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Tuukka Hirvonen: Okay. [Foreign Language] Good afternoon, and welcome to Orion's earnings conference call and webcast for the financial period of January-September 2025. My name is Tuukka Hirvonen. I'm the Head of Investor Relations here at Orion. In a few moments, we will start with the presentation by our CEO and President, Mrs. Liisa Hurme, after which then we will have a Q&A session where you can post questions both to Liisa and also to our CFO, Rene Lindell. [Operator Instructions] And just before I let Liisa to take the stage, I'd like to draw your attention to this disclaimer regarding forward-looking statements. But with that, it's my pleasure to hand over to Liisa. Liisa? Liisa Hurme: Thank you, Tuukka, and welcome to Orion Q3 webcast on my behalf as well. Here are some highlights from quarter 3 2025. Nubeqa received approval from European Commission for use of darolutamide and ADT, androgen deprivation therapy in patients with metastatic hormone-sensitive prostate cancer. Nubeqa also reached all-time high royalties and product deliveries to Bayer during Q3. Generics and Consumer Health business had a strong quarter, supported by good availability of products in our major markets and very successful new launches. Unfortunately, ODM-105, tasipimidine Phase II trial for insomnia didn't reach its efficacy target, and we decided to discontinue the development of that program. And Q3 financials are here. And before I go deeper into the financials, it is good to remember that the comparative period Q3 2024 was an exceptional quarter. We received EUR 130 million worth of milestones last year's Q3. There was a EUR 70 million sales milestone from Bayer related to Nubeqa and EUR 60 million milestone related to the MSD agreement on opevesostat. So these are quite difficult to compare to each other. And now as I go along, I will talk about the base business. So the business without the milestones. The base business growth was 24% from quarter 3 '24 to this year's quarter 3, totaling to EUR 423 million. The operating profit growth was even stronger, 68%, up to EUR 121 million. And our cash flow grew 15% and was being very solid. Of course, last year's -- during last year's Q3, the milestones were booked, but yet not paid. So they were not yet cash in our bank. And when we look closer, the net sales bridge, we can see the kind of a net effect of the difference between the quarters here regarding the milestones in Innovative Medicines column, which is EUR 59 million, but underlying net sales increased by EUR 71 million. So I think the growth, as I earlier said, of Nubeqa product sales and royalties was very strong, but it didn't fully compensate the previous year's milestones. We can also see here that all other divisions positively developed positively, strongest being Generics and Consumer Health, but also Branded Products and Animal Health showed positive development. And Fermion was more or less on par. And here on the operating profit bridge, we can see the full -- kind of a full effect of the last year's milestones, EUR 130 million, but also the positives on the change in sales volume and change in prices and cost of goods and product mix of almost EUR 20 million. And then the royalties of EUR 50 million. We can also see that our fixed cost increased as well, but this is all planned. It's mainly R&D and sales and marketing costs here. Now let's take a view for the first 9 months from January to September. Again, a very nice 22% growth during the first 9 months and 7.8% growth even though we would compare to the previous year's quarter 3, including the milestones. And the first 3 months ended up with EUR 1.2 billion of net sales. Regarding operating profit, EUR 57 million -- 57% growth and slight decrease if we compare to the numbers, including milestones in previous year. And again, a very positive development on cash flow during the first 9 months. Now to Innovative Medicines. This is a bit different picture than you've used to see. There is the shaded area, which tries to tell you the comparison between the quarters, including everything else, but the milestones from the previous year. And 71% of growth is very healthy for Innovative Medicines and also almost 75% growth during the first 9 months. And on the right side here, you can see this all-time high royalties plus product deliveries ending up to EUR 166 million. And I always remind looking at this picture, the very, how would I say, year is very late ended loaded -- back-ended loaded -- back-end loaded for Nubeqa, as you can see here, when you look at the '24 from the first quarter to the last quarter, but here as well. But I would like to remind that in comparison to '24, we already reached the higher royalty rate in the previous quarter with Nubeqa. So we are not going to see a similar shift and change in the royalty rate as we saw last year between the Q3 and Q4. Branded Products growth during Q3 was somewhat slow. It was 3%. And this slowliness in the growth is mainly due to timing of deliveries to our Stalevo partners. And that will be fixed during the rest of the year. So it's kind of a temporary change here. And the growth for the first 9 months is a healthy 9%. And in Easyhaler portfolio, budesonide-formoterol combination product was the clear driver for the growth. And then on the CNS portfolio, Stalevo Japan contributed to growth in Branded Products. And as I say, Generics and Consumer Health quarter 3 was very, very strong. 5.4% growth is extremely good for any generic business, but especially here when we remember that Simdax and Dexdor are included in this business, and they are constantly sliding down facing the generic competition. So we are able to compensate that decrease, but -- and at the same time, increase and grow our sales. And the reason for good quarter is really the good availability of the products in our Nordic countries. The service level is the thing in the Generic business. You need to have the products at the time of the tender where they should be, and you would need to be able to deliver also for all the different countries in the specific timings of tenders or pricing processes. And also, we had a good launch, for example, for Apixaban in Finland. Animal Health continued the good growth trend, although here, we see a bit of a similar slowdown as with Branded Products, and that partly has to do with deliveries as well. But when we look at the first 9 months, it's a very strong 2-digit number growth. And our top 10 product list is as it has been. Nubeqa, there as a flagship with 83% or 84% growth. Easyhaler product portfolio growth was close to 8% and entacapone products grew close to 5%, mainly due to the Japan sales. And our HRT product, Divina, performed very well here on the row 5, growing almost 23%, continuing the strong growth from earlier this year and some oldies like Trexan even 10% -- close to 10% growth and Quetiapine products, 10% growth. And currently, our business divisions are very healthy. The balance between business divisions is very healthy, approximately 30% for Innovative Medicines and Generics and close to 20% for Branded Products. Now Orion's key clinical development pipeline has clearly become oncology focused as we decided to discontinue the ODM-105 project for treatment of insomnia. We have also removed ARANOTE from this list as it's approved both in U.S. and EU. So we now have the DASL-HiCaP study on this list. and then the 2 OMAHA studies with opevesostat that MSD is responsible for. It's good to mention here for these 2 opevesostat studies that their design or primary endpoints have changed since we last presented this so that for the OMAHA3, which is for the later line patients, the primary endpoint is now overall survival. So the progression-free survival has been demoted and overall survival is the primary endpoint. Also, there are changes for the frontline patients study 004, so that the progression-free survival is now a primary endpoint for this study. And these are changes that our partner, MSD, has done, and it looks in all possible ways very logical. Then we have Tenax levosimendan study for pulmonary hypertension proceeding in Phase III. They are planning to start also another Phase III study by the end of this year, another global study for this indication. And then we have another study for opevesostat for metastatic castrate-resistant prostate cancer and 3 studies ongoing, Phase II studies ongoing for several or 3 different hormonal cancers, women's hormonal cancers, breast, endometrial and ovarian cancer. And still, we continue the CYPIDES, which was the Phase II study that formed the basis for those 2 opevesostat 3 and 4 studies for prostate cancer. And our TEAD inhibitor, ODM-212 for solid tumors is proceeding well in Phase I, and we are preparing to start the Phase II program on the first half of next year. Then a few words on the sustainability this time about decarbonization targets. We have set an ambitious target to reduce absolute Scope 1 and 2 greenhouse gas emissions by 70% by the year 2030, and also have 78% of our suppliers, meaning Scope 3 emissions covered by our targets. Then how do we do this? I think for the Scope 1 and 2, we have very concrete actions ongoing. The steam production is one of the most energy-consuming phase in the chemical industry, especially in the API industry. And we are changing the energy source for steam production in all of our facilities -- manufacturing facilities. In Turku, we are electrifying the steam production. In Oulu, we are changing to biofuels from the fossil fuels. And also, we will start an electrifying project in Espoo. So very, very concrete examples here, and we have even done a lot of concrete actions and projects before this, for example, in our Hanko plant. And in the supplier management, we are targeting to our highest emitting suppliers who are not yet aligned with SBT. And here, we try to offer support and practices and technical expertise with our suppliers. And we have specified our outlook today. Our operating outlook for operating profit, we have narrowed from EUR 410 million to EUR 490 million. So nothing drastic. We've been able to narrow it as the year has -- 10 months have already passed. There are 2 months left, and we have a much clearer view on how the year will pan out. And for the net sales, our outlook is from EUR 1.640 billion to EUR 1.720 billion. And here, you can see the upcoming events for next year. And I thank you on my behalf, and welcome Rene here with me to answer your questions. Tuukka Hirvonen: Thank you, Liisa, for the presentation. As we said in the beginning, we will first take questions from the conference call lines, and then we will turn to the questions you can type in through the chat function in the webcast. But at this point, I would like to hand over to the operator with the conference call. Operator: [Operator Instructions] The next question comes from Sami Sarkamies from Danske Bank Markets. Sami Sarkamies: I have 4 questions. We'll take this one by one. Firstly, starting from the guidance. Can you elaborate on what is driving the small revisions to the lower and upper ends of the guidance ranges? Is this about third quarter actuals? Or have you also updated your forecast for the fourth quarter? Liisa Hurme: Well, of course, the first thing is, as I mentioned, that we know now how the first, say, 10 months have passed, and there are only 2 months left. But there are, of course, uncertainties for the latter part of the year. Nubeqa is a big moving factor in this, also R&D costs. And the tariffs are not that big of a matter here. We do think that they wouldn't have any effect to this year '25. But there are still uncertainties for the rest of the year. So still, we have this range, but there are less uncertainties, and that's why we were able to narrow the range. Sami Sarkamies: Okay. Then moving on to growth momentum at Branded Products and Animal Health. Third quarter growth rates are clearly weaker than we saw in the second quarter. How would you explain that? And what is your expectation regarding Q4? Liisa Hurme: Well, yes, you are very correct that the Branded Products and Animal Health showed a slower growth than previously this year. And it's mainly due to some delays in our deliveries to partners. We have both Animal Health. Animal Health is actually working closely with. We have some very big partners that we are working with. So there might be a 1-day or 2-day delay for the deliveries, and it has an effect clearly even on the quarter if there are big deliveries going on. Same goes with Branded Products. We deliver still to our Stalevo partners across the world. And it's the same thing. I think we've experienced this earlier years as well that sometimes it just happens that we are not able to ship during the quarter that we had planned. But this should be -- we should be able to sort this out by the end of the year during the Q4. Sami Sarkamies: Okay. Then moving on. The third question is on ODM-208. You mentioned that Merck has been changing primary endpoints for the OMAHA studies. When was this change made? Liisa Hurme: This change became public, I think, a month ago, 3 weeks ago, maybe. Tuukka Hirvonen: It was a few weeks ago. In early October, they changed the protocols. It was visible in the ClinicalTrials.gov. So nothing material because we didn't come out with at that point. But of course, something that is very interesting for all of you. So we wanted to highlight it here. Sami Sarkamies: Okay. And then finally, regarding the R&D pipeline, thinking of next year, can you give a bit more color on when you're expecting Phase I readout for ODM-212? And when would you expect to initiate the first Phase II study for that molecule? And then secondly, at CMD, you talked about 3 biological preclinical programs moving into Phase I during next year. Just wanted to check if these projects are still live as you are currently guiding for at least one new program during next year. Liisa Hurme: Yes. I'll start with ODM-212. The Phase I is almost completed. We are looking at the results, and we are basing our Phase II planning on those results. And of course, we will report the results in some forthcoming scientific meeting. Those are usually on embargo until we release them for the scientific audience. And regarding the Phase II program, it's currently under plans. We have filed IND for that and hope to be starting by hopefully mid-'26. And what was -- then there was one more question. Tuukka Hirvonen: About the biologics status. Liisa Hurme: Biologics. Indeed, yes, we told that we have 3 biologics close to advancing to clinical pipeline. And we think that we will be able to proceed with at least one of them to the Phase I next year. Operator: [Operator Instructions] The next question comes from Shan Hama from Jefferies. Shan Hama: Three from me. Also happy to take them one by one. So firstly, could you perhaps give us some, I guess, guide as to the impact on your OpEx from the ODM-105 failure? I mean I know you weren't planning to take it to late-stage development yourselves. So I assume it's not significant, but perhaps any guidance on the provisions set aside there would be helpful. Rene Lindell: Yes, maybe I can take that one. So of course, ODM-105, it was -- we got the results and in such a way, you could say the project was completed. So for this year's perspective, not a big impact in terms of how we expect this year's R&D expenses to be going as it was in our plans and it was completed. Then of course, for next year, you can obviously think that there is a change in how the budget is allocated. 105 million, of course, is not moving forward. There are some tail costs for next year that we'll be taking in this year. But overall, we see it as being quite neutral for this year in compared to whatever we save and whatever provisions we take for costs that would have occurred next year. Shan Hama: All right. And secondly, I mean, you're able to specify your guidance on this increasing visibility on the performance of the businesses. I assume the visibility on the milestone should also be better. Could you perhaps speak a bit on your expectations for this and whether that visibility has shifted slightly from last quarter? Liisa Hurme: Well, as we have stated, we think that we will receive the milestone next year, '26, but it is possible that we receive that milestone already '25. But it's still not possible to state that as a fact that we get it this year. So we remain where we have been to this date that it's possible this year, but we are -- in our plans, it's next year. Shan Hama: Understood. And then finally, given the delay that you mentioned in the deliveries in Branded Products and Animal Health, is it fair to expect a slight boost to 4Q, assuming those deliveries are made as well as the normal business expected in 4Q? Or is it more of a pull-through dynamic? Liisa Hurme: Now I didn't quite get the question. Is it... Tuukka Hirvonen: It's about the timing of shipments in Branded Products and Animal Health since we now saw some headwinds. Will there be a boost in Q4 now that... Liisa Hurme: No, I think it's just -- it's according to plan that we get them out here. So it's not boosting the Q4. Operator: The next question comes from [ Matty Carola ] from OP Corporate Bank. Unknown Analyst: It is [ Matty Carola ]. I ask 2 Nubeqa related questions. First, regarding the U.S. situation and the pricing. I know you are not willing to say a lot about it, but maybe could you a little bit say about the political atmosphere. Do you or your partner get the pressure to lower the price? Or what's your kind of look right now if you look on another side of the Atlantic? Liisa Hurme: Well, I think that's a good question regarding the U.S. business environment. However, I think a question whether our partner gets pressured or needs to change price, I think it's fair to say that, that needs to be asked from Bayer. It's not my place to comment that matter. But in general, there are a lot of things happening in U.S. regarding the pricing, the most favored nation initiative and also, of course, the tariffs. So we follow the situation carefully. Unknown Analyst: All right. Then the second one, you received the latest permits in the U.S. during the summer and also in Europe regarding the latest indication. Have you seen kind of significant volume change or kind of any change about the sales during the Q3 if we speak about the kind of adoption rates or any other kind of sales indication, which is visible after you got the final sales permits? Liisa Hurme: Well, we don't -- of course, we see that the volumes are increasing. That's a very positive thing. But we don't have a kind of a step change if you're referring to that with the new indication. It's more of a linear growth. So it's very positive. I'm sure ARANOTE has a positive effect as it can be used also without docetaxel. But to have a kind of a step change or big growth there, such we don't see exactly. Operator: [Operator Instructions] The next question comes from Anssi Raussi from SEB. Anssi Raussi: One question from me, and it's just to double check something you said during the presentation about Nubeqa royalties in Q4 compared to Q3. So I understood that we shouldn't expect similar growth as we saw last year, but anything else to add or comment on Q4 royalty rate? Maybe I didn't catch up everything you said in that comment. Liisa Hurme: Very good that you asked. I was trying to explain that last year, the royalty rate changed between Q3 and Q4. So... Tuukka Hirvonen: During Q4. Liisa Hurme: During -- yes, not exactly between, but during Q4. So it had an impact so that the Q4 was clearly higher in Nubeqa sales or royalties to us. But this year, we already reached that royalty rate during Q3. So even though the royalties will be -- or the sales will be growing, so there will be a kind of a double effect of sales growing and royalties -- royalty percentage increasing during quarter 2. So that's the difference. I don't know if I explained it well or if my colleague wants to explain it even better. Anssi Raussi: Got it. And so is your royalty rate hit the cap during Q3? Was it at the end of the quarter? Or was the average rate already capped and will be similar in Q4? Or is it like the run rate at the end of Q3? Tuukka Hirvonen: We reached the cap during Q3, not going to specifics at which point of time. But like Liisa said, kind of the message is that one should not expect similar step-up as you saw last year between Q3 and Q4 because in Q4 last year, we got the step-up coming from the royalty rate increase, but now that won't be happening between Q3 and Q4. So that was kind of the message that we expect the growth to continue, but similar kind of step-up as you saw last year, one should not expect. Operator: There are no more questions at this time. Tuukka Hirvonen: All right. Thank you, operator. Then we turn on to the chat questions. We have a couple here. You still have time to type in more if you have anything on your mind. Let's start with one. This is actually already covered, but just to let you know that [ Aro ] is asking, is it still realistic to think that the EUR 180 million Nubeqa milestone would come already this year? And actually, you, Liisa, already addressed that question. So that's covered. Then we are having one coming from Iiris Theman from DNB Carnegie. Regarding Nubeqa, have you received any feedback from Bayer how ARANOTE sales have developed? What are Bayer's comments? Liisa Hurme: I think not specific comments on ARANOTE . I think we are more or less following the all sales development. And as I said, it's linearly growing. So there, we haven't really seen any step-up due to ARANOTE. And let's remember that there might have been already off-label use with Nubeqa for this patient segment. So it might be that -- it might not be that dramatic, and that's what we've been trying to tell all along while we've been waiting for the ARANOTE approval. Tuukka Hirvonen: All right. Thank you, Liisa. We have no further questions in the chat, but I got a message. Well, actually, now Iiris has a follow-up here. So why administration costs were lower year-on-year? And what should we expect for Q4? Rene Lindell: Yes, There are typically quite many line items there, and some of those are -- can be just shifting from quarter-to-quarter. There can be also some definition changes, what is considered admin and what is considered in the other line items. There are quite minor changes in terms of the overall admin expenses. There's nothing big changing the normal inflation, which is across the board. But yes, I wouldn't expect any drastic differences. Tuukka Hirvonen: All right. Thanks, Rene. Then we have a follow-up from Sami Sarkamies from Danske. So following changed endpoints for ODM-208, so opevesostat, OMAHA trials, do you still foresee an interim readout in '26? Before you answer, of course, we need to point out that we have never estimated or foreseen that there will be a readout. Liisa Hurme: Interim readout. No, no, no. But I think that's public, the readout for the full year. It's that when... Tuukka Hirvonen: Yes. Yes, the full readout, yes, but interim readout. Liisa Hurme: No, no, no. We are not going to comment that or we have never commented that. But the readout from both studies should be in 2028. Tuukka Hirvonen: Yes, that's correct. Then we have a follow-up from Heikkila. He says that Orion's R&D costs have been increasing clearly. At which point do you expect these increases to show as a growth in terms of net sales? And to which development programs are you focusing the most after Nubeqa? Liisa Hurme: We clearly focusing the development programs that are in our hands, and that's ODM-212 now and of course, the biologics that are following that. And when can we expect that program to turn into sales? I would say that would be early 2030s. Tuukka Hirvonen: All right. Thank you, Liisa. Now we have exhausted all the questions from the chat. And also, I got a message that there are no follow-ups in the conference call lines. So it's time for us to wrap up. Thank you for joining us today, and have a great rest of the day and week. Liisa Hurme: Thank you.
Jan Strecker: Good afternoon, ladies and gentlemen, and thank you for joining us today to review financial results for the third quarter of 2025. Present on today's call are Stephan Leithner, our Chief Executive Officer; and Jens Schulte, Chief Financial Officer. Stephan and Jens will provide an overview of our performance and key developments during the quarter. Following their remarks, we will open the line for your questions. As usual, the presentation materials have been distributed via e-mail and are also available for download on our Investor Relations website. This call is being recorded, and a replay will be made available shortly after the conclusion of today's session. With that, let me now hand over to you, Stephan. Stephan Leithner: Thank you, Jan, and welcome, everyone. I'm pleased to present our third quarter results, which once again demonstrate the strength, resilience and strategic balance of Deutsche Börse Group's diversified business model. Despite a more challenging backdrop in select areas, particularly index derivative at Eurex, ESG & Index at ISS stocks and some FX headwinds, we delivered solid net revenue growth without treasury results. This performance was driven by broad-based momentum with 5 out of 8 business units achieving double-digit growth in the quarter. That's a clear reflection of the robust diversification of our franchise. Our portfolio's balance enables us to consistently deliver even when individual segments faced temporary headwinds. By combining businesses with distinct growth drivers, we maintained a steady and scalable performance trajectory. Let me begin the review of the quarter with Investment Measurement Solutions. As expected, Software Solutions was the key growth driver delivering a solid 10% increase in net revenue. Importantly, annual recurring revenue is trending towards the upper end of our guidance range, supported by a robust client pipeline as we head into the fourth quarter and beyond. The recent acquisition of Domos marks an important strategic step for us in the Software Solutions business. Paris-based Domos is a leading provider of technology-driven solutions for managing and administering alternative assets including private equity, real estate and infrastructure investments. By integrating Domos' advanced digital platform and specialized expertise, we can offer clients a broader range of services, great operational efficiency and enhanced transparency in the alternative investment space. This positions us to capture the growing demand for alternatives among institutional investors and strengthens our footprint in a rapidly evolving segment of the financial industry, especially with the general partners, this opens up many new client opportunities. As we explained last quarter, the environment in the second part of our Investment Management Solutions segment, ISS STOXX remains challenging, especially for the ISS part. While we acknowledge the headwinds resulting from a changed attitude towards certain products, especially in the U.S., we believe this is largely temporary dynamic similar to historic cycles. We remain confident in a return to stronger growth in the medium term. In addition to market dynamics, this business saw the biggest impact of the weaker U.S. dollar on the top line. Regarding the 20% minority stake in ISS STOXX held by General Atlantic, nothing has changed, and we are under no pressure to make a decision this year. A buyout remains an option, and we will continue to carefully evaluate all alternatives with a focus on long-term value creation. Let me turn to the second area to Trading & Clearing. We saw strong contributions across several areas. Cash Equities delivered an impressive 21% net revenue growth driven by robust demand for European equities, in particular, from retail flows. Commodities advanced by 10%, continuing their secular growth trajectory, while FX rose by 7%, supported by market share gains. In Financial Derivatives, fixed income products performed well with 11% net revenue growth without treasury results. We're already seeing initial benefits from the active account requirements under EMEA for example, in OTC clearing with a noticeable step-up in volumes, and this puts us on track with our fixed income road map for further momentum in the coming months. As we have explained before, clients have some flexibility for activating accounts, but the overall potential has not changed. Equity index derivatives, however, remained under pressure due to subdued volatility and challenging market conditions. We believe this is primarily driven by cyclical factors, and encouragingly, we have already seen some improvement in volumes in October as volatility has picked up again. Our Fund Services and Security Services businesses, #3 and #4 of my outline, have also delivered excellent results with net revenue growth without treasury results of 15% and 13%, respectively. These gains were driven by record activity levels, supported by continued expansion of debt outstanding, healthy equity market valuations and sustained inflows into European assets, while double-digit growth in our fund business was in line with expectations. The performance in Security Services clearly exceeds them. In addition to strong custody activity, we saw new all-time highs in international settlement and collateral management, which further underscores the strength and scalability of this business. Let me especially applaud the teams in the new client wins and fast onboarding, like with German neo-brokers and Asian clients. On the cost side, for the entire group, operating expense growth came in slightly below our expectations. FX tailwinds and lower share-based compensation helped offset higher investments and inflationary pressures, keeping us firmly on track to achieve our full year target of around 3% cost growth. Based on our new steering methodology without treasury results, this translates into significant scalability, a 7% increase in revenue drove a strong 16% increase in EBITDA for the quarter. Even when including the treasury results, we maintained solid scalability underscoring the strength of our operating leverage. Looking at the 9 months of the year, we are fully in line with our expectations, delivering 9% net revenue growth without treasury results. Based on this performance, we confidently confirm our guidance for 2025. Our outlook remains supported by strong secular growth trends and continued inflows into European assets even as we experience slight FX headwinds. We're also confirming our overall targets for next year under the Horizon 2026 strategy. At our Capital Markets Day on December 10 in London, we'll provide an update on our progress and introduce new midterm guidance beyond 2026. We firmly believe that the secular growth drivers addressed by our strategy will continue to support our performance at least until the end of the decade. In addition, we see new growth themes emerging across the group that we will focus on to further fuel long-term growth. Taken together, these factors will enable us to consistently deliver growth levers going forward comparable to what we have achieved over the past several years. Artificial intelligence will also play a positive role in this journey. Let me emphasize this. It is certainly not a disruption risk, but as a powerful enabler of revenue growth and operational efficiency. We have performed an AI assessment across the group, and the results are very clear. We see our overall portfolio as extremely robust because we operate regulated system-critical infrastructure at scale. Today, I cannot replace. Instead, we are well positioned to capitalize on the AI opportunity. Our cloud-first infrastructure strategy, coupled with our current cloud adoption rate of over 74% has laid the groundwork for rapid, cost-effective and secure scaling of AI. We expect AI to generate tangible value for our clients and shareholders in 3 key areas. First, although most of our core process is already highly automated, AI will help us create greater efficiencies in our internal processes. Currently, we are focusing on automations across the software development life cycle, corporate center optimizations and improvements to client service and processes. Second lever that we see, we are actively rolling out algorithmic and domain-specific AIs across our products to enhance client productivity and initial results are very promising. AI also provides an additional distribution channel for our proprietary financial market data. And as a third lever, we are seeing positive secondary effects in our core businesses. For example, in our commodity business. Europe's power demand is estimated to increase by 10% to 15% due to AI data center energy consumption. Just like AI will drive further noncorrelated trading and small-sized high-volume trading in all of our asset classes. To hear more about this and much more, I warmly invite you to join us in London on December 10. It will be a great opportunity to engage with our leadership team, gain deeper insights into our strategy beyond Horizon 2026 and explore the exciting growth opportunities ahead. With that, I will hand it over to Jens for a closer look at the financials and segment details. Jens Schulte: Yes. Thank you very much, Stephan, and welcome, everyone, also from my side. Let's start with a quick look at our performance over the first 9 months as shown on Page #2. As you recall, the first half of the year came in slightly ahead of expectations. This was largely driven by elevated equity market volatility in March and April, along with strong inflows into European assets. In Q3, we experienced the typical summer seasonality, coupled with lower equity volatility. This had a somewhat greater than anticipated impact on equity derivatives, particularly index products. That said, our year-to-date results remain firmly in line with our full year expectations and our Horizon '26 growth path. Net revenue without the treasury result rose by a solid 9%, underscoring the strength and resilience of our business model. Now turning to operating costs. We saw a few moving parts across the 3 quarters, but overall, the picture is consistent with our planning share-based compensation provision fluctuated during the period but ultimately were flat year-over-year in the first 9 months. The U.S. dollar-euro exchange rate, which started the year as a headwind turned into a modest tailwind. While the impact was less than 1 percentage point, it still contributed positively to the cost development. We also benefited from lower exceptional costs this year. This reflects last year's termination fee related to the EEX NASDAQ agreement as well as the wind down of costs tied to IMS synergy realization. All in, operating costs increased by 3%, exactly as expected. This uptick was primarily driven by inflation and targeted investments in our strategic growth areas. Bottom line, our EBITDA margin without treasury results improved significantly to 53%, up from 50% in the prior year as our businesses continue to scale. And we also made further progress with our share buyback program. By the end of last week, we had repurchased Deutsche Börse shares worth around EUR 441 million. This leaves approximately EUR 59 million remaining to be executed by the end of November. Let's move to Page #3 with our third quarter results. As Stephan already mentioned, net revenue without the treasury result grew by a strong 7%. Given the cyclical headwinds we faced this quarter, this performance highlights the breadth of our diversified portfolio. Total net revenue rose by 3% to EUR 1.44 billion. This was driven by the continued decline in the treasury results, primarily driven by lower interest rates and despite stable cash balances. Operating costs remained stable in the third quarter, while inflation and increased investments played a role. These were fully offset by favorable FX movements, lower share-based compensation expenses and a reduction in exceptional costs. Overall, our cost discipline remains strong and fully aligned with our strategic priorities. We continue to strike the right balance between investing for growth and maintaining operational efficiency. As a result, EBITDA without the treasury result showed high operating leverage increasing by 16%. Lastly, our effective tax rate came in slightly below expectations, thanks to smaller onetime positive effects. Looking ahead, we continue to plan with a 27% tax rate for '26 and beyond. Let's now turn to Page #4 and take a closer look at our segment results, starting with Investment Management Solutions. This segment is composed of 2 key areas. First, Software Solutions, which combines SimCorp's software business with Axioma's analytics capabilities. Within this area, we saw SaaS revenues grow by 22% and while on-premise revenues declined slightly by 1% as expected. This reflects a clear and ongoing shift. Existing clients are increasingly migrating to the cloud and new clients are typically SaaS-based from day 1. Our annual recurring revenue reached EUR 632 million at the end of the quarter, an 18% increase year-over-year at constant currency. Growth was particularly strong in North America with 27% and APAC with 37%. EMEA delivered a solid 17%. These figures compare very favorably with our main peers and reinforce the strength of our global footprint. The second part of the segment is the ESG & Index business of ISS STOXX, which saw flat net revenue development. However, on a constant currency basis, the picture is more encouraging. Net revenue in ESG & Index grew by 4% in Q3, supported by a solid contribution from the ESG business with 6% revenue growth. Similar to previous quarters, the Market Intelligence business experienced flat growth and low equity market volatility negatively impacted the exchange license business in the Index segment. Importantly, the segment's EBITDA saw a significant increase, driven by disproportionately lower operating cost growth, highlighting the scalability and efficiency of our model. Now let's turn to Slide 5, which highlights the performance of our Trading & Clearing segment. Starting with Financial Derivatives. We continue to benefit from strong fixed income activity. Net revenue without the treasury result increased by 11%, driven by double-digit growth in fixed income futures and repo revenues. OTC clearing all saw high single-digit growth, supported by record clearing volumes following the implementation of the EMEA 3.0 active account requirements in June. On the Equity Derivatives side, volatility moderated significantly in the third quarter, creating a headwind for index products. As markets trended upwards to new all-time highs, hedging activity also declined. However, we partially offset the effects of volume through an increase in average revenue per contract. This was in part due to the decommissioning of the Korea Exchange Link for after hours KOSPI trading as mentioned in our last call. Our Commodities business delivered another strong quarter with double-digit growth once again. In gas, revenue rose 31%, fueled by robust activity in European gas markets amidst supply uncertainties and below target storage levels. We also saw continued momentum in power derivatives in the U.S. and APAC, while activity in Europe moderated slightly due to reduced hedging needs. In Cash Equities, we benefited from strong demand for European equities and significant inflows into European ETFs. This reflects a broader investor rotation into European markets and growing interest in passive strategies. Additionally, we recorded a onetime revenue effect of approximately EUR 3 million from the sale of a T7 license to a third-party exchange. Finally, our Foreign Exchange business achieved net revenue growth across most product lines supported by new client wins and geographic expansion. This diversification continues to broaden our revenue base and enhance the resilience of the FX franchise. Turning to Slide #6. Let's look at the continued strong performance in our Fund Services segment. We are seeing positive momentum across the board, supported by higher equity market levels, new client wins, portfolio growth and ongoing inflows into European assets. As a result, we recorded a further increase in assets under custody and sustained high volumes of settlement transactions. Notably, our fund distribution business saw a significant step up in assets under administration, which now exceeds EUR 700 billion, a major milestone. This growth underscores the increasing relevance of our Fund Services offering and our ability to support clients across the full investment life cycle, from custody and settlement to distribution and administration. With disproportionately lower operating cost growth, the segment delivered significant operating leverage, resulting in strong double-digit EBITDA growth, both with and without the treasury results. Lastly, let's move to our Securities Services segment on Page #7, which has seen a further acceleration of growth compared to the strong first half of the year. The segment continued to benefit from strong capital markets activity with ongoing fixed income issuance and higher equity market levels, driving sustained growth in assets under custody and settlement transactions. We also saw record levels of collateral management outstanding this quarter, which contributed to the strong performance in custody revenue. These trends reinforce our central role in the post-trade infrastructure and the strength of our platform. On the interest income side, cash balances remained stable, averaging around EUR 17 billion for the quarter. As expected, we saw seasonal lows in July and August followed by a recovery in September when market activity picked up and balances rose to slightly above EUR 18 billion. The main driver behind the decline in net interest income was the lower interest rate environment. The ECB rate was 1.5 percentage points below the prior year quarter. And the Fed rate was 0.75 percentage points lower, both in line with our expectations. To wrap up, let's take a look at our full year 2025 outlook on Page #8. We are confirming our guidance for the year, supported by our expectations of continued secular growth and sustained inflows into European assets. This is despite the modest FX headwinds and the low equity market volatility and also aligns with the current sell-side consensus. In addition, we continue to expect a treasury result of more than EUR 0.8 billion for 2025. Based on current interest rate assumptions and stable cash balances, we forecast around EUR 825 million, which is also in line with analysts' expectations. On the cost side, we are very well on track to meet our guidance of around 3% growth in operating expenses for the full year. This reflects our disciplined cost management and strategic investment approach. That concludes our presentation. We now look forward to your questions. Operator: [Operator Instructions] And the first question comes from Arnaud Giblast, BNP Paribas Exane. Arnaud Giblat: One question then. I was wondering if -- I mean, you mentioned during the call that the IMS [ STOXX ] was postponed and that you are still considering a potential buyout. But I'm just wondering if you could update us whether there's an actual time frame on giving the [ minority ] shareholders a liquidity event? And if I may, secondly, there's been quite a lot of news around political comments made by German Chancellor around the potential -- around their willingness to see further consolidation in cash equities. So I was just wondering if you could update us on your thoughts there. I mean, historically, we know that cash equities hasn't necessarily been your priority in terms of consolidation. I'm just wondering if that might have shifted. Stephan Leithner: On your first, Arnaud, and I just looked it up last call, we also took you as the first one on the question. So you've got a [ pull ] position. On the first one of your questions regarding to the minorities, there's no change to what we said before. There's the dual track. As we have always said, we're not alone, there is a partner, and we jointly manage the time line. So no changes in that overall. I think second, on the remarks that Chancellor made, I will put them into the context of a broader, very encouraging commitment that is made around strengthening the European capital markets. So really a push that wasn't there historically around capital markets unions, progressed a number of levers in that context. I think for us, we are a big contributor to that. We have made a lot of progress in terms of European full coverage in terms of infrastructure. This isn't only about the cash markets. So there's really no change with respect to our position and our strategy. Operator: Next question is from Benjamin Goy, Deutsche Bank. Benjamin Goy: One question on your excess cash. Maybe you can remind us of the likely position at year-end and how this impacts your capital allocation policy other than the potential minority buyout? Any other major files you're looking at. Jens Schulte: Yes. So thank you very much, Benjamin. So in terms of excess cash, probably this will play out somewhere in the magnitude of EUR 1.5 billion to EUR 2 billion towards the end of the year. In terms of share buybacks that you alluded to, we have our program running, right, as I said, and we will complete the EUR 500 million. And the further story we will communicate when time is there. Operator: The next question is from Enrico Bolzoni, JPMorgan. Enrico Bolzoni: One, I wanted to go back on your comments about AI and being an opportunity, not a risk. And of the 3 elements you listed, I was particularly interested in the second one. I think you quickly mentioned that it might create new distribution channel. Can you perhaps expand a bit more and let us know if, for example, you are signing or about to sign partnership with, for example, third-party AI engines and whether you think that we might see a monetization of these agreements? And then related to that, if I actually have to take a more bearish stance, there's been a lot of rumor about potential disruption for software solution companies. Can you just remind us of what is the position of SimCorp in this regard and why you think is not subject to perhaps AI disruption? So that's my first question. And my second question is, in a way also related to technological disruption. I know you -- when it comes to the ledger, so the blockchain technology [indiscernible] in the past agreement with HQLA. Can you remind us what do you expect will happen to post services in an environment where there is basically a rising velocity of collateral and perhaps the settlement cycle compresses further, maybe also beyond T+1. So how do you think the business should be positioned and is that a risk? Stephan Leithner: Thank you very much, Enrico, taking up both of your questions. Let me first start on the AI side. And I really emphasize and appreciate you taking up SimCorp. I think the uniqueness of SimCorp is that contrary to sort of any ancillary type services on the software side. SimCorp is very much a front-to-back sort of backbone type business. Therefore, it is really anchored at the core of what is the clients' operations, and that really sets it apart. That's why I think we see a lot of positive enhancement possibilities. That's what SimCorp has started to put in place with the copilot for example around their front office reporting capabilities. Many of those tools give improved usage capabilities for the clients. But I don't think there is any way similar to many of our operations type businesses and execution services. This is a real backbone type system that we operate for the clients in the cloud increasingly as we have said. I think the second point with respect to the data, we have a broad set of data points. And let me just highlight 2 or 3 examples out of that. One is the proprietary data that we can provide on collateral management. One of the themes that you later come back with the DLT and blockchain. So we have a pretty unique capability. In terms of the data understanding, both on collateral as well as on settlement that allows us to deliver services directly to clients because we have that connection to the clients. So therefore, our focus is not signing up a wider distribution agreement, but it's really delivering and optimizing what we can do directly with the client. I think that economically is a much better, much stronger way to monetize AI as well as proprietary data, which we have in so many areas. On your second theme around the blockchain and DLT, HQLAX is one good example of a very advanced and broad industry partnership where Deutsche Börse or Clearstream in this case, has carved out a pretty unique position because within that ecosystem of HQLAX with most of the relevant market participants, the only TTP, so the only trusted third party that is able to confirm the portfolio composition similar to a tri-party agent role is really the Clearstream side. So I think it shows that in these network environments, even if there is DLT used, there is a very strong ability for Clearstream to position and have a unique starting point. Now you also inquired around the implications, if I get it correctly, on the T+1, the higher settlement cycles. We overall see this as something that we don't expect material extra costs on our side, very different from many custodian firms who have a big rewiring to do. So there is no material cost because today, we are really able to operate. Most of this process is already on a T+1. This doesn't fundamentally change. So we also don't see an erosion of our position coming out of T+1. It's really strengthening the strongest operators in the CSD space, and that's where certainly there's not more than 2, if I look those that are able to operate. We have just announced the pan-European footprint operation by basically operating direct services on settlement across all 28 CSDs. Again, it's a unique partnership, a unique link up network that Clearstream has, no others have it. I think it will be strengthened if we move into T+1. Operator: Next question is from Tobias Lukesch, Kepler Cheuvreux. Tobias Lukesch: Also one or two questions from my side, please. Touching on the costs, you mentioned some active cost management and also some investments. I would be interested how active were you in Q3? Should we consider the 3% guidance to be more of a 2.6% for this year, and in terms of investments, is there more to come on the AI opportunities that you're seeing? Or is that something we should consider for '26? Or is that not all really impacting your investment cycle that you have planned so far? And very quickly, you touched on the OTC derivative clearing again and said, with EMEA, this is well on track. Maybe you could give us a bit more insight on the business development since also your competitor kind of doubled down on the business with Q3. Jens Schulte: Good. So I take -- first of all, I start with the OpEx question. So in terms of just generally active cost management, we continuously do active cost management, for example, in terms of expanding our location footprint currently moving parts of the business to India and other locations and gaining further efficiency from our systems. So that is an ongoing process that is not only -- has not only been relevant for Q3. Now very specifically to your question in terms of guidance, we do confirm that guidance at the moment. Keep in mind that as in previous years, if you look into '23 and '24, we usually in Q4 have some seasonality, for example, driven by investments being a bit back-end loaded, driven by merit increases, severance and several other things that typically tend to come more out towards the year-end. So for the moment, we do plan with the 3% and that is the target and then let's see how we come in. But we are well underway. I mean that is certainly true. On the second point, OTC clearing, and the EMEA side, so what I alluded to in my part is that we actually did increase the number of accounts from about 1,600 to 2,200, so by 600 accounts. It is fair to say that the activation rate of those accounts is still relatively muted. So it's overall around 20%. However, what we do recognize now is that after a technical implementation standards have come out and after the clients have started to sort themselves, they are now making specific plans as to how to route their flows. And so we do expect the activity to increase next year. Bear in mind on this topic, that the -- basically, the activation requirement needs to be fulfilled throughout the first full year, so until basically May of next year, so the customers still have time and they take the time to organize themselves properly, but we do expect a significant increase of activity beginning of the next calendar year. Stephan Leithner: Let me take your third part, the investments impact of AI. First of all, let me give you a context that I think is truly very important and sets us apart, which is we have gone very much an advanced investment cycle when it comes to a number of items that now really benefit us on the AI journey, and that's, in particular, the transition into the cloud. We have a mid-70% of our portfolio that is in the cloud that allows us much faster and much more efficient. We have in parallel done and made the transition on the IT security side. So again, these are all areas where we have, over the last years, run significant investment portfolios from which we are now benefiting, that's why we also don't expect any requirements or change when it now comes on the AI invest because we can really build on that effectively and efficiently work together with major model providers and deploy very fast into our organization. So that's one of the items that I think truly from a wider market debate that I've seen around the margin impact of AI is something that we, in our scan and in our review process that we have run have really not seen happen. And I think that's very encouraging to us in terms of the speed and the implementation environment. Operator: [Operator Instructions] And now is from Hubert Lam, Bank of America. Hubert Lam: I've just got one of them. Can you talk about a bit about the pipeline of new clients or upsell for SimCorp into Q4. Usually, I think there's more seasonality in Q4. Just wondering if we should expect a big quarter and what kind of growth to expect heading to the end of the year? Stephan Leithner: Thanks for asking the question, Hubert. I think the seasonality of Q4, we have now explained a number of times and documented in the past years. I think we have given the guidance that in the remaining quarters, we'll see 10% quarter-by-quarter or that's what we said after the first quarter, I think we continue to stick and believe. And if we look at the pipeline, that's what we actually see. But software is every year back-end loaded sort of environment, and therefore, I think it's a lot of hard work, but signs are all on track. Operator: And the next question is from Tom Mills, Jefferies. Thomas Mills: You've alluded to the setting up of new medium-term targets at your CMD on the 10th of December, which I guess means to out sort of 2028. There's obviously been a change of CEO and CFO since the current medium-term targets were put in place. Could you maybe talk a bit about how you fear about getting to the '26 targets? Is it your intention to kind of maintain those or do you step back from them at all? Just because I see sort of consensus is a little below where you're currently expecting to get to? Stephan Leithner: Thank you very much, Tom, for giving me the opportunity to reiterate and emphasize what I said earlier. I think we both really very much confirming our 2026, Horizon '26, as we had talked about it before. I think there is no change and December 10 will not make us change their position. And secondly, also emphasize what I alluded to earlier, which is we see that many of the new growth themes that we see emerging are really fueling us for a long-term growth that goes beyond 2026. So we have a very comfortable outlook there. Operator: Next question is from Jochen Schmitt, Metzler. Jochen Schmitt: I have one follow-up question on custody revenues. You have already mentioned higher revenues from collateral management. Would you see those revenues as partly nonrecurring? Or would you see Q3 as a reasonable starting base for modeling purposes? That's my question. Stephan Leithner: So we do see that as recurring revenues. The settlement business, settlement custody business has a very good run at the moment, and we do see that carrying into the future. Operator: At the moment, the last question comes from Michael Werner from UBS. Michael Werner: I got two, please. First, on the [indiscernible] products. I was just wondering if you can update us on your thoughts about the fee holidays that you currently have on them and whether that could potentially lift in 2026? And then just looking at IMS, I know there was some decline in exceptional costs. But the underlying cost base in IMS year-on-year has been pretty steady, showing quite decent operating leverage. Is that something we should expect going forward? Was there any kind of moving parts on the cost base as I assume SimCorp is a place you want to continue to invest? Stephan Leithner: I think with respect to the fee holiday outlook, we have said we will work on establishing a very stable sort of business base before we really change. So we'll continue to monitor that in Q1, how far out that is going to go. We will decide in the course of the year. So there is no prediction that we're giving at this point. I think the second question that you had with respect to the IMS cost operating leverage, indeed, sort of clearly with respect to some of the areas that have shown slower growth or we have been active and the management teams have been working on the cost. So I think you need to look at that in the aggregate of IMS. I think it doesn't signal at all. And our investment commitment around the SimCorp momentum, as we speak, is very unchanged and there's important product enhancements on which we're working. There have been recent product introductions that have also been fueling some of those big wins, in particular, in the U.S. that we have been very proud about and that we reported on basically a named basis, if I can say, in Q2 already. Jan Strecker: There are no further questions in the pipeline. So we would like to conclude today's call. If there's anything else, then please do feel free to reach out to us directly. Thank you very much for your participation, and have a good day.
