually, the second quarter, pre-working capital, generated $1.9 billion of operating cash flow in both periods. You think about WRB coming into the equation and I'll use this number partly to keep the math simple, but if we're at $8 billion in operating cash flow annually, you can you know, we're still committed to returning 50% of cash operating cash to shareholders. That's $4 billion, which would be split evenly between the dividend and the buybacks. That leaves $4 billion that's available. The capital budget of $2 to $2.5 billion per year as we talked about earlier, leaves somewhere in the order of $1.5 to $2 billion per year available for debt reduction. That's 2026 and 2027. Obviously, margins will do what margins do, and so we don't have complete control over all of that. That's a reasonable construct to think about this. In the fourth quarter of this year, we will have the proceeds from the Jet disposition, but we also had just funded the WRB acquisition in those two kind of offset but we'll have a sizable working capital benefit. In the fourth quarter, somewhere in the order of $1.5 billion will come back to us, maybe slightly more so between $1.5 billion in the fourth quarter of this year and then the $1.5 to $2 billion potentially in each of 2026 and 2027 gets us comfortably to that $17 billion level by the '27. And that doesn't include any potential additional dispositions of noncore assets which just provides upside and additional flexibility. Justin Jenkins: Perfect. Appreciate that detail, Kevin and Mark. I guess my second question on the refining macro and maybe tilt to that cash generation side of things. Does seem to fit your portfolio pretty well with high diesel frac and expectations for wider diff. Maybe just your overall expectation on how cracks play out and crude diff play out into 2026? Brian Mandell: Hey there. This is, Chris O'Brien again. On the crude diffs, you know, we expect to see light heavy spreads start to widen. During Q4 and into Q1. It's been somewhat delayed, I think, surprising many of us. But the heavy crude has been slower, as I said. With additional OPEC barrels moving into China's SPR. And staying in the East in general, and then just the geopolitical concerns heading market volatility around Russia, Iran, and Venezuela? In The US Gulf Coast through Q3, the Canadian heavy crude became more attractive than high sulfur fuel oil. Which caused refiners on The US Gulf Coast to run more Canadian crude, and that supported differentials. But that we as we've entered Q4, we're starting to see some impact from additional OPEC crude and a kind of relative weakening, although still strong of the high sulfur fuel oil. Additionally, the WCS production increased by 250,000 barrels in Q3 and we were gonna expect another 100,000 barrels or more in Q4. And as more Canadian volume comes online along with the winter diluent blending, we're seeing the WCS diff weaken by about a dollar in Q4 versus Q3. And Canadian production is expected to increase next year as well with several projects coming online and also from winter diluent blending. So in 2026, WCS curve is off another dollar from Q4 as additional crude hits the market, including Middle Eastern crude, we'd also expect to see Middle Eastern OSPs to fall and put additional pressure on heavy crude. And as you know, we're a large user of WCS. So watching the WCS differential continue to widen will be a benefit to us. Justin Jenkins: Thanks, man. Operator: Doug Leggett with Wolf Research. You may proceed with your question. Doug Leggett: Hey. Good morning, everybody. Guys, utilization rates blew out quarter record, I believe, since 2018, I think you said in the release. When we were running around Sweeney with you guys, I asked I forgot the gentleman's name who joined you from Chevron recently. So what are you doing differently on how you think about plan turnarounds, the habitual ones every four to five years is that changing? And should we think about your go-forward capacity utilization, your ability to manage that if you like, as averaging higher over time. The reason I asked the question is because Valero had a similar situation. And between the two of you, you've just basically offset the closure of Lyondell, Houston. So we're trying to understand if our utilization is a new normal for not just you guys, but for the industry. Rich Harbison: Hey, Doug. This is Rich. You know, the gentleman you were talking to is Bill. He's the refinery manager down there at Sweeney, and that was a good visit. I'm glad you mentioned that. It was a good opportunity for us to show off an asset there that highlights one of our core strategies, which is integration with the midstream and also CPChem operation there as well. You know, when I think about your question and how do I answer that, it's to me, it's a journey that we have been on. And, you know, you don't sustain utilization rates like this if you're making quick and short-term decisions. These have to be long-term end-of-sight, visionary, type direction that you're moving a large set of assets to. You know, of course, we started that with a cost and margin, but we also simultaneously were running an improvement, out opportunities and initiatives around our reliability programs. And those reliability programs are essential to this sustainability component. To it. And that to me is what culturally has continued to improve over the last two to three years on this journey as we've marched down this path. And also on the margin front, which is a journey that we started a couple of years ago, and that was really centric around starting to fill up our downstream processing units behind the crude. First, you gotta fill the crude unit up, and then you gotta fill the downstream units up. Those directly result in clean product yield. Which is where, you know, most of their earnings are flowing into the organization. So I think with that commitment to reliability, world-class reliability program that we're executing. As well as the fundamental change in our cost and margin outlooks. At each of the sites gives me a high level of comfort that we will be able to sustain this level of performance going well into the future. Doug Leggett: That's really helpful. I threw the AI, words out to Valero and it bumped their stock up, I think. So maybe you could say AI helping you manage your utilization. So my follow-up, a very quick one for Kevin. Kevin, on that same trip, we had an opportunity to have dinner with the guys and you sadly, were not there to take this question on the chin. And the question basically is, if you're a relatively enterprise volume, what I mean by that is you've got a lot of long-life assets. However, you think about mid-cycle, a little bit of growth in midstream in the context of the overall company, but relatively static enterprise value. Seems to me that the easiest way to basically boost your equity value is to reduce your net debt. Simple math. Equities enterprise value minus net debt. So why is net debt reduction not part of the cash return formula? Raise the formula, include net debt. Why not? Kevin Mitchell: Well, it's I mean, you're absolutely correct. That everything else stays the same, a reduction in debt. Translates into an increase in equity value. And you can choose to look at debt reduction in that light. I mean, what we do is take a very sort of consistent view that most others in the space do, which is the cash return to shareholders is the dividend plus the buybacks. And at the same time, as part of our capital allocation framework, we've got debt reduction as a key part of that. We actually have this debate internally when we have traditionally thought of capital allocation being how much is returned to shareholders, dividend and buybacks, and how much is reinvested in the business. In terms of the capital program. And now we've got this additional dynamic of debt reduction, at which bucket does it fall into. We tended to just break it out separately on its own. But you are absolutely correct that there is a clear value proposition for equity holders through debt reduction and we do see it the same way in that context. It's really then down to the semantics of how you, how we communicate that. Doug Leggett: Great. I appreciate the answer, Kevin. Thanks. Operator: Manav Gupta with UBS. Please go ahead. Your line is open. Manav Gupta: I want to really thank Jeff Dietert over the years. I've thrown a lot of stupid questions at him. He's been very patient in answering all of those. So thank you, Jeff. You will be missed a lot. My first question here, sir, is on the chemical side. The indicator, and I understand it's an industry indicator, seemed relatively flat. The earnings jumped materially. Now I think some part of it was the Port Arthur non-downtime, but was it also a function of you using a higher ethane blend than what probably the indicator is in showing? That's what I concluded, but I wanted your opinion on it. And if you could also talk about when can we get back to, like, mid-cycle chemical margins? Mark Lashier: Yeah. Just for the record, Manav, I've never fielded a stupid question from you, so I think I can speak for the rest of them. You ask insightful questions, and this one's very insightful. You partially answered it. You know, CPChain's chain margins increased about 9.5, 9.7¢ per pound. IHS was flat. There's really three drivers there. We had higher high-density polyethylene margins due to lower feedstock cost. So our blend of feedstock is different than the blend used in the IHS Marker. We're, as you noted, more heavily weighted to ethane. I think the most heavily weighted to ethane, and that provides a very resilient advantage. Also, in the second quarter, CPChem had some planned downtime at Port Arthur, some unplanned downtime at Cedar Bayou. They had some turnarounds as well. And so when you flip all that to the third quarter, those things go away. That was beneficial. And also, the warm burns, other people had unplanned downtime in the third quarter and CPChem was able to take full advantage of that because of the short in the market. And so we see you know, the chemicals world is still over but I would say that what happened in the third quarter with that quick uptick in margins when there was a little bit of tightness created that's a really good sign. You know, CPChem because of its cost position, is gonna they generated year to date $700 million of EBITDA. They should that's our half, not just CPChem, our half of their EBITDA. They'll be up around a billion dollars, and this is the bottom of a very protracted cycle. And so they are doing quite well. They're able to jump in when others falter. They're running at above a 100% when others are rationalizing. There's gonna be a lot of asset rationalization going forward. You're even hearing news out of Korea about the potential for rationalization. Europe's already well down that path, and so I think when you start seeing margin upticks when people have outages, that's a good sign. We're not calling this down cycle over. We think it's gonna be a long slog forward. But I think there'll be more shakeout when CPChem starts up their two large world-scale the definition of world-scale, frankly, assets both here in The US and in Ras Laffan, Qatar and that will even, I think, potentially force out other high-cost producers. And so they're gonna be moving from strength to strength. And the long-term prospects are quite good for CPChem. Manav Gupta: Thank you for the detailed response. My quick follow-up is here, sir. Initially, when you did the epic deal, I think now you call it Coastal Bend, there was a little bit of a pushback but now things are really coming together. The line has already had one expansion, and I think one more phase is planned. So help us understand where is the epic acquired assets EBITDA at this point on a quarterly basis and then what would it become once the full expansion happens? If you could just run us through that math. Thank you. Mark Lashier: Yeah. Thank you for highlighting that, Manav. Again, the inorganic opportunities that we've done in midstream have always opened up more organic opportunities. And so I think that it's important to continue to look at our track record of what we do. We're not buying inorganic opportunities just to get bigger. We're buying because it opens up a new playing field. It creates more opportunity that perhaps the incumbents couldn't realize. And that is the case in Epic, and we're quite pleased with Epic and everything that's going on around that. And, you know, Don can fill in the details of what's coming next. Don Baldridge: Sure, Don. And in terms of just looking back since we closed on the epic transit in April, you know, compared to the acquisition plan, we are meeting to even exceed what we expected from the assets. That's really a testament to the synergy capture around the operations and commercial around that now Coastal Bend pipeline. It certainly has been a really nice add in the Gulf Coast for us. The Corpus Christi presence. Combined with what we have at Sweeney. And as you mentioned, we turned on the first phase of the expansion here in August. We're running that pipeline full. Again, that's a sign that we've had the volumes available on the system. That's why we acquired the system and expanded it because we needed the capacity. We're filling it up as we turn it on. We've got another expansion that'll come on later in 2026. And most all that volume is already on the ground and flowing on third-party pipes that will move over or it's a volume that's gonna come from the GNP expansions that we've already announced. So we're executing on the acquisition plan as we advertised and really pleased with the results and the follow-on opportunity that we're seeing with having that as part of our portfolio. Manav Gupta: Thank you. Operator: Jason Gabelman with Cowen Inc. Please go ahead. Your line is open. Jason Gabelman: Yeah. Hey. Thanks for taking my questions. The first question is a portfolio one. You've obviously concentrated your footprint in Central Corridor talking a lot about synergies with your midstream footprint. As you think about your East Coast and West Coast refining footprints, do you still view those as core? I mean, there are some good assets there. But obviously not as well integrated. With what you're doing in midstream and chems. So how do you think about the importance of those regions within the overall business? Mark Lashier: I think there's a couple of key things to think about here. It's that clearly, we have a core strategy around the integration of our Mid Continent or Central Corridor refineries there. They have the greatest crude flexibility. They have lots of optionality. That doesn't mean that we're ignoring our remaining coastal refineries. You think about Ferndale, we've already talked about it. Transitioning to produce California carob and its value is increasing as refineries refinery capacity in California tightens up and so we're not gonna kick out assets that are creating good value but we are going to focus more intensely on the integration in the Mid Continent and Central Corridor. Likewise, Bayway, when you think about the Atlantic Basin, we've got opportunities to integrate between Bayway and Humber. We can move streams back and forth to optimize there and to enhance the profitability and the reliability of both of those assets. And there's some very, very strong opportunities there that we're continuing to look at. Jason Gabelman: Okay. Great. That's very clear. My follow-up is on the renewable fuel segment and obviously results saw a meaningful improvement quarter over quarter. You mentioned some impact from selling credits and I think there was something about selling product out of inventory in there. So wondering if you could just elaborate on what drove the increase quarter over quarter, how much of that is kind of underlying versus some timing impacts? Thanks. Brian Mandell: This is Brian Jason. Let me just talk about Q3, and we'll talk a little bit about what we're seeing in Q4 and beyond. But in Q3, the renewable margins were actually worse if you took a look at just the margins. But we did a lot of self-help in Q3. We reduced costs. We improved our logistics, particularly to get in more domestic feedstock. We sent more of our renewable products to Pacific Northwest where fossil basis was stronger. We got a lot of value from some new pathways that we got. We doubled SAF production. And then as you pointed out, we had the timing of the European credits. In Q4, we'll have some timing impacts as well. But in Q4, margins are improving with weaker soybean prices and relatively stronger credit values. We think the industry will continue to run at about the same rates as they did in Q3 given the turnaround activity. The European market will continue to attract renewable products. We've been sending renewable products in that direction both in Q3, and we continue doing that. We also anticipate continuing to increase our SAF production in Q4, and we've seen strong interest from SAF buyers. And finally, the new pathways that I mentioned will give us some additional flexibility. But in the end, we still need more clarity on federal and state policy. For example, the guidance on the RVO policy, including reallocation of SREs and wind generation on foreign feedstock, and even more clarity on the European policy. Kevin Mitchell: And Jason, it's Kevin. Just one other clarification. That inventory comment, that was a variance relative to the second quarter. There was no net benefit in the third quarter from inventory. It's just relative to what we saw in the second quarter. So there's that's not a direct impact. Jason Gabelman: Yep. That's a helpful call out. Thanks, guys. Operator: Brian Todd with Piper Sandler. Please go ahead. Brian Todd: Yeah. Thanks. Maybe a couple back on refining. Throughput was obviously, you know, much higher than anticipated in the quarter. But margin capture, the still probably still a few headwinds that we see that existed in the third quarter. Can you talk about maybe some of the headwinds in the third quarter and how those might be trending or improving into the fourth quarter? And then maybe as a follow-up, a few years ago, as part of your strategic priorities, you talked about a goal of driving margin capture improvement of 5%. Can you talk about where you are on that progress you've clearly made improvements on clean product yield. But where do you think you are on that journey? And what are some of the things that you may be working on over the next couple of years that we should keep an eye on on that front? Rich Harbison: Hey, Ryan. This is Rich. Let me start and then Brian can clean up anything else in the market front there. But you know, as I think about it, maybe the best way to approach this is a regional conversation. In the Atlantic Basin, market capture this quarter was 97%, pretty solid. Quarter over quarter, that was really a difference in turnaround activity in that region. But we did see improved market cracks and some inventory impacts that were really offset by some higher feed costs as well as some lower product differentials in the region. The operations of the plants were quite good though. Utilization for the region was sitting at 99%. And, you know, and on our journey to improve, you know, we had a clean product yield in that region of 88%. So very solid performance in that area. And we think that's a lot of that's supported by a project that we initiated at Bayway that increased the native gas oil production and it's allowed us to fill up that cat and really, we're seeing positive returns on that. In the Gulf Coast area, market capture was a little bit lower at 86%. And, really, the headwinds on this one were we saw that, in the marketplace. Utilization for the region pretty solid at 100%. And the clean product yields at its typical 81% for that area, which may seem a little low on clean product yield, but I'll just remind everyone that at Lake Charles, we produce a gas oil that is sent over to Excel that impacts the overall clean product yield for the facilities. Central Corridor 101% market capture. Very solid. Again, you know, that's one of our highest performing regions. The headwinds there, lower product differentials again, and those were offset by some improved market cracks. But that differential, the common theme you're hearing here, the octane value, as well as the jet to distillate differential. Again, for the 103% on the utilization front. And 90% clean product yield. So you can see how those assets are running and performing quite well. And then, of course, one of our headwinds for the core was in the West Coast that 69% market capture. And that's primarily driven by the wind down of the Los Angeles refinery and the impacts associated with that. So you'll we had that impact in the third quarter. You'll see that impact continue into the fourth quarter. Where we will have wind down expenses but yet no barrels to offset that. In the profile. So we'll provide some clarity on that when we report in on the fourth quarter. Utilization was reasonably well on the West Coast at 88% and of course, they're very complex refineries, so they're playing product yields up there too. Brian Mandell: And the only thing I would add was now we're seeing we saw, as Rich mentioned, jet under diesel. Now those regrades have flipped and across all pads Jet is over diesel, which will be a tailwind for us, and octane spreads have firmed as well. With weakening naphtha to crude and so that's also will be a tailwind for us as well. Brian Todd: Great. Thank you. Operator: Philip John Lewis with BMO. Please go ahead. Your line is now open. Philip John Lewis: Thanks for taking the question. On Western Gateway, how important is Phillips integration between midstream and refining and designing and executing this project. And then separately, what's your level of confidence around regulatory permitting risk? And any different dynamics here to keep in mind between the greenfield pipe and the reverse in the California? Mark Lashier: Yeah. So we have a team that looks at integration opportunities that has from refining, commercial, midstream, all looking at where can we capture the most value, create the most optionality. And this opportunity jumped right out of that kind of collaboration. And it was a home run. And so we see opportunities both on the refining side, we see commercial opportunities, and certainly midstream is the glue that pulls it all together. So Don, I don't know if you have anything on the regulatory side. Don Baldridge: Yeah. Other than, yeah, the feedback that we've gotten initially from folks in the various states as well as in the federal has been encouraging and positive. We're obviously in the early days of going through the open season and firming up any of the route nuances as we look at the new build. But we feel very positive in terms of the ability to get this project done and to follow on just to what Mark said. I think, you know, from an integration standpoint, this is a project that Phillips 66 is uniquely positioned to help facilitate and drive as a really a compelling industry solution to market access for the Midwest refineries as well as satisfying a supply deficit in the West. So really feel good about where we stand and the opportunity set in front of us. Mark Lashier: I've had conversations with key people at the federal level as well as the state level in California. California, and they are enthusiastic about this. I think the opportunity to leverage Mid Continent energy dominance through infrastructure. They can come online fairly quickly. It's very attractive. At the federal level in California. Is looking for ways to provide energy security and this does that. So when you get both of those sides to the table in a positive way, I think that's a strong vote of confidence for the project. Philip John Lewis: Okay. Great. And recognizing Chemicals ran really well in the quarter, just going back to industry capacity rationalization, wanted to get your sense on the China anti-involution policies and just how meaningful do you think this could be to help bring balance back into the market? Mark Lashier: Well, I think you've seen it in refining. In China where the teapot refineries is the same kind of concept. We're hearing from our chemicals folks that they're looking at drawing a line in the sand around old in less efficient assets to make room for what they're doing around their crude to chemicals thing. So I think that watch that space. I think that will result in rationalization of assets, maybe even as young as only 10 or 20 years old. Operator: Thank you. This concludes the question and answer session. And I will now turn it back over to Mark Lashier for closing comments. Mark Lashier: Thanks, Raj. Great questions. We remain committed to our strategic priorities. Consistently strong operational performance across our assets, disciplined investments which deliver attractive returns, a strong balance sheet, and a commitment to returning capital to shareholders. Thank you for your interest in Phillips 66. If you have questions or feedback after today's call, please reach out to Sean or Owen. Operator: Thank you. This concludes today's conference. Thank you all for your participation and you may now disconnect.