Operator: Good day, ladies and gentlemen. Welcome to KPN's Third Quarter Earnings Webcast and Conference Call. Please note that this event is being recorded. [Operator Instructions] I will now turn the call over to your host for today, Matthijs van Leijenhorst, Head of Investor Relations. You may begin. Matthijs van Leijenhorst: Yes. Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us today. Today, we published our Q3 results. With me today are Joost Farwerck, our CEO; and Chris Figee, our CFO. And as usual, before we begin the presentation, I would like to remind you of the safe harbor on Page 2 of the slides, which applies to any statements made during this presentation. In particular, today's presentation may include forward-looking statements, including KPN's expectations regarding its outlook and ambitions, which were also included in the press release published this morning. All such statements are subject to the safe harbor. Now let me hand over to our CEO, Joost Farwerck. Joost Farwerck: Thank you, Matthijs, and welcome, everyone. Let's start with the highlights of the last quarter -- third quarter. Our group service revenues increased by 1.7% with growth across all the segments. In the mix, consumer was supported by ongoing commercial momentum, both in broadband and mobile. Business was driven by mainly SME and LCE. As expected, growth slowed in the third quarter, mainly due to the tailored solutions parts and wholesale continued to grow mainly driven by sponsored roaming. Our EBITDA grew by 2.3% on a comparable basis. And as expected, our free cash flow rebounded in the third quarter, up 12% year-to-date, driven by EBITDA growth. We further expanded our fiber footprint together with our joint venture, Glaspoort. And finally, we remain confident to deliver on the full year 2025 outlook and our 337 midterm ambition. As a reminder, our Connect, Activate and Grow strategy is supported by 3 key pillars. First of all, we continue to invest in our leading networks. Second, we continue to grow and protect our customer base. And third, we further modernize and simplify our operating model. And together, these priorities support our ambition to grow our service revenues and adjusted EBITDA by approximately 3% on average and our free cash flow by approximately 7% over the entire strategic period. And given that we are now nearly halfway through our strategic period, we look forward to sharing a strategy update with you next week, November 5, and we hope you will join us online for the webcast. Let me now walk you through the business details. We lead the Dutch fiber market. In the third quarter, we expanded our fiber footprint by adding 74,000 homes passed together with Glaspoort, and we connected 82,000 homes, bringing us close to 80% homes connected within the fiber footprint. And the rollout pace slowed compared to previous quarters due to timing. We stick to our ambition to cover 80% of Dutch households with fiber. During our strategy update next week, we'll share how we will get there within our financial framework. Let's now have a look at the consumer segment. Consumer service revenues continue to grow, driven by consistent fiber and mobile service revenue growth. Customer satisfaction remains a priority, and thanks to our CombiVoordeel offer supported by super Wi-Fi, our Net Promoter Score rose to plus 15 year-to-date and Net Promoter Score even reached plus 17 during the quarter, showing how these improvements are making a real difference for our customers. Let's take a closer look at our third quarter KPIs. We saw another quarter of double-digit broadband-based growth despite a challenging competitive environment. Thanks to a steady and healthy inflow of new fiber customers, combined with a growing ARPU, our fixed service revenues continue to grow. In mobile, we maintained a strong commercial momentum, adding 47,000 subscribers. And this was partly offset by ARPU decline driven by ongoing promotional activity in the no-frill segment. So overall, our mobile service revenue grew by 1%. Let's now turn to the B2B segment. Business service revenues increased by 1.4% year-on-year, driven by SME and LCE and good commercial momentum. Net Promoter Score rose to plus 5 in the third quarter, reflecting customer appreciation for stability, reliability and the quality of our networks and services. SME service revenues increased by 3.3% year-on-year, driven by growth in Cloud and Workspace, broadband and mobile. LCE service revenues increased by 1% year-on-year, supported by growth in mainly IoT, Unified Communications and CPaaS. Mobile service revenues were impacted by ongoing price pressure, though this was partly offset by a growing customer base. And finally, and as expected, I must say, Tailored Solutions service revenues decreased by 2.5%, reflecting a further focus on value steering. And then wholesale -- our wholesale service revenues continue to grow, mainly due to a strong performance in mobile, driven by the continued growth in international sponsored roaming. Broadband service revenues increased despite a decline in copper base driven by fiber and other service revenues increased mainly due to an update in visitor roaming. Now let me hand over to Chris to give you more details on financials. Hans Figee: Thank you, Joost. Let me now take you through our financial performance. First, let me summarize some key figures for the third quarter. First, adjusted revenues increased 2.4% year-on-year in the third quarter, driven by service revenue growth across all segments and higher non-service revenues. Second, our adjusted EBITDA after leases grew by 4.4% compared to last year, supported by higher service revenues, the IPR benefit and contribution from tower company, Althio. This was partly offset by the holiday provision effect. As a reminder, starting this year, most employees no longer register holiday leave, resulting in a lower provision release in Q3 compared to last year, impacting therefore, the distribution of EBITDA growth over the year with a specific negative accounting impact in the third quarter. Finally, as anticipated, our free cash flow rebounded in Q3 and is now up 12% year-to-date. I'll share more details on the underlying cash developments later in this presentation. Group service revenues grew by 1.7% year-on-year, supported by all segments. And within this mix, consumer revenues increased by 1.1%, driven by, as Joost said, continued solid momentum in both fixed and mobile. Business service revenue growth tapered off somewhat in the third quarter compared to previous quarters, mainly due to developments in Tailored Solutions and timing effects. And finally, wholesale service revenues increased by 5.2% year-on-year, driven by ongoing growth in our international sponsored roaming business. Our adjusted EBITDA grew 4.4% year-on-year in Q3 or 2.3% on a comparable basis if we adjust for the IPR benefits, the Althio contribution and the holiday provisioning effects. Direct costs remained broadly in line with last year, reflecting shifts in the revenue mix, particularly within Tailored Solutions, where our continued focus on value and margin steering is shaping direct cost dynamics. On a comparable basis, our indirect cost base decreased by EUR 5 million, driven by lower energy and billing costs. We further scaled down our workforce, resulting in a reduction of over 300 FTEs compared to previous year. Our year-to-date operational free cash flow increased by 12% compared to last year or 8.6% excluding the IPR benefit and Althio, driven therefore by EBITDA growth. As expected and communicated to you, free cash flow generation rebounded in the third quarter, mainly due to improved working capital and lower interest payments. Year-to-date, our free cash flow is up 12% compared to the first 9 months of last year, again, supported by EBITDA growth and partly offset by higher interest payments and cash taxes paid this year. Finally, we ended the quarter with a cash position of EUR 373 million, absorbing the impact of the interim dividend over '25 and share buyback payments. We continue to run with a strong balance sheet. At the end of Q3, we had a leverage ratio of 2.5x, in line with our self-imposed ceiling and remained stable compared to the previous quarter. We expect our leverage ratio to return to 2.4x by the end of the year, supported by increased free cash flow generation. Our interest coverage ratio was sequentially a bit lower at 9.5x, and our cost of senior debt decreased slightly, mainly driven by lower floating interest rates. Our exposure to floating rates, by the way, remains limited at only 16%. Our liquidity position of around EUR 1.4 billion remains strong covering debt maturities until the end of '28. We are on track to deliver the 2025 outlook we shared with you in July. And on 25th of July, we completed our EUR 250 million share buyback program for the year. The cancellation of about 60 million treasury shares will be finalized in Q4. And August 1, we paid out an interim dividend of EUR 0.073 per share in respect of 2025. And finally, we reiterate our midterm, also known as our 337 targets as presented at our previous Capital Markets Day. As outlined back then, both service revenues and EBITDA are expected to grow 3% per year on average over the plan period and our free cash flow by 7% per annum on average with growth in cash back-end loaded due to our CapEx plans. Until 2026, our free cash flow growth is expected to grow at a low single-digit rate per year since we face increasing cash taxes year-on-year. Now let me briefly wrap up with the key takeaways. We continue to see service revenue growth across all segments. While revenue growth moderated somewhat in Q3, we anticipate a recovery in the fourth quarter. Our commercial momentum remains solid, and we continue to lead the Dutch fiber market. Our net add developments in both fixed and mobile and both in consumer and business was quite satisfactory in Q3. As expected and planned for, EBITDA growth was relatively soft in Q3, but is set to recover in Q4. Cash flow generation was strong, up more than 10% year-to-date. Overall, we're on track this year and continue to make good progress towards our annual and midterm targets, and we reiterate our guidance for the year. Finally, as we approach the halfway point of our strategy, we can't wait and look forward to providing you with an update of our strategy next week, on November 5. Thanks for listening and turn to your questions. Matthijs van Leijenhorst: Yes. Thanks, Chris. Operator, please open the line for the Q&A. Please limit your questions to 2 please. Operator: [Operator Instructions] Our first question is from Polo Tang of UBS. Polo Tang: I have 2. The first one is, is there any update in terms of the Glaspoort acquisition of part of the DELTA Fiber footprint? And my second question is, we have a general election in the Netherlands this week, but is this having any impact on public sector spending in terms of your B2B segment? Joost Farwerck: Yes, Polo, thanks for the questions. The Glaspoort acquisition, it takes our regulator a very long time to come to a final opinion. So as you know, Glaspoort intends to acquire a rural fiber footprint of approximately 200,000 house passed from DELTA Fiber, and it's still under ACM review. We expect, well, something within 1, 2 months because it takes really too long. We think it's still no reason to refuse it. This could reduce overbuild risks for both parties and supports healthy market development. Then elections coming up in the Netherlands, that's tomorrow, by the way. We -- on the midterm, we see limited impact on KPN. Major topics in the elections are immigration, health care, housing markets. Well, the government wants to build more houses, and we think that's a good one because then we can take them into the house pass footprint. Topics that could affect KPN on the longer term are about investments in defense, and we're in good position on that. We are selected as the main digital provider for the Ministry of Defense and discussions around fiscal affairs, for instance, the innovation box facility and the share buyback taxation, but that's a vacant faraway remark somewhere from one of the left wing parties. So all in all, I don't expect that much impact for KPN. Polo Tang: Just on public sector, can I just clarify if there's any freezing of public sector spend into an election or out of an election because we see that sometimes in other markets? Joost Farwerck: No, not really. We have some kind of a framework. So when elections are coming up and when a Cabinet falls in the Netherlands, then they select a couple of topics that they have to continue to run. And we are all convinced in the Netherlands that we should keep on investing in the themes I just mentioned. And also when it comes to cybersecurity and digital, there's no slowing down there from the government, and we are heavily involved in there. Operator: And our next question comes from Mollie Witcombe of Goldman Sachs. Mollie Witcombe: My first question is on B2B. You have said that you've seen some price pressure in mobile and B2B. Could you give us a little bit more color on this? Are you seeing this dynamic both in LCE and in SMEs? And to what extent should we consider this when we're looking at longer-term trends going into 2026? And my second question is just on the B2C competitive environment. What are you seeing in terms of competition? And have there been any incremental differences versus last quarter? Hans Figee: On your question on mobile price pressure, mostly in LCE and larger corporate tickets, there is some price pressure going on. I think that I would say from our point of view, there's still some of the decline, but the decline is declining. So you can say the second derivative is positive, but that's a bit of a nerdy view. But I would say expected LCE, some repricing of our base into next year, but then probably we have good hope it's going to be bottoming out, at least. So there is some price decline, but it's getting a bit better. We saw something similar in SME, but SME, we especially be able to counter that with value-added services by selling more security solutions to customers. So keeping our ARPU up. So there is some price pressure, most notable in LCE, but gradually abating. So we'll go into next year, but I think somewhere during the course of this year, that effect we hopefully [ achieve that ]. And SME, it's much less prevalent. And there, we see and have experienced good opportunities to counter that with additional value-added services like additional bundlings, but mostly security services around SME to keep your ARPU stable there. Joost Farwerck: Yes. And on the competitive environment, well, like in Q2, the market remains competitive in consumer markets, so Odido and VodafoneZiggo, especially. VodafoneZiggo launched a new proposition, broadband fixed on their cable network, a 2-gig proposition recently announced. So interesting to see how they will do there. But impact on KPN expected to be limited because our first proposition is 1 gig, and we also offer 4 gig. So most of the new customers land in 1 or 4 gig via our fiber network. And for us, it's very important to play our own game. So we focus on base management, for instance, on convergence households via CombiVoordeel, resulting in lower copper and fiber churn and 11,000 net adds. We also are very happy with the acquisition of Youfone because on the lower end of the market, you call it that way, there's true competition going on. So Youfone covers that. And currently, more than already 2/3 of our broadband base is on fiber, and that's leading to lower churn and higher NPS. So that's how we position ourselves in this competitive environment. Operator: And our next question comes from Paul Sidney of Berenberg. Paul Sidney: [Technical Difficulty] revenue growth, it did slow into Q3 at the group level. There's obviously lots of moving parts... Matthijs van Leijenhorst: Paul, paul. Paul Sidney: Can you hear me? Matthijs van Leijenhorst: We couldn't hear the first part. Could you start over again? Thanks. Paul Sidney: Sure. Can you hear me now okay? Matthijs van Leijenhorst: Perfect, perfect. Paul Sidney: Okay. Great. Yes, just a first question on service revenue growth. We did see it slow into the quarter at the group level. There's lots of moving parts, and you've given some great granularity in terms of the drivers of that. But as we head into Q4, how confident are you that we can see an acceleration in that service revenue growth trend? And then secondly, just looking a bit bigger picture, you report very comprehensive KPIs, very detailed guidance, net add, service revenue growth, NPS scores, free cash flow and returns guidance. I was just wondering, if we take a step back, which of those is most important to KPN as a business in terms of what really is sort of driving the business? And maybe we get more detail on next week, but just really interested to hear your views on that. Hans Figee: Yes. Paul, let me give you some more granularity on how we see service revenue growth developing. I'm going to just walk you through the business. I think the second question is a typical CEO question. Joost Farwerck: Yes, for sure. Hans Figee: I'll leave that to you. Look, on consumer, fixed is showing 1% service revenue growth. We've had tailwinds from a price increase, some headwinds from migration from front to back book discounts, et cetera. I think overall, the good news is that churn is actually reducing. The churn is doing better than ever. It's one of the best churn quarters in fixed in some time to come. Also please note, we have a CombiVoordeel product, which we give customers with multiple products, additional discounts leading to lower churn. That additional discount feeds through the top line. So that affects top line and fixed service revenue growth by almost 0.5% this quarter and even more in next quarter. So for Q4, we expect fixed service revenues to come in at a 0.4%, 0.5%, but that's really the accounting and the upfront payment on these additional discounts that lead to churn. So the discount, especially to multi-converged customers, and we're seeing benefits of churn on that. We'll give you more intel next week because that feeds into [ '26 ]. In mobile, you see a price increase coming in has already come in, has landed pretty well. So I would expect mobile consumer to be around 1.5% in the fourth quarter, fixed below 1% and mobile well above 1% then go to B2B. I see SME recover. I mean there was some technicality in the SME numbers, but it's also, I think, good base and ARPU development, especially in the third quarter. And a little bit easier comps, I would say SME should be 4% to 5% again in the fourth quarter and also in that into the next year. LCE hovering around 0. And on the Tailored Solutions business, there's always some volatility in this business that has to do with the timing of projects. For example, if you go back to last year, we saw growth -- service revenue growth in Q3, from 5% to 2% back to 5%. There's always a bit of volatility in this business due to the nature of these activities. In the third quarter, we saw the effects of KPN condition more steering on margins. So we lost some business. Some of it we didn't actually mind because there was actually 0 margin revenues and underlying this growth in defense spending. So I'd expect the Tailored Solutions business to be back around 2% to 3% in the fourth quarter, which should bring B2B to around 3%. Wholesale, I would say, probably around 4% to 5-ish in the fourth quarter. So that means overall service revenues in Q4, I would say, around 2%, probably 2% or a bit up. But that's the moving parts. Some of it has to do with technicalities. For example, as I said, in fixed service revenues, the accounting for the [indiscernible] cost shows up to revenues. It is showing up to churn, so it leads to real value, but short-term service revenues are a bit affected. Mobile should recover, SME should recover and the rest, I think I explained to you for probably around 2%-ish service revenue growth in Q4. Joost Farwerck: Yes, Paul. And then your question on all the KPIs and the main target. I mean, yes, we try to keep things simple in our strategy. We're a single country operator. We're healthy, and we build a plan for all stakeholders. So we invest in the Netherlands, we invest in customers, we invest in our own people, and we want to reward our shareholders in a decent way. And for that reason, you're right, we give a lot of KPIs, which is about broadband base growth or base growth in broadband, mobile, SME, CAGRs on revenue, net Promoter Score, you name it all. At the end, we simplified everything by saying it's a 337 CAGR. So that's a top line EBITDA and cash. And if I have to make a choice, I say the 7, the cash is the most important one of those 3. And the rest is all leading. So sometimes you're a bit behind on the subsegment. Sometimes you're a bit speeding up somewhere, sometimes NPS is lower or higher. But at the end, it's very important that we get to that financial promise, and we're on track. So -- but it depends a bit on the stakeholder, I -- when it comes to the KPIs we focus on. Operator: And the next question comes from David Wright of Bank of America. David Wright: Just on VodafoneZiggo, they obviously announced their strategic shift earlier this year, pushing a little more into Q2. I'm sure we'll get a similar message on Q3. Are you observing -- how are you observing the sort of retail pushback now? They've obviously branded the 2 gigabit product. We've got a slightly keener pricing. Do you observe anything else? Is there a lot more marketing spend? Is the marketing different than it was before? Just any casual observations you might have on how they've changed [ TAC ]. Joost Farwerck: Well, the change we saw was the announcement on Superfast Internet. I think for the market, that's not that bad. I mean, on mobile, we all 3 move to unlimited, which is a good development for the total market. And if the total market moves to higher speed broadband, wouldn't be that bad, I guess. But we play our own game. So like I mentioned, customers come in on 1 or 4 gig, and that's difficult to copy. So, so far, it's more an announcement then I see real movements in the market. Chris, anything to add on? Hans Figee: Yes. I mean when I look at, for example, our broadband net adds and fiber net adds, fiber net adds have been steady, net adds. But if you exclude all the copper migrations, fiber real new clients come in around 60,000 to 70,000 for quite some time now. So it's pretty steady. We've seen churn coming down. So we've seen churn coming down in both fiber and copper. That churn reduction started in Q2 and continued in Q3. So that's actually positive. And we don't want to steer just by the month, but when I look at just the simple October numbers, the order balances and the early indication of the month of October are fine. So at this point, it feels that we are obviously cognizant that it's a serious competitor out there. But in terms of underlying performance, no change in recent trends from where we are right now. In fact, churn has come down and things have not fallen off a cliff in the month of October. Operator: And our next question comes from Joshua Mills of BNP Paribas. Joshua Mills: A couple of questions from my side. Firstly, it's been about a year since Odido launched FWA services across the Netherlands. I wondered if you could give an update on how you think that's impacted the competitive landscape and whether it is impacting on your wholesale line losses as well or whether that's due to other factors? And then secondly, if I just build on that wholesale line loss question, trends look to be similar to the last couple of quarters. How would you expect that to develop over the next couple of years? And do some of the more aggressive promotions we're seeing from your ISP partners go anyway to help with that trend going forward, even if it's painful on the retail side? Joost Farwerck: Yes, fixed wireless access from Odido, we see activations on fixed wireless access, but it's also a different market than the broadband market in general in the Netherlands. So it's also a bit of a niche market for people camping, people on holiday, people in boats. So therefore, it's useful. It's also used as another option than whole buy on our network or on DELTA's network. So for Odido, they are asset-light on fixed and they are asset-heavy on mobile. So they try to clearly sell more customers, fixed wireless access to leverage the asset and to avoid the wholesale payments. But it's not really impactful when it comes to total broadband market share. So we use it as well, by the way, in super rural areas, but we always use it in combination with the fixed line. So for us, convergence is, as you know, the strategy. So in copper areas, the speed of the Internet connection can be supported by bonding via fixed wireless access. And probably, we're going to use that more frequently in the rural areas. Hans Figee: Yes. And Joost, on the wholesale side, if you look at the line losses in wholesale, that's really only copper. So wholesale fiber is growing from our main customer and wholesale copper is declining. As we understand, that decline is mostly related to the switching of the Tele2 brand, so the switching of a brand and the switching of the brand leads to customer migration. That's the main driver for losses in copper and wholesale. I expect that to continue in Q4 and possibly in Q1, but that's probably -- then the light at the end of the tunnel. I think that's the end in sight on that development. And then, for example, broadband service revenues, I think we're up about 2% this year. I think broadband service revenues in mobile will be plus 2% this year. Next year, around flattish is a combination of fiber growth indexation and the decline in that copper part. So I think when I look at it, it's mostly the line loss in copper related to the switching off of a brand, and that is a project that will come to an end, I would say, next -- somewhere mid- to early Q1, I would expect that impact to really to fade away. Operator: And our next question comes from Keval Khiroya of Deutsche Bank. Keval Khiroya: I've got 2 questions, please. So you've done quite well on consumer broadband despite the competitive backdrop. But how do you think about the gap between front and back book pricing in broadband? Do you get many requests from customers to move to the current cheaper promos in the market? And secondly, helpfully, you commented on wholesale broadband. But how do we think about the level of mobile wholesale growth next year? Obviously, sponsored roaming has been quite helpful. And does that continue? Any insights on the level of growth next year would be helpful. Joost Farwerck: Yes. So we shifted a bit on strategy as we announced last year, and that is invest more in existing customers instead of playing the acquisition game. We think it's very important to make a difference against the more challengers in the market. And investing in the customer base also leads to back book front book migrations. So that's how revenues in broadband are impacted, and that's why you only see 1 point something on service revenue growth while we do a price increase of 3. Having said that, that's part of our plan. And so when we move customers into what we call combination -- CombiVoordeel, then they have to sign up for 2 years, and that's leading to a back book front book migration. But -- so we made it part of our strategy. Hans Figee: Yes. And Keval, on the wholesale side, yes, indeed, we've been quite successful in mobile service revenue growth in wholesale. I expect that to continue. I don't plan on this level of growth going forward. But we have a decent funnel of potential new counterparties signing up in these type of businesses. And then we have a number of these clients that we help to win new business. So we work them for them to win new businesses. So I expect continued growth in this business going forward, perhaps not at the same pace. I think wholesale should be able to grow around 4% or so top line growth next year, all in with flattish broadband service revenue growth and the remainder is mobile. So continued growth, but let me be a bit conservative and not project the same level of growth, but wholesale around 4% service revenue growth next year is definitely feasible with all of this. Operator: And our next question comes from Ajay Soni of JPMorgan. Ajay Soni: Mine is just around the FTE reduction. So I think you're 300 lower year-over-year, which seems to be around 3% of your employee base. So my first question is just around why is this not being reflected maybe more obviously within your EBITDA bridge? Are there any other headwinds which are -- which means it isn't reflected? And I think looking further ahead, can you accelerate this FTE reductions over the next year, so they are more meaningful in 2026? Joost Farwerck: Yes. Thanks for the question. And next week, we will update you on what we are doing on transformation programs and how we look at the company in a couple of years from now and what kind of operating model we're building. And as a result of that, yes, we expect more FTE reduction. So why don't you see the minus 300 already impacting our EBITDA. First of all, we have a CLA increase. We -- other increased pension costs. So we have to cover up for, I don't know, 6% something of increasing wage costs. And secondly, it's also about the timing in the year. So the 300 will kick in on a higher scale next year than this quarter. But moving the company to a lower FTE base as a result of quality improvements and digitalization is very important also to cover costs and to make a step down. Operator: And our next question comes from Siyi He of Citi. Siyi He: I have 2, please. The first one is really on the comments of the Q4 service revenue growth of 2%. Just trying to think about the trend for next year. I think you mentioned that the B2B and wholesale trend probably is going to be similar level to Q4. And I'm just wondering if you can comment what kind of tailwinds that you would expect to basically help the service revenue growth to accelerate from the 2% to the midterm guidance of 3% and my second question is basically on fiber rollout. I'm sure that you will cover it next week. But just wondering if you can give us some color of how should we think about the fiber CapEx considering that there seems going to be a decent acceleration needs to be done to meet the above 80% coverage target. Joost Farwerck: Well, on the fiber CapEx, we clearly guided to the market that we will make a step down in 2027, and we still plan for that. So we expect a step down of at least EUR 250 million. That's in our guidance, and we stick to the guidance. Chris? Hans Figee: Yes. I mean on the service revenue growth, we'll give you a lot more details -- next week on our capital strategy update -- on the full capital market strategy update, we'll give you more details. But think of consumer to be growing around 1.5%, I think B2B north of 3%, B2B around 4%, and that should make for top line growth, but more in details next week. B2B 3, wholesale 4, yes. Operator: And the next question comes from David Vagman of ING. David Vagman: The first one, coming back on the competitive environment in broadband. If you can comment on your view on your expectation rather on the potential ARPU evolution, in mind speed tiering, but also competition, the announcement of VodafoneZiggo and the tweaking of offers by Odido yesterday. And then second question on the broadband wholesale market in the Netherlands, also your expectation on the ARPU side for KPN? Joost Farwerck: Yes. So on the -- I mean, the market is competitive. It will stay competitive, and I don't expect that to change. The difference between the Netherlands and most other markets is that we have a fully fiberized country already almost. So we're -- 90% of the households already are covered by fiber networks. All households are connected to at least 2 networks fixed. So what I want to say, our digital infrastructure fixed is of a super high level compared to other countries. So there is a competition between the fixed players, but I don't expect much competition coming in from fixed wireless access or satellite or other things you see in countries covering more rural areas as well, like -- and then -- so the competition will be firm, but we positioned ourselves, and I'm glad we did, by the way, we built a fiber footprint of almost 70%, more or less clean. And there's not that much appetite to overbuild us there. It will be more competitive in the new areas for us. So there, we can say to overbuild. We're waiting for our regulator to see what they do with that Glaspoort deal. But compared to other countries, I would say, yes, it is competitive. It is challenging, but we build a strong fiber footprint in the core of our strategy. Hans Figee: Yes. And to your point on wholesale ARPUs in broadband, a couple of things at play. Of course, every year, we have indexation. There's a schedule approved and agreed with the regulator, effectively around 2% indexation every year. Our ARPU is supported by the mix shift from copper to fiber. So we see a decline in copper and increase in fiber, that is supportive. And then any ARPU actions that we do to support our broadband -- for broadband partners tend to be linked to retention, tend to be for specific higher speeds or tend to be around linked to volume commitments. So basically, I would say ARPUs in wholesale broadband are pretty much the same and often linked to a combination of mix, price increases and/or specific agreements on retention and volume. Operator: And the final question is from Ottavio Adorisio of Bernstein. Ottavio Adorisio: A couple of follow-up questions. On Slide 8, you effectively stated that you expect bottoming up on the mobile. And during the call, effectively, you highlighted the price increases. But when someone look at the chart, you can see that, that revenue trends bottom up already in Q4 and deteriorated afterwards. So my question is that what makes you confident that the price increase will stick this time around, we don't go to promotion later on and the revenue trends deteriorate again? The second one is on the broadband. The churn for copper for your copper customers is stable, you stated that one. But looking at the numbers, you look at the migration from copper to fiber to be the lowest this quarter over the past 2 years. So my question is that there is any plan to encourage migration by reducing the price gap between copper and fiber? Hans Figee: Yes. On the first question, what happened -- what will happen from Q3 to Q4, what happened last year? Well, Q4 last year was a very particular quarter where a few things happened. We saw a temporary drop, actually, an accounting drop with roaming that actually reversed in the first quarter. You can see in the first quarter, sales revenue growth in mobile going up had to do with the accounting and booking of some roaming revenues. Second, we had an iPhone credit. If you recall well last year, we had some iPhone disturbances for which we gave some of our customer specific credits to compensate for that. I mean the iPhone disturbances are on hold for the end customers. And thirdly, we had a special offer in the market in that very fourth quarter. So a couple of particular trends that took down growth in the fourth quarter to a low level after which it rebounded in Q1 last year. So those were particular impacts on that third quarter, fourth quarter, and I don't expect them to repeat. So that gives me some comfort that, that blip that you saw last year will not come again this year. And the second question on copper upgrades to fiber. We really try to upgrade customers to fiber. It's a function of network rollout. It's a function of planning. It's a function of access to customers that fluctuates a bit over time. There's no strategic or technical retweet in this part, if you see what I mean. It has to do with timely and operational execution. We will continue to migrate customers from copper to fiber. We might actually, at the point in the midterm, try to accelerate that to enable the switch off of our copper network to accelerate. Joost, do you want to add? Joost Farwerck: Well, the unique thing of our fiber footprint is that we're building a fiber footprint with 80% of the households homes connected. And that's first of all to migrate all existing customers of KPN to the fiber network. That's the copper churn or the urban copper migration. Then we want to connect a lot of new customers, and then we want to connect as well a lot of wholesale connections. So there's more room on the network of households already prepared for an activation from a distance. So the copper migration is something that's really in our system to finalize to switch off the copper network as well. Matthijs van Leijenhorst: Okay. One final question. Operator: And our final question comes from Joshua Mills from BNP Paribas. Joshua Mills: Possibly a pedantic one here. But if I look at Slide #6 in the presentation where you have homes passed as a percentage of Dutch households, you have the target of 80%. And I don't see a year associated with that. I think in previous presentations, you were highlighting that you'd reach 80% homes passed coverage by the end of 2026. Can you just confirm that that's still the guidance and there's no change there, just so I'm clear. Joost Farwerck: Well, so yes, we are expanding our fiber footprint this year, next year and the years after, 74,000 homes passed, 82,000 homes connected this quarter. We stick to 66,000 because if you read it as well as you did. And last quarter, we also reported 66,000, but that's because of annual addition of households by CBS, the Central Bureau of Statistics in the Netherlands. And we stick to our ambition of 80% of Dutch households on fiber. But next week, during our strategy update, we'll share how we will get there within our financial framework. So we aim for 80%, and we confirm our midterm ambition of 3 targets, including the CapEx step down of to EUR 1 billion in 2027. Joshua Mills: Okay. And just -- so to be clear, the explicit target previously of reaching 80% by the end of 2026 is... Joost Farwerck: I've said earlier in previous calls as well that there's a lot of KPIs like we just discussed out there. And sometimes we meet -- we're getting faster, sometimes we're slowing down. The 80% is also a target, which is a very important one for us, and we will meet it for sure. But on the timing part, we will get back to you next week. And at the end, it's for us very important that the overall total strategy works, and that's working. Matthijs van Leijenhorst: Okay. That concludes today's session. Obviously, we will see -- we'll meet online next week during our strategy -- next Wednesday on the 5th of November. See you then. Cheers. Operator: Thank you. Ladies and gentlemen, this concludes today's presentation. Thank you for participating. You may now disconnect your line. Have a nice day.
Operator: Welcome to the fiscal 2026 First Quarter Earnings Call for Applied Industrial Technologies. My name is Eric, and I'll be your conference operator for today's call. [Operator Instructions] Please note that this conference call is being recorded. I will now turn the call over to Ryan Cieslak, Director of Investor Relations and Treasury. Ryan, you may begin. Ryan Cieslak: Okay. Thanks, Eric, and good morning to everyone on the call. This morning, we issued our earnings release and supplemental investor deck detailing our first quarter results. Both of these documents are available in the Investor Relations section of applied.com. Before we begin, just a reminder, we'll discuss the business outlook and make forward-looking statements. All forward-looking statements are based on current expectations subject to certain risks and uncertainties, including those detailed in our SEC filings. Actual results may differ materially from those expressed in the forward-looking statements. The company undertakes no obligation to update publicly or revise any forward-looking statement. In addition, the conference call will use non-GAAP financial measures, which are subject to the qualifications referenced in those documents. Our speakers today include Neil Schrimsher, Applied's President and Chief Executive Officer; and Dave Wells, our Chief Financial Officer. With that, I'll turn it over to Neil. Neil Schrimsher: Thanks, Ryan, and good morning, everyone. We appreciate you joining us. I'll begin today with perspective and highlights on our results, including an update on industry conditions and expectations going forward. Dave will follow with more financial detail on the quarter's performance and provide additional color on our outlook. I'll then close with some final thoughts. So overall, we had a nice start to fiscal 2026. We delivered strong earnings performance in the first quarter with EBITDA and EPS growing 13% and 11%, respectively, over the prior year, which exceeded our expectations. Sales growth was largely in line with our outlook and strengthened compared to last quarter against a still muted and choppy end market backdrop. We converted stronger sales growth into even greater EBITDA growth through solid gross margin execution, cost control and our internal initiatives. As a result, EBITDA margins expanded over the prior year and exceeded the high end of our first quarter guidance. In particular, our service center team delivered a strong quarter on both the top and bottom line, and I'm encouraged by the positive momentum building from our internal initiatives and industry position. Sales across our Engineered Solutions segment were relatively flat versus the prior year, but orders remain positive. Hydradyne contribution continues to increase and the segment has solid growth potential moving forward. Overall, our execution and progress in the first quarter provides positive momentum to achieve our fiscal 2026 objectives and accelerate our value creation potential moving forward. Digging more into the sales trends, broader end market demand remained mixed during the quarter as lingering trade policy uncertainty continued to impact customers' purchasing decisions. That said, we would describe the underlying demand backdrop as stable to slightly positive. And overall, moving in the right direction when looking at it over the past several quarters. Year-over-year trends across our top 30 end markets improved slightly with 16 generating positive sales growth compared to 15 last quarter. We saw stronger trends across several of our primary end markets with strongest growth in machinery, food and beverage, refining, pulp and paper, metals, oil and gas and aggregates during the quarter. This was offset by declines in lumber and wood, transportation, chemicals, mining and utilities and energy. Year-over-year organic sales trends were stronger in July and August relative to September, though partially reflecting more difficult comparisons later in the quarter. Combined with greater pricing contribution, reported organic sales growth of 3% was the strongest in 2 years with a 2-year stack trend improving sequentially for the third consecutive quarter. Organic sales growth in the quarter was led by our Service Center segment with reported growth of 4.4%, accelerating nicely from the low single-digit declines we experienced in fiscal 2025. Growth was strongest across our national account base, while local account sales were up modestly year-over-year. which is an improvement from recent quarters. Strengthening service center sales growth is an encouraging sign for both the segment as well as our broader operations, as the shorter cycle nature of our service center operations is typically a good indicator of underlying industrial activity and potential demand for capital-related spending moving forward. We believe modest firming in manufacturing production and capacity utilization, combined with pent-up demand from deferred maintenance activity is driving more technical MRO and break-fix activity at the margin. We're seeing stronger activity across some of our heavy U.S. manufacturing verticals that are break-fix intensive. This includes primary metals market, where related service center sales were up by a high single-digit percent year-over-year in the quarter. Our service center team also continues to benefit from ongoing sales initiatives technology investments and greater cross-selling opportunities, which is supplementing their performance beyond underlying market demand. It's also important to highlight the strong execution of our service center team in the quarter where they levered 4% sales growth to 10% EBITDA growth, while particularly benefiting from more favorable AR provisioning over the prior year, the underlying earnings leverage was solid and highlights the team's operating discipline, ongoing cost control and effective management of broader inflationary headwinds. Within our Engineered Solutions segment, organic sales in the first quarter finished slightly lower compared to the prior year but remain on a solid path to stronger growth. Of note, segment orders sustained positive momentum, increasing nearly 5% organically over the prior year during the quarter, with a 2-year stack trend accelerating sequentially. Segment orders have now been positive year-over-year for 3 straight quarters with book-to-bill above 1 during the quarter. Order growth strengthened across our industrial and mobile OEM fluid power operations during the quarter. This exceeded our expectations and leaves us incrementally constructive on related fluid power sales trends moving forward. Our fluid power team for leading engineering capabilities and customer reach are driving new business opportunities tied to mobile electrification, next-generation fluid power systems and fluid conveyance. We also believe a lower interest rate environment and tax incentives could be particularly positive for our fluid power customer base, which is primarily comprised of small to midsized domestic OEMs. In addition, new business development and customer indications signal a potentially active backdrop across our technology vertical and discrete automation operations entering the second half of fiscal 2026. This includes an expanding position supporting the data center market with our fluid power and flow control solutions tied to thermal management applications and our automation teams providing robotic solutions supporting material handling applications. Our enhanced technical footprint in the Southeast U.S. region, following our Hydradyne acquisition, has further strengthened our data center position and related order momentum. Demand signals across our semiconductor customer base also remain encouraging and indicate a potential greater ramp in related orders and shipments during the second half of fiscal 2026, as the wafer fab equipment cycle gains momentum. I would also highlight recent investments we've made in engineering, systems and production capacity over the past several years that provide significant support to fully leverage these demand tailwinds moving forward. As a reminder, the technology and discrete automation verticals combined represent more than 25% and of our Engineered Solutions segment sales and could be an increasing contributor to the segment's growth moving forward based on our initiatives, growing order book and broader secular tailwinds. In addition, our flow control team is focused on capturing growth developing within life sciences, pharmaceutical and power generation markets within the U.S. With established product portfolios and leading technical capabilities around calibration services, instrumentation, steam and process heating and filtration we are favorably positioned to win in these markets. On a side note, our flow control backlog ended the quarter at its highest first quarter level in over 3 years, with orders positive year-over-year. Combined with relatively easy comparisons, we remain optimistic on the setup of our Engineered Solutions segment entering the second half of fiscal 2026 as recent order momentum converts and underlying end markets continue to firm. At the same time, we remain constructive on our ability to lever stronger sales and drive greater earnings growth and EBITDA margin expansion. Our first quarter performance is a good reflection on this. Of note, we achieved 17% incremental margins on EBITDA, inclusive of ongoing inflationary pressures, including LIFO and unfavorable M&A mix. We believe our underlying business model, combined with ongoing operational initiatives and structural mix tailwinds provide notable earnings growth levers to achieve our mid- to high-teen incremental annual margin target and continue to expand EBITDA margins in a positive sales growth backdrop. In addition, sales growth and EBITDA margin should benefit from ongoing progress developing across Hydradyne. As we approach our 1-year anniversary of the acquisition, we are very encouraged by the performance the broader team is delivering and the potential we see ahead. Hydradyne earnings contribution continues to improve, with EBITDA up over 20% sequentially in the first quarter and EBITDA margins improving nicely from the prior 6-month trend. We are making strong progress with sales synergies and our teams collaborate and leverage innovative fluid power solutions. This includes connecting Hydradyne strong repair and field service support across our legacy MRO customer base while enhancing their value proposition by providing access to our systems engineering team and complementary product lines. We're also tracking well to our operational synergy streams, including solid progress on harmonizing systems processes and operational efficiencies. Combined with the growing backlog and firming demand across their core end markets, we believe Hydradyne could be nicely additive to our organic sales growth and EBITDA margin trend as we anniversary the transaction into the second half of fiscal 2026. Lastly, we remain on track to have another active year of capital deployment to further supplement our growth potential and shareholder returns. M&A remains a top capital allocation priority for fiscal 2026. Our pipeline is active with varying sized targets across both segments. This includes several midsized targets at various stages of due diligence that could enhance our technical differentiation and value-added service capabilities. In addition, we expect to remain active with share repurchases for the remainder of fiscal 2026 as we balance the cadence of potential acquisitions, our balance sheet capacity and the value we see across applied from our strategy and long-term earnings potential. At this time, I'll turn it over to Dave for additional detail on our results and outlook. David Wells: Thanks, Neil. Just as a reminder before I begin, as in prior quarters, we have posted a quarterly supplemental investor presentation to our investor site for your additional reference as we recap our most recent quarter performance. . Turning now to details of our financial performance in the quarter. Consolidated sales increased 9.2% over the prior year quarter. Acquisitions contributed 6.3 points of growth which was partially offset by a negative 10 basis point impact from foreign currency translation. The number of selling days in the quarter was consistent year-over-year. Netting these factors, sales increased 3% on an organic basis. As it relates to pricing, we estimate the contribution of product pricing on year-over-year sales growth was approximately 200 basis points for the quarter. This is up from approximately 100 basis points in the fourth quarter and primarily reflects the effective pass-through of incremental announced supplier price increases in recent periods as previously discussed. Moving to consolidated gross margin performance as highlighted on Page 7 of the deck, gross margin of 30.1% was up 55 basis points compared to the prior year level of 29.6%. During the quarter, we recognized LIFO expense of $2.6 million which was up slightly from the prior year first quarter amount of $2 million. On a net basis, this resulted in an unfavorable 5 basis point year-over-year impact on gross margins during the quarter. The year-over-year improvement in gross margins primarily reflects positive mix contribution from our Hydradyne acquisition, solid channel execution and benefits from our margin initiatives as well as more muted gross margin performance in the prior year first quarter. This was partially offset by mix headwinds from growth in strategic accounts and lower flow control sales. Price cost trends were relatively neutral in the quarter. As it relates to operating costs, selling, distribution and administrative expenses increased 9.7% compared to prior year levels. SG&A expense was 19.4% of sales during the quarter. Excluding depreciation and amortization expense, SG&A was 18% of sales during the quarter and down 10 basis points from the prior year. On an organic constant currency basis, SG&A expense was up a modest 0.7% year-over-year compared to the 3% increase in organic sales. During the quarter, ongoing inflationary headwinds and growth investments were balanced by solid cost control and internal productivity initiatives as well as the benefit of more favorable AR provisioning resulting from our working capital initiatives and collections performance. Overall, stronger organic sales growth, coupled with M&A contribution, favorable gross margin performance and solid cost control resulted in reported EBITDA increasing 13.4% year-over-year, including over 6% on an organic basis. This resulted in EBITDA margins of 12.2%, expanding 46 basis points from the prior year level of 11.7%, which was above the high end of our first quarter guidance of 11.9% to 12.1%. Reported earnings per share of $2.63 was up 11.4% from prior year EPS of $2.36. On a year-over-year basis, EPS benefited from a reduced share count tied to our buyback activity, partially offset by a higher tax rate as well as increased interest and other expense on a net basis. Turning now to sales performance by segment. As highlighted on Slides 8 and 9 of the presentation. Sales in our Service Center segment increased 4.4% year-over-year on an organic basis when excluding a 10 basis point positive impact from acquisitions and a 10 basis point negative impact from foreign currency translation. So organic sales increase in the quarter was primarily driven by ongoing internal initiatives firming technical MRO demand and incremental price contribution. Sales growth was strong across our national account base, reflecting benefits from sales force investments and cross-selling actions. Segment trends also continue to be supported by favorable growth across Fluid Power MRO sales. Segment EBITDA increased 10.1% over the prior year while segment EBITDA margin of 13.9% expanded over 70 basis points. This year-over-year improvement primarily reflects solid operating leverage and stronger sales growth, channel execution and cost control as well as more favorable AR provisioning requirements. Within our Engineered Solutions segment, sales increased 19.4% over the prior year quarter with acquisitions contributing 19.8 points of growth. On an organic basis, segment sales decreased 0.4% year-over-year. The modest decline was primarily driven by muted sales trends during September across our flow control operations, reflecting softer project-related shipments. In addition, sales growth across our technology vertical was softer than expected in September, primarily tied to more gradual or conversions across the semiconductor market. We view this as timing related, considering backlog trends customer indications and broader sector tailwinds, as Neil highlighted earlier. Sales across industrial and mobile fluid power markets were also lower year-over-year. However, the decline was more modest and improved notably from fiscal 2025 trends, primarily reflecting easier comparisons and firming OEM customer demand. Sales across our automation businesses increased organically for the second straight quarter with organic growth of 4% year-over-year, driven by solid robotic solutions demand in the U.S. business. EBITDA increased 16% over the prior year, reflecting contributions from our Hydradyne acquisition as well as solid cost management, which was partially offset by modestly lower organic EBITDA on muted sales trends in the quarter. Segment EBITDA margin of 13.8% was down roughly 40 basis points from prior year levels, primarily reflecting unfavorable acquisition mix and lower fluid control sales. That said, we expect segment EBITDA margin trends to improve as acquisition mix headwinds ease and segment sales improve. Of note, Hydradyne's EBITDA contribution continues to increase as we progress along our integration and synergy initiatives with its financial performance tracking to our first year guidance of $260 million in sales and $30 million in EBITDA with growth and synergy momentum, providing upside support into the second half of fiscal 2026. Moving to our cash flow performance. Cash generated from operating activities during the first quarter was $119.3 million, while free cash flow totaled $112 million, representing conversion of 111% relative to net income. Compared to the prior year, free cash was down slightly, reflecting greater working capital investment balanced by ongoing progress with internal initiatives. From a balance sheet perspective, we ended up September with approximately -- excuse me, $419 million of cash on hand and net leverage at 0.3x EBITDA, which is above the prior year level of 0.1x. Our balance sheet is in a solid position to support our capital deployment initiatives moving forward. including accretive M&A, dividend growth and opportunistic share buybacks. During the first quarter, we repurchased approximately 204,000 shares for $53 million. Turning now to our outlook. As indicated in today's press release and detailed on Page 12 of our presentation, we are modestly raising full year fiscal 2026 EPS guidance to reflect first quarter performance and updated diluted share count assumptions following the first quarter buyback activity. We now project EPS in the range of $10.10 to $10.85 compared to prior guidance of $10 to $10.75. That said, we are maintaining our sales guidance of about 4% to 7%, including up 1% to 4% and on an organic basis as well as EBITDA margins of 12.2% to 12.5%. Guidance continues to assume 150 to 200 basis points of year-over-year sales contributions from pricing. Our sales outlook remains largely unchanged from the views we provided in mid-August. We believe end market trends are moving in the right direction, and we are encouraged by positive order and business funnel momentum. However, we continue to assume industrial activity remains mixed near term, and we expect our conversion across our Engineered Solutions backlog to be more weighted toward the back half of our fiscal year. Combined with sales trends in October, we currently project fiscal second quarter organic sales to increase by a low single-digit percent over the prior year quarter with Service Center segment growth above the Engineered Solutions segment. This is consistent with the midpoint of our initial guidance provided in mid-August and implies underlying sales trends remain relatively stable in the second half of our fiscal year at midpoint. We also acknowledge the low end of our sales guidance would imply a softening market in the back half of the year. We view this as little probability based on our indicators and performance to date. However, consistent with our typical approach to guidance, we believe it remains prudent to maintain our full year range at this early point in the year, pending greater clarity and less volatility across the macro and trade policy backdrop. Overall, we are running in line with our sales expectations year-to-date and remain constructive on our setup moving to the second half of the year. Lastly, from a margin standpoint, we are encouraged by our first quarter performance and reiterating the outlook provided in mid-August. We continue to assume ongoing inflationary pressures and growth investments as well as $14 million to $18 million of LIFO expense. For the second quarter, we expect gross margins to increase slightly on a sequential basis and EBITDA margins of 12% to 12.3%. I would note that we faced a difficult year-over-year gross margin and EBITDA margin comparison in the second quarter. Our prior year second quarter margin was favorably impacted by more modest LIFO expense of $0.7 million and nonroutine supplier rebate benefits as well as record performance across our Engineered Solutions segment tied to favorable mix. We expect stronger relative year-over-year EBITDA margin trends in the second half of the year reflecting greater expense leveraging and ongoing Hydradyne synergy progress as well as the potential for more favorable mix dynamics. With that, I will now turn the call back over to Neil for some final comments. Neil Schrimsher: So to wrap up, we are encouraged by our first quarter performance, including stronger top line trends, sustained positive order momentum and margin execution. We continue to have many self-help growth and margin opportunities that we expect to manifest in coming quarters and provide ongoing support levers. That said, we expect near-term sales to remain choppy, as customers balance production schedules, project phasing and capital investments into the seasonally slower fall and winter months particularly as broader trade policy uncertainty continues to linger. Importantly, we believe the underlying fundamental backdrop within our core end markets is moving in the right direction and has the potential to gain momentum as the year progresses. Feedback and sentiment from customers is gradually improving. Demand indications are more favorable across both traditional end markets, such as metals and machinery as well as emerging verticals, including discrete automation, life sciences and technology. We're seeing encouraging funnels across both our segments that should translate into incremental order growth as additional trade policy clarity emerges, interest rates continue to moderate and capital investment decisions are finalized. Certain U.S. industrial macro data points have trended more positive in recent months, including machinery and metals new orders as well as mining production, which have traditionally correlated well with our underlying core business. While ISM readings remain in flux, we believe the elongated sub-50 trend is positioned to move higher when considering leaner inventories and potential benefits from pro-business policies. In addition, qualitative data points around planned investments in North American manufacturing infrastructure, and onshoring continue to broaden, while our customer service requirements are growing as they face technical labor shortages and an aged equipment base. We are well positioned to capitalize on these trends given our domain knowledge and scale across industrial facilities core capital equipment. This includes our expertise around critical motion and powertrain products in demanding applications, access to premier supplier brands and nonstandard components, nationwide local service reliability. In addition, we have leading channel position in providing advanced robotics, machine vision and high-tech fluid power systems. Combined with our network of service shops, technicians and engineers, we are positioning our strategy and teams to play an increasingly critical role in linking legacy industrial production infrastructure and processes with new advanced applications and technologies, both now and into the future. Lastly, our balance sheet and liquidity provide strong support to opportunistically pursue ongoing organic investment and strategic M&A in the current environment as well as other capital deployment that could augment returns for all stakeholders going forward. Once again, we thank you for your continued support. And with that, we'll open up the lines for questions. Operator: [Operator Instructions] Your first question comes from the line of David Manthey with Baird. David Manthey: My first question -- first a comment, I mean, the business seems to be tracking really well, and I appreciate the conservative guidance given the many headwinds. And along those lines, as we look forward here into the December quarter, Christmas is on a Thursday this year, which makes it kind of tough for that Friday, December 26 between the holiday and the weekend. Just wondering if you've been hearing anything from your customers in terms of holiday shutdowns as they look forward to the end of the year. Neil Schrimsher: I would say at this stage, still a little early. We plan to be working. I'd say that for one. But I think many dialogue with our customers, they're starting to look at projects, planned maintenance activity out for and looking forward to the -- what they think will be ongoing demand requirements for them. So -- and we're aware of the mid-week seasonal holiday dropping in that, a little early, but I'm expecting some customers are going to be leaning in and active as they look forward at demand requirements and some others may take some time out, but that also opens up doors for additional planned project maintenance. Ryan Cieslak: Dave, this is Ryan. I just would add to that dynamic is taken into account in terms of the second quarter guide that we provided as it relates to maybe some impact from the holiday timing. We do have an easier comparison in the month of December, which could balance some of that as well. David Manthey: Great. I can't promise I'll be in the office on the 26th, but I'm glad to hear you guys will. Second question is, Neil, in the past, you've mentioned that inflation is manageable if your suppliers, a, increase the price as opposed to putting through a surcharge and b, give you 45 days' notice to push that through to the customer base. One of your distribution comps recently noted a compressed supplier notification periods. And I'm just wondering if you've noticed anything, any different behavior from your supplier base along those lines? Neil Schrimsher: David, I'd say overall, no real difference in behavior. I would say the orderly the increases have been orderly notifications. Obviously, the team is doing a very nice job in implementing across price/cost in the quarter, equal into that side, we did see price contribution increased a couple of hundred basis points in that. We're looking at perhaps there'll be the 232 on derivative products. But I think there, some manufacturers, a few moved, and I think some others are just contemplating looking at country of origin and when that -- what the impact will be and when that will come through as a price increase. And so some will organize that for the beginning of the calendar year with the typical notice period. So I'd say overall, it continues to be an orderly environment. Teams are focused. We know how to execute, and we'll continue to do so. Operator: Your next question comes from the line of Brett Linzey with Mizuho. Peter Costa: This is Peter Costa on for Brett. So I think you had said previously that Engineered Solutions would outperform Service Center by about 100 basis points in fiscal '26, is this still something that's possible with a stronger second half? Or are you expecting a more balanced organic mix now? Neil Schrimsher: Yes. I would say as we look at the second quarter, I could see service centers continuing to be ahead. And then as I look at the second half of the year, we could see Engineered Solutions with the order backlog, project conversions to be greater than the Service Centers in the second half of fiscal '26. Ryan Cieslak: Yes, Peter, I'd say that, that assumption for the full year is still in line with our guidance as it relates to overall the Engineered Solutions segment around 100 basis points. Peter Costa: Awesome. And then maybe just on consolidated incrementals as you get Engineered Solutions comes back and Hydradyne's less dilutive. Could you actually see upside to incrementals as we go into the second half? Neil Schrimsher: Yes, we think there could be the setup also a broadening of local accounts, greater engineered solutions. So I think clearly, that potential exists. Operator: Your next question comes from the line of Sabrina Abrams with Bank of America. Sabrina Abrams: Can you help me understand like the orders growth has been quite good for the past few quarters in both fluid power and I think on the flow control. And my understanding is the projects, the lead times are not particularly long, maybe 180 days or less. So just trying to understand the dynamic. When these orders do turn positive and when you do convert out of backlog, are customers delaying? Because it seems like it's taken longer than usual. Neil Schrimsher: No, Sabrina, I would say there's just variance in projects on the time to convert based on sometimes complexity of the project or the overall status of the project and the schedule and where we sequenced into that. So I'm encouraged by the continuous orders expansion into that. Fluid power was up nicely, 9% in the quarter. Flow control, nice order growth in as well. I think there, there is some pivot in some of the projects where previously they would add projects around carbon capture and some other activity. There's a little more around power generation, life science and pharmaceuticals, but we're encouraged that, that work will continue to be in the U.S. markets. And then on the automation side, we had a tough comparable, plus 25% from an order standpoint last quarter, down slightly on order this side, but a 2-year stack that's over 23%. We take that as very encouraging across our discrete automation opportunities in robotics and vision. So good coming input on projects. We expect the conversion will be occurring. Some of it may sequence more in with calendar year-end into the second half of our fiscal 2026, but we've got a good pipeline to execute on. Sabrina Abrams: Okay. Great. And just want to ask again about pricing. I think last quarter, the thought was that pricing would ramp through the year with Q1 maybe not quite -- like it seems like pricing came in better than what we had spoken about. Have you changed how you are thinking about the cadence of pricing throughout the year? Because it seems to me not raising the pricing guide. It seems like you're being conservative here. Neil Schrimsher: I think, Sabrina, we're just early into it. We did come in at that 200 basis points. We've guided to 150 to 200 basis points. Could it develop more as we look out, I think that will be a little bit contingent on market activity and the rate of additional supplier increases at that time. So we think coming offsetting those expectations mid-August to looking at now, perhaps it's a little early to say it will ramp beyond the 200 basis points that we had in the quarter. Operator: Your next question comes from the line of Ken Newman with KeyBanc. Kenneth Newman: Maybe for my first one. Neil, on the Engineered Solutions side, it's good to hear that the orders they are improving. I'm just curious, do you have any color on what you're seeing out of that segment through October? Any help on whether that's kind of improving from what you saw at the end of September with maybe the fall off in activity there and just confidence on the timing of the conversion of that backlog. Neil Schrimsher: Yes. We continue to see good order activity. Teams are engaged and working on that order conversion and working on those projects. I would say also there is an MRO component in those businesses that we're working on. A little bit of the flow control group as they work through chemicals, perhaps there's a little bit of softness on the MRO side that played into the quarter. We expect that to continually improve, especially as we get into calendar 2026, with that interaction of customers. And then I just think that the setup and the dialogue, and we touched on it in the remarks. I think there's greater wafer fab equipment activity in calendar 2026. We know there's increased life sciences and pharmaceutical interest on that side. Our participation in data centers continues to grow and things that we're doing in thermal management, liquid cooling, but also our robotic solutions in that. So I'm encouraged that our Engineered Solutions business has great breadth. When an end market is shifting or changing, the teams are very focused on being where growth is occurring and positioning ourselves very nicely. So as we work through the second quarter, we feel very good about the second half of fiscal 2026. Kenneth Newman: Got it. That's helpful. And then just thinking about capital allocation, it was good to hear that the pipeline is still pretty active for M&A you did buy back some stock this past quarter. How do you think about the priority or the opportunities to put capital to work here in the second quarter or into the back half? And with automation starting to pick up on demand, is that making it easier or harder to get deals done? Neil Schrimsher: I would say a few things there. Priorities remain, right? We very much are going to be focused in funding our organic growth opportunities like we have to support automation and our fluid power technology segment businesses in that. So we'll continue to have organic growth also in systems remains a priority. We are active, busy on multiple fronts. Pipeline continues to have bolt-on opportunities in both segments as well as some midsized opportunities. So we'll continue to be busy on that front. And then we'll have other ways to return capital to the shareholders, increasing dividend as well as remaining active in share repurchase. So we think we're in a good position, continuing strong cash generation in that area. And I don't think the deal environment is more difficult in that front. We're going to continue to be a disciplined acquirer. We have clear priorities. We work to have ourselves in good positions when those opportunities arise. We say we can't perfectly control timing, but we feel good about our setup and opportunities for increased capital deployment in 2026. Operator: Your next question comes from the line of Chris Dankert with Loop Capital Markets. Christopher Dankert: Congrats on a nice start to the year here. I guess, first off, I'm looking at the margin guidance, calling for gross margins up a little bit sequentially, nice to see that. I guess I appreciate the year-over-year comp headwinds from rebates and mix and whatnot. But why wouldn't the EBITDA gross margin -- or excuse me, the EBITDA margin improved sequentially as well? And what are some of the maybe the sequential offsets that we should be thinking about? Neil Schrimsher: Yes. I think as you get in, Dave touched on it a little bit as we think about LIFO, the LIFO expense in the second quarter last year, $700,000. As we think about LIFO this time, it could perhaps be $4 million or greater into the site. So I think that is one different point Dave touched on the nonroutine rebate that would have occurred last time. And then perhaps some of the mix headwinds, still the M&A integration is lower as it would come in for now into that front. And then I think on a little less engineered solutions in the quarter and perhaps local accounts on the service center side ramping, but ramping less than some of the national accounts will all be influences on that side. David Wells: Yes, on that, Chris, we did see some modest benefit in the first quarter. You recall we took some provisioning charges in our Q4 based on our formulaic approach with customers and a couple of payment delays, vast majority of that came back to us in the quarter. So that was a modest benefit as well that would play through to EBITDA versus beyond the gross margin step-up that we talked about. Neil Schrimsher: And then I think, Chris, right, if we look past the second quarter, we feel like we've got a nice opportunity for greater expense leveraging in the back half of our year, probably increased in ongoing contributions from Hydradyne and then potentially mix benefits that we would get there of greater engineered solutions as well as local accounts as we think about the back half of the year. Christopher Dankert: Got it. I guess as a follow-up, thinking about the Hydradyne synergies, anything you can give us there in terms of is that still on track from both a cross-selling and a cost reduction perspective? Any anecdotes in terms of cross-selling wins you highlight there? Neil Schrimsher: Yes. So I would say on track to deliver first year synergies. So we feel good about that, growing opportunity on the sales and the repair. So they have very good capabilities there. And so we would see it on the maintenance side, cylinder repair and other opportunities, just where we have capability and resource in an important geography and then continued progress on the work streams on the cost side, use of technology in that front, standardizing on some processes, supporting them for the internal back-office capabilities in that front, all of those developing nicely. And then as we think about ongoing growth, they're well positioned from a data center standpoint. We think there's more we can do there and then how we support them from a central engineering standpoint, especially as fluid power technologies continue to increase around electrification in some of those electronics and controls can be positive as well on the growth side as we look forward. David Wells: We did highlight too in the comments, Chris, the EBITDA for the quarter did step up another 20% sequentially following the increase that we saw in Q4. So we continue to be pleased with the progress the team is making there. Operator: Your next question comes from the line of Patrick Schuchard with Oppenheimer. Patrick Schuchard: I wanted to ask about automation growth in Engineered Solutions. Can you contrast how much of the positive sales growth is secular market pickup versus internal initiatives and/or market share impact? Neil Schrimsher: Well, I think it's still early. We got a good run rate of the businesses probably scaling nicely at $250 million or so. So we're doing a nice job in ramping. I think we are opening and serving more industrial customers opportunities with these capabilities as well as participating in some nice projects around traditional industry segments. So we expect robotics as a general market to continue to grow, and we're well positioned there, both collaborative and autonomous mobile robots into the site. But we're also doing a nice job in the vision offering and where customers can see the benefits of quality control and inspection and what those solutions provide in there. So I think it's a combination, Pat, that we're just well positioned. We're opening up more opportunities with existing customers as well as serving traditional verticals with those companies that they had previously and growing them. Patrick Schuchard: Okay. And you talked about cross-selling as an organic driver. And you've mentioned in the past these initiatives were in the early innings of getting going. So just looking for an update there, what are you guys seeing in terms of revenue at cross-selling tool overall? Neil Schrimsher: Yes. I'd still say we'd characterize it as early innings. Our funnels are growing, project opportunities are expanding. Teams will be together in the coming weeks to further that planning and execution, some key suppliers there as well. So pleased with the progress. We know we have even more impact that we can have with our customers. And as the customers deal with aging equipment, perhaps an aging technical workforce, they're looking for someone to help them on broader needs, broader solutions, and we're well positioned to continue to do that. Patrick Schuchard: And if I could just squeeze one more in. You talked about some of the sequential margin dynamics in the guide, but I wanted to dig a little bit deeper on the top line. You mentioned demand is stable. The engineered business had positive book-to-bill this quarter, but the guide implies the second quarter might be down slightly sequentially versus normal seasonality, up low single digits. So just kind of curious if there's anything we should consider there. Ryan Cieslak: Patrick, I would say nothing different than how we typically think about it. The guide for the second quarter top line is in line at the midpoint with what we guided in August. We continue to expect a choppy environment near term, as we talked about in the prepared remarks around the slower seasonality, also earlier talking about the timing of holidays, taking that into account as well. And then just the backlog conversion of the Engineered Solutions segment, we expect that to be more of a back-half weighted dynamic. And so taking, taking that into account, but really is no change to how we view the year setting up in the original guidance that we established in August. Operator: Your next question comes from the line of Sam Darkatsh with Raymond James. Sam Darkatsh: Apologize if you mentioned this earlier and I missed it, I was kicked off the call middle of the way through. First, your end market vertical commentary was fairly similar to your #1 competitor with a couple of exceptions, which would be pulp and paper and oil and gas, which you called out as favorable and they called out as headwinds. What specifically happening in those 2 particular verticals that's conceivably allowing you to pick up some incremental business? Neil Schrimsher: Yes, I don't know that I've got a great comparison contrast in that. I think a broadly energy markets seem to be active and doing well into the side. And just paper, we've got a good position, and we continue to look at how do we create value add for those customers and perhaps expand our offering and capabilities with them. But in a comparison contrast, I don't know if they had anything else to point out. Sam Darkatsh: Got it. And my last question. And again, I'm sorry if you've already mentioned this. The 2% pricing that you realized in the quarter, how would that break out service center versus engineered? Ryan Cieslak: Yes. Yes. Sam, I'd say relatively similar. Not a huge change or difference in the -- by segment if I had to push it one way, maybe a little bit higher in the service center side of the business, but pretty consistent. Sam Darkatsh: Are there particular product categories or verticals in which pricing was more pronounced, I'm guessing product categories more so than verticals? Ryan Cieslak: Yes, nothing that we would call out as materially different. I mean, it's been generally a pretty broad-based impact across the product and you're seeing inflation as well as just general price updates come through really across the board. So nothing that we would call out as materially different in one category versus the other. Sam Darkatsh: So as an example, then what I'm getting at, I guess, is bearings is not like something steel related or something along those lines would not be a material outlier? Ryan Cieslak: No. I mean, I think in the context of really our core products in general, a lot of steel content across all of them, particularly on the service center side. So we would not call out bearings as an overweight in terms of what we're seeing from a pricing standpoint right now. Operator: At this time, I'm showing we have no further questions. I'll now turn the call over to Mr. Schrimsher for any closing remarks. Neil Schrimsher: I just want to thank everyone for joining us today, and we look forward to talking with you throughout the quarter. Thank you. Operator: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
Operator: Good day, everyone. Welcome to the conference call covering NBT Bancorp's Third Quarter 2025 Financial Results. This call is being recorded and has been made accessible to the public in accordance with SEC Regulation FD. Corresponding presentation slides can be found on the company's website at nbtbancorp.com. Before the call begins, NBT's management would like to remind listeners that, as noted on Slide 2, today's presentation may contain forward-looking statements as defined by the Securities and Exchange Commission. Actual results may differ from those projected. In addition, certain non-GAAP measures will be discussed. Reconciliations for these numbers are contained within the appendix of today's presentation. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call is being recorded. I will now turn the conference over to the NBT Bancorp President and CEO, Scott Kingsley for his opening remarks. Mr. Kingsley, please begin. Scott Kingsley: Thank you. Good morning, and thank you for joining us for this earnings call covering NBT Bancorp's Third Quarter 2025 results. With me today are Annette Burns, NBT's Chief Financial Officer; Joe Stagliano, President of NBT Bank and Joe Ondesko, our Treasurer. Our operating performance for the third quarter reflected the positive attributes of productive asset repricing trends, the diversification of our revenue streams, prudent balance sheet growth and the additive impact of our merger with Evans Bancorp completed in the second quarter. Operating return on assets was 1.37% for the third quarter with a return on equity of 12.1% and an ROTCE of 17.6%. Each metric demonstrates continued improvement over the linked and prior year quarters, and importantly, reflects the generation of positive operating leverage. Our tangible book value per share of $25.51 at September 30 is 7% higher than a year ago and above the level it was at when we announced the Evans merger 13 months ago. This continued capital strength has us very well positioned to support all our strategic growth initiatives. The continued remix of earning assets, diligent management of funding costs and the addition of the Evans balance sheet resulted in an improvement in net interest margin for the sixth consecutive quarter. We are pleased with our progress to date with net interest margin expansion. However, recent and expected changes to Fed funds rates will likely challenge future margin improvements compared to our most recent quarters. Growth in noninterest income continues to be a highlight with each of our nonbanking businesses achieving productive improvements in both revenue and earnings generation year-over-year. We were also pleased to announce an 8.8% improvement to our dividend to shareholders earlier in the quarter, marking our 13th consecutive year of increases. This reflects our strong capital position and our generation of consistent and improving operating earnings. As we have stated before, our capital utilization priorities are to continue to support NBT's organic growth and the consistent improvement to the quarterly dividend we pay our shareholders. In addition, we appreciate the opportunity to evaluate and partner with other like-minded community banks. Returning capital to shareholders and opportunistic share repurchases is also part of our capital planning. And as such, we renewed our $2 million share repurchase authorization through the end of 2027. Before turning the meeting over to Annette to review our third quarter results with you in detail, Joe Stagliano will provide some additional color on our progress in the Western region of New York and other initiatives across the markets. Joe? Joseph Stagliano: Thank you, Scott. We continue to build on the momentum of our successful Evans Bank integration. Since the merger, we've experienced solid growth in deposits in the Western region of New York and we are retaining key lending relationships despite experiencing approximately $30 million of net contractual runoff in the portfolio. Customer sentiment remains strong, and employee engagement is high. Let me walk you through some of our key market developments. In Buffalo and Rochester, we've had success recruiting and onboarding talented professionals across all lines of business, which complements the strong team we already have in place. Our new Webster branch in Greater Rochester opened in April, and it's off to a promising start. To support growth -- to support our growth initiatives in Rochester, we plan to open a financial center in the market during 2026. Additionally, we are exploring locations in the Finger Lakes to fill in our branch network in this attractive region. In the second half of 2026, we expect to break ground on a new branch location near the planned Micron chip fabrication site in Clay, New York. In addition, our current team of bankers and network of locations in the Mohawk Valley are well positioned to support the growth anticipated from Chobani's plans for a new facility expected at 1,000 jobs to the area. Our new Malta, New York branch near GlobalFoundries is seeing excellent traffic and growth. In the Hudson Valley, IBM has announced plans to expand the Poughkeepsie and we are seeing positive demographic shifts in the region. We entered this market through our merger with Salisbury Bank and are eager to improve our concentration characteristics in this region. Earlier this year, we opened our fourth branch in Burlington, Vermont, and we are seeing good momentum. We are set to open an additional branch office in Portland, Maine in early 2026. We've also secured a site in Torrington, Connecticut that will connect our presence in West Hartford with our locations in Litchfield County in early 2026. In addition, we remain focused on scaling our operations in New Hampshire, supported by the strong team of bankers we have in place there. Our team continues to evaluate both new locations and branch optimization using an active and structured process. This dual focus ensures that we remain agile and responsive to market needs as we maintain operational efficiency. I will now turn it over to Annette. Annette Burns: Thank you, Joe, and good morning. Turning to the results overview page of our earnings presentation. In the third quarter, we reported net income of $54.5 million or $1.03 per diluted common share. Excluding acquisition expenses, our operating earnings per share were $1.05, an increase of $0.17 per share compared to the prior quarter. Revenues grew approximately 9% from the prior quarter and 26% from the third quarter of the prior year, driven by improvements in net interest income, including the impact of the Evans merger. The next page shows trends in outstanding loans. Total loans were up $1.6 billion for the year, including acquired loans from Evans. Excluding consumer loans and a planned contractual runoff status and the loans acquired from Evans, annualized loan growth in 2025 was approximately 1% higher from December 2024. Growth in commercial, indirect auto and home equity loans were partly offset by declines in residential mortgage balances. During 2025, we have experienced a higher level of commercial real estate payoffs while production has remained strong. We have captured quality lending opportunities across our markets, which has also provided growth in core deposits. This gives us flexibility to remain disciplined in our loan pricing and focus on holistic relationships. Our total loan portfolio of $11.6 billion remains very well diversified and is comprised of 56% commercial relationships and 44% consumer loans. On Page 7, total deposits of $13.7 billion were up $2.1 billion from December 2024. Excluding the deposits acquired from Evans, deposits increased $250 million from the end of 2024, with growth in checking and money market accounts. 58% of our deposit portfolio consists of no and low-cost checking and savings accounts, while 42% is held in higher cost time and money market accounts. The next slide highlights the detailed changes in our net interest income and margin. Our net interest margin in the third quarter increased 7 basis points to 3.66% from the prior quarter primarily driven by the continued improvement in earning asset yields. Net interest income for the third quarter was $134.7 million, an increase of $10 million above the prior quarter and $33 million above the third quarter of 2024. The increase in net interest income from the prior quarter was largely attributed to the first quarter impact of the Evans acquisition, along with earning asset yield improvement. As a reminder, approximately $3 billion of earning assets repriced almost immediately with changes in the federal funds rate while approximately $6 billion of our deposits, principally money market and CD accounts remain price-sensitive. The opportunity for further upward movement in yields will depend on the shape of the yield curve and how we reinvest loan and investment portfolio cash flows. The trends in noninterest income are outlined on Page 8. Excluding securities gains, our fee income was $51.4 million, an increase of 9.8% compared to the previous quarter and an increase of 13.5% from the third quarter of 2024. The seasonally higher third quarter also benefited from a full quarter of Evans activity. Our combined revenue from retirement plan services, wealth management and insurance services executed $32 million in quarterly revenues. As a reminder, and consistent with historical trends, the fourth quarter is typically our lowest quarter in revenue generation for these businesses. Noninterest income represented 28% of total revenues in the third quarter and reflects the strength of our diversified revenue base. Total operating expenses, excluding acquisition expenses, were $110 million for the quarter, a 4.4% increase from the prior quarter and reflected a full quarter of Evans activity. Salaries and employee benefit costs were $66.6 million, an increase of $2.5 million from the prior quarter. This increase was primarily driven by the full quarter impact of Evans, higher incentive compensation and higher medical costs. Slide 10 provides an overview of key asset quality metrics. Provision expense for the 3 months ended September 30, 2025, was $3.1 million compared to $17.8 million for the second quarter of 2025. The decrease in provision for loan losses during the quarter was attributable to $13 million of acquisition-related provision for loan losses in the second quarter, partially offset by net charge-offs returning to a more normalized level in the third quarter. Reserves were 1.2% of total loans and covered 2.5x the level of nonperforming loans. In closing, growth in our net interest income and fee-based revenues drove our record performance in the third quarter and contributed to our meaningfully improved operating performance for the first 9 months of 2025. We are in a strong capital position, have growth opportunities across all our markets and are well positioned to take advantage of them. Thank you for your continued support. At this time, we welcome any questions you may have. Operator: [Operator Instructions] It comes from the line of Feddie Strickland with Hovde Group LLC. Please proceed. Feddie Strickland: Just wanted to start on expenses. You've got a full run rate of Evans, now on the expense line. I was just wondering if you could talk about where you're at in terms of cost saves and maybe what we should expect in terms of the total expense line over the next quarter or so. Annette Burns: Sure. Happy to take that. We think that our cost saves are essentially achieved during the third quarter. So we don't expect to have any additional meaningful impact related to those on a go-forward basis. The run rate that we had in the fourth -- in the third quarter of $110 million is an appropriate run rate as we look forward. Just as a reminder, we typically see merit increases starting in the first quarter and running off our typical expense increase going forward, typically runs somewhere between 3.5% and 4.5%. That's kind of how we think about 2026. Feddie Strickland: Got it. That's helpful. And just wanted to ask, thinking about loan growth, it sounds like you've got some new hires there that should help the pipeline longer term. What should we think over the next couple of quarters in terms of net new loan growth and keeping in mind what's the level of runoff that you expect in the residential solar and other consumer book? Scott Kingsley: So let's attack that one together. In terms of our activity for the last 2 quarters, it's actually been very robust. We experienced a much higher level of payoffs than we had anticipated. And quite frankly, than we had experienced in a year ago. But I think as we roll into early to mid-2026, low to mid-single-digit growth rate is probably appropriate for our markets. Stand-alone, our markets still have really good activity levels in them. And our pipeline, quite frankly, is very good. Getting things on the construction side to a closing outcome, as you know, in our weather, we probably don't close a whole bunch of those in December through February. But quite frankly, we like where the pipeline is with that and think there's really good opportunities. We will look at where we are from a balance sheet perspective right now and really like where we're centered holistically, which means an 85% loan-to-deposit ratio for us, quite frankly, is more comfortable for us than something in the '90s. We think it gives us longer-term optionality from an invested asset standpoint. So at that level and where we are in those expected growth rates, we could still move up earning assets, they might just not all be loans. So -- but we're very comfortable with that from an outcome standpoint and think it's probably almost as important for us that we've continued this steady growth on the funding side, mostly on the core deposit side. So that's how we're kind of framing where we think the balance sheet moves. Operator: Our next question comes from the line of Steve Moss with Raymond James. Stephen Moss: Maybe just start off, Scott, maybe just following up on expenses here. You guys mentioned the recruitment of talent here and the de novo branches as well. Just maybe curious as to if you can size up what your expected talent recruitment is going to be and kind of how you're thinking about how many de novo branches you may add over the next 12 months or so? Scott Kingsley: So I kind of frame it this way, Steve, and I'll ask Annette and Joe to comment if I've left something out. I think in terms on the brand side, I think we're thinking 4 to 6 a year to improve our concentration in some of the markets that we're either new to or where our concentration is, quite frankly, not robust enough. So as an example, I think we've said that from the beginning that Rochester, New York, as an example, is one of those markets where when we partnered with Evans, their concentration was we'll see on the east side of Rochester in some great spots, but building that out across sort of Central City, Rochester and maybe even to the west side maybe there's a concentration of 2 to 4 more sites for us over the next couple of years to use that example. I think that's also a spot for us where the recruiting of additional talent in the Western region of New York State has been very productive for us. We had this -- let's hold stuff in from Evans posture for the first 5 or 6 months, and we think we've done that, and we think our team has done very well on that. And now we're in a position to be a little bit more assertive and add some people to the mix that we think can move up some of our long-term expectations on the growth side. Annette Burns: I would just say from a expense management, I think we look at branch optimization to kind of offset some of the growth initiatives and then as well as technology investments to help improve efficiencies. So given that, I don't think that we would see an outsized expense growth than what we historically see from NBT. Stephen Moss: Okay. That's helpful. And then just in terms of maybe just thinking about your presence across upstate New York, just kind of curious, are you interested in additional M&A deals or just kind of how you're thinking about things at the current time. Scott Kingsley: Steve, I'd frame it kind of both ways saying that we are interested in building out the franchise that now goes from Buffalo to Portland and Wilkes-Barre, Pennsylvania to Burlington. Fill-in strategies for us are probably first in our mind. Would we move the franchise another 50 miles West, South, East for sure. But frankly, filling in some of those from an opportunistic build-out standpoint, including the potential for M&A is absolutely primary for us. So we are -- we have the opportunity to have discussions with like-minded smaller community banks. And we're hoping that we've left a good impression in that if long-term independence is not in their plans, they'll see the value proposition of talking to us. Stephen Moss: Appreciate that, Scott. And then maybe just 1 on the core margin here, just kind of curious, any updated thoughts around purchase accounting accretion going forward here? And could we see any incremental core margin expansion here? Annette Burns: Great question. So from an accretion standpoint, I think that's fairly stabilized and appropriate run rate. So I don't think we'll have any material change of that over the next, let's say, 4 quarters or so. As we think about the margin, in the short term, with the potential for multiple rate cuts, in our near future here. We think there might be a little bit of margin pressure, and that's really because even though we're neutrally positioned, our assets reprice almost immediately, while we have to actively manage our deposit repricing. As a reminder, $6 billion of our assets of our deposits that we're able to reprice about $1.4 million of those are in CDs. So it might take a little like a full quarter to work through those to help offset those asset repricing. So the fourth quarter could see a little bit of pressure and then looking out into 2026, especially if we see an improvement in that shape of the yield curve, we could see some margin improvement jumping off of the fourth quarter. Stephen Moss: Okay. And just 1 follow-up there. Just what percentage of loans are variable rate these days? Annette Burns: Somewhere around $3 billion are variable rate. Scott Kingsley: Yes. And Steve, that includes all of our assets that are variable. So the loans are probably $2.5 billion to $2.6 billion, which quick in my head, that's a little over 20%. And then there's probably $100 million to $150 million worth of investment securities that's are variable. And then currently, we find ourselves in a Fed fund sold position. So those overnight funds obviously move with changes in SOFR or Fed funds changes, and that's a couple of hundred million for us. Operator: Our next question comes from the line of Mark Fitzgibbon with Piper Sandler. Mark Fitzgibbon: Just wanted to follow up with a question on the solar loans. I guess I'm curious, is there any way to kind of accelerate the exit of those? Is there kind of any depth to the market to sell those loans? Scott Kingsley: That's a really good question and something we spend a lot of time with. Today, Mark, the answer is no for that. There is desire potentially for that asset. In other words, people still like the asset class a lot despite all of the volatility and future volatility associated with new originations. But remember, we still have a fair portion of our loans that were originated in the 2020 to 2023 operating years and they contain yields that are lower than the market is demanding today. So for us to move that on an accelerated basis, we would have to embrace a fair value loss today. And that's something we need to do. Those assets are performing, again, not utopian yields, but those assets are performing the way they're supposed to perform and our credit characteristics have been exactly in line with what we expected. Mark Fitzgibbon: Okay. And then I guess I'm curious, are you seeing any pressure at all on the auto loan delinquencies right now? Scott Kingsley: Not significant at all. Quite frankly, it's been very consistent. Remember, we're in the A and B paper classes. I think both from an origination standpoint, we might see this going forward with a couple of the industry announcements that capacity for C&D lending might be more substantially impacted over the next 3 months, 12 months period of time. But for us, it's been great. And remembering, we're making our indirect auto loans in our footprint. And most of our footprint doesn't have meaningful public transportation. So people are making their car loan payments so they can go to work. Mark Fitzgibbon: Okay. And then 1 for Annette. Annette, your comments earlier, I think you said with respect to the margin, it'd be challenging to improve it. Should we take that to mean that the margin will decline? Or do you sort of think you can hold the margin somewhere close to the current level? Annette Burns: So for the fourth quarter, that's where we're reflecting it might be a little bit of a challenge to hold but a few basis points for one direction or the other. And then I think we kind of stabilize pending no further rate actions and have the ability to see a little bit of margin improvement quarter-over-quarter as we still have some opportunity to reprice our loan book. Scott Kingsley: And Mark, we've been very deliberate about making sure that we're holding spreads on new assets that we're winning. We don't think at this point in time, in sort of the credit cycle, which is probably closer to mature is the right time to be reaching for growth. Mark Fitzgibbon: Okay. And then lastly, no updates on the timing for the Micron technology project. Scott Kingsley: Yes. $64,000 question so thanks for asking it. Today, we still expect shovels in the ground at the site here late in the fourth quarter. But if you know our ZIP code very well, the shovel has to have a lot of pressure on it to get into the ground in the next couple of months. Our perspective today on that, Mark, is that the site will be improved relative to taking on the fill and because this site, quite frankly, is a touch wet so I think the next 5 to 7 months are site fill in making sure that the activity has been compressed with the expectation that building actually starts mid-to late 2026. Operator: Our next question is from the line of Matthew Breese with Stephens Inc. Matthew Breese: A few kind of margin-related questions. First, do you happen to have the spot cost of deposits either at quarter end or most recent date and then I was hoping you could provide some color on the roll-on versus roll-off dynamics of fixed and/or adjustable rate loans today. Scott Kingsley: On the spot side, now let's get back to you. We don't have that sitting in front of us today. I will say this, we're pretty sure because we made some adjustments to deposit costs after the Fed rate change in September that October's cost of funds are probably slightly lower than September's. But my guess is it's measured in single basis points. So let's reframe your second part of your question if you would. Matthew Breese: Yes. For your fixed rate and adjustable rate loans, what is the roll-on versus roll-off rates? Annette Burns: Maybe I'll take that based on book. So for our commercial portfolio, we probably have about a 50 basis point differential now between our portfolio yields and our origination rates. For indirect auto, we're just about there. And really, that's dependent on the belly of the curve and where we price those auto loans. So if you look at our presentation, we're probably a little bit lower on our new origination rates than our current portfolio yield. So that's going to probably fluctuate from quarter-to-quarter. And then where we have the most room is in our residential mortgages, which is about -- still about 160 basis points of room between our portfolio yields and our new origination rates. Matthew Breese: Okay. And then this 1 kind of leads into my next question, which is your securities yields are still pretty low relative to what you could go purchase something at today. When do we see a more pronounced pickup in securities yields as the back book starts to reset or mature? Scott Kingsley: So our portfolio today is very much a cash flowing portfolio. So it's mostly mortgage-backed securities. So it's pretty orderly. It's in the line of a couple of hundred million dollars a year from a cash flow standpoint. So we don't think that changes much. But we will acknowledge your comment that our portfolio yields are now below our peer group because we think we're the last ones in the peer group that did not do a onetime charge or a restructuring. Matthew Breese: Okay. And just last one, Scott, your comments on perhaps earning asset growth beyond loan growth. I felt like it was a not so subtle hint that we might see some securities growth near term. To what extent might that happen? And to what extent do you lean into kind of your excess cash position to do that? Scott Kingsley: Yes. That's a terrific question. I think today, we have that flexibility today. And maybe over the last couple of years, we didn't enjoy that flexibility at the same level. So I think it's a duration-based risk/reward for us, Matt, that today, when you stay in the short term end setting aside expectations as short-term rates may come down a little bit. There's really not much of a penalty to stay in Fed funds or something very short term. That probably gets a little bit more definition to it after the expected changes in Fed funds rates here in the fourth quarter, and we'll assess it from there. When we kind of look at that is we've never taken a real mismatch in terms of duration in our portfolios. So I wouldn't expect to start that in this cycle. But I do think an opportunity does present itself for us to continue to analyze if we can leg into that a little bit more. Remember we are very deliberate about how we handle the investment portfolio that we inherited from Evans and where we push those cash flows to what we disposed of and what we decided to retain. Our construct around investment securities continues to be making sure we have enough latitude to support the collateralization for our municipal deposits. So that's more of our focus points than whether we have incremental earnings opportunity associated with a $50 million, $60 million, $100 million leg in on the security side. Operator: Our next question is from the line of David Konrad with KBW. David Konrad: I wanted to switch gears a little bit and talk about fee income. I thought it was a really good quarter, particularly in insurance. Just maybe -- I know it's seasonally probably your strongest quarter there, but highlight what's going on there? And maybe is 7% in annual growth rate that you can think about in 2026. Annette Burns: Good question. So for our insurance business, our third quarter is our most seasonally high, probably to the tune of about $1 million, and that's just some seasonality of some of our municipal customers. So the first and third quarter are typically higher for our insurance business. The growth rate of around 7%, I would say somewhere those high mid-single digits is an appropriate run rate seeing some good commercial growth across our business line. Commercial business -- our insurance business is very integrated with our banking business. So a lot of referral opportunities as it relates to that, and that's what drives the growth there. Scott Kingsley: And to follow that, David, the rate of change on rate increase that the insurance companies have been able to be approved for is a little bit less than we experienced over the last couple of years. So in other words, new rate structures, we're generating growth for most agencies in the 4% to 6% rate before you even add new customer development. David Konrad: Got it. And then maybe last question and follow-up here. Help us out a little bit on next quarter and your outlook as we get a little bit more seasonally challenged in the fourth quarter for the total fee income business. Scott Kingsley: Yes. So historically, and Annette will remind me if I'm wrong on this, historically, fee income for benefits administration and insurance has typically been 6% to 8% lower in the fourth quarter than it was experienced in the third quarter. And there's nothing for us today telling us that we'd be outside of that expectation. Annette Burns: And I would also just remind there's probably about $1.5 million of unique items to the quarter gains in the third quarter. So that also kind of made the third quarter a little higher. Operator: [Operator Instructions] We have a question from the line of Feddie Strickland with Hovde Group. Feddie Strickland: Just had a quick follow-up on capital. You talked a little bit about M&A down the road already. But just wanted to get your thoughts on capital management, any sort of capital ratio number you're trying to manage to? And could we see buybacks executed beyond the level of offsetting the stock-based comp? Scott Kingsley: So thank you for the question and good reference point. Over the last 2.5 years, we've been really, really deliberate on capital retention because we were going through the completion and closing of both the Salisbury transaction as well as the Evans transaction. So we weren't active -- real active in a lot of our other attributes because we wanted to make sure we had the purchase accounting right and that our estimates of impact on dilution were appropriate. We've gone through that. We're very comfortable. A matter of fact, we've exceeded our expectations on getting back to pre-announcement levels of capital. Holistically, right now, we're really comfortable from a capital position. And I would argue on most days, we have too much. And just given the risk attributes of our balance sheet, but that being said, I think we're in a spot from a maintenance standpoint of our capital levels holistically and specifically at the bank, where there's -- we can embrace every opportunity that we have without worrying about that. To your question, historically, we always try to cover equity-based compensation plans with repurchases so that we didn't dilute ourselves on a creek basis. Today, given where valuations are for high-quality earnings generation characteristics like we have suggest that maybe we should be a little bit more active with repurchase activity. Has never been our principal focus relative to capital management, but we find ourselves in a position today where we're not sure the market has fully recognized our capacity for earnings. Feddie Strickland: All right. Great. And just one last one on the margin. I understand the dynamics of repricing loans versus deposits and a lag on deposits. But it sounds like if we get some level of steepness in the yield curve and a couple more cuts, and you start to get the benefit of those deposit costs lower, maybe in the mid '26. I mean, could we see initial pressure on the margin near term, but maybe margins start to come up a little bit over time with maybe some backup loan repricing, the deposit lag piece and assuming we have some level of steepness in the curve. Annette Burns: I think that's a good summary of how we're thinking about margin and potential for margin improvement, was just a reminder that you're probably not going to see the same level of benefit that we saw in 2025 just because a lot of our loan book has repriced. And so it's really less of an opportunity than what we've seen. Operator: And as I'm not showing any further questions in the queue, I will turn the call back to Scott Kingsley for his closing remarks. Scott Kingsley: Thank you. In closing, I want to thank everyone on the call for participating today and for your continued interest in NBT and at least for this week, go build. Operator: And, thank you, Mr. Kingsley. This concludes our program. You may disconnect, and have a great day. Scott Kingsley: Thank you.
Operator: Good day, and welcome to the Everest Group Limited 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 Matt Rohrmann, Head of Investor Relations. Please go ahead. Matthew Rohrmann: Thank you, Betsy. Good morning, everyone, and welcome to the Everest Group Limited Third Quarter of 2025 Earnings Conference Call. The Everest executives leading today's call are Jim Williamson, President and CEO; and Mark Kociancic, Executive Vice President and CFO. We're also joined by other members of the Everest management team. Before we begin, I'll preface the comments by noting that today's call will include forward-looking statements. Actual results may differ materially, and we undertake no obligation to publicly update forward-looking statements. Management comments regarding estimates, projections and future results are subject to the risks, uncertainties and assumptions as noted in Everest's SEC filings. Management may also refer to certain non-GAAP financial measures. Available explanations and reconciliations to GAAP can be found in our earnings press release, investor presentation and financial supplement on our website. With that, I'll turn the call over to Jim. James Williamson: Thanks, Matt, and good morning, everyone. Since becoming CEO of Everest 9 months ago, I've been focused on resolving the legacy issues surrounding our U.S. insurance casualty book, evaluating how and where capital is allocated in the group and assessing the results, opportunities and challenges facing each of our businesses. Yesterday, we announced 2 strategic actions that position Everest as a more agile and profitable company with greater capital flexibility to invest in developing the group and return capital to shareholders. First, we are exiting global retail insurance. The teams running that business have done an exceptional job improving performance over the last 2 years. At the same time, it's clear to me the ongoing investments required in that business and the capital needed to support it are better placed than Everest's other opportunities. Second, we have established a comprehensive adverse development cover for our North America insurance division covering reserves for accident years 2024 and prior. With $1.2 billion of gross limit attaching at a strengthened carried reserve level, this cover will help ensure the results of prior poor underwriting decisions no longer overshadow our strong current performance. Long-term prospects in our core Reinsurance business and in the Wholesale & Specialty insurance operations we're retaining are excellent. I'll continue to set a simple standard for the businesses we operate. Capital deployed must be properly remunerated at acceptable levels of risk. We will operate in businesses with clear competitive advantage, strong economics and a well-defined forward path. This standard will be applied as we continue to develop our operations and evaluate opportunities to further diversify the company. Turning now to performance in the quarter. Group gross written premium was $4.4 billion, down 1% from last year, largely reflecting targeted re-underwriting in Insurance and careful portfolio mix management in Reinsurance. Our combined ratio for the quarter was 103.4%. Excluding prior year development and net cat losses, the attritional combined ratio was 89.6%, demonstrating the strength of our underlying book. Operating income was $316 million compared with $630 million last year, the difference almost entirely attributable to the reserve adjustment I mentioned earlier. Our Reinsurance business continued to perform exceptionally well in the quarter. Gross written premium of $3.2 billion was down 2% year-over-year, reflecting disciplined cycle management. The combined ratio was 87%, improving year-over-year, driven by lower cat losses and favorable prior year development. Reinsurance reserves are in a strong position. Portfolio mix in Reinsurance continues to develop favorably with property and other short-tail lines increasing by almost 5% year-over-year, while casualty and financial lines decreased by over 10%. This reflects our consistent strategy of reducing exposure to U.S. casualty in the face of persistent legal system abuse. I would also highlight the strong performance of our Global Specialties business, which produced almost $500 million of gross written premium and over $100 million of underwriting income in the quarter. We're investing in this business and expect it to deliver top and bottom line growth in the coming quarters and years. Market conditions in the Reinsurance business, particularly in our cat-exposed lines, should remain favorable through the January 1, 2026, renewal. While market capacity is increasing, Everest is a preferred partner, and we see no barriers to continued attractive capital deployment in this market. Make no mistake, though, where deals do not offer attractive and appropriate returns, we will cut back. Moving to Insurance. The team's execution of our 1-Renewal Strategy remediated the North America casualty book in record time. We're maintaining pricing momentum, improving risk selection and exiting underperforming accounts, all of which position the go-forward Insurance portfolio for increased profitability. In the quarter, 45% of our U.S. casualty business did not renew. We believe AIG is ideally positioned to maximize the value of this portfolio going forward, and we were pleased to conclude our renewal rights transaction with such a close partner. We're now reorganizing our insurance operation to focus on our global wholesale and specialty insurance capabilities and expertise. This is a strategic move that directly aligns Everest with the evolving needs of the market. Historically, our go-forward wholesale and specialty businesses outperformed our retail business by approximately 10 combined ratio points. Year-to-date, total written premium was approximately $1.7 billion. The long-term profitability and growth outlooks for the market segments we're focused on are excellent, while Everest's current share is measured in basis points. I'll have more to say about that business in future quarters. To summarize, I would characterize this past quarter as one of action and clarity. We've confronted our legacy casualty issues head on, optimized the portfolio and positioned Everest for a new chapter. Our core business engines, Reinsurance as well as Wholesale & Specialty insurance are performing well. Our balance sheet is strong and generating meaningful net investment income. Our capital is flexible, and we're moving to a position of significant excess capital to deploy. And our team remains intensely focused on disciplined execution. Before I hand it over to Mark, I want to thank my Everest colleagues around the world. These past months have required both focus and resolve, and our team has handled them with the utmost professionalism and integrity. We're all driving toward a unified goal of a more nimble, resilient and profitable enterprise. And with that, I'll turn the call over to Mark. Mark Kociancic: Thank you, Jim, and good morning, everyone. The transformative actions we announced this quarter helped drive certainty into Everest's insurance reserve adequacy and position the company to focus on well-developed and more profitable lines of business. We expect these moves to yield improved returns on capital for Everest and value creation for shareholders. As Jim mentioned earlier, we sold the renewal rights of our U.S., U.K., European and Asia Pacific commercial retail insurance business to AIG. These businesses collectively total approximately $2 billion in gross written premiums. The transaction will result in meaningful total value to Everest and significant capital will be released over time. We expect to take a pretax nonoperating charge in the range of $250 million to $350 million associated with the transaction with the charge being recognized over 2025 and 2026. The transaction meaningfully streamlines Everest's operating model and bolsters our focus on core Reinsurance and Specialty & Wholesale Insurance businesses. We took further action to fortify our U.S. casualty reserves, strengthening reserves by $478 million on a net basis or 12.4 points on the combined ratio. This was split between the insurance and other segments and follows the acceleration of our global reserve studies into the third quarter. We also entered into an adverse development cover, providing $1.2 billion of gross limit with Everest having co-participation of $200 million. The ADC covers $5.4 billion of North American insurance subject reserves for accident years 2024 and prior with an effective date of October 1, 2025. Everest will be transferring $1.25 billion of in-the-money reserves. As a result, we expect net investment income to be lower by approximately $60 million per year over the next several years. And we will be paying approximately $122 million of premium upon closing of the transaction, which is expected to be in the fourth quarter. Starting with group results. Everest reported gross written premiums of $4.4 billion, representing a 1.2% decrease in constant dollars, while excluding reinstatement premiums from the prior year quarter. The combined ratio was 103.4% for the quarter, reflecting the net reserve strengthening I mentioned a few moments ago. The Reinsurance business had favorable reserve development of $29 million, and this was more than offset by reserve strengthening of $361 million in our Insurance segment and $146 million in our Other segment. The quarter benefited from relatively light catastrophe losses, which contributed 1.3 points to the group combined ratio. The group attritional loss ratio increased 1.4 points to 59.9% in the quarter, with the increase largely driven by our conservative approach to setting initial loss picks in U.S. casualty lines. The attritional combined ratio increased 3 points to 88.8% when excluding the impact of $34 million in profit commissions related to prior year loss reserve releases in mortgage lines, largely due to contingent commissions also associated with our mortgage lines business. Moving to Reinsurance. Gross written premiums decreased 1.7% in constant dollars when adjusting for reinstatement premiums during the quarter. Consistent with prior quarters, we exhibited solid growth in property and specialty lines while remaining disciplined in casualty lines. The combined ratio improved 4.8 points from the prior year to 87%. The improvement was largely driven by lower catastrophe losses, which amounted to $45 million or 1.6 points on the combined ratio versus 9.1 points on the combined ratio in the prior year quarter. Net favorable prior year development also contributed 1 point to the improvement. Our reinsurance reserve studies yielded minor development in casualty lines with continued strength in property, mortgage and international lines. Overall, we believe we are continuing to build upon our embedded reserve margins. The attritional loss ratio increased 60 basis points to 57.5% as we proactively embedded conservatism into our U.S. casualty loss picks. The attritional combined ratio increased 180 basis points to 85.3% when excluding the impact of $34 million in profit commissions associated with mortgage -- favorable mortgage reserve development. And moving to Insurance. Gross premiums written increased 2.7% in constant dollars to $1.1 billion. Strong growth in Other Specialty and Accident & Health was largely offset by the aggressive actions we are taking in U.S. casualty lines. The underwriting-related expense ratio was 19%, with the increase driven by reduced casualty earned premium growth from our 1-Renewal Strategy. The attritional loss ratio increased to 67% this quarter, reflecting our disciplined approach to setting and sustaining prudent loss picks in our U.S. casualty lines portfolio, given the elevated risk environment due to social inflation. As I mentioned earlier, we strengthened our insurance reserves in the quarter, largely driven by U.S. casualty lines in accident years 2022 through 2024. And this was due to an acceleration of large loss activity, particularly in excess casualty and management liability and higher frequency in general liability and management liability, resulting in more conservative assumptions. We believe that increased prudence in loss development factors in 2025 loss picks in conjunction with the ADC transaction we entered into will help us turn the page on the U.S. casualty reserving issues experienced over the past several years. Reserve strengthening in the Other segment was largely driven by U.S. casualty lines, primarily the sports and leisure business. Most other segment reserves are also covered in the ADC, excluding asbestos, amongst other minor items. Moving on to investments. Net investment income increased to $540 million for the quarter, and this was driven by higher assets under management and strong alternative asset returns, which generated $112 million of net investment income in the quarter versus $72 million in the prior year quarter. Overall, our book yield decreased slightly to 4.5% given the large component of non-U.S. dollar assets. Our current new money yield is approximately 4.8%, and we continue to have a short asset duration of approximately 3.4 years and the fixed income portfolio benefits from an average credit rating of AA-. For the third quarter of 2025, our operating income tax rate was 9.4%, which was below our working assumption of 17% to 18% for the year due to the jurisdictional mix of profits in the quarter and a $23 million onetime benefit from our 2024 U.S. tax filing. Shareholders' equity ended the quarter at $15.4 billion or $15.5 billion, excluding $87 million of net unrealized depreciation on available-for-sale fixed income securities. Book value per share ended the quarter at $366.22, an improvement of 15.2% from year-end 2024. When adjusted for dividends of $6 per share year-to-date. We will also realign our reporting segments beginning in Q1 2026 and communicate that once it's finalized in the coming weeks. We did not repurchase any shares in the quarter. However, we continue to view share repurchases as an attractive opportunity to deploy capital, and we expect to resume meaningful share repurchases going forward. With that, I will turn the call back over to Matt. Matthew Rohrmann: Thanks, Mark. Betsy, we're now ready to open the line for questions. [Operator Instructions] Operator: [Operator Instructions] The first question today comes from Josh Shanker with Bank of America. The first question comes from Meyer Shields. Meyer Shields: May I come in, too? Mark Kociancic: Yes. Josh, we hear you. James Williamson: It's -- it's actually, Meyer, but I'm glad you can hear me. Meyer Shields: Yes. So doing some very quick math on the 10 percentage point differential on -- between the specialty and the retail business in insurance, it suggests that it's running at a 95% combined ratio, excluding cat. I was hoping you can get a sense as to what the cat load is for the specialty business, whether 2025 or 2026? Mark Kociancic: Meyer, it's quite modest actually, almost de minimis, definitely very low relative to the overall insurance division burden that we currently have. Meyer Shields: Okay. Fantastic. And when I look at the transferred reserves and the fact that $2 billion of insurance gross written premiums is going to be non-renewed one way or the other. Is there any way of ballparking what that ultimately means in terms of capital liberation? Mark Kociancic: So Meyer, just I want to make sure I understand your question. So the $2 billion of retail business that we transferred to AIG and any other nonrenewal of subject premium over the renewal, you're interested in the capital release from that? Is that accurate? Meyer Shields: Yes, that's exactly right. Mark Kociancic: Yes. So there's multiple components to that. We do expect it to be substantial over time. The -- let me just put a few things on the table because I think it's more of a timing issue than anything else. So the renewal process will take place, broadly speaking, over the coming 12 months. So over that time, we will benefit from nonrenewing that premium on our own paper, and we will start to reduce the capital intensity associated with the premium itself. In the meantime, we will have meaningful net earned premium continue to show up in our P&L from 2025 writings, as you would expect. And that will be accompanied with traditional P&L items, so commission expense, loss expense, G&A, et cetera. And so those loss reserves will also attract some capital charge over that time. In addition to that, we will have the existing set of reserves which have been enhanced by roughly $0.5 billion of casualty reserves running off over time, and that will release capital as well. However, we do have as a result of the extra $0.5 billion charge principally in casualty, a significantly higher level of casualty reserves, which means we'll have less diversification benefit in the coming few quarters of that reserve runoff. So I would expect capital relief from this transaction, the remediation, the runoff, et cetera, to become more visible in the back half of '26, but we certainly see it coming. Matthew Rohrmann: The next question comes from Josh Shanker with Bank of America. Joshua Shanker: There's a lot of moving parts in the announcement. There's the ADC, there's the renewal rights transfer. Obviously, there's the charge related. The one thing that hasn't been announced is a plan of what to do with capital. I think investors might have felt some comfort if there was some announcement that we plan a large repurchase or there was a commitment from management to want to own the shares here. The stock is trading below book, how should we frame the appetite for returning capital to shareholders over the 1-, 2-year period? Mark Kociancic: So Josh, it's Mark. We obviously view capital repatriation, share buybacks very attractively for the several of the points you mentioned. Clearly, trading at a discount to book makes it attractive. We're in a lower growth period of the cycle. And so as we're generating returns, we certainly foresee meaningful retained earnings accumulation. I would say that the kind of activity that you saw in the first half of the year this year would represent a floor on buybacks as we pursue Q4 and then into 2026. And to my earlier point to Meyer, we do expect the transactions that we've entered into to unlock more capital for that purpose over time. Joshua Shanker: All right. And then trying to understand the sort of chronology. Obviously, a little less than a year ago, there was a plan for a 1-year renewal and obviously, the decision that Everest is not the appropriate owner for a lot of its retail risk. When did the company come to understand that? And of the underwriting that had done in like the past 6 months, do we have any concerns that Everest wasn't the right underwriter for that risk and we need to worry about '25 reserves? James Williamson: Yes, Josh. So let me start by talking a little bit about the re-underwriting process and where we are in that process, and then I'll come on to the timing of the decisions around the go-forward business. So just to refresh memories, I took on leadership of the Insurance business last year 2024 at the sort of end of the spring. We had really ramped up the remediation process that you've seen play out that we've called the 1-Renewal Strategy in July of '24, meaning it essentially began to complete itself in July of '25 and with a little bit of tail into the third quarter. And so that re-underwriting is complete. There is no further re-underwriting of the casualty book other than normal portfolio management that is required as we go forward. One statistic that I will share with you, and this is going to be relevant to how you think about the '25 loss picks. But if you look at the development that we've observed in 2025 that led us to an additional strengthening of our back book reserves, 80% of that development in U.S. casualty came from policies that were eliminated from our portfolio during the course of the remediation. And I think that's a good early indicator that we were over the right target that we dealt with the remediation decisively and that the go-forward portfolio will perform extremely well. Now that said, we've still booked it at very, very prudent loss picks. We're not taking credit for any of that, but we do expect it to play out. And then to the broader question you asked, which I think is an important one, and I'm going to spend a couple of minutes on it, if you'll indulge me. In terms of how we got to the decision and the chronology of getting to the decision around the go-forward portfolio, that was a comprehensive process. It was not driven by what we observed in the reserves. It was a process that was led by the management team, included a number of outside strategic advisers and ultimately included our Board of Directors in a very thorough process. And the purpose of that process was to determine what are our best opportunities to drive shareholder value and compounded book value per share growth over time period. We didn't bring any biases into that process around businesses we had built, businesses that we otherwise liked, et cetera. It was purely a strategic review to get at those critical answers. And during the course of that process, as I shared in my opening comments, it became really clear to me, to the rest of the management team, to our advisers and to our Board that our best opportunities are in our Reinsurance business, which is a leading -- market-leading franchise and in our Wholesale & Specialty Insurance operations, which perform at a very high level, which allow us to very nimbly manage the market cycle, which require much less investment in terms of people and technology and therefore, have less execution risk. And we talked a little bit about the performance gap in the combined ratio. And so therefore, the decision was to focus on those businesses. And as a result, we determined that it was best to exit retail insurance, and that's how we got to the transaction that we announced yesterday. But that gives you a comprehensive sense of how these things play together. Operator: The next question comes from Gregory Peters with Raymond James. Charles Peters: So one of the questions that seems to pop up on a recurring basis as you've cleaned up your insurance operation casualty reserves is the potential risk of spillover into the reinsurance book on your casualty business. And since you've completed your full year reserve review a little early, maybe you can give us some perspective on why you're confident your -- the casualty reserves inside your reinsurance business are going to hold up. James Williamson: Yes, Greg, I certainly understand the question, but I think I would really begin by resetting the premise because these are 2 very different portfolios. And one of the things I've been really honest about during the course of this process is where our insurance casualty book performed on a historical basis. And I would characterize it bluntly as squarely in the bottom quartile of performance in our industry. And whether you -- whether I observe our own results, if you talk to brokers who have a fair bit of data, industry observers, there is a huge distinction in performance between bottom quartile underwriters and top quartile underwriters. And I think that's played out over all market cycles in all lines of business. So we were bottom quartile. Now we fixed that. And I think over time, that portfolio is going to perform really well, and I think will be an asset to our partner, AIG, as they take it on. So that's one point. The other is I would not expect, based on the fact that we write a top quartile reinsurance portfolio, there's no basis to expect that portfolio to perform in the same way that a bottom quartile portfolio would perform. Now yes, it's subject to the same issues around social inflation and things of this nature. But the top quartile underwriters, they were consistently doing what we've done over the last year in insurance, which is very closely managed limits, ensure that you're getting top pricing for the exposures you're taking, carefully selecting classes of business to write, leaning on loss-sensitive features to align interest with your clients. All of those things that we've talked about as part of the remediation. That's what our reinsurance clients have consistently done throughout the cycle. And so there's just no reason to expect those portfolios to operate in a similar fashion over time. Charles Peters: And then can we just talk about property reinsurance pricing conditions going forward, considering the light year, I noted in your presentation that your PMLs are inching upwards and that you grew your property cat and non-cat reinsurance business in the quarter. How are you thinking about that business in the '26 period of time, considering what looks to be like a lot of pricing pressure? James Williamson: Yes. Well, first of all, I would characterize it in general as still a very favorable environment. And one of the points that I made on the last quarter's call was that if you didn't know that prices had corrected up by 50% at 1/1/23 and you just looked at the rate level that's currently persisting in the market and compared it to prior historical rate levels, let's say, in the 20 teens, you would say this is a great cat market and people should be writing it. And I think that's true. And I think that's why you're seeing the competition. People recognize that it's well priced and they want to write it. Prices will likely come down. There are various estimates if you believe, let's say, a 10% expectation of price decreases at 1/1. I still think that means that property cat is well priced. And so I think it's still a risk that we will be looking to take. Now as I said in my prepared remarks, when the market moves down 10%, that's going to mean there's going to be some clients where we view the pricing and we don't think it's adequate, and we'll adjust accordingly. In terms of the non-cat or the pro rata growth you saw in the quarter, that was really -- that's more of the flow-through of growth that's occurred over the last couple of years as we've leaned into that market correction. We've been very selective in terms of where we're growing that portfolio and with which cedents. And so I feel very, very good about that book. The one thing I do want to just say, though, and I think this is important, when people talk about a light year, nothing we're going to do at 1/1/26 or in any renewal has anything to do with the fact that it was a light year. First of all, I didn't feel that light. We started with a major wildfire. We've got a Cat-5 hurricane churning in the Caribbean right now. We don't react to one good year and say, well, we're going to do one thing or the other based on that. We're making long-term bets based on where we see the pricing trajectory of the business. And you will not see us be afraid when the time comes, if it comes, to begin pulling back, taking ships off the table if we're not getting paid appropriately for the risks that we're being asked to bear. Operator: The next question comes from Alex Scott with Barclays. Taylor Scott: I wanted to come back to the ADC and just see if you could talk a bit about how you thought about sizing the $1.2 billion gross protection. I mean, can you characterize that in terms of like standard deviations away from your point estimate and that kind of thing, just so we can get a sense for how protected this is? James Williamson: Yes, Alex, good question. Let me start with a little bit of the philosophy or the strategy behind it before we get into the actual ADC numbers. What we wanted to do was to put the issues of our historical casualty reserve challenges behind us. And you've seen this management team, I think, be pretty focused on making that happen and obviously have taken a couple of actions to do that. Obviously, the reserve strengthening that you saw in the quarter was all about getting ultimately to an ADC that would create finality around those issues. This is something we don't want to have to talk about again. So in terms of sizing it, one of the things I would think about is we've talked about reserve margin in the past, and we talked about hundreds of millions of dollars of reserve margin. I would think about the ADC as $1.2 billion of reserve margin. It's about ensuring that -- again, that we create that finality. And so it's less about, well, I need to be at a certain percentage of the actuarial best estimate or a certain standard deviation. It's more about putting this out in the tail so that people don't have to worry about it anymore. So that's really what drove it more than trying to land anywhere on a particular curve. Mark Kociancic: Alex, I would add a couple of points to Jim's commentary. So the subject matter reserve pool is approximately $5.4 billion. So when you take into context the $1.2 billion of cover on top of that, that is very substantial. So if you think about a distribution to the point you were making, I would call that quite broad, quite strong, certainly more than a traditional range of an ACE and certainly nothing that we would expect to blow through, to be quite frank with you, given the overwhelming nature of it. So the underlying reserve base is also somewhat diversified with other lines of business. So the casualty reserves, I would say, are the ones that are currently in focus from a risk perspective. And so this $1.2 billion can really be seen, I think, as to Jim's point, finality on the subject for us. Taylor Scott: Got it. Very helpful. Follow-up question is on the insurance segment, you commented a bit about the profitability of what you're retaining versus what's going in the renewal rights. You also mentioned several times just the conservatism that you're now embedding into loss picks. And so I just wanted to make sure I'm understanding the 2 things correctly. I mean if it's sort of -- I think Meyer mentioned 95% and you didn't correct them on the go forward, is there any kind of conservatism that needs to be thought of layered on top of that for a while before you kind of get to that level? Or is that where it's running right now even with the conservatism that you feel like you're embedding now? James Williamson: Yes, Alex. Look, I would say one of the reasons I didn't correct the 95% is we don't give forward guidance. But I'd say we have tried to create some clarity here by indicating this business performs well. I'd say the lower half of the 90s is a reasonable way of thinking about a conservative approach to booking that business. Given where we've come from, we want to make sure that we are being prudent in the loss picks. And so the way I'm talking about it assumes that we're going to keep some conservatism. The other key point to keep in mind, though, is if you think about the Wholesale & Specialty business on a go-forward basis, the share of that business that's U.S. casualty exposed is something that we're managing very closely. And so the need for conservatism gets affected, obviously, by the mix of the portfolio you're writing, and that's certainly within our control. So I think you can see us print some very solid current period results while also being conservative in the picks, which to me is the best combination. Operator: The next question comes from Andrew Andersen with Jefferies. Andrew Andersen: Hear your comments on the difference between the reinsurance casualty and insurance casualty, but I think you did mention some movement on casualty reinsurance this quarter. Could you just expand a bit on what that was? And I just want to confirm, this was effectively the reserve study for the year across both segments? Or is there still some studies in the fourth quarter? Mark Kociancic: No. Reinsurance is complete in terms of the reserve studies. There might be a couple of very small ones, but they'd be immaterial to this. Clearly, we did all the casualty studies, very minor puts and takes, nowhere close to the magnitude of what we had last year. Feeling very good about it, and it's fully reflected in our Q3 figures. Andrew Andersen: Okay. And on just growth, I suppose if you don't have that favorable view of -- on primary casualty, that somewhat reflects your reinsurance casualty growth. But that line has been coming in for a while. What are you kind of seeing in the pricing environment on casualty reinsurance and your go-forward view there for growth? James Williamson: Yes. I mean the main way that we participate in the casualty reinsurance market is on a quota share basis. And so the real price that we keep an eye on is rate relative to the trend line. I think that's been a pretty favorable story really for the last year plus. I don't really see that changing. It's compressed a little bit, but you still see -- our clients are still keeping rate in excess of trend across those casualty lines. I don't -- I haven't seen any evidence of the quality of underwriting slipping, certainly not among our clients where we've seen that, that those are folks that are no longer our clients. And then the last piece I would say is there has been a persistent stickiness to ceding commissions that I don't think is really all that smart on the part of the reinsurance industry. And so you've seen us act maybe a little counter to what some others are doing insofar as if we're going to take these risks, we want to make sure that the alignment of interest is there and that we're not overpaying for the business. So I don't really see that changing. So I think it's sort of status quo. I think there's plenty of good quality casualty reinsurance to write, maybe not as much as we would like, but plenty for us to focus on, plenty of great clients to participate with. And so I think we're kind of in a -- I think we're at the right level now. And from here, it's just the usual portfolio management work that we are always doing. Operator: The next question comes from Brian Meredith with UBS. Brian Meredith: Jim, first question, I think in your prepared comments, you talked about looking for ways to diversify the company more. Can you maybe elaborate a little bit on that? And why is that important? And why not just kind of stick with your kind of core competencies here right now in Reinsurance and Wholesale & Specialty businesses? James Williamson: Sure, Brian. Yes. I mean, look, what I -- I wouldn't read too much into that comment. We're always looking at opportunities. When we talk about diversification, I would always apply the clear priorities that I signaled or the standard that I set in my prepared remarks, which is if we're going to deploy capital anywhere, it's got to get remunerated at acceptable levels of risk. It's got to be in businesses where we see clear competitive advantage, where the economics are good, where the path forward around execution is strong. And so look, it's a big world. We participate, I think, meaningfully in a number of markets. We're still underweight in a lot of places. And you've heard me talk about them in the past. In the specialties, obviously, and I mentioned our reinsurance specialty performance, $500 million of premium in the quarter, over $100 million of profit. It's a terrific business, lots of room to grow there, which creates diversification because you're not -- that's not property cat, that's not core U.S. casualty. We're still underweight in Asia. The team out there in Reinsurance has done a phenomenal job of growing that business. I think we can continue to play that out over time. We have -- we're organizing now around Global Wholesale & Specialty in a way that we haven't before. We've named Jason Keen, who was the co-CEO of our International Insurance business as CEO of that new division. He will definitely find interesting opportunities to grow again over time. And so that's really what I'm referring to. And we evaluate those very carefully. And I think you can certainly feel confident that we've set a clear standard on how we're going to think about those opportunities as we move forward. Brian Meredith: Great. That's helpful. And then second question, just back on the ADC. I'm just curious, any way you can provide maybe some details on how you think the ADC reinsurers arrived at the attachment point? I mean I look at the adverse development you had in your insurance, it's about 2x your risk margin at year-end 2024 and 1x on the other segment. James Williamson: Yes. I mean one thing that I would point out is I was really, really glad that we were able to do this transaction with Longtail Re, which I'm sure you're familiar with that team and Mike Sapnar. Those are super credible underwriters. They did an excellent job evaluating the portfolio. And so it's -- I would describe it as more of a collaborative process than anything else. Obviously, one of the features of this ADC that I think is really critical to focus on is the fact that there is no loss corridor. And clearly, establishing a stronger reserve base is, I think, a precursor to getting $1.2 billion of gross limit on top of your carry position without a loss corridor. And so that was an important characteristic of how we brought all this together. And I think that was important to us because it now creates certainty and people now understand that '24 and prior North America insurance development, if there is any, which we set our ultimates hoping that there's not. But if there is any, it will be covered under the ADC. And so that's sort of the process they go through. It's a very rigorous process, a collaborative one. And I think it got to economics that will be very, very good for Longtail Re, but are also quite reasonable from Everest perspective. Operator: The next question comes from David Motemaden with Evercore ISI. David Motemaden: I had a question just on the casualty reinsurance reserves. Mark, you had mentioned there was some minor development there in the quarter that was offset by some of the shorter tail releases. I was wondering if you could just elaborate a little bit on what happened exactly there and some of the trends you're observing on the casualty reserves. Mark Kociancic: Yes. A couple of comments. I would say it's definitely subsided. You're looking at a few older years that were getting impacted from a few cedents. We're seeing good signs of adequacy overall. And when I compare it to the trends we saw last year or the previous year '23 or '24, really didn't see the same level of development that we saw there, particularly when we were bridging the data. So we felt quite comfortable with what we were seeing and the ability to offset it. I think the other point that I would make is -- so I mean, it's all U.S. casualty based. There was nothing else from an international basis that was concerning us at all. It's obviously something we're focused on because it is so much in the spotlight with social inflation. So we do a lot of individual cedent reviews as we look at the data. But the other point that I made in my script is the overall strength of the reinsurance segment and the embedded margin that we believe we're building in there. We continue to see very favorable signs of adding embedded margin, waiting for it to season and then releasing it when it's ready. David Motemaden: Got it. And the gross change on the Casualty Re side, is that something you could size for us? Mark Kociancic: A few percentage points, very small on the base. So definitely on the low end. David Motemaden: Got it. And then just quickly, I think just staying on the Casualty Re reserves. I think when we had the reserve update at the end of last year, there was $180 million of risk margin in that book, and you guys had said it was at the upper part of the actuarial best estimate range. I was wondering, has that improved? Is that in the 90th percentile now? I guess, how big is the risk margin? Has that stayed the same? Any sort of detail on those metrics would be helpful. Mark Kociancic: Yes. I want to make sure I understand which segment you're referring to. Was it -- sorry, was it Reinsurance or Insurance? David Motemaden: Yes, the casualty -- on the Casualty Re side. Mark Kociancic: On the Casualty Re side, yes. So we're definitely comfortable with it. I think what we did last year, the concept of the risk margin that we put into the management best estimate was really to deal with uncertainties that we foresaw from a management perspective relative to the actuarial central estimate. And so as we observe the data coming in, the loss experience and how broad-based it was, we could see that, that uncertainty really wasn't crystallized into a loss experience that was more in line with our expectations. And so the point that I would make is that the uncertainty on the higher end is not something that we see today. We're quite comfortable with the loss development factors that we put into our Q3 studies. We're benefiting from this extra data. We're seeing stabilizing trends. The loss picks are in a good spot. It's something we've also taken the time out of prudence to strengthen in the current year 2025. So from a Reinsurance perspective, we're in a good spot. Operator: The next question comes from Ryan Tunis with Cantor. Ryan Tunis: Just, I guess, Jim, kind of a broad question on just the ROE trajectory. At the beginning of the year, you thought the ROE was x, I don't know, call it, 14%, 15%. Just thinking through the moving parts on what that is now. I mean we're losing $2 billion of insurance premium, $60 million of investment income, but obviously, we're getting some costs out and some elevated capital management. So I'm just wondering how you're thinking about the ROE profile of this company. James Williamson: Yes, Ryan, thanks for the question. It's good to hear from you. Let me step back a little bit and paint a little bit of the broader picture and then get into the specifics of your question just in terms of the moving parts around the specific transaction and what it will mean for the group. The first thing I would say is, as you'd appreciate, there's an embedded cost that is included in the P&L that's now going to be transferred, which involves, obviously, employee costs, technology, et cetera. We have a very clear strategy around how we rationalize that in 2026. And as Mark indicated earlier, we're still expecting and just on simple math and accounting, a fairly robust amount of earned premium to flow through our P&L from the portfolio that we're selling in 2026 as it runs down. And so I think the -- on a very rough justice basis, the rundown of the cost and the rundown of the earned premium are moving in the same direction. Not to say there won't be some drag at certain points or things we'll have to manage. But I'm pretty confident we'll get to a good place around that. And so as we sort of exit the transaction and get the business rightsized, I don't expect that to be a long-term headwind for the group as you get out past 2026. The other thing I would say is, obviously, you have a market cycle that is -- it's doing what market cycles do. It's ebbing and flowing. And right now, particularly in short-tail lines, you see a little bit of a takedown both in the primary market and in reinsurance around property pricing, et cetera. But as I indicated in earlier questions, I still think it's very attractive. And so are we still sort of in the mid-teens level of ROE for -- over the cycle? Yes. Are we at a part of the cycle in '26 where maybe it's just slightly below that? Maybe. But lots of levers for us to pull, not least of them will be capital management actions, as Mark indicated, to manage that over time in a really attractive way. Ryan Tunis: Got it. And then just a follow-up on the decision to do the renewal rights deal. Are you describing -- I guess, first of all, I was a little bit surprised that it doesn't sound like there's any overlap on the retail business and the remediation you did. So seems reasonably clean from a reserve standpoint and it's a sub-100% combined ratio business. So why do the renewal rights deal rather than pursue sale opportunities? James Williamson: Yes. Yes. So fair question. So first of all, just to reiterate some things I said earlier, the decision around -- the strategic decision that I made in conjunction with the management team, our advisers and the Board was about focusing on our core reinsurance business and these really attractive Wholesale & Specialty businesses. That's the real primary decision that got made. And so the decision to exit retail insurance is a byproduct of that. And then the question becomes, once you've gotten there, what is the most effective way to create that. And I think from the perspective of a few factors played into why a renewal rights transaction. Well, one, the reality is we're going to need to and we have dealt with the back book of reserves from the ADC, but it's just not a practical thing to try to transfer that at this point. A number of legal entities that support the retail business are also really important to the Wholesale & Specialty businesses that we're persisting. That's important. And then ultimately, we got to a place where we had the right partner to work with to get this deal done effectively quickly with a lot of certainty. And there's also, obviously, the needs of your partner you got to think about. So all those things aligned. And ultimately, it was really clear to me that a renewal rights transaction was the most efficient way to effectuate the strategic priorities that we had set during this process of focusing on our Reinsurance and Wholesale & Specialty Insurance businesses. Operator: The next question comes from Hristian Getsov with Wells Fargo. Hristian Getsov: In the past, you've spoken about increasing the international component of the primary insurance book. I guess with all the moving pieces, particularly around the renewal rights and the new focus on the Wholesale & Specialty side, is there any change in that game plan? And then I guess, sticking to that, is there enough runway for you guys to grow that business organically? Or can M&A be a bigger part of the story moving forward? James Williamson: Sure, Hristian. Let me take the questions in turn. So the growth in international, obviously, that was largely a retail strategy, although we also have a terrific wholesale business in our Everest Global Markets, which is our London market business. And I want to be really clear about something important. And I think this is true both on the international side as well as North America post the remediation, there was nothing wrong with the books of business. And there was nothing wrong with the way the teams were executing their strategies. They were getting good results. But the question that we confronted strategically is what is the best use of our capital and our investments going forward. And clearly, as I've said a number of times, the opportunity in Reinsurance and in Wholesale & Specialty Insurance for us at this point in our evolution is just a much stronger proposition than continuing to invest in retail. So yes, the decision to divest the retail business will blunt the international growth in the short term, but it's for strategic reasons that we've spent a lot of time explaining today. So in terms of the business going forward, and particularly that Wholesale & Specialty business, which I said -- as I've said, we've now reorganized into a single business under great leadership. I do think there will be growth opportunities. We're supremely focused on bottom line results. But as market conditions allow, I think there is organic growth that we can pursue. I will stress probably being very repetitive at this point, but we can pursue those growth opportunities organically with far fewer investments in people and infrastructure than is required in the retail business, which I think is attractive for us. And then could M&A be part of the plan? I think that's possible. But we've been pretty consistent on this point, which is if we do something like that in Wholesale & Specialty, it's going to be about bolting on capabilities that are attractive, that are consumable, that have modest execution risk. Those are the sorts of characteristics that I think would you would want to think about if we were to do any M&A in the Wholesale & Specialty space. Hristian Getsov: Got it. And then how are you thinking about pricing at the 1/1 renewals, just given what we know through hurricane season to date? And does the ADC and renewal rights sell, does that increase your appetite for you to go and get new business now that you're done through the 1-Renewal Strategy and you're getting a bunch of capital alleviation over the next 12 months? James Williamson: Yes. So in terms of the pricing outlook, I think the market consensus is prices are going to come off a bit, probably in the range of 10%, depending on who you believe. I think the business is still well priced if that happens in terms of expected return. Now having said that, I would not expect us to look to significantly grow from that point when prices are coming down, I think it's more about being very selective. Capital constraints were never an issue as we've expanded the book. And we had excess capital before this transaction. We have more of it now. That is not a factor in determining how much cat we're going to write. It's really more about the underlying dynamics of the cat market and how it compares to other opportunities to deploy capital. Operator: The next question comes from Tracy Benguigui with Wolfe Research. Tracy Benguigui: Just some clarification on your comment, there was no loss corridor. I mean, I see that in the schematic. But I just assumed that the $539 million of casualty reserve strengthening would have been your loss corridor have you not taken those actions. So I'm just wondering, did Longtail Re come in and say, I will attach $5.4 billion, so you have to fill in the gap? Or would they have done the deal at a lower attachment? James Williamson: Well, yes, Tracy, I'm not going to speculate on what they might have done. But what I would say is it was a collaborative process in terms of arriving at the structure of this deal, and we were sharing a lot of information, a lot of transparency was taking place. But remember, this is fundamentally driven by an appropriate actuarial process within Everest to arrive at what we think the ultimate loss ratios are going to be. And I think -- and again, I'm not going to speak for Longtail, but I think anyone looking at the approach that we've taken to those reserves would say, we believe in the ultimates, and I think that's the real takeaway here. Those are the right ultimate loss ratios given everything that's occurred in the external environment and the underwriting issues that we've had. And so therefore, we can attach at that ultimate. And I think that speaks volumes about how people are feeling about what's going to happen next in terms of those ultimate loss ratios holding from here. Tracy Benguigui: Got it. And I'm just curious how wide of a search did you conduct? This is not a knock on Longtail Re, but just doing a deal with a non-rated reinsurer piqued my interest given the capital discussion on this call. I mean, there's less relief given higher counterparty credit risk. James Williamson: Yes. So just one thing in terms of the deal features, and then I'll come into the process. We are facing off against 2 rated fronting carriers as part of the transaction. So we're not taking credit risk to Longtail Re. We have rated balance sheets, very strongly rated balance sheets facing us as fronts in the transaction. So it's a good question and something we thought carefully about. We ran a very comprehensive process. We use Gallagher Re as our broker in the process. They were -- and if you know their casualty team is world-class. They did a very comprehensive search. We worked with a number of parties. But -- what I really liked about Longtail is a couple of things. One, we have a pre-existing relationship with Stoneridge Asset Management through Mount Logan. They've been very steadfast partners of ours. So that was a feature. And I think there's a lot of our companies do together today and can do together going forward. And then I have enormous respect for Mike Sapnar personally, and I think he's a fantastic underwriter and his -- frankly, his seal of approval on all this was important to me. So I think this outcome is just fantastic for Everest, and I think it will prove to be a really good trade for Longtail as well. Tracy Benguigui: Okay. So you said there were 2 fronting companies. It's like retrocession. Like if you could just share a little bit more detail behind that. James Williamson: Yes. So the deal, the transaction, the $1.2 billion gross limit is split into 2 layers. The first layer is fronted by State National. The second layer is fronted by MS Transverse. Longtail sits behind those 2 carriers and has collateral arrangements, et cetera. But we face off, we are ceding to those 2 rated balance sheets. Mark Kociancic: Yes. Tracy, it's worth pointing out we have an 8-K with all the details on the ADC. I think we issued it yesterday. So certainly, you can get that structure from there. Operator: This concludes our question-and-answer session and concludes our conference call today. Thank you for attending today's presentation. You may now disconnect.