Operator: Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the FIBRA Prologis 3Q 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Alexandra Violante, Head of Investor Relations. Please go ahead. Alexandra Violante: Thank you, Kate, and good morning, everyone. Welcome to our Third Quarter 2025 Earnings Conference Call. Before we begin our prepared remarks, please note that all information disclosed during this call is proprietary and all rights are reserved. This material is provided for informational purposes only is not a solicitation of an offer to buy or sell any securities. Forward-looking statements made during this call are based on information available as of today. Our actual results, performance, prospects or opportunities may differ materially from those expressed in or implied by the forward-looking statements. Additionally, during this call, we may refer to certain non-accounting financial measures. The company does not assume any obligations to update or revise any of these forward-looking statements in the future, whether as a result of new information, future events or otherwise, except as required by law. As is our practice, we have prepared supplementary materials that we may reference during the call as well. If you have not already done so, I will encourage you to visit our website at fibraprologis.com and download this material. On today's call, we will hear from Hector Ibarzábal, our CEO, who will discuss our strategy and market conditions; and from Jorge Girault, our CFO, who will review results and guidance. Also joining us today is Federico Cantú, our Head of Operations. With that, it is my pleasure to hand the call over to Hector. Hector Ibarzabal: Thank you, Alexandra, and good morning, everyone. Today, I'd like to begin by addressing the geopolitical environment in which we are operating. Trade uncertainty has improved slightly as Europe and Japan have formalized new trade agreements with the U.S., while negotiations between China and the U.S. remain intermittent. On the other side, the U.S. has hardened its stance towards Mexico and Canada, implementing additional sector-specific tariffs outside of the USMCA framework. In this environment, most manufacturing customers remain cautious about expansions and new projects. We've observed some improvement in manufacturing leasing activity in certain markets and also signs of customers reconfiguring their supply chains to strengthen their presence in the U.S., seeking political goodwill. Overall, the outlook is constructive, though we continue to monitor developments closely. If a definitive resolution on tariffs doesn't emerge in the next 2 or 3 quarters, we believe uncertainty will become the new normal and customers will begin to move forward incorporating that uncertainty into their business risk assessments. Turning to our consumption-driven markets, Guadalajara and Mexico City continue to perform exceptionally well, fueled by both e-commerce growth and the modernization of supply chains by major retailers. These dynamic markets represent about 50% of our operating portfolio. We continue to see a robust pipeline of customers seeking large modern spaces to optimize operations, particularly in Mexico City, which accounts for nearly 40% of our activity. E-commerce continues to expand its market share with leading players making significant investments in new facilities. Thanks to this strong diversification, FIBRA Prologis delivered outstanding financial and operational results this quarter. Jorge will provide more details shortly. Talking about market dynamics, new leasing activity totaled 10 million square feet, up sharply from 5 million last quarter and roughly in line with the 2024 average of 11 million. We saw a rebound in manufacturing markets and a notable uptick in Mexico City. Net absorption reached 7.8 million square feet, impacted by move-outs in Tijuana, but still consistent with the average of the past 4 quarters. New supply declined 33% versus last quarter's to 10 million square feet, but this level was sufficient to increase vacancy by 40 basis points to 5.3%. Construction starts totaled 14 million square feet, reversing the downward trend of the previous 2 quarters and nearing a historical record. Market trends were relatively stable this quarter with consumption markets seeing low single-digit growth, while manufacturing markets were flat to a slightly down. Property values were also stable with marginal cap rate expansion in select submarkets, mainly Tijuana. While headwinds remain on the trade front, customers appear to be gradually making investment decisions in advance of the upcoming USMCA renegotiation. The path ahead may be bumpy, but we expect a constructive outcome. We continue to closely monitor customer sentiment and policy developments to ensure we maximize long-term value for all stakeholders. Turning to the Terrafina acquisition. On October 14, we launched the third tender offer for the remaining 10% at MXN 42.5 per certificate. We are optimistic about the results and expect to provide an update by mid-November when the tender offer closes. By reaching 95% ownership, our intention remains to delist Terrafina. At the same time, we are making solid progress elevating Terrafina's operating standards, bringing contracts to market rents, which has surpassed expectations and moving forward our disposition and asset recycling goals. We remain fully committed to our shareholders and to always placing their interest first. With that, I'll hand it over to Jorge. Jorge Girault: Thank you, Hector, and good morning, everyone. We're pleased to share that our third quarter results were strong and on track. We continue to see clear benefits from the Terrafina acquisition, especially in bringing rents to market and strengthening our balance sheet. Now let's go to our financials. FFO was $0.056 per CBFI, up 28% from last year, reaching $90 million in nominal terms. AFFO totaled $78 million, up 50% year-over-year. Operationally, it was also a strong quarter. We leased a record 4.1 million square feet above expectations, reaching $9.2 million for the year, which represents 70% of the total 2025 expirations. Period end and average occupancy remains high at 98%. Tenant retention stood at 82%. Net effective rent change was 47%, consistent with our portfolio mark-to-market levels. Same-store NOI, both cash and GAAP, grew around 15%, showing the combined effect of rent increases and the neutral impact of peso movement. Let me spend a minute on the balance sheet. We've successfully refinanced short-term debt in both FIBRA Prologis and Terrafina. We are now developing a comprehensive debt financing strategy to enhance our access to the broader debt capital markets. While this process will take time, it will ultimately strengthen our balance sheet, making it more flexible, value-driven and better positioned to support future opportunities. Regarding impact and sustainability, ESG. Our MSCI rating improved from BB to BBB and Standard & Poor's Corporate Sustainability score also rose from 55 to 60, reinforcing our commitment to transparency and continuous improvement. I want to spend some time on Terrafina tender offer. As Hector mentioned, we launched a third tender offer for about 10% of Terrafina remaining certificates at MXN 42.50 per CBFI. We encourage investors to take part of this tender to avoid holding any illiquid privately held vehicle in the future. In compliance with tender offer process, we want to be addressing questions related to the Terrafina on this call. Please refer to the public information and feel free to reach out to the Acting [indiscernible] or Citibank's teams if you have questions about the process. Let me move to our 2025 taxable distribution. We expect taxable income boosted by peso appreciation and projected inflation to exceed our 2025 distribution guidance. If by year-end, FX stays at these levels, total taxable income to be distributed will be about twice our cash guidance. Therefore, we will be combining CBFIs and cash in line with local FIBRA tax rules to comply with additional requirements. This approach will protect our balance sheet by avoiding new debt through pro rata certificate issuance. We will be making a portion of this additional distribution before year-end and the remainder once final FX and inflation figures are confirmed. Going to guidance. Due to our internal process, we are adjusting our disposition guidance to be between $0 and $50 million. We are also revising our acquisition guidance to be between $50 million and $100 million. And we're revising our CapEx as a percentage of NOI to be between 9% and 12%, given timing and our -- and new budgeting on maintenance CapEx. All other guidance remains unchanged. You can find the details on Page 8 of our supplemental financial information. We believe that the key driver for continued operational excellence will be energy accessibility and customer service, which remain core to our DNA. Before we wrap up, I want to recognize our teams on the ground for their outstanding execution this quarter. We remain laser-focused on our long-term strategy and ready to adapt when needed, always guided by discipline and agility. With that, let me turn it to Q&A. Thank you. Operator: [Operator Instructions] Your first question comes from the line of Rodolfo Ramos with Bradesco BBI. Rodolfo Ramos: My question is, it's a bit on your guidance. I mean, when you look at fundamentals, they continue to seem quite solid. We've seen the light at the end of the tunnel, stable occupancy. We're seeing still very high rent rollovers. So can you give us a little bit of more detail on your lower outlook for asset acquisitions and dispositions? I mean, is this is a more of a timing issue that we're close to the year-end and things haven't closed through or sellers, buyers are just a little bit more reluctant to transact in this current environment. So any detail on that and perhaps how you see it going into 2026 would be helpful? Hector Ibarzabal: Thank you for your question, Rodolfo. Indeed, as I mentioned in my opening remarks, we have been very active on our asset recycling strategy. And as of today, I am very pleased with the results that we are receiving so far. As you mentioned, what is happening and the main reason behind this review on guidance has to do with timing. We found that the potential buyers that are active for the first portfolio are players that are active in the market as of today. So we needed to design a clean room in order to be able to share information according to compliance. This on top of having a new antitrust commission is making us feel more comfortable to move for the first quarter of next year, the disposition of the first portfolio. Regarding acquisitions, that's something that we monitor permanently, and we feel that we are not obliged necessarily to do them. It's not that there is no opportunities, but it's important to do the right opportunities, and we will never be forced to do acquisitions just because we guide on them. That doesn't mean that we will be showing on 2026 important opportunities, but we are not seeing them happening on 2025. Operator: Your next question comes from the line of Gordon Lee with BTG. Gordon Lee: I have a quick question on TERRA''s not related to the tender. But you mentioned that Hector in your remarks that you have continued to progress on improving TERRA's operating standards and bringing them up closer to Prologis' own standards, both operationally and financially. And I was wondering if you sort of had to benchmark to 100, right, 100 is as much as you can improve. Where are you in that process? And is the remaining portion at all impacted by having 2 listed entities? Is it easier if you're able to only have one vehicle? Hector Ibarzabal: Thank you, Gordon. I think that all the standards that Prologis has with its portfolio are already 95% implemented into the Terrafina assets. We have now fully dedicated teams. And I think that we have importantly enhanced the service that is provided to customers. We as well have been invested a fair amount of money on bringing the operational standards of the building to what Prologis uses as a market practice. Having said this, we have been able to importantly increase the rent on the renewals, above 40%, I would say, in the rollover that we have been experiencing. It's going to take at least 3 more years to bring 100% of the Terrafina portfolio up to market standards. But I think what I would like to highlight is that we are showing execution in these buildings that we are already operating, I would say, it's going to be 1 year that we have been having full control among them. Regarding the listing of Terrafina, I think that -- and as I mentioned in my opening remarks, by mid-November, once that the third tender process is completed, we will be able, hopefully, to provide positive news about it. And Jorge mentioned in his opening remarks, our objective is still to get the listing Terrafina hopefully early next year. Operator: Your next question comes from the line of Piero Trotta with Citibank. Piero Trotta: I have a question on CapEx. I would like to know if you could tell us if there is a relevant difference in CapEx requirements between Terrafina's portfolio and Prologis. I ask that because Terrafina's portfolio is on average older than Prologis assets. So it would be great if you could tell us on that. Federico Cantú: Piero, thank you for your question. This is Federico. So we've been -- as we guided, we're spending a little bit less as a percentage of NOI and CapEx, driven by careful analysis and rationalization in our CapEx investments, and we feel comfortable with these levels. We are assessing, of course, we constantly assess all our buildings and Terrafina perhaps need a little bit more CapEx investment, but we're bringing them up, as Hector mentioned, in line to our standards, and we feel comfortable with those levels. I would like to highlight that we maintain laser focus in providing the highest standards of quality in all our buildings. Hector Ibarzabal: We anticipated that the Terrafina assets had some lag on CapEx, and that was part of the underwriting when we were targeting Terrafina acquisitions. So nothing of what has been happening has been a surprise to us. Operator: Your next question comes from the line of [ Elena Ruiz with Actinver. ] Unknown Analyst: My first question is on -- you mentioned in your press release at the end of quarter, FIBRA Prologis and Prologis U.S. had 2.9 million square feet under development or pre-stabilization. Could you give us like a regional breakdown of how that GLA is distributed? And the second one is, could you give a little more color on the almost 15% same-store NOI growth, which percent of it came from the appreciation of the Mexican peso and which percent came from rent increases? Hector Ibarzabal: Thank you, [ Elena, ] for your question. Following market conditions, Prologis as a [ FIBRA ] sponsor and the one responsible of doing 100% of our development has an important backlog in all of the markets in which we participate. As of today, we decided until further visibility about the new reconfiguration of the trade agreements is reached that development needs to be more cautious. This is not the case in Mexico City. In Mexico City is the market in which we are more active because we are trying to fulfill the needs of the major players that are expanding importantly in the most important consumption market, which is Mexico City as a big apple of Mexico. So we are active. We are entertaining as well some build-to-suit opportunities. And I can say that once the definitions are reached or once that we have a better visibility of how the market is going to be recuperating, we have the ability to restart development in a few weeks. Jorge Girault: [ Elena, ] this is Jorge. You made a question on the 15% cash and GAAP NOI. The main drivers for the rent change -- sorry, the NOI increase have to do with rent change on rollovers and annual bumps. That's about 2/3 of the increase. The other 1/3 has to do with a pickup in occupancy versus the same period. FX, to your question, was muted. We are about the same levels than this time last year. So FX did not have an impact this time or it was very small. Thank you, [ Elena ]. Operator: Your next question comes from the line of Francisco Chávez with BBVA. Francisco Chávez Martínez: We have seen some volatility in the EBITDA margin from the high 70s in the first half of the year to the low 70s in 3Q. Where do you see EBITDA margin stabilizing? Jorge Girault: Francisco, this is Jorge. The short answer to your question is it's going to be around 77%. And yes, we have seen volatility given the acquisition of Terrafina and everything that has to be done. But in the long term, you should be -- you should see 77% and that's around the number if you take the 9 months for the year. That's about the EBITDA margin for the 9 months. So there you are. Thank you. Operator: Your next question comes from the line of Jorel Guilloty with Goldman Sachs. Wilfredo Jorel Guilloty: I had a question on the leasing spreads, the cash leasing spread. So it's been going up for a bit and hit about almost 40% in 2Q '25, but we saw that it was 26% now in 2Q '25. And we also noticed that the amount of leases that were commenced it is a materially bigger number that we've seen in the past few quarters. So I just want to get a sense about this decline in the sense of is this -- do you see this as a one-off that's just pertaining to these leases that are being signed? And how should we think about these cash leasing spreads going forward? Do you think we go back to the 40s we've been seeing? Or is it between 25% and 40%. So I wanted to get any color you can get on that one. Jorge Girault: Jorel, thank you for your question. This is Jorge. I'll try to simplify your question and give you a straight answer. Leasing spreads depend on 2 things. One is whenever we lease -- we have -- the rent is signed vis-a-vis when it's going to expire. And the other part is where the market is, obviously. So if we lease something 4 years ago, which expires today, the leasing spread on that specific rent is going to be somewhere in the 50%, 60%. But if it's a 1-year lease, meaning that we leased it a year ago and today, maybe it's a 10% or 5% leasing spread. So I mean it depends on the bucket of leases that are expiring per quarter and their venue, you may. Also, it depends on -- remember that we do it on a net effective rent basis. So we put everything into the blender, not only the cash rent, but also the concessions that are given or the increases if they're fixed annual increases if they're fixed into the formula. So it has a lot of bits and pieces, if you may. But I would say that the main one is when these leases are done or originally signed vis-a-vis today. So hopefully, this gives you a little bit more color. Operator: Your next question comes from the line of David Soto with Scotiabank. David Soto Soto: Congrats on the results. I just have one question. Could you please provide some detail if you have seen potential consolidation of 3PLs in Mexico City? Or would you consider that this could be a trend in Mexico City? And as well, have you seen any move-outs due to consolidation of 3PLs in other regions? Hector Ibarzabal: Thank you for your question, David. The 3PLs had worked in Mexico City is cyclical. You see top executives leaving some of the important franchises and then they start their own business. They pay a lot of attention to the customer, they grow the business and then they are bought by someone else. What is happening nowadays is not different from what has been happening in the past. The 3PL that we have seen very active on buying some competitors is DSV. DSV is one of the most important customers that we have in Mexico. And we have very good communication with our customers. So sometimes we get to know this even before they do the transaction because they need to do some planning about consolidation, about leaving some of the spaces. And the fact that we have the largest portfolio help them to achieve their objectives. So this will keep on happening is nothing new what we're seeing today. Operator: Your next question comes from the line of Felipe Barragan with JPMorgan. Felipe Barragan Sanchez: So I have a question on sort of what you guys have been seeing this month of October. There have been some companies seeing some activity pick up this month. So I just wanted to do a channel check with you guys. That's it. Hector Ibarzabal: Could you repeat your question? We had some trouble getting to the main point. Felipe Barragan Sanchez: Yes, of course. So we've had some peers that have been commenting that throughout October, there's been an uptick in activity. So I just wanted to check with you guys if you guys have also seen an uptick in activity throughout October after the quarter end? Federico Cantú: Yes, Felipe, thank you. This is Federico. Yes, we have seen over the last few weeks, somewhat of an uptick in activity. Our pipeline is healthy across all our markets, including the border markets, of course. And I just wanted to mention, as companies navigate this uncertainty, which has prevailed over the last few months, some companies have had to decide on current conditions and their best guess as to what's going to happen going forward. As we all know, we're getting closer to the renegotiation of USMCA. I think there is a somewhat of a prevailing mindset that we're going to have a good outcome in the negotiation, hopefully. And so that is, I think, factoring into some decisions. Let's not forget that markets continue to demand from our customers. So they're having to make decisions. So we feel very good about both renewal and new leasing going forward and we're encouraged to see this recent activity. Operator: Your next question comes from the line of Alan Macias with Bank of America. Alan Macias: Just if you can provide an update on Prologis' development pipeline, the GLA of the development and in what markets and the leasing ramp-up that you have been seeing there? Hector Ibarzabal: Thank you, Alan. I would say that 95% of our activity is devoted in the Mexico City market on the development front. Particularly in Toluca, we have found interesting opportunities that are just in line with what the main players of e-commerce are requesting. We do see the expansion plans that they have, and we are positive that this activity will remain on 2026 and on. Operator: Your next question comes from the line of [indiscernible]. Unknown Analyst: I also have a quick question regarding land reserves, specifically with Terrafina. Do you consider part of disposal assets? Or do you consider looking at part of the development pipeline that you might... Hector Ibarzabal: Thank you for your question [indiscernible]. I think the land that Terrafina has in its [indiscernible], which is not significant compared to the backlog that Prologis has, is following exactly the same result that the assets. The land that is in our markets is being kept for future opportunities and the land that is outside of our markets is in the process of disposition. Operator: [Operator Instructions] I will now turn the call back to Hector Ibarzábal, CEO, for closing remarks. Hector Ibarzabal: I want to thank you all for your time devoted this morning to FIBRA Prologis. We know well how valuable your time and attention is. I feel very comfortable on our progress looking to year-end, and I am very excited about the opportunities that I see in front of us. According to our practice, we will be reachable to all of you any time. Talk to you soon. Operator: Ladies and gentlemen, that concludes today's call. You may now disconnect. Thank you, and have a great day.
Ingela Ulfves: Good morning, everyone. A warm welcome again to Fortum's joint webcast and news conference for the investor community and media on our January-September interim report. My name is Ingela Ulfves, and I'm heading the IR team at Fortum. As always, this event is being recorded, and a replay will be available on the website later today. With me here in the studio are again our CEO, Markus Rauramo; and our CFO, Tiina Tuomela. Markus and Tiina will present the group's financial and operational performance during the third quarter and first 9 months of this year. I would also like to remind you of the upcoming Investor Day for analysts, institutional investors and other capital market participants to be held on the 25th of November. It is possible to attend both in person in Helsinki and also virtually online. The registration is open on our website until the 17th of November. As we do not want to preempt the content and discussions for the event, we aim to strictly focus on the Q3 performance and results in today's webcast and then leave all the other topics to be addressed during the Investor Day. We look forward to your participation and hope that as many as possible of you are able to join us then. Now let's go to our Q3 presentation, after which we will take your questions in the Q&A session. So with this, again, I hand over to Markus to start. Markus Rauramo: Thank you very much, Ingela. A warm welcome to our Q3 results call also from my side. I will start by going through the key elements of our quarterly highlights and our financial performance, then say a couple of words about the hydrological situation. After that, Tiina will provide more details on the financials and how the operational performance turned into our results. Let me now start with the highlights. Starting with a very positive point. Our third quarter achieved power price was higher than last year's level, EUR 46.1 per megawatt hour compared to EUR 44.1 per megawatt hour, supported by higher spot prices and strong physical optimization. Realized market prices, which means the blended price for Fortum's price areas were EUR 17 per megawatt hour higher than in the third quarter last year. Then a few words about the volume challenges we have faced this year. As you remember from earlier quarters this year, both nuclear and hydro volumes have been clearly below the normal level. The same situation continued during the third quarter. So this year has been abnormal when it comes to generation volumes. However, this should be seen as temporary due to hydrology and unplanned nuclear outages. It shows quite clearly in this third quarter, which is typically the smallest quarter result-wise in our business. As said, unavailabilities in our nuclear generation fleet still continue to impact the fourth quarter. Tiina will talk more about generation volumes in her part of the presentation. The efficiency improvement program is coming to an end now by the end of this year. Fortum reduces its annual fixed cost by EUR 100 million, excluding inflation gradually until the end of 2025. The full run rate will be effective from the beginning of 2026. In July, we announced the acquisition of a wind power project development portfolio in Finland, which we bought from the German renewables developer and constructor, ABO Energy. This acquisition strengthens our development pipeline for renewables as we prepare for future growth. With the acquired 4.4 gigawatt portfolio, Fortum's pipeline of onshore wind and solar projects in the permitting phase is approximately 8 gigawatts with more projects in the early development phase. Potential investment decisions for these projects will be made case by case. The projects will be backed by customer PPAs and need to meet our investment criteria. Currently, there is sufficient power supply in the Nordic area, and we can sell PPAs from our existing outright portfolio. Fortum's coal exit progresses with the decarbonization of the Zabrze CHP plant in Poland. Today, we announced that we will invest approximately EUR 85 million in the plant's retrofit. This is in line with our target to exit coal by the end of 2027. On another positive note, we also updated our optimization premium for the year 2025. Now we estimate the optimization premium to be approximately EUR 10 per megawatt hour for the year 2025. Previously, we forecasted EUR 7 to EUR 9 per megawatt hour for '25. The main reason for the increase is higher power price volatility. The lower nuclear volumes this year also contributed slightly to the higher premium. Then I move over to our main figures and financial KPIs. Here are our familiar comparable headline KPIs for the group's third quarter and for the first 9 months 2025. As you see, all KPIs decreased in all periods, which reflects the lower generation volumes. In Q3, our comparable operating profit totaled EUR 97 million, while comparable EPS amounted to EUR 0.08. On a cumulative basis, the group's comparable operating profit amounted to EUR 674 million. Our comparable EPS was EUR 0.59 per share. The operating cash flow was at a good level. However, it decreased to EUR 787 million. For the balance sheet, our leverage, defined as financial net debt to comparable EBITDA was basically unchanged at 1.0x at the end of September. Tiina will go into more details on the result analysis in her part. Next, I will say a few words about the market environment, especially hydro conditions. Let's look at the situation of the hydro reservoirs for the Nordic market. It's good to note this is not only Fortum's reservoirs. As we have communicated earlier this year, reservoirs were record full during the winter, meaning in the first quarter. However, the water was mainly in Norway and northern parts of Sweden, where Fortum does not have hydropower. As the winter was mild and the snowpack was thin, this resulted in minor spring floods. Because of this, the reservoir levels decreased fast in the spring. And as you can see, now the reservoirs are close to normal level. As we have said, generation volumes will be clearly lower this year. The unplanned outages in our nuclear fleet, mainly in Oskarshamn 3 in Sweden, reduced our annual nuclear volumes by approximately 3.6 terawatt hours for the full year 2025. This is based on announcements so far. The current estimate is that Oskarshamn would come back online on 1st of November. We have also highlighted the risk of lower hydro volumes for the full year. Unfortunately, this seems to be the case. For the last 12 months, hydro volumes are 17.8 terawatt hours compared to a normal hydro output year, which is between 20 and 20.5 terawatt hours. It is not possible to give an estimate for the full year as hydro conditions might change, but the assumption is that our annual hydro volumes will be below that of a normal hydro year. Still coming back to the power price volatility. Lately, we have again seen increased volatility, partly because of the introduction of the 15-minute market. The continued high power price volatility supports our capability to generate a premium through our optimization. From a value creation perspective, this is reflected in the updated guidance. We expect our optimization premium for this year to be approximately EUR 10 per megawatt hour. This concludes my part, and I would now like to hand over to Tiina to tell more about our business performance. Tiina Tuomela: Thank you, Markus. Good morning, everyone, also on my behalf. I will now go through our financials in more detail. Let's start with the key financials. I will start with some of the comparable KPIs. The comparable operating profit for the third quarter amounted to EUR 97 million. In the third quarter, both our comparable net profit and comparable EPS decreased. This reflects the lower result in the Generation segment. At the same time, our Consumer Solutions business is doing well as they generated a record high third quarter result. We are very satisfied with the Consumer Solutions result performance this year. Our comparable net profit for the quarter declined to EUR 70 million. Consequently, our comparable EPS for the third quarter declined to EUR 0.08 compared to EUR 0.14 last year. Comparable EPS for the last 12 months is now EUR 0.77. Our cash flow during the quarter declined by EUR 218 million and totaled EUR 131 million, mainly reflecting the lower result. Then over to the segment result for comparable operating profit. Compared to the previous year, our result in our Generation segment decreased, while both Consumer Solutions and Other Operations segment improved. In the Generation segment, comparable operating profit decreased by EUR 84 million to EUR 92 million, mainly due to the lower nuclear and hydro volumes, lower hedge power price and somewhat higher property taxes in nuclear and hydro in Sweden. It is also notable that similar to the second quarter, the hedge ratio was high also in this quarter as a result of the lower volumes. The result contribution from the Pjelax wind farm was slightly negative. Seasonality is reflected in the district heating business, which was loss-making, mainly impacted by lower sales price for power in Poland. As said, the third quarter shows good performance in our Consumer Solutions business. The comparable operating profit reached an all-time high third quarter level of EUR 23 million. This is an increase of EUR 17 million, which mainly relates to the improved electricity margin in the Nordics and improved gas margin in the enterprise customer business in Poland. In the other Operating segment, comparable operating profit improved by EUR 6 million, showing a negative result of EUR 18 million. The main reason for the improvement was lower fixed cost and higher internal charges for the services of enabling functions. Then let's move on to the cumulative result waterfall for the segments. When looking at the waterfall for the first 9 months of the comparable operating profit at the segment level, it shows the same pattern as for the third quarter. Compared to the previous year, the result in our Generation segment decreased, while both Consumer Solutions and other operation segments improved. In the Generation segment, comparable operating profit decreased clearly by EUR 305 