Tuukka Hirvonen: Okay. [Foreign Language] Good afternoon, and welcome to Orion's earnings conference call and webcast for the financial period of January-September 2025. My name is Tuukka Hirvonen. I'm the Head of Investor Relations here at Orion. In a few moments, we will start with the presentation by our CEO and President, Mrs. Liisa Hurme, after which then we will have a Q&A session where you can post questions both to Liisa and also to our CFO, Rene Lindell. [Operator Instructions] And just before I let Liisa to take the stage, I'd like to draw your attention to this disclaimer regarding forward-looking statements. But with that, it's my pleasure to hand over to Liisa. Liisa? Liisa Hurme: Thank you, Tuukka, and welcome to Orion Q3 webcast on my behalf as well. Here are some highlights from quarter 3 2025. Nubeqa received approval from European Commission for use of darolutamide and ADT, androgen deprivation therapy in patients with metastatic hormone-sensitive prostate cancer. Nubeqa also reached all-time high royalties and product deliveries to Bayer during Q3. Generics and Consumer Health business had a strong quarter, supported by good availability of products in our major markets and very successful new launches. Unfortunately, ODM-105, tasipimidine Phase II trial for insomnia didn't reach its efficacy target, and we decided to discontinue the development of that program. And Q3 financials are here. And before I go deeper into the financials, it is good to remember that the comparative period Q3 2024 was an exceptional quarter. We received EUR 130 million worth of milestones last year's Q3. There was a EUR 70 million sales milestone from Bayer related to Nubeqa and EUR 60 million milestone related to the MSD agreement on opevesostat. So these are quite difficult to compare to each other. And now as I go along, I will talk about the base business. So the business without the milestones. The base business growth was 24% from quarter 3 '24 to this year's quarter 3, totaling to EUR 423 million. The operating profit growth was even stronger, 68%, up to EUR 121 million. And our cash flow grew 15% and was being very solid. Of course, last year's -- during last year's Q3, the milestones were booked, but yet not paid. So they were not yet cash in our bank. And when we look closer, the net sales bridge, we can see the kind of a net effect of the difference between the quarters here regarding the milestones in Innovative Medicines column, which is EUR 59 million, but underlying net sales increased by EUR 71 million. So I think the growth, as I earlier said, of Nubeqa product sales and royalties was very strong, but it didn't fully compensate the previous year's milestones. We can also see here that all other divisions positively developed positively, strongest being Generics and Consumer Health, but also Branded Products and Animal Health showed positive development. And Fermion was more or less on par. And here on the operating profit bridge, we can see the full -- kind of a full effect of the last year's milestones, EUR 130 million, but also the positives on the change in sales volume and change in prices and cost of goods and product mix of almost EUR 20 million. And then the royalties of EUR 50 million. We can also see that our fixed cost increased as well, but this is all planned. It's mainly R&D and sales and marketing costs here. Now let's take a view for the first 9 months from January to September. Again, a very nice 22% growth during the first 9 months and 7.8% growth even though we would compare to the previous year's quarter 3, including the milestones. And the first 3 months ended up with EUR 1.2 billion of net sales. Regarding operating profit, EUR 57 million -- 57% growth and slight decrease if we compare to the numbers, including milestones in previous year. And again, a very positive development on cash flow during the first 9 months. Now to Innovative Medicines. This is a bit different picture than you've used to see. There is the shaded area, which tries to tell you the comparison between the quarters, including everything else, but the milestones from the previous year. And 71% of growth is very healthy for Innovative Medicines and also almost 75% growth during the first 9 months. And on the right side here, you can see this all-time high royalties plus product deliveries ending up to EUR 166 million. And I always remind looking at this picture, the very, how would I say, year is very late ended loaded -- back-ended loaded -- back-end loaded for Nubeqa, as you can see here, when you look at the '24 from the first quarter to the last quarter, but here as well. But I would like to remind that in comparison to '24, we already reached the higher royalty rate in the previous quarter with Nubeqa. So we are not going to see a similar shift and change in the royalty rate as we saw last year between the Q3 and Q4. Branded Products growth during Q3 was somewhat slow. It was 3%. And this slowliness in the growth is mainly due to timing of deliveries to our Stalevo partners. And that will be fixed during the rest of the year. So it's kind of a temporary change here. And the growth for the first 9 months is a healthy 9%. And in Easyhaler portfolio, budesonide-formoterol combination product was the clear driver for the growth. And then on the CNS portfolio, Stalevo Japan contributed to growth in Branded Products. And as I say, Generics and Consumer Health quarter 3 was very, very strong. 5.4% growth is extremely good for any generic business, but especially here when we remember that Simdax and Dexdor are included in this business, and they are constantly sliding down facing the generic competition. So we are able to compensate that decrease, but -- and at the same time, increase and grow our sales. And the reason for good quarter is really the good availability of the products in our Nordic countries. The service level is the thing in the Generic business. You need to have the products at the time of the tender where they should be, and you would need to be able to deliver also for all the different countries in the specific timings of tenders or pricing processes. And also, we had a good launch, for example, for Apixaban in Finland. Animal Health continued the good growth trend, although here, we see a bit of a similar slowdown as with Branded Products, and that partly has to do with deliveries as well. But when we look at the first 9 months, it's a very strong 2-digit number growth. And our top 10 product list is as it has been. Nubeqa, there as a flagship with 83% or 84% growth. Easyhaler product portfolio growth was close to 8% and entacapone products grew close to 5%, mainly due to the Japan sales. And our HRT product, Divina, performed very well here on the row 5, growing almost 23%, continuing the strong growth from earlier this year and some oldies like Trexan even 10% -- close to 10% growth and Quetiapine products, 10% growth. And currently, our business divisions are very healthy. The balance between business divisions is very healthy, approximately 30% for Innovative Medicines and Generics and close to 20% for Branded Products. Now Orion's key clinical development pipeline has clearly become oncology focused as we decided to discontinue the ODM-105 project for treatment of insomnia. We have also removed ARANOTE from this list as it's approved both in U.S. and EU. So we now have the DASL-HiCaP study on this list. and then the 2 OMAHA studies with opevesostat that MSD is responsible for. It's good to mention here for these 2 opevesostat studies that their design or primary endpoints have changed since we last presented this so that for the OMAHA3, which is for the later line patients, the primary endpoint is now overall survival. So the progression-free survival has been demoted and overall survival is the primary endpoint. Also, there are changes for the frontline patients study 004, so that the progression-free survival is now a primary endpoint for this study. And these are changes that our partner, MSD, has done, and it looks in all possible ways very logical. Then we have Tenax levosimendan study for pulmonary hypertension proceeding in Phase III. They are planning to start also another Phase III study by the end of this year, another global study for this indication. And then we have another study for opevesostat for metastatic castrate-resistant prostate cancer and 3 studies ongoing, Phase II studies ongoing for several or 3 different hormonal cancers, women's hormonal cancers, breast, endometrial and ovarian cancer. And still, we continue the CYPIDES, which was the Phase II study that formed the basis for those 2 opevesostat 3 and 4 studies for prostate cancer. And our TEAD inhibitor, ODM-212 for solid tumors is proceeding well in Phase I, and we are preparing to start the Phase II program on the first half of next year. Then a few words on the sustainability this time about decarbonization targets. We have set an ambitious target to reduce absolute Scope 1 and 2 greenhouse gas emissions by 70% by the year 2030, and also have 78% of our suppliers, meaning Scope 3 emissions covered by our targets. Then how do we do this? I think for the Scope 1 and 2, we have very concrete actions ongoing. The steam production is one of the most energy-consuming phase in the chemical industry, especially in the API industry. And we are changing the energy source for steam production in all of our facilities -- manufacturing facilities. In Turku, we are electrifying the steam production. In Oulu, we are changing to biofuels from the fossil fuels. And also, we will start an electrifying project in Espoo. So very, very concrete examples here, and we have even done a lot of concrete actions and projects before this, for example, in our Hanko plant. And in the supplier management, we are targeting to our highest emitting suppliers who are not yet aligned with SBT. And here, we try to offer support and practices and technical expertise with our suppliers. And we have specified our outlook today. Our operating outlook for operating profit, we have narrowed from EUR 410 million to EUR 490 million. So nothing drastic. We've been able to narrow it as the year has -- 10 months have already passed. There are 2 months left, and we have a much clearer view on how the year will pan out. And for the net sales, our outlook is from EUR 1.640 billion to EUR 1.720 billion. And here, you can see the upcoming events for next year. And I thank you on my behalf, and welcome Rene here with me to answer your questions. Tuukka Hirvonen: Thank you, Liisa, for the presentation. As we said in the beginning, we will first take questions from the conference call lines, and then we will turn to the questions you can type in through the chat function in the webcast. But at this point, I would like to hand over to the operator with the conference call. Operator: [Operator Instructions] The next question comes from Sami Sarkamies from Danske Bank Markets. Sami Sarkamies: I have 4 questions. We'll take this one by one. Firstly, starting from the guidance. Can you elaborate on what is driving the small revisions to the lower and upper ends of the guidance ranges? Is this about third quarter actuals? Or have you also updated your forecast for the fourth quarter? Liisa Hurme: Well, of course, the first thing is, as I mentioned, that we know now how the first, say, 10 months have passed, and there are only 2 months left. But there are, of course, uncertainties for the latter part of the year. Nubeqa is a big moving factor in this, also R&D costs. And the tariffs are not that big of a matter here. We do think that they wouldn't have any effect to this year '25. But there are still uncertainties for the rest of the year. So still, we have this range, but there are less uncertainties, and that's why we were able to narrow the range. Sami Sarkamies: Okay. Then moving on to growth momentum at Branded Products and Animal Health. Third quarter growth rates are clearly weaker than we saw in the second quarter. How would you explain that? And what is your expectation regarding Q4? Liisa Hurme: Well, yes, you are very correct that the Branded Products and Animal Health showed a slower growth than previously this year. And it's mainly due to some delays in our deliveries to partners. We have both Animal Health. Animal Health is actually working closely with. We have some very big partners that we are working with. So there might be a 1-day or 2-day delay for the deliveries, and it has an effect clearly even on the quarter if there are big deliveries going on. Same goes with Branded Products. We deliver still to our Stalevo partners across the world. And it's the same thing. I think we've experienced this earlier years as well that sometimes it just happens that we are not able to ship during the quarter that we had planned. But this should be -- we should be able to sort this out by the end of the year during the Q4. Sami Sarkamies: Okay. Then moving on. The third question is on ODM-208. You mentioned that Merck has been changing primary endpoints for the OMAHA studies. When was this change made? Liisa Hurme: This change became public, I think, a month ago, 3 weeks ago, maybe. Tuukka Hirvonen: It was a few weeks ago. In early October, they changed the protocols. It was visible in the ClinicalTrials.gov. So nothing material because we didn't come out with at that point. But of course, something that is very interesting for all of you. So we wanted to highlight it here. Sami Sarkamies: Okay. And then finally, regarding the R&D pipeline, thinking of next year, can you give a bit more color on when you're expecting Phase I readout for ODM-212? And when would you expect to initiate the first Phase II study for that molecule? And then secondly, at CMD, you talked about 3 biological preclinical programs moving into Phase I during next year. Just wanted to check if these projects are still live as you are currently guiding for at least one new program during next year. Liisa Hurme: Yes. I'll start with ODM-212. The Phase I is almost completed. We are looking at the results, and we are basing our Phase II planning on those results. And of course, we will report the results in some forthcoming scientific meeting. Those are usually on embargo until we release them for the scientific audience. And regarding the Phase II program, it's currently under plans. We have filed IND for that and hope to be starting by hopefully mid-'26. And what was -- then there was one more question. Tuukka Hirvonen: About the biologics status. Liisa Hurme: Biologics. Indeed, yes, we told that we have 3 biologics close to advancing to clinical pipeline. And we think that we will be able to proceed with at least one of them to the Phase I next year. Operator: [Operator Instructions] The next question comes from Shan Hama from Jefferies. Shan Hama: Three from me. Also happy to take them one by one. So firstly, could you perhaps give us some, I guess, guide as to the impact on your OpEx from the ODM-105 failure? I mean I know you weren't planning to take it to late-stage development yourselves. So I assume it's not significant, but perhaps any guidance on the provisions set aside there would be helpful. Rene Lindell: Yes, maybe I can take that one. So of course, ODM-105, it was -- we got the results and in such a way, you could say the project was completed. So for this year's perspective, not a big impact in terms of how we expect this year's R&D expenses to be going as it was in our plans and it was completed. Then of course, for next year, you can obviously think that there is a change in how the budget is allocated. 105 million, of course, is not moving forward. There are some tail costs for next year that we'll be taking in this year. But overall, we see it as being quite neutral for this year in compared to whatever we save and whatever provisions we take for costs that would have occurred next year. Shan Hama: All right. And secondly, I mean, you're able to specify your guidance on this increasing visibility on the performance of the businesses. I assume the visibility on the milestone should also be better. Could you perhaps speak a bit on your expectations for this and whether that visibility has shifted slightly from last quarter? Liisa Hurme: Well, as we have stated, we think that we will receive the milestone next year, '26, but it is possible that we receive that milestone already '25. But it's still not possible to state that as a fact that we get it this year. So we remain where we have been to this date that it's possible this year, but we are -- in our plans, it's next year. Shan Hama: Understood. And then finally, given the delay that you mentioned in the deliveries in Branded Products and Animal Health, is it fair to expect a slight boost to 4Q, assuming those deliveries are made as well as the normal business expected in 4Q? Or is it more of a pull-through dynamic? Liisa Hurme: Now I didn't quite get the question. Is it... Tuukka Hirvonen: It's about the timing of shipments in Branded Products and Animal Health since we now saw some headwinds. Will there be a boost in Q4 now that... Liisa Hurme: No, I think it's just -- it's according to plan that we get them out here. So it's not boosting the Q4. Operator: The next question comes from [ Matty Carola ] from OP Corporate Bank. Unknown Analyst: It is [ Matty Carola ]. I ask 2 Nubeqa related questions. First, regarding the U.S. situation and the pricing. I know you are not willing to say a lot about it, but maybe could you a little bit say about the political atmosphere. Do you or your partner get the pressure to lower the price? Or what's your kind of look right now if you look on another side of the Atlantic? Liisa Hurme: Well, I think that's a good question regarding the U.S. business environment. However, I think a question whether our partner gets pressured or needs to change price, I think it's fair to say that, that needs to be asked from Bayer. It's not my place to comment that matter. But in general, there are a lot of things happening in U.S. regarding the pricing, the most favored nation initiative and also, of course, the tariffs. So we follow the situation carefully. Unknown Analyst: All right. Then the second one, you received the latest permits in the U.S. during the summer and also in Europe regarding the latest indication. Have you seen kind of significant volume change or kind of any change about the sales during the Q3 if we speak about the kind of adoption rates or any other kind of sales indication, which is visible after you got the final sales permits? Liisa Hurme: Well, we don't -- of course, we see that the volumes are increasing. That's a very positive thing. But we don't have a kind of a step change if you're referring to that with the new indication. It's more of a linear growth. So it's very positive. I'm sure ARANOTE has a positive effect as it can be used also without docetaxel. But to have a kind of a step change or big growth there, such we don't see exactly. Operator: [Operator Instructions] The next question comes from Anssi Raussi from SEB. Anssi Raussi: One question from me, and it's just to double check something you said during the presentation about Nubeqa royalties in Q4 compared to Q3. So I understood that we shouldn't expect similar growth as we saw last year, but anything else to add or comment on Q4 royalty rate? Maybe I didn't catch up everything you said in that comment. Liisa Hurme: Very good that you asked. I was trying to explain that last year, the royalty rate changed between Q3 and Q4. So... Tuukka Hirvonen: During Q4. Liisa Hurme: During -- yes, not exactly between, but during Q4. So it had an impact so that the Q4 was clearly higher in Nubeqa sales or royalties to us. But this year, we already reached that royalty rate during Q3. So even though the royalties will be -- or the sales will be growing, so there will be a kind of a double effect of sales growing and royalties -- royalty percentage increasing during quarter 2. So that's the difference. I don't know if I explained it well or if my colleague wants to explain it even better. Anssi Raussi: Got it. And so is your royalty rate hit the cap during Q3? Was it at the end of the quarter? Or was the average rate already capped and will be similar in Q4? Or is it like the run rate at the end of Q3? Tuukka Hirvonen: We reached the cap during Q3, not going to specifics at which point of time. But like Liisa said, kind of the message is that one should not expect similar step-up as you saw last year between Q3 and Q4 because in Q4 last year, we got the step-up coming from the royalty rate increase, but now that won't be happening between Q3 and Q4. So that was kind of the message that we expect the growth to continue, but similar kind of step-up as you saw last year, one should not expect. Operator: There are no more questions at this time. Tuukka Hirvonen: All right. Thank you, operator. Then we turn on to the chat questions. We have a couple here. You still have time to type in more if you have anything on your mind. Let's start with one. This is actually already covered, but just to let you know that [ Aro ] is asking, is it still realistic to think that the EUR 180 million Nubeqa milestone would come already this year? And actually, you, Liisa, already addressed that question. So that's covered. Then we are having one coming from Iiris Theman from DNB Carnegie. Regarding Nubeqa, have you received any feedback from Bayer how ARANOTE sales have developed? What are Bayer's comments? Liisa Hurme: I think not specific comments on ARANOTE . I think we are more or less following the all sales development. And as I said, it's linearly growing. So there, we haven't really seen any step-up due to ARANOTE. And let's remember that there might have been already off-label use with Nubeqa for this patient segment. So it might be that -- it might not be that dramatic, and that's what we've been trying to tell all along while we've been waiting for the ARANOTE approval. Tuukka Hirvonen: All right. Thank you, Liisa. We have no further questions in the chat, but I got a message. Well, actually, now Iiris has a follow-up here. So why administration costs were lower year-on-year? And what should we expect for Q4? Rene Lindell: Yes, There are typically quite many line items there, and some of those are -- can be just shifting from quarter-to-quarter. There can be also some definition changes, what is considered admin and what is considered in the other line items. There are quite minor changes in terms of the overall admin expenses. There's nothing big changing the normal inflation, which is across the board. But yes, I wouldn't expect any drastic differences. Tuukka Hirvonen: All right. Thanks, Rene. Then we have a follow-up from Sami Sarkamies from Danske. So following changed endpoints for ODM-208, so opevesostat, OMAHA trials, do you still foresee an interim readout in '26? Before you answer, of course, we need to point out that we have never estimated or foreseen that there will be a readout. Liisa Hurme: Interim readout. No, no, no. But I think that's public, the readout for the full year. It's that when... Tuukka Hirvonen: Yes. Yes, the full readout, yes, but interim readout. Liisa Hurme: No, no, no. We are not going to comment that or we have never commented that. But the readout from both studies should be in 2028. Tuukka Hirvonen: Yes, that's correct. Then we have a follow-up from Heikkila. He says that Orion's R&D costs have been increasing clearly. At which point do you expect these increases to show as a growth in terms of net sales? And to which development programs are you focusing the most after Nubeqa? Liisa Hurme: We clearly focusing the development programs that are in our hands, and that's ODM-212 now and of course, the biologics that are following that. And when can we expect that program to turn into sales? I would say that would be early 2030s. Tuukka Hirvonen: All right. Thank you, Liisa. Now we have exhausted all the questions from the chat. And also, I got a message that there are no follow-ups in the conference call lines. So it's time for us to wrap up. Thank you for joining us today, and have a great rest of the day and week. Liisa Hurme: Thank you.
Operator: Good evening, and thank you for standing by for New Oriental's FY 2026 First Quarter Results Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I'd like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao. Sisi Zhao: Thank you. Hello, everyone, and welcome to New Oriental's First Fiscal Quarter 2026 Earnings Conference Call. Our financial results for the period were released earlier today and are available on the company's website as well as on Newswire services. Today, Stephen Yang, Executive President and Chief Financial Officer; and I will share New Oriental's latest earnings results and business updates in detail with you. After that, Stephen and I will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the view expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental's Investor Relations website at investor.neworiental.org. I'll now first turn the call over to Mr. Yang Stephen. Please go ahead. Zhihui Yang: Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. Before diving into the details of our first quarter results, I would like to share that after periods of testing and trialing various business models and offerings, formulating the right strategy and direction for New Oriental. We're pleased to see that the company has now entered a stable growth trajectory. This quarter, we recorded an encouraging set of results that exceeded our expectations, mainly driven by our strong capabilities, enhancing operational resilience and sustainable profitability. This quarter's total net revenue has increased by 6.1% year-over-year. Bottom line-wise, we're delighted to see that our efforts to manage costs and streamline efficiency has yielded tangible success with non-GAAP operating margin reaching 22% this quarter, representing a year-over-year improvement of 100 basis points. Our key remaining business remains solid, while our new initiatives have continuously demonstrated positive momentum. Breaking it down for the first fiscal quarter of 2026. Overseas test prep business recorded a revenue increase of about 1% year-over-year. Overseas study consulting business recorded a revenue increase of about 2% year-over-year. Our adults and university students business recorded a revenue increase of 14% year-over-year. At the same time, our continued investments in new education business initiatives primarily centered on facilitating students all around development have delivered consistent progress, further driving the company's overall momentum. Firstly, the non-academic tutoring business, which focused on cultivating students' innovative ability and comprehensive qualities has now been rolled out to around 60 cities. Market penetration has grown steadily, particularly across high-tier cities. The top 10 cities contribute over 60% of this business. Secondly, the intelligent learning system and device business, which utilize our past teaching experience, data technology to provide personalized and targeted learning and exercise content to improve students' learning efficiency has been tested in around 60 existing cities. We're encouraged by the improved customer retention and scalability of these new initiatives. The top 10 cities contribute over 50% of this business. In summary, our new educational business initiatives recorded a revenue increase of about 15% year-over-year for the first quarter of 2026. Moving to the integrated tourism-related business line and breaking it down, both domestic and international study tours and research camp for K-12 and university students were connected across 55 cities nationwide, with the top 10 cities contributed over 50% of our revenue. In parallel, we provide a series of premium tourism offerings primarily designed for middle-aged and senior audiences across 30 featured provinces in China and internationally. Our product range has also been expanded to now include cultural travel, China study tour, global study tour and camp education. With regards to our OMO system, our efforts in developing and revamping our online merging offline teaching platform continued. These efforts aim to deliver more advanced and diversified education service to our customers of all ages. A total of $28.5 million have been invested during the quarter to upgrade and maintain our OMO teaching platform. Beyond OMO, we continue to focus on our venture in AI. Our newly launched AI-powered intelligent learning device and smart study solution marks significant steps of our ongoing pursuit to transform education through technology. Encouraged by the positive market feedback, we have been and will continue to refine and embed AI across our offerings to strengthen New Oriental's core capabilities. Simultaneously, we're also leveraging AI to streamline internal operations, thereby boosting efficiency and providing enhanced support for our teaching staff. As an industry leader, we're dedicated to driving long-term revenue growth through dual focus on product innovation and operational efficiency. In upcoming quarters, we look forward to sharing tangible results and positive highlights on performance that are backed by our investments in AI. Now with regards to the East Buy's performance. In fiscal year 2026, East Buy strategically invested in its private label portfolio centered around the promise to deliver products that are healthy, high quality and good value for money. As we enrich East Buy's product categories, our blockbuster offerings, namely the nutritious food product line has particularly stood out. We have strengthened our capability through rigorous end-to-end quality management from sourcing to aftersales service, which resulted a greater market recognition for our private label products. During the reporting period, East Buy further advanced its East Buy app and membership platform, connecting our loyal customer base to premium products and services. As the business continued to evolve steadily, East Buy has intensified its focus on improving operational efficiency and profitability metrics to align closely with the group's corporate strategy. Now, I will turn the call over to Sisi to share with you about the key financials. Sisi, please go ahead. Sisi Zhao: Thank you, Stephen. Now I'd like to share our key financial details for this quarter. Operating costs and expenses for the quarter were $1,212.2 million, representing a 6.1% increase year-over-year. Cost of revenues increased by 9.3% year-over-year to $637.8 million. Selling and marketing expenses increased by 3.6% year-over-year to $200.6 million. G&A expenses increased by 2.4% year-over-year to $373.8 million. Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 239.8% to $23.3 million in the first fiscal quarter of 2026. Operating income was $310.8 million, representing a 6% increase year-over-year. Non-GAAP operating income, excluding share-based compensation expenses and amortization of intangible assets resulting from business acquisitions was $335.5 million, representing an 11.3% increase year-over-year. Net income attributable to New Oriental for the quarter was $240.7 million, representing a 1.9% decrease year-over-year. Basic and diluted net income per ADS attributable to New Oriental were $1.52 and $1.5, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $258.3 million, representing a 1.6% decrease year-over-year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $1.63 and $1.61, respectively. Net cash flow generated from operations for the first fiscal quarter of 2026 was approximately $192.3 million, and capital expenditure for the quarter were $55.4 million. Turning to the balance sheet. As of August 31, 2025, New Oriental had cash and cash equivalents of $1,282.3 million, $1,570.2 million in term deposits and $2,178.1 million in short-term investments. New Oriental's deferred revenue, which represents cash collected upfront from customers and related revenue that will be recognized as the service or goods were delivered at the end of the first fiscal quarter of 2026 was $1,906.7 million, an increase of 10% as compared to $1,733.1 million at the end of the first fiscal quarter of 2025. Now, I will hand over to Stephen to go through our outlook, guidance and our new shareholder return plan. Stephen? Zhihui Yang: Thank you, Sisi. Following a strong start to the fiscal year, we're optimistic about further improving our margins and operational efficiency while staying committed to effect cost control and sustainable profitability across our all business. As part of these efforts, we are taking a thoughtful and strategic approach to capacity expansion and hiring, ensuring that we continue to grow without compromising the quality of our offerings. We plan to increase our presence in cities with stronger top line and bottom line performance last year, while carefully managing resources. Rest assured, we will closely monitor the pace and scale of new openings, aligning them with local official needs and financial results throughout the year. Guidance-wise, we expect total net revenue for the group, including East Buy in the second quarter of the fiscal year 2026, September 1, 2025 to November 30, 2025, to be in the range of $1,132.1 million to $1,263.3 million, representing year-over-year increase in the range of 9% to 12%. In the second quarter, we projected a notable acceleration of revenue growth in K-12 business, driven by our enhanced service quality, which has led to steady year-on-year and quarter-on-quarter improvement in student retention rates. As for the full fiscal year 2026, we are very confident that our previously provided guidance of total net revenue for the group, also including East Buy to be in the range of $5,145.3 million to $5,390.3 million will be realized, representing a year-over-year increase in the range of 5% to 10%. As part of our appreciation for our shareholders' unwavering support, we today announced that the shareholder return plan for the fiscal year 2026 has begun. The Board of Directors has approved an ordinary cash dividend and new share repurchase program. Regarding the ordinary share dividend, the ordinary cash dividend of $0.12 per common share or $1.2 per ADS will be paid in two installments with an aggregate amount of approximately $190 million. The first installment with $0.06 per common share or $0.6 per ADS will be paid to holders of common shares or ADS of recorded as of the close of business on November 18, 2025, Beijing and Hong Kong time and New York time, respectively. The second installment $0.06 per common share or $0.6 per ADS is expected to be paid around 6 months after the payment date of the first installment to holders of common shares and ADS of the record date to be further determined by the Board of Directors. Details of the second installment will be announced in due course. Regarding the share repurchase program, pursuant to the new share repurchase program, the company may repurchase up to $300 million of its ADS or common shares from open market over the next 12 months. To conclude, New Oriental remains committed to our trajectory of sustainable growth, delivering premium offerings to our customers and sharing the fruits of our success with our shareholders. We're also in close collaboration with the government authorities in various province and municipalities in China, ensuring compliance with the relevant policies, guidelines and any related implementations, regulations and measures and adjusting our business operation as required. This is the end of our fiscal year 2026 Q1 summary. At this point, I would like to open the floor for questions. Operator, please open the call for these. Thank you. Operator: [Operator Instructions] We will now take our first question from the line of Felix Liu from UBS. Please ask your question, Felix. Felix Liu: I'm glad to hear that you mentioned or expect a notable acceleration in your K-12 business in the upcoming quarter. I know previously, there are market concerns over increased competition, especially over the summer. So, could management elaborate on how is the latest competition landscape in K-12 that you're feeling at the moment? What are the -- have you made any adjustments to your strategy? And what is a reasonable level of sustainable growth for your K-12 business in the mid- to long term? Zhihui Yang: Thank you, Felix. First of all, I'm very happy to see the revenue growth acceleration in our K-12 business since Q2. As you know, started in Q1 and even for the whole year, I think our target is to enhance our quality of product and service in K-12 business. And I think since Q2, we will see the good result. I think, the better quality drives the student retention rate up after the summer. So, that means more and more students chose our Q2 course and also the better word of mouth attracts new student enrollment of our autumn classes. Yes, as you know, we missed some competition pressure in the summer, because of some competitors were using the low price or even the free course strategy. But now we are happy to see students came back to New Oriental to enroll our classes in autumn. So, that's why we raised the guidance of the K-12 business. So, let's divide the K-12 business one by one. And so, we expect the K9 new business revenue growth will be around 20% year-over-year growth in Q2. And for the high school business, I think in the Q2, the growth rate will return to double-digit growth. So, I think you see the revenue acceleration since Q2. And so, I think the high student retention rate and the better word of mouth will drive the revenue growth acceleration. And I think, I believe the revenue growth acceleration will continuously since Q2 and throughout the year. So for -- yes, so for the whole year, 2026, I think the K9 business will be -- the year-over-year growth will be over 20%. And for the high school, like double-digit growth. So, I think, our strategy is correct, because the student retention rate, both for the primary school students and middle school students and high school students, all this is why the student retention rate is getting higher year-over-year. Operator: Our next question comes from the line of Alice Cai from Citibank. Yijing Cai: I have two quick questions. First on SBC. It jumped into a lot to $23 million this quarter. I'm wondering what drove this increase and what's the outlook? The other increase, $21 million, would you break down what the driver is for the SBC? Zhihui Yang: Yes. I think, Alice, your question is about the SBC, the share-based compensation. I think in the second half of the last fiscal year, we issued -- we grant the ADS shares to the management and the staff and teachers in the next 3 years. So, it's driving the SBC up. And yes, so the number of the SBC in this quarter is bigger than that of last year. And yes, but as you know... Sisi Zhao: Yes. You can roughly estimate going forward, every quarter, the SBC expenses will be similar with this quarter and at this kind of level for the coming several quarters. Zhihui Yang: Yes. But I think typically, the first year we recorded more SBC expenses, more in first year and then less in second and third year. Operator: We will now take our next question from the line of Lucy Yu from Bank of America Securities. Lucy Yu: Stephen, I have a question on overseas. It looks like overseas has been stronger than your earlier expectation. Could you please break down the test prep growth by age and also the consulting growth break down by subsegment? How should we think about the overseas sustainability growth? And will that impact your guidance for the full year? Zhihui Yang: Yes. As for the overseas-related business, as you know, we are adversely affected by the external environment. Last quarter, we guided in Q1, the revenue of the overseas-related business would be down by 5%. But in Q1, I think overseas test prep still grew by 1%. Overseas consulting business grew by 2%. I think, we will strive to minimize the negative impact going forward. And so, in the Q2, we still guide the overseas-related business will be down by low single digits in Q2, which were still use the conservative method to make the forecast. And I think, yes, the negative impact from the -- like the international relationship, even the outside environment changed a lot. But I think, we will strive to minimize the impact. And so, we do expect we can beat our guidance, because we do the guidance in Q2, even for the whole year more conservatively. Lucy. Lucy Yu: Stephen, just to follow up. So for example, your test prep is positive. So by age group, like younger age, high school and like, college students, which one of them is better than expected? And also for the consulting business, I believe that 60% is around pure consulting and the other 40% is like background raising. So which part of that is better than expected? Zhihui Yang: Within the overseas test prep, the younger age students group, the business of that part grew very fast, even more than 25% year-over-year. So, that's why the makeup of the like the adults or even the college students business is down. And within the overseas consulting business, I think the non-U.S. and U.K. business, especially for the Asia country consulting business and the background improving the business still grew very fast. So as a whole, I think the overseas test prep and consulting business, we will still give the guidance like the 4% or 5% down year-over-year. But I believe we will do better than our guidance, Lucy. Operator: Our next question comes from the line of D.S. Kim from JPMorgan. D. S. Kim: I actually wanted to ask why the share price is down 6%, 7% pre-market, but I guess that's a question for the market not you. I actually have a question regarding shareholder return policy, if that's okay. How shall we think about the policy going forward, say, is this based on your projected or budgeted net profit and payout ratio? Or is it more based on our expectation on cash flows and whatnot? The reason why I'm asking is, if I use my own estimated the GAAP EPS, what you announced is roughly about 100% payout, say, like 40% payout for the dividend and 60% for buyback based on my GAAP net profit or EPS. Is that what we should think about going forward, i.e., like we could pay regularly over 50% as you guided, but more like 100% payout going forward based on this earnings and payout? Or shall we treat the buyback as one-off only for current year, because of the stock price is low and we only -- we can only expect 50% going forward? Like can we walk us through how we can think about the payout ratio or shareholder return going forward? Zhihui Yang: Thank you, D. S. It's a good question. I think last quarter, our Board approved 3-year shareholder return plan. And this -- we announced earlier today, we paid $190 million dividend, which amounted to the 50% of net profit, we generated last year. And combined with the $300 million, the new share buyback program. So let's do the math. We -- I think, the payout ratio this year is over 130% if you compare the capital allocation with the net profit we made last year. And the dividend plus the share buyback yield is over 5%. So, I think the -- going forward, next year, I think the dividend we will pay, because I think, it is a regular dividend. And the $300 million share buyback we announced this year is not onetime. It's not onetime. I think, next year, I think, I will discuss with the Board and to push the Board to approve the new capital allocation program. And I think, we will keep the high level of the payout ratio and the yield, because think about that, we meet some pressure slowing down the top line. And -- but we can still like the 10% or plus topline growth and generate higher margin. And also, we are piling up the cash. So, that's why the Board support the management to pay more capital allocation to investors. And I think the investors deserve to get more money the capital allocation from the company. And so we announced the 3 years -- the shareholder return plan. So, I think in the next year, we will pay more. D. S. Kim: If I may follow up just on that part, just to clarify, when I said 100%, that was based on fiscal year '26, my EPS. Because the wording of the announcement say this is a dividend for fiscal year 2026. But based on what you say, shall we, going forward, expect that, like, what you announced is actually coming out of fiscal year '25 earnings and what you are going to announce next year will be coming out of fiscal '26. So, will there be 1-year delay? And is that how we should think about? Or I guess, it's all flexible, but just wanted to get your thoughts. Zhihui Yang: I think, this is our internal policy. Because we make the calculation based on the last year net profit. So, we -- last quarter, we announced that we paid no less than 50%. But finally, we paid about 30% -- 30%. And next year, I think we will calculate based on the net profit we made in fiscal year 2026, and we will do the same thing. D. S. Kim: I think that's actually much, much better than what I had expected. So, I am again wondering why stock is down 6%, not up 6%. But anyway, let's see how it goes. Operator: Next question comes from the line of Yikun Zheng from Citic. Yikun Zheng: Congratulations on the strong results. My question is regarding the operating margin. Since the operating margin in Q1 is quite good, I'm not sure if it was mainly due to the cost reduction plan or some other reasons? And how can we expect the contribution of the cost reduction plan for the next season or for the full year? And how do we expect the operating margin for the full year? Zhihui Yang: It's a good question about margin. Let us start the margin analysis of Q1 this quarter. Even though we meet some margin pressure from the slowdown of the overseas-related business, but we still got the group margin expansion by 100 basis points in Q1. And I think the margin expansion was mainly driven by the better utilization, operating leverage and the cost control and the profit contribution from East Buy. As you know, we started to do the cost control since March in the last fiscal year, this year March. And we have seen the good results. And I think, it will help the margin expansion even in the rest of the year, this fiscal year. And we look ahead into the Q2 margin guidance. I think, we are quite optimistic about the margin expansion for the whole group in Q2. And so that means the core business and the East Buy business, both of the business, the margin will be up in Q2. And I believe the margin expansion in Q2 will be greater than that of Q1. And as for the margin outlook for the whole year, I think the whole group are focusing on the profitability across all business lines. We are doing the cost control in all business lines. So, we do hope we can get the margin expansion for the whole year for the group. Operator: We'll take our next question from the line of Elsie Sheng from CLSA. Yiran Sheng: Congratulations on the very good results. I have a quick question on the tax rate, because I noticed that the tax rate in the first quarter is higher. So, could you let us -- so what should we look at the tax rate in the next quarter and also for the full year? Zhihui Yang: In Q1, I think the situation is special, because even the -- since the second half of last year and Q1, we paid dividend from the WFOE to ListCo. And so, we need to pay the withholding tax to the tax bureau. So, it drive the ETR up in Q1. So it was 27%. And typically, we paid 25% of the ETR. And going forward, I think we probably -- we will do more -- pay more dividends from WFOE to ListCo. So, I think in this year, the ETR will be higher than that of last year or normal. But I think the reason is that, you saw, we announced earlier today, we raised the capital allocation to investors roughly $490 million as the capital allocation total. So, we need more dollars, and that's why it drives the ETR up. Operator: [Operator Instructions] We now take our next question from the line of Timothy Zhao from Goldman Sachs. Timothy Zhao: My question is regarding the Q2 K9 new initiatives. When I look at the enrollment growth for this quarter, I still noticed a pretty big gap between the non-academic tutoring and the intelligent learning system and devices. Just wondering, can we use that gap to model the revenue growth gap between these two segments for the first quarter or the second quarter? And do we think that this gap may sustain, I think, going forward, given I think for the intelligent learning system, I think it's a very good business. It's probably also margin accretive to you. Zhihui Yang: I think, the growth rate, the revenue growth of the junior high school business is a little bit faster than the primary schools business. Because, first of all, it's a little bit low base than the kids' business. And secondly, we spent a lot of the efforts and resources in the last 3, 4 years to open a new business of the middle school business. And I think, the whole team contribute a lot of the -- provide a better the product to the customers and the students love the new product. That's why the revenue growth is better. And so going forward, I think we believe the revenue growth of the middle school business will be a little bit higher than the kids' business. But as a whole, the K9 new business growth, you saw our guidance for Q2 and even for the whole year. I think definitely, it's the revenue acceleration is coming. And so as I said, in Q2, the K9 business roughly 20% top line growth. And we do hope we can do better in the second half of the year. Operator: We are now approaching the end of the conference call. I'll now turn the call over to New Oriental's Executive President and CFO, Stephen Yang, for his closing remarks. Zhihui Yang: Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our Investor Relations representatives. Thank you. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect your lines.
Operator: Good day, ladies and gentlemen. Welcome to KPN's Third Quarter Earnings Webcast and Conference Call. Please note that this event is being recorded. [Operator Instructions] I will now turn the call over to your host for today, Matthijs van Leijenhorst, Head of Investor Relations. You may begin. Matthijs van Leijenhorst: Yes. Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us today. Today, we published our Q3 results. With me today are Joost Farwerck, our CEO; and Chris Figee, our CFO. And as usual, before we begin the presentation, I would like to remind you of the safe harbor on Page 2 of the slides, which applies to any statements made during this presentation. In particular, today's presentation may include forward-looking statements, including KPN's expectations regarding its outlook and ambitions, which were also included in the press release published this morning. All such statements are subject to the safe harbor. Now let me hand over to our CEO, Joost Farwerck. Joost Farwerck: Thank you, Matthijs, and welcome, everyone. Let's start with the highlights of the last quarter -- third quarter. Our group service revenues increased by 1.7% with growth across all the segments. In the mix, consumer was supported by ongoing commercial momentum, both in broadband and mobile. Business was driven by mainly SME and LCE. As expected, growth slowed in the third quarter, mainly due to the tailored solutions parts and wholesale continued to grow mainly driven by sponsored roaming. Our EBITDA grew by 2.3% on a comparable basis. And as expected, our free cash flow rebounded in the third quarter, up 12% year-to-date, driven by EBITDA growth. We further expanded our fiber footprint together with our joint venture, Glaspoort. And finally, we remain confident to deliver on the full year 2025 outlook and our 337 midterm ambition. As a reminder, our Connect, Activate and Grow strategy is supported by 3 key pillars. First of all, we continue to invest in our leading networks. Second, we continue to grow and protect our customer base. And third, we further modernize and simplify our operating model. And together, these priorities support our ambition to grow our service revenues and adjusted EBITDA by approximately 3% on average and our free cash flow by approximately 7% over the entire strategic period. And given that we are now nearly halfway through our strategic period, we look forward to sharing a strategy update with you next week, November 5, and we hope you will join us online for the webcast. Let me now walk you through the business details. We lead the Dutch fiber market. In the third quarter, we expanded our fiber footprint by adding 74,000 homes passed together with Glaspoort, and we connected 82,000 homes, bringing us close to 80% homes connected within the fiber footprint. And the rollout pace slowed compared to previous quarters due to timing. We stick to our ambition to cover 80% of Dutch households with fiber. During our strategy update next week, we'll share how we will get there within our financial framework. Let's now have a look at the consumer segment. Consumer service revenues continue to grow, driven by consistent fiber and mobile service revenue growth. Customer satisfaction remains a priority, and thanks to our CombiVoordeel offer supported by super Wi-Fi, our Net Promoter Score rose to plus 15 year-to-date and Net Promoter Score even reached plus 17 during the quarter, showing how these improvements are making a real difference for our customers. Let's take a closer look at our third quarter KPIs. We saw another quarter of double-digit broadband-based growth despite a challenging competitive environment. Thanks to a steady and healthy inflow of new fiber customers, combined with a growing ARPU, our fixed service revenues continue to grow. In mobile, we maintained a strong commercial momentum, adding 47,000 subscribers. And this was partly offset by ARPU decline driven by ongoing promotional activity in the no-frill segment. So overall, our mobile service revenue grew by 1%. Let's now turn to the B2B segment. Business service revenues increased by 1.4% year-on-year, driven by SME and LCE and good commercial momentum. Net Promoter Score rose to plus 5 in the third quarter, reflecting customer appreciation for stability, reliability and the quality of our networks and services. SME service revenues increased by 3.3% year-on-year, driven by growth in Cloud and Workspace, broadband and mobile. LCE service revenues increased by 1% year-on-year, supported by growth in mainly IoT, Unified Communications and CPaaS. Mobile service revenues were impacted by ongoing price pressure, though this was partly offset by a growing customer base. And finally, and as expected, I must say, Tailored Solutions service revenues decreased by 2.5%, reflecting a further focus on value steering. And then wholesale -- our wholesale service revenues continue to grow, mainly due to a strong performance in mobile, driven by the continued growth in international sponsored roaming. Broadband service revenues increased despite a decline in copper base driven by fiber and other service revenues increased mainly due to an update in visitor roaming. Now let me hand over to Chris to give you more details on financials. Hans Figee: Thank you, Joost. Let me now take you through our financial performance. First, let me summarize some key figures for the third quarter. First, adjusted revenues increased 2.4% year-on-year in the third quarter, driven by service revenue growth across all segments and higher non-service revenues. Second, our adjusted EBITDA after leases grew by 4.4% compared to last year, supported by higher service revenues, the IPR benefit and contribution from tower company, Althio. This was partly offset by the holiday provision effect. As a reminder, starting this year, most employees no longer register holiday leave, resulting in a lower provision release in Q3 compared to last year, impacting therefore, the distribution of EBITDA growth over the year with a specific negative accounting impact in the third quarter. Finally, as anticipated, our free cash flow rebounded in Q3 and is now up 12% year-to-date. I'll share more details on the underlying cash developments later in this presentation. Group service revenues grew by 1.7% year-on-year, supported by all segments. And within this mix, consumer revenues increased by 1.1%, driven by, as Joost said, continued solid momentum in both fixed and mobile. Business service revenue growth tapered off somewhat in the third quarter compared to previous quarters, mainly due to developments in Tailored Solutions and timing effects. And finally, wholesale service revenues increased by 5.2% year-on-year, driven by ongoing growth in our international sponsored roaming business. Our adjusted EBITDA grew 4.4% year-on-year in Q3 or 2.3% on a comparable basis if we adjust for the IPR benefits, the Althio contribution and the holiday provisioning effects. Direct costs remained broadly in line with last year, reflecting shifts in the revenue mix, particularly within Tailored Solutions, where our continued focus on value and margin steering is shaping direct cost dynamics. On a comparable basis, our indirect cost base decreased by EUR 5 million, driven by lower energy and billing costs. We further scaled down our workforce, resulting in a reduction of over 300 FTEs compared to previous year. Our year-to-date operational free cash flow increased by 12% compared to last year or 8.6% excluding the IPR benefit and Althio, driven therefore by EBITDA growth. As expected and communicated to you, free cash flow generation rebounded in the third quarter, mainly due to improved working capital and lower interest payments. Year-to-date, our free cash flow is up 12% compared to the first 9 months of last year, again, supported by EBITDA growth and partly offset by higher interest payments and cash taxes paid this year. Finally, we ended the quarter with a cash position of EUR 373 million, absorbing the impact of the interim dividend over '25 and share buyback payments. We continue to run with a strong balance sheet. At the end of Q3, we had a leverage ratio of 2.5x, in line with our self-imposed ceiling and remained stable compared to the previous quarter. We expect our leverage ratio to return to 2.4x by the end of the year, supported by increased free cash flow generation. Our interest coverage ratio was sequentially a bit lower at 9.5x, and our cost of senior debt decreased slightly, mainly driven by lower floating interest rates. Our exposure to floating rates, by the way, remains limited at only 16%. Our liquidity position of around EUR 1.4 billion remains strong covering debt maturities until the end of '28. We are on track to deliver the 2025 outlook we shared with you in July. And on 25th of July, we completed our EUR 250 million share buyback program for the year. The cancellation of about 60 million treasury shares will be finalized in Q4. And August 1, we paid out an interim dividend of EUR 0.073 per share in respect of 2025. And finally, we reiterate our midterm, also known as our 337 targets as presented at our previous Capital Markets Day. As outlined back then, both service revenues and EBITDA are expected to grow 3% per year on average over the plan period and our free cash flow by 7% per annum on average with growth in cash back-end loaded due to our CapEx plans. Until 2026, our free cash flow growth is expected to grow at a low single-digit rate per year since we face increasing cash taxes year-on-year. Now let me briefly wrap up with the key takeaways. We continue to see service revenue growth across all segments. While revenue growth moderated somewhat in Q3, we anticipate a recovery in the fourth quarter. Our commercial momentum remains solid, and we continue to lead the Dutch fiber market. Our net add developments in both fixed and mobile and both in consumer and business was quite satisfactory in Q3. As expected and planned for, EBITDA growth was relatively soft in Q3, but is set to recover in Q4. Cash flow generation was strong, up more than 10% year-to-date. Overall, we're on track this year and continue to make good progress towards our annual and midterm targets, and we reiterate our guidance for the year. Finally, as we approach the halfway point of our strategy, we can't wait and look forward to providing you with an update of our strategy next week, on November 5. Thanks for listening and turn to your questions. Matthijs van Leijenhorst: Yes. Thanks, Chris. Operator, please open the line for the Q&A. Please limit your questions to 2 please. Operator: [Operator Instructions] Our first question is from Polo Tang of UBS. Polo Tang: I have 2. The first one is, is there any update in terms of the Glaspoort acquisition of part of the DELTA Fiber footprint? And my second question is, we have a general election in the Netherlands this week, but is this having any impact on public sector spending in terms of your B2B segment? Joost Farwerck: Yes, Polo, thanks for the questions. The Glaspoort acquisition, it takes our regulator a very long time to come to a final opinion. So as you know, Glaspoort intends to acquire a rural fiber footprint of approximately 200,000 house passed from DELTA Fiber, and it's still under ACM review. We expect, well, something within 1, 2 months because it takes really too long. We think it's still no reason to refuse it. This could reduce overbuild risks for both parties and supports healthy market development. Then elections coming up in the Netherlands, that's tomorrow, by the way. We -- on the midterm, we see limited impact on KPN. Major topics in the elections are immigration, health care, housing markets. Well, the government wants to build more houses, and we think that's a good one because then we can take them into the house pass footprint. Topics that could affect KPN on the longer term are about investments in defense, and we're in good position on that. We are selected as the main digital provider for the Ministry of Defense and discussions around fiscal affairs, for instance, the innovation box facility and the share buyback taxation, but that's a vacant faraway remark somewhere from one of the left wing parties. So all in all, I don't expect that much impact for KPN. Polo Tang: Just on public sector, can I just clarify if there's any freezing of public sector spend into an election or out of an election because we see that sometimes in other markets? Joost Farwerck: No, not really. We have some kind of a framework. So when elections are coming up and when a Cabinet falls in the Netherlands, then they select a couple of topics that they have to continue to run. And we are all convinced in the Netherlands that we should keep on investing in the themes I just mentioned. And also when it comes to cybersecurity and digital, there's no slowing down there from the government, and we are heavily involved in there. Operator: And our next question comes from Mollie Witcombe of Goldman Sachs. Mollie Witcombe: My first question is on B2B. You have said that you've seen some price pressure in mobile and B2B. Could you give us a little bit more color on this? Are you seeing this dynamic both in LCE and in SMEs? And to what extent should we consider this when we're looking at longer-term trends going into 2026? And my second question is just on the B2C competitive environment. What are you seeing in terms of competition? And have there been any incremental differences versus last quarter? Hans Figee: On your question on mobile price pressure, mostly in LCE and larger corporate tickets, there is some price pressure going on. I think that I would say from our point of view, there's still some of the decline, but the decline is declining. So you can say the second derivative is positive, but that's a bit of a nerdy view. But I would say expected LCE, some repricing of our base into next year, but then probably we have good hope it's going to be bottoming out, at least. So there is some price decline, but it's getting a bit better. We saw something similar in SME, but SME, we especially be able to counter that with value-added services by selling more security solutions to customers. So keeping our ARPU up. So there is some price pressure, most notable in LCE, but gradually abating. So we'll go into next year, but I think somewhere during the course of this year, that effect we hopefully [ achieve that ]. And SME, it's much less prevalent. And there, we see and have experienced good opportunities to counter that with additional value-added services like additional bundlings, but mostly security services around SME to keep your ARPU stable there. Joost Farwerck: Yes. And on the competitive environment, well, like in Q2, the market remains competitive in consumer markets, so Odido and VodafoneZiggo, especially. VodafoneZiggo launched a new proposition, broadband fixed on their cable network, a 2-gig proposition recently announced. So interesting to see how they will do there. But impact on KPN expected to be limited because our first proposition is 1 gig, and we also offer 4 gig. So most of the new customers land in 1 or 4 gig via our fiber network. And for us, it's very important to play our own game. So we focus on base management, for instance, on convergence households via CombiVoordeel, resulting in lower copper and fiber churn and 11,000 net adds. We also are very happy with the acquisition of Youfone because on the lower end of the market, you call it that way, there's true competition going on. So Youfone covers that. And currently, more than already 2/3 of our broadband base is on fiber, and that's leading to lower churn and higher NPS. So that's how we position ourselves in this competitive environment. Operator: And our next question comes from Paul Sidney of Berenberg. Paul Sidney: [Technical Difficulty] revenue growth, it did slow into Q3 at the group level. There's obviously lots of moving parts... Matthijs van Leijenhorst: Paul, paul. Paul Sidney: Can you hear me? Matthijs van Leijenhorst: We couldn't hear the first part. Could you start over again? Thanks. Paul Sidney: Sure. Can you hear me now okay? Matthijs van Leijenhorst: Perfect, perfect. Paul Sidney: Okay. Great. Yes, just a first question on service revenue growth. We did see it slow into the quarter at the group level. There's lots of moving parts, and you've given some great granularity in terms of the drivers of that. But as we head into Q4, how confident are you that we can see an acceleration in that service revenue growth trend? And then secondly, just looking a bit bigger picture, you report very comprehensive KPIs, very detailed guidance, net add, service revenue growth, NPS scores, free cash flow and returns guidance. I was just wondering, if we take a step back, which of those is most important to KPN as a business in terms of what really is sort of driving the business? And maybe we get more detail on next week, but just really interested to hear your views on that. Hans Figee: Yes. Paul, let me give you some more granularity on how we see service revenue growth developing. I'm going to just walk you through the business. I think the second question is a typical CEO question. Joost Farwerck: Yes, for sure. Hans Figee: I'll leave that to you. Look, on consumer, fixed is showing 1% service revenue growth. We've had tailwinds from a price increase, some headwinds from migration from front to back book discounts, et cetera. I think overall, the good news is that churn is actually reducing. The churn is doing better than ever. It's one of the best churn quarters in fixed in some time to come. Also please note, we have a CombiVoordeel product, which we give customers with multiple products, additional discounts leading to lower churn. That additional discount feeds through the top line. So that affects top line and fixed service revenue growth by almost 0.5% this quarter and even more in next quarter. So for Q4, we expect fixed service revenues to come in at a 0.4%, 0.5%, but that's really the accounting and the upfront payment on these additional discounts that lead to churn. So the discount, especially to multi-converged customers, and we're seeing benefits of churn on that. We'll give you more intel next week because that feeds into [ '26 ]. In mobile, you see a price increase coming in has already come in, has landed pretty well. So I would expect mobile consumer to be around 1.5% in the fourth quarter, fixed below 1% and mobile well above 1% then go to B2B. I see SME recover. I mean there was some technicality in the SME numbers, but it's also, I think, good base and ARPU development, especially in the third quarter. And a little bit easier comps, I would say SME should be 4% to 5% again in the fourth quarter and also in that into the next year. LCE hovering around 0. And on the Tailored Solutions business, there's always some volatility in this business that has to do with the timing of projects. For example, if you go back to last year, we saw growth -- service revenue growth in Q3, from 5% to 2% back to 5%. There's always a bit of volatility in this business due to the nature of these activities. In the third quarter, we saw the effects of KPN condition more steering on margins. So we lost some business. Some of it we didn't actually mind because there was actually 0 margin revenues and underlying this growth in defense spending. So I'd expect the Tailored Solutions business to be back around 2% to 3% in the fourth quarter, which should bring B2B to around 3%. Wholesale, I would say, probably around 4% to 5-ish in the fourth quarter. So that means overall service revenues in Q4, I would say, around 2%, probably 2% or a bit up. But that's the moving parts. Some of it has to do with technicalities. For example, as I said, in fixed service revenues, the accounting for the [indiscernible] cost shows up to revenues. It is showing up to churn, so it leads to real value, but short-term service revenues are a bit affected. Mobile should recover, SME should recover and the rest, I think I explained to you for probably around 2%-ish service revenue growth in Q4. Joost Farwerck: Yes, Paul. And then your question on all the KPIs and the main target. I mean, yes, we try to keep things simple in our strategy. We're a single country operator. We're healthy, and we build a plan for all stakeholders. So we invest in the Netherlands, we invest in customers, we invest in our own people, and we want to reward our shareholders in a decent way. And for that reason, you're right, we give a lot of KPIs, which is about broadband base growth or base growth in broadband, mobile, SME, CAGRs on revenue, net Promoter Score, you name it all. At the end, we simplified everything by saying it's a 337 CAGR. So that's a top line EBITDA and cash. And if I have to make a choice, I say the 7, the cash is the most important one of those 3. And the rest is all leading. So sometimes you're a bit behind on the subsegment. Sometimes you're a bit speeding up somewhere, sometimes NPS is lower or higher. But at the end, it's very important that we get to that financial promise, and we're on track. So -- but it depends a bit on the stakeholder, I -- when it comes to the KPIs we focus on. Operator: And the next question comes from David Wright of Bank of America. David Wright: Just on VodafoneZiggo, they obviously announced their strategic shift earlier this year, pushing a little more into Q2. I'm sure we'll get a similar message on Q3. Are you observing -- how are you observing the sort of retail pushback now? They've obviously branded the 2 gigabit product. We've got a slightly keener pricing. Do you observe anything else? Is there a lot more marketing spend? Is the marketing different than it was before? Just any casual observations you might have on how they've changed [ TAC ]. Joost Farwerck: Well, the change we saw was the announcement on Superfast Internet. I think for the market, that's not that bad. I mean, on mobile, we all 3 move to unlimited, which is a good development for the total market. And if the total market moves to higher speed broadband, wouldn't be that bad, I guess. But we play our own game. So like I mentioned, customers come in on 1 or 4 gig, and that's difficult to copy. So, so far, it's more an announcement then I see real movements in the market. Chris, anything to add on? Hans Figee: Yes. I mean when I look at, for example, our broadband net adds and fiber net adds, fiber net adds have been steady, net adds. But if you exclude all the copper migrations, fiber real new clients come in around 60,000 to 70,000 for quite some time now. So it's pretty steady. We've seen churn coming down. So we've seen churn coming down in both fiber and copper. That churn reduction started in Q2 and continued in Q3. So that's actually positive. And we don't want to steer just by the month, but when I look at just the simple October numbers, the order balances and the early indication of the month of October are fine. So at this point, it feels that we are obviously cognizant that it's a serious competitor out there. But in terms of underlying performance, no change in recent trends from where we are right now. In fact, churn has come down and things have not fallen off a cliff in the month of October. Operator: And our next question comes from Joshua Mills of BNP Paribas. Joshua Mills: A couple of questions from my side. Firstly, it's been about a year since Odido launched FWA services across the Netherlands. I wondered if you could give an update on how you think that's impacted the competitive landscape and whether it is impacting on your wholesale line losses as well or whether that's due to other factors? And then secondly, if I just build on that wholesale line loss question, trends look to be similar to the last couple of quarters. How would you expect that to develop over the next couple of years? And do some of the more aggressive promotions we're seeing from your ISP partners go anyway to help with that trend going forward, even if it's painful on the retail side? Joost Farwerck: Yes, fixed wireless access from Odido, we see activations on fixed wireless access, but it's also a different market than the broadband market in general in the Netherlands. So it's also a bit of a niche market for people camping, people on holiday, people in boats. So therefore, it's useful. It's also used as another option than whole buy on our network or on DELTA's network. So for Odido, they are asset-light on fixed and they are asset-heavy on mobile. So they try to clearly sell more customers, fixed wireless access to leverage the asset and to avoid the wholesale payments. But it's not really impactful when it comes to total broadband market share. So we use it as well, by the way, in super rural areas, but we always use it in combination with the fixed line. So for us, convergence is, as you know, the strategy. So in copper areas, the speed of the Internet connection can be supported by bonding via fixed wireless access. And probably, we're going to use that more frequently in the rural areas. Hans Figee: Yes. And Joost, on the wholesale side, if you look at the line losses in wholesale, that's really only copper. So wholesale fiber is growing from our main customer and wholesale copper is declining. As we understand, that decline is mostly related to the switching of the Tele2 brand, so the switching of a brand and the switching of the brand leads to customer migration. That's the main driver for losses in copper and wholesale. I expect that to continue in Q4 and possibly in Q1, but that's probably -- then the light at the end of the tunnel. I think that's the end in sight on that development. And then, for example, broadband service revenues, I think we're up about 2% this year. I think broadband service revenues in mobile will be plus 2% this year. Next year, around flattish is a combination of fiber growth indexation and the decline in that copper part. So I think when I look at it, it's mostly the line loss in copper related to the switching off of a brand, and that is a project that will come to an end, I would say, next -- somewhere mid- to early Q1, I would expect that impact to really to fade away. Operator: And our next question comes from Keval Khiroya of Deutsche Bank. Keval Khiroya: I've got 2 questions, please. So you've done quite well on consumer broadband despite the competitive backdrop. But how do you think about the gap between front and back book pricing in broadband? Do you get many requests from customers to move to the current cheaper promos in the market? And secondly, helpfully, you commented on wholesale broadband. But how do we think about the level of mobile wholesale growth next year? Obviously, sponsored roaming has been quite helpful. And does that continue? Any insights on the level of growth next year would be helpful. Joost Farwerck: Yes. So we shifted a bit on strategy as we announced last year, and that is invest more in existing customers instead of playing the acquisition game. We think it's very important to make a difference against the more challengers in the market. And investing in the customer base also leads to back book front book migrations. So that's how revenues in broadband are impacted, and that's why you only see 1 point something on service revenue growth while we do a price increase of 3. Having said that, that's part of our plan. And so when we move customers into what we call combination -- CombiVoordeel, then they have to sign up for 2 years, and that's leading to a back book front book migration. But -- so we made it part of our strategy. Hans Figee: Yes. And Keval, on the wholesale side, yes, indeed, we've been quite successful in mobile service revenue growth in wholesale. I expect that to continue. I don't plan on this level of growth going forward. But we have a decent funnel of potential new counterparties signing up in these type of businesses. And then we have a number of these clients that we help to win new business. So we work them for them to win new businesses. So I expect continued growth in this business going forward, perhaps not at the same pace. I think wholesale should be able to grow around 4% or so top line growth next year, all in with flattish broadband service revenue growth and the remainder is mobile. So continued growth, but let me be a bit conservative and not project the same level of growth, but wholesale around 4% service revenue growth next year is definitely feasible with all of this. Operator: And our next question comes from Ajay Soni of JPMorgan. Ajay Soni: Mine is just around the FTE reduction. So I think you're 300 lower year-over-year, which seems to be around 3% of your employee base. So my first question is just around why is this not being reflected maybe more obviously within your EBITDA bridge? Are there any other headwinds which are -- which means it isn't reflected? And I think looking further ahead, can you accelerate this FTE reductions over the next year, so they are more meaningful in 2026? Joost Farwerck: Yes. Thanks for the question. And next week, we will update you on what we are doing on transformation programs and how we look at the company in a couple of years from now and what kind of operating model we're building. And as a result of that, yes, we expect more FTE reduction. So why don't you see the minus 300 already impacting our EBITDA. First of all, we have a CLA increase. We -- other increased pension costs. So we have to cover up for, I don't know, 6% something of increasing wage costs. And secondly, it's also about the timing in the year. So the 300 will kick in on a higher scale next year than this quarter. But moving the company to a lower FTE base as a result of quality improvements and digitalization is very important also to cover costs and to make a step down. Operator: And our next question comes from Siyi He of Citi. Siyi He: I have 2, please. The first one is really on the comments of the Q4 service revenue growth of 2%. Just trying to think about the trend for next year. I think you mentioned that the B2B and wholesale trend probably is going to be similar level to Q4. And I'm just wondering if you can comment what kind of tailwinds that you would expect to basically help the service revenue growth to accelerate from the 2% to the midterm guidance of 3% and my second question is basically on fiber rollout. I'm sure that you will cover it next week. But just wondering if you can give us some color of how should we think about the fiber CapEx considering that there seems going to be a decent acceleration needs to be done to meet the above 80% coverage target. Joost Farwerck: Well, on the fiber CapEx, we clearly guided to the market that we will make a step down in 2027, and we still plan for that. So we expect a step down of at least EUR 250 million. That's in our guidance, and we stick to the guidance. Chris? Hans Figee: Yes. I mean on the service revenue growth, we'll give you a lot more details -- next week on our capital strategy update -- on the full capital market strategy update, we'll give you more details. But think of consumer to be growing around 1.5%, I think B2B north of 3%, B2B around 4%, and that should make for top line growth, but more in details next week. B2B 3, wholesale 4, yes. Operator: And the next question comes from David Vagman of ING. David Vagman: The first one, coming back on the competitive environment in broadband. If you can comment on your view on your expectation rather on the potential ARPU evolution, in mind speed tiering, but also competition, the announcement of VodafoneZiggo and the tweaking of offers by Odido yesterday. And then second question on the broadband wholesale market in the Netherlands, also your expectation on the ARPU side for KPN? Joost Farwerck: Yes. So on the -- I mean, the market is competitive. It will stay competitive, and I don't expect that to change. The difference between the Netherlands and most other markets is that we have a fully fiberized country already almost. So we're -- 90% of the households already are covered by fiber networks. All households are connected to at least 2 networks fixed. So what I want to say, our digital infrastructure fixed is of a super high level compared to other countries. So there is a competition between the fixed players, but I don't expect much competition coming in from fixed wireless access or satellite or other things you see in countries covering more rural areas as well, like -- and then -- so the competition will be firm, but we positioned ourselves, and I'm glad we did, by the way, we built a fiber footprint of almost 70%, more or less clean. And there's not that much appetite to overbuild us there. It will be more competitive in the new areas for us. So there, we can say to overbuild. We're waiting for our regulator to see what they do with that Glaspoort deal. But compared to other countries, I would say, yes, it is competitive. It is challenging, but we build a strong fiber footprint in the core of our strategy. Hans Figee: Yes. And to your point on wholesale ARPUs in broadband, a couple of things at play. Of course, every year, we have indexation. There's a schedule approved and agreed with the regulator, effectively around 2% indexation every year. Our ARPU is supported by the mix shift from copper to fiber. So we see a decline in copper and increase in fiber, that is supportive. And then any ARPU actions that we do to support our broadband -- for broadband partners tend to be linked to retention, tend to be for specific higher speeds or tend to be around linked to volume commitments. So basically, I would say ARPUs in wholesale broadband are pretty much the same and often linked to a combination of mix, price increases and/or specific agreements on retention and volume. Operator: And the final question is from Ottavio Adorisio of Bernstein. Ottavio Adorisio: A couple of follow-up questions. On Slide 8, you effectively stated that you expect bottoming up on the mobile. And during the call, effectively, you highlighted the price increases. But when someone look at the chart, you can see that, that revenue trends bottom up already in Q4 and deteriorated afterwards. So my question is that what makes you confident that the price increase will stick this time around, we don't go to promotion later on and the revenue trends deteriorate again? The second one is on the broadband. The churn for copper for your copper customers is stable, you stated that one. But looking at the numbers, you look at the migration from copper to fiber to be the lowest this quarter over the past 2 years. So my question is that there is any plan to encourage migration by reducing the price gap between copper and fiber? Hans Figee: Yes. On the first question, what happened -- what will happen from Q3 to Q4, what happened last year? Well, Q4 last year was a very particular quarter where a few things happened. We saw a temporary drop, actually, an accounting drop with roaming that actually reversed in the first quarter. You can see in the first quarter, sales revenue growth in mobile going up had to do with the accounting and booking of some roaming revenues. Second, we had an iPhone credit. If you recall well last year, we had some iPhone disturbances for which we gave some of our customer specific credits to compensate for that. I mean the iPhone disturbances are on hold for the end customers. And thirdly, we had a special offer in the market in that very fourth quarter. So a couple of particular trends that took down growth in the fourth quarter to a low level after which it rebounded in Q1 last year. So those were particular impacts on that third quarter, fourth quarter, and I don't expect them to repeat. So that gives me some comfort that, that blip that you saw last year will not come again this year. And the second question on copper upgrades to fiber. We really try to upgrade customers to fiber. It's a function of network rollout. It's a function of planning. It's a function of access to customers that fluctuates a bit over time. There's no strategic or technical retweet in this part, if you see what I mean. It has to do with timely and operational execution. We will continue to migrate customers from copper to fiber. We might actually, at the point in the midterm, try to accelerate that to enable the switch off of our copper network to accelerate. Joost, do you want to add? Joost Farwerck: Well, the unique thing of our fiber footprint is that we're building a fiber footprint with 80% of the households homes connected. And that's first of all to migrate all existing customers of KPN to the fiber network. That's the copper churn or the urban copper migration. Then we want to connect a lot of new customers, and then we want to connect as well a lot of wholesale connections. So there's more room on the network of households already prepared for an activation from a distance. So the copper migration is something that's really in our system to finalize to switch off the copper network as well. Matthijs van Leijenhorst: Okay. One final question. Operator: And our final question comes from Joshua Mills from BNP Paribas. Joshua Mills: Possibly a pedantic one here. But if I look at Slide #6 in the presentation where you have homes passed as a percentage of Dutch households, you have the target of 80%. And I don't see a year associated with that. I think in previous presentations, you were highlighting that you'd reach 80% homes passed coverage by the end of 2026. Can you just confirm that that's still the guidance and there's no change there, just so I'm clear. Joost Farwerck: Well, so yes, we are expanding our fiber footprint this year, next year and the years after, 74,000 homes passed, 82,000 homes connected this quarter. We stick to 66,000 because if you read it as well as you did. And last quarter, we also reported 66,000, but that's because of annual addition of households by CBS, the Central Bureau of Statistics in the Netherlands. And we stick to our ambition of 80% of Dutch households on fiber. But next week, during our strategy update, we'll share how we will get there within our financial framework. So we aim for 80%, and we confirm our midterm ambition of 3 targets, including the CapEx step down of to EUR 1 billion in 2027. Joshua Mills: Okay. And just -- so to be clear, the explicit target previously of reaching 80% by the end of 2026 is... Joost Farwerck: I've said earlier in previous calls as well that there's a lot of KPIs like we just discussed out there. And sometimes we meet -- we're getting faster, sometimes we're slowing down. The 80% is also a target, which is a very important one for us, and we will meet it for sure. But on the timing part, we will get back to you next week. And at the end, it's for us very important that the overall total strategy works, and that's working. Matthijs van Leijenhorst: Okay. That concludes today's session. Obviously, we will see -- we'll meet online next week during our strategy -- next Wednesday on the 5th of November. See you then. Cheers. Operator: Thank you. Ladies and gentlemen, this concludes today's presentation. Thank you for participating. You may now disconnect your line. Have a nice day.
Operator: Good day, and thank you for standing by. Welcome to the Q3 2025 Labcorp Holdings Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Christin O'Donnell, Vice President of Investor Relations. Please go ahead. Christin O'Donnell: Thank you, operator. Good morning, and welcome to Labcorp's Third Quarter 2025 Conference Call. As detailed in today's press release, there will be a replay of this conference call available. With me today are Adam Schechter, Chairman and Chief Executive Officer; and Julia Wang, Executive Vice President and Chief Financial Officer. This morning, in the Investor Relations section of our website at www.labcorp.com, we posted both our press release and an Investor Relations presentation with additional information on our business operations, which include a reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures. Please see the use of adjusted measures section in our press release and Investor Relations presentation for more information regarding our use of non-GAAP financial measures. Additionally, we are making forward-looking statements. These forward-looking statements include, but are not limited to, statements with respect to the estimated 2025 guidance and the related assumptions, the projected impact of various factors on the company's businesses, operating and financial results, cash flows and/or financial condition, including global economic and market conditions, future business strategies, expected savings, benefits and synergies from the LaunchPad initiative and from acquisitions and other strategic transactions and partnerships, the completed holding company reorganization and opportunities for future growth. Each of the forward-looking statements is subject to change based upon various factors, many of which are beyond our control. More information is included in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and in the company's other filings with the SEC. We have no obligation to provide any updates to these forward-looking statements even if our expectations change. Now I'll turn the call over to Adam Schechter. Adam Schechter: Thank you, Christin, and good morning, everyone. Thank you for joining us today to discuss our third quarter 2025 financial results and progress on our strategy. During the quarter, we delivered strong revenue growth and margin improvement, leading to double-digit EPS growth. Our financial results reflect continued momentum in our Diagnostic Laboratories and Central Laboratory businesses. At an enterprise level, revenue increased to $3.6 billion, representing 9% growth compared to last year. Margin for the quarter improved 100 basis points, driven by Diagnostics. Adjusted EPS grew 19%, and we generated strong free cash flow of $281 million. Moving to our business segments. Diagnostics revenue increased 8.5%, primarily due to strong organic growth of 6%. Margin improved 110 basis points, driven by strong organic demand in Invitae. Invitae was accretive in the quarter and will be slightly accretive for the full year. BLS revenue increased 8% or 5% constant currency. Central Laboratories growth was strong at 10% or 7% constant currency, more than offsetting softness in early development. BLS margin improved 20 basis points and the quarterly book-to-bill was 0.9 with the trailing 12 months remaining strong at 1.09. In response to the lower-than-anticipated revenue in early development, we are beginning to divest or restructure through site consolidation, approximately $50 million of annual revenue. We will focus these actions on noncore areas, which will result in a more streamlined business and slight improvement to operating income. Julia will provide more details on our results and full year 2025 outlook in just a moment. We continue to make progress on our strategy to be the partner of choice for health systems and regional/local laboratories to lead in high-growth therapeutic areas and to use science and technology to accelerate growth, to enhance the customer experience and to improve operational efficiency across our business. Starting with health systems and regional/local laboratories, we've added a significant number of strong strategic relationships over the past several years. Through these partnerships and acquisitions, we've expanded our patient and provider network, and we've strengthened our presence in key markets. These partnerships have increased access to our broad test menu. They've improved patient care and have driven efficiencies for our customers. This quarter, we signed an agreement to acquire select clinical laboratory assets of Empire City Laboratories, which serves the New York Tri-State area. We signed an agreement to acquire select assets of Laboratory Alliance of Central New York, a pathology reference laboratory. In parallel, we signed an agreement with Crouse Health to manage their inpatient labs. We expect these transactions to close in the first quarter of 2026. We continue to make progress on the acquisition of select assets of the outreach business from Community Health Systems across 13 states, which we expect to close by year-end. We completed our acquisition of select oncology and clinical testing assets from BioReference Health. This acquisition further solidifies Labcorp's position as an industry leader in oncology. We continue to have a very robust pipeline of opportunities, and we look forward to updating you on our progress. Additionally, we are expanding our business in high-growth specialty areas, including oncology, women's health, neurology and autoimmune diseases. These are areas where science, clinical need, the use of genetic testing and innovation are accelerating. We are experiencing strong growth across these segments, which also increases demand in our core test menu as physicians rely on Labcorp for comprehensive diagnostic solutions. In the quarter, we introduced several innovative testing capabilities. We expanded our leading oncology and genetic testing portfolio. OmniSeq INSIGHT, our comprehensive genomic profiling test for solid tumors in support of therapy selection now evaluates ovarian tumors for HRD. PGDx elio tissue complete used for therapy selection for pan solid tumors became the first and remains the only tissue-based tumor profiling test with CE marking under the European Union's In Vitro Diagnostic Regulation. This enhances our global tissue profiling capabilities in support of clinical trials. Geneoscopy received FDA approval for a simplified at-home collection method for ColoSense for colorectal cancer screening. As a commercial partner, we will be expanding access to this test to patients and providers. We also expanded access to our Invitae genetic tests through Epic Aura, enabling streamlined ordering and results delivery for Epic customers. In neurology, where we have one of the most comprehensive test menus in the industry, we expanded our leadership position. We introduced the first blood-based test cleared by the FDA to aid in the diagnosis of Alzheimer's disease in specialty care settings. In early 2026, we're planning to offer the only FDA-cleared blood test to rule out Alzheimer's related amyloid pathology in the primary care setting. Separately, we continue to experience strong momentum in our consumer business. In the quarter, we launched several consumer-initiated tests through Labcorp OnDemand, including tests for lead exposure, ApoB for heart health and a panel for healthy aging. Labcorp partnered with Praia Health, a consumer experience platform for health systems to help close care gaps and to deliver better experiences for patients. Moving now to review our use of science and technology to accelerate growth, to enhance the customer experience and to improve operational efficiency. This quarter, we launched Labcorp Test Finder, a generative AI tool developed with Amazon Web Services to improve test selection for providers and health systems. It allows clinicians to easily search for lab tests using plain language, streamlining decision-making and improving care. In our core laboratory operations, we're investing in digital and AI capabilities to improve in areas such as pathology, cytology and microbiology. Through a collaboration with Roche, we are digitalizing pathology workflows using slide scanners to enhance diagnostic speed and scalability. We've also deployed a new FDA-cleared AI platform for digital cytology that enables remote viewing and rapid analysis of cell-based samples, improving turnaround times. Finally, we're using AI and automation to accelerate microbiology workflows to reduce turnaround times. These are just a few examples where we are using technology, robotics and AI. We look forward to discussing others in the future. In summary, we delivered a strong quarter and made meaningful progress on our strategy. We have momentum as we finish 2025 and move into 2026. Our focus remains on driving value for both our customers and shareholders. With that, I'll turn the call over to Julia to discuss our financial results and 2025 outlook in greater detail. Julia Wang: Thank you, Adam. Now let me start with a review of our Q3 financials, and my remarks today will focus on our adjusted financial results. Please see our earnings press release and supplemental financial presentation for detail on our GAAP results. Revenue for the quarter was $3.6 billion, an increase of 8.6% compared to last year, driven by organic growth of 6.2%, the impact from acquisitions of 1.7% and the foreign currency translation of 0.7%. Adjusted operating income in the quarter was $513 million or 14.4% of revenue compared to $441 million or 13.4% of revenue last year. The increase in adjusted operating income and operating margin was primarily driven by organic demand, including the strong performance of Invitae. Our LaunchPad initiative continued to be on track in the quarter, which offset typical increases in personnel costs. The adjusted tax rate for the quarter was 23.3% compared to 22.8% last year. We continue to expect our adjusted tax rate for full year 2025 to be approximately 23%. Adjusted EPS was $4.18 in the quarter, up 19% from last year. Free cash flow for the quarter was $281 million compared to $162 million last year. The $119 million increase in free cash flow was primarily driven by higher cash earnings. For the full year, we expect capital expenditures to be approximately 3.5% of revenue. During the quarter, the company invested $268 million in acquisitions and partnerships, paid out $60 million in dividends and repurchased $25 million of stock. At quarter end, we had $598 million in cash, while total debt was $5.6 billion. Our debt leverage as of quarter end was 2.4x gross debt to trailing 12-month adjusted EBITDA and slightly under the low end of our targeted leverage range of 2.5x to 3x. Now I will review our segment performance, beginning with Diagnostics Laboratories. Revenue for the quarter was $2.8 billion, an increase of 8.5% compared to last year, with organic growth of 6.3% and acquisitions of 2.2%. Total volume increased 4.7% compared to last year, with organic volume contributing 3.5% as we continued to execute our strategy and drive strong demand. Acquisitions contributed 1.2%. Price/mix increased 3.7% versus last year. Organic price/mix was 2.8% as we benefited from mix, primarily due to the annualization of Invitae as well as an increase in test per accession. Acquisitions contributed 1%. Diagnostics adjusted operating income for the quarter was $450 million or 16.3% of revenue compared to $387 million or 15.2% of revenue last year. Adjusted operating margin was up 110 basis points. Adjusted operating income and operating margin increased, primarily driven by organic demand, including the strong performance of Invitae, coupled with slight favorability from weather year-over-year. Now I will review the segment performance of Biopharma Laboratory Services or BLS. Revenue for the quarter was $799 million, an increase of 8.3% compared to last year due to an increase in organic revenue of 5.3% and foreign currency translation of 3%. We continue to perform well in Central Labs. In constant currency, Central Labs revenue was up 7% in the quarter. Early Development revenue was up 1.1%, lower-than-expected due to delayed study starts. In response to the lower-than-anticipated revenue in Early Development, we are beginning to divest or restructure through site consolidation, impacting approximately $50 million in annual revenue in noncore areas. We expect these actions to result in a more streamlined business with a slight improvement in operating income. BLS adjusted operating income for the quarter was $132 million or 16.5% of revenue compared to $121 million or 16.4% of revenue last year. Adjusted operating income grew 9% year-over-year, driven by organic demand. We ended the quarter with a backlog of $8.6 billion, and we expect approximately $2.7 billion of this backlog to convert into revenue over the next 12 months. Our segment quarterly book-to-bill was 0.89. Our trailing 12-month book-to-bill remains strong at 1.09. Now I will discuss our updated 2025 full year guidance, which assumes foreign exchange rates effective as of September 30, 2025, for the remainder of the year. The enterprise guidance also includes the impact from currently anticipated capital allocation, utilizing free cash flow for acquisitions, share repurchases and dividends. Beginning with the segments, Diagnostics continues to execute well in the marketplace. We have maintained the midpoint versus prior guidance and narrowed the growth range to 7.2% to 7.8%, which assumes approximately 4.5% organic revenue growth. In BLS, we expect to grow 5.7% to 7.1% versus prior year. We have lowered the midpoint by 40 basis points versus prior guidance due to the unfavorable impact of currency. In constant currency, we have maintained the midpoint versus prior guidance as strength in Central Labs is offsetting softness in Early Development. We continue to expect Central Labs to grow in the mid-single digits for the full year. We now expect Early Development to grow low single digits for the full year, with Q4 presenting the most challenging year-over-year comparison. We updated the 2025 enterprise revenue growth guidance range to 7.4% to 8%. We lowered the midpoint by 40 basis points due to timing of acquisition revenue, which are held at the enterprise and the unfavorable impact from currency. We continue to expect full year enterprise margins to increase with margins improving in both Diagnostics and BLS in 2025 versus 2024. Our guidance range for adjusted EPS is $16.15 to $16.50 with an implied growth rate at the midpoint of 12%. As compared to prior guidance, we have narrowed the range and raised the midpoint by approximately $0.05. Our free cash flow guidance range is $1.165 billion to $1.285 billion. We narrowed the range and raised the midpoint by $25 million versus prior guidance, given our strong cash flow generation year-to-date. In closing, our quarterly performance reflects the strong execution of our strategy and the continued efforts of our teams across the organization. As we look ahead, we are confident in our ability to deliver sustainable growth and long-term value for our shareholders. We look forward to updating you in the coming quarters. Operator, we will now take questions. Operator: [Operator Instructions] And our first question comes from Lisa Gill of JPMorgan. Lisa Gill: I just want to better understand when we think about the revenue and the updated guidance around revenue. So Julia, I heard you talk about currency and acquisitions. I'm curious, one, are you seeing an increase in utilization from, for example, the exchange population as people anticipate that they potentially could lose their benefit or it could cost more going into 2026? And then is there a way for you to break down that 40 basis point between currency and acquisitions? And again, is the acquisition just a timing aspect and so we'll see that come through in '26? Adam Schechter: Lisa, I'll start. First, I'd say that $13 million of it was from the foreign exchange, the rest was from the acquisitions, and it's fully timing related. Some of the acquisitions this year closed a little bit later than what we anticipated. So that impacted us just a little bit and then a few fell into next year. But overall, the pipeline remains strong. The acquisitions remain strong. So it's purely timing related. With regard to your question on utilization, I'll first start off by saying we had a very strong quarter when you look at the Diagnostic business. And when you look at the organic volume, it was up 3.5%. And when I think about the volume, we're certainly seeing some uptick, I think, from demographics in the marketplace, from market share that we're gaining. I don't necessarily believe it's due to people concerned about losing to ACA because doctors can only take so many appointments and I don't -- and they're usually very booked. So it would be hard to get a large number of people into those offices that quickly. So I think we're seeing it more from organic volume increases. Operator: And our next question comes from Michael Cherny of Leerink Partners. Michael Cherny: Congrats on a nice quarter. Maybe if I can dig in a little bit on organic price per mix in particular. It's been strong. You had a tough comp this quarter, and yet it still grew nicely. As you think about the behavioral changes that you're making as an organization, how much of it do you feel is proactive versus reactive in terms of what you can push versus what the market is bringing to you as we think about how that builds beyond this year? Adam Schechter: Yes. Sure, Michael. I'll give you some context, and I'll ask Julia to jump in and give you some specifics on the price/mix. So when I look at the Diagnostic revenue, it grew 8.5% versus last year. Organically, it was about 6%. When I look at the organic volume, that grew 3.5% and price/mix grew about 2.8%. Some of that was from mix, but also from Invitae. But I'll ask Julia to give you some more specifics about the price/mix. Julia Wang: Yes. Michael, if you were to break down the impact between unit price and mix, we continue to see unit price being relatively flat. Therefore, the price/mix impact has really been benefiting from mix. And as Adam just shared, in the third quarter, our organic price/mix was up 2.8%. That was driven primarily by increase in tests per session as well as Invitae. Now the impact in Invitae was more pronounced in Q3 due to the timing of the annualization being in the middle of Q3. And going into Q4, we expect Invitae to drive continued price/mix favorability and the impact will somewhat moderate when compared to Q3. And if we step back and look at price/mix in general, over time, we have seen a slight yet consistent growth in test per accession post-COVID era. Longer term, we continue to believe that the mix growth will be supported by the increase in our partnerships with the large hospitals and the health systems as well as the aging population, the health and wellness trend, the breadth of our test menu as well as our focus on specialty testing. And for the full year, you might have seen that in terms of our updated guidance, we maintained the midpoint of Diagnostic revenue guidance of 7.5% and updated the organic revenue growth expectation to 4.5%, whereby the price/mix is going to be a big contributor to that expectation. Operator: And our next question comes from Jack Meehan of Nephron Research. Jack Meehan: I was hoping to get a little bit more color on the announcement around the site consolidation in the Early Development business. Can you just talk about what the factors were you're seeing in the market that led you to make this decision? And it sounds like we got the revenue impact. Is it possible to think about -- it sounds like this might be a low margin, just what the earnings impact might be from the decision? Adam Schechter: Yes, absolutely. And Jack, I'll start off with giving some additional color, then I'll answer the question specifically. But if you look at the Biopharma Laboratory Services businesses, it performed well. And you saw an 8% increase in revenue or 5% in constant currency, but it was really driven by strength in Central Laboratories, it was up 10%, 7% if you look at constant currency, and it more than offset the weakness that we saw in Early Development. Based upon what we're seeing in Early Development, we've decided to look at some noncore areas. We're going to divest certain things there, but we're also going to have some site consolidation. And that will be leading to approximately $50 million of annualized revenue. But without that revenue, we expect to see a slight increase in operating income. So it actually was negatively impacting our accretion. So that will be a positive for us. What drove us that decision was we look at 3 things with the Early Development business. We look at RFPs coming into us, then we look at what's our win rate and then we look at do the trials start on time. If you look at the RFPs and numbers, we're getting about the same number of RFPs that we've gotten in the past. If you look at our win rate, it's about the same. Our market share is stable as it's been in the past. The issue that we're seeing is with timing of study starts. They're just not starting in a timely fashion that we would have expected based upon historical time lines. We expected that to start to come back to more normalcy. Unfortunately, it has not. Based upon that, we've decided to streamline the business and to take the actions we talked about today. Operator: And our next question comes from Patrick Donnelly of Citi. Patrick Donnelly: Maybe just given that PAMA is a little more topical here heading into year-end. Can you just talk about the expectations there? I know you've talked about the $100 million top line impact. I think during conference season, you were talking about some levels of mitigation efforts, maybe something like $25 million. Can you talk about, I guess, the probability, what you're hearing on PAMA, results, et cetera? And then again, what you're doing on the offset? Are you already kind of getting things in line? Would love just your thoughts on the expectations and then the potential mitigation efforts you guys could do into next year? Adam Schechter: Yes, absolutely, Patrick. So we've consistently said that we believe the CMS's execution of PAMA was not accurate, and it shouldn't be implemented in its current form. We've worked really closely with our trade organization, ACLA, to advocate for the RESULTS Act, which would put a freeze on the cuts for a period of time. When you look at that, it has strong bipartisan support. I mean, Democrats, Republicans sponsored the bill. We think that we have very strong support. The question is, with everything that's happening right now and the shutdown and everything else, will we see additional legislation approved by the end of this year. We're going to continue to advocate for it. We have strong support for it, but it's very hard to handicap whether or not that will happen by year-end. We also are continuing to work to see if it should be and can be delayed again as it has been for the last number of years. And that's really going to come down to, I believe, the [ OBO ] score, which we've not seen a final score. If the [ OBO ] score is positive or maybe kind of neutral to slightly negative, I think there's a good chance that it could be delayed again. If it's not, and it goes in a different direction, then I think it will be more difficult with everything else that's going to have to happen by the end of the year. So it's really difficult to predict whether we'll be able to get the results, legislation implemented and/or get another delay. So therefore, we think the prudent strategy is for us to plan that there will be a $100 million impact on both the top line and bottom line for full year 2026. And with that, we are already planning and we have work underway to offset, like you said, approximately $25 million of that impact. And that's in addition to the commitment that we have for LaunchPad, which roughly offsets the cost of inflation. So we're going to do that in addition to. And a lot of that's going to come from the things that we've started to discuss for AI implementation and things that we're doing to increase our efficiency and use AI more effectively. So those things are underway, and we'll provide guidance for 2026 in February, and we'll give you more specifics. Operator: And our next question comes from Erin Wright of Morgan Stanley. Erin Wilson Wright: Could you speak a little bit to your efforts around the consumer-driven testing, the contribution you're seeing now from that? I know one of your peers was talking about that, the margin profile growth rate of that business? And is it starting to what move the needle in terms of volume or overall revenue growth? Adam Schechter: Yes. So if you look at our consumer business, we continue to have a strong focus on consumerism. We're trying to meet the patients where they are through a whole bunch of different channels. And importantly, I mean, we interact or engage with over 75 million patients through all the different avenues that people come to get Labcorp results or information from Labcorp. So as the consumers are taking a much greater control of their health care, we want to be a resource for them and offer solutions that put them in the driver seat, frankly. Today, a lot of them engage with us through our on-demand e-commerce platform. We also have the Ovia app where many people interact with us as well. And what we're seeing is a very significant increase in terms of growth rate. There's no doubt about it. It hasn't reached critical mass at the moment for us to pull out the numbers and provide separate numbers, but we're continuing to add new tests. Just this quarter, we added tests for lead exposure, ApoB for heart health and even a panel for healthy aging. And we're going to continue to add new things there. In addition to that, if you look at Ovia Health, it's a leading app that supports women's health and it guides through all different stages, including pregnancy, postpartum, menopause and a lot more. So these are really important capture points for us. I do believe we're going to continue to see growth in these areas. And as it reaches critical mass, we'll figure out when to start to report it separately. Operator: And our next question comes from Andrew Brackmann of William Blair. Andrew Brackmann: Maybe I guess, on the Diagnostics segment margin expansion, I think it was 110 basis points in the quarter. Can you maybe pick that apart a bit more for us? And I guess, how should we be thinking about the go forward there and considerations around things like price, Invitae and just underlying improvements there? Julia Wang: Yes. Andrew, let me provide some color on margin. As you can see, we delivered meaningful margin expansion at the enterprise level in the third quarter, up 100 basis points versus prior year, supported by both segments. As we shared before, the year-over-year margin comparison in the second half of this year gets tougher for BLS and gets easier for Diagnostics, given the margin evolution throughout 2024. As such, in the third quarter of this year, BLS margin was up 20 basis points, driven by organic demand. Diagnostics had a strong margin improvement of 110 basis points versus prior year, which was primarily driven by organic demand, including strong performance of Invitae. You might recall that Invitae annualized in August of this year and is now fully integrated into our broader business infrastructure. As you look at the Diagnostics margin in Q3, in addition to Invitae, there were some other puts and takes. For example, the savings from our LaunchPad initiative, coupled with a slight favorability from weather helped us offset typical annual wage increases and mix impact from in-hospital lab management agreements. As we think about Q4 margin for Diagnostics, we expect Invitae to continue to be a tailwind. Sequentially speaking, we expect margins to moderate in Q4 versus Q3, reflecting typical seasonality. Overall, I would say that we expect the full year margin expansion by both segments to support enterprise margin expansion in 2025, which contributes to our expectation of growing adjusted EPS by 12% for the full year at the midpoint of our guidance. Operator: Our next question comes from Elizabeth Anderson of Evercore ISI. Joanna Dynak: This is Joanna for Elizabeth. So I have a question about '25 guidance. We only have 1 quarter left, yet the EPS guidance do have a very wide range of $0.35. Like what are the major moving pieces that could swing you towards the high end or the low end of that guidance range? Adam Schechter: Yes. Thank you for the question. And as I look at the guidance, we've narrowed the ranges in our overall revenue guidance and our Diagnostic guidance. We purposely kept the range in BLS a little bit larger. We didn't adjust it this quarter. And the primary reason is as we're looking to do some of the divestitures and/or the site consolidation, the timing of what could impact us this quarter is a little bit uncertain. We're moving as fast as we can, but there are certain things that we can only move so fast on. And that's why we've kept that range a bit wider than we typically would. Operator: And our next question comes from Kevin Caliendo of UBS. Kevin Caliendo: I'm still a little confused about why the margins weren't maybe a little bit better in 3Q. I'm wondering if there was anything discretionary, but any discretionary spend on top of that, just given this. But my real question is more around '26. If we think about the impact if PAMA comes back, let's say, you said the net impact would be $70 million, $75 million. Given all the other puts and takes that you have with Invitae and some of the other deals that you have, can you still meet your LRP if PAMA comes back? And I know there a chance that you could be updating your LRP at some point next year. But I'm just thinking out loud here, just given sort of where the headwinds and tailwinds are. Adam Schechter: Yes. So Kevin, first of all, thank you for the question. And there's nothing unusual for the margins. The 110 basis point improvement in Diagnostics, we think, is strong, driven partially by Invitae, but there's also offsets when you think about some of the hospital deals that we do, they typically start off being dilutive to margins and over time, get to the average margin. So there's always some puts and takes to the margins as we think about that. We also are on track for our Labcorp -- our LaunchPad initiative, which is taking out a significant amount of cost covering almost all of the inflation that we have from employees. So if you then think about Biopharma Laboratory Services, we also saw an increase in the margin of about 20 basis points. When you put those 2 together, we thought we had a strong margin improvement of 100 basis points for the quarter. As we think about next quarter, we expect to see continued strength, particularly in Diagnostics. It's important to note that this quarter, we overlapped 2 or 3 months from the Invitae acquisition. Next quarter, it will be 3 out of 3 months. And in addition to that, we'll continue to make progress in the other areas. BLS will be more difficult because, as you may recall, it was an easier compare in the first half of the year, it's a much more difficult compare in fourth quarter for BLS. But net-net, margins for both businesses, we expect to improve this year versus last year. It's frankly too early to give specifics about 2026. We're going to provide that guidance in February. But I would say we're working really hard to do everything we can to not only get the LaunchPad, but also additional savings from some of the AI initiatives that we have underway, which would offset as much as we can from the impact of PAMA, which is such both on the top line importantly as well as the bottom line. So it's an impact to both top line and bottom line there. Operator: And our next question comes from Luke Sergott of Barclays. Anna Krasinski: This is Anna Krasinski on for Luke. It sounds like the hospital M&A pipeline has reaccelerated given all the macro and policy uncertainty. And just curious if you can talk about whether your deal criteria has changed at all given this larger opportunity set? And would you be willing to take on a lower-margin asset that offers meaningful potential share gains in a particular geography where you're less penetrated? Adam Schechter: Yes. No, thank you for the question. And the hospital pipeline does remain strong, and I expect it to continue to be strong. When I think about the hospital business, I think about 3 different parts of it. One is running the laboratories in the hospital. Those are typically the lowest margin business, but it has a very high return on cost of capital. So we will do that business even though it's a bit lower in margin because it does have a great return on cost of capital. The second thing we look at is the reference work. So if it's business that they can't do in a hospital lab, well they send it to us as reference. And that's good margin business, about the same as our average margin. And then the third part is acquiring the outreach business, which also is about the same as our average margin. Most hospitals, when we do all 3 of those things, it ends up being about the same as our average margin. If we were to only do the hospital running of the labs, it would be lower, but that's not typical. Typical, we would do running the labs along with either the reference and/or the outreach business. So net-net, it should be neutral to margins over time. Operator: And our next question comes from Michael Ryskin of Bank of America. Unknown Analyst: This is Aaron on for Mike. It looks like esoteric testing is growing almost double routine. I guess how are you guys prioritizing R&D investments into those more esoteric tests? And then kind of following that line of questioning for Geneoscopy's ColoSense, how are you thinking about your commercialization strategy? And any reimbursement updates that you guys can provide us? Adam Schechter: Yes. So I'll start with the esoteric business. And we certainly are seeing growth in esoteric business, and it's -- continued asymptotic increases over time. But when you think about 700 million tests that we do in a year, it's hard to move the needle. And typically, esoteric tests are lower in volume overall, but they're very important because when you run the esoteric test, you typically do all the routine tests that come along with it. We have been launching many esoteric tests. But importantly, we're focused on oncology, women's health, neurology and the autoimmune areas. And in those areas, we see growth rates that should be 2 to 3x faster than the overall diagnostic market. So it's certainly an area that we want to be competing in. When we think about how to compete, some of those tests we develop ourselves, some of those tests we license or acquire. And we're really focused on what's the best way to get the best test to market as quickly as we can. And to us, it's more about having all the tests that a physician would need for a patient as opposed to developing any one test internally. So we're really agnostic to developing it ourselves or to acquiring or licensing it. Operator: And our next question comes from Yujin Park of Baird. Yujin Park: On BLS, can you provide more color on bookings between Central Lab and Early Development? I recognize Central Lab bookings can be more chunky quarter-by-quarter and Early demand -- Development demand environment, as you said, didn't change much, but I wanted to hear your thoughts between the 2. Adam Schechter: Yes. So I'll start off with overall on the book-to-bill, then I'll talk specifically. If you look at the book-to-bill, it was about 0.9 for the quarter, a little bit lower than we typically like. We like to be about 1.0 to 1.05. But if you look at the trailing 12 months, it was a 1.09. And I've always said that you have to be careful looking at any one quarter because there are ups and downs to any one quarter. But over time, the trailing 12 months, that's a better predictor. I would expect the book-to-bill in fourth quarter to be better than it was in the third quarter, if you look at it sequentially, albeit it will be a tough year-over-year compare because last year fourth quarter was very strong as well. If I look at the book-to-bill, I feel confident that we're in a very good place. Book-to-bill is a good measurement for the Central Laboratory business, and it remains very strong. I've always said book-to-bill is a little bit more difficult for Early Development business with the primary reason being that many studies in Early Development start and end in the same year. And therefore, there's not a lot of 2- or 3-year trials that kind of build your book-to-bill over time. So you would expect the Early Development book-to-bill to be lower than the Central Laboratory, which it is. But I would say the Central Laboratory is very strong. For the Early Development, I look at the RFPs, the win rate are strong. It's the study starts that are really the issue in Early Development. Operator: And our next question comes from David Westenberg of Piper Sandler. Skye Gilbert: This is Skye on for Dave. Could you provide some more color on the expected revenue and EPS accretion from the completed and progressing acquisitions for 2025 and if you can, 2026, kind of what are the key integration milestones we should be looking out for and potential synergies expected from these transactions? Adam Schechter: Yes. So I think it's -- if you look at what we've provided, we say typically, we expect the acquisitions to provide 1.5% to 2.5% growth in a given year. And that's what we are projecting in our longer-term guidance, which we continue to expect that type of growth. The pipeline remains strong. It remains good. We don't give specific operating income or margin for the individual deals. What I would say is, as I look at hospital deals, in general, when you do all 3 pieces of the business, meaning the reference laboratory work, the in-house laboratory work for the hospital itself as well as the acquisition of the reference -- of the outpatient labs, you tend to have a margin that's about the same as our average margin. Operator: And our next question comes from Tycho Peterson of Jefferies. Tycho Peterson: I want to probe on the Central Lab strengths a bit more. I understand your book-to-bill comments earlier, but can you maybe just talk about the acceleration you saw here in 3Q, a nice step-up from 2Q. Maybe just talk about the durability of what you're seeing now on the Central Lab side. Adam Schechter: Yes. So if you look at our Central Lab business, it remains strong. It had 10% growth on the top line, but it was 7% if you looked at the constant currency growth rate, which is very healthy growth. We expect that it will be in the mid-single-digit growth for the full year. That's typically where you'd expect the Central Laboratory business to grow. We're seeing strong book-to-bill. Last quarter, we announced that we had several large studies that were going to go over multiple years. The more large studies over multiple years you have, the better you are. But overall, I would say that, that business, we expect to continue to grow and to do well as we look for that to offset some of the softness that we're seeing for the Early Development for the rest of the year. Operator: I show no further questions at this time. I'd like to turn it back to Adam Schechter for closing remarks. Adam Schechter: Well, thank you, everybody, for joining us today. And I want to just take a moment to recognize our 70,000-person team members around the world. Our employees really are the driving force behind our mission to improve health and improve lives. Hopefully, you see we have momentum based upon our third quarter results going into fourth quarter, and we look forward to sharing our 2026 guidance in February of next year. Thank you all. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Jan Strecker: Good afternoon, ladies and gentlemen, and thank you for joining us today to review financial results for the third quarter of 2025. Present on today's call are Stephan Leithner, our Chief Executive Officer; and Jens Schulte, Chief Financial Officer. Stephan and Jens will provide an overview of our performance and key developments during the quarter. Following their remarks, we will open the line for your questions. As usual, the presentation materials have been distributed via e-mail and are also available for download on our Investor Relations website. This call is being recorded, and a replay will be made available shortly after the conclusion of today's session. With that, let me now hand over to you, Stephan. Stephan Leithner: Thank you, Jan, and welcome, everyone. I'm pleased to present our third quarter results, which once again demonstrate the strength, resilience and strategic balance of Deutsche Börse Group's diversified business model. Despite a more challenging backdrop in select areas, particularly index derivative at Eurex, ESG & Index at ISS stocks and some FX headwinds, we delivered solid net revenue growth without treasury results. This performance was driven by broad-based momentum with 5 out of 8 business units achieving double-digit growth in the quarter. That's a clear reflection of the robust diversification of our franchise. Our portfolio's balance enables us to consistently deliver even when individual segments faced temporary headwinds. By combining businesses with distinct growth drivers, we maintained a steady and scalable performance trajectory. Let me begin the review of the quarter with Investment Measurement Solutions. As expected, Software Solutions was the key growth driver delivering a solid 10% increase in net revenue. Importantly, annual recurring revenue is trending towards the upper end of our guidance range, supported by a robust client pipeline as we head into the fourth quarter and beyond. The recent acquisition of Domos marks an important strategic step for us in the Software Solutions business. Paris-based Domos is a leading provider of technology-driven solutions for managing and administering alternative assets including private equity, real estate and infrastructure investments. By integrating Domos' advanced digital platform and specialized expertise, we can offer clients a broader range of services, great operational efficiency and enhanced transparency in the alternative investment space. This positions us to capture the growing demand for alternatives among institutional investors and strengthens our footprint in a rapidly evolving segment of the financial industry, especially with the general partners, this opens up many new client opportunities. As we explained last quarter, the environment in the second part of our Investment Management Solutions segment, ISS STOXX remains challenging, especially for the ISS part. While we acknowledge the headwinds resulting from a changed attitude towards certain products, especially in the U.S., we believe this is largely temporary dynamic similar to historic cycles. We remain confident in a return to stronger growth in the medium term. In addition to market dynamics, this business saw the biggest impact of the weaker U.S. dollar on the top line. Regarding the 20% minority stake in ISS STOXX held by General Atlantic, nothing has changed, and we are under no pressure to make a decision this year. A buyout remains an option, and we will continue to carefully evaluate all alternatives with a focus on long-term value creation. Let me turn to the second area to Trading & Clearing. We saw strong contributions across several areas. Cash Equities delivered an impressive 21% net revenue growth driven by robust demand for European equities, in particular, from retail flows. Commodities advanced by 10%, continuing their secular growth trajectory, while FX rose by 7%, supported by market share gains. In Financial Derivatives, fixed income products performed well with 11% net revenue growth without treasury results. We're already seeing initial benefits from the active account requirements under EMEA for example, in OTC clearing with a noticeable step-up in volumes, and this puts us on track with our fixed income road map for further momentum in the coming months. As we have explained before, clients have some flexibility for activating accounts, but the overall potential has not changed. Equity index derivatives, however, remained under pressure due to subdued volatility and challenging market conditions. We believe this is primarily driven by cyclical factors, and encouragingly, we have already seen some improvement in volumes in October as volatility has picked up again. Our Fund Services and Security Services businesses, #3 and #4 of my outline, have also delivered excellent results with net revenue growth without treasury results of 15% and 13%, respectively. These gains were driven by record activity levels, supported by continued expansion of debt outstanding, healthy equity market valuations and sustained inflows into European assets, while double-digit growth in our fund business was in line with expectations. The performance in Security Services clearly exceeds them. In addition to strong custody activity, we saw new all-time highs in international settlement and collateral management, which further underscores the strength and scalability of this business. Let me especially applaud the teams in the new client wins and fast onboarding, like with German neo-brokers and Asian clients. On the cost side, for the entire group, operating expense growth came in slightly below our expectations. FX tailwinds and lower share-based compensation helped offset higher investments and inflationary pressures, keeping us firmly on track to achieve our full year target of around 3% cost growth. Based on our new steering methodology without treasury results, this translates into significant scalability, a 7% increase in revenue drove a strong 16% increase in EBITDA for the quarter. Even when including the treasury results, we maintained solid scalability underscoring the strength of our operating leverage. Looking at the 9 months of the year, we are fully in line with our expectations, delivering 9% net revenue growth without treasury results. Based on this performance, we confidently confirm our guidance for 2025. Our outlook remains supported by strong secular growth trends and continued inflows into European assets even as we experience slight FX headwinds. We're also confirming our overall targets for next year under the Horizon 2026 strategy. At our Capital Markets Day on December 10 in London, we'll provide an update on our progress and introduce new midterm guidance beyond 2026. We firmly believe that the secular growth drivers addressed by our strategy will continue to support our performance at least until the end of the decade. In addition, we see new growth themes emerging across the group that we will focus on to further fuel long-term growth. Taken together, these factors will enable us to consistently deliver growth levers going forward comparable to what we have achieved over the past several years. Artificial intelligence will also play a positive role in this journey. Let me emphasize this. It is certainly not a disruption risk, but as a powerful enabler of revenue growth and operational efficiency. We have performed an AI assessment across the group, and the results are very clear. We see our overall portfolio as extremely robust because we operate regulated system-critical infrastructure at scale. Today, I cannot replace. Instead, we are well positioned to capitalize on the AI opportunity. Our cloud-first infrastructure strategy, coupled with our current cloud adoption rate of over 74% has laid the groundwork for rapid, cost-effective and secure scaling of AI. We expect AI to generate tangible value for our clients and shareholders in 3 key areas. First, although most of our core process is already highly automated, AI will help us create greater efficiencies in our internal processes. Currently, we are focusing on automations across the software development life cycle, corporate center optimizations and improvements to client service and processes. Second lever that we see, we are actively rolling out algorithmic and domain-specific AIs across our products to enhance client productivity and initial results are very promising. AI also provides an additional distribution channel for our proprietary financial market data. And as a third lever, we are seeing positive secondary effects in our core businesses. For example, in our commodity business. Europe's power demand is estimated to increase by 10% to 15% due to AI data center energy consumption. Just like AI will drive further noncorrelated trading and small-sized high-volume trading in all of our asset classes. To hear more about this and much more, I warmly invite you to join us in London on December 10. It will be a great opportunity to engage with our leadership team, gain deeper insights into our strategy beyond Horizon 2026 and explore the exciting growth opportunities ahead. With that, I will hand it over to Jens for a closer look at the financials and segment details. Jens Schulte: Yes. Thank you very much, Stephan, and welcome, everyone, also from my side. Let's start with a quick look at our performance over the first 9 months as shown on Page #2. As you recall, the first half of the year came in slightly ahead of expectations. This was largely driven by elevated equity market volatility in March and April, along with strong inflows into European assets. In Q3, we experienced the typical summer seasonality, coupled with lower equity volatility. This had a somewhat greater than anticipated impact on equity derivatives, particularly index products. That said, our year-to-date results remain firmly in line with our full year expectations and our Horizon '26 growth path. Net revenue without the treasury result rose by a solid 9%, underscoring the strength and resilience of our business model. Now turning to operating costs. We saw a few moving parts across the 3 quarters, but overall, the picture is consistent with our planning share-based compensation provision fluctuated during the period but ultimately were flat year-over-year in the first 9 months. The U.S. dollar-euro exchange rate, which started the year as a headwind turned into a modest tailwind. While the impact was less than 1 percentage point, it still contributed positively to the cost development. We also benefited from lower exceptional costs this year. This reflects last year's termination fee related to the EEX NASDAQ agreement as well as the wind down of costs tied to IMS synergy realization. All in, operating costs increased by 3%, exactly as expected. This uptick was primarily driven by inflation and targeted investments in our strategic growth areas. Bottom line, our EBITDA margin without treasury results improved significantly to 53%, up from 50% in the prior year as our businesses continue to scale. And we also made further progress with our share buyback program. By the end of last week, we had repurchased Deutsche Börse shares worth around EUR 441 million. This leaves approximately EUR 59 million remaining to be executed by the end of November. Let's move to Page #3 with our third quarter results. As Stephan already mentioned, net revenue without the treasury result grew by a strong 7%. Given the cyclical headwinds we faced this quarter, this performance highlights the breadth of our diversified portfolio. Total net revenue rose by 3% to EUR 1.44 billion. This was driven by the continued decline in the treasury results, primarily driven by lower interest rates and despite stable cash balances. Operating costs remained stable in the third quarter, while inflation and increased investments played a role. These were fully offset by favorable FX movements, lower share-based compensation expenses and a reduction in exceptional costs. Overall, our cost discipline remains strong and fully aligned with our strategic priorities. We continue to strike the right balance between investing for growth and maintaining operational efficiency. As a result, EBITDA without the treasury result showed high operating leverage increasing by 16%. Lastly, our effective tax rate came in slightly below expectations, thanks to smaller onetime positive effects. Looking ahead, we continue to plan with a 27% tax rate for '26 and beyond. Let's now turn to Page #4 and take a closer look at our segment results, starting with Investment Management Solutions. This segment is composed of 2 key areas. First, Software Solutions, which combines SimCorp's software business with Axioma's analytics capabilities. Within this area, we saw SaaS revenues grow by 22% and while on-premise revenues declined slightly by 1% as expected. This reflects a clear and ongoing shift. Existing clients are increasingly migrating to the cloud and new clients are typically SaaS-based from day 1. Our annual recurring revenue reached EUR 632 million at the end of the quarter, an 18% increase year-over-year at constant currency. Growth was particularly strong in North America with 27% and APAC with 37%. EMEA delivered a solid 17%. These figures compare very favorably with our main peers and reinforce the strength of our global footprint. The second part of the segment is the ESG & Index business of ISS STOXX, which saw flat net revenue development. However, on a constant currency basis, the picture is more encouraging. Net revenue in ESG & Index grew by 4% in Q3, supported by a solid contribution from the ESG business with 6% revenue growth. Similar to previous quarters, the Market Intelligence business experienced flat growth and low equity market volatility negatively impacted the exchange license business in the Index segment. Importantly, the segment's EBITDA saw a significant increase, driven by disproportionately lower operating cost growth, highlighting the scalability and efficiency of our model. Now let's turn to Slide 5, which highlights the performance of our Trading & Clearing segment. Starting with Financial Derivatives. We continue to benefit from strong fixed income activity. Net revenue without the treasury result increased by 11%, driven by double-digit growth in fixed income futures and repo revenues. OTC clearing all saw high single-digit growth, supported by record clearing volumes following the implementation of the EMEA 3.0 active account requirements in June. On the Equity Derivatives side, volatility moderated significantly in the third quarter, creating a headwind for index products. As markets trended upwards to new all-time highs, hedging activity also declined. However, we partially offset the effects of volume through an increase in average revenue per contract. This was in part due to the decommissioning of the Korea Exchange Link for after hours KOSPI trading as mentioned in our last call. Our Commodities business delivered another strong quarter with double-digit growth once again. In gas, revenue rose 31%, fueled by robust activity in European gas markets amidst supply uncertainties and below target storage levels. We also saw continued momentum in power derivatives in the U.S. and APAC, while activity in Europe moderated slightly due to reduced hedging needs. In Cash Equities, we benefited from strong demand for European equities and significant inflows into European ETFs. This reflects a broader investor rotation into European markets and growing interest in passive strategies. Additionally, we recorded a onetime revenue effect of approximately EUR 3 million from the sale of a T7 license to a third-party exchange. Finally, our Foreign Exchange business achieved net revenue growth across most product lines supported by new client wins and geographic expansion. This diversification continues to broaden our revenue base and enhance the resilience of the FX franchise. Turning to Slide #6. Let's look at the continued strong performance in our Fund Services segment. We are seeing positive momentum across the board, supported by higher equity market levels, new client wins, portfolio growth and ongoing inflows into European assets. As a result, we recorded a further increase in assets under custody and sustained high volumes of settlement transactions. Notably, our fund distribution business saw a significant step up in assets under administration, which now exceeds EUR 700 billion, a major milestone. This growth underscores the increasing relevance of our Fund Services offering and our ability to support clients across the full investment life cycle, from custody and settlement to distribution and administration. With disproportionately lower operating cost growth, the segment delivered significant operating leverage, resulting in strong double-digit EBITDA growth, both with and without the treasury results. Lastly, let's move to our Securities Services segment on Page #7, which has seen a further acceleration of growth compared to the strong first half of the year. The segment continued to benefit from strong capital markets activity with ongoing fixed income issuance and higher equity market levels, driving sustained growth in assets under custody and settlement transactions. We also saw record levels of collateral management outstanding this quarter, which contributed to the strong performance in custody revenue. These trends reinforce our central role in the post-trade infrastructure and the strength of our platform. On the interest income side, cash balances remained stable, averaging around EUR 17 billion for the quarter. As expected, we saw seasonal lows in July and August followed by a recovery in September when market activity picked up and balances rose to slightly above EUR 18 billion. The main driver behind the decline in net interest income was the lower interest rate environment. The ECB rate was 1.5 percentage points below the prior year quarter. And the Fed rate was 0.75 percentage points lower, both in line with our expectations. To wrap up, let's take a look at our full year 2025 outlook on Page #8. We are confirming our guidance for the year, supported by our expectations of continued secular growth and sustained inflows into European assets. This is despite the modest FX headwinds and the low equity market volatility and also aligns with the current sell-side consensus. In addition, we continue to expect a treasury result of more than EUR 0.8 billion for 2025. Based on current interest rate assumptions and stable cash balances, we forecast around EUR 825 million, which is also in line with analysts' expectations. On the cost side, we are very well on track to meet our guidance of around 3% growth in operating expenses for the full year. This reflects our disciplined cost management and strategic investment approach. That concludes our presentation. We now look forward to your questions. Operator: [Operator Instructions] And the first question comes from Arnaud Giblast, BNP Paribas Exane. Arnaud Giblat: One question then. I was wondering if -- I mean, you mentioned during the call that the IMS [ STOXX ] was postponed and that you are still considering a potential buyout. But I'm just wondering if you could update us whether there's an actual time frame on giving the [ minority ] shareholders a liquidity event? And if I may, secondly, there's been quite a lot of news around political comments made by German Chancellor around the potential -- around their willingness to see further consolidation in cash equities. So I was just wondering if you could update us on your thoughts there. I mean, historically, we know that cash equities hasn't necessarily been your priority in terms of consolidation. I'm just wondering if that might have shifted. Stephan Leithner: On your first, Arnaud, and I just looked it up last call, we also took you as the first one on the question. So you've got a [ pull ] position. On the first one of your questions regarding to the minorities, there's no change to what we said before. There's the dual track. As we have always said, we're not alone, there is a partner, and we jointly manage the time line. So no changes in that overall. I think second, on the remarks that Chancellor made, I will put them into the context of a broader, very encouraging commitment that is made around strengthening the European capital markets. So really a push that wasn't there historically around capital markets unions, progressed a number of levers in that context. I think for us, we are a big contributor to that. We have made a lot of progress in terms of European full coverage in terms of infrastructure. This isn't only about the cash markets. So there's really no change with respect to our position and our strategy. Operator: Next question is from Benjamin Goy, Deutsche Bank. Benjamin Goy: One question on your excess cash. Maybe you can remind us of the likely position at year-end and how this impacts your capital allocation policy other than the potential minority buyout? Any other major files you're looking at. Jens Schulte: Yes. So thank you very much, Benjamin. So in terms of excess cash, probably this will play out somewhere in the magnitude of EUR 1.5 billion to EUR 2 billion towards the end of the year. In terms of share buybacks that you alluded to, we have our program running, right, as I said, and we will complete the EUR 500 million. And the further story we will communicate when time is there. Operator: The next question is from Enrico Bolzoni, JPMorgan. Enrico Bolzoni: One, I wanted to go back on your comments about AI and being an opportunity, not a risk. And of the 3 elements you listed, I was particularly interested in the second one. I think you quickly mentioned that it might create new distribution channel. Can you perhaps expand a bit more and let us know if, for example, you are signing or about to sign partnership with, for example, third-party AI engines and whether you think that we might see a monetization of these agreements? And then related to that, if I actually have to take a more bearish stance, there's been a lot of rumor about potential disruption for software solution companies. Can you just remind us of what is the position of SimCorp in this regard and why you think is not subject to perhaps AI disruption? So that's my first question. And my second question is, in a way also related to technological disruption. I know you -- when it comes to the ledger, so the blockchain technology [indiscernible] in the past agreement with HQLA. Can you remind us what do you expect will happen to post services in an environment where there is basically a rising velocity of collateral and perhaps the settlement cycle compresses further, maybe also beyond T+1. So how do you think the business should be positioned and is that a risk? Stephan Leithner: Thank you very much, Enrico, taking up both of your questions. Let me first start on the AI side. And I really emphasize and appreciate you taking up SimCorp. I think the uniqueness of SimCorp is that contrary to sort of any ancillary type services on the software side. SimCorp is very much a front-to-back sort of backbone type business. Therefore, it is really anchored at the core of what is the clients' operations, and that really sets it apart. That's why I think we see a lot of positive enhancement possibilities. That's what SimCorp has started to put in place with the copilot for example around their front office reporting capabilities. Many of those tools give improved usage capabilities for the clients. But I don't think there is any way similar to many of our operations type businesses and execution services. This is a real backbone type system that we operate for the clients in the cloud increasingly as we have said. I think the second point with respect to the data, we have a broad set of data points. And let me just highlight 2 or 3 examples out of that. One is the proprietary data that we can provide on collateral management. One of the themes that you later come back with the DLT and blockchain. So we have a pretty unique capability. In terms of the data understanding, both on collateral as well as on settlement that allows us to deliver services directly to clients because we have that connection to the clients. So therefore, our focus is not signing up a wider distribution agreement, but it's really delivering and optimizing what we can do directly with the client. I think that economically is a much better, much stronger way to monetize AI as well as proprietary data, which we have in so many areas. On your second theme around the blockchain and DLT, HQLAX is one good example of a very advanced and broad industry partnership where Deutsche Börse or Clearstream in this case, has carved out a pretty unique position because within that ecosystem of HQLAX with most of the relevant market participants, the only TTP, so the only trusted third party that is able to confirm the portfolio composition similar to a tri-party agent role is really the Clearstream side. So I think it shows that in these network environments, even if there is DLT used, there is a very strong ability for Clearstream to position and have a unique starting point. Now you also inquired around the implications, if I get it correctly, on the T+1, the higher settlement cycles. We overall see this as something that we don't expect material extra costs on our side, very different from many custodian firms who have a big rewiring to do. So there is no material cost because today, we are really able to operate. Most of this process is already on a T+1. This doesn't fundamentally change. So we also don't see an erosion of our position coming out of T+1. It's really strengthening the strongest operators in the CSD space, and that's where certainly there's not more than 2, if I look those that are able to operate. We have just announced the pan-European footprint operation by basically operating direct services on settlement across all 28 CSDs. Again, it's a unique partnership, a unique link up network that Clearstream has, no others have it. I think it will be strengthened if we move into T+1. Operator: Next question is from Tobias Lukesch, Kepler Cheuvreux. Tobias Lukesch: Also one or two questions from my side, please. Touching on the costs, you mentioned some active cost management and also some investments. I would be interested how active were you in Q3? Should we consider the 3% guidance to be more of a 2.6% for this year, and in terms of investments, is there more to come on the AI opportunities that you're seeing? Or is that something we should consider for '26? Or is that not all really impacting your investment cycle that you have planned so far? And very quickly, you touched on the OTC derivative clearing again and said, with EMEA, this is well on track. Maybe you could give us a bit more insight on the business development since also your competitor kind of doubled down on the business with Q3. Jens Schulte: Good. So I take -- first of all, I start with the OpEx question. So in terms of just generally active cost management, we continuously do active cost management, for example, in terms of expanding our location footprint currently moving parts of the business to India and other locations and gaining further efficiency from our systems. So that is an ongoing process that is not only -- has not only been relevant for Q3. Now very specifically to your question in terms of guidance, we do confirm that guidance at the moment. Keep in mind that as in previous years, if you look into '23 and '24, we usually in Q4 have some seasonality, for example, driven by investments being a bit back-end loaded, driven by merit increases, severance and several other things that typically tend to come more out towards the year-end. So for the moment, we do plan with the 3% and that is the target and then let's see how we come in. But we are well underway. I mean that is certainly true. On the second point, OTC clearing, and the EMEA side, so what I alluded to in my part is that we actually did increase the number of accounts from about 1,600 to 2,200, so by 600 accounts. It is fair to say that the activation rate of those accounts is still relatively muted. So it's overall around 20%. However, what we do recognize now is that after a technical implementation standards have come out and after the clients have started to sort themselves, they are now making specific plans as to how to route their flows. And so we do expect the activity to increase next year. Bear in mind on this topic, that the -- basically, the activation requirement needs to be fulfilled throughout the first full year, so until basically May of next year, so the customers still have time and they take the time to organize themselves properly, but we do expect a significant increase of activity beginning of the next calendar year. Stephan Leithner: Let me take your third part, the investments impact of AI. First of all, let me give you a context that I think is truly very important and sets us apart, which is we have gone very much an advanced investment cycle when it comes to a number of items that now really benefit us on the AI journey, and that's, in particular, the transition into the cloud. We have a mid-70% of our portfolio that is in the cloud that allows us much faster and much more efficient. We have in parallel done and made the transition on the IT security side. So again, these are all areas where we have, over the last years, run significant investment portfolios from which we are now benefiting, that's why we also don't expect any requirements or change when it now comes on the AI invest because we can really build on that effectively and efficiently work together with major model providers and deploy very fast into our organization. So that's one of the items that I think truly from a wider market debate that I've seen around the margin impact of AI is something that we, in our scan and in our review process that we have run have really not seen happen. And I think that's very encouraging to us in terms of the speed and the implementation environment. Operator: [Operator Instructions] And now is from Hubert Lam, Bank of America. Hubert Lam: I've just got one of them. Can you talk about a bit about the pipeline of new clients or upsell for SimCorp into Q4. Usually, I think there's more seasonality in Q4. Just wondering if we should expect a big quarter and what kind of growth to expect heading to the end of the year? Stephan Leithner: Thanks for asking the question, Hubert. I think the seasonality of Q4, we have now explained a number of times and documented in the past years. I think we have given the guidance that in the remaining quarters, we'll see 10% quarter-by-quarter or that's what we said after the first quarter, I think we continue to stick and believe. And if we look at the pipeline, that's what we actually see. But software is every year back-end loaded sort of environment, and therefore, I think it's a lot of hard work, but signs are all on track. Operator: And the next question is from Tom Mills, Jefferies. Thomas Mills: You've alluded to the setting up of new medium-term targets at your CMD on the 10th of December, which I guess means to out sort of 2028. There's obviously been a change of CEO and CFO since the current medium-term targets were put in place. Could you maybe talk a bit about how you fear about getting to the '26 targets? Is it your intention to kind of maintain those or do you step back from them at all? Just because I see sort of consensus is a little below where you're currently expecting to get to? Stephan Leithner: Thank you very much, Tom, for giving me the opportunity to reiterate and emphasize what I said earlier. I think we both really very much confirming our 2026, Horizon '26, as we had talked about it before. I think there is no change and December 10 will not make us change their position. And secondly, also emphasize what I alluded to earlier, which is we see that many of the new growth themes that we see emerging are really fueling us for a long-term growth that goes beyond 2026. So we have a very comfortable outlook there. Operator: Next question is from Jochen Schmitt, Metzler. Jochen Schmitt: I have one follow-up question on custody revenues. You have already mentioned higher revenues from collateral management. Would you see those revenues as partly nonrecurring? Or would you see Q3 as a reasonable starting base for modeling purposes? That's my question. Stephan Leithner: So we do see that as recurring revenues. The settlement business, settlement custody business has a very good run at the moment, and we do see that carrying into the future. Operator: At the moment, the last question comes from Michael Werner from UBS. Michael Werner: I got two, please. First, on the [indiscernible] products. I was just wondering if you can update us on your thoughts about the fee holidays that you currently have on them and whether that could potentially lift in 2026? And then just looking at IMS, I know there was some decline in exceptional costs. But the underlying cost base in IMS year-on-year has been pretty steady, showing quite decent operating leverage. Is that something we should expect going forward? Was there any kind of moving parts on the cost base as I assume SimCorp is a place you want to continue to invest? Stephan Leithner: I think with respect to the fee holiday outlook, we have said we will work on establishing a very stable sort of business base before we really change. So we'll continue to monitor that in Q1, how far out that is going to go. We will decide in the course of the year. So there is no prediction that we're giving at this point. I think the second question that you had with respect to the IMS cost operating leverage, indeed, sort of clearly with respect to some of the areas that have shown slower growth or we have been active and the management teams have been working on the cost. So I think you need to look at that in the aggregate of IMS. I think it doesn't signal at all. And our investment commitment around the SimCorp momentum, as we speak, is very unchanged and there's important product enhancements on which we're working. There have been recent product introductions that have also been fueling some of those big wins, in particular, in the U.S. that we have been very proud about and that we reported on basically a named basis, if I can say, in Q2 already. Jan Strecker: There are no further questions in the pipeline. So we would like to conclude today's call. If there's anything else, then please do feel free to reach out to us directly. Thank you very much for your participation, and have a good day.