million to EUR 648 million. The main reason were lower hydro and nuclear volumes, lower spot and hedge power prices and somewhat higher property taxes in Sweden as well as higher nuclear fuel cost. The result contribution of the Pjelax wind farm was slightly negative and lower than in the comparison period as a consequence of lower power prices. In the comparison period, the result of the renewable business was positively impacted by a sales gain of EUR 16 million for the divestment of the Indian solar power portfolio. The result of the district heating business was at the same level as in the comparison period. Lower fuel and CO2 costs as well as higher heat price offset the impact from lower sales price of the power. Reaching an all-time high level for the first 9 months, the Consumer Solutions segment's comparable operating profit increased by EUR 36 million and was EUR 96 million for the first 9 months of the year. The continued improvement was mainly as a result of improved gas margin in the enterprise customer business in Poland improved electricity margin in the Nordics and approximately EUR 13 million of cost synergies. In the Other Operating section, comparable operating profit improved by EUR 22 million and amounted to minus EUR 17 million, mainly due to the positive impact from divestment in the Circular Solutions business finalized in 2024, lower fixed costs and higher internal charges for the services of enabling functions. Then over to the leverage and liquidity. Our financial position continues to be strong, primarily supporting our objective to maintain a credit rating of at least BBB. It naturally also provides a good financial foundation in this uncertain and turbulent market environment, but it also caters for growth and shareholder returns. When considering our capital allocation principles, we balance leverage, investments and dividends while always keeping the credit rating in mind. Fortum's current long-term credit rating by both S&P Global Ratings and Fitch Ratings is now BBB+ with stable outlook. I want to go through the reconciliation of our financial net debt in the third quarter. As you can see, it is fairly unchanged. At the end of second quarter, our financial net debt was EUR 1,270 million. In the third quarter, the operating cash flow was EUR 131 million and investment amounted to EUR 122 million. The change in interest-bearing receivables amounted to EUR 14 million, while FX and other FX were EUR 9 million. So at the end of second quarter, our financial net debt was EUR 1,283 million and the leverage ratio for financial net debt to comparable EBITDA was at 1.0x. Looking at our debt portfolio and the loan maturity profile, I want to highlight a few things. At the end of the quarter, our gross debt, excluding leases totaled EUR 4.7 billion. Bonds are and continue to be our primary source of funding. Our maturity profile is very balanced, and there are no large maturities in any single year. The next maturing bond is EUR 750 million in 2026. At the same time, our liquidity position is strong. We have ample liquidity reserve, EUR 7 billion with EUR 3.1 billion of liquid funds and EUR 3.9 billion of undrawn committed credit facilities and overdrafts. The cost for our EUR 4.7 billion loan portfolio is 3.3%, while the interest income that we get for our EUR 3.1 billion liquid funds has come further down and is now 2.1%. With the strong liquidity position, we continue to optimize our cash and credit lines. The overall objective is to have sufficient liquidity while optimizing the balance between debt and cash to minimize funding costs. Then over to the final section, the outlook. The outlook section comprises 4 familiar elements: guidance for outright portfolio, taxes, CapEx guidance and our fixed cost reduction program. As we have stated already a few times today, we will fall clearly behind the normal historical output level this year because of announced availabilities in nuclear and lower expected hydro output. For the sake of comparison, in a normal year, our annual outright volume is approximately 47 terawatt hours. Based on announced outages, nuclear output for 2025 is now estimated to be 3.6 terawatt hours lower this year, of which 3 terawatt hours realized in the first 9 months of 2025. Our hydro output for the last 12 months was 17.8 terawatt hours compared to the normal level of 20 to 20.5 terawatt hours. About the hedges. At the end of the third quarter, our hedge price for the rest of 2025 was EUR 42 and the hedge ratio was 90%. The hedge price for 2026 is EUR 41, EUR 1 higher compared to the last time disclosed, while the hedge ratio increased by 10 percentage points to 70%. As an update today, our annual optimization premium for the year 2025 is estimated to be approximately EUR 10 per megawatt hour. Previously, it was between EUR 7 to EUR 9 per megawatt hour. The guidance for our corporate tax rate also remains unchanged for the years 2025 and 2026. We expect the comparable effective income tax rate to be in the range of 18% to 20%. The Finnish government plans to decrease the corporate tax from 20% to 18% from the beginning of 2027. There is, however, no official law in place yet. Our very preliminary estimate is that this would result in a 1 percentage point decrease in the corporate tax rate from the year 2027 onwards. I also want to repeat that in Sweden, the property taxes are revised from 2025. For Fortum, the increase of the property taxes is now estimated to be approximately EUR 30 million for the years 2025 to 2030. The major part of the cost increase is recorded in our fixed cost. We do not make any changes to our capital expenditure at this point of time as this year is about to come to the end. However, we will come back to this topic in our Investor Day. Finally, a few words in our fixed cost reduction program. For the first 9 months, our fixed costs were EUR 615 million. For the last 12 months, fixed costs totaled EUR 884 million. We reduced our recurring annual fixed cost base by EUR 100 million, excluding inflation by the end of this year with a new run rate from the beginning of 2026. Our current estimate is that the new run rate for our fixed cost base in 2026 will be approximately EUR 870 million. This includes the fixed cost increase of EUR 20 million in the Swedish property tax. As mentioned before, there are additional costs for growth in 2025. These are related to, for example, renewables development, site development, buildup of commercial organization and the hydrogen pilot project. This was all for my presentation, and we are now happy to answer your questions. So with this, Ingela, over to you. Ingela Ulfves: Thank you, Tiina, and thank you, Markus. So as this was a more straightforward quarter, the presentations were also a bit shorter. So now we are then ready to take your questions, and let's begin the Q&A session. You can also ask your questions in Finnish. Moderator, please go ahead. Operator: [Operator Instructions] Tiina Tuomela: The next question comes from James Brand from Deutsche Bank. James Brand: English, unfortunately. Two questions for me. The first is on demand. So you highlighted that energy demand was pretty much in line with last year. And you said that was after industrial demand experienced a slowdown, particularly in Sweden. I was wondering if you could just give a bit more detail in terms of what you're seeing there and what's caused that? Is that just the general economic situation at the moment? Or is there something else going on? That's the first question. And then the second is on the supply business. You've obviously had a great year in supply, and you've seen quite a significant step-up in profitability and it looks like you'll be producing EBITDA of comfortably over EUR 200 million this year, depending on what happens in Q4. I just want to get some color from you on whether you think the profitability that you've seen this year is sustainable going forward or whether it's been a slightly exceptional year and we would be expecting a step down in 2026. Not necessarily looking for a precise guidance, but just directionally, is this sustainable? Markus Rauramo: Thank you. English is absolutely fine. So on the first one, so I attribute the, let's say, sideways movement of the demand a bit to the global geopolitical turbulence. So difficult for our customers to take investment decisions. So if I put this into a big perspective, we see good signs of decarbonization and electrification going ahead. We get the incoming inquiries for new power, but investment decisions take long to take place. We see that the consumers are saving and companies are being very scrutinous about their costs. So that's my quick take on the customer side. Then on the supply side, I assume you meant our Consumer Solutions business. So the business has experienced so far a very stable year. So there have been a few surprises. There's been volatility, but something we have been able to manage. So we haven't had risk events like we had in '21-'22. So in these conditions, this is a good indicator of what the business is able to produce. But the team is doing really good work. We're getting in synergies from the earlier acquisitions, and Mika and his team are working on the efficiencies continuously. Operator: The next question comes from Harry Wyburd from BNP Paribas Exane. Harry Wyburd: The line went blank for me at the very beginning of the call. So apologies if I've missed something in the very early part. Can I -- so two questions. So firstly, the CMD, I presume you want to sort of keep things back. But I wondered if you could clarify one very specific thing, which is, have you been in negotiations with a data center or hyperscaler developer over a PPA during this quarter? And would you rule out or rule in that you might announce a data center PPA at the CMD on the 25th of November? And then the second one is on the data center tax in Finland. So I read in the press and I noted in the release that the government has gone ahead with raising the power tax on data centers in Finland. So I wonder that they also mentioned that there might be some offsetting support package. So I wondered if you could give us some color on what that support package might be and when it might be announced and whether there might be a bit of a blockage on data center PPAs until -- in Finland until that's been straightened out. And are you seeing any discussion elsewhere in the Nordics along these lines about potential tax increases on data centers and politicization of data center demand? Markus Rauramo: Thank you. So maybe, Tiina, if you take the more general tax question. And then for the -- regarding -- well, I don't think you missed anything material that you wouldn't be aware of in the very beginning. It was about the results and the markets. But then with regards to negotiations, we are in negotiations and discussions with actually several data center operators. So like we have said earlier, there are discussions going on about steel, aluminum, chemicals, hydrogen and data center operators are looking for electricity contracts. So I cannot -- and of course, I'll not preempt the CMD or Investor Day, but discussions are going on certainly on many fronts. Then on the -- more generally, so indeed, there's a discussion going on as we can see it globally in various places. Regarding location of new industries, including data centers and what kind of pressure that puts on the systems. And that's why we engage in discussions about how will the whole energy system develop and what are we doing to make sure that there's then additional supply if customers are willing to pay for that, and how do we also bring stability to the market as well. And on the Finnish case, particularly, indeed, this has been now in discussion for a longer time that would or would not be the lower tax rate be applied to data centers going forward. And now it seems that the government is going ahead with the tax increase, but then a compensating support for data centers up to a certain level. Those details, how does that work? And what are the approvals needed for this whole setup? I think that's very much in the works still. But Tiina, do you want to comment further on the Swedish Finnish tax? Tiina Tuomela: Well, maybe to put some numbers around what has been discussed currently. So in Finland, we have the electricity tax and there the general level for the tax is EUR 0.0224 per kilowatt hour. And then data centers have been among those reduced tax level, which has been EUR 0.05 per kilowatt hour. And now this will change. So data centers will go back to this general tax level. But as Markus said, there is also a plan to have some kind of support mechanism, which should compensate at least some part of the increase in the taxes. In Sweden, there has been also discussing about the electricity tax, and they reduced the level from EUR 0.04 per kilowatt hour to EUR 0.03 per kilowatt hour. So still Sweden, slightly higher than the Finnish tax level. Harry Wyburd: Got it. Okay. And sorry, just to clarify on the first one. I think in your past conference calls, you've generally said that you didn't have any substantive discussions on the go with data center developers. And I think your past comments were that generally interest was more in the shorter tenors of 3 to 5 years. So Markus, should I take your comments and I know you want to hold back for the CMD, but should I take that as a change in the comment there? Has the nature and substantiveness of your negotiations on PPAs changed since we last had the conference call on Q2? Markus Rauramo: Not materially. But in the CEO comment, you would have noted that we said that we continue to see robust demand and that we thought very carefully. So like I said in the previous -- for the previous question, there is geopolitical turbulence. We see all kinds of questions around is the transition happening and so on. But our customer pipeline for the discussions we are having with the different sectors, that looks very similar to earlier quarters. So clearly, it looks like that industries and commercial actors continue to look for places where to locate their businesses. So the robust is the good work. Operator: The next question comes from Anna Webb from UBS. Anna Webb: Two from me and then maybe a clarification, if I can. So firstly, on data centers, when you do the site development, can I ask if you bundle that with PPA contracts, so you always do the sell the site and the PPAs or if they're sold separately? And what's the rationale on how you do that? Secondly, I think you said you had a negative contribution from the Pjelax wind farm, which was an issue as well earlier in the year. Can I ask what drives this because the operating cost for that should be pretty low. So I know you mentioned low power prices, but how do you get to a negative result, still a little bit unclear to me? And also whether that's a kind of one-off effect or you think this might be a headwind into the future? And then finally, just if I can clarify on the volumes. I know you said hydro volumes are variable and you can't comment on full year guidance. But if Q4 is normalized, can you comment on how much has the debt in the first 3 quarters has been versus a normal year? And so if Q4 was normal, what the loss would be on hydro, that would be really helpful. Markus Rauramo: Okay. I can start with the data center question. And then Tiina, if it's okay, if you can comment on the Pjelax impact and the hydro and nuclear volumes. So as you would know, when we developed the -- what is now becoming the Microsoft cluster in the capital region in Finland, we developed 3 sites, then found Microsoft and we sold the sites. And we actually did -- we bundled that with a deal to do the world's largest heat offtake. So we try to look for solutions where actually, we do a win-win both for our customers, for the society and ourselves. So this is supporting the Clean Heat Espoo project and decarbonization leading to a massive excess heat offtake. Of course, our interest is that we would do PPAs with the site development. But then we need to look at the various customers' situations that how committed can one be at the stage when we do the sites. And this is a dynamic discussion that we're having all the time, depending on the demand for the sites, what all can we bundle to that. But there is no one size fits all for these situations. Tiina Tuomela: All right. Then moving to the Pjelax. So we commented that in the third quarter, the Pjelax result was negative like previous year as well. So these are usually the quarters when the power prices are low, and this is also the reason. If we look at it on cumulative basis, so we can say that we are nearly to the 0 level. So it is, in that sense, let's say, seasonal. And the main reason really is the power price in the market and what the wind farm will capture. So even though the average price in the market is high, then when it's windy, so then the prices tend to be lower. So the capture rate has been lower now in the summer months. Then about the volumes. So what comes to the hydro volumes, so we have stated the average production is between 20 to 20.5 terawatt hours per year. And this year, I would say that particularly the second quarter was the biggest difference. There, we had the production volume of 3.7 terawatt hours, which is absolutely the lowest ever production volume in our history. And that was due to the lower inflow to the water reservoirs. And this second quarter, the hydro volumes were roughly 1.5 terawatt hours lower than our average production. So that gives some kind of indication. What is the difference to our average production in general. In third quarter, the production was lower than the previous year, but not that much difference to if we compare the longer-term average. Now the hydro reservoirs are nearly on roughly on the 0 level or 1 terawatt hour lower. So now the outlook for the remaining of the year looks fairly kind of normal. Operator: The next question comes from Julius Nickelsen from Bank of America. Julius Nickelsen: Just two for me. One follow-up on these PPA discussions that you've mentioned with the data centers and the industry. I mean, to the level that you can comment, do you see in these more long-term discussions that there is demand to pay a premium to the current futures curve? Because if I look at the '27 hedging that you've now disclosed, it doesn't seem that there's much premium to the current futures. And then secondly, on the optimization premium, obviously, the upgrade to EUR 10 this year. I mean, you haven't touched the long-term guidance is 6% to 8%. Is it still fair to say that given how the opportunities shape out at the moment that at least for the next 1 or 2 years, we should be more at the upper end of that scale? Or is that difficult to forecast? Markus Rauramo: Okay. Again, I'll take the first question. And Tiina, do you want to comment on the -- then on the optimization premium. Tiina Tuomela: Yes. Markus Rauramo: So indeed, compared to the implied forward curve, which I have to say is very thin. So liquidity is not high at all when you go further out. So when we think about the pricing, if we go out a few years and longer, then our price curve -- implied price curve is upward sloping. And that reflects the point of view that like was highlighted by the Pjelax example that new capacity with these prices is very hard to get to the market. So the prices need to be higher for new supply to come to the market. So to start with the further out we go in time, the higher our expectation for the price and then on top of that, there is still the optimization premium. So what we agree with the customer is then separate from what we get on top of that. Then the third element I'll mention is the different characteristics. So the more specific the customer demand is tied to the profile. If you want 8,500-hour product, that will have an impact on the availability of the product. If it's RFNBO earmarked to a certain asset, even more. And this we see practically in the PPA. So we talk about several euros of impact for longer-term contracts depending on what characteristics a particular contract would have and then optimization premium on top of that. And that's a good bridge to Tiina. Tiina Tuomela: All right. Very good. Thank you. Thank you, Markus. So the optimization premium, so we had a guidance for this year, EUR 7 to EUR 9 per megawatt hour, and we increased that after a very strong first quarter. So then the volatility was high, and we said that the optimization premium was around EUR 10 per megawatt hour. What we have seen that the volatility in the market has increased. Also, as Markus mentioned, our production volume has been somewhat lower, which was improved the number. But also what we can see that the predictability is getting more difficult. So therefore, what we have done that we fine-tuned the guidance further we go to the year and see how the optimization premium will develop. So EUR 10 for this year and for the time being, for the next year, EUR 6 to EUR 8 per megawatt hour. Operator: The next question comes from Louis Boujard from ODDO BHF. Louis Boujard: Two on my side. Maybe the first one regarding the hedging strategy. We see indeed that going forward, '26, '27 price are slopping down on a hedge point of view. At the same time, optimization is quite strong and is expected to remain quite strong. So I was wondering if you were thinking about eventually changing a little bit your hedging strategy going forward, notably in terms of duration or in terms of openness to the market prices in the short term so that you could capture better the short-term volatility of the market instead of having a stronger visibility into lower prices. And maybe the second question would be regarding what you mentioned on the wind farm Pjelax, notably regarding the fact that the capture price in the end below the one of the market regarding the fact that the wind, of course, blow for everyone at the same time. Do you think that it would make sense eventually to consider some investments in specific dedicated battery systems, which could be related to the different farm that you could develop in the future so that you could improve the returns expected from these wind farms? That would be my second question. Markus Rauramo: Okay. Thank you. So with regards to the hedging strategy, so of course, this has -- for the 13 years I've been with Fortum, this has always been the question that what is the strategy? And the idea with the hedging is to get visibility into the short-term cash flows. Then when we go longer out, then we can adjust also our operations. So when you go 3 years out, then we can do changes in our resources and processes and so on. If we look at spot price this quarter, the average in our areas was EUR 37. So rather close to the hedge price. So then having an open position wouldn't have had a huge impact, but negative nonetheless versus achieved power price. But in the comparable quarter last year, it was below EUR 20. So then being open would have impacted our result massively if we just look at the spot prices. So that's where the fundamental driver comes from. Then mostly when we do the bilateral hedging, as we did also in NASDAQ, it is financial hedging. So then we have still the possibility for the physical optimization. And then, of course, we have the risk that can we deliver the power at spot delivery, but that we settle, of course, always on a daily basis. But financial hedging with customers and then leaving the optimization. In the longer run, we have said that we want to get to 20% rolling 10-year hedge level. So we wish is that we target to stabilize the cash flows also going further. And the idea with doing PPA-backed investments, if there is need for additional power stems from that when we make investments, whether it's wind or solar or any other, the payback times typically are quite long and then stability has a positive impact on our internal cost of capital and thereby the return requirements. And that's a good bridge to the second question, which is that do we consider batteries or other flexibility connected to renewable investments? The answer is yes. So that's part of our development. We are typically citing also space for batteries connected with the renewables investment so that there is a possibility to do it if the financial conditions are there. Historically, we have built some batteries since a long time. Actually, when Tiina was heading generation even, we were doing that so already many, many years ago. And I believe that batteries will be -- of course, they will be a needed part of the system. What we see happening on that front also is that there are new uses coming for the -- that are catalyzed by volatility. For example, electrified heating, which I mentioned earlier, so heat offtake, heat pumps, electrical boilers, they can utilize very flexibly the low cost or even negatively priced towers. So the volatility will change also the business opportunities, and we are capturing those as we speak. Louis Boujard: Can I maybe a very quick follow-up? Markus Rauramo: Sure. Louis Boujard: Yes. Just wondering regarding the batteries. Do you consider that currently the regulation is supportive enough for you? Or does it need any change? Markus Rauramo: So of course, there are issues that need to be considered, for example, on the consumer side, when we have investments behind the meter, of course, then the taxation and grid fees and so on, these are of a lesser issue. But when we get to a communication between customer assets and the market, then these are things that need to be seriously addressed on European level and national level. Operator: [Operator Instructions] The next question comes from Harrison Williams from Morgan Stanley. Harrison Williams: Two for me and possibly one clarification. Firstly, on the optimization premium, so I appreciate that it's very strong this year with guidance at EUR 10 per megawatt hour. Can you give us what that number would be had you had a normalized nuclear year? Because clearly, that is helped a little bit by the lower nuclear volumes. Just understanding if that's within the 6% to 8% range or kind of above the top end of that. The second question I had was again going back to PPAs. I mean, I guess we've not yet seen any of these longer-term PPA contracts being struck. And trying to understand, is this a case of offtakers not being certain on the kind of volume requirements in the 5- or 10-year period? Or is this a mismatch between pricing expectations because you say yourself that you have maybe a higher exited forward curve than what we can see on our screens. So trying to understand where that is. Is that a volume mismatch? Or is that a price mismatch? And then the final clarification, thank you for the color on nuclear volumes this year. Can we clarify that next year, you are still expecting a normalized 26 terawatt hour output? Or is there anything we should be aware of? Markus Rauramo: Okay. So if I take the PPA question and Tiina, if you take again the optimization premium and volume question, so then we start to follow our pattern here. Tiina Tuomela: Yes, we will. Markus Rauramo: Okay. So for the long-term PPAs, so of course, we have a kind of inherent wish when we do new investments that are volatile and also we have the capture rate issues. So they would benefit from visibility long term. Otherwise, historically, we have been hedging in the short term. So the drive to do long-term PPAs isn't really coming primarily from our side, but it is how we communicate is based on what we hear from the customers. So customers are making inquiries on 3-year, 5-year, 7-year, 10-year and even longer PPAs. There are a couple of points I see there. One is this whole geopolitical situation. So the customers' investment plans are taking time to materialize. So our customer pipeline has stayed very stable. Like I said, the outlook from that point of view is robust. Then a contradictory point is that if I look at the Nordic traditional heavy industries, they typically would have a wish to get visibility for various inputs. But the order books, whether it is steel or chemicals or pulp and paper, they tend to be rather short. So we talk about months or a year. And then locking in input costs create a basis risk, which we all are very familiar with. So even if something would look inherently very affordable, there's still a risk that your incomes go below your costs and then you have out-of-the-money contract. So this is one structural thing that continues to be impacting our customers' ability to do long-term contracts. But overall, there is structural demand for power, power availability. And if the format to get that to the customers is the PPAs, then structurally, we're heading that way. We haven't done massive PPAs that we would have announced separately. But if you look at our hedging levels and the volumes, that actually implies that we're doing hundreds of bilateral contracts, also longer-term PPAs, which you can see in the 10-year rolling hedge ratio. So we are doing also long-term PPAs, but the volumes are not massive. But they're a good indication in line with what I said earlier. And then to the optimization premium and nuclear volumes. Tiina Tuomela: Alright, thank you. So when we calculate the optimization premiums, so we take the full volume, as you said, so 47 terawatt hours in the normal year. This year has been exceptional when it comes to the nuclear, so 3.6 terawatt hours more outages what we planned at the beginning of the year and also hydro being somewhat lower, particularly because of this low second quarter. Of course, what is the final number will depend on what will happen and how we run in the fourth quarter. But if we take roughly to give you an idea, so the optimization premium would have been roughly at the same level as the previous year. So previous year, it was EUR 8.7, so somewhere EUR 8.5 or that range with the normal, normal without particularly the nuclear extensions. Then what comes to the next year nuclear production. So the normal year, we have indicated is roughly 46 terawatt hours. And all the time, the nuclear producers will put the UMMs with the updated outages. And what we now know is that Loviisa and also Oskarshamn 3, they have a normal cyclical longer outages. So those are normal and planned and goes according to the schedule, but they are a bit taking the production volume lower. Operator: The next question comes from Harry Wyburd from BNP Paribas Exane. Harry Wyburd: Sorry to monopolize and to come back, but I'm sorry to really labor this topic, but it's driven a 10% or nearly 10% move in your shares since this morning. So it's really important, I think, to get the language sort of understood correctly. So I think from my question earlier, I interpreted that you were -- there maybe been a positive change in your discussions with data center operators versus what you told us at Q2. In the subsequent questions, you've kind of mentioned that if you did a big PPA, you'd announced that separately. You're doing -- you're not really doing big long-term PPAs. I think really to distill it down, what I think the market is questioning here is, are you poised to sign a big long-term PPA with a sort of big industrial data center operator. So just to really clarify what you said, is it plausible that you could sign a significantly sized long-term PPA with a data center operator or announced it in the next few weeks? Or is that something that we should interpret from your comments that is less what you're looking at, at the moment? Sorry for the long question. Markus Rauramo: That's absolutely okay. So like I said, I think the one word, the robust says it very well. So when we look at all the customer segments, there is continuous activity. And from our point of view, we see that electrification, decarbonization are driving industries. It will be more efficient. Clean power is actually more affordable than fossil power, the brand promises that companies have made, these are all pushing ahead what we have been preparing for. So the underlying activity is at a good level. But then in all honesty, there's a lot of uncertainty. So even with all these discussions, we don't know what they will materialize into before deals are done. And to -- not to try to shy away from the question, but to give you color on how do we address this is that we see the potential, but we see a lot of uncertainty. And that's why our preparation is that we're spending almost EUR 100 million a year in developing the renewables pipeline, pumped hydro, batteries, even new nuclear as a feasibility study for the future. We're developing the sites. So we want to create the optionality that if there is additional demand, we can answer that. And then we have the efficiency programs, the availability. We improve our processes to be able to serve from our existing portfolio. So it is not 1 or 2 discussions that we are having. It's a big list of customers that we're talking with all the time and preparing for that potential. Sorry for not being able to be clearer than that, but this is the very kind of honest picture of what is happening. But bottom line is that I'm positive about the whole decarbonization, electrification opportunity and the Nordics are in an excellent position to answer that. But it seems that the overall sentiment has a lot of uncertainty. So investment decisions also take time. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Ingela Ulfves: Thank you so much. Thanks for all your questions. Very interesting. And also happy to have gone through now the Q3 performance. As there were some technical issues in the beginning, I would just quickly repeat what I said about the Investor Day. So it was a reminder that we will host the Investor Day on the 25th of November and also then saying that the registration is open until the 17th of November. You're able to attend both in person in Helsinki, most welcome to join us in -- at the event, but then also participate virtually online. But with this, thank you for your participation, and we all wish you a very nice rest of the day. Markus Rauramo: Thank you very much. Have a good day. Tiina Tuomela: Thank you. Bye-bye.
Operator: Good morning, and welcome to the Ionis Pharmaceuticals, Inc. Third Quarter 2025 Financial Results Conference Call. As a reminder, this call is being recorded. At this time, I would like to turn the conference over to Mr. Wade Walke, Senior Vice President of Investor Relations, to lead off the call. Please begin, sir. Wade Walke: Thank you, Chuck. Before we begin, I encourage everyone to go to the Investors section of the Ionis Pharmaceuticals, Inc. website to view the press release and related financial tables we will be discussing today, including a reconciliation of GAAP to non-GAAP financials. We believe non-GAAP financial results better represent the economics of our business and how we manage our business. We have also posted slides on our website that accompany today's call. With me on the call this morning are Brett Monia, our Chief Executive Officer; Richard Geary, our Chief Development Officer; Kyle Jenne, our Chief Global Product Strategy Officer; and Beth Hougen, our Chief Financial Officer. Also joining us are Eugene Schneider, Chief Clinical Development Officer, and Eric Swayze, Executive Vice President of Research, who will join us for the Q&A portion of the call. I would like to draw your attention to Slide three, which contains our forward-looking language statement. During this call, we will be making forward-looking statements that are based on our current expectations and beliefs. These statements are subject to certain risks and uncertainties, and our actual results may differ materially. I encourage you to consult the risk factors contained in our filings for additional detail. Brett Monia: Thanks, Wade. Good morning, everyone, and thank you for joining us on today's call. The third quarter was a watershed moment for Ionis Pharmaceuticals, Inc. as we made important progress advancing first and best-in-class medicines for several serious diseases, including in our core focus areas of neurology and cardiometabolic diseases. Our first independent launch for Tringolsa, the only FDA-approved treatment for familial chylomicronemia syndrome, or FCS, continues to build strong momentum. This performance reflects Tringolza's compelling clinical profile, strong launch execution, and the significant unmet need that we are addressing. Based on this performance and confidence in our continued success across the business, we are raising our 2025 financial guidance, including TRINGOZA revenues, which Beth will review in more detail shortly. Tringolza also recently received European approval, and we are pleased that our partner Sobe expects to begin bringing this transformative medicine to patients across Europe in the fourth quarter. In August, the FDA approved Donzara for Hereditary Angioedema, or HAE, marking our second independent launch. This is an important milestone for people living with HAE and for Ionis Pharmaceuticals, Inc. I am especially proud of the launch execution by our commercial team, which Kyle will further highlight in a few moments. In September, we reported positive top-line results from two pivotal programs from our wholly-owned pipeline, both of which were groundbreaking in their own right. Olazarsen in severe hypertriglyceridemia, or SHTG, showed highly significant reductions in triglycerides and became the first medicine ever to show a reduction in acute pancreatitis in this population. And in neurology, Zilgarnason showed the first-ever disease-modifying effect in Alexander disease, a rare and often fatal neurologic disease. These results reinforce the strength of our science and position Ionis Pharmaceuticals, Inc. for two additional independent launches next year. Together, these two programs, along with Tringolza and Donzara, represent significant breakthroughs for patients and the potential for multibillion-dollar revenue for Ionis Pharmaceuticals, Inc. Complementing our rich wholly-owned pipeline is our partner pipeline, which continues to progress very well. By 2027, we anticipate four key launches from our partner pipeline targeting both rare and highly prevalent life-threatening diseases. We expect these partnered programs will further expand the impact of Ionis Pharmaceuticals, Inc. discovered medicines and meaningfully increase total revenue for Ionis Pharmaceuticals, Inc. With the strong momentum across our business, including our first two independent launches underway, an advancing wholly-owned late-stage pipeline, and a robust partnered portfolio, Ionis Pharmaceuticals, Inc. is well-positioned to deliver transformative medicines for patients year after year, driving sustained growth. And with that, I'll turn the call over to Richard. Richard Geary: Well, thank you, Brett. We are making excellent progress across our pipeline, reinforcing Ionis Pharmaceuticals, Inc.'s ability to deliver on our mission of bringing transformational medicines to patients for years to come. Just last month, we reported positive top-line results from the Phase III CORE and CORE II studies of olisarcin in people with SHTG who had triglyceride levels substantially higher than 500 milligrams per deciliter despite being on standard of care lipid-lowering therapies at baseline, putting them at risk of life-threatening acute pancreatitis. In these pivotal studies, olesarsen demonstrated highly statistically significant and clinically meaningful mean reductions of up to 72% in placebo-adjusted fasting triglycerides at six months, the primary endpoint of these studies. In these studies, olesarsen also significantly reduced acute pancreatitis events, making it the first and only treatment to achieve this positive outcome in people with SHTG. Olisarcin achieved a highly statistically significant 85% reduction in adjudicated acute pancreatitis events. It's important to remember that the main goal of triglyceride management in SHTG is to prevent these AP events, and olicersin is the first medicine to demonstrate it can do just that. We believe these unprecedented results position olicarsen to meet the substantial unmet needs of people with SHTG, a large patient population in great need of more effective triglyceride lowering to reduce the risk of potentially fatal acute pancreatitis. In terms of next steps, we're looking forward to presenting additional data from the core and core two studies on November 8. Following that, we are on track to submit our sNDA in the US by the end of the year, with additional global filings expected next year. And as Kyle will highlight, launch preparations are already underway, and we are moving with urgency as we look to deliver olicarsen to people with SHTG next year. Turning our attention to zilgarnirsen, our medicine to treat Alexander disease, an ultra-rare leukodystrophy that profoundly impacts patients and families who today have no approved disease-modifying therapies. With the positive phase three results in hand, we are on track for another independent launch next year, and we expect this to be the first of numerous additional independent launches from our leading neurology pipeline. In our phase three study, zilgarnirsen achieved statistically significant and clinically meaningful stabilization on the primary endpoint of gait speed. This is an assessment of gross motor function, as measured by the 10-meter walk test. At week sixty-one, silvenirsen showed a 33% mean benefit in gait speed versus control, with a favorable safety and tolerability profile. Zilgrenosen also demonstrated consistent benefit across key secondary endpoints. These results represent the first time an investigational medicine has shown a positive disease-modifying impact in Alexander disease. We plan to submit a new drug application to the FDA in 2026, and we are also initiating an expanded access program in the US. Turning to ION 582, our investigational medicine for Angelman syndrome, the newest addition to our late-stage pipeline. Angelman syndrome is a serious, rare, neurodevelopmental disorder that causes profound and lifelong physical and cognitive impairments estimated to affect more than 100,000 people. Earlier this month, at our innovation day, we shared additional twelve and eighteen-month data from the long-term extension portion of the HALO study. Results from this study showed consistent and durable improvement in expressive communication over eighteen months, exceeding what is seen in natural history while maintaining a favorable safety and tolerability profile. Improvements were also observed across multiple other functional domains, including cognition and motor function, suggesting meaningful disease-modifying potential for ion 52582. As a reminder, the primary endpoint in our Phase III REVEAL study is expressive communication, reflecting what families have reported matters most to them. And just last month, the FDA granted ION 582 breakthrough therapy designation, recognizing the encouraging results from the phase one two HALO study and the significant unmet need. Enrollment in the phase three registration study is progressing well, and we remain on track to be fully enrolled next year, with data in 2027. With multiple data readouts and regulatory milestones expected this year and next, our advancing pipeline underscores the strength of our science and our commitment to addressing unmet needs in people with serious diseases. With that, I'll turn the call over to Kyle. Kyle Jenne: Thank you, Richard. With our first independent launch gaining momentum, a second now underway, and two more anticipated next year, our commercial team is focused on flawless execution to bring these important medicines to patients. In the third quarter, Trangosa continued to exhibit strong momentum as we reported $32 million in net product sales, reflecting a nearly 70% increase in revenues quarter over quarter. Our patient identification initiatives are proving effective. The breadth and depth of unique physicians prescribing Trinvolta continue to expand through the third quarter, underscoring the positive experience of both clinicians and patients. This demand also spans a broad mix of specialties, with cardiologists and endocrinologists representing nearly 70% of prescribers and lipidologists and internal medicine providers making up the balance. This favorable provider mix will support awareness and familiarity when we expand into the broader SHTG patient population next year, assuming approval. Access and coverage have also remained strong. To date, the coverage mix for patients on TRINGOZA is approximately 60% commercial and 40% government. Importantly, both clinically diagnosed and genetically confirmed patients have continued to obtain coverage through a growing number of formal policies or via the medical exception process. We're proud of Tringola's early momentum, but we know we're still in the early innings. The vast majority of the estimated 3,000 people living with FCS in the US remain unidentified. As a result, we're continuing to focus on our patient-finding efforts and HCP education. Our customer-facing team has reached over 3,000 physicians, and over 30,000 HCPs have been targeted through our omni-channel capabilities, further increasing awareness of FCS, expanding patient identification, and educating on the potential benefits of Trangolza treatment. Backed by an experienced and high-performing team, we are well-positioned to continue to take advantage of our first-mover position to bring Trincalza to patients in need. Building on our early success in FCS, we are preparing for a launch in the severe hypertriglyceridemia patient population. SHTG represents a large patient population, many of whom struggle to manage their triglyceride levels with current treatments. In the US alone, more than one million people have high-risk SHTG, defined as individuals with triglyceride levels above 880 milligrams per deciliter or above 500 milligrams per deciliter with a history of acute pancreatitis or other comorbidities. With a significant first-mover advantage and groundbreaking positive Phase III data in hand, as Richard just outlined, we believe olezarsen is well-positioned to address the unmet needs of patients with severe hypertriglyceridemia. Our commercial team is making excellent progress as we prepare for an expected launch next year. To unlock the potential of olanzarcen in SHTG, we plan to initially target approximately 20,000 HCPs in the US who are high-volume treaters of high-risk SHTG patients and expand this outreach even further via our omni-channel capabilities. Our commercial strategy leverages the strong foundation we have built with healthcare providers already prescribing Trinvolza, many of whom manage SHTG patients. At the same time, we are broadening our reach to additional prescribers who treat SHTG patients. To support this effort, we are expanding awareness through targeted disease education and continued investment in our commercial infrastructure. With key field leadership now in place, we plan to scale the Trangosa field force to approximately 200 representatives ahead of launch. At the same time, we have begun engaging payers to ensure broad patient access at launch. We believe there is strong recognition of the value in treating SHTG, given the potential to reduce the risk of life-threatening triglyceride-induced acute pancreatitis and the cost associated with treating these patients. Now turning to Donzara. The approval of Donzara marked a major milestone for Ionis Pharmaceuticals, Inc. And our team is energized and focused on executing a successful launch. We've built a top-tier commercial organization with deep experience in allergy and immunology, including in HAE. Within ten days of approval, we shipped our first prescriptions, and the first patient self-administered their initial dose. We're pleased to see strong early adoption of Donzara, with patients switching from prior prophylactic or on-demand therapies, as well as treatment-naive patients starting on Donzara. And the initial feedback from both physicians and patients has been very encouraging, with clear early excitement around Donzara. Notably, we are already seeing repeat prescribers. The US prophylactic HAE market is well established, yet many patients remain dissatisfied with their current therapies. Approximately twenty percent of patients switch treatments each year, highlighting the ongoing need for better treatment options. While educating patients and physicians and supporting from existing therapies will take time, we believe Donzara, with its differentiated profile and focused launch strategy, is well-positioned to meet this unmet need. As with Trangolza and FCS, we are committed to providing appropriate and comprehensive support to the HAE community, including ensuring broad and timely access for patients who need Donzara. We have established differentiated patient assistance and financial support programs. We are offering a free trial program, which allows patients, in collaboration with their healthcare providers, to determine if Donzara is the right fit for them. For eligible commercially insured patients, out-of-pocket costs can be reduced to as little as $0. With this foundation in place, we are confident in the anticipated trajectory of Donzara as we work to transform the treatment landscape for patients with HAE. Now turning to zilganeursen for Alexander disease. Zilganeursen could deliver the first meaningful advance for patients and caregivers, as there are currently no approved disease-modifying treatments. This program represents another important opportunity to extend our commercial capabilities. We will build on Ionis Pharmaceuticals, Inc.'s long-standing partnerships with the neurology community and patient advocacy groups to support awareness, diagnosis, and access. At launch, our focus will be on ensuring continued access for clinical trial participants to zilganeursen, expediting access for diagnosed patients, and improving identification of new patients, including enhanced genetic screening. Additionally, we will be working to ensure treatment availability at appropriately equipped centers. With preparations well underway, we are confident that zilganeursen can provide a first-in-class disease-modifying treatment option for patients and caregivers and opens the door to further strengthen our foundation as we advance our leading neurology pipeline. Our experienced commercial organization is already delivering strong results, as reflected in the early momentum of both Tringolza and Donzara. Building on this success, we remain focused on maximizing the full potential of these therapies while preparing to execute two additional launches by the end of next year, expanding Ionis Pharmaceuticals, Inc.'s reach to even more patients in need of our medicines. With that, I will now turn it over to Beth. Beth Hougen: We delivered another strong quarter driven by continued commercial execution and disciplined financial management, which enables us to raise our financial guidance once again. Our results reflect accelerating revenue growth with strong contributions from our marketed medicines and sustained progress across our pipeline. We remain focused on executing our strategy, advancing our late-stage portfolio, and maintaining the financial strength that enables us to invest in future growth. In the third quarter, we generated $157 million in revenue, representing a 17% increase year over year. For the first nine months of this year, revenue totaled $740 million, an increase of 55% compared with the prior year. As you heard from Kyle, the Tringosa launch continues to perform exceptionally well, earning $32 million in product sales, representing a nearly 70% increase over the second quarter. Royalty revenues increased by approximately 13% to $76 million in the third quarter, anchored by meaningful contributions from both SPINRAZA and WAINUA. As planned, total non-GAAP operating expenses year to date increased 9% year over year, highlighting our commitment to disciplined investment and driving operating leverage. Our sales and marketing expenses increased year over year, driven by our investments in the US launch of Trigolza and Danzara. R&D expenses decreased year over year as several of our late-stage studies recently concluded. Importantly, we continued to strategically fund our advancing pipeline, with more than two-thirds of our total R&D expenses funding our late-stage programs. Based on this continued strong performance and fourth-quarter outlook, we are once again increasing our 2025 financial guidance, our third consecutive increase this year. We now expect to generate between $875 million and $900 million in total revenue for the year, an increase of $50 million versus our prior guidance. Our guidance reflects meaningful contributions from our commercial portfolio, including continued strong performance of Trincosa. We now anticipate TRINGOZA product sales between $85 and $95 million for the full year, also an increase from prior guidance. Given the timing of approval, we expect ANZERA will provide a modest revenue contribution this year, with a greater impact beginning next year. We now expect an operating loss between $275 million and $300 million for the full year. This improvement includes our planned acceleration in investments to support commercial preparations for olanzarcen and zilganeursen following the strong Phase III data and anticipated launches next year. Additionally, we now expect to end the year with a cash balance of more than $2.1 billion, highlighting our strong balance sheet that will support continued to drive accelerating growth. Our third-quarter results demonstrate strong execution across our business. With two product launches now underway and more on the horizon, Ionis Pharmaceuticals, Inc. is well-positioned to deliver transformative medicines to patients in need and achieve our goal of cash flow breakeven by 2028, driving long-term value creation. With that, I'll turn the call back over to Brett. Brett Monia: Thanks, Beth. The third quarter was marked by strong execution and accelerating momentum across our business. With two independent launches underway, continued pipeline progress, and key regulatory milestones achieved, we are delivering on our strategy. The commercial organization continues to perform very well. The TrINGOLZA launch is strong, and the approval of Donzara for HAE marked another important milestone, with encouraging early feedback from physicians and patients. And positive phase three results for olanzarcen SHTG and zilgarnirsen in Alexander disease are paving the way for two additional independent launches next year. Together, these achievements strengthen our foundation for long-term growth. With a deep pipeline, outstanding execution, and a clear path to achieve cash flow breakeven in 2028, Ionis Pharmaceuticals, Inc. is well-positioned to deliver transformative medicines for patients and accelerating value creation for shareholders. Now before we move to the Q&A, I'd like to take a moment to recognize and thank Richard Geary for his tremendous impact on Ionis Pharmaceuticals, Inc. over the past thirty years. With his retirement at the end of this year, this will be his last earnings call with us. Richard has been a driving force behind our innovation, leading dozens of development programs and guiding six transformative medicines through regulatory approvals and to patients. His leadership, vision, and unwavering commitment to patients have been instrumental in shaping Ionis Pharmaceuticals, Inc. into the company we are today. On behalf of the entire Ionis Pharmaceuticals, Inc. team, I want to thank Richard for his remarkable contributions and his dedication to improving the lives of patients around the world. And with that, we'll now open the call up for questions. Chuck? Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed, and you would like to withdraw your question, please press star then 2. And at this time, we'll take our first question. Excuse me. Will come from Miss Jessica Fye with JPMorgan. Please go ahead. Jessica Fye: Hey, guys. Good morning. Thanks for taking our question. Was hoping you could talk a little bit about how we should best think about the shape of the launch curve for olanzarzan in SHTG. And I guess what I mean by that is kind of like in terms of the, you know, physicians you're targeting and the number of patients they cover, you know, do you perceive that there's, you know, pent-up demand or almost like a warehouse effect where you see rapid adoption the way we have in this obviously, much, much smaller FCS setting. Or if not, you know, what is the right way to think about the shape of that ramp? Thank you. Kyle Jenne: Yeah. Thanks, Jess. This is Kyle. It's a great question. First, I'll just mention that there's strong interest in trying to expand the use of Trangosa and interest in ezolasarcin in the SHTG patient population. An ongoing question that we get from HCPs as we're interacting with them today. Our current target population of HCPs is about 3,000 that we're reaching with our existing Salesforce. We're going to expand that to reach approximately 20,000 HCPs. Those 20,000 HCPs are covering approximately 360,000 patients that have SHTG. Some of those are high-risk patients, meaning above 880 or above 500 with a history of AP. Many of those patients are currently on standard of care treatments. So they're on fibrates and fish oils and statins and PCSK9s and other background therapies. So what we are expecting is that if those patients are on standard of care treatment and they're not getting to goal today, that there will be interest in using olanzarcen in that population, you know, based on the phase three data that we generated in core and core two. So that will be the beachhead in which we approach this. And, you know, we expect strong uptake based on the interest and what we've learned about the market thus far. Jessica Fye: Thank you. Operator: The next question will come from Gena Wang with Barclays. Please go ahead. Gena Wang: Thank you for taking my questions. So maybe I will also ask one is olefsacen, core and core two data. Since you have updated you we already have a top-line data. Anything that will be concerning regarding, say, the acute pancreatitis, events? You know, if it's I I I know the rate ratio is a super impressive, but, you know, you did have approved two studies. Would that be anything will be you know, we should be pay attention to? Would that be well balanced between the core and the core two? Regarding the, acute pancreatitis events and also any any other things we should be pay attention to. So that was one question. And the second, high level, I know you give peak revenue potential for Donzara over $500 million. Do you have a view regarding say, Alassane and also Alexander? Disease. Brett Monia: Okay. Let's try those three questions, you know. Let's try to go through them quickly. But thank you. So I'll start with the then I'll turn it over to Kyle for Dunsera and Alexander disease. So we're very much looking forward to presenting the detailed data at American Heart Association in a prestigious weight-breaking clinical trial session on November 8. None don't nothing to be concerned about. The AP data is groundbreaking. And I think that people are gonna really be impressed when we share the detailed data on the AP. Outcome, including the repeated how rapid protection is against acute pancreatitis and how durable those effects are. Remember, this was a pre-specified statistical plan analysis of core and core two purposefully because we want to ensure the maximum powering for the a positive outcome, which was proven to be a very, very smart thing to do. Core and Core two have been published on their bay the baseline demographics. And what you see the baseline demographics is that there's a higher triglyceride, median amount in core versus core two, and that reflect that will reflect acute pancreatitis events in the study too. But you'll see all that data at the and there's nothing else to be concerned about. We're very much looking forward to it. Again, brown results, and the will be a great venue. We're also encouraged that with, where we are in the review process for publication, no guarantees. But we're hoping for a simultaneous publication, with the presentation. If we can get that done and then all the deep that we can't get to in the presentation will be in the publication. So stay tuned for all that. Looking forward to it. Touch on Donzera and and Alexander? Kyle Jenne: Yeah. I'll just touch on, peak sales for each of the programs. Peak sales for Donzara, as you referenced, are expected to be greater than $500 million. For olezarsen, our first anticipated blockbuster, launch, we are expecting to be greater than $1 billion. And for Alexander's disease, is greater than $100 million are the expectations. Gena Wang: Thank you very much. Operator: The next question will come from Mike Ulz with Morgan Stanley. Please go ahead. Mike Ulz: Good morning, and thanks for taking the question. Maybe just a follow-up on ozarsen and SHTG. Just curious if you have any updated thoughts on pricing. I know this is an area where you're doing some extra work, so just curious if there's anything there to to share or if not, you know, when we might expect a little bit more clarity on on the pricing. Question. Thank you. Kyle Jenne: Yeah. Thanks, Mike. This is Kyle again. The work is ongoing. We do have the core and core two data, the s data, and we've got a lot of work to go through with our information related to, ER visits, hospitalization rates, number needed to treat, which is some information that will come out at as well. So there's still a lot for us to, to pull together. The the research will, will kick off, and we expect to have additional information next year for us to be able to make some decisions around in terms of final pricing recommendation. I think what some early signals continue to tell us and is consistent with the research that we've done in the past, is that this is a market of greater than 3 million patients and that payers are going to look at this market in terms of their total exposure to potentially covering olazarsen in in an SHTG indication of greater than 500 milligrams per deciliter patient population. So we're still doing that work, and we will announce the final price, upon the approval of the SHCG indication similar to how we've done with the FCS indication as well as the HE indication for Donzara. Mike Ulz: Great. Thank you. Operator: The next question will come from Yaron Werber with TD Cowen. Please go ahead. Yaron Werber: Great. Thanks so much. Congrats on a really nice quarter and a hopefully, it should be very good next year as well. Couple of questions. Number one, just for when you're looking at when we're looking at the data, should we be expecting that it's the reduction in AP is gonna be principally in patients with a history of AP, is there a chance that you're gonna show potentially a prevention of new events in patients that are did not have AP events in the past then secondly, you know, some of the other companies in the HAE space are actually beginning to talk that there's considerably more patients in The US market. They're think some are mentioning as many as eleven thousand patients, and seventy five percent on prophylaxis. I know you're mentioning seven thousand. Maybe can you can you help us kinda maybe understand the difference a little bit? Thank you. Brett Monia: Sure, Yaron. Thank you for the question. I'll Kyle will address the, you know, market research and the prevalence in HAE in The US. Regarding a HAE, mean, Ah heart association meeting, So, again, I wanna get ahead of details, Yaron, but what I'll what I can say is this. You know, all of the research has been done over the decades has indicated that the higher the triglycerides, the more AP events that you're gonna get. In in in a in a study, and that's exactly what we've seen in our study. So the higher the triglycerides, the more AP events you're gonna get. In in the study. And that and that, you know, will correspond to the the data that we present at or just gonna be in the in the patient's not only with a AP above eight eighty, also consistent with research, if you've had an AP prior event, you're chances of having another one is higher. So that is consistent with with the data that we will present at So you're gonna see a lot of you're gonna see more events in the high risk patient population as you would expect. So there's no surprises there. That's actually very comforting because that means that all the work that we've done, all the research we've done is holding up. And triglycerides are driving these AP events. Kyle Jenne: Yeah. In terms of the the prevalence in The United States, we're still working off of the seven thousand estimated patients in The US. That's, the information that we've documented and been able to work from up to this point. You referenced that about seventy five percent of those patients are on a current prophylactic therapy today. And so this is a switch market, that's really the market that we're focused on is moving patients over that, could be doing potentially do better on, on a on a therapy with a profile like Donzara? And, there are some patients that were on demand therapy patients only that have added Donzara up to this point. And, we'll also get newly diagnosed patients as your reference. But, yeah, we're not I'm not aware of an 11,000 number. We're still working off of the 7,000 population that, has been addressable up to this point. Brett Monia: And and, Yaron, I'd like to come back to your first question too. You know, at one point I I didn't make that I think is very important is to remember that the AP data that we have generated in core and core two is after only twelve months of treatment. Right? So, you know, when you think about a cardiovascular outcome trial, when you're looking at outcome data, it's years of treatment. This is only twelve months, so, we expect there to be even more AP events eventually in all segments of the SHCG population. With longer term observation, longer term treatment. So this is a relatively short study, which is makes our results even more remarkable. Operator: The next question will come from Gary Nachman with Raymond James. Please go ahead. Gary Nachman: Thanks and congrats on all the progress. So Trungosa accelerated really nicely in the third quarter. Are most of those additional FCS patients coming from? So how many physicians are prescribing right now? And maybe describe the percent genetic versus clinical that are diagnosed And and based on your full year guidance, you you have that acceleration slowing. A bit in the fourth quarter. Is there any good reason for that? Could you explain that? And then just on the olanzarcen filing, for severe high trigs. Any chance you can get a priority review for it especially if it's gonna be lowering the cost of the drug significantly I mean, you're still working through that, but it it would be a significant drop. So I don't know if if that's an argument that could be made to get it on the market. Sooner. Thank you. Brett Monia: Gary, I'll take the second question first, and Kyle could address the, you know, the your question about Trin Golza. So our assumptions right now are as a standard review. Supplemental NDA by the end of the year, ten month review. However, we will do, we we will pursue all avenues to potentially bring this medicine to the market as quickly as possible. So stay tuned for that, but right now, we're assuming it a ten month review. We don't see any reason why it it couldn't be considered for for other you know, other other paths forward with regulators. Kyle Jenne: Yeah. In terms of the FCS patient population, there are a couple of things that we've been doing. Number one is identification of patients and you move them through the diagnosis and then, the prescription. We focused on those highest prescribing, SHTG physicians, the first 3,000, right, that we've been working through throughout the balance of this year, I mean, we've also supplemented that with some of our marketing and our omni channel capabilities to drive more disease state awareness and an understanding about the need to treat patients with high triglycerides, and specifically how to assess and diagnose FCS. The clinical, scoring tools either the North America FCS scoring tool or, the Mulan criteria, are also driving the clinical diagnosis ability for these HCPs. So they're looking for these patients. They know these patients are in need. They wanna get them out of harm's way of acute pancreatitis. And they're using the available tools and resources to either, you know, clinically confirm or genetically confirm these patients. The other thing I'll mention is on the payer dynamics, the policies are getting put in place to where, it's a streamlined process for HCPs to be able to prescribe. Once they've made the diagnosis for FCS. So I won't get into specific numbers around, age or the split between genetic and clinical confirmation, but, you know, what's going well is disease education is improving, the awareness of of, the need to treat continues to go up. And, Trangosa is performing very well when HCPs are using it and they're looking for more appropriate patients order to treat with Trinvolza because of the performance of the drug. Oh, for Q4, it it's I don't wanna say it's Q4? a slowdown. We we took a look at a couple of things. One thing is is duration. It's ten weeks as opposed to thirteen weeks because we've got the holidays in there. And then also, don't know the seasonality yet, if there's some implications here at the end of the year because this is our first full year. Of, of the Trangosa launch. So, you know, we're just making sure that we're taking into account some of the unknowns as we're considering the guidance for the quarter. Gary Nachman: Alright, great. Thank you, and, best of luck to you, Richard, on your retirement. Operator: Thank you. The next question will come from Jason Gerberry with of America. Please go ahead. Jason Gerberry: Hey, guys. Thanks for taking my questions. Just two for me. Ahead of Cardio Transform next year, I just wonder get your latest thoughts How do you maybe maximize the benefit of the data in combination with tafamidis if it if it hits stats to the disproportionate benefit of epilentersen, and that there isn't sort of a free riding effect that happens for your competitor, as it pertains to sort of the validated, you know, benefit of of of silencers and stabilizers together. And so that's question one. And then just question two, into and the and the update on NNT, Just wondering if you can contextualize as we think about the NNT both in the all comer and the high risk group, You know, if if obviously the NNT is more compelling in the high risk group, that's a small proportion of the overall population, how important that is? Is that to the overall kind of value proposition in the eyes of payers from your perspective? Brett Monia: Thanks. Thanks, Jason. You know, on Cardio Transform, as you know, it's the largest study ever conducted in TTR cardiomyopathy I mean, by far. And we will have the largest amount of data for combination usage as well as monotherapy usage in the study. And, you know, the the combination usage is a key secondary endpoint. In the statistical plan. A cardio transform and, as well. So know, how important, how valuable that will be once we launch eflandersen in TTR cardiomyopathy is to be seen, to be determined. Obviously, the mechanisms are highly complementary in theory. And we expect to see added benefit over over monotherapy in the study, but that remains to be seen and proven. But if anyone is gonna be able to show a benefit of combination usage, and and for that to drive value and and resulting in driving value for, you know, the commercial opportunity for Ephrontera, and it'll be it'll be this program. I don't wanna comment on whether that provides, you know, tailwinds for other competitor programs and those sorts of things. We're focused on on EfwamTersen, and we think we the right trial design. We have the right drug. And we're very much looking forward to the data in the second half of of of next year. We will be sharing some data on n n in different subgroup populations in SHTG at and and if we can get a simultaneous publication as well. I think the results are are are gonna be strikingly positive in both groups or in all the subgroups that we've looked at. But I don't wanna get ahead of that data at this time, Jason. As far as the value for payers, I'll I'll leave it to Kyle to comment on that. Kyle Jenne: Yeah. I I comment on the totality of the data and how the evidence is stacking up for core and core two and how that will will be interpreted by the payers, Reductions in triglyceride levels to the magnitude that we're seeing of up to 72%, for example, on top of standard of care. So these are patients that are being treated already that aren't getting to goal, that aren't getting out of harm's way. Of AP on the current standard, and by adding olazarcin, you're seeing significant reductions in triglycerides. An eighty five percent reduction in acute pancreatitis is, you know, really incredible to see. And payers, I think will will will react accordingly when they see that data. Hospitalizations and ER visit data the NNT data will just add value and will complement that. It'll talk about some of the subpopulations, but overall, I think that the the quality and the totality of the data here is what's gonna drive payer engagement and and, you know, effective reimbursement here. Keep in mind that the the focus here is to is to prevent a first AP attack from ever occurring. And, HCPs understand that, the guidelines represent that, And HCPs are trying to treat the goal, and they just can't with the current existing therapies that are out there. The other thing that I'll mention is these are fasting triglyceride levels. And you're gonna have postprandial spikes in these patients you know, even if they are between five hundred and eight eighty. That increases their risk of having an acute pancreatitis event. So that whole story and the comprehensive nature of the data that I just just talked through, I think, is gonna be the value sorry, in the proposition for the payers. Jason Gerberry: Thanks, guys. Operator: The next question will come from Yanan Zhu with Wells Fargo Securities. Please go ahead. Yanan Zhu: Great. Thanks for taking our questions and congrats on the quarter. Maybe a couple of questions, one on DONGSYRA launch. One on Winua. Can you give more color a little more color on the early prescription for for Downsera? Are these from switching patients or newly diagnosed patients? And if it's switching patients, any pattern of the previous therapy. For Weinua, there's also a sizable bump in in the polyneuropathy revenue. Looks like twenty five percent. Is that due to the growing of the market via newly diagnosed patients, or is that reflecting you taking share? And any updated metrics, like, new to brand numbers? Thank you. Kyle Jenne: Yeah. I'll start with, with the Donzara launch. First, it it it's going very well as were highlighted in the the opening comments. Both HCPs and payers, the feedback has been very positive. The commercial team has executed extremely well. Getting product into channel, getting the first prescriptions in, getting those patients onto treatment and patients self-administering, with Donzara. So the the launch is going very well. It's very early. Right? I mean, the PDUFA was August 21. You know, we're you know, a month month or so into this launch. So I I don't wanna provide too many details or specifics at this point in time, but but I'll just share with you that the receptivity by HCPs has been very strong. The profile of the drug, the data to support it, the label, and, specifically the switch data. Has been very valuable so that they can understand that they can move these patients over safely, and effectively and get them started on Donzara and have a positive experience there using our Ionis Every Step patient support program. So I think all signals are are very positive. We are seeing switches from, all of the currently approved prophylactic treatments. We're seeing, Donzara added to on-demand treatments where patients weren't on a prophylactic treatment. And then, you know, we're seeing newly diagnosed patients as well. So I won't get into the details on the splits, but all signals are very positive so far with the early signs of the launch. Brett Monia: And then the bump in Whenua? Revenue? Kyle Jenne: Yeah. The bump in Waynua revenue. Again, so this is a growth market. And, you know, as we've said all along, it's it's about new patient identification and that's predominantly where the demand is coming from in the third quarter for Wenua. The product's performing very well, in terms of quality of life, improvements. Access is going very strong in terms of coverage. The majority of patients paying $0 out of pocket. You know, we do expect continued growth with the identification of new patients, especially in the centers of excellence. Where these amyloidosis centers are using Waynua, very broadly for the polyneuropathy indication. And, I I think we just continue to be encouraged by AstraZeneca's execution around the launch and their focus on the program. Yanan Zhu: Great. Thank you. Operator: The next question will come from Miles Minter with William Blair. Please go ahead. Miles Minter: Hi, thanks for taking the question. First off, Richard on his retirement. Thoroughly deserved. The question is on hepatic fat fraction data in in the core studies, and if you can comment on that and if we'll see it. I've just been getting some questions considering you've got, you know, robust serum triglyceride reductions there, whether you're shunting, you know, maybe too much to deliver at any one time and it's accumulating there. You know, also acutely aware that you have the wait live for a day to presented that actually showed reductions in hepatic fat fraction. So any sort of color on that, metric would be helpful. Brett Monia: Yeah. Miles, I don't wanna get ahead of the presentation because you know, that is a secondary endpoint, so it'll be it will be covered in the presentation. And and publication. So, yeah, I we're gonna present we're gonna do a deep dive at on the primary endpoint of triglyceride lowering, including both doses through twelve months, time courses, no that kind of thing. You'll see the durability of triglyceride reductions, You'll see, details on the acute pancreatitis, which is secondary endpoint, and you'll see all the data, you know, listed out on all the secondary endpoints, including hepatic fat fraction. We'll also talk a little bit about the NNT that we touched on in the earlier question. So I don't wanna get ahead of that. Let's we'll sit we're just a couple of weeks away from and let's just leave it there. Miles Minter: No worries. Thanks. Operator: The next question will come from Luca Issi with RBC. Please go ahead. Luca Issi: Great. Thanks so much for taking my question and then Richard, congrats on a fantastic run, and all the best on your next chapter there. If maybe if I can circle back on severe hypoglycemia, Kyle and Beth, You have obviously a billion dollar plus peak revenue revenue opportunity for the drug. Is that conservative? The reason why I'm asking is because if the TAM is truly a million patients, the price is $20,000 patients, which seem consistent with your commentary, that all implies, like, 5% penetration at peak, which, again, feels a little conservative to me. So would love to to hear you talk about some of the assumptions that went into that $1 billion plus number that you have articulated. Then maybe sticking on severe hyperglycemia, what's the latest thinking on whether you're gonna file just the eighty milligram, which is obviously same bill as approved in FCS versus filing both the 50 and the eighty milligram. To give, you know, docs more options to kind of tailor the dose based on the need of the patient's call there, much appreciated. Thanks so much. Brett Monia: Yeah. Thanks, Luke. I'll take the easy question. We're filing on both doses. Both doses look great. And, we believe that dosing flexibility in the hands of cardiologists, endocrinologists, lipid specialists will be very well received. Once we get to the market. So that's that. And, with respect to, peak sales, Kyle Jenne: Yeah. Luca, I mean, you know, I I keep referencing that this is a it's a prevalent patient population. Right? Greater than three million patients. The high-risk SHTG patients, you've got approximately a million of that that you were just referencing as well. I I think we still have some unknowns here around, the payer dynamics We also have some unknowns around pricing dynamics. In order to to factor into these, these assumptions. You know, what we felt comfortable with, I think, going into into this, and have been consistent all along is greater than a billion in peak sales is where we've landed up to this point. We're continuing to assess the market. We've got a lot of good learnings from FCS as well in terms of how the launch trajectory has gone here. We're doing more market research to understand, HCP and and payer and patient perceptions, around the SHTG marketplace. And, you know, we will provide, you know, updated information as as we learn more and feel more comfortable and confident with, the way the information comes together. But, it's greater than a billion dollars is where we feel comfortable today. Luca Issi: Nice. Thanks so much, guys. Operator: Your next question will come from Jay Olson with Oppenheimer. Please go ahead. Jay Olson: Congrats on all the progress. I'll add my best wishes to Richard as well. Beth, I know you commented a little bit about this on your opening remarks, but with your strong balance sheet, could you share your priorities for capital allocation, especially with regards to any external versus internal investments. Thank you. Beth Hougen: We're happy to. We we do have a strong balance sheet, very healthy cash balance, and expect with the increased guidance that we'll maintain that. As we go into next year. Continue to execute on these launches as well as the oligosarcin s a and zilgarnirsen launches next year. Our capital our top priority for capital allocation is for internal growth. We think that that there's tremendous opportunity in our pipeline and behind these existing marketed products and the ones coming to market here shortly. So we will continue to prioritize growth for capital allocation. We'll do that with discipline as we've done historically, but that's what you where you should expect to see us using our balance sheet. Jay Olson: Great. Thank you. I think we have time for one more question. Operator: Our last questions for the day will come from Mitchell Kapoor with H. C. Wainwright. Please go ahead. Mitchell Kapoor: Hey, for taking the questions. Just wanted to ask with an impressive 90% rolling into the open label extension in the SHTG trials, can you name some of the more prevalent drop out reasons and whether there's any reasons that we should be cautious going into a launch. Because of some of those? Brett Monia: Thanks, Mitch. And I'm going to let Rich answer the final question of this earnings call. Any any any reasons be concerned with dropouts in the core core two studies? Richard, anything you wanna highlight? Richard Geary: Yeah. So first, I would say the dropout rate was about half what we expected from the beginning. Very well tolerated medicine. I would there isn't actually any one issue that that led to discontinuations. They they varied across the study. Some of them had to do with personal reasons, moves, vacations, different things that needed to be taken care of. Pregnancies, etcetera. But there were and so I I can't point to, like, a main reason. And for that reason, I'm very bullish on this medicine in terms of its, tolerability and safety. Mitchell Kapoor: Excellent. Thank you all very much, and congrats, Richard. Brett Monia: Thanks, Richard. Thanks, Mitch. Thanks, everybody, for joining us and participating in our call today. We really do look forward to building on on the remarkable momentum that we've achieved this year so far and for and for years to come. And sharing additional updates along the way. Just as a reminder, the detailed data from the Landmark phase three core and core two studies for olanzarcen, will be presented in s h for SHTG will be presented during a late-breaking session on November eighth. At We encourage you to listen in. To our webcast. Until then, thanks for participating, and everybody have a great day. Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Roger White: Well, good morning, ladies and gentlemen, and welcome to the C&C Group FY '26 Half Year Results. My name is Roger White, and I'm joined today by Andrew Andrea, CFO. I'm sure you will all know that in due course, Andrew will be swapping barley apples and wheat for tomatoes and pepperoni as he moves from drinks to food and from a wholesaler to operator moving into Domino's Pizza CFO. There will be plenty of time to wish Andrew Bon Voyage in due course. In the meantime, we have plenty to do in the period he's still with us. And I know that Andrew is fully focused on C&C Group across the whole of that period. Today, we will start with the highlights of the last 6 months before I hand over to Andrew, who will give you a detailed review of the financial performance in the first half of '26. I will then update on our current thinking regarding strategy, followed by a brief operational review of the first half, a closing summary and outlook before we move on to some Q&A in the room. Now moving directly on to Slide 4 in your packs. We've delivered a solid performance across the first half of FY '26. From a market context perspective, it's been a mixed period. The well-publicized challenges for the hospitality sector have accelerated across the past 6 months. Increased operating costs and mixed demand has impacted most operators. However, some decent summer weather certainly lifted the mood across the sector at certain times across the summer. However, as welcome as the good weather was, it did not lead to positive volume performance across the total market. At C&C, we focused on improving our efficiency, driving out costs and delivering great service to our customers. This has underpinned our performance in the period, leading to a 4% increase in our operating profit. Both our reporting segments, brands and distribution improved margins, and we continue to deliver strong free cash flow, which in turn has supported our capital allocation choices with further returns to shareholders via increased dividends and further execution of our share buyback plans. Revenue in the period appears subdued, but reflects in the main, the transition of contracted Budweiser Brewing Group volume out of the group alongside some thinning out of some lower-margin contract and customer volumes, something which is likely to continue as we look forward and focus our efforts on improving margins, in particular, in the wholesale part of the business. It's been a busy 6 months for the teams inside the business where we have worked hard on business improvement across control, simplification and business process redesign, alongside team development and our initial actions on brand development and innovation. Improvement in C&C is underway, but there is much to do, and it will take time to feed through to our performance. I would like to take this opportunity to thank all 2,850 colleagues at C&C Group who continue to work hard to serve and support all our customers and consumers at the same time as we seek to improve the business. Now I'm going to hand over to Andrew, who will take you through the detailed financial review for the first half. Andrew? Andrew Andrea: Thanks, Roger. So moving on to the next slide and starting with the headline financials. As Roger just alluded to and as we reported back in September, revenues were 4% behind last year, and I'll come back to that in a moment. However, we've made operating margin improvements in both our Branded and Distribution segments. That's helped drive group margins up 40 basis points and consequentially, that's driven positive momentum in each of the key profit metrics, most notably operating profit up 4% and double-digit growth in both PBT and earnings per share. From a cash perspective, we continue to be strongly cash generative. There have been a couple of one-off items, which I will expand on later, but the underlying cash flow of the business continues to be strong and leverage is in line with last year at 1.1x. So a business continuing to generate strong cash flows underpinned by earnings progression. Turning now to revenues on Slide 7. But as you can see from the chart, the majority of the revenue decline was anticipated and relates to the loss of the BBG distribution in Ireland. Just to remind you, this will annualize in January. So there's a little bit more of this to come through in the next 3 months or so. In our underlying distribution business, as widely reported in the market, national customers are reporting like-for-like absolute sales growth, but volume decline in drink, and that's reflected in our own distribution performance. And we are seeing some rationalization in the estates of many of our big customers. In the U.K. on-trade, cider has underperformed. Magners and Orchard Pig have seen lower sales this year. Roger will touch on off-trade progression, but on-trade is harder to land, and that's reflected in the sales performance. But encouragingly, we've seen an improvement in revenues in both Bulmers and Tennent's, our 2 core brands overall. So moving on to earnings. On the next slide, please. Thank you. We've seen operating margin percentage improvement in both Branded and Distribution. And this is driven by 2 key areas of focus in our business across both segments. The first of those is a focus on efficiency through our Simply Better Growth program, driving costs lower through the organization. But secondly, a much more disciplined approach to trading. So what we mean by that is, we want to run a business with sustainable earnings at an appropriate level of margin. We will actively exit things that don't earn us money. It's the classic failed is vanity, profit sanity equation. But by applying that, as you can see, that margin growth has driven absolute operating profit growth in both of our trading segments. Turning now to costs on Slide 9. By way of reaffirmation, our FY '26 costs are in line with our expectations. Modest inflation is the underlying theme for this year. And for FY '27, we are starting to hedge some positions. But as things currently stand, we're anticipating another year of modest inflation overall. There's nothing at this stage that is not in line with our expectations. So moving now on to cash flow and balance sheet. From a cash perspective, as I mentioned earlier, we've seen strong cash generation in the period. But as you can see, we've got a couple of one-off items bolstering that cash flow overall. First of all, from a CapEx perspective, our program this year is second half weighted. We're still guiding full-year CapEx of around EUR 18 million to EUR 20 million, and we've had a GBP 10 million benefit on working capital. I'd expect that to level out in the second half year. So GBP 15 million of that GBP 20 million uplift should flow back in H2. We have closed out some cash positions with the revenue that has given us an income tax benefit in the period. But overall, our aspiration is for free cash flow to be at a similar level to that which we generated in FY '25. Moving on now to debt and leverage. Our borrowings have increased slightly in the period. I'd expect that again to level off in the second half year. We've closed out a couple of lease negotiations on a couple of our bigger depots. So our IFRS 16 obligations have increased in the period. But our leverage, and just to remind you, our focus is on borrowings to EBITDA on a pre-IFRS basis is at 1.1x, in line with last year. And by way of reminder, our financing is long dated with headroom. So we have an RCF and term loan extending out to January 2030, and a couple of private placement notes maturing in 2030 and 2032. So we've got a prudent level of leverage, headroom against our facilities and no short-term refinancing requirements, which gives us cash and capital flexibility. So what does this all mean, then wrapping this up for capital allocation. Well, our primary driver of increased cash generation is growing our earnings in the medium term through growing EBITDA. But importantly, our underlying cash flows outside that are quite predictable. So working capital is pretty stable. There are opportunities, most notably rationalization of our SKU base. Our CapEx is modest in nature. We're forecasting somewhere in the region of EUR 15 million to EUR 20 million of CapEx year in and year out. And because of the finance facilities we've got, our finance costs are stable, and we have a stable effective tax rate overall. What that means, therefore, is we retain and maintain our aspiration of a business generating at least EUR 75 million of free cash flow in the medium term. And that capital allocation priority is to honor our commitment to return EUR 150 million back to shareholders in the 3 years to FY '27. And that will be driven through a combination of growing our base dividend. We've announced a 4% increase in our interim dividend and the option of either share buybacks or special dividends. Clearly, our preference is for the former, and we completed the latest EUR 15 million tranche of share buybacks in September of this year. So including the interim dividend, we've announced just over GBP 90 million of returns to date. So we've got around GBP 60 million to go. If we add in our dividend expectations, that means over the next 18 months, we've got around GBP 30-or-so million of buybacks to achieve in that 18-month period. And in generating that cash flow, coupled with our financing flexibility, we do have the ability to invest in strategic growth opportunities should they arise. And clearly, that will be done on a case-by-case basis and returns driven. Underpinning all of that is a target leverage of 1x earnings overall in the medium term. But what this demonstrates is that we have a business that's generating predictable cash flow. We've got very clear capital allocation methodologies underpinned by a low level of leverage overall. That's everything from me. I'll now hand back to Roger. Roger White: Thank you, Andrew. I'd now like to take a few minutes of your time to update on strategy before I talk through a brief operational review of the first half. So turning to Slide 14 in your packs. It's now around 9 months since my first day at the C&C Group, that time has certainly flown by. I've spent most of my time during the last 9 months just building my understanding of the business and the markets we operate in. It's true to say that we certainly have some complexities as a business, but we also have a range of opportunities and balanced with challenges. Let me update you on where we are thinking regarding the direction of travel of the C&C Group strategy. And if I can start by looking backwards to just set some context. C&C Group has been built over time via acquisition of multiple businesses to create a scale business across multiple markets and multiple geographies. However, integration has not been prioritized in this business build. So systems, policy, procedure and even cultures have in many ways not been harmonized. We, therefore, operate in multiple business models within a group structure, which at times has been unclear in its strategy. In addition, we struggle to realize the benefits associated to our scale. In recent years, to address this, the stated objective has been to create an integrated one C&C approach, attempting to push our group into one operating model. However, this has not been fully delivered due to the complexities of the businesses and the lack of historic integration that I mentioned a moment ago. So we currently operate in a slightly uncomfortable middle ground, neither as an integrated group nor as discrete business units. This reflects in our cost base, it reflects in our controls and it reflects in our focus as a business. We do, however, believe that scale alongside our brands and wholesale model can bring significant benefits in the markets we operate in and thus supports the principle that the C&C Group has a rational role to play in the creation of value across the beverage markets we operate in. Moving on to Slide 15. As we look forward, our immediate priority is to evolve how we operate as a group, simplifying and focusing on execution as we aim to create value from our scale and expertise, both centrally and locally. Our view is definitely that the beverage sector is a great part of the consumer goods market. It has deep consumer penetration across multiple occasions and has products and brands for everyone, whether locally or globally and whether consumed in a hospitality venue at home or even on the go. We can develop our position in this market as a highly credible brand owner and developer, supported by our position as an experienced and sizable wholesale operator. By leveraging our enviable scale alongside our market-leading reach, range and service, supported by our industry-leading category expertise, specifically associated to the hospitality sector. We need to develop further the winning consumer and customer propositions that will drive our business forward successfully. In the meantime, our operating segments will remain Branded and Distribution. We have many things to occupy us as a business in the coming period, but I would boil them down to these 3 simple objectives: simplifying our core central operations, processes and reducing our costs, growing volume in our branded segment and improving margin in our distribution segment. To achieve this, there are multiple actions required, some of which are already underway, others we will develop in the coming months. This will lead to an updated set of performance outcomes and longer-term performance targets, all of which we will set out in May 2026. I believe this evolutionary approach will yield the best outcome for shareholders in the short and medium and long-term and lead to the delivery of our longer-term strategy from a much more solid starting point. Now turning to Page 16. As we look forward and plan how we'll shape and grow the business, one thing underpins all of our ambition, and that is the building of a winning culture where performance and people go hand in hand. To support our evolving strategy, we aim to create an agile, inclusive and performance-driven culture that supports our local hero challenger status, providing our consumers and customers with a great experience, whether that be associated to our brands, our supply or even corporately. As you can all see from the slide, there are a number of work streams across the organization, talent, leadership, communication and capability, all of which tie into our cultural development and all of which are necessary to meet our ambition. However, in the very immediate term, we are still very much fixing the basics across our business to ensure that we are building from the most solid foundations. These foundations will support our operating structures and our growth ambitions as we progress the strategy development of our business. Now turning to Slide 17. Moving on to review the last 6 months, let me briefly update on markets brands, operations and our responsibility agenda. Firstly, turning to consumers and markets on Page 19. Consumer behaviors remain significantly influenced by economic factors. Confidence remains fragile. And as costs in hospitality have risen and consumers have had to shoulder the burden for this, it has led to some volume issues as consumers simply cannot afford to enjoy hospitality occasions as frequently as they historically have. In addition, when they do go out, value for money takes on even more importance. The drive for value has also impacted choices, not only where to visit, but what to consume while you're there. This is manifested in the higher proportion of sales in long alcoholic drinks products, somewhat to the detriment of wine and spirits. This picture speaks to the complexity that exists in our markets and reinforces the importance of our portfolio breadth and market coverage as a business. Now our branded portfolio is performing well in these challenging market conditions, supported by our strong regional routes to market. Our core brands have a unique long-standing importance to consumers within the markets they operate, and we are only just starting to tap into the possibilities of developing our brands further, whether it's in our well-known core or in areas where we currently have a smaller, more niche presence. As I mentioned earlier, we are confident in the potential of the wider beverage market to sustain long-term growth, and we believe there is potential for C&C to grow within that context. Now turning to Slide 20 and specifically to talk about some of our core brands. 2025 marks a major milestone for the Tennent's lagger as we celebrate 140 years of brewing Scotland's favorite beer. Despite market headwinds, Tennent's has shown remarkable resilience, broadly maintaining its market share across Scotland. In the off-trade, we have widened the gap to the 2 nearest competitors, while in the on-trade, our rate of sale is 2.5x that of our nearest competitor. Such as the strength of the brand performance, Tennent's is now a top 10 lagger brand by value across GB as a whole, outperforming a number of leading global brands. Tennent's does play a unique role in Scottish culture, and we have continued to be at the heart of what matters to our consumers from rewarding Scotts for the best and worst Scottish summer weather being part of the conversation and the experience at the Oasis concerts as the tour of the year arrived at Murrayfield. In fact, across the summer set of concerts in Scotland's 2 national stadia over 365,000 pints of Tennent's were enjoyed. Our last financial year-end review, I said we would bring innovation back to the brand. And I'm delighted to say that we've just launched Tennent's Bavarian Pilsner [indiscernible]. And this is a 4.7 ABV limited edition beer with a distinctive Bavarian flavor coming to the market this month. This is the first of a number of planned launches for the Tennent's brand built through our new innovation team and process. In addition, we brought a significantly improved reformulated Tennent's Zero to market alongside an expanded pack range for Tennent's Light, critical to the growing number of adults and GB saying they are moderating. Tennent's is an amazing brand with so much more potential still to be unlocked. Moving on to Slide 20 to talk about Bulmers. Bulmers has delivered a strong first half with total revenue up more than 6%, driven by focused brand investment and a revitalized brand communication strategy. In the on-trade, Bulmers original growth accelerated across the reporting period, up over 10% in the 3 months to July, benefiting from the undoubted spell of decent summer weather, while in the off-trade, it outperformed the cider category with growth of 10% and a 1.8% share gain. Power brand, as measured by Kantar, is up 9.5% year-on-year, reflecting the impact of the above the line and digital campaigns with its our time advertising returning for a second year backed by a 33% increase in media spend, helping Bulmers become the most salient long alcoholic drink brand in Ireland. We backed Bulmers Zero with Tonight's Zero, Tomorrow's Hero campaign, reaching almost 3 million consumers with both strong growth and share growth in the nonalcoholic cider category. Bulmers Light continues to grow with volume up, meeting the growing demand for lower calorie options. Like Tennent's 2025 was also a milestone year for Bulmers as the brand turned 90. We celebrated, as you would imagine, in both the trade and with consumers and employees. So in its 90th year, Bulmers is in good health, growing, innovating and connecting with consumers. Now moving on to Magners on Slide 22. I told you earlier in the year that we were at the beginning of a journey with Magners, and I'm pleased to say that we are on our way, seeing some positive initial impacts from our efforts. However, this is a journey that will take time and commitment. In the period, we have made our largest brand investment in over a decade, which has seen the magnetism campaign begin a renewed energy to the brand and consumers. It's already driving some strong brand health improvements in awareness and consideration and the social engagement scores are moving in the right direction. This marks a real shift in momentum after some very challenging years. Magners remains the #1 package cider in GB on-trade, selling over GBP 90 million in the last 6 months. So we do have scale, but we now need to drive momentum as we improve consumer awareness and drive brand reappraisal. We have new packaging that has now been rolled out and is driving increased consumer perceptions of quality and our focus on pack mix is beginning to bear fruit. Recovery journey for Magners is only just underway. Slide 22 highlights a number of consumer actions made to build brand momentum, including a number of PR-led activities, whether that's in concerts such as Belsonic in Northern Ireland, where we reached an audience of over 200,000 people with the Magners brand. Magners reach continues to grow globally, exported to 45 countries and including the U.S.A, I couldn't resist the picture of a Victoria's Shane Lowry enjoying Magners after clinching the rider cup for Team Europe. Magners is therefore, regaining its edge with renewed brand energy, improved consumer perception and a clear plan to drive value and growth into FY '27. Now moving to Slide 23. Our premium portfolio continues to grow, driven by Menebrea's strong performance in H1. On-trade volume sales are up 8%, with significant growth, particularly in Scotland. For Menebrea, we focused on building awareness and specifically food credentials, particularly through a strategic partnership, including with the well-known celebrity chef, James Martin. This has helped us drive our awareness now at 13% in GB, but a significant awareness in Scotland of over 28%, cementing a key point of difference, which is based on the insight that 73% of [at-home] beer serves are now accompanying food. We've launched new pack formats supported by our biggest off-trade investment to date, and we've delivered the strong growth that I mentioned. We've anticipated across multiple channels from [indiscernible] and digital screens in stores through to a traditional Italian beer window in London, which has brought a touch of Florence to the streets of London and driven national media coverage. Meanwhile, our exciting modern new cider brand Outsider is gaining momentum. It's now the #2 cider brand in Northern Ireland behind -- in the on-trade behind Magners, and it's expanded into Scotland with nearly 300 listings. In the off-trade, our new 4 packs and 10 packs have been listed in over 700 stores in H1, building on the strong digital-first marketing and consumer engagement position. So Menebrea and Outsider are proving the case that our premium and challenger brands, can drive growth, relevance and value across the portfolio. Now turning to the distribution business on Slide 24. Our distribution business, specifically Matthew Clark Bibendum operates a full-service composite supply model across the U.K. hospitality industry from 11 warehouses, it services 12,000 customer delivery points with a range of over 8,000 SKUs. I talked when we last met about a Road to Recovery for MCB. And I am delighted to confirm that if the measurement of recovery relates to customer service, choice and value, then we are in a much improved position. The tangible measure of service performance is now fully recovered, and we are now firmly into the phase of improvement in our operating efficiency from a strong base level of service. Whilst we have seen our product sales mix move in the period in line with market trends, we are starting to see the benefits associated to our technology investment in this area, such as our sales force efficiency and our ability to improve our customer performance, which is beginning to take shape. This is likely to see some short-term attrition to our customer numbers as we move out of less commercially attractive business and seek mutually beneficial longer-term commercial supply partnerships with our customers. This remains a highly competitive sector, but we're working to ensure we are increasingly capable of providing winning customer propositions at the same time as we provide our branded partners with unrivaled on-trade access. Turning to Slide 26. Let me give you a short update on our sustainability and responsibility performance. We see our sustainability agenda as a core part of our business operations and simply just part of daily life at C&C. We continue to make good progress in our decarbonization journey across the group with the latest major initiative being the anticipated investment in an e-boiler at our Wellpark Brewery next year to replace our current usage of gas at Wellpark with sustainably generated electricity. This initiative will be a major contributor to our decarbonization plan, but obviously, alongside the multitude of smaller but important actions we take every day. Across the group, our commitment to safety is absolute. In the period, we launched our health and safety Center of Excellence at our Birmingham site, where we train and develop our safety activities for rollout across the wider group. This initiative underpins our improvement plans, ensuring our development of safe working practices are successfully trained across the whole business. As a group, we continue to invest in technology and assets that meet our responsibility agenda, including the important enabling investment in dealcoholization technology to support our innovation drive into low and no. This exciting investment will be made at Wellpark and is expected to be operational during the course of next financial year. It will give us a technical edge in the production and delivery in this critical product area. So in the broadest sense, we continue to prioritize our responsibility agenda, not only with words, but also with tangible actions. So moving on to the final slide. In summary, H1 FY '26, we delivered a solid financial and operating performance. We delivered sustained improvement in service to customers and continued to generate strong amounts of cash. Our brand performance was resilient and gives me confidence in our longer-term potential. Distribution has recovered its service, which is critical to us moving to the next phase of margin improvement. I said in May, there is much to do at C&C. I would reiterate that comment once again today. Market conditions are without doubt challenging, but we now have a clear view of our next steps and where to prioritize our efforts as we deliver the balance of the current year and plan for the next. Thank you for listening today, and we are now going to open up to questions from the room, if we have any. And we have a microphone. So if you'd be good enough, if you have a question, just announce yourself who you represent and then ask the question. Harold Jack: Douglas Jack with Peel Hunt. Just a quick one on the distribution. How far along the road do you think you are towards removing unprofitable business within that division? I mean what's -- how many years should we look to you seeing that process complete? And what kind of benefit? Roger White: I think it's a long-term journey. It's not a short-term position. We provide a wide range, as I said, to 9,000 or so SKUs. Within that 9,000 SKUs, there's work to be done to both improve the range and also streamline the range, and that's to be done with the customer and consumer in mind, but will require a reasonable amount of effort to do it. So I think I would look at this as a -- this isn't going to happen overnight. It's going to take time. Some of the volume will be contracted. Some of it will require replacement activity behind it, but it's the motivation to work with our customers -- all our customers to give them a better outcome, but also to give us a better commercial outcome. Laurence Whyatt: Laurence Whyatt here with Barclays. I've got a couple, if that's okay. When you talk about this sort of new integration that you're putting the C&C Group back together, are there any KPIs that you are particularly targeting that we should focus on? Is it simply growth in the branded business, margin in the distribution business? Or are there any other indicators that you think are particularly important? Maybe we start with that. Roger White: I think there will be lots of KPIs that we will need to pull together and as I say, in May next year, come back to you with a set of hopefully -- properly worked through plans, initiatives and actions and a set of numbers that will go with that and a set of monitoring KPIs. I think today was really just about setting the stall out in what the higher level focus would be and that simplification at the center, margin improvement in distribution and growth in brands are, the areas we're working on the initiatives behind those. As I said, some are started. We've got a team of people on innovation. We've got a new process design. We've got the first signs of new things coming to market. So we've got growth in mind. We've got a more growth mindset in the service on the distribution business is going well, but we've got a lot of commercial work to be done to get a ranging right and our pricing right. So I think there will be much more to come. Laurence Whyatt: You mean pricing -- it's a clear focus in the industry at the moment. One of your competitors last week was talking around a lot of price being taken during the pandemic period and perhaps a lot more price than inflation. And then for their plan going forward to 2030, they're looking to take price below inflation, albeit ahead of the cost inflation. I was wondering if you have any similar thoughts on the consumer price environment within the U.K. and where do you think your pricing will be able to be? Roger White: Look, I -- there are in essence, 2 fundamental bits to our business. There's a branded business and there's a distribution business. And in the branded business, for us, it's about -- as I said, it's about growth, and we want to support our customers. If there is inflation there, we'll look to offset that as much as we can with efficiency and cost. And if we need to pass some on it, we'll be as modest as possible in support of the sector. The distribution business is a fundamentally lower margin business. It's about moving cost through, but being efficient, and we're going to do both of those things. So I can foresee -- as we sit at the minute, as Andrew said on his slide around materials, we don't see anything from a cost point of view that looks shocking at the minute. We will wait and see how the next few weeks goes. We are hedging for next year, and we can see a very similar sort of low single-digit amount of inflation coming. Fintan Ryan: Fintan Ryan here from Goodbody. Just a few questions from me, please. Firstly, maybe following on from that last question in terms of margins. Within the 60 basis points branded margin increase in H1, can you break down what was maybe the COGS gross margin? What was -- how much A&P stepped up by? And then what other sort of operational leverage you got? Andrew Andrea: An equal measure. So I wouldn't focus on one thing. With the margin improvement in branded, we're pulling lots of levers, as Roger has alluded to. So I don't think there's any one dominance in all of those 3, Fintan. Fintan Ryan: And in terms of A&P spend for the second half? Andrew Andrea: We're seeing a slight increase year-on-year. So a continuation of that going through to H2, including the continued investment in Magners that we've commenced in H1. Fintan Ryan: Okay. And maybe just following on from that point. Clearly, I know as a consumer see Menebrea everywhere and like good listing, particularly in Tesco. Maybe it's probably a longer-term question, but do you see any positive synergies in terms of reigniting the Magners brand, reflecting some of the wins that you've got from Menebrea and maybe even bringing Tennent's out of the border? Roger White: Look, I think momentum is everything in brands. And to get momentum moving, you need multiple sets of activity. It needs to be a combination of building awareness, growing distribution, bringing something new to market, having great products, convincing people through competitive pricing. There's -- so it's a range of activity. I'm delighted to hear that you're seeing Menebrea everywhere. I don't think we are nearly everywhere, but I'm glad that you're seeing it. I think there is a halo impact. If you are showing momentum, then whether it's consumers or customers or partners all see the positive benefit of that. So we do want to get into that positive momentum with all our brands. Fintan Ryan: One final question. I think you said to get to the GBP 150 million total cash return, you need to do 30 million buybacks over the next 18 months. Any thoughts of when we should expect that buyback? And basically given the shares have come off a bit recently, why not now? Andrew Andrea: Well, I think we sort of hold code when we pay dividends and there was an expectation of what the residual dividend will be. We've always said that we will do GBP 15 million or so tranches. So crudely speaking, we've got 2 tranches to go over an 18-month period. And we'll just align that to match to our cash flows, which was always the intention. But it's well within reach is the key point. Damian McNeela: Damian McNeela from Deutsche Numis. First question on Magners, Roger. I mean I appreciate that we're at the start of the journey on Magners, but it was a particularly good summer, and we saw the evidence of that in Ireland. What are the challenges that Magners brand really faces in the U.K.? And what work do you need to do to remedy that? Roger White: So look, I think the Magners brand is -- has been a great brand in the past, can be a great brand in the future. It's been heavily skewed in recent years to quite high volume, low-value price activity, in particular, in the take-home market. It's lost a lot of its momentum in the on-trade and building that distribution through the draft side of things, it's going to take time to do. So the starting point is consumer reappraisal, and we started that with the work we're doing and the early results on that look encouraging, but that doesn't feed through immediately into brand performance. We are starting to see trade reappraisal, our customer base appreciate the scale, breadth and positioning of the brand and they seem to positively want to support us. We need to get the distribution moving. We need to rebuild it. We need to move away from the lower value, high-volume price promotional work that's characterized it in retail, and we need to get the distribution in the on-trade moving. That is just going to take us a bit of time. But if we can have the consumer reappraisal successfully set up, then the off-trade will follow quickly and then the on-trade will take a little bit longer. So I think it is the longest journey. Andrew Andrea: Yes. I mean most national operators on draft have multiyear arrangements. So you're having to participate as the cycle arises. That will not arise all in a single year. Damian McNeela: And then just the second one, I think you mentioned on the distribution business, you were looking for potential customer attrition over the next -- well, can you qualify and quantify exactly the level that we should expect to see and whether that feeds through to revenue and margin? Roger White: No, I can't quantify. I think I'm just raising the potential as we look at our portfolio, as we look at our customer proposition, then we need to be adding value to our customers. We need to be creating value for our branded partners, absolutely. But we need to make some margin in doing that. And for me, as a relative newcomer here, I can see some areas where we are not making a suitable return, and that will require us to make some changes. I have got, I guess, I hope that we can find suitable ways of doing that, that doesn't lead to customer attrition, but it would be unrealistic of me to not suggest that there is a risk of that as we try and improve it. Now I'd like to think that we can grow the business. But we're -- as we said, we're going to focus on improving the margin and some of that might come at the expense in the short term of some turnover if it's not adding value to what we do. Damian McNeela: Okay. And then one last one for me. Christmas is just around the corner. What's the trade saying about bookings? And how are you feeling specifically about trading into Christmas? Andrew Andrea: The sentiment on bookings is positive at the moment. Christmas will happen fairly enough, 25th of December. It's midweek Christmas. So for the trade, that should be good. In Scotland, there's an old firm game in the middle. And a lot of our plans are making sure we land all of that right. So you've got a backdrop of positivity. But I've been in the pub game for a very long time. And what I do know is no matter what your bookings are, the majority of Christmas is impulse. And so no matter what [Hubco] say about bookings. It's what happens in that 2 weeks of Christmas that is mission-critical. So we'll let you know about Christmas on 6th of January. Roger White: The focus on the controllables for us, we are well set up internally to ensure that we give our customers the best possible service regardless of the challenges of which days fall, what. How the supply process is going to work, we are well setup to do that. And so as Andrew said, we will wait and see what the absolute demand is. But our most important thing we can control is making sure that we are ready and working with our trade customers to make sure that they have absolutely everything that they need. So when the consumers do walk through the doors that the pubs are well served. Clive Black: Clive Black from Shore Capital. Always interesting to have results from Scottish company when Celtics manager resigns. Three questions. Hopefully, one is fairly straightforward. I'll ask that first. Just in terms of your assortment, and you mentioned SKU rationalization, a, how happy are you with your assortment? And b, where are you on your rationalization journey? Roger White: We are just at the start of the rationalization -- first of all, we are just at the start of the rationalization piece. I think it's basic stuff first. We've got some very deep and very complex ranging in the business. Some of it is fully justified. Some of it is less justified. The aim would be to cut out wasteful areas which are not adding value to our customers rather than just have a target number that we are trying to get down to. How happy are we with our range? I mean, pretty happy. I mean it's -- we supply such a variety of outlets. It is important that we have that variety of range. It's just, as I said, looking through for the obvious areas where we can make improvements. And there will be some areas of our assortment, I think, that will grow, but equally, there will be other areas that we have over-ranged. So yes, just at the start. Clive Black: Okay. And then I guess you're going to get this asked repeatedly, particularly after next spring, but of the simplification efficiency program, is it sensible to suggest a fair amount of that has to go back in the business? Or should we be becoming excited about where the operating margin can go in C&C? Roger White: I think that's something we can talk about next May rather than today. What's important for us to do is to have deliverable plans and make good choices for the long-term benefit of the value creation that we can do with C&C. I can see, as I said, there are challenges that we can all see, but there are opportunities as well. And I think it's a balanced scorecard that we need to work out which ones we can unlock, how fast can we get to them and how certain can we be of them. So I'll try and answer that when we've got bankable plans. Clive Black: Okay. Good luck on that. And then lastly, and this, I think, is the most difficult one for any business. You mentioned culture. What is it about C&C's culture you have to change? And how long will that take? Roger White: That's a good question. It's not an easy one to answer. I think I would answer it by saying the business has been grown through, as I've said, through acquisition and bringing together businesses. We want to not -- we want to positively embrace our differences. We want to find consistent ways of building efficiency, driving the benefits associated with scale, but we want to unleash our ability to serve customers and build brands and embrace our differences where it's important and where it supports us. If you travel around our organization, as I have done, and I'm sure many of you have done and you go to the various operating parts of it and you ask people who they work for, they generally work for Bulmers, Matthew Clark, Bibendum, Tennent's Caledonia Breweries. They don't generally work for C&C Group first and foremost, and we need to embrace that rather than try and break it. So I see it more as trying to reestablish what's important for us and trying to get benefit from we have -- what we have -- we have 2,800 and almost 50 colleagues, and they are passionate about the business, and it's just about harnessing that. So I think you don't change culture quickly, but there is a little bit of back to the future about it rather than trying to do something that's alien. Great. Thank you all very much for your attendance, either in person or online. And we will draw proceedings to a close. So thank you all very much. Nice to see you all.
Operator: Good day, and thank you for standing by. Welcome to the Waystar Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Sue Dooley, Vice President of Investor Relations. Please go ahead. Sue Dooley: Thank you, operator. Good afternoon, everyone, and thank you for joining Waystar Third Quarter 2025 earnings call. Joining me today are Matt Hawkins, Waystar's Chief Executive Officer; and Steve Oreskovich, Waystar's Chief Financial Officer. This afternoon, we issued a press release announcing our financial results and published an accompanying presentation deck. You can find these materials at investors.waystar.com. Before we begin, I'd like to remind you that this call contains forward-looking statements, which are predictions or beliefs about future events or performance. Examples of these statements include expectations of future financial results, growth and margins. These statements involve a number of risks and uncertainties that may cause actual results to differ materially from those expressed in these statements. For a full discussion of the risks and other factors that may impact these forward-looking statements, please refer to this afternoon's press release and the reports we file with the SEC, all of which are available on the IR page of our website. Any forward-looking statements made on this call are only as of today and will not be updated unless required by law. We will also discuss certain non-GAAP financial measures. These measures are intended to provide additional insight into our performance and should not be considered in isolation or as a substitute for financial information prepared in accordance with GAAP. We have provided reconciliations of the non-GAAP financial measures included in our remarks to the most directly comparable GAAP measures, together with explanations of these measures in the appendix of the presentation slide deck and our earnings release. With that, I would like to turn the call over to Matt. Matthew Hawkins: Thank you, Sue, and good afternoon, everyone. In Q3, Waystar continued its strong momentum, achieving solid revenue growth and profitability. This performance was anchored by healthy client retention and expansion, reflecting our leading position in modernizing the health care payment process. Our cloud-based AI-powered software creates compelling value that drives meaningful ROI, strengthens client financial outcomes and improves transparency in the cost of patient care. Let's review a few key highlights. Reflecting strong execution, Waystar delivered another quarter of double-digit revenue growth and strong margins, outpacing our guidance on both measures. Revenue grew to $269 million, representing 12% year-over-year growth with an adjusted EBITDA margin of 42%. On October 1, Waystar completed the acquisition of Iodine Software, expanding our reach to more providers uniting clinical, administrative and financial data, increasing the total addressable market and unlocking new opportunities to drive profitable growth. We announced innovations across our AI-powered platform and engaged hundreds of health care's top technology and industry leaders at Waystar True North, our annual client conference, to foster connection, celebrate success and ensure our product road map continues to meet providers' needs today and in the future. At Waystar, the mission is clear, to simplify health care payments. The health care financial system is complex, fragmented and administratively heavy and Waystar is modernizing it through a cloud-based platform that streamlines the entire process. Our technology helps providers get paid faster, more accurately and with less administrative burden so they can focus on what matters most, delivering quality patient care. Purpose-built for health care, our platform integrates with more than 500 electronic health records and practice management systems. This extensive integration enables us to serve over 1 million providers nationwide of all types and sizes. And we believe Waystar's impact is unmatched. Waystar leads the market in advanced automation and intelligence, leveraging AI-powered workflows, unrivaled data assets and meaningful innovation. Our powerful software fuels industry-leading client satisfaction and is transforming the financial and administrative engine of health care. As the industry seeks greater efficiency, transparency and value, we believe Waystar is positioned to capture a vast and durable growth opportunity for years to come. Turning to the completion of the Iodine Software acquisition. Waystar has taken a major step forward in our mission. The addition of Iodine expands our total addressable market by more than 15%, accelerates innovation and strengthens our ability to drive durable, profitable growth. We've also welcomed nearly 150 health systems, representing more than 1,000 hospitals to our client base. Iodine brings proven AI-powered mid-cycle capabilities, including clinical documentation integrity, utilization management and prebill anomaly detection. With Iodine now part of Waystar, we're uniting clinical, financial, administrative and payer data in a single intelligent platform. By infusing these capabilities and data into our software, we're extending and compounding the value Waystar provides before, during and after care. Our platform and access to this tremendous data spans every stage of the revenue cycle, powering AI insights, automation and accuracy that enable complete compliant and defensible claims, accelerating reimbursement and strengthening provider financial performance. We estimate that Iodine accelerates portions of our product road map by nearly 2 years as we deliver the next generation of clinically informed AI-powered capabilities. We are pleased to have Iodine Founder, William Chan, now serving as Waystar's Chief AI and Product Officer. In this role, William is shaping the future of the Waystar platform and advancing our innovation agenda. He is joined by several senior leaders and domain experts from Iodine who bring deep clinical and technical expertise to accelerate our progress. To give you a sense of what's ahead, we envision a future where AI continuously scans data, identifying anomalies across patients, providers and payers, automating tasks, validating documentation accuracy and predicting and delivering financial outcomes. This is the path toward true autonomous AI in health care revenue management. And ultimately, we believe these innovations will power the future of the health care system. Waystar recently hosted its sold-out client conference, Waystar True North, convening more than 500 revenue cycle leaders, one of the largest gatherings of decision-makers in the industry. At the conference, we highlighted client results that generated meaningful ROI and strong performance. A few examples of client impact include reduced prior authorization submission time by 70% within weeks of implementation at a large regional health system, achieved a 4x ROI for a major nonprofit health system through lower denials and higher revenue capture and increased point-of-service cash collections while redeploying the equivalent of 10 full-time employees to higher-valued work and a large Midwestern health system. These outcomes reinforce the scalability and financial impact of the Waystar platform and our ability to deliver sustainable, profitable growth. Also at Waystar True North, we convened the Waystar Advisory Board, senior executive decision-makers and early adopters of Waystar software from leading provider organizations who provide invaluable insights that fuel our innovation and help shape our strategy. Our discussions reflected the realities provider face today, rising utilization accelerating denial rates and ongoing workforce shortages that continue to pressure margins. Many are turning to AI, seeking technology to drive greater efficiency, reduce administrative waste and deliver the financial transparency that builds trust across all stakeholders. Despite this progress, key barriers remain, most notably data fragmentation. Much of the health care data is siloed or locked in unstructured formats, such as clinical charts and notes, PDFs, lab reports and images, limiting the effectiveness of AI. An MIT study found that nearly 95% of AI initiatives rely on incomplete or inconsistent data. The results, without high-quality data, AI doesn't create efficiency, it creates more work. The second challenge is integration. Providers need technology that operates seamlessly within their current systems and workflows. Without interoperability, the value of AI remains unrealized. And finally, cybersecurity remains critical as AI becomes more deeply embedded in clinical and financial processes. Secure, compliant data management at every point of contact is essential. These challenges underscore the need for a unified, intelligent and trusted platform and this is where Waystar is uniquely positioned to lead. An independent market study ranked Waystar the #1 trusted vendor among top competitors, recognizing a sustained commitment to data protection, client experience and innovation. Insights from the Waystar Advisory Board and independent studies reinforce our differentiated position and confirm the growing demand for a unified, intelligent and trusted platform. We continue to build client confidence and deepen relationships that drive expansion, accelerate adoption and power the next generation of innovation across the platform. At the heart of Waystar's differentiation is innovation. Our platform advances continuously with hundreds of new capabilities launched each quarter to improve automation, accuracy and ease of use. Twice each year, new product capabilities are unveiled through the innovation showcase, highlighting how the platform is advancing to meet providers' needs. Launched at Waystar True North, our fall innovation showcase introduced new AI-powered capabilities that address some of the most pressing challenges in health care, including denial prevention and recovery and patient financial care, driving better outcomes for providers and the patients they serve. The important advancements we announced include denial prevention. Waystar AltitudeAI targets the 60% of denials that are preventable, reducing time related to critical prevention work by 95% for a midsized health system and building on our industry-leading 98.5% plus first pass clean claim rate across our client base, accelerating reimbursement and improving cash flow. In denial recovery, Waystar is addressing the $20 billion annual denial problem. Waystar AltitudeAI enables providers to create hundreds of appeal packages simultaneously, more than 90% faster than before, driving double-digit increases in overturn rates for early adopters and improving reimbursement speed and accuracy and patient financial engagement. To address the $17 billion uncompensated care gap related to patient collections, Waystar's cost estimation capability is seamlessly integrated within our patient digital experience to increase pre-service patient payments, accelerate cash flow and reduce uncompensated care. Client feedback on these innovations has been very positive, validating our road map and reinforcing the growing demand for AI-powered automation. This innovation continues to build client confidence and deepen long-term relationships that drive adoption, expansion and sustained growth across the Waystar platform. Trust remains central to our success. Following Waystar True North, attendees reported a 93% confidence level in Waystar as a trusted partner. That confidence is reflected in our performance with strong Net Promoter Scores and a net revenue retention rate of 113%. The number of clients generating more than $100,000 in trailing 12-month revenue grew to 1,306 in Q3, an increase of 11% year-over-year. And the market is taking note of our progress. We were proud to receive 2 prestigious awards during the third quarter, powerful validation for Waystar. Fast Company named Waystar one of the Best Workplaces for Innovators in North America and the 2025 Stevie Awards named Waystar Healthcare Company of the Year and honored us as the top-ranked payments solution. In closing, sustainable transformation in health care requires a strong foundation. We believe Waystar's industry-leading AI-powered platform is that foundation, the essential differentiated choice for providers seeking to simplify health care payments and achieve better outcomes. Waystar's momentum is strong and accelerating as we advance our mission and capture a large expanding market opportunity. We are operating with discipline and delivering results, building a rule of 50-plus software business with the ability to compound revenue and profitable growth. With that, I'll turn it over to Steve to walk through the financial details from the quarter. Steven Oreskovich: Thanks, Matt. Please note that my comments regarding third quarter and year-to-date results reflect Waystar's performance only, while full year guidance and implied Q4 guidance include a full quarter of contribution from Iodine. Revenue increased 12% year-over-year in the third quarter to $269 million, driven by healthy client retention and expansion, highlighting our durable, predictable model of low double-digit revenue growth annually on a normalized basis. We also expanded our client base, generating more than $100,000 of LTM revenue by 38 clients in the third quarter to 1,306 at quarter end, an increase of 11% year-over-year. Our net retention rate, or NRR, was 113% for the last 12 months compared to 15% year-over-year revenue growth over the same period. As we've discussed over the past several quarters, NRR benefited from the rapid time to revenue from clients impacted by a competitor's cyber event in early 2024 and elevated patient utilization of the health care system since early 2024. Subscription revenue of $134 million increased 14% year-over-year and 3% sequentially. Going forward, we expect Iodine to further enrich our subscription revenue mix. Volume-based revenue of $132 million increased 10% year-over-year and decreased 4% sequentially, in line with our seasonality expectations associated with revenue from patient payment solutions. Also, we saw overall patient utilization in the third quarter begin to revert back to historical growth rates. Adjusted EBITDA of $113 million for the third quarter increased 17% year-over-year. Our adjusted EBITDA margin was 42%, above our long-term target of approximately 40%. The adjusted EBITDA outperformance was driven by a revenue shift to higher-margin solutions, along with ongoing operational cost initiatives, outpacing reinvestments in areas such as innovation, cybersecurity and client experience. Please note that none of the $15 million of expected cost synergies from the Iodine acquisition are reflected in our third quarter results. We have already notified and acted on approximately 70% of annualized cost synergies. We expect these action synergies to be realized and beginning to positively impact results over the next few quarters. We are confident in our ability to achieve the full cost synergies within the previously communicated period of 18 to 24 months post close. We further believe our track record and M&A will demonstrate with time and integration that Iodine's clinical expertise, robust data and AI capabilities add to our long-term profitable growth profile. Turning to cash flow and the balance sheet. We ended the quarter with $421 million in cash and equivalents and $1.2 billion in gross debt. As a reminder, in conjunction with the Iodine acquisition, we issued $250 million of debt and drew on $30 million of our revolving credit facility. We also lowered the interest rate on both facilities by 25 basis points to SOFR plus 200 for the entire debt and SOFR plus 1.75 for the revolver. Unlevered free cash flow was $96 million in the third quarter of 2025 with an unlevered free cash flow to adjusted EBITDA conversion ratio of 85% for the third quarter and 86% year-to-date, which are both well ahead of our 70% long-term target. The trend of high cash flow conversion, coupled with the expansion of our trailing 12-month adjusted EBITDA, generated a 1.9x leverage ratio at September 30, which is down almost a full turn since the beginning of the year, ahead of our previously stated goal of reducing our leverage ratio by approximately 1 turn annually. If we carry this calculation forward to October 1, 2025, to account for the Iodine acquisition, the leverage ratio would be 3.4x. We are confident in our ability to delever approximately 1 turn annually. Regarding 2025 full year guidance, please note that the following includes a full quarter of contribution from Iodine. We are raising revenue guidance for 2025 to a range of $1.085 billion to $1.093 billion, with the midpoint of $1.089 billion, representing a 15% year-over-year growth rate. This is an increase of $53 million or 5% versus the prior guidance midpoint. The increase represents a 12% year-over-year growth rate for stand-alone Waystar and an expectation of approximately $30 million of revenue from Iodine in the fourth quarter. Our expectation for Iodine revenue for the full year 2025 is approximately $120 million, which includes alignment with Waystar accounting policies and is in line with prior expectations. Further, given our approach to rapidly uniting all aspects of Iodine and the significant progress we have made towards organizational alignment, including product development, go-to-market and cross-selling, we don't expect to separately break out Iodine going forward. We are also raising adjusted EBITDA guidance to a range of $451 million to $455 million with a midpoint of $453 million, increasing by $31 million or 7% versus the prior guidance midpoint. We now expect an adjusted EBITDA margin of approximately 42% for 2025, driven in part by the outperformance through the first 3 quarters of the year. This guidance assumes $12 million of contribution from Iodine in the fourth quarter at its historic adjusted EBITDA margin of approximately 40%. We look forward to providing 2026 guidance on our next earnings call. This concludes our opening remarks. With that, we are ready for your questions. Operator, please open the call. Operator: [Operator Instructions] Our first question comes from the line of Ryan Daniels from William Blair. Ryan Daniels: Congrats on the strong performance. Matt, maybe one for you. Interesting that True North took place right around the Iodine transaction close. And I'm curious if you had the opportunity to introduce clients to that and see new Iodine clients? And just overall, kind of what areas were key focus and what the overall feedback on Iodine and Waystar from the Iodine clients were? Matthew Hawkins: Thanks, Ryan. It was a perfectly timed client conference for us. Waystar True North was fabulous. As we indicated, it was sold out and we were able to highlight -- we hosted an innovation lab where we allowed clients to get hands on with our technology advancements and see AI at work. We also had the opportunity to showcase how Iodine, which, again, is this middle revenue cycle, tremendous software set of solutions, how Iodine can really connect Waystar's front-end and back-end solutions effectively together. And the client sentiment was 100% positive. We heard feedback from our Advisory Board meeting that we hosted just on the front end of the Waystar True North Client Conference. And I noted a couple of particular quotes. One said, we're so thrilled about this announcement. This will be awesome for us and for health care. And another one said, "I'm actually an Iodine user too." So I'm very excited about this acquisition, and it feels like a perfect fit for you. And so as we think about the opportunity now to combine these 2 special companies, we feel like it's a perfect strategic fit and it's helping us toward our ultimate goal of creating that perfect undeniable insurance claim. Thank you for the question. Operator: Our next question comes from the line of Brian Peterson from Raymond James. Brian Peterson: I'll echo my congrats on a strong quarter. Matt, maybe a high-level one for you, especially as you think about the platform with Iodine in the fold, how do you think about the cadence of the legacy or replacement of legacy processes in RCM? I know some of these sales cycles for hospital health systems can be long. But I'm curious in kind of an AI-enabled and Agentic world, will we start to see customers maybe move faster to tackle this opportunity? Matthew Hawkins: Thanks, Brian. Let me start with maybe just a bit of 1 more background or 2 comment on Iodine and then how we're leaning into being able to sell the full Waystar platform. So just as a quick reminder, Iodine sits in the mid-revenue cycle. It is really a powerful software that does clinical documentation, integrity, utilization management and prebill anomaly detection. And these capabilities bring structure to unstructured clinical information. They detect missing codes or incorrect codes before a bill is complete. And they keep a human in the loop, so to speak, as they deploy over 160 different leading AI models within Iodine Software that allow the human to validate what the AI has identified as an accurate code. So what that's doing is that's leading to a 70% reduction in the likelihood of a set of codes needing to be rereviewed before a claim is submitted. So that fits perfectly into Waystar's next-generation cloud platform, and we really feel like this will allow us to continue to demonstrate market leadership and establish us as the next-generation revenue cycle solution of choice. We've cross-trained our sales teams. We noted at the announcement that there was this tremendous cross-sell and upsell opportunity with -- when you do the overlap or the Venn diagram of the portion of clients that are both Iodine and Waystar's -- gosh, there's only somewhere between 35% and 40% of clients that are using both. So not only we cross-trained our sales teams, we've introduced Iodine now to Waystar clients, and we're beginning to tell that story and promote some of the incredible capabilities that we'll be able to do together. And conversely, we've been able to introduce Waystar to Iodine clients. So there's certainly cross-sell opportunities where we'll replace legacy and incumbent software that may have been in place for years. There's also the opportunity for us to increasingly promote the whole platform. And when you think about the clinical data access that Iodine brings to Waystar's software solutions. Iodine process is more than 160 million patient encounters annually and about 34% of all patient discharges in the United States annually. So there's a tremendous amount of clinical information that we're already figuring out how to integrate and unite and place into the large language models that we're using to automate prior authorizations, for example, or to strengthen our claims processing capability or to further automate the appeal management process where some clinical information is super helpful. Overall, we're headed toward more platform sales opportunities, and we're very excited by it. So thank you for asking the question, Brian. Operator: Our next question comes from the line of Adam Hotchkiss from Goldman Sachs. Adam Hotchkiss: I think, Steve, you mentioned that patient utilization has started to move back to historical levels. Could you maybe just expand a little bit on that? And I know that the volume-based business declined 4% sequentially. I think it's a little bit more than we've seen in the last couple of years. So could you maybe just expand on what the right way for us to think about seasonality in a more normalized environment going forward looks like? Steven Oreskovich: Yes. Certainly, Adam. So I can share a few thoughts here. So maybe a couple of level-setting thoughts and then I can specifically address your questions. Recall that our solutions help providers become more efficient and effective, so they have the ability to capture utilization upside of the health care system as we've seen in the past several quarters. Also, our mix of revenue is generally 50% from subscription based and 50% volume-based with the volume base coming from both provider solutions, those solutions that help providers interact with and obtain payments from commercial payments and governmental entities as well as you mentioned, Adam, patient payments, those that help them interact with and collect from patients. So my prepared comment is based on what we're seeing, particularly within patient payments, which, as you noted, has a natural first half, second half seasonality aspect to it based on the timing of patients with high deductible plans. And notably, what I was looking at qualifying is we started to see the timing of patients reaching deductibles occur earlier in the third quarter than we had last year. It's an early indication though versus a long term or a trended expectation. So we've kind of taken that into context in how our approach is to guidance, which we believe is prudent. So as we set guidance, particularly for the remainder of 2025 and implied fourth quarter, we've taken that into account. What I mean there, Adam, is if our volume-based outcomes and the patient utilization continue on sort of that same trended rate we've seen for the first 3 quarters of the year, we would expect to come in at the high side of guidance. If we see that those patients that are reaching those deductibles within those high deductible plans continue as we started to see them here in the third quarter and that sequential change versus the third quarter and second quarter, we could be at closer to the midpoint of guidance versus potentially even on the lower end of guidance. So hopefully, that's helpful context. Operator: Our next question comes from the line of Allen Lutz, Allen from Bank of America. Allen Lutz: At one of your innovation showcases several weeks ago, you talked about shipping patients from mail payments to mobile. Can you talk a little bit about discussions with your customers around making that change and how long that would take? And then how should we think about the relative gross margin delta between those 2 products? Matthew Hawkins: So thank you, Allen. And thank you for tuning into our innovation showcase, by the way. It's available to anybody on our website. We do it once in the spring and once in the fall. And in the fall, we did it in conjunction with the Waystar True North Client Conference. It felt like we were at a rock concert. It was really well received. And with respect to the digitization of the patient statement and the integration of the patient payment with a well-informed digital statement, it certainly has a different margin profile. We think it has a different impact. One of our -- one of the things that we foresee overall across the health care marketplace and what we're pursuing is a tremendous opportunity to move from analog to digital in several areas. And we believe that Waystar could be a market leader in that. One of the pain points that has persisted on the analog side of things is a tremendous amount of paper that continues to be used in health care, some in faxes, in back offices, some inpatient statements where it's a fact that there's a portion of the population that still wants their patient statement in paper form so that they can review it. Waystar is working to make that as intuitive and as easy as possible and to integrate the patient payment capabilities to create transparency, ease of understanding and facilitate accurate and timely payments to providers. We're doing all that now and making it available in a digital format. And providers are beginning to opt in to that strategy. They're beginning to embrace it. They're asking patients that they would like to opt in. And we're thinking through the time line. We don't see it dramatically shifting in 1 quarter or 2 quarters. This is a long tail of transformation and opportunity as we help providers connect with patients, but we know that Waystar to be a market leader there and that the experience for the patient can be meaningful because it will -- we're introducing patient statements that oftentimes do -- is like educating for the patient is anything, which is really great way to think about that. But it's also meaningful for the provider. When you look at Waystar's patient financial care suite of solutions, one of the things that we measure is patient NPS scores, not just provider NPS scores, but patient NPS scores. And what we find is that when a patient understands their financial responsibility at the point of care that the Net Promoter Score goes up because they appreciate the transparency, they can make appropriate plans for how they'll make payment. In fact, Waystar's software helps the provider arrange for payment plans within this integrated software solution, within our patient financial care suite. So we know that digitization is on the way and we're a facilitator and a driver of that to help both providers and patients. Operator: The next question comes from Vikram Kesavabhotla from Baird. Vikram Kesavabhotla: I wanted to ask about the Iodine acquisition as well. And I think in your prepared remarks, you said that this could accelerate parts of your product road map by nearly 2 years. And I'm just wondering if you can elaborate on that comment a little more. What are some of the best examples of how this is adding to your innovation process? And how should we think about the time line to seeing some of those combined capabilities start to emerge in the product portfolio? Matthew Hawkins: Terrific. Thank you, Vikram. Let me give you some tangible examples of why we're so excited and why we think it will accelerate the road map by nearly 2 years as we've indicated. Let's take a couple of product examples. So one is a Waystar product called prior authorizations. As you know, and as we've stated and showcased in our innovation lab and in our innovation showcase, we're automating 90% of the prior authorization experience for provider organizations. But sometimes, that prior authorization when a provider is committing an authorization to perform a service for a patient, they submit that authorization request to a payer. Sometimes the payer come back -- comes back and asks for clinical information. They'll ask for, is this medically necessary. And that is a medical necessity-based prior authorization. So if Waystar were to go and gather that clinical information itself, we would go out to all of our hospitals that we work with, build appropriate APIs ourselves and then gather that clinical information. Getting access to Iodine's incredibly powerful clinical data set, uniting it with Waystar not only creates one of the most comprehensive administrative and clinical data sets, to our knowledge, in the United States of America, but we'll be able to use that clinical data set to do things like medical necessity-based prior authorizations where clinical information is required by the payer before they're fully authorized in treatment or a service provider to perform for a patient. One other example, when a claim gets denied, and we know that denials are on the minds of all provider decision-makers. When a claim does get denied and providers are working to contest or appeal that denied claim, 450 million claims we get denied annually. So this is a real problem. When they go through the process of appealing the denied claim, oftentimes, it's helpful to supplement the appeal letter with clinical information that can be used to help a test for the reasons for why that denied claim should be overturned and successfully adjudicated and payment remitted to the provider. So those are solutions that Waystar has in place. Those are generative AI solutions, prior authorization and appeal management letters where we're generating learners very rapidly. We're keeping a human in the loop, and now as we infuse clinical information into that appeal letter where we believe that, that will drive successful overturn rates and supplement and accelerate an already great product with clinical information. Those are 2 examples. But we're very excited about the acceleration of -- and bolstering of Waystar software with this clinical information. And conversely, I would say, as we learn more about the Iodine suite of software capabilities, there are -- as you know, Waystar processes 6 billion insurance transactions annually. And we have a tremendous amount of administrative data that we can use to then also support and strengthen Iodine software solutions in clinical documentation improvement. We're processing billions of claims. We understand code combinations and we understand what gets successfully adjudicated and reimbursed. We can use that to train Iodine's AI models. Likewise, with prebill anomaly detection, we'll use administrative data there to further supplement Iodine's already strong and tremendously capable solution. So hopefully, those examples are helpful, Vikram. Operator: Our next question comes from Elizabeth Anderson from Evercore ISI. Elizabeth Anderson: Congrats on the quarter. Obviously, you've given us a tremendous amount of detail about how Iodine fits into the portfolio and sort of your view for the fourth quarter. I was wondering as we have used hospitals who are seeing some margin pressure on the horizon or currently, have you guys noticed a -- and you have a broad suite of solutions to address all sorts of things. But have you noticed any shift in terms of the types of modules people are -- hospitals are interested in? Are they going for sort of more things versus other things? Just any additional color you can provide on that front would be helpful in just kind of understanding the broader landscape. Matthew Hawkins: Thank you, Elizabeth. Speaking of the hospital demand environment, let me start with a high-level idea or 2 and then speak to solutions that we see being very attractive to decision-makers. We know that decision-makers want efficiency. They want entity. They want to work with entities or partners that can help them get paid faster, accurately and efficiently in our side of the world, so to speak. They want cybersecure solutions. There's also, as I mentioned just a moment ago, a greater focus on denial rates and what is actually driving them. And these are all areas that completely align with Waystar's value proposition. Our solutions are mission-critical. They help drive efficient cash flows, and we get prioritized amongst decision-makers. So in this demand environment, we've been saying this now for a few quarters, but we tend to get prioritized because we are mission-critical. And we see strong demand for our -- increasing demand for our platform, but it's interesting provider decision-makers are now starting to understand the relationship, the compounding benefit of using more than 1 or 2 of Waystar software modules. For example, if they're using Waystar's claims management suite, which already has a tremendously high first pass claim acceptance rate that is greater than 98.5% across our entire network. But denial prevention and denial reduction is on their mind, then we're able to have a conversation with them about eligibility and eligibility automation and insurance coverage detection, which we know statistically reduces the likelihood that a claim gets denied. We are then often talking to provider decision-makers about prior authorization automation, another sticky point. When a provider doesn't get authorized to perform a health service, that's a reason why claims get denied. So we have seen demand across our platform. But we see a note that there is interest in reducing denials. And we see -- we're able to articulate as we go through the discovery process with these clients and prospects and decision-makers. We were able to understand their current activity rates or metrics and then compare that with what we could do prospectively when they begin to use more of our solutions. And so eligibility, automation, coverage detection, prior authorization are seemingly hot areas of product. On the other side of that, denial and appeal management software where Waystar solutions shine because of the autonomous generative AI work that we're doing there is also something of interest to providers. Operator: Our next question comes from Daniel Grosslight from Citi. Daniel Grosslight: Congrats on the quarter and closing Iodine. I was at a conference recently and the most striking thing to me was just the number of vendors that have popped up with AI-powered RCM capabilities. Given what seems to be increasing competitive intensity, can you talk a little bit about how your go-to-market strategy has changed or will change and how bringing William on as your Chief AI and Product Officer may impact this? Matthew Hawkins: Sure. Yes. Thank you, Daniel, for that question. So let me speak to our approach and then the competition and growth opportunities as we see them. We have a strong pipeline of opportunities with a very healthy mix of new and cross-sell opportunities. It's interesting to note that we've seen new products that we've launched, so think about some of the AltitudeAI solutions that we've launched now beginning to make a meaningful contribution to our pipeline and our year-to-date results. This is very important. And our go-to-market team, I think it's a fabulous team. This is a fabulous group of leaders. They care a tremendous amount about not just proving results, but actually transforming health care, and it's a privilege for me to work alongside such a fantastic group of go-to-market people and team members. With respect to our approach, it's -- we feel like we have a market-leading approach. We're not going to tell the world our secret sauce on this call. But we do some things to train and make our team members productive and enrich a discovery process that enables us to understand what's going on at our client sites that then enable us to have an ROI-based discussion and really promote and drive our solutions. What I'd say with respect to competition, we are at the street level. We see what's going on. And we think that imitation may be the nicest form of admiration or flattery, and we appreciate that. There does seem to be plenty of noise in the market with splashy announcements being made. But we're focused on executing our business plan. And what we see is continued momentum and success in our platform approach. Again, we're driving real ROI conversations. We're moving from AI hype to drive to kind of ROI reality. We believe that we're the best platform in the market. We're a platform. We're not a point solution. We're a platform from end to end. We have the lowest total cost of ownership and the highest ROI. And our win rates are consistently high, and they've increased modestly since we last published them in our S-1. So we feel very good about the strong pipeline of opportunity, the continued elevated participation rates in RFPs and sales activities. And we know that there's a lot of curiosity and interest in the RCM, revenue cycle management category. And we believe that our competitive advantage or edge is the fact that we're cloud native. We have a data rich and robust rules engine that governs our network. We are AI-enabled and driving automation, and we delight clients with high client satisfaction. Operator: Our next question comes from the line of Saket Kalia. Saket Kalia: Matt, maybe for you, actually, I want to pick up on that thread a little bit. It sounds like there's been a ton of innovation through AltitudeAI, and you just talked about how it's starting to contribute to Waystar. I was just curious how you kind of think about monetization. Some software companies create separately billable SKUs, right, that sort of add an AI layer on top. Some are able to sort of deliver or charge additional value. How do you kind of think about that monetization strategy for Waystar? Matthew Hawkins: Thank you, Saket. So for us, monetization comes in multiple forms. We're beginning to monetize it now. But it starts with retention and a long enduring relationship with clients as they use our software and they get the benefit of that, and it shows up in real returns to that. The second is we have an annual price uplift program that has been in place for several years. And we price to value, and we're beginning to price to value where we see incremental benefits as we've begun to introduce autonomous or generative AI capabilities within the various software modules. So we're starting to price those to value without disclosing things further. And the third is the opportunity to introduce actual new SKUs, so to speak, or new software modules. And we've begun to do that in a couple of areas, and we're excited about that without necessarily publicly commenting on what those are. We are absolutely focused on introducing those to our clients. And those are the 3 that come to mind. I might just add that Waystar, as you know, Saket, and this is more of a general comment, but Waystar has been a long-time deployer of AI on our platform. And I think it's very important in this world where AI may be the biggest opportunity in our lifetime, especially in health care, where the technology might be a little bit ahead of where the human factor is. And we see that in health care provider organizations who are very interested in beginning to consume and get the benefit of AI. For us at Waystar, we're working to set the standard in how we use AI. We want AI to be deployed responsibly and ethically. And we want people to be able to trust us. We believe that there's an opportunity for us to use AI for moral good and to advocate for providers and patients to improve access to care and transparency and fairness and empathy and reduce waste and burden. So those are things that excite us. One of the last comments I'll make is as we monetize AI, one of the things that we hear from providers is they want to use it, but they don't know quite how it fits into their workflow. And so what Waystar has now been doing for a long time on our platform, please recall that our platform is a workflow platform. So we're deploying AI across the platform today. It's intuitive. It's easy for end users. It delights them. And what we're doing is we're conditioning end users to consume AI as they use our platform. We're bringing the right AI to the right use case, often with a human in the loop, where appropriate to validate that the results are accurate. But we're making -- the AI that we're deploying is making the end users that use Waystar software, making their lives easier. And they may not even know or fully realize that they're consuming AI because AI is automating tasks in the background or AI is prioritizing work for them. we're driving insights to them to make their day easier. And so that AI hype to ROI realities are mantra, and we'll continue to monetize it, but we're very encouraged by the products that we have launched, pricing that we are achieving and their long-term enduring relationships that we're creating with our clients. Operator: Our next question comes from the line of Charles Rhyee from TD Cowen. Charles Rhyee: Matt, I just wanted to -- obviously, in the last couple of months, you've also seen some big announcements from the big EHR vendors. I think Epic at their annual event as well as Oracle talking about Cerner. They're starting to build more AI into the EHR itself as well as talking about solutions for rev cycle management using agents. Can you talk about sort of how you see that developing, maybe talk about how the Waystar platform can work with the HR systems as well and maybe points of difference in maybe doing different things? Or maybe if you could just talk a little bit more about how these will all coexist together. Matthew Hawkins: Thank you. So it's interesting because in health care -- we have well over 1,000 hospitals today, and the majority of those are on Epic, that are clients of ours. So they're using Waystar today. We have many Cerner clients today. We have many Meditech and other practice management and EHR clients today that are delighted to be using Waystar software. You said a phrase that I'd like to just highlight. And that is these organizations are "talking" about RCM. Waystar is doing RCM. That's all we do. And we have a team of people completely focused on simplifying health care payments, using modern AI capabilities. We are using every modern LLM that you can envision in the market to do work. But we think that the value is actually in access to data to train these large language models. These should really be called large object models because they can do a lot more than just consume language. They're consuming lab charts, they're consuming objects that are in PDF forms and images. And Waystar is doing that today. So we think we can be a fabulous partner. We could be a linchpin technology for these EHR systems, where they become the large monolith and they're focused on so many different things. We've proven that our interoperability and integration to their systems actually delight their clients and we welcome the chance to partner with these systems. And while I'm on this point, this theme of interoperability and connectivity, I would just say from a regulatory perspective, the Waystar is an advocate for modern connectivity via APIs to all the payers. We promote that. We're connected to the vast majority of payers in the United States. We also connect to more than 500 different instances of electronic health record, practice management and hospital information system vendors. So we think there -- we can be a great partner and we're demonstrating that as we help them and their clients grow and achieve great results as they use our software. Operator: Our final question comes from Jailendra Singh from Truist Securities. Jailendra Singh: Congrats on a very strong quarter. I wanted to ask about EBITDA margin trends. I know you guys have talked about 40% as being the reasonable long-term target. But what are your views on the sustainability of some of these margin efficiencies and gains you've seen recently? You shared several examples around the ways you're using AI to create value for your clients. But given your expertise, is it fair to assume you're using AI to drive some internal operational efficiencies? And what kind of opportunities do you see in that area? Matthew Hawkins: Well, thank you, Jailendra. I appreciate your question. It's a very important one for us as well. We appreciate all these questions actually. What I would say is, just to start by grounding us in fact, we talk about our business model being an enduring long-term normalized low double-digit revenue growth business. You've also heard us talk about our long-term target of adjusted EBITDA margins of 40%. And those are targets for us. And we're very mindful of -- we know we could run the business at greater than 40% EBITDA margins, for example. But we feel like the right range to run it in today is while we invest in innovation, invest in cybersecurity, invest in go-to-market capabilities in this unique period of time in health care, it's the right kind of way to run the business at that 40% or so level. We're certainly pleased with the recent quarter's results and being slightly higher than that. But I suspect we'll continue to find areas to invest, and we'll be very conscious about that long-term target. With respect to some of the internal initiatives around AI, let me just highlight a couple of things. One, we do have William acting as a Chief AI and Product Officer. We're very excited about that because he complements an incredibly talented team of other leaders who are very passionate about driving to our long-term targets. We also have established an internal AI team, it's we call it our Kaizen AI team. And this is a team that works within Waystar cross-functionally across all the businesses, all the functional teams to identify use cases where AI could be used to create market-leading experiences, but at a higher -- or maybe create more operating leverage by deploying AI instead of people for certain tasks. One of the things that we emphasize internally is that we believe that AI is more of a productivity augmentation tool that will allow us to scale future from here as we make our team members even more and more productive in their jobs. This is an awesome group of people. And what we've done is we've given every single team member at Waystar, a Copilot license. We've taken them through certification and training on how to responsibly and ethically -- and from a business perspective, the Waystar way of how we like them to deploy Copilot. We have contest internally where we celebrate individuals and teams who have created novel use cases using Copilot through some prompting or some engineering capabilities to improve or automate certain tasks that have been done manually previously to make our team members even more productive and to help them delight clients as they do to help them write source code and have it be reviewed. Our development teams, for example, are using GitHub and Copilot and we're starting to see some increased efficiency and as they deploy AI and they're using it to review code and do integrity testing and other types of testing in our software. We're really excited about the opportunity there. And I suspect that we'll find future opportunities to advance and drive operating leverage in the business as we find those operating leverage basis points or percentage point, so to speak. We may not convert that all to adjusted EBITDA, because we may choose at this point in our journey as a company to reinvest operating leverage that we find back into the business to drive innovation and drive go-to-market success, drive cybersecurity and drive a market-leading client experience. And so that's how we're thinking about the internal use of AI. We've got well over 100 use cases that are actively being explored and pilot tested within Waystar today on the internal side. So we're very excited about that. Operator: Thank you. This concludes the question-and-answer session. Now I will turn the call over to Matt Hawkins, CEO, for closing remarks. Matthew Hawkins: Yes. So let me just close here. We thank everybody for participating today and for your thoughtful questions. I hope you'll sense that we're pleased with the performance of the business we -- it's -- there's a sense of momentum. We are raising our full year guidance on that basis. We're thrilled to have closed the Iodine acquisition, and we're well underway and excited to work together as one team to really do some transformational work in health care. What I'd say is it's all due to our team. I'm so grateful to work alongside such a talented and dedicated group of people. This is a team that really cares about our mission to simplify health care payments, and it's an honor for me to work alongside them. What we're building is a market-leading platform. We're beginning to get data and network effects as we process more transactions and we get richer data, drive to smarter automation. That creates higher client value and deeper stickiness and retention with our clients. So we're excited about the work that we're doing, and we look forward to continuing to execute on our business plan. Thank you very much for the time today. Operator: Thank you, everyone, for your participation in today's conference. This does conclude the program. You may now disconnect.