Operator: Thank you for standing by, and welcome to Invesco's third quarter earnings conference call. [Operator Instructions] As a reminder, today's call is being recorded. Over to Greg Ketron, Invesco's Head of Investor Relations. Sir, you may begin. Gregory Ketron: All right. Thanks, Cedric, and to all of you joining us today. In addition to the press release, we have provided a presentation that covers the topics we plan to address. The press release and presentation are available on our website, invesco.com. This information can be found by going to the Investor Relations section of the website. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slide 2 as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco is not responsible for the accuracy of our earnings transcripts provided by third parties. The only authorized webcast are located on our website. Andrew Schlossberg, President and CEO; and Allison Duke, Chief Financial Officer, will present our results this morning, and then we'll open up the call for questions. I'll now turn the call over to Andrew. Andrew Schlossberg: Okay. Thank you, Greg, and good morning to everybody. I'm pleased to be speaking with you today. We continue to perform remarkably well against our strategic priorities, which are centered on emphasizing the intersection of market size and secular change while leveraging our unique position to drive growth in the highest opportunities, regions, channels and asset classes. We delivered another strong quarter of broad-based progress, and we continue to generate significant operating leverage while executing on initiatives to unlock value across the organization to deliver for both clients and shareholders. If you turn to Slide 3 of the presentation, which highlights some of our most recent high-impact initiatives over the past several months. In aggregate, these initiatives will help to streamline our business, drive profitability and margin expansion, build a stronger balance sheet and continue to enhance shareholder returns. Significant among these efforts is the strengthening of our capital management through the recapitalization of our balance sheet. Here, we have improved flexibility, enabling us to continue to further deleverage. We have already repaid approximately 25% of the term loans used for the $1 billion preferred stock repurchase announced earlier this year, accelerating the expected earnings accretion from that transaction and paving a path for future redemptions. We have also made substantial progress in our efforts to simplify and hone our organizational focus. Of note is the implementation of our hybrid investment platform which we announced in May, would be shifting to a combined Alpha and Aladdin program. Progress continues in our conversion. During the third quarter, we launched the second wave of significant equity AUM onto the Alpha platform. This entire hybrid implementation, which is on track to be complete by the end of 2026 will drive simplification, improved investment system consolidation and future cost avoidance. Also under the banner of simplifying our business and focusing on improving performance, earlier in the quarter, we realigned our fundamental equities, global international and regional investment teams. We have consolidated capabilities under a single CIO for these particular asset classes and made portfolio management changes to our U.S. developing markets and aspects of our international and regional equity strategies. This consolidated global related equity platform mirrors our already established global fixed income structure and as part of our ongoing efforts to strengthen our investment returns in this important area for the firm. The single platform also allowed us to elevate our top investment talent and use our scale advantages to gain efficiencies. Investment performance does take time to turn around, but we are beginning to see progress on this front. Further advancing our efforts to simplify and streamline our focus, we announced in late summer, our decision to sell Intelliflo, which is our cloud-based practice management software subsidiary. This sale will generate net cash of approximately $100 million at closing, which is expected in the fourth quarter, and it could also generate up to $65 million in additional future potential earn-outs. Finally, we are accelerating growth through a number of recently announced business development initiatives noted on the bottom of Page 3. I'm pleased to report that we have made significant progress with our Barings private markets partnership, launching our first joint product together earlier this month. The speed at which we have been able to execute is notable. Together, we have come to market with the jointly managed Invesco Dynamic Credit Opportunity Fund within just a few months of our announced partnership. This product strategy is an interval fund targeting the U.S. wealth management market that dynamically allocates across the full spectrum of private corporate credit. By combining our 2 firms complementary strengths, we're accelerating our ability to meet client demand for income-oriented solutions in this rapidly evolving market. This represents the first milestone of the broader private market strategic product and distribution partnership with Barings, which MassMutual intends to support with a total of $650 million of capital. A second co-managed fund is currently in development and is expected to be in market at the beginning of next year. These new strategies will complement our existing private real estate offerings that are targeting U.S. wealth management clients and have seen significant organic traction over the past several quarters. Also in the category of accelerating our growth, we are in the final stages of selling a majority interest in our Indian business to the Hinduja Group and jointly establishing a local joint venture. We believe that the combined benefits of our existing Indian asset management business with Hinduja's domestic financial institution and local expertise will enhance the growth of that business. Our ongoing minority ownership structure will allow us to participate in the Indian market development, while also refocusing our resources accordingly. We expect this transaction to close in the fourth quarter and Allison will detail the financial implications and anticipated timing of these transactions later in the call. Finally, as you are all well aware, a significant transformative growth initiative is underway as we seek to modernize the structure of our sizable QQQ ETF. We are in the process of soliciting shareholder approval, and we are pleased to report that we have seen strong participation and momentum in the proposals outlined in the proxy, and votes cast are overwhelmingly in favor of the proposals. We are getting close to the vote totals needed and to allow for additional time to solicit the votes needed to pass the proposals. Last week, we announced that the special meeting of the QQQ shareholders has been adjourned until December 5. Our scheduled time to complete the solicitation process is not an all uncommon. And given the sheer size of this fund and its large retail shareholder base, it is not unexpected. We are proud of the progress on these significant initiatives highlighted on Page 3. We believe they are indicative of the exceptionally hard work of our Invesco colleagues to drive these and other efforts to completion, while continuing to seek incremental opportunities to unlock value. I am grateful for all that has been done and the ongoing disciplined focus on delivering to our clients and our shareholders. So let's pivot now to Slide 4 for our third quarter business highlights. We had strong momentum coming into the quarter, which continued as key market indices reached new highs and increasing investor confidence was bolstered with the Fed rate cut in September. These dynamics are leading to some broadening out of investor demand, which is a welcome shift in the asset management landscape and one that we are beginning to see reflected in our results. We reached a record AUM of $2.1 trillion with exceptionally strong net long-term inflows of nearly $29 billion, or an 8% annualized organic growth which is our best flow quarter since 2021. Even more encouraging with the breadth of these flows, reflecting our diversified scaled global platform. We had strong growth on many dimensions, including across most of our strategically important investment capabilities. It also included positive flows in aggregate in both our active and passive products, the retail and institutional channels and across the Americas, EMEA and Asia Pacific regions. Nearly 40% of our long-term AUM is now from clients outside of the U.S. and 2/3 of our net inflows this quarter were from EMEA and Asia Pacific regions. In the quarter, we continued to scale our ETF platform, gaining market share and launching products to meet client demand. When considering the entirety of our ETF and index offerings across all investment capabilities and including the QQQ, we recently reached an important milestone of $1 trillion in AUM. This was among our best-performing quarters for our increasingly profitable ETF and index investment capability with an annualized organic growth of 15%. We garnered record net inflows in a diverse set of products for our U.S. range, including the QQQM,several ETFs within our S&P Factor suite, the China technology ETF. And in EMEA, we generated strong flows in our use of QQQ ETF and our synthetic product suite. We continue to innovate and evolve our ETF lineup to offer investors new ways to access our in-house, high-quality active strategies. Notably, 65% of our ETF launches this year have been active. Our 5 new active ETFs launched during the third quarter brings our total to 36 months. The development is not only a U.S. trend. We now have 10 active UCITS ETFs, extending our smart beta range of products in the EMEA region. Our ending active ETF AUM firm-wide stands at $16 billion. However, when including our active teams engaged in our passive and index capabilities, it elevates that total AUM to nearly $30 billion. Bringing the depth of our investment capabilities into the ETF wrapper has long been part of our overall strategy and will continue to be as we innovate to meet client demand. Shifting to fundamental fixed income where we garnered over $4 billion in net long-term inflows in the third quarter. However, this only considers what's included in our fundamental fixed income capability. Looking more broadly at the fixed income asset class across all of our investment products, the third quarter net long-term flow number jumps to nearly $13 billion with the inclusion of our fixed income ETFs and China JV-based fixed income assets. Here again, the strength of our geographic profile is evident with more than half of our overall fixed income inflows coming from clients outside the United States. Though overall recent client demand trends remained largely intact this quarter in fixed income, we did begin to see a measured extension from ultrashort and short-term fixed income to the intermediate and longer end of the curve. We saw institutional interest for investment-grade bonds with strong demand in Asia, driving net inflows. Further, we saw demand for our leading United States defined contribution focused, stable value capability, and we are exiting the quarter with a healthy pipeline for this product. Additionally, our U.S. Wealth Management SMA platform continued to help drive fixed income flows, particularly in municipal bond strategies. Our entire SMA platform which also includes a portion of equity assets continued to capture market share, and it now stands at nearly $34 billion in AUM. We have one of the fastest-growing SMA offerings in the U.S. wealth management market with an annualized organic growth rate of 19%. Moving to our China JV and Indian capabilities where we produced exceptionally strong results this quarter. Our broad product suite and scale position in China is empowering us to perform as well as dynamic shift in this market. We reached a record high AUM in our China JV of $122 billion, reflecting a 16% increase over last quarter. We delivered a robust $8.1 billion of net long-term inflows in these capabilities, marking one of our best quarters to date, $7.3 billion of that total came from our China JV which represents a 34% annualized organic growth rate. Flows during the quarter in our China JV were led by fixed income plus and our ETF funds. Institutional investors are favoring fixed income plus strategies as they provide an effective means of enhancing equity exposure. We are also beginning to see interest in pure equity strategies, particularly in passive funds, as demand for active equity is slower to regenerate. We are exceedingly well positioned for the near and longer-term trends developing in the onshore China market. We continue to innovate to meet client demand across both active and passive capabilities. Of note, we launched 12 new products this quarter in our China JV, including our first fixed income ETF. We believe that in time, demand for fixed income products will shift towards those offered in the ETF wrapper. We also launched equity index funds to capture increasing demand for these growth-oriented products. While we continue to launch innovative products to meet current and future client demand in our China JV, existing products have been the more significant driver of our organic growth, an indication of the strength of our platform. We expect our China JV to continue to benefit as both the secular and now cyclical tailwinds develop in the world's second biggest economy. Shifting to private markets where we posted $600 million of net inflows driven by private credit and direct real estate. Private credit had nearly $1 billion of net inflows with strong CLO demand during the quarter in both the U.S. and EMEA as these products continue to offer meaningful value versus corporate bonds. We launched 3 new CLOs during the quarter, two in Europe and one in the United States. Direct real estate contributed nearly $100 million of net inflows. INCREF, which is our real estate debt strategy targeting the U.S. wealth management channel continues to generate net inflows, and we continue to onboard platforms and clients. INCREF is now on 3 of the 4 major U.S. wealth management platforms. Assets in this fund with leverage now total over $4 billion after just 2 years in the market. Our real estate team also remains well-positioned in the institutional markets, with $7 billion of dry powder to capitalize on emerging opportunities. And as I outlined earlier, our partnership with Barings should help accelerate growth for overall private market strategies in the wealth channel. In fundamental equities, we have continued to see positive flows from our clients in EMEA and Asia Pacific, specifically for global and regional equities and headlined by our Global Equity Income Fund managed out of the United Kingdom. This fund posted record net inflows of $3.8 billion during the quarter, predominantly from clients in the Japanese market, where it ranked first among retail active funds and has rapidly grown to $20 billion in AUM and has a very favorable net revenue yield to the firm. This is a compelling representation of our ability to have the right products in the right markets at the right time. Despite these positive flow highlights, we did record overall net outflows in fundamental equities of $5 billion in the quarter. Our results partially reflect the broader secular outflow trend in actively managed equities, particularly in the United States. This was compounded by the expected acceleration of net outflows from our developing markets fund, which totaled $4.5 billion for the quarter. Given our strategic decision to reposition the fund to a new internal portfolio management team, this wasn't wholly unexpected. We are confident that the aforementioned fundamental equity platform changes that have been recently implemented sharpen our focus on investment performance and risk management as we continue to identify areas of demand within fundamental equities and mitigate redemptions at a better rate than the market. Moving on to Slide 5, which shows our overall investment performance relative to benchmark and peers as well as our performance in key capabilities where information is readily comparable and more meaningful to driving results. Investment performance is key to winning and maintaining market share despite overall market demand. As such, achieving first quartile investment performance remains a top priority for Invesco. Overall, more than half of our funds are performing in the top quartile of peers on a 3-year time horizon with 45% reaching that bar on a 5-year basis. Further, nearly 70% of our AUM is meeting its respective benchmarks over those measurement periods. Of note, we saw significant improvements in some of our fundamental equity performance with more than half of our funds beating benchmark on a 3-year basis and 39% in the top quartile on a 5-year basis. Continuing to strengthen our investment performance is key to reducing redemption rates in these critically important equity strategies. Fixed Income continues to have strong performance with nearly half of our funds performing in the top quartile on a 3-year basis and nearly 2/3 beating their benchmarks. So with that, let me turn the call over now to Allison to discuss the quarter's financial results, and I look forward to your questions. Allison Dukes: Thank you, Andrew, and good morning, everyone. I'll start with the third quarter financial results on Slide 6. Strong markets and net asset inflows drove assets under management to a record level for Invesco in the third quarter. Total AUM exceeded $2.1 trillion at quarter end. This was $123 billion or 6% higher than at the end of the second quarter and $329 million or 18% higher than the end of the third quarter of 2024. Average long-term assets under management were $1.46 trillion, an increase of 9% over last quarter and 16% over the same quarter last year. Growth in total assets under management during the quarter was driven by market gains of $99 billion and net long-term inflows of $29 billion. Net revenues, adjusted operating income and adjusted operating margin all significantly improved from last quarter and the third quarter of 2024, while adjusted operating expenses continued to be well managed. This drove meaningful operating -- this drove meaningful positive operating leverage on both a sequential quarter and a year-over-year basis. On a sequential quarter basis, positive operating leverage was 480 basis points delivering a 300 basis point improvement in the third quarter operating margin to 34.2%. On a year-over-year basis, positive operating leverage was 410 basis points delivering a 260 basis point improvement in operating margin. Adjusted diluted earnings per share was $0.61 for the third quarter. We continue to strengthen the balance sheet during the quarter through the repayment of $260 million of the 3-year bank term loan. We also ended the quarter with no draws on our revolving credit facility. Given the level of operating cash generation going into the fourth quarter, we are in a position to repay the remaining $240 million of the 3-year term loan by the end of this month. When we announced the repurchase of $1 billion of preferred stock in April, funded with $1 billion in term loans, we indicated that once the loans will repay, the EPS run rate benefit would reach $0.13 annually. Given that we will have repaid $500 million, up to $1 billion in term loans earlier than projected, we will have captured approximately 60% of that EPS run rate benefit on a go-forward basis. The magnitude of the potential reduction in the remaining $500 million term loan that matures in 2030 will depend on the level of cash flow we generate going forward. Additionally, we have a $500 million senior note that we intend to redeem when it matures this coming January of 2026. Finally, we continued common share repurchases, buying back $25 million or 1.2 million shares during the quarter. Moving to Slide 7, a slide most of you are familiar with by now is we've been including this update for a number of quarters, and hopefully, you have found this helpful in analyzing our net revenue and net revenue yield dynamics. Client demand continues to drive diversification of our portfolio. And as a result, concentration risk and higher fee fundamental equities and multi-asset products has been reduced while our portfolio reflects a higher mix of ETFs, index and fundamental fixed income capabilities. Our more balanced AUM profile better positions the firm to navigate various market cycles, events and shifting client demand. The ranges by capability are representative of where the net revenue yield has trended over the past 5 quarters, and we know where in the range yields have trended more recently. To provide context for the net revenue yield trends during the third quarter, our overall net revenue yield was 22.9 basis points. This is similar to the sequential quarter decline that we experienced in the second quarter. The magnitude of the last 2 quarterly declines is notably lower than prior quarters. And maybe aside, we're closer to reaching a degree of stabilization in the net revenue yield, but this will be dependent on the future direction of asset mix shift. The exit net revenue yield at the end of the third quarter was 22.8 basis points near the adjusted net revenue yield for the quarter. As Andrew noted earlier, last week, we announced a special meeting of QQQ shareholders have been adjourned until December 5 to allow for additional time to solicit votes. We did want to note that under the new structure, the revised fee allocation would work similar to how we currently recognize fees on most of our ETFs. The 18 basis point fee will be recognized as investment management fees, approximately 12 basis points, which is principally for the licensing fee and administrative custody and transfer agency services will be recognized as third-party distribution, service and advisory expense. Under the current structure, marketing expenses associated with the QQQ are included a third-party expense. Upon finalization and filing of the definitive proxy statement, reflecting comments from the SEC and further accounting review, it would determine that the marketing expenses associated with the QQQ should be included in the marketing expense line item versus third-party expense. This is solely a reclassification of where the marketing expenses are reported and the expected overall net impact to adjusted operating income of approximately 4 basis points of QQQ AUM and is unchanged from what we previously disclosed. Now turning to Slide 8. Net revenue of $1.2 billion in the third quarter was $82 million higher as compared to the same quarter last year. The increase in net revenue was largely from investment management fees, which were $102 million higher than last year and mainly driven by higher average AUM. Operating expenses continue to be well managed with the increase of $24 million, partially driven by variable employee compensation related to higher revenue. On a sequential quarter basis, the increases in net revenue and operating expenses were driven by similar dynamics as the year-over-year changes. And that result is a substantial increase in positive operating leverage on both the year-over-year and sequential quarter basis. The Alpha hybrid platform implementation costs of $11 million were below our expectations for the third quarter, but near the range of prior quarters. We launched the second wave of equity AUM onto the Alpha platform during the third quarter. We will continue to implement the hybrid approach we announced earlier this year. We expect the overall implementation to be completed by the end of 2026. Regarding implementation costs going forward, we expect onetime implementation costs to continue in the $10 million to $15 million range for the fourth quarter as we transition more AUM onto the platform. This amount in future quarters may fluctuate to a degree due to timing as we work towards completion by the end of 2026. We'll provide further updates as the implementation progresses throughout next year. As disclosed in August, we reached an agreement with Carlyle to sell Intelliflo, our cloud-based practice management software subsidiary. We moved Intelliflo to held for sale in the third quarter and the noncash impairment charge of $36 million was recorded in other gains and losses, somewhat lower than the $40 million to $45 million that we had indicated previously. We expect to close this transaction in the fourth quarter and then the annual net operating impact of Intelliflo is insignificant to the overall Invesco operating results. Given Intelliflo is the U.K. subsidiary, the loss is not a taxable event. As such, we anticipated the effective non-GAAP tax rate for the third quarter to be closer to 29%. The effective tax rate for the quarter was 11.2% as we were subsequently notified late in the quarter of a favorable resolution of a certain tax matter, including the reversal of a reserve for uncertain tax positions which had a significant impact on our third quarter non-GAAP effective tax rate. For the fourth quarter, we estimate our non-GAAP effective tax rate will move back to the 25% to 26% range, excluding any discrete items. The actual effective rate can vary due to the impact of nonrecurring items on pretax income and discrete tax items. Andrew also noted that the sale of a majority interest in our India asset management business is expected to occur in the fourth quarter, potentially at the end of October. Post closing, given we will retain a minority interest India's AUM, which is near $15 billion and future asset flows will not be reported in our results. In addition, India's operating results will no longer be reported as part of Invesco's overall operating results including the associated revenues and expenses. Our 40% share of the joint venture's net income will be reported in equity and earnings of unconsolidated affiliates going forward. We currently expect $140 million to $150 million in cash proceeds from the sale. I'll wrap up on Slide 9. As I noted earlier, we continue to make considerable progress on building balance sheet strength. During the third quarter, we repaid $260 million of the $1 billion in bank term loans used to fund the $1 billion repurchase of preferred stock held by MassMutual earlier this year. The $260 million repayment reduced the 3-year term left to $240 million. And as I noted earlier, we're in a position to repay the remaining balance by the end of this month, leaving only $500 million [ in ] the 5-year maturity term loan. The full impact of the $14.8 million reduction in the preferred dividend was realized in the third quarter and the go-forward run rate preferred dividend is $44.4 million per quarter. The $14.8 million reduction is now earnings available to common shareholders. We also continued common share repurchases in the third quarter buying back $25 million or 1.2 million shares during the quarter. We intend to continue a regular common share repurchase program going forward and expect our total payout ratio, including common dividends and share buybacks to be near 60% this year as well as in 2026 as we continually evaluate our capital return levels. The partial repayment of the bank term loan improved our leverage ratios for the quarter with the leverage ratio, excluding and including the preferred stock, improving to 0.63x and 2.5x, respectively. Going forward, we expect this ratio to continue to improve as we repay the term loan and redeem the $500 million senior note maturing in January. To conclude, the strength of our net flow performance and diversity of our business is evident again this quarter, driving strong revenue growth. This, combined with well-managed expenses resulted in significant operating leverage and a sizable improvement in our operating margin. We're pleased with our progress on building a stronger balance sheet. And we are committed to driving profitable growth, a high level of financial performance and enhancing the return of capital to shareholders. With that, I'll ask the operator to open up the line for Q&A. Operator: [Operator Instructions] And the first question comes from Bill Katz with TD Cowen. William Katz: Okay. Thank you very much. I excuse my voice this morning. Maybe it's on the QQQs. I'm sort of curious if you could maybe put any kind of meat on the bone a little bit around where you are relative to the quorum or the approval rate and the development with the SEC in terms of re-categorizing and reclassifying where you're going to account for the marketing spend. Does that raise the probability of getting to the required vote to make the shift? Thank you. Allison Dukes: We can't give you details on where we are relative to the quorum or the approval rate, but as we noted in our disclosures, we're very pleased with the progress, and it's an overwhelming majority that's voting in favor of the fee change. We're pleased. It's not unexpected that these things take a lot of time, especially for a fund as large and widely held as this one. It takes a little more time to get to the quorum, but we're pleased with the progress we're making. On the second question, as it relates to the marketing expenses, no, there's nothing in that that really changes anything, to be frank. This is entirely related to the comments from the SEC on the proxy, some of the language changes, putting that back through an accounting review, and we determined this is the most accurate and appropriate place to reflect those marketing expenses. Going forward, I don't think it really has any impact whatsoever on how people are thinking about the proposal. There's no change at all to operating income. Again, it's still approximately four basis points, and the way the marketing expense will work is as disclosed in the proxy filing, which is a discretionary amount of marketing expense within the range that we provided in the proxy. Operator: Our next question comes from Brennan Hawken with BMO Capital Markets. Brennan Hawken: It's just a follow-up on Bill's question. I understand that you guys are using a proxy voting firm to help drive participation. I just want to confirm, is that considered a marketing expense of the fund, and is there any sort of spend threshold where over that it starts to become an operating expense for Invesco? Allison Dukes: Yes, we are using a proxy solicitation firm, and it is considered a marketing expense of the fund. Those expenses are accrued in the fund. I don't foresee that happening with those expenses bleeding over into operating expenses for Invesco. There can be some timing differentials in terms of how we accrue within the fund, month to month, versus just timing, I would say, on fund expenses versus operating expenses for Invesco. Right now, I do not see that as being a risk to Invesco's operating expenses, especially if we continue on the path to the meeting on December 5 as scheduled. Brennan Hawken: Got it. Okay. Thank you. This might be a little granular, but I'm going to give it a shot anyway. I understand that there's three proposals in the proxy vote. Are all three proposals progressing similarly, or is there any divergence in between one, two or three? Allison Dukes: No, there's no divergence. They're all progressing similarly. I think that is a very granular question. There's one in particular everybody's focused on, but fair question. No, I think it's all progressing consistently. Operator: The next question comes from Glenn Schorr with Evercore. Glenn Schorr: So your fixed income flows have been pretty good. Your performance is very good. There has obviously been some volatility around the potential of lower rates and the potential of credit issues rising. It has been a while since any of the channels had to deal with that. I am curious what you saw in October and things like bank loans. More importantly, in general, given the global nature of your flows, what you expect on a go-forward basis just across the fixed income platform. Andrew Schlossberg: Sure. Let me start. We did not see any material implications from some of the events you described in October. We're continuing to see real strength in our fixed income business. It's a $680 billion platform, it's up from $625 billion at the start of the year. That's come through mostly organic growth. We've had over $30 billion in platform-wide fixed income flows. We mentioned in the prepared comments that's really been broad-based. Our SMA platform in the U.S. has probably been the strongest piece here in the United States. But overseas, we've seen a good movement out of some shorter duration strategies into some longer duration strategies, global bonds, investment-grade bonds. We're seeing that pick up materially in Asia and EMEA. We continue to go from strength to strength. I'd say some of the bank loan flows were a little weaker at the back end of the quarter, but it continues. We continue to be a leader in that space and continue to do well in the bank loans and also in CLOs. Anything you want to add? Allison Dukes: No surprise and no secret. Markets have been a little bit jittery on the credit side in the month of October. I do think we see some softening, maybe some outflows on the bank loan side in the month of October. We'll see how this plays out as we continue to try to evaluate if this is a rather specific risk or something broader-based. I would say nothing notable. Overall, we continue, as Andrew said, to see things perform pretty well. In particular, the strength in our CLO platform and some of the launches across the third quarter and the demand coming into the fourth quarter still remains high. Andrew Schlossberg: And investment performance is pretty strong across the whole platform. So as demand picks up, as some of this cash starts to potentially move off the sidelines, we should be well positioned. Operator: Our next question comes from Alex Blostein with Goldman Sachs. Alexander Blostein: I was hoping you could maybe unpack the two divestitures you made -- earlier that you mentioned, both on the Intelliflo side as well as the JV in India. Maybe one, with the use of proceeds, obviously, you guys have been deleveraging, and there's more to do there, but maybe talk a little bit about capital return priorities as you look out over the next 12 to 18 months. As we start to look out into 2026, what are the implications maybe for expense growth on the back of those divestitures? Allison Dukes: Sure. Maybe I'll take that in a couple of different directions. Let me start with India. India, as we noted, we're expecting proceeds there of $140 million to $150 million. Maybe just a little bit of color getting to kind of what's the impact on some of the expense, and I'll say operating income trajectory from there. India is a business that, from a revenue perspective, runs around $13 million a quarter. Expenses run around $7 million a quarter, call it, operating income of roughly $6 million a quarter. As we noted, that will come out of our operating income results, and we will reflect that 40% ownership below the line in equity and earnings going forward. The AUM of about $15 billion in the flows will no longer be reported in those results either. Intelliflo, we're expecting, as I noted, about $100 million in proceeds. That's before any potential future earnouts. We expect that one to close later in the fourth quarter. That one, operating income runs anywhere from breakeven to $1 million or $2 million loss a quarter. Call it very negligible to results overall. That would be removed entirely from our results. Total proceeds of around $240 to $250 million. In terms of our capital priorities, they remain balanced. We remain focused on improving the balance sheet, returning about 60% of our capital to shareholders, and investing in our own growth capabilities. We're getting to a place where we're starting to create more and more capacity for ourselves. We're pleased with the progress we're making on the balance sheet. I don't think we're totally where we want to be yet. We are seeking to continue to improve that leverage ratio, particularly while we have these strong operating cash flows that we have. I'm very pleased with the ability we have to pay down the remainder of the three-year term loan by the end of this month. That's all from operating cash flow and before any of these proceeds. These proceeds give us the flexibility to continue to launch new products going into next year. We're highly focused on our capital planning for 2026 and working with our teams across the firm as we think about what's going to drive revenue most aggressively going forward. It gives us flexibility to keep doing all of those things, investing in ourselves, creating flexibility on the balance sheet, managing these debt levels lower, and returning capital to shareholders. In terms of expenses next year, I'd say expect them to continue to be really well managed, and we'll certainly be giving you more color as we get into 2026. Operator: Our next question comes from Dan Fannon with Jefferies. Daniel Fannon: Great. So I guess another question on expenses just with regards to the Alpha platform and integration. We've got $10 million to $15 million, I guess, in the fourth quarter of ongoing implementation costs. Can you talk to next year in terms of the pace versus what we've seen this year? Ultimately, I think it's about reducing future cost growth. Can you give us kind of the end state as you think about what this integration will do in terms of how to think about long-term expense growth? Allison Dukes: Yes. As we noted, we are highly focused through the hybrid platform implementation on completing this by the end of 2026. There is aggressive planning underway right now. We do expect the pace of implementation and implementation costs to remain high throughout 2026 as we seek to move all of our assets onto the collective platforms by the end of the year. I would say, as we think about '26, and again, we'll give you more color as we get closer, we would expect some of the costs to modestly increase related to Alpha and the hybrid platform implementation. That gives us the opportunity to then start to look at what we decommission, how do we streamline our operating systems. I wish we could be turning off more along the way, but we have to complete a lot of these things before we can actually decommission and stop renewing certain other aspects of our overall operating platform. That really becomes a 2027 opportunity. I'd say it's certainly early to be giving guidance around 2027. What I will say is I expect these run rate expenses that are associated with the hybrid implementation to peak in'26, and then we will begin aggressively planning for how we streamline our operating platforms going into '27. Against that backdrop, and I'll reiterate this, I think you can look back over the last few years and see our overall expense base has been extremely well managed, even while we've been putting in these systems. It has been a heavy lift, and there has been cost associated with it. We've really been able to improve operating margin significantly against this. Revenue growth has helped, no question, but the expense base in particular has been very well managed along the way. We're not going to take our foot off the gas there. We've got real opportunity to continue to manage that going into the next few years. Andrew Schlossberg: Yes. And we're really pleased with the progress of the implementation on the hybrid solution since announcing the change in the spring. We brought on a pretty significant piece of the equity business onto the platform. It's, you know, things are going well in terms of the implementation and the teams working together. Operator: Our next question comes from Benjamin Budish with Barclays. Benjamin Budish: Maybe just another follow-up on the expense side. It looks like markets are constructive. Your flow profile has been looking increasingly healthy. If the QQQ vote goes through as it sounds like you're optimistic it does, there's going to be kind of even more flowing to the bottom line. So I guess, maybe just kind of -- again, following up on the last couple of questions. How are you thinking about variable expenses going into '26 and '27? Obviously, there is the [ ports and ] pieces you can control. But how are you thinking about opportunities to drive more operating leverage given the -- what looks like a healthy backdrop for top line revenues? Allison Dukes: Sure. I'll take that. I mean variable expenses, as we've noted in the past, they run about 25% for us. So that certainly is the first port of call, if you see pullback in revenue and it is where we see expenses really moving up as we see increases in revenue. So as we think about what that means going forward, I mean our focus is really on how do we keep managing, maybe we fixed expense base because the variable in many respects is what it is, and we're pleased for that to fluctuate up and down. The fixed expense base is where we spend a tremendous amount of time really looking at how do we continue to unlock value there and taking a hard look at every aspect of it. I think a lot of the work we've been doing over the last couple of years, and you're seeing the fruits of that is the simplification work. And where we can reduce redundancies and simply our operating platform across all of our investment capabilities by unifying teams, by looking at where we can be more global as a firm and a little less regional reducing some of the duplication that came with some of that structure in the past. Those are the opportunities we've had to continue to interrogate our fixed cost expense base, and we will continue to do that. That's really a part of our rigor now. And so as contracts mature, as opportunities arise, as people leave the firm, as markets change, we really look at how do we continue to simplify and collaborate better and collapse some of our platforms perhaps together so that we can go to market in a single fashion. And that's going to be -- that's work that -- it's in our blood now, it's in our DNA, and it's the work we're going to continue going into the next couple of years. Andrew Schlossberg: Yes, I think we -- clarifying our strategic priorities that we've shared with you over the past year or two has been helpful to energize the firm towards those. And while managing expenses in a very disciplined way, as Allison mentioned, also investing in the business, whether that's in the product line, our private market capabilities and distribution efforts, what we're doing in our ETF platform, we've been able to invest over the last 18 months on a net basis as well. Benjamin Budish: Really helpful. Maybe just one separate follow-up if I may. Andrew, I think you addressed one of the questions around credit more broadly. Just curious with the launch of this new fund with MassMutual, any specific feedback on that one? I know there's a healthy component of direct lending in there. And just in terms of distribution, maybe remind us what the sort of rollout looks like, whether it's wires versus RIA, how should we see things start to flow in? Andrew Schlossberg: Yes, no problem. The fund -- we repurposed a legacy fund that has about $250 million in assets in it, and we'll get an infusion for MassMutual as well. So it's starting with a decent asset base, it has a good record. And it's going to be targeting all of those U.S. wealth management clients that you mentioned. So traditional financial advisers, RIAs, et cetera. We've only been in market for a couple of weeks. So it's a little too early to say with regard to where progress is. But I will say the notion of it being dynamic, meaning it cuts across all sides of the credit spectrum, the ability for it to leverage both the strengths of Barings and Invesco. And it's well priced and relatively liquid. I think those are all attributes that we've heard soundings from the wealth management marketplace that they're looking for a little more of a one-ticket solution. And that's how we're putting it into the marketplace and we'll report on it as we go forward, and we're already working on product too. Operator: Our next question comes from Patrick Davitt with Autonomous Research. Patrick Davitt: Another follow-up on the expense question. Sorry if I missed this and all the discussion. But I think non-comp, in particular, was still well below expectations in 3Q. So is that a good run rate to think about how things are tracking in 4Q at least? Allison Dukes: Yes. Thanks. I would say I think non-comp, probably a little low in the third quarter. It could be a touch higher in the fourth quarter. I think we typically do see some seasonality when you think about marketing expenses and the professional services, some of the things that come in there at year-end. So it's not significantly higher, but I think I would expect non-comp to be modestly higher in the fourth quarter very modestly. I think comp to rev is probably -- or compensation expense as you think about compensation as a percentage of revenue, it's probably the one that's maybe a bigger driver as you think about just the fourth quarter and the overall year compensation is highly dependent on revenue. We'll see how the fourth quarter shapes up. But it's probably -- so far this year, we're accrued to about 43.4% year-to-date. We really manage it on a full year basis. I think it's probably something in the 43% context. It could be a touch under 43%. That's how I would think about fourth quarter expenses overall. Patrick Davitt: Great. And then as a quick broader follow-up, I guess you mentioned a bunch of active ETF launches. Any sense of AUM into those kind of products more coming from existing products or existing wrappers, cannibalizing existing wrappers or do you sense that it's actually new AUM in the system? Andrew Schlossberg: Yes. I mean, it's a couple of billion dollars. So it's not unmeaningful. It's hard to tell exactly where it's coming from. I'd say the strategies we brought forward have been a combination of new strategies and some that are existing strategies in another format. So -- and most of it has been actually in new strategies. So I think it's incremental growth, quite frankly. It's similar advisers, though. So the higher net worth advisers that we work with across private markets and ETFs in general are interested in those active ETFs, too. But our expectation is that this is very early and it will develop over time and that it's not just a U.S. phenomenon. I think this is something that the world is kind of acknowledging that. The ETF vehicle has some significant benefits. And it's a good vehicle for both passive strategies and active strategies and things that are hybrids of the two, which I think will come in time. Operator: The next question comes from Brian Bedell with Deutsche Bank. Brian Bedell: Great. Maybe just right along that -- the last question from Patrick on the ETFs. As you expand those strategies and move more of that or I should say, as RIAs in particular, adopt the strategies, are you -- is that moving more into the ETF and index bucket? Or should we think about this over the long term as propelling growth in that ETF and index bucket? Or is that factoring into fundamental equities? Andrew Schlossberg: Yes. I mean, look, at the moment, it's -- we're seeing a lot of growth in the past in the index side of the business. The active side is kind of just getting going. I think you'll see it across the piece. And I don't think it's just going to be ETF wrapper. I think you're also going to see the SMA wrapper and then model portfolios, which incorporate a lot of ETFs, currently passive, but I think in the future active. You'll see all of those vehicle types grow, and the underlying investment capabilities will include all of the categories, you know, that we have outlined whether it's fundamental equity, fundamental fixed income and ultimately, maybe some of the alternative private assets, too. So I think you'll see it both in the vehicles that I mentioned being the expansive vehicles and I think across the capabilities. Fixed income has been a place where we've seen a good amount of growth in our ETF lineup, both passive and active. So equity is probably the one that needs to -- will pick up the pace here as we go forward. But fixed income has predominantly been where the flows have come. Brian Bedell: Great. Just a couple of housekeeping. On the India sale, is there a segmentation of where that $15 billion is coming out of in the categories? Just on the QQQ ETF, if that is approved on December 5, when would you expect that conversion to happen to the P&L, is it right, subsequent to that? Or do we have to get through more approvals and that's beginning of next year? Allison Dukes: Sure. So on your first question on the India AUM, that shows up on the China and India -- sorry, that shows up in the China JV and India AUM category. So you expect to see that $50 million -- $15 billion come out of that category. And then the second question -- that would convert immediately following the shareholder meeting. So assuming we have the quorum, once we have the quorum and the shareholder vote, requires both, in that meeting, then it would convert effectively the next day. Operator: Our next question comes from Michael Cyprys with Morgan Stanley. Michael Cyprys: Want to circle back to India. I was hoping you could speak to the sale of a majority interest. Just curious if you could elaborate what led to that decision. It's a major market where many are quite bullish on the long-term prospects. So why reduce the stake? Maybe you can elaborate a bit on your partner and just blend how you decided to partner with them, how you see them helping drive accelerated growth from here? Andrew Schlossberg: Yes. Thanks for the question. We've had great success with partnerships and alliances and JVs, notably the one we have in China over the last 22 years. And so we look at the Indian market and it's growth, but we also look at how local that market is. Us having a domestic business there and seeing the market trends and development that we're bullish about, finding a partner that in both financial institution as well as a large brand and a well-known local operator in the Hinduja Group was just a good combination and marriage together. It will allow us, as Allison said, to participate in the growth from a profitability standpoint, but it will also allow us to see that business grow and for us to participate hopefully with sub-advising assets into it, especially those assets that will be beyond the local Indian managed assets. So I think as global equities or global bonds come into that market and Invesco will be hopefully, the underlying manager of those strategies, and that's the expectation of the partnership. So it really was just a classic sort of 1 plus 1 equals 3 and an ability for us, as we mentioned, to really focus our resources and energy on a full basis in other areas and participate in the Indian market as it grows and develops. Michael Cyprys: Great. And then just a follow-up question on China, where you're seeing quite robust flows. I was hoping you could elaborate on the success that you're seeing there, the steps that you've taken to drive this improved momentum? What sort of demand are you seeing for passive versus active in China? Maybe remind us of the complexion of the business today. Gregory Ketron: Yes, sure. So, look, I think some of our success in China is a function of us being there for 22 years and staying committed and focused on developing a full-fledged retail asset management business there, which we have. And so the $122 billion in assets that we have under management there is an established platform, one of the larger ones in the market, a well-known brand, well thought of for its compliance and investment integrity. And so as markets improved and as demand has started to improve from those retail investors in the market, we're seeing the benefits of that. The business is pretty diverse. So as a reminder, it's about 30% equities, 30% bonds, 20% balanced and 20% money markets. And to your question on ETFs, I think it's around $12 billion or $13 billion now of ETF. It's a business we only -- or the JV only started in the last few years. The growth has been still largely in the active part of the business, but we're seeing a pickup in the ETF flows as well. And we're trying to meet that demand by launching new product, as I mentioned. So I think the ETF part will continue to develop as will their models area, as will the traditional equity business, it's really evolved over the course of those 22 years. And so as we're getting a little more favorable outputs from China in terms of the easing signals from the government or the pushing forward of consumption, less reliance on the property sector. And importantly, for us, the development in time of a retirement market there and a more robust capital market, we think that JV should continue to go from strength to strength. And just as a reminder, it's a domestic to domestic business exclusively. Operator: Our last question comes from Ken Worthington with JPMorgan. Kenneth Worthington: Okay. Great. So M&A is back in investor dialogue, given Trian's offer for Janus as you sort of reflect on Invesco in the industry, where has consolidation been successful and where has it fallen short? And given your balance sheet is strong, your fundamentals are strong, is it a good or a bad time for Invesco to think about M&A to further strengthen your position and kind of get to your strategic priorities more quickly? Andrew Schlossberg: Yes, thanks. We're -- we've been very focused on all the organic opportunities that we have inside the company. And hopefully, we demonstrated throughout this call in the last few quarters, of the progress that we're making. And we still think there's quite a bit of progress we can continue to make in time organically. The business is global. It's diverse. It's in the asset classes where there's demand and we continue to believe we can grow that organically. I think Allison mentioned the priorities that we have for our use of capital and what our focuses are at the moment. We want to continue to invest in ourselves, and we want to continue to improve our balance sheet. We'll keep our eye on M&A. We'll continue to keep our eye in particular in places like the private markets areas where we have a strong business today with $130 billion in assets but also expectations for future growth. So I don't think it changes much our focus and our dedication as a company. Operator: Okay. And back to you, Mr. Schlossberg. Andrew Schlossberg: Okay. Well, thank you. And in closing, we are unlocking value across the organization for the benefit of clients and shareholders. This includes looking at how we fundamentally operate leaving no opportunity unexamined as we strive to improve client outcomes, generate operating leverage and profitability, continue building a strong balance sheet and enhancing our ability to return capital to shareholders. We have resilient operating performance across many key value drivers. Our global footprint with a significant and unique Asia Pacific presence and a strong performing EMEA business, coupled with our scale and breadth of products positions us well to perform through shifting market dynamics. We continue to demonstrate that we have durable performance and reason to be optimistic about the future. We want to thank everybody for joining the call today, and please reach out to our Investor Relations team for any additional questions. And we appreciate your interest in Invesco and look forward to speaking with you all again soon. Operator: Thank you. That concludes today's conference. You may all disconnect at this time.
Sarah: Good morning and welcome to PayPal Holdings, Inc.'s third quarter 2025 earnings conference call. My name is Sarah, and I will be your conference operator today. As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today's conference, Steve Winoker, PayPal Holdings, Inc.'s Chief Investor Relations Officer. Please go ahead. Steve Winoker: Thanks, Sarah. Welcome to PayPal Holdings, Inc.'s third quarter earnings call. I'm joined by CEO Alex Chriss and Chief Financial and Operating Officer Jamie S. Miller. Our remarks today include forward-looking statements that involve risks and uncertainties. Actual results may differ materially from these statements. Our commentary is based on our best view of the world and our businesses as we see them today. As described in our earnings press release, SEC filings, and on our website, those elements may change as the world changes. Over to you, Alex. Alex Chriss: Thank you, Steve. Good morning, everyone, and thanks for joining the call. PayPal Holdings, Inc. is a fundamentally stronger company today than it was two years ago. Focus and execution have enabled us to drive a positive inflection across our business. Take transaction margin dollar growth, excluding interest on customer balances. We are on pace for 6% to 7% growth in 2025 compared to negative growth just two years ago. Revenue growth has accelerated in the past two quarters as a result of our deliberate strategy to focus on profitable growth. Operationally, we are winning new customers and deepening engagement across our existing base. We have reinvigorated unprofitable and underperforming parts of the business. We're leveraging our incredible brands to innovate and expand our addressable market beyond online payments. Thanks to our omnichannel initiatives, we've accelerated branded experiences TPV growth to be between 7% and 8% on a currency-neutral basis over the past four quarters. Our BNPL business is sustaining 20% volume growth quarter after quarter. Venmo revenue growth has accelerated 10 points compared to two years ago, while we have also continued to grow our user base. Our enterprise payments business has turned a corner, returning to volume growth and consistently contributing to company transaction margin dollar growth. We have delivered this acceleration in our business while remixing inefficient spend into growth investments and returning capital to shareholders. In total, we are on pace to deliver at least 15% non-GAAP EPS growth this year. All of this gives us confidence in the business's longer-term growth potential and ability to deliver high single-digit transaction margin dollar growth and non-GAAP EPS growth in the teens or better over the longer term. I'm also excited to announce that we are initiating a dividend. Our overall capital allocation priorities remain the same. We will continue investing first and foremost in our business's growth and transformation. We see this dividend as strengthening our overall capital return program, working in conjunction with our ongoing share buybacks. Our free cash flow generation and balance sheet are strong and give us ample room to both deploy capital to drive growth and return capital in a disciplined way to shareholders. Put simply, this is the new PayPal Holdings, Inc., built for faster, more profitable growth. Our strong foundation, differentiated competitive advantages, and clear strategic direction position us to capture a massive and growing addressable market. With building execution momentum, we are driving innovation at a remarkable pace and scale. This makes us exceptionally well-placed to win into the future. Turning to our third quarter performance, we delivered at or above the high end of our guidance range for transaction margin dollars and EPS. Importantly, our TM dollar growth continues to come from multiple areas of the business, including branded experiences, PSP, and Venmo. Non-GAAP earnings per share increased 12%, reflecting the flow-through of our transaction margin performance. The strength of our two-sided platform is evident in how customers are choosing to deepen their relationship with us. Monthly active accounts grew 2%. When you look at transactions per active account growing 5%, excluding PSP, you see the real story. Customers aren't just signing up; they're incorporating PayPal Holdings, Inc. and Venmo into their daily lives. This engagement depth makes us a valuable partner to merchants and will drive sustainable, profitable growth. Now I'd like to discuss the progress we are making in our four strategic growth drivers: winning checkout, scaling Omni, and growing Venmo, driving PSP profitability, and scaling our next-gen growth vectors. As you can see on slide four, PayPal Holdings, Inc.'s TM dollar growth, excluding interest, has not only accelerated, it is coming from a far more balanced mix across our business. This is important to appreciate the strategy underpinning the value our teams are working to create. Compared to last year, win checkout's contribution increased, and PSP, Omni, and Venmo's contributions are a multiple of what they were in the past. This is a direct result of the work we have done to build more holistic, healthier merchant relationships, to scale our omnichannel presence, and to monetize Venmo. The innovation and momentum across the company are increasingly visible, as you have seen in our recent announcements and as you will hear today. I plan to move quickly so that we can go deep in a few key areas like BNPL and Venmo, while also leaving ample time for Q&A. Let me start with branded experiences, which covers our first two growth drivers: online and in-store branded checkout. Our strategy is to meet our customers everywhere they shop, whether online, in-store, or agentic. We are focused on delivering the best checkout experience so consumers can pay how, where, and when they want. It means they can pay online with PayPal Holdings, Inc., Buy Now, Pay Later, Venmo, crypto, or soon a partner wallet through PayPal World. It means they can pay in-store with a PayPal Holdings, Inc. or Venmo debit card, BNPL, or Tap to Pay. It also means building for a future where consumers can pay through AI agents powered by Google, OpenAI, Perplexity, and others. Last September, we launched PayPal Everywhere in the U.S. to move beyond our legacy in online branded checkout into an omnichannel world. A year in, and the results show our strategy is working. Branded experiences TPV grew 8% on a currency-neutral basis in the quarter. This includes PayPal Holdings, Inc., Buy Now, Pay Later, Venmo, and our debit card programs, and is the single most important metric to track the progress on transformation from an online payments company to a commerce company. We need to be available everywhere a consumer wants to make a purchase. This is about more than being present across channels. It's fundamentally expanding what PayPal Holdings, Inc. means to our customers and the total spending we can capture. Historically, PayPal Holdings, Inc. was synonymous with online retail payments. Today, we're evolving the way consumers pay for all of their commerce needs, moving beyond retail into services, subscriptions, bills, everyday expenses, and more. We're now playing for a much bigger addressable market. Our confidence in the financial impact of this strategy comes from the flywheel effects we see across our ecosystem. When customers start using PayPal Holdings, Inc. or Venmo offline with our debit card, their online activity increases as well. ARPA goes up, profitability improves. In Q3, our PayPal Holdings, Inc. debit card actives transacted nearly six times more and generated nearly three times the ARPA of checkout-only accounts. We see a similar pattern with BNPL. Its use drives an uplift in overall activity and engagement. The data clearly validates our strategy and gives us confidence to increase our growth investments. Most of our product initiatives, plus our marketing investments over the past year, have started in the U.S. It's worth examining our U.S. proof points as they demonstrate the potential for our business as adoption scales internationally. For example, in the third quarter, we reached 10% branded experiences volume growth in the U.S., more than double our growth the same quarter a year ago. That acceleration comes from two things: growing omnichannel adoption and sustained improvement in the U.S. online branded checkout trends, supported by our improved experiences. We have the right set of drivers and initiatives in place. Now our focus is on adoption and investing to amplify our impact. As we move into 2026, we will be leaning more into these efforts and expanding across key international markets. Let me address online branded checkout in more detail. TPV grew 5% in the third quarter on a currency-neutral basis. That's solid growth, especially with the choppy global macro trends we continued to see this quarter. Given the competitive intensity online, we know more work is needed to close the gap between our performance and overall e-commerce growth. Our strategy moving into next year centers on three priorities: continuing to scale our redesigned checkout experiences, improving how we are prioritized across merchants, and importantly, driving biometric adoption. We are also leaning into new verticals and geographies that expand our addressable market and avenues for growth. All of this will be complemented by a consumer value prop with a highly competitive rewards program aimed at increasing frequency and selection rate. We also have a powerful growth lever with Buy Now, Pay Later and Venmo, which I'll discuss further shortly. This year, we've made significant progress deploying our redesigned pay sheet experience, which now covers close to 25% of our global checkout transactions. We're moving quickly, but untangling a decade or more of legacy integrations is complex and taking more time than planned. In the cohorts where we are now optimized in the U.S., we continue to see close to one point conversion improvement. This gives us confidence. It's a win, not if we see more benefit from this monetization. At the same time, it's critical that we keep improving PayPal Holdings, Inc.'s prioritization across merchants and scaling biometric login, both of which have been proven to increase conversion. On the prioritization side, we are focused on scaling upstream messaging on product pages, driving adoption of our payment-ready API that allows merchants to target high-converting PayPal Holdings, Inc. users when they land on their site, and improving PayPal Holdings, Inc.'s placement at checkout. Improved prioritization and presentment are powerful. In testing, when our Buy Now, Pay Later options are presented upstream on a product page, we see a nearly 10% lift in branded checkout volume on average. That improvement drives incremental sales for our merchants and customer loyalty with repeat use for PayPal Holdings, Inc. Within biometrics, we are focused on scaling biometric login, including passkeys, and driving mobile app adoption, which enables seamless authentication during checkout. In ongoing testing to date, these authentication efforts, when paired with the redesigned pay sheet we've been scaling, have shown improved conversion between 2% to 5%. Consumers benefit from a mobile checkout experience that is second to none, while merchants see a higher customer satisfaction and sales. It's a win for both sides of our network. The bottom line, the initial results we have seen to date in the U.S. make us confident we're on the right path and have the right initiatives in place, both to drive acceleration and increase growth investments as we move through next year. Now that I've covered some of the foundational work underway, let me dive deeper on two important growth levers that I mentioned: BNPL and Venmo. The shift towards Buy Now, Pay Later is a fundamental change in how consumers want to pay, and we are extremely well-positioned to capture this shift. In the markets where we offer BNPL, our solutions are available nearly everywhere PayPal Holdings, Inc. is accepted. It's a reach and scale that's hard to replicate. This quarter, BNPL volume continued to grow more than 20%, with particular strength in the U.S. This puts us on track to process close to $40 billion in BNPL TPV in 2025. Monthly active accounts climbed 21%, and our net promoter score globally is 80. People love this product. We have everything we need to win this market. We are investing to transform our BNPL business from a payment option that consumers discover in the PayPal Holdings, Inc. Wallet after they made a purchase decision into a customer acquisition channel. This means moving to the beginning of the shopping journey through marketing and upstream presentment so that consumers know they can increase their purchasing power with BNPL. This focus and investment will expand our right to win in BNPL and further accelerate growth. We are also expanding BNPL to new geographies and introducing new product offerings, both online and in-store. We have successfully expanded BNPL into Canada and extended payment terms in Italy and Spain to up to 24 installments. After proving the model in Germany, we brought Buy Now, Pay Later (BNPL) in-store to the U.S. through the PayPal Holdings, Inc. mobile app, seamlessly connecting online and offline shopping. We are building the future of flexible payments, and we're doing it at scale. Moving to our Venmo business, Venmo isn't just another payment app. It's the money movement platform of choice for the next generation. One of the things that continues to set Venmo apart is its user base, young, affluent, digitally native consumers who are shaping the future of commerce. With nearly 100 million total active accounts growing mid-single digits, Venmo has tremendous scale in this attractive demographic. We have a deliberate, sequenced strategy that's changing how these users engage with Venmo. At the core is maintaining our leadership as the best P2P platform in the market, attracting more funds into the Venmo ecosystem, driving omnichannel spending, and seamlessly integrating commerce into the Venmo app. We are already seeing results. Venmo is at a clear inflection, with TPV growing 14% in the third quarter, continuing to accelerate from 12% in Q2 and 9% in 2024. Pay with Venmo just hit a milestone: $1 billion of TPV in September alone, and Pay with Venmo monthly active accounts grew by nearly 25% in the quarter. We hit a new record with our Venmo debit card, which attracted 1 million first-time users in Q3, thanks in part to our college partnerships. Monthly Venmo debit actives grew by more than 40%. This has resulted in overall Venmo monthly active account growth accelerating to 7% year over year to nearly 66 million monthly active accounts. From a financial perspective, Venmo is on pace to generate $1.7 billion in revenue this year, excluding interest income. That's up more than 20% and a 10-point acceleration from two years ago. Under the surface, we are also changing our revenue mix and growing in high margin areas. Over the past two years, we've doubled Pay with Venmo and Venmo debit card revenue. Not only can Venmo become a more significant revenue driver as it scales, but it is also accretive to transaction margin. Here's what makes this so compelling. We're still in the early innings of monetization. Today, Venmo's average revenue per monthly active account sits at just over $25. While over 90% of Venmo's users engage with P2P, only 5% to 10% are using our debit card or Pay with Venmo, and less than 5% have set up recurring funds in. For the subset of accounts engaged across P2P, debit, and Pay with Venmo, which is still small today, ARPA is about 4x higher. For accounts that are also bringing funds in through direct deposit or instant add, ARPA is 6x higher. In other words, the upside on Venmo's revenue is a multiple of where we stand today. The good news is that adoption is accelerating. For example, new users today are adopting our debit card at nearly 4x the rate they were two years ago, giving us massive runway as we continue driving attachment of these high-value products. This is one of the reasons why we are investing in our college partnerships and introducing unique, personalized rewards that drive multi-product adoption and encourage balanced spending within the Venmo ecosystem. We're also expanding Pay with Venmo into new high-value use cases like our built partnership for rent payments. At Investor Day, we discussed growing Venmo revenue to more than $2 billion by 2027, and it's clear that the team's execution will allow us to deliver well beyond this over time. Taken together, these businesses, online branded checkout, BNPL, Venmo, and Omni, drove branded experiences TPV growth of 8% on a currency-neutral basis. Moving to our PSP business, our PSP volume growth accelerated to 6% from 2% last quarter, demonstrating that we are accelerating growth after rebaselining. This growth is profitable and contributed to transaction margin dollar growth in the quarter. We are doing this by continuing to build holistic relationships with merchants. Value-added services like payouts, adaptive payment optimization, and FX as a service deliver real, measurable value, including improvements to authorization rates and cost reduction. We're seeing merchants not only willing to pay for these capabilities, but actively requesting more of our services as they begin to recognize the benefits for their business. As we continue to expand our unified enterprise payments platform globally, we are bringing these margin-accretive services to new merchants from day one. We expect accelerated growth in this business as we expand the adoption of value-added services across our existing customer base and launch with Verifone as our first omnichannel solution provider in Q4, strengthening our position in the PSP market. While we accelerate growth in branded experiences and PSP, we are also aggressively innovating in agentic, ads, stablecoins, and digital wallet interoperability through PayPal World to establish avenues for future growth. I'll highlight just a few of our recent developments. We continue to partner with leaders across the agentic space, including Perplexity earlier this year, and in September, we announced our expansive multi-year partnership with Google to create new AI shopping experiences. This morning, we announced a significant partnership with OpenAI to expand payments and commerce in ChatGPT, including adding PayPal Holdings, Inc. branded checkout for shoppers and payment processing for merchants using instant checkout. This is a big win for PayPal Holdings, Inc. and our customers. Today, we also announced our own agentic commerce services, which help merchants sell through multiple AI platforms, including Google, OpenAI, and Perplexity. Merchants will have one integration to access consumers through multiple LLMs. Agentic commerce will take time, but we do believe consumer behavior will shift. PayPal Holdings, Inc. is building for that future. Finally, I'm very excited to share that PayPal World is officially in its pilot stage, and the first test transactions are happening this week. I'm proud of the progress that we've made this quarter, from partnerships to new product innovations to continuing to strengthen our profitability. With that, let me turn it over to Jamie to go into the financials in more detail. Jamie S. Miller: Thanks, Alex. Moving to slide 10, PayPal Holdings, Inc. delivered another quarter with good execution and real momentum across the underlying business. TPV and revenue growth both accelerated by 2 points from the second quarter. Transaction margin dollars, excluding interest, grew 7%, continuing the momentum we built through the first half. The drivers of that growth have been broad-based, led by strong credit performance, branded checkout flow-through, improvements in PSP profitability, and Venmo monetization. Growth across these areas was partially offset by higher transaction losses in the quarter. The diversification and quality of this growth is a meaningful improvement from where we were at the start of the company's transformation. We have clear opportunities to build on this progress with investments that strengthen our competitive position and drive durable, profitable growth. Moving back to third quarter financials, non-GAAP operating income grew 6%. Strong operating income, share buyback, and a favorable tax rate more than offset headwinds from lower interest rates, contributing to 12% growth in non-GAAP EPS. Adjusted free cash flow, which excludes the timing impact from the origination and sale of pay later receivables, was $2.3 billion or $4.3 billion year to date. Turning to slide 11, we are driving deeper, more active relationships with our customers. Monthly active account trends showed steady progress, up 2% year over year to 227 million. Transactions per active account, excluding PSP, which is a good proxy for engagement, accelerated to 5% growth. Moving to slide 12, total payment volume accelerated to 8% growth at spot and 7% on a currency-neutral basis to over $458 billion. We've moved branded experiences to the top of this slide to reflect the importance of this metric to our more expansive strategy and value creation. Looking across the product portfolio, we see encouraging signs that our initiatives are gaining traction and making an impact. Branded experiences TPV, which includes online checkout, PayPal Holdings, Inc., and Venmo debit, as well as Tap to Pay, posted another quarter of 8% growth. As Alex mentioned, U.S. branded experiences TPV growth accelerated to 10% in the quarter, benefiting from both omnichannel adoption and better trends in U.S. online branded checkout. While debit card and Tap to Pay spend represent a small portion of branded experiences volume today, they are growing rapidly, up 65% year over year, accelerating from last quarter. Venmo TPV growth accelerated two points to 14%, marking the fourth consecutive quarter of double-digit growth. On an online-only branded checkout basis, volume grew 5% on a currency-neutral basis. Compared to last quarter, there was less pressure on volumes from Asia-based marketplaces selling into the U.S. At the same time, this improvement was offset by pockets of softer consumer discretionary spending in Europe and the U.S. later in the quarter. Overall, we have seen relatively consistent growth in the number of checkout transactions, but basket sizes or average order value has decreased. While still early in a back-end loaded quarter, we've observed this trend continuing through October. We remain focused on the initiatives we can control. We're confident in our branded checkout strategy and the roadmap that our teams are advancing. The early results in the U.S. demonstrate that we're on the right path with our initiatives, including our redesigned experiences, Buy Now, Pay Later, and Pay with Venmo. We're laser-focused on execution across the three key areas Alex Chriss discussed: scaling our redesigned experiences, improving prioritization, and driving biometric adoption. All of this is increasingly complemented by a compelling consumer value prop that differentiates PayPal Holdings, Inc. and Venmo as one of the best, most rewarding ways to pay. While this work is complex and takes time, we fully expect to see our efforts build as we move through the next year and scale these initiatives. Pay with Venmo and Buy Now, Pay Later continue to outpace the market, taking share from other payment methods, growing 40% and 20% respectively. These results give us the confidence to begin making targeted investments in the fourth quarter that amplify the impact of these and other initiatives throughout the portfolio. Turning to PSP, which spans both enterprise and SMB processing, as well as parts of our vast portfolio like payouts, invoicing, and point-of-sale solutions, volume growth accelerated to 6% from 2% in the first half of the year. Our focus on prioritizing healthy, quality growth within our enterprise payments business is contributing to steady improvement in both revenue growth and transaction margin dollars. We expect to see ongoing improvement in the quarters ahead, supported by profitable frontbook business, our existing merchant base, and the attachment of value-added services. Moving to more financial detail on slide 13, transaction revenue accelerated to 6% growth on a spot basis to $7.5 billion. Other value-added services revenue grew 15% to $895 million, driven by another quarter of strong performance in consumer and merchant credit. We've also been encouraged by growth in customer balances and the impact of our initiatives designed to encourage customers to bring more funds into the ecosystem. While lower interest rates are still a headwind, a portion of this impact has been offset by higher balances. We continue to be pleased with the quality, diversification, and performance of our credit portfolio. In September, we took another step forward in line with our balance sheet light model for credit, externalizing a portion of our short-term U.S. pay later receivables with Blue Owl Capital. We ended the quarter with $6.4 billion in net loan receivables, down 8% sequentially. Transaction take rate declined by three basis points to 1.64%, driven largely by product and merchant mix as well as the impact of foreign exchange hedges. This decline was an improvement relative to last quarter and included less impact from foreign exchange hedges and enterprise processing. Online branded checkout take rates continue to be relatively stable year over year, reflecting our transaction and merchant mix as well as our focus on profitable growth. As I mentioned earlier, TM dollars ex interest grew 7%. TM dollar growth included a one and a half point headwind from higher volume-based expenses, largely transaction loss provisions resulting from the temporary service disruption in August, which primarily impacted Germany. There was also a slight benefit, less than one point, from the Blue Owl pay later externalization I referenced earlier. Setting aside the impact of loss provisions related to the August service disruption, we've seen an improvement in transaction loss rates relative to last quarter. Non-transaction related OpEx increased 6% as we continue to actively manage our cost structure while reinvesting in key growth initiatives. Non-GAAP operating income grew 6% in the quarter to nearly $1.6 billion. Moving to capital allocation, as you saw in our materials and heard from Alex, I'm excited to share that we are initiating a dividend as part of a disciplined capital allocation strategy. Our strong free cash flow generation and balance sheet give us ample room to both deploy capital for growth and return capital to shareholders. In general, we continue to target about 70% to 80% of our free cash flow for capital return, with the vast majority going to buyback. The dividend serves as a complement to our existing buyback plans and will be calculated based on a 10% payout ratio relative to net income. This quarter, we completed $1.5 billion in share repurchases, bringing share repurchases over the past four quarters to $5.7 billion. Finally, we ended the quarter with $14.4 billion in cash, cash equivalents, and investments, and $11.4 billion in debt. Moving to guidance on slide 14, following another quarter of strong financial performance, we are raising our full-year guidance for TM dollars and non-GAAP EPS. For the fourth quarter, we expect currency-neutral revenue growth in the mid-single digits. We expect fourth quarter TM to be between $4.02 billion and $4.12 billion, which represents about 3.5% growth at the midpoint. Excluding interest on customer balances, we expect TM dollars to grow by about 5% at the midpoint compared to 7% year to date. Setting interest rates aside, there are a few factors to highlight that impact our fourth quarter outlook. First, we have seen strong credit outperformance over the past year, driven by good execution from the team, as well as a more benign loss environment. We expect to see year-over-year comparisons start to normalize more in the fourth quarter. Second, given the performance of some of our key initiatives, we see an opportunity to lean into our competitive differentiation with additional investment to drive faster growth over time. In the fourth quarter, we will begin increasing investments designed to drive product attachment and habituation. Some of these investments are linked to volumes and therefore recorded as contra revenue, impacting TM dollars and designed to drive additional growth over time. Other growth investments, such as global brand awareness campaigns, typically sit within marketing and non-transaction OpEx. Lastly, on TM, our fourth quarter guide assumes some deceleration in branded checkout growth relative to our third quarter average. From a volume perspective, the most important weeks and months of the quarter still lay ahead. That said, we are planning prudently given recent spending trends and the uncertain macro backdrop. We are also cognizant of lapping strong consumer spending in the fourth quarter of last year. Moving to OpEx, we are planning for low single-digit non-transaction OpEx in the quarter and expect about 3% growth for the full year. We expect to deliver fourth quarter non-GAAP earnings per share in the range of $1.27 to $1.31, up 7% to 10%. For the full year, we are raising our transaction margin dollar guidance by $100 million at the low end and $50 million at the high end to a range of $15.45 to $15.55 billion, which represents 5% to 6% growth. Excluding interest, we expect transaction margin dollars to grow between 6% to 7%. We are raising our full-year non-GAAP earnings per share guidance to a range of $5.35 to $5.39, growing at 15% to 16%. Our guidance continues to project approximately $6 billion in share buyback and full-year adjusted free cash flow of approximately $6 to $7 billion, which excludes the timing impact of the origination and sale of pay later receivables. I'd like to wrap up by thanking the PayPal Holdings, Inc. team for their hard work and execution this quarter. We are making tangible progress across the business, and the foundation we're building positions us well for continued growth ahead. With that, back to you, Alex. Alex Chriss: Thanks, Jamie. We are operating from a position of strength. The results you're seeing are proof that our strategy is working. We built a more balanced, profitable growth engine across branded experiences, PSP, and Venmo, and that's exactly what we set out to do. We're investing in high-impact growth initiatives that will move the needle and future-proofing the business with critical partnership, while simultaneously returning value to shareholders through our buyback program and our newly launched dividend. We've moved this business from defense to offense, from stabilization to acceleration. We know exactly where the opportunities are, and we are laser-focused on executing our strategy. With that, Steve, let's go to Q&A. Steve Winoker: Before we open the lines for Q&A, I'd like to ask everyone to limit themselves to one question so we can get through as many of your fellow analysts as possible. Sarah, please open the line. Sarah: Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Tien-Tsin Huang with J.P. Morgan Payments. Your line is open. Tien-Tsin Huang: Hey, thanks a lot. Good morning here. I just want to ask about agentic commerce. It's a popular topic here at Money2020, and I'm not sure how to ask it, Alex and team, but maybe I'll just rapid-fire a few, if you don't mind. Has agentic commerce changed PayPal Holdings, Inc.'s strategic priorities in any way? What's your right to win? Can you fully fund investments here without sacrificing your incremental margins? Of course, you've announced a lot of key partnerships like OpenAI today, Perplexity, Google, et cetera. Do you have the coverage you need to drive ubiquity, or is there more work to do on the partner front? It seems like there's a lot of talk about collaboration, and you guys are definitely in the center of all that. Just love to hear your thoughts on all of that, if you don't mind. Thanks. Alex Chriss: Love it. Thanks, Tien-Tsin, and hope you're enjoying Money2020. We've got a good contingent there as well. To hit on a few of those, first, from a prioritization, from a priority question, not really, right? Our strategy we've laid out very clearly is that we want PayPal Holdings, Inc. to be available anywhere and everywhere that consumers want to pay, and we want merchants to be able to sell to consumers anywhere and everywhere. We've talked about this even back at Investor Day, where we laid out we want it to be online, we want it to be in-person, and we want it to be agentic. Agentic is just an evolution of this strategy. In terms of our right to win, we actually think we're extremely well-positioned to win here. Let me just lay out a couple of the different components. First, on the merchant side, merchants are going to need to figure out how to integrate with each of these LLMs. That's hard because there's multiple LLMs that are out there. Whether you're a large enterprise or a small business, you really don't have the bandwidth to go figure out how to integrate with each and every one of these LLMs, make your catalog available, understand the identity and fraud protection that comes with each of these different elements. What we announced today was our PayPal Holdings, Inc. agentic commerce services, which enables merchants to integrate once with PayPal Holdings, Inc., a partner that they've known and loved and integrated with for years, and be able to orchestrate their services to every LLM that's out there so that they get full coverage of consumers. That is a huge win for merchants. We give them seller protection. We give them the ability to scale across all the different LLMs. From the consumer standpoint, we're, again, very well-positioned. We've got the largest wallet ecosystems that are out there, and our ability to give consumers the trust, the safety, the buyer protection, and the ability to get access and make purchases on any of the LLMs they want to is a huge win. They get to use the wallet that they know and love and have a great end-to-end experience, which includes not only the purchase through the LLM, but also then all of the things that happen afterwards, whether it's package tracking or customer service or returns. That's, again, a big win for consumers. For the LLMs themselves, it would take over a decade if they wanted to go and try to build the same kind of merchant ecosystem of the head, the torso, and tail of merchants that PayPal Holdings, Inc. has established over the last couple of decades. Instead, they get to partner once with us and get access to tens of millions of merchants with identity authentication, fraud protection, and payment processing on a global scale. We really feel like we are connecting this ecosystem together. It will take time for agentic to eat into overall purchasing, but if you think about it, we want to meet customers where they are: online, offline, agentic, and PayPal Holdings, Inc. is in a very strong position there. As far as investments, Jamie, do you want to hit on that? Jamie S. Miller: Sure. These partnerships do entail some level of investment, whether that's in product and tech or around co-marketing, things that really drive usage and habituation around the product. I mentioned in my prepared remarks that we would be reinvesting, begin reinvesting some of our margin dollars in the fourth quarter to really amplify some of our product initiatives. Between the push into agentic and that, some of those investments are likely to be a near-term headwind to how fast transaction margin dollars or earnings grow next year. We are really excited about understanding what's working and really putting our dollars behind that and the core business, in addition to really advancing our initiatives across the business on things like agentic. Alex Chriss: The last part of your question was ubiquity. We obviously feel like we've got the largest breadth of merchants. We obviously have the largest breadth of consumers. Now with the partnerships, we've already announced OpenAI, Perplexity, Google. As we look to partner with any of the LLMs that are out there, we think we've got actually quite good scale and ubiquity across the ecosystem. We are very well-positioned to win as agentic commerce continues to evolve. Sarah: The next question comes from Harshita Rawat with Bernstein. Your line is open. Harshita Rawat: Hi, good morning. I want to ask about branded. I know you highlighted some headwinds and the 5% growth number. You highlighted some kind of deceleration in the fourth quarter. I'm also thinking you have some benefit from Pay with Venmo and the Buy Now, Pay Later promotion in the holiday season. Going back to the Investor Day, you laid out the path to branded acceleration. I know it's not linear. How should we think about just the overall path from here? Should we focus more on slide four, right, that you highlighted, which is very helpful, which focuses on more diversified drivers of growth? Thank you. Jamie S. Miller: Yeah, Harshita, maybe I'll answer that in two parts. I'll talk about fourth quarter and then really talk about the broader investor framework. We've had consistent mid-single digit growth in branded checkout for multiple quarters now. For the quarter, we've seen really good momentum across our growth initiatives with Buy Now, Pay Later, with Pay with Venmo. We've seen continued U.S. growth at higher rates as well this quarter. When we got into September, we began to see macro-related deceleration, and that is both in the U.S. and in Europe. I talked about it in my prepared remarks, but really a relatively consistent number of transactions. We're seeing basket sizes just trade down, average order value being down, particularly in retail where consumers are just being more selective. That behavior has continued into October. Obviously, it's really early in the fourth quarter. The holiday season is very back-end loaded. It's something we're watching. We did call out, and you're right, our guidance assumes a rate of growth lower than that of third quarter. When you look at that macro, and I pivot now to talking about the broader framework, we've seen very good progress. I think what I'm most excited about is we know what's working, and we're really doubling down against that. Alex has talked a lot about Buy Now, Pay Later. We've talked a lot about Pay with Venmo. Importantly, year to date in the U.S., our growth rates are higher than what we saw year to date last year in the U.S. We're really seeing nice progress. That macro piece of it, whether it's tariffs or some of this deceleration, is offsetting our progress. We set those 2027 targets, assuming a consistent consumer macro environment. Ultimately, that's how we'll measure progress against that. What I am excited about is we have scaled our initiatives in the U.S. first. Where we see progress, we've got real confidence as we scale outside of the U.S. and internationally. I think we've invested in the right products. We're seeing customer adoption and engagement around the things we've talked about, in addition to things like omnichannel initiatives and places where we get other halo effect. The investments we're making are really predicated on our confidence and our ability to continue to build on our progress as we get through the next couple of years. Sarah: The next question comes from Dan Dolev with Mizuho. Your line is open. Dan Dolev: Hey, guys. Great results, as always. Just wanted to ask a quick question in a very, very short follow-up. On Buy Now, Pay Later, huge momentum here. Can you maybe give us sort of the lay of the land, like how you view, Alex, the industry? Who are you gaining share from most and in what territories? I just have a super quick follow-up for you, Jamie, on the investments next year. If there's any way to quantify that, that would be great. Those are my questions. Thank you. Alex Chriss: Great. Thanks, Dan. Look, we're very excited about BNPL. We see this as one of those generational shifts that's happening now. We're seeing not only in the results, but also just as we talk to customers, particularly a younger generation is moving more and more towards debit and BNPL as the way that they want to make purchases. We think we're incredibly well-positioned to win there. As you said, we're seeing good growth. We're actually seeing growth across the board. U.S. MAs are up 21% in Q3. TPV continuing to grow pretty consistently over 20%. This is a product that people love. An NPS of 80 is quite incredible. From a strategy and a share perspective, we think we have something unique. We have a brand that people know and love. We have a global scale. Not only seeing good gains in the U.S., but we continue to expand our global footprint. It just expanded to Canada within the last week or so and continuing to expand the offerings across the board and across Europe. We're also moving to where customers want to pay as well, not just online, but moving in store. We started in Germany and are now expanding that in the U.S. We really see BNPL as one of those growth drivers for us. The other big shift that I would want you to be aware of is most of our BNPL, and again, we're on track to do $40 billion or so of TPV in 2025. Most of that has come almost after they've chosen the PayPal Holdings, Inc. button choice. For many customers, that's actually too late. They want to make a choice upfront when they're making that purchase, and they want to see what that payment could look like if it was split into a few payments. Strategically, we're now meeting our customers where they are, and think we have a really exciting expansion opportunity to be upstream in presentment. Again, with a brand that people know and love, with a product that they're already familiar with and using, when we get upstream into some of these purchases, we think we have the opportunity to continue to accelerate. Very, very excited with BNPL and something that we're going to invest in to win over the next few years. Jamie S. Miller: Dan, with respect to the second part of your question, it's early. We are still working our 2026 plan, and we plan to take you through that on our February earnings call. When you look at the types of investments that we're talking about, these are targeted really around product attach and habituation. Things like merchant co-marketing, cashback offers, and rewards, and things around better placement and presentment drive right back into the business and around growth. We'll have some more information for you on that in a couple of months. Sarah: The next question comes from Sanjay Sakhrani with KBW. Your line is open. Sanjay Sakhrani: Thank you. I want to dig into the really strong growth momentum at Venmo, where the revenues have been consistently growing 20%. Alex, you mentioned sort of the multiplier of upside from here. Could you maybe map that out for us in terms of how we should think about the growth rate you've posted recently and what you could do next year and beyond, given all the different initiatives you have in place inside of Venmo? Alex Chriss: Yeah, thank you. We, Sanjay, are equally excited about the trajectory that Venmo is on. Let me just pull back and talk a little bit about where Venmo was a couple of years ago and the contours of where we're moving. Venmo a couple of years ago was an incredible P2P product, a brand in the U.S. that was a verb. It was the way a younger, very valuable demographic was moving money amongst themselves. That was a very strong starting position. The challenge was we really weren't meeting customers where they are. Money was moving from a P2P perspective, but if you were splitting a meal, you couldn't actually pay for that meal in person. You had to use a different instrument. We've expanded what Venmo means to this demographic. We're now meeting them where they are and enabling them to make purchases in person, online, move money between each other, as well as starting to think about different experiences that they're having together. I'll touch on that in a minute. If you look at what that means, it means that not only are we continuing to grow our active base, so MA is up 7% year over year at 66 million. That's very strong. Now we're starting to see real penetration into two of our monetization levers. Debit card MAs are up 43%. Pay with Venmo MAs are up 24%. This is starting to drive ARPA up. ARPA is up mid-teens year to date. When you put all of that together, I still feel like we're just scratching the surface. If I look at us versus peers from an ARPA perspective, we are a third to a quarter of what I believe our potential is over time. We're starting to now see really good adoption of the cards that we're putting in, the debit card and Pay with Venmo. All of the trajectory is moving in the right direction. What you're going to start to see on top of that is new products and services coming in. The way that we've talked about it is Venmo is a social product. It's the product that you're using oftentimes with other people. You look at the announcement that we made yesterday with Built to be able to make rent and mortgage payments. Oftentimes, this is a demographic where they're making rent payments because they're living with others. They were using Venmo after the fact to move money across. Now we're enabling them to make their rent payments and split their rent payments upfront with that kind of partnership. You are going to see more of those types of things from us over the coming months as we start to think about all of those experiences that this incredible demographic is using to be able to move money across. We think we are just scratching the surface of the ARPA that is available. We have good proof points of the monetization levers of debit card, Pay with Venmo, and now we are expanding into other experiences where folks can go. Our go-to-market campaigns are working as well. You have seen the success of the college partnerships that we put out that drove over 1 million FTUs of debit card in Q3 alone. We are really, really excited about where this is going. It is starting to bring in very, very valuable merchants as well. Whether it is eBay or Ticketmaster, Sephora, Taco Bell, DoorDash, TikTok, these are all merchants that really want access to this demographic. Venmo is the best way to get access to them. We are just getting started, excited about the growth trajectory, and we expect this to continue well into the future. Sarah: The next question comes from Darrin Peller with Wolfe Research. Your line is open. Darrin Peller: Hey, guys. Thanks, and congrats on the OpenAI and the dividend announcements. I just want to touch on the exit growth rate of the year for a minute. I know you're guiding 2% to 5% for transaction margin growth. Maybe the puts and takes of what that could compare when you think about trending into 2026 and how we should think about next year in the context of the exit rate. I know you talked about investments being made, obviously, for all these initiatives. How does that impact our thought process on operating leverage and just overall investment EPS potentially for our next year as well? Whatever you can comment. I know it's early. Thanks, guys. Jamie S. Miller: Yeah. Good morning, Darrin. I'll stay away from giving 2026 guidance, but I will give you some color on the fourth quarter transaction margin dollars and what we expect to see there. You know, to some level, we've got some impact from interest rate cuts coming in the fourth quarter. In the credit business, we've got tougher comps. You may remember that we really got that business back to growth in the fourth quarter of last year, and we just have tougher comps coming into the fourth quarter this year. I mentioned some level of investments in growth initiatives as well. With what we're seeing on macro, you know, we want to be prudent in terms of how we guide there. Across the portfolio, the product initiatives, I think what's probably important to call out is that some of this goes through transaction margin dollars. Other parts go through OpEx. Things like investment in product and tech and brand marketing, things like that go through OpEx. As we work our plan, you know, we work across all of that to really get to the right mix as we get into it. We'll take you through more in a couple of months, but hopefully, that's some color for you. Alex Chriss: Hey, Darrin. I want to, without going into the details for next year, I do though want to set a mindset for us because this is what we're thinking about internally. You know, I've mentioned, and we've talked about it so far on this call, a couple of big shifts that we see in the market. I want to call that out. We see three pretty significant generational shifts right now. One is a massive shift to digital wallets, and this is globally. The second is a real shift to Buy Now, Pay Later. Again, a younger generation that's now moving the way they're spending. This, we think, can start to take share away from credit cards and be the way that this new generation is going to start to pay. The third shift we've talked about is towards agentic commerce. These are all three massive shifts that can recast the entire commerce landscape. We think we're extremely well-positioned in all three of them. If you look at digital wallets, we have leading wallets such as PayPal Holdings, Inc. and Venmo we just talked about, and we have our expansion into PayPal World, which continues to connect wallets around the world. In Buy Now, Pay Later, we just talked about upstream presentment. We talked about the expansion and the trajectory we have there. We've talked earlier about agentic commerce and the shift that's happening in our ability to lean in and win. The mindset that we have from a company is these are generational shifts that we are well-positioned and we must win in. We are going to invest appropriately. Those investments may very well lead to some near-term headwinds in how fast transaction margin dollars and earnings grow in 2026. We'll come back with more details as we think through that. Our goal is to win these markets and set ourselves up for faster, durable growth in the future across all of commerce. I just wanted to set that tone. Sarah: The next question comes from Jason Kupferberg with Wells Fargo. Your line is open. Jason Kupferberg: Good morning, guys. Thanks for taking the question. You obviously had a nice beat here on transaction margin dollars in the quarter. It seems like the branded business came in right in line with your expectations. The OWAS revenues were quite strong. I wanted to just unpack the sources of transaction margin upside in the quarter a bit. If you can give us a relative sense on how much of that upside came from the credit products versus some of the other drivers, and then just any quick comments on how you see cadence of additional penetration of the new checkout experience moving beyond the 25% level as we move into next year. Thanks. Jamie S. Miller: Thanks, Jason. Good morning. Really, when you look at third quarter transaction margin dollar performance, we had meaningful contribution across each of branded checkout, Venmo, PSPVAS, and credit. What's important there, and we really tried to highlight this in our prepared remarks as well, is that we've got nice diversification not only on the revenue side, but on the margin sources. I think that's demonstrative of that. Alex Chriss: Yeah. On the penetration, we've talked a little bit about it. Just to set the tone, we really started in the U.S. We now are roughly 25% of global transactions. Even under that 25%, though, about half are actually optimized. We're really working through how do we nail the overall pay sheet improvement, the biometrics that we're starting to put together. When all of that comes together, the pay sheet and the biometrics, we're actually seeing conversion rates increase 2% to 5%. We know we have a winning product. It just is taking time. I'm as impatient as anyone. I want to see this move as fast as we can. We're talking about bending the curve on over half a trillion dollars of spend, and it's just taking time to get there. We have confidence, as Jamie mentioned earlier, U.S. branded checkout is growing faster year to date than it did in 2024. We know the experiences are working. We're now rolling it out in Europe. We expect that to continue through 2026. In the meantime, we're leaning into BNPL growing north of 20%, Pay with Venmo growing north of 40%. We know that overall in branded checkout, we're on the right path. It's just taking time. Sarah: The next question comes from Will Nance with Goldman Sachs. Your line is open. Will Nance: Hey, I appreciate you taking the question. I wanted to dig in a little bit on the BNPL volumes. Just a couple of questions here. I guess first, if you could just quantify some of the run rate financial impacts you're expecting on the Blue Owl offloading, just any help with the geography of those impacts on the P&L if we think about that going forward. Maybe a big picture question on the BNPL growth. Obviously, very strong. I think you've said in the past that the branded numbers or the branded volumes are roughly 40% U.S., 60% international. Do the BNPL volumes skew meaningfully differently? Any color on what you're seeing from a geographical perspective in terms of adoption and penetration of branded volumes in BNPL? Thank you. Alex Chriss: Yeah. Let me take that second part, and then Jamie can lean in. BNPL, right now, we're looking at less than 30% of originations in the U.S. This is still a very global business. It's one where, as I mentioned earlier, what we're excited about is really an expansion of our strategy into upstream presentment. We think that's going to be a big, big shift and opportunity for us, as well as a change as we start to expand into omnichannel. Being able to move Buy Now, Pay Later into in-store, you know, it's interesting. The dynamics of how we're seeing people shop is it's not just hard lines of in-store or e-commerce. There are a lot of people that are shopping on their phone and then wanting to pick up in-store, and that's where they get the opportunity to do their Buy Now, Pay Later purchase. All of this is coming together in a holistic product. Again, we're seeing the flywheel effect of BNPL as well. When somebody starts to leverage BNPL, there's a lift in engagement. Their TPV is up 35%, and we start to see their ability to use us for all purchases. This is, you know, it's very interesting just to see the dynamics of purchase behavior. I think in the past, as e-commerce and commerce in general was evolving, there were much harder lines. What we're seeing from customers now is they want to pay when they want to pay. Sometimes it's pay now. Sometimes it's pay later. Where they want to pay, online, in-store, or agentic, and how they want to pay, whether it's with their friends, whether it's with crypto, whether it's the wallet from their home country. We now have a strategy that enables us to meet them everywhere they are. Exciting trajectory there. Again, you're going to see us lean in even more into BNPL over the coming years. Jamie S. Miller: Yeah. With respect to the first part of your question on Blue Owl, we had a small impact in the quarter, but that was net neutral to operating income, which both raised margin a bit, but also was offset in OpEx. With respect to 2026, there's a small impact to 2026 OpEx in terms of increasing the run rate. Alex Chriss: Hey Sarah, let's make time. I know we're past the top of the hour, everybody, but let's make time for one last question if we can. Sarah: Thank you. Your last question will come from Timothy Chiodo with UBS. Your line is open. Timothy Chiodo: Great. Thank you. I think we've covered some great numbers on the BNPL business today. I was hoping we could round it out with a few more, and this would help us in comparability to some of the competitors in Affirm and Carta. I was hoping you could give a little bit on the mix of paying for versus some of your longer-term pay monthly loans. Also, maybe touch on the loss rates. What I think investors really want to get down to is balancing those losses and potentially more favorable funding mix for the repayment. What really is the transaction margin dollar net take rate per unit of BNPL volume so that we can compare that to metrics like RLTC as a % of GMV for Affirm? Thanks. Jamie S. Miller: Good morning, Tim. You've packed a lot into that, so I'm hoping I remember it all. Let me start with sort of thinking about unit economics on the core product. First, with respect to what type of product is it, most of this is paying for, pay monthly. We've got about an average turn on the portfolio of Buy Now, Pay Later of about 40 days. When you think about that compared to peers, the duration of the portfolio is a much higher turn than maybe some of the others you look at. Secondly, as we price it, our economics are on par or better than our peers. The thing I'd really point you to here is when we look at Buy Now, Pay Later, we do run it at the business level, but we look at it much more holistically at the total branded checkout or PayPal Holdings, Inc. level around how do we habituate and engage our consumers around the brand and across the brand and drive sustained lift or a halo across that with Buy Now, Pay Later adoption. It just drives stickiness. We really see. Alex Chriss: to 40% sort of incremental usage of branded checkout, and that stays with us as the consumer continues to spend with BNPL. We're expanding through new geographies, as Alex mentioned, really focused on driving consumer experience and marketing dollars. Hopefully, that gives you a little bit of color as to how to compare. Steve Winoker: Hey, Alex. Any final thoughts before we wrap? Alex Chriss: Thank you, everyone, for your questions. As you can hear from us, it is an exciting time at PayPal Holdings, Inc. We mentioned some of these significant generational shifts, and that makes it exciting to be at the forefront and a leader in this space. We have got the right plan. We are making great progress and delivering results along the way. I look forward to updating you as we continue to make progress. Take care, everyone. Jamie S. Miller: Thank you. This concludes today's conference. Thank you for participating. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Arcutis Biotherapeutics 2025 Third Quarter Financial Results and Investor Day presentation. [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, Brian Scholkoff, Head of Investor Relations. Please go ahead. Brian Scholkoff: Thank you. Good morning, everyone, and thank you for joining us today to review our third quarter 2025 financial results and business update. And for our extended Investor Day presentation, slides for today's call are available on the Investors section of the Arcutis website. Joining me on the call today are Frank Watanabe, President and CEO of Arcutis; Todd Edwards, Chief Commercial Officer; Patrick Burnett, Chief Medical Officer; and Latha Vairavan, Chief Financial Officer. We will also be joined later in the call by Douglas DiRuggiero, a certified physician assistant and doctor of medical science, who has specialized in dermatology for the past 25 years and is the founding President of the Georgia Dermatology Physician Assistant Society. I would like to remind everyone that we will be making forward-looking statements during this call. These statements are subject to certain risks and uncertainties, and our actual results may differ. We encourage you to review all of the company's filings with the Securities and Exchange Commission, including descriptions of our business and risk factors. With that, let me hand it over to Frank for a brief introduction of today's call. Todd Watanabe: Thanks, [ Brian], and thanks to all of you for joining us today and freeing up some additional time in your calendars for what we believe will be a compelling review of the strong foundation of our business today and a more in-depth look at our strategy to sustain our growth in the future. We'll start today's call by reviewing our commercial and financial results for the third quarter. As you'll hear from Todd and Latha in a moment, we achieved yet another strong quarter with robust net product revenue growth and continued steady growth of prescriptions across all approved formulations and indications for ZORYVE. We'll then move on to the Investor Day presentation, where we'll do a deep dive into why we are excited by and confident in the future of Arcutis and our unique potential to address key unmet needs for patients impacted by immune-mediated dermatological diseases. Today's discussion on our corporate strategy is timely and pertinent as we approach cash flow positivity, enabling us to self-fund investments in our business that will sustain the continued growth of Arcutis. Our excitement is grounded first in the outstanding growth opportunities for ZORYVE, a revolutionary topical agent that is already reshaping the treatment of chronic inflammatory skin diseases and impact we foresee only amplifying in the years ahead. As you'll hear today, we have multiple opportunities to grow and further expand our ZORYVE business, and we have the capabilities and resources to exploit those opportunities. We'll also go into more detail today about our exciting pipeline building efforts, starting with ARQ-234, a novel biologic with best-in-class potential to address a large unmet need in atopic dermatitis. Complementing the ZORYVE franchise, ARQ-234 and future pipeline opportunities will enable us to extend our mission to champion meaningful innovation for patients impacted by immune-mediated skin conditions and strengthen Arcutis' position as one of the industry's most consequential medical dermatology powerhouses. I'd also like to take a moment to thank the Arcutis team for their efforts and commitment to bringing better outcomes to patients living with serious skin diseases. Their unwavering dedication underlays our achievements to date and will be the foundation for the ambitious plans we discussed today. So thank you all again for taking the time to join us today. And now I'll turn the call over to Todd for our Q3 commercial update. Todd Edwards: Thank you, Frank, and good morning, everyone. Turning to Slide 6. As Frank noted, we continued to deliver strong revenue growth, driven by the increase in adoption of the ZORYVE portfolio by both patients and clinicians across all improved indications. In the third quarter, we generated net product revenues of $99.2 million, reflecting 22% sequential growth and a 122% increase compared to the same quarter of 2024. The substantial revenue expansion was fueled by growing demand for ZORYVE supported by rising prescription volume across all products in our portfolio. This accessible launch is a reform for the treatment of plaque psoriasis, the scalp and body contributed meaningfully to the expansion in demand and helped to offset typical third quarter seasonality headwinds. Improved gross to net rates during the period also contributed to sequential sales growth driven by reduced utilization of patient co-pay programs as patients progress through their annual deductibles earlier in the year than anticipated. As a result, we expect the quarter-on-quarter gross to net improvement will be more limited in the fourth quarter, consistent with historical trends with only modest additional benefit expected from co-pay program usage. On Slide 7. Consistent with previous quarters, our Q3 growth was driven by sustained demand growth across all strengths and indications. Total prescriptions for ZORYVE increased by 13% compared to Q2 and by 92% versus Q3 2024. Weekly prescriptions on a rolling 4-week average basis reached a new record high with over 17,000 scripts. Following the FDA approval as the [ reform ] is 0.3% of the treatment of plaque psoriasis, the scalp and body in May and a subsequent launch in June, we experienced particularly strong performance from the foam product, with product revenue increasing by more than 25% versus the prior quarter. The inflection in total ZORYVE volume following the launch as illustrated in the graph, demonstrates the significant impact of this new indication launch. Importantly, we also continued to see steady and growing volume for ZORYVE cream 0.3% during the period, reflecting sustained demand across both formulations in plaque psoriasis. Overall, our sustained momentum in Q3 highlights ZORYVE's exceptional utility, the growing confidence in our brand among both clinicians and patients and more importantly, the broader treatment shift driven by steroid conversion. In today's presentation, we will further discuss the dynamics behind the shift away from topical clinical steroids. And I look forward to sharing the additional actions we are taking to catalyze and accelerate this transition in the near term. Looking ahead to the fourth quarter, we anticipate continued strong net sales growth driven by increased patient demand, even as we expect only nominal improvements in our gross to net rate compared to the third quarter. This growing demand will be further supported by the launch of ZORYVE cream 0.05% for atopic dermatitis, age 2 to 5 years old. With that, I'll turn the call over to Latha to review Q3 financial results. Latha Vairavan: Thank you, Todd. I'm now on Slide 8. As Todd just reviewed, we generated net product revenues in the third quarter of approximately $99.2 million which is up 122% from Q3 of 2024 and 22% from Q2 of this year. Cost of sales in the third quarter were $8.7 million compared to $5.5 million in Q3 2024, primarily driven by increased ZORYVE rev sales volume. For the third quarter, our R&D expenses were $19.6 million versus $19.5 million for the corresponding period in 2024. Our R&D spend was consistent with prior year as clinical expenditures shifted from ARQ-255 to pediatric [ reforma last ] studies. Moving forward, we expect an increase in our R&D spend in 2026 as we continue to advance ZORYVE life cycle management, clinical development activities and initiate our Phase I trial of ARQ-234. SG&A expenses were $62.4 million for the third quarter of 2025 versus $58.8 million in the same period last year, a 6% increase attributable to investments in our continued commercialization efforts of ZORYVE, but SG&A expenses were down approximately 10% as compared to the second quarter of 2025 primarily due to a decrease in promotional and marketing spend resulting from timing of expenditures between quarters. Net income for the quarter was $7.4 million compared to a net loss of $41.5 million for the same period last year and a loss of $15.9 million for the second quarter of 2025. The net profit generation in the quarter was driven by the $17.7 million of sequential increase in net sales concurrent with a $5.4 million reduction in operating expense. While we do not expect our net income to remain positive in the near term, the improving operational leverage that we demonstrated in the quarter with growing net sales contribution from ZORYVE outpacing increases to our core expense base speaks to the profit generation capacity of the ZORYVE franchise. We previously communicated that we anticipated achieving cash flow breakeven in 2026. However, the continued momentum of ZORYVE net sales growth, combined with our expense discipline has facilitated the acceleration of this important milestone, and we now expect to achieve cash flow breakeven in the fourth quarter of 2025. Now turning to Slide 9. Our cash and marketable securities balance as of September 30, 2025, was $191 million, with cash burn from operations of $1.8 million for the period. We have total debt of $108.5 million and have the option to withdraw another $100 million in whole or in part at our discussion through the middle of 2026 providing us with the flexibility to invest in the continued expansion of our business. The success of the ZORYVE franchise and the economies of scale we are generating will permit us to invest in the business for the sustained growth over the years ahead. I will elaborate on this when discussing our capital allocation strategy later in today's presentation. With that, I'll turn the call back over to Frank to kick off the Investor Day portion of today's call. Todd Watanabe: Thanks, Latha. We founded Arcutis in 2016 to address what we saw as a significant innovation gap in the immunodermatology drug development space. We recognize that the vast majority of dermatology patients were being treated by older therapies that offered inadequate efficacy, did not target specific disease mediators and/or carried substantial safety and tolerability issues. So we set out to identify, develop and commercialize best-in-class molecules that would address unmet needs in dermatology by directly targeting immunological mediators of inflammatory diseases. We have been extremely focused, deliberate and successful against this goal, steadily executing on the promise of ARQ-151 and ARQ-154, now known as ZORYVE Cream and ZORYVE Foam as a true pipeline in a molecule opportunity. As we approach the significant milestone of achieving cash flow breakeven, we've been thoughtfully planning Arcutis' next phase where we will apply the same focus and dedication to ensuring long-term growth, success and most importantly, continued impact for patients. As outlined on Slide 11, Three pillars provide the strategic framework for sustaining our company's near- and long-term growth. First, we will continue to grow our core ZORYVE business as we establish ZORYVE as the foundational therapy for adults and children who need ongoing therapeutic solutions for managing psoriasis, [ cebroid ] dermatitis and atopic dermatitis. A significant component of the grow pillar is our sustained efforts to meet the increasing calls for safer, more targeted topical alternatives to topical steroids. A topic we will be spending a good deal of time today talking about. This pillar also includes our efforts to expand into primary care and pediatrics and in-line growth opportunities, such as our recent launches in scalp and body psoriasis and pediatric atopic dermatitis and incremental data generation opportunities to bolster ZORYVE's position for our currently approved indications. Second, we plan to expand the ZORYVE franchise through strategic life cycle management. Specifically, we are evaluating new potential indications that represent significant unmet needs and where patients would benefit from ZORYVE's unique profile. Our new indication exploration, a core tenet of our clinical development strategy will be guided by a large body of case reports from clinicians who have used ZORYVE in various other inflammatory dermatosis and have seen encouraging signs of efficacy. And finally, we will build our pipeline advance by advancing other innovative medicines for patients, leveraging the best-in-class clinical development and commercialization capabilities we have developed at Arcutis. Our focus initially will be on ARQ-234 and in parallel on potentially sourcing promising external innovation. As you'll see on Slide 12, we've designed today's agenda to align with these 3 strategic pillars I just reviewed. We'll cover sustainable growth drivers for ZORYVE's current indications. As part of the presentation, Patrick will host a Q&A with the imminent dermatology physician assistant, Douglas DiRuggiero to gain a clinician's perspective on the changing treatment landscape. We'll follow this with an overview of our expansion efforts, including our exploration of potential new indications for ZORYVE with initial efforts in vitiligo and [indiscernible]. And finally, on the ZORYVE re front, we'll provide some insights into peak sales potential. We'll then move forward to a discussion of our pipeline building strategy, which will include a review of ARQ-234 and its opportunity to address a significant unmet need in atopic dermatitis and an overview of our framework for evaluating business development opportunities. Lastly, we'll wrap up with a review of our capital allocation and balance sheet strategy before opening up the call to Q&A. With that, let's dive right into the agenda. Turning to Slide 13. It's been just over 3 years since we received our first FDA approval for ZORYVE. Since that time, and as we've demonstrated yet again today with our Q3 financial results, we've achieved meaningful and sustained growth in our 3 current indications through a steady drumbeat of new formulations expanded adoption within those syndications and strong execution, leading to consistent prescription growth quarter-on-quarter. But beyond these individual milestones, it's important to consider ZORYVE from a 30,000-foot view. And what we see from that perspective is that there has never been a product as uniquely suited to the treatment of immune-mediated inflammatory skin diseases as ZORYVE. As we outlined on this slide, ZORYVE's unique profile, which is truly exceptional amongst topical agents can be categorized into 3 key buckets. First is ZORYVE's [ pleotropic ] mechanism of action, combined with its variety of formulations. Patrick will go into more detail on the MOA later in the presentation. But at a high level, [ PDE4 ] has demonstrated the potential to impact multiple inflammatory cytokines, decreased neuronal itch signaling and increased melanocyte activity. Second is ZORYVE's rapid and robust efficacy, spanning multiple dimensions in multiple dermatosis. As you might imagine, the first and second bucket gives ZORYVE remarkable potential utility across a wide breadth of inflammatory skin conditions, not only psoriasis, atopic dermatitis and [ set ] derm but potentially well beyond our 3 initial indications. And third and critically is ZORYVE's safety and tolerability profile, which enables its use anywhere in the body and for any duration. Safety with chronic use is a key differentiator versus topical steroids and an essential characteristic for the treatment of conditions that often require therapeutic solutions, not just for a month or 2, but for years and often a lifetime. This unique profile is set against the backdrop of an emerging sea change in dermatology where the prolonged use of corticosteroids, historically the standard of care across many inflammatory dermatosis and is facing increased scrutiny and where there's a call to action by a growing number of dermatology clinicians and patients for long-term targeted nonsteroidal treatment strategies. For immune-mediated inflammatory skin conditions, ZORYVE is the right drug with the right profile at the right moment. And because of this convergence of factors and the opportunity for ZORYVE [indiscernible] growth is vast. I'll now turn the call over to Todd to review ZORYVE's opportunity through market landscape lens. Todd Edwards: Thanks, Frank. Slide 15 provides a clear illustration of the sizable and realistic market opportunity for ZORYVE. In the U.S., across our currently approved indications of psoriasis, sender and atopic dermatitis, the diagnosed population totals approximately 30 million patients. Of these patients, about 19 million people are already receiving topical treatment, primarily topical corticosteroids prescribed by clinicians in every specialty. Within this group, roughly 8 million are being treated in a dermatology specialty setting. The area where acute has concentrated its commercialization efforts to date. As a result, the serviceable obtainable market of patients who are already under dermatology care and are already receiving a topical prescription for their psoriasis, AD or seb derm is both substantial and highly addressable. The key question then is what share of this market will ZORYVE recapture? Given ZORYVE's differentiated clinical profile, the strong foundation established during the early phases of commercialization, broad reimbursement coverage, the shifting treatment landscape and the strategic actions we are taking to drive both prescribing breadth and depth, we believe increasing the ZORYVE share to 15% to 20% of topical steroid prescriptions or potentially more is both realistic and achievable. As we'll outline further today, there are compelling reasons to believe ZORYVE is positioned for significant and sustained growth in the years ahead. Now turning to Slide 16. The foundation of our conviction is rooted in what we are already seeing playing out in the market. On the left side of the slide, you can see that over the last 6 quarters, the branded [ non-sola ] has been carving out a meaningful foothold in the topical market. During this period, the [ non-serotopical ] volume, shown by the middle grade has increased over 60%, while topical steroids represented by the yellow line, has essentially remained flat. Within the non-sorted class, ZORYVE is clearly the growth driver, with volumes increasing nearly 200% for the same period as shown by the top most line. Corticosteroids still account for the vast majority of topic descriptions today, which is not surprising, given they have been the topical standard of care for chronic inflammatory skin conditions for over 70 years. However, the treatment landscape is shifting in both the U.S. and globally, there is a growing demand for innovation in the topic of [ second], innovation that can -- that can deliver improved outcomes and safety. As a result, we are beginning to see erosion to the topical steroid share within the topical market. Importantly, this version is in its early stages, and there remains a substantial base of topical steroid prescriptions available for conversion. The chart in the center shows nearly 70% of the 24 million annual prescriptions for psoriasis, AD and seb derm written by dermatology specialists are still for topical steroids. This acquaints to roughly 17 million topical steroid prescriptions each year, a substantial base that will continue to fuel ZORYVE's growth for the years to come. And that does not yet account for the PCP MP opportunity. ZORYVE's outsized growth compared to the broader nonstretopical classes already translated into a meaningful increase in market share. As shown on the right-hand side, nearly half of all brand topical prescriptions are now written for ZORYVE. With this leading position, ZORYVE is exceptionally well positioned to capture the ongoing shift away from steroids. Next, Patrick will do a deeper dive on the state of the conversion of topic steroids and the factors driving the shift in practice. Patrick? Patrick Burnett: Thank you, Todd, and good morning, everyone. We want to spend some time expanding on the momentum behind steroid conversion. First, because it signals a crucial paradigm shift in the treatment of immune-mediated inflammatory skin diseases. And second, because it provides a key data point to support our obtainable market thesis that Todd outlined. So what exactly is driving this conversion? And why does it matter? The first successful use of corticosteroids for chronic inflammatory skin diseases was reported in 1952. In more than 70 years, we've seen remarkable scientific and medical innovations across many therapeutic areas and treatment modalities. But topical steroids have remained a mainstay in the management of conditions like atopic dermatitis and psoriasis. The introduction of biologics has represented a major advancement in the treatment of immune-mediated inflammatory skin conditions. However, even as the introduction of these novel therapeutics has benefited the subset of patients with more severe diseases. Topicals overwhelmingly remain the first-line therapy for the vast majority of patients. And even patients on biologics often continue to rely on adjunctive topical treatments in order to manage residual disease and breakthrough flares. There's an increasing recognition among health care providers, professional societies and patients that the long-term use of topical steroids can be associated with serious adverse effects that can both be local and systemic and this is at the stage for intensifying calls to limit long-term topical corticosteroid use and embrace innovation in the topical modality. So that you can understand, what is galvanized this loud global call of concern about the use of topical corticosteroids, I want to help frame the problem at hand. And to accomplish this, we've adopted a slide from a recent review article written by Douglas DiRuggiero who I was speaking to later in this program. On the left-hand side of Slide 17, we see the list of common local adverse effects of chronic steroid treatment. Most of these were well documented all the way back into the 60s and include skin barrier damage, atrophic changes like stria or stretch marks, cataract formation and delayed wound healing. Importantly, adverse effects related to topical corticosteroids are not limited to local effects. What you see on the right hand of the slide is the list of systemic effects, which are broad and deep, including disruptions in reproductive endocrinology growth suppression, osteoporosis and bone fracture, diabetes and ophthalmic effects, including cataracts and glaucoma. The clear association of cumulative topical steroid exposure and increased risk of bone fracture and diabetes have only been fully appreciated more recently as topical multiple publications emerge that validate the growing concern that long-term adverse effects of topical steroid use are not that different from the well-known adverse effects that have made systemic steroids a treatment of last resort for most inflammatory diseases. While the risk of these effects increases with steroid potency and duration of use, there have been cases reported with low potency agents or short periods of use. Additionally, infants and children may be most at risk because their skin disease typically involve a higher body surface area than adults and their immature skin barrier can result in greater permeability. And lastly, patient populations at even higher risk include those who use topical corticosteroids on the face or genital areas, as [ center ] skin is not only more prone to local adverse effects, but is associated with greater skin permeability and drug absorption, especially in those with atopic dermatitis, separate dermatitis, given the skin barrier dysfunction inherent in these diseases. Clinicians are often increasingly realizing that many patients are not only exposed to topical steroids, but also may be using other steroid treatments like inhaled, intranasal and even oral steroids and this total cumulative steroid exposure dramatically increases the risk of adverse steroid effects. Given all this, you can also understand why we are so passionate about addressing these mounting concerns and leveraging scientific innovation to bring more targeted therapeutic solutions to patients that is both effective and safe. As you can see on Slide 18, in August of this year, 2 of the primary professional dermatology societies in the U.S. The Society of Dermatology Physician Assistance, the SDPA, and the Society of Dermatology Nurse Practitioners, the SDNP, issue statements recognizing the emerging evidence of these potential adverse effects and the importance of incorporating advanced topical targeted therapies that reduce the reliance on chronic topical steroid use. These statements are the latest in a growing list of high-profile calls for the limited use of topical steroids due to the adverse effects, including calls from regulatory agencies in Canada, United Kingdom and India, other professional societies, such as the International [ Eczema Council], British Dermatological Nursing Group British Association of Dermatologists and the American Academy of Family Physicians, patient advocacy groups like National Eczema Society and National Eczema Association as well as several recently published physician expert consensus panel recommendations. As you can see, this represents not merely an isolated regional appeal, but a global groundswell. In the U.S., the recent acknowledgment by the SDPA and the SDNP is particularly important given the key role physician assistance and nurse practitioners play in treatment decisions for patients with chronic inflammatory skin conditions. Next, we'd like to share a conversation I recently had with Douglas DiRuggiero on the evolving topical treatment landscape for immune-mediated dermatosis. Douglas DiRuggiero is a certified physician assistant and a doctor of Medical Science, who specialized in dermatology for the past 25 years. Douglas practices with the skin cancer and cosmetic dermatology center, nationally recognized provider of advanced adult and pediatric dermatology care in Northwest Georgia and Southeast Tennessee. Douglas is also the Founding President of the Georgia Dermatology of Physicians Assistance Society and recently was named a national Honoree by the National Psoriasis Foundation, the first time a physician assistant ever received this award. He's written and spoken extensively on the topic of potential adverse effects from prolonged use of topical corticosteroids. I think it might be good to frame the conversation with Douglas by highlighting the role that physician assistance and nurse practitioners play in the dermatology field. NPs and PAs are providing an increasing amount of direct dermatology care, including prescription writing, this expanding role is in part being driven by heightened demand for dermatological care as dermatologists provide care in medical dermatology as well as surgical procedures and cosmetic services. These NP and PA providers are failing critical gaps and ensuring patients with skin conditions have access to the vital and high-quality care they need. Well, Douglas, I want to thank you for joining me here and being willing to come on and share some of your insights over the almost 30 years of practice that you've had. And especially, I want to talk to you coming out of your paper that you published on the impact of topical corticosteroids systemically. I found that to be a really excellent review, learned a lot from it. I thought it would be great to have you come on and share your perspective that led to that. Patrick Burnett: Next, on Slide 20, I want to come back to an analysis that we shared in 2023 on historical analogs, where newer classes of medicines disrupted established treatment paradigms, unset unseating entrenched generic standards of care. These are 4 different diseases that had firmly established generic standards of care that were disrupted by safer, more effective or more convenient innovative treatments, across the market for anticoagulation, depression, GERD and schizophrenia. It required between 5 and 10 years before the newer innovative therapies were able to capture 50% of the serviceable obtainable market. It's just been over 3 years since we received our initial indication in psoriasis just under 2 years for seb derm in only 15 months since our launch in AD. We're just getting started and look forward to the continuing evolution of the treatment paradigm for these diseases. Imagine the growth potential if the topical anti-inflammatory market only converted half as much as these other markets. Now on Slide 21, we highlight key aspects of the topical steroid profile that have driven their wide adoption in dermatology so that we can understand the profile that a nonsteroidal alternative needs to achieve in order to successfully compete. It really comes down to 2 key characteristics. First, like topical corticosteroids, the drug needs to be effective in resolving both inflammation and itch and it needs to do so quickly. Second, topical steroids work on many of the most common skin diseases like atopic dermatitis, psoriasis and cebra dermatitis, as well as many of the more rare conditions, where there may not currently be any FDA-approved treatment. So like topical corticosteroids, the drug also needs to work broadly across indications. This is distinct from the expectation for a systemic treatment where a more targeted therapy is desired. Now consider what characteristics a drug would need to move beyond competing with topical steroids, but rather displacing them as a superior therapy for chronic inflammatory dermatosis. Patients with these chronic conditions desperately need topical drugs that can be used safely over an extended period of time to avoid flare ups, while mitigating the risks and adverse effects associated with prolonged topical corticosteroid use. In addition, the treatment needs to be safe and convenient to use in multiple areas of the body, including topical including difficult-to-treat areas like the scalp and sensitive areas like the face and growing, all of which can be affected by inflammatory dermatosis. I'll walk through ZORYVE's MOA in detail a bit later in my presentation. Like steroids, ZORYVE has a broad impact on multiple biological processes implicated in immune-mediated inflammatory skin conditions. This distinguishes ZORYVE from biologics that target very specific pathways and other branded topicals that work on a narrower set of mechanisms. And in fact, as Frank mentioned earlier, ZORYVE as a potent inhibitor of [ PDI], has even broader effects than steroids, directly impacting neuronal itch signaling and melanocyte function in addition to reducing inflammation. We've amassed a substantial body of clinical data supporting our 6 FDA approvals that demonstrate the safety and efficacy profile of ZORYVE with prolonged use across multiple disease states and essentially every area of the body. As you can see, ZORYVE checks all the boxes for the ideal profile, not only to compete with, but also to potentially replace topical steroids, helping explain why ZORYVE continues to rapidly gain share from topical corticosteroids. I'll now turn it over to Todd to discuss our ongoing commercial efforts in the primary care physician and pediatric specialties. Todd Edwards: Thank you, Patrick. I'm now on Slide 22, expanding the breadth of prescribers beyond dermatology will be a key driver of ZORYVE's continued growth. Our initial focus was on dermatology practices, which provided a time and resource efficient rollout, given that the relatively small base of dermatology prescribers account for roughly half of all topical scripts for inflammatory dermatosis. While we continue to make strong inroads among dermatology practitioners, we have also ramped up efforts to expand the reutilization in primary care and pediatric settings, where over 13 million topical prescriptions are written a year for our current indications. These initiatives are being advanced through our partnership with [indiscernible]. In the primary care and pediatric setting, many providers have had limited exposure to topical nonrate treatments, intended default to prescribing steroids. [indiscernible] team is deploying a targeted high-frequency approach to drive initial trial and ultimately, adoption of ZORYVE among these providers and their patients. As our thyroid conversion movement continues to gain momentum and visibility, we expect it will increasingly influence prescribing habits in these settings. While the overall universe of providers in primary care and pediatrics is vast, our joint commercial strategy with [indiscernible] is both strategic and highly focused. As shown in the pie charts on the right side of this slide, of the more than 0.5 million total PCP and pediatricians in the U.S. The top 30,000 prescribers were about 5%, right, 4 million prescriptions or nearly 1/3 of all prescriptions in these segments. These high-volume prescribers are the focus of our efforts and give us confidence that we will be able to officially drive growth with this strategy. Our activation in primary care and pediatrics is still in the early days. And we are determined to drive ZORYVE's penetration in these settings to ensure this large pool of patients is provided with alternative treatment option to topical steroids. I will now turn the call back over to Patrick, who will discuss in more depth the opportunities to continue growing ZORYVE and psoriasis setter and AD through targeted clinical activities. Patrick? Patrick Burnett: Great. Thank you, Todd. We'll now turn to the growth opportunities for ZORYVE presented by further extension of our current indications, ensuring that we can deliver ZORYVE to as broad a number of patients with psoriasis, [ cebra ] dermatitis and atopic dermatitis as possible who would benefit from the unique profile of this drug remains a key priority. Our planned and ongoing label expansion efforts to support pediatric patients with plaque psoriasis and pediatric and infant patients suffering with atopic dermatitis are central to advancing this goal as we've outlined here on Slide 23. Pediatric and infant atopic dermatitis patients urgently need innovative alternatives to topical corticosteroids. Unlike other inflammatory skin conditions, atopic dermatitis often presents at early ages for patients. Nearly 10 million children in the U.S. are impacted by atopic dermatitis with roughly 60% developing symptoms in their first year of life. Atopic dermatitis presents unique challenges in these younger age groups not only because the skin is more sensitive, but also because the condition often covers a greater percentage of their total body surface area compared to adolescent in adults. Parents of these pediatric patients are particularly sensitive to potential negative effects from topical steroids. These concerns range from the impact of chronic steroid use on the child's growth and bone development to more immediate complications like application to the child space or contact with the eyes and mouth and can be difficult to control. Given the size of the patient population and the acute need and desire for safer and more tolerable therapeutic interventions, we've been methodically pursuing label expansions for ZORYVE to younger ages of atopic dermatitis patients. Earlier this month, we received approval of our supplemental NDA for ZORYVE Cream 0.05% for the treatment of children aged 2 to 5 years old with atopic dermatitis, a population of about 1.8 million patients. Commercial launch efforts are underway, and we're excited to be bringing this important new -- this new therapeutic option to clinicians and most importantly, to pediatric patients and their caregivers. We're simultaneously pursuing development of ZORYVE Cream 0.05% in atopic dermatitis for even younger AD patients, ages 3 months to 24 months. Enrollment in our integument infant trial for this age range has been brisk and exceeded typical enrollment patterns and our expectations, confirming that there is significant interest in nonsteroidal treatment options. In addition to atopic dermatitis, we're also pursuing a label expansion to treat pediatric plaque psoriasis patients. While this patient population is smaller than that of pediatric atopic dermatitis there is still an acute need for better therapeutic options that we're always trying to meet. On September 2, we announced that we are submitting a supplemental NDA for ZORYVE cream 0.3% to expand its indication to the treatment of plaque psoriasis in children ages 2 to 5. If approved, the ZORYVE cream would be the first and only topical PDE4 inhibitor indicated for plaque psoriasis in children as young as 2, offering patients and caregivers, an important alternative to topical steroids and vitamin D analogs. ZORYVE Cream is uniquely formulated to be effective, safe and well tolerated for all areas of the body, including sensitive areas such as intratrigenous skin, where plaque psoriasis often presents in children. There are very limited FDA-approved treatment options for plaque psoriasis for children under 6. We're very proud of this clinical data package and that we have compiled to support this sNDA, and we look forward to the FDA's decision. Next, on Slide 24, I'll discuss incremental data generation opportunities that our clinical team is pursuing to further bolster ZORYVE's position within our currently approved indications. The utility of these efforts is to produce a clinical data that can be referenced with health care providers that further support the robust and diverse effects of ZORYVE in plaque psoriasis, atopic dermatitis and separate dermatitis. The intent of these efforts is to enhance the label of current indications by establishing ZORYVE among health care providers as a foundational choice amongst various options in controlling these dermatoses. Examples of note in this effort include polymer plantar psoriasis, nail psoriasis, and cicatricial or scarring alopecia, when it occurs alongside a seborrheic dermatitis. Like nail psoriasis, [ palmoplantar ] psoriasis is a manifestation of plaque soriasis in a particular body area and both conditions are part of our indicated patient treatment population for ZORYVE. [ Palmar-plantar ] and nail psoriasis present unique clinical challenges and have historically been less responsive to standard of care topical therapies and even available systemic therapies. However, we've received indications from the field, both through formal case reports and informal dialogue with HCPs that ZORYVE is impactful in addressing these challenging locations. Our intention is to validate this impact through a generation of data that could be made available to the HCPs we engage with. We believe that demonstrating efficacy in these difficult-to-treat patients will incline practitioners to default towards the use of ZORYVE in their preferred topical therapy for their psoriasis patients. Now currently, scarring alopecia, a group of related conditions, leading to the irreversible hair loss have no FDA-approved treatment. Clinicians tell us that many patients with scarring alopecia also present with seborrheic dermatitis, and there's a belief that these 2 conditions may be linked. This comorbidity is particularly well documented in publications that demonstrate that over half of patients with central centrifical sycatritial alopecia, also known as [ CCCA ] 1 form of scarring alopecia, also have seborrheic dermatitis and researchers have proposed that aggressive management of their receptor may reduce the disease incidence, reduce its severity and a psychological burden in patients with CCCA. Again, if the clinical data that we produce validates a unique efficacy profile for patients with seborrheic dermatitis and scarring alopecia we believe that it will drive preferential usage of ZORYVE versus other sebderm treatments. This incremental data generation opportunity requires small data sets, a minimal investment while driving depth of prescriptions in these underserved subpopulations. As such, they're highly resource efficient. This effort will help further guide clinical treatment decisions. Now turning to Slide 25. We you can see select images from case reports that we've received in both palmoplantar psoriasis and nail psoriasis. While the meaningful effect of ZORYVE represented in these pictures needs to be validated through our own clinical evaluation, it's easy to see why we're receiving such excited feedback from the field on the potential for these subsets of patients. So I'll turn it back over to Todd to contextualize the impact that the components of our strategy we have reviewed so far to grow and expand ZORYVE will have on our market opportunity. Todd Edwards: Thank you, Patrick. Turning to Slide 26. This morning, we've highlighted the key drivers that sustained ZORYVE's growth in our current indications, continued conversion from steroids expansion into the PCP and pediatric specialties label expansion and generation of intraretinal data for patient subpopulations. These levers of growth will expand our market opportunity in 2 distinct ways. First, our tenable market will increase to 17 million patients as we continue to broaden our focus beyond the dermatology setting, doubling the patient population across specialties where we have a commercial presence. Second, we expect to drive continued expansion in ZORYVE's share of total topical prescriptions. To frame the opportunity just within the subset of health care providers, we target across dermatology primary care and pediatrics. Every 1 percentage point of share gain in topical steroid prescriptions equates to approximately $150 million in annual net sales. As we build share from our current position to the 15% to 20% range that we believe is achievable, ZORYVE will establish itself as a blockbuster franchise across these 3 indications alone. Now Patrick will discuss our plans to expand ZORYVE into new markets. Patrick Burnett: Thank you, Todd. Transitioning now from growing our core ZORYVE business in our currently approved indications to expanding the ZORYVE franchise by exploring potential new indications for ZORYVE. Pursuing new patient populations that may benefit from ZORYVE has been a principal focus for our clinical development strategy from the outset. This is evidenced by the 5 expansions we have secured across plaque psoriasis, seborrheic dermatitis and atopic dermatitis following our initial plaque psoriasis approval in 2022. We believe that there are additional skin diseases that may respond to and more patients who may benefit from ZORYVE. This belief is not only supported by our understanding of ZORYVE's broadly applicable anti-inflammatory and antipruritic properties as well as its potential impact on stimulating melanocytes, but also by the direct and ongoing feedback we've received from health care providers in the field on their real-world ZORYVE experiences. So that you can understand how and why ZORYVE has potential across such a breadth of skin diseases, I want to take a moment to reorient you to ZORYVE's MOA, its mechanism of action. Notably, it's pleotropic nature. ZORYVE inhibits phosphodiesterase 4 or PDE4. It's an enzyme that plays a key role in inflammation. PDE4 regulates inflammation by increasing levels of cyclic adenosine monophosphate or cyclic AMP an intracellular messenger in immune cells. The increase in cyclic AMP in turn impacts multiple biological processes implicated in immune-mediated inflammatory skin conditions. Specifically, it reduces the expression of multiple key pro-inflammatory cytokines, including interferon gamma, type 1 interferon alpha, TNF alpha, IL-4, IL-6, IL-17 and IL-23, which spans signaling through the TH1, TH2 and TH17 immune-mediated responses. PDE4 also plays a key role in sensory neuron activation. So inhibiting PDE4 likely direct likely directly mediates the itch sensation. PDE4 inhibition also normalizes keratinocyte activation and differentiation, which can lead to mitigation of the epidermal barrier dysfunction that occurs in many inflammatory dermatosis. And finally, it increases melanocyte proliferation, melanocyte gene and protein expression and protects melanocytes from apoptosis. The breadth of mechanisms and pathways that ZORYVE impacts stands in stark contrast to the very limited and specific pathways targeted with biologics for inflammatory dermatosis. These targeted therapies generally impact one or a handful of cytokines involved in the inflammatory cascade. This narrow focus limits the ability of these therapeutics to be applied widely across dermatosis in the same way that ZORYVE. For example, inhibiting IL-23 is wonderful to treat psoriasis, but it has no impact on atopic dermatitis or many other inflammatory dermatoses, ZORYVE's unique pleiotropic MOA may also be an important differentiator between it and other topical anti-inflammatory treatments. Critically, ZORYVE affects this broad set of inflammatory pathways in inflammatory dermatosis without causing systemic immune suppression and thus avoids the deleterious effects that often a company knocking down the immune system broadly with systemic therapeutics. It also avoids many of the deleterious side effects of topical steroid usage, including local skin adverse effects as well as systemic adverse effects such as HPA access suppression, glycemic rate dysregulation, osteoporosis and osteoporotic fractures and ophthalmological AEs. ZORYVE's comprehensive MOA, coupled with a very favorable safety and tolerability profile enables us uniquely to have broad application across an exceptionally wide range of indications and patient populations. To date, this spanned plaque psoriasis, AD and seborrheic dermatitis. It may also enable us to treat diseases where topical corticosteroids have no impact or not used, such as hidradenitis separative and [ Haley Haley ] disease or where their efficacy is low and use is limited due to topical adverse events, as is the case in vitiligo and cutaneous lupus. Now I'd like to talk about how ZORYVE [ pleatropic ] MOA translates broadly in the clinical setting. As part of our obligations as a manufacturer of ZORYVE, our medical team monitors this clinical feedback. To date, as shown on Slide 29, we've identified more than 40 published case reports from clinicians who've used ZORYVE in a multitude of other inflammatory dermatosis that have seen encouraging signs of efficacy. These clinicians have experienced a safe, tolerable, versatile and effective profile of ZORYVE in their psoriasis, AD and seb derm patients that have independently chosen to investigate novel applications of the therapy. The efforts of these clinicians serve as valuable initial signals that our life cycle management process then builds upon. This pursuit of potential new indications is aligned with our original understanding of ZORYVE's pipeline in a molecule opportunity, our approach to assessing these potential opportunities is stepwise and resource efficient as outlined by the simple graphic on the right-hand side of this slide. As indications of interest come to light, we'll conduct exploratory Phase II proof-of-concept studies where appropriate to evaluate the degree of response and understand potential safety and efficacy. Based on the results of these initial studies, our analysis of the unmet need and the addressable patient populations for a given disease as well as discussions with regulatory agencies will then decide if proceeding with a registrational trial is prudent use of capital given the anticipated return on investment. Importantly, the investment we plan to make in pursuit of these additional potential indications involves very efficient deployment of capital. For the FDA to approve ZORYVE for these additional patient populations, we would immediately realize operating leverage on our existing sales force, supply chain and operational foundation already in place to serve patients for our core ZORYVE business. As we reviewed on our Q2 call, we selected 2 initial exploratory indications, vitiligo and [ hydranitis ] super tivo or HS, and our underway with proof-of-concept Phase IIa studies, and we anticipate initiating several other Phase II studies in 2026. On Slide 30, you can see select images from compelling case reports, we've received in patients with just some of the skin diseases that were listed on the previous slide, lupus, [ Haley Haley ] disease and neurodermatitis of the scalp. Now I'd like to turn to the unmet needs and potential opportunity in vitiligo and hydrants [ Superteva]. The first 2 potential indications we're exploring based on case reports from the field, starting with vitiligo on Slide 31. The immune-mediated inflammatory condition, this immune mediated inflammation condition is characterized by the loss of pigment or melanin and patches of the skin, resulting in white or light colored areas. In vitiligo, the body's immune system mistakenly attacks and destroys melanocytes, which are cells responsible for pigment production and skin pigmentation. There are several vitiligo types based on patterning distribution of depigmented patches and nonsegmental or generalized is the most common. There's no cure for vitiligo. Topical corticosteroids have been standard of care but have limited efficacy and the prolonged use side effects can be a challenge. Opzelura received approval by the FDA in 2022 for the treatment of nonsegmental vitiligo and nearly half of Opzelura's current usage is for this indication. You'll recall that as part of the multi-pathway MLA, PV4 inhibition with roflumilast, the active ingredient in ZORYVE that only regulates inflammation, the underlying cause of vitiligo, but also increases melanocyte proliferation, melanocyte gene and protein expression and protects melanocytes from hepatosis. In line with the MOA, we've been highly encouraged by multiple case reports from clinicians who pursued vitiligo as a novel application of ZORYVE and showed success treating vitiligo with ZORYVE 0.3% cream once a day. In the ongoing Phase II proof-of-concept study, we plan to enroll 20 patients in determining whether to advance the program to a Phase III trial, we'll consider the clinical profile we see in the Phase II trial, along with data observed in the field. A rigorous evaluation of the commercial opportunity we would expect based on clinical results and how that compares to results from our other life cycle management trials. For vitiligo, in particular, a clinical result that we may find compelling could be Opzelura-like efficacy with more rapid onset of symptom relief and a more convenient dosing regimen. While we, of course, need input from regulatory agencies in determining what an appropriate Phase III trial design might look like, we anticipate the size and cost of registrational program would be similar to those that we've conducted with ZORYVE approved indications. However, the duration of treatment on how quickly the disease respond to treatment could impact development cost. We believe that there are aspects of ZORYVE's profile that would make it a compelling therapeutic option relative to the current available treatments such as a once-daily dosing and the fact that ZORYVE is not contraindicated with therapeutic biologics or immunosuppressants. Now let's take a look at ZORYVE's potential opportunity in [ hydriditis superativa], or HS, on Slide 32. HS is a chronic recurrent and inflammatory skin condition that causes painful nodules, abscesses and tunnels. Currently, diagnosis and treatment rates remain low as treatment options are limited. HS involves disregulation of several key immune pathways addressed by ZORYVE's MOA, including TNF alpha, IL-6, IL-17 and 23 and interferon gamma. Topical and oral antibiotics are common first-line therapies for mild HS, but provide insufficient relief with a high proportion of patients not improving or relapsing. Beyond antibiotics, options are limited to systemic therapeutics, including corticosteroids, expensive biologics or difficult surgical procedure-based therapies. It's also worth noting that there are extensive off-label experiences with a [indiscernible], an oral PDE4 inhibitor in the treatment of HS. In short, this is a painful, very difficult to manage chronic disease with many patients not served by the currently available therapeutic approaches. It's our belief that an effective nonantibiotic topical anti-inflammatory would be an important therapeutic option in the treatment paradigm of these underserved patients, particularly at the milder end of the severity spectrum. In the ongoing Phase II proof-of-concept study, we plan to enroll 20 patients, evaluate the efficacy, tolerability and rate of relief onset provided by ZORYVE how we approach the decision on whether to advance the program to a Phase III trial will be equivalent to the approach in vitiligo. We'll evaluate the strength of clinical data and implicit commercial opportunity and hold that against other opportunities we have across our life cycle management program. The addressable patient population is also compelling with a 3 million to 3.5 million patient prevalence. Unfortunately, the diagnosis rate amongst these patients is low at less than 15%, in part driven by a dearth of effective therapeutic interventions, which are available. Industry projections predict substantial expansion of the diagnosis and treated HS population over the next decade based on the belief that much like psoriasis and atopic dermatitis before it, new therapeutic options should drive greater disease awareness, diagnosis and broader treatment. Currently, development of novel therapeutics for HS is most concentrated in the more severe stages of disease and primarily consists of systemic treatments. We believe that ZORYVE, if it demonstrates activity in the clinic, could be an important topical therapy for mild to moderate disease and used in complement to systemic treatments currently approved and in development. Now on Slide 33, you can see compelling examples of the impact of ZORYVE in patients with vitiligo and HS. On the left-hand side, there's visible repigmentation in 2 vitiligo patients over a period of 7 and 5 months. On the right-hand side, you can see meaningful clearance of [ hidradenitis super teva ] lesions over just a 30-day period with reduction of inflammation and also a normalization of pigment. These select examples help demonstrate the encouraging signals that we're receiving from clinicians and why we are excited to further validate the effects of there for these conditions in a controlled clinical setting. I'll now turn it over to Todd. Todd Edwards: Thank you, Patrick. I'm now on Slide 34. As we look to the future and potentially expand the ZORYVE portfolio, it is pertinent to reemphasize the competing effect of additional indications on prescriber behaviors that we have previously highlighted. We have observed that clinicians who prescribe ZORYVE across multiple indications generates significantly higher prescription volume overall, as they recognize both the broad disease management benefits and exceptional tolerability profile ZORYVE provides their patients. We expect the potential introduction of additional label expansions and communications or further compound this trend, serving as a key driver of depth of prescription writing among HCPs is supporting sustained volume growth for ZORYVE in the years ahead. Now to Slide 35. The important efforts being undertaken by the clinical team at Arcutis have the potential to expand the patient population that can benefit from ZORYVE. Should these clinical efforts prove successful and regulatory approval is secured. We will see increases to our total serviceable and [indiscernible] market that drive increased commercial opportunity for the franchise. I'll now hand it back to Frank. Thank you. Todd Watanabe: Before shifting gears and spending time on our vision for building our clinical pipeline, I want to take a minute to pull together all the foundational elements of the exceptional opportunity that we have with ZORYVE. We are pursuing a massive treated patient population with more than 17 million patients in the obtainable market. In ZORYVE we have a drug that shares all of the most important qualities that have led to TCS as being a backbone in dermatology for decades, primarily its magnitude of efficacy across multiple inflammatory dermatosis. But what ZORYVE delivers that TCS don't is the characteristic of being safe and tolerable for prolonged use in these chronic diseases, the ability to be used in every area of the body and mechanistic dimensions with respect to neuronal signaling and melanocytes that aren't part of the TCS profile. And we're bringing this therapy to market at a time when there is a seismic shift occurring and how clinicians and patients think about the appropriate use of topical steroids to manage these diseases. This confluence of factors gives us tremendous confidence in the meaningful and sustainable growth prospects of ZORYVE. Taken together, we see a future for ZORYVE where our share of the topical steroid market increases from the 3% roughly level where we're currently sitting to a share of 15% to 20% or greater. This growth of share will not happen overnight. As we discussed earlier, this type of therapeutic conversion takes time to effect. But the reasons discussed -- for the reasons discussed, we are confident that we are on a course to achieve this level of penetration. What's more, as we approach this inflection point of generating positive cash flows from our core business, we will have additional resources to reinvest in ZORYVE to catalyze the share growth. Beyond the immediate opportunity offered by our currently approved indications, the peak potential for ZORYVE will also be driven by expanding our indicated patient population through life cycle management, as Patrick just walked us through. With consideration of both of these dynamics, we see a peak market potential across the ZORYVE portfolio of somewhere between $2.6 billion and $3.5 billion. We'd like to now move to the final pillar of our corporate strategy, building for the future through a pipeline of innovative medicines. As I touched upon at the outset of today's presentation, our mission is to bring meaningful innovation to patients impacted by immune-mediated inflammatory skin diseases. As we approach sustained profitability, we are well positioned to extend our focus to building and advancing an innovative pipeline to address additional unmet needs in line with our mission. These pipeline efforts include initiating the Phase I clinical study of ARQ-234 in atopic dermatitis and ongoing efforts to evaluate externally sourced assets. Patrick will come back now on to walk through us through both of these components of our innovative pipeline strategy. Patrick Burnett: Thanks, Frank. I'm now on Slide 39. As we highlighted in our last call, we achieved an important milestone with our IND submission in Q2 for ARQ-234 as a novel systemic treatment for moderate to severe atopic dermatitis. As we gear up to initiate our clinical study of ARQ-234. We want to spend some time today highlighting the untapped opportunity in the atopic dermatitis market and important potential role that this molecule may play in it. ARQ-234 is an agonist of the CD200R immune checkpoint, which is a clinically validated target found on activated immune cells. The use of the immune checkpoint inhibition in oncology revolutionized the treatment of many cancers, harnessing the body's own immune system by inhibiting immune checkpoints such as PD-1, PD-L1 has transformed the paradigm for how oncologists approach and think about treating many cancers. By acting upon the CD200R mechanism, we're looking to use immune checkpoints in reverse, agonizing versus inhibiting the immune checkpoint in order to reestablish homeostasis of the immune system and patients experiencing excessive immune activation that drives autoimmune diseases. This sort of checkpoint [ agonism ] represents a novel and potentially powerful approach to the control of atopic dermatitis and other autoimmune diseases. While there's reason to believe that this mechanism could be impactful across multiple autoimmune and inflammatory diseases will first evaluate its impact in atopic dermatitis, where clinical validation is strongest. AD still offers a compelling opportunity for the development of new biologics for 2 primary reasons. First, compared to other inflammatory dermatosis like plaque psoriasis, penetration of biologics is in the early stages. Roughly 25% of eligible patients receive systemic therapies for plaque psoriasis while only 10% of eligible patients receive systemic therapy in AD. There's reason to believe that as new biologics enter the category, the total biologic penetration of the market will expand in turn, as was observed in plaque psoriasis, where the market grew by nearly 300% from 2014 to 2024 to approximately $23 billion following the introduction of IL-23 and IL-17 targeting therapies. Similar growth is anticipated in AD in the years ahead with projections reflecting a greater than 10% CAGR through the end of the decade, resulting in greater than 80% growth in U.S. sales for this indication. Second, and related, clinicians are eager to be equipped with biologic options beyond dupilumab and dupilumab is a leading biologic approved for AD currently. However, a significant unmet need remains. But we have heard clearly in our conversations with clinicians is the desire for new mechanisms to address atopic dermatitis in patients who do not adequately respond to dupilumab, which works by blocking the inflammatory mediators IL-4 and IL-13. CD200R agonism represents a unique mechanism of action, complementary to and differentiated from other AD therapies targeting IL-4 IL-13 or OX40 and OX40 ligand. ARQ-234 has the potential to differentiate on multiple metrics, including efficacy, responder sets, durability of response, frequency of dosing and safety. What's been demonstrated in clinical development efforts from other biopharmas targeting the CD200R access is that the durability of response off treatment after final dose is promising. This may be a unique benefit of restoring immune homeostasis more broadly with the checkpoint mechanism versus targeting specific cytokines or other components of the greater immune cascade. The development landscape for CD200R is relatively nascent but I will still highlight a few aspects of our candidate that we believe give us the potential to differentiate our program from other CD200R programs being or previously having been pursued. ARQ-234 targets a different and we believe optimized binding site at the native location. It also has a higher affinity as a fusion protein versus a monoclonal antibody. We also observed an extended half-life for the molecule driven by selective mutations engineered into the fusion protein. Given its unique profile, ARQ-234 has the potential to be a class-leading program and highly differentiated from other systemic therapies in the AD market, a market we believe will produce ample and compelling opportunity for new therapeutic entrants for years to come. And considering a recent setback in development programs targeting other MOAs in AD such as [ OX40], time is right for us to move this program into clinical development. From a portfolio strategy perspective, we also believe there are compelling reasons to advance a program like ARQ-234 that has been -- that has best-in-class potential for more severe diseases to complement the strong position we've already established with ZORYVE. I'd like to touch on our framework for evaluating potential external oil innovations. And from the outset, our stated strategy at Arcutis was to identify, develop and commercialize best-in-class molecules against validated targets, enabling us to develop differentiated products in less time at lower cost and at substantially lower risk than other approaches. As you can see on Slide 20, the strategy remains unchanged and continues to guide our business development evaluation framework. In addition to clinically validated targets and differentiated product profiles we're seeking opportunities that are at a stage where the clinical and commercial expertise we've already amassed will create shareholder value. And perhaps most importantly, we're interested in opportunities that will deliver substantial innovation to address significant unmet medical needs in immune-mediated disease. Finally, as Frank has stated previously, given the number of internal opportunities in front of us, we see business development as an attractive opportunity, but not as a strategic imperative. So we will remain disciplined in evaluating business development opportunities and in deciding whether to acquire additional assets. I'll now hand the call over to Latha to discuss our 2026 sales outlook and our capital allocation strategy. Latha Vairavan: Thank you, Patrick. I'm on Slide 42. As we detailed at the opening of today's call, Q3 2025 was yet another strong quarter for ZORYVE, tailwinds from our ongoing product launches and continued demand growth despite the typical seasonality led to substantial sequential growth. We are confident that this momentum will continue through the end of 2025 into 2026 and beyond. As we began to exit the launch period across our ZORYVE indications, we anticipate more predictability in our rate of growth, allowing us to be more precise in anticipating the trajectory of sales for future periods. Considering this, today, we will provide sales guidance for the first time. In 2026, we anticipate full year net product revenues to be in the range of $455 million to $470 million. We also anticipate continued strong net sales growth in the fourth quarter of 2025, driven by increased patient demand, even as we expect only nominal improvement in our gross to net rate compared to the third quarter. Turning now to our capital allocation strategy. As we highlighted earlier today, we anticipate achieving the meaningful milestone of cash flow breakeven beginning in Q4 of this year. The expense base considered in these cash flow forecast contemplates our continued investment in growing and expanding ZORYVE as we detail today and the advancement of ARQ-234. We are confident that we will be able to fund these investments with the capital produced from our core ZORYVE business. This will be enabled by a dynamic where the timing of continued improvement of cash flow generation from the ZORYVE franchise lines up with increasing resource requirements. We will continue to be protective of shareholder capital and be attentive to managing our capital allocation to ensure that this dynamic plays out. We are fortunate to have a portfolio of high ROI investment opportunities paired with a cash flow-generating franchise, like ZORYVE. I will now hand the call back to Frank for some closing remarks. Todd Watanabe: Thank you, Latha. We are at an exciting inflection point at Arcutis. We have built a solid foundation for our business with the successful launch of ZORYVE and look forward to sustained and substantial growth with the franchise. Our initial success with ZORYVE will not only allow us to reinvest in that core business, but also to invest in expanding to potential new indications to ensure that sustained momentum and also allow us to continue to build and advance a pipeline of innovative therapies to bring new solutions to patients impacted by immune mediated skin diseases, the grounding mission and guiding force of our enterprise. And with that, we'll open up the call to Q&A. Patrick Burnett: And I think a good place to start is just kind of what is your personal experience been with the use of topical corticosteroids over the time that you've been in practice, you've seen a lot change and our understanding of therapeutics change. So what's your -- been your personal experience and also a little bit about how that may have evolved over that time? Douglas DiRuggiero: Well, first off, an honor to be here. Thank you for inviting me. when I stepped into dermatology 26 years ago and have been there ever since. I was very easily [ would ] into topical corticosteroids as being the medication that is for all things. And it's had an impact, I would say, on the trajectory of dermatology, probably more than any other product in our specialty. And so it's -- and it's been around for a long time, 1952 when it was first compounded into something that we could use on the skin, and it's been used ever since. And so my experience when I got into this in 1999, it was a topical corticosteroids were a mainstay of therapy, first line, second line, third line, maintenance therapy, all of the above. But we didn't have the targeted therapeutics we have now to address some of these systemic diseases with systemic therapy. So we were using a lot of topical steroids and topical tar and [ Anthera ] lot of compounded things in phototherapy and a lot of the old traditional systemic medications. So the playing field has changed tremendously, not just with targeted systemic therapeutics, but now with vehicles, with delivery systems to the skin and with active ingredients that are finally giving us the efficacy of steroids without the side effects that we have always known about have largely not largely, but I'd say, to a certain extent, maybe turn a blind eye to and we simply can't do any longer. There's just too much data out there, both to the public knowledge and to the prescribers knowledge that we have to face the facts that steroids carry a lot of dangerous. And we can't transfer that danger or at least I can't transfer that danger any longer on to my patients without really having a lot of information to give them. So it's a shared decision-making process. Patrick Burnett: Yes. That was one of the things I really took away from your paper. I think that historically, there's been a lot of conversation around local side effects. And I think a lot of people felt somewhat comfortable, especially when there wasn't another option with that. But I think one of the things that you really highlight well in the paper are some of the new areas of data that have come out kind of highlighting these systemic effects. Is there kind of like one aspect of that in particular that impacted you the most? I know in the paper, you talked about diabetes, you talk about bone fracture and osteoporosis. Any particular area that was impactful for you? Douglas DiRuggiero: Well, I'll tell you 2 stories that drove that, and I'll answer that question indirectly through this. I had a patient who is a 13-year-old boy, who came in for eczema, atopic dermatitis and I put them on triamcinolone, which is a very commonly prescribed mid-potency prescription steroid and he was a type 1 diabetic. He had been since he was about 6. So he had a pump and he had a monitor, and he was able to watch his sugars closely. And the mother came in, this is about 3 years ago and told me that we can put [ triamcinolone ] on his 2 forearms, and we can watch his blood sugar go up 40 points in 40 minutes. And I was just like shocked by that, that they could see that rapid of a rise in his glucose levels with the application of a topical steroid cream, on about 5% to 7% of his body service here, not like this whole body. I began doing some research on this and say, what are really the systemic side effects to this. We are focused in dermatology, and we do a good job of counting our patients against the cutaneous side effects. If you use it too long, and in the wrong areas and unfolds, it could extend the skin, what we call [indiscernible], you could have [ strand ] stretch marks, you would get steroid-induced acne or folliculitis, you get unwanted hair or hypertrycosis. It could create dyschromia, discoloration. I asked all of these very experienced derm providers. If a mom wants steroids and she's demanding to have them, what reasons will you give her or to an adult patient, what reason would you give them on why they should not have more steroids topically. And they all listed all of those things. No one listed anything systemic because we [ fastly ] associate all the systemic side effects with giving them systemic steroids. And we do not and have not been trained and do not recognize the whole body of information is out that shows that these medicines are highly absorbed, and they act like a systemic drug like you're taking it orally or injecting it. And so yes, we have a lot of data out there that shows that it will raise blood sugar, diabetes, it can create something called [ cushanoid ] syndrome or adrenal insufficiency. But the surprising one for me is the data out there on developing a vascular necrosis of the hip. 20 and 30-year olds that have only been on topicals, no other systemic case reports, having had hip replacements. I highlighted a couple of those in the recent lecture I gave. [ Osteopritic ] fractures, I did -- talked about a case report an 11-year-old we've been using mid- to high potency corticosteroid creams only, no systemics, just topicals for 3 years and had a [ wrist ] fracture and a full body osteoporosis like an 80-year-old and this kid's 11 and had [ osteopretic ] fracture. And so we are seeing now that increase in ocular pressure in the eye. We used to think that if you just use steroids around the eye, you increased your chance of that now. We know you can use steroids anywhere on the body and increase your risk of glaucoma and increased ocular pressure. So we can't turn a blind eye any longer to the internal systemic impact of using an external topical steroid because it is acting like we're giving it internally, and we've got to face those facts. And it should change the way we prescribe and it should change the way we educate our patients about these things. Patrick Burnett: What are you hearing from your peers on this idea of the role of topical corticosteroids and how that may be changing over recent times? Douglas DiRuggiero: It's really a lot of shock to be honest with you, when they see the data because it's not something that's being talked about in the clinic that these trials and these case reports and these meta-analysis and the system analysis of are not really being championed and put forth. And quite frankly, we're being forced by insurance companies in a lot of areas to use topical corticosteroids first line before we can go and use the medicines that we feel like are safer and work just as well. And so some of it is for step through therapies and some of it is just simply lack of knowledge. So the reaction I get is using one of like, I just cannot believe. And when I present this information, I really present it in a very self-reflective way because I have been one of the top [ riders ] of topical corticosteroids in my state for many years. So I mean I'm looking in the mirror and saying, how much have I contributed to these things without knowing it but I can't willingly continue to contribute to it. And so I think that's what a lot of people have. I've got a lot of incredible comments, e-mails, people have called me to tell me about the impact that this data has had on them and how it's changing the way that they are [indiscernible] patients, how they're beginning to keep track of the grams of steroids that they're giving out how they're asking about other forms of steroids that the patients are getting. These are just not things that we've been used to slowing down and monitoring what we were calling this corticosteroid stewardship in order to catch up to some of our colleagues that are overseas or in Canada where they're beginning to heavily monitor these products and give patient warnings when they're dispensed from the pharmacy. Other countries are beginning to see this and have already begun to be proactive with educating and monitoring these things in the U.S. really needs to take a role in this, in my opinion. And I feel like a lot of us in dermatology have the ability and now have some momentum to make this happen. Patrick Burnett: And you made reference to these advanced targeted topical therapies like ZORYVE. How do that they've kind of played into this evolution and this change over the course of your practice, given that topical corticosteroids are still the majority of the prescriptions that are written for patients with some of these chronic inflammatory skin diseases like atopic dermatitis, psoriasis and [indiscernible]? Douglas DiRuggiero: In the second quarter of 2025. So I don't have the third quarter numbers, but in the second quarter, so fairly recently, how many prescriptions do you think were field of topical corticosteroids by dermatology practices? So just derm providers, not family care, not any other specialty. Most -- the highest number I have people guess is 500,000 in a quarter. Most we're guessing 200,000 to 300,000 written by the 20-or-so thousand derm providers that are out there. And when I tell them it's 2.9 million not over the span of a year, but in 1 quarter, 2.9 million prescriptions of topical corticosteroids filled, not even written filled by patients that are receiving the prescriptions from derm providers. I mean you talk about jaws dropping when they realize how much of this we are contributing to this. And so I mean, even if I can change 1% of that, I mean, at 1%, 29,000, if even if you can less than 29,000, that's a huge, I think, impact over 1 quarter time. So I think the numbers are really alarming to us in dermatology when we are faced with them and we realize how much we are contributing to this to this problem. And so now we have such fantastic alternatives like ZORYVE. I mean we have had nonsteroidal topical [indiscernible] inhibitors, TCIs, I mean the first 1 was approved in 2000. And so then the next one was improved in 2001. And so we had these 2 topical cases. The problem was is that the tolerability is hard particularly [ tacrolimus ] is things and burns and not as much with [ pericularmas], but they don't work very well. It's just their efficacy was very lackluster and then we had a PDE4 inhibitor first generation, I would call it an old generation that came out in around 2014, '16 and again, tolerability, low efficacy. And so patients want to get clear, and we want to see them get clear. So it was hard to put peculate but now have something that is like ZORYVE, a medication that's in my hands right now that I can say this works as well as a mid to high potency steroid in my experience and the studies can back this up, and this is once a day, and you can use it anywhere. That's the beauty of a product like ZORYVE is that there's no limitations from how long a patient can use it. There's no limitations on where they can use it. We have been -- I have been contributing to such a complex regimen of care where you can use this low potency stereo interface and you're going, this mid-potency steroid here. This one is for your scalp because it's a solution. This is a ointment if it's really thick. This one is a [ remit ] -- and these patients have these draw pools of cranes in all of these written out plans on red lights and green lights and when to use it and not to use it. And you should see the relief on their face say, "This is one cream that you can use anywhere, at any time, it's only once a day and it's got great clearance, and it's going to create itch data and great clearance of disease, whether that's atopic dermatitis or psoriasis." Patrick Burnett: So in that setting, what do you see as the biggest barrier then for some of these advanced targeted topical therapies? What do you see is kind of that barrier, you've talked about some of the differences in the profile between them and steroids. And we -- I talked about that earlier as well. But is it really a profile issue? Or are there other things that are playing into this kind of transition that you're talking about? Douglas DiRuggiero: Well, I've mentioned this earlier, and that's step-through therapies. Our largest barrier are insurance plans forcing us to write things that we don't want to write first or to try them or to make it very difficult to get these things approved. So really, the issue when a rep comes in, it's not where you give us a trial or you try medicine. They really need to be saying for almost every medication now is, will you fight for us. Just to try it is 1 thing. The try it just means they're going to get denied, and then you move on back to your generic prescribing habit. But he's going to have to rise up a little bit and fight for a product that you know is safer and works well. That's how these insurance companies are going to be convinced that the demand is there. I think it's easy to convince patients of the safety. I think it's easy to give them samples or to get them started on something and they see it works. So I think the 2 main categories is always safety. Safety is always in the driver seat and anything in efficacy or its effectiveness is ride and shotgun. So those are the 2 things in the front seat, you want to be safe and you want it to work. And then in the back seat of any car, is it convenient? Can you get it filled, does -- will the patient be compliant and when you got something once a day, compliance is high. You've got something that doesn't burn or [indiscernible] compliance is high. You've got something that works. Compliance is high. What's not compliant is often an insurance company trusting us to be doing the name we think is best for our patient. And I think that's one of the larger blocks. Improvements are being made I will say the words out, I have a lot more patients coming in because of TikTok. I know we kind of throw TikTok and Google, Dr. Google under the bus a lot, but there are some ways where it's been very beneficial. And in terms of informing patients about corticosteroid withdrawal and all the dangers of it, I have a lot of patients who come in and they are -- they sit there and they asked me, what is what you're writing me a steroid stairway because I don't want my child on a steroid. They're now preemptively saying, "I don't want to be on a topical steroid." And so I've seen a shift in the last 2 years, in particular, when more and more patients despite their insurance, despite their economic status. They themselves are beginning to say, "I don't want to be on this. And I'm in [ World Georgia]. [indiscernible] not like there's a high [ fluting ] area, where you'd expect that to happen." I'm in a very rural area, and I still have patients on a weekly basis who are questioning me, is this more [indiscernible] steroid because I don't want to be on that. Pediatricians already tried. I don't want my chart on it. I don't want to be on it. I had a guy came in the other day when they talk of dermatitis, he's 40 years old, had it since he was -- birth. He says, if you're going to write me a prescription for [indiscernible], this would be the last time you've ever seen me. It was his first visit with me. I was like, well, okay. Well, I don't plan to do that, but it's nice to know to convince you and says, "My wife makes you come in every 2 years to see if there's anything new that's out. Tell me what I've got, list my options." And so -- so we're seeing a shift. It may not be as fast as we want it to be, but it's happening. It's happening. Unknown Attendee: Thank you, Frank. Unfortunately, Todd is under the weather today and will not be able to join us for the Q&A session, but I am joined by Frank, Latha and Patrick. [Operator Instructions]. So we'll jump right in. First question for the team here on the conversion of topical steroids. You spoke in the call to the evolution in treatment paradigm with topical corticosteroids starting to be displaced with nonsteroidal topicals. What actions are you taking or do you plan to take to accelerate this transition? Brian Scholkoff: This is, I think, an extremely important question given the criticality of this process to the future for ZORYVE. And I think it's really important to emphasize that this trend towards topical stewardship and being more judicious in the use of topical steroids for really short duration treatment is a trend that's being -- that's emerging in dermatology and it's really being driven by the dermatology clinicians themselves. And as you heard from Patrick and Douglas on the call today, there's this growing body of evidence that demonstrates the serious adverse effects that come from prolonged topical corticosteroid use, both locally and systemically, the side effects and dermatology clinicians are learning about that as Doug shared, they're talking about it and they're adjusting their practice. I was actually at the fall clinical conference this past weekend, and there was quite a bit of discussion from the podium about this Patrick mentioned the SDNP and the SDPA statement. So this is something that's happening organically and it's going to benefit the entire [ non steroid ] topical class as a whole. But specifically, it's going to help us given our very strong share of that nonsteroidal market. In terms of what Arcutis specifically is going to be doing to accelerate that trend. I think really there are 3 levers you can think about. I think the first one is the sales force. The second is on market access and the third is around our marketing activities. We're already in a very good place vis-a-vis the sales force and market access. We added about 40 reps last year around the atopic dermatitis launch. So we have a very strong field presence that covers the dermatology clinicians that are writing about 90% of all the topical prescriptions in dermatology. And then from access -- from an access standpoint, I think folks know, we have very strong coverage across commercial beneficiaries as well as Medicaid beneficiaries and we're working on expanding the Medicaid even further, and we're also hoping to start obtaining Medicare coverage as well. So I think we're in a really good place from a coverage standpoint. And then finally, with regard to marketing, again, I think we're in a very strong position. We've been very thoughtful as a company about our marketing investments. because we have to be careful about how we allocate capital, but also because we've been benefiting from this organic shift that I mentioned before that's happening from the grass roots in dermatology. So I think as ZORYVE, the franchise starts generating cash, as Latha mentioned, this is probably 1 of those areas where we'll be making some incremental investments in our marketing spend. Unknown Attendee: Great. Thank you. The next question here relates to the commentary on peak sales. The question is, as part of your peak sales guidance, you said you can reach 15% to 20% share of the topical corticosteroid market. What gives you confidence that you can grow from your current roughly 3% share position to that range? And any commentary on how long that process and that share gain will take? Brian Scholkoff: Sure. So you're going to hear from me a lot since Todd is sick today. But I think the best indicator this transition is already happening and it's going to continue to -- is the rate with which we're already seeing the nonsteroidal topicals take share from topical corticosteroids. As mentioned earlier in the call, the non-steroidal class is growing very rapidly albeit from a small base, but taking into account the fact that the nonsteroidal market has grown 50% roughly just in the last year alone, right? So there's a very, very strong growth trend and a lot of that's being driven by ZORYVE. I think that it's important to remember that while we're seeing this very strong growth trend in steroid conversion and this conversation with a topical steroid stewardship, it is a very recent phenomenon. If you think about it, the [ led wall ] paper just came out in January of this year, the SDNP and SDPA statements just came out a few months ago. So these conversations are happening right now, and they really weren't happening nearly as much a year ago. So I think we're really just at the very beginning of seeing the impact of this change in the thinking amongst dermatologists. In terms of specifically what's going to be the drivers for ZORYVE's market share going forward, again, I think the most important driver is the increased focus on stewardship of topical steroids that we just talked about and that's going to rely -- it's going to necessitate a much greater reliance on nonsteroidal topicals like ZORYVE. And again, we stand to differentially benefit from that shift given our [indiscernible] share of the non steroidal class and our growing share of the non-steroidal classes we've discussed already. I think a second lever is our expansion into new treatment settings as we continue to gain awareness and adoption in primary care and pediatrics via our [ Cola ] partnership. Third, I think the incremental data generation that Patrick highlighted today is going to be a driver of prescriber behavior for certain key populations like patients with nail psoriasis or palmoplantar psoriasis, which are in our current indication, but we don't have all that much data around that yet. So that will be an important incremental data set. On the access front, we're in a great place with the reimbursement, but we have further opportunities to go in terms of expanding our Medicaid coverage and also picking up Medicare coverage. And then lastly, actions that we take that really highlight or drive patient awareness to reinforce the trends that we're already seeing where patients are coming in and asking their doctors for something that's not a steroid, right? There's a great deal of public conversation around this topic. And I think that's going to be another important driver for [indiscernible] forward growth. From a timing perspective, again, if you look at the analogs that Patrick spoke about earlier, these paradigm shifts in treatment practice do take time to effect. I think we're very encouraged by the rate of adoption that we're seeing already. And I think the demand growth that you saw this quarter is a good data point to show that that's happening. But the shift from these outdated topical steroids to the newer advanced topical therapies is going to take some time. If you look at the analogs somewhere between 5 and 10 years for that to happen, and we're still very early in that process with the topical steroids. So I think it's hard to say, but it's not going to happen overnight, but I think we're very confident is going to happen for all the right clinical reasons, and we're already starting to see these trends play out. Unknown Attendee: Okay. Great. And we'll shift gears here to ARQ-234. We've had a few questions come in on this, several of them just making reference to any clinical evidence that already exists derisking the class or the target. But more specifically a question regarding ARQ-234. Eli Lilly discontinued its CD200R agonist after stopping the Phase II trial in atopic dermatitis for strategic reasons. Are there any learnings you've taken from that program that can be applied to 234 or any comments you can make on differentiation between the 2 programs? Todd Watanabe: Yes. So Patrick, do you want to take that one? Patrick Burnett: Yes. Thanks, Frank. Yes. No, we've watched the [ OLE ] program very, very closely. And I touched on this a little bit in the presentation. I think one of the key reasons why we are confidently moving forward with ARQ-234 really has to do with the structure. The Lilly molecule was a monoclonal antibody that bind outside of the native binding site, whereas we're a fusion protein that's engineered for an extended half-life and also has 2 high-affinity modified CD200 ligand. So really a very different molecular approach. And we have preclinical evidence that suggests that we're getting a higher affinity. So we feel very good about that and as well as this kind of extended PK half-life that we think could have benefit with regard to our dosing frequency. Of course, that has to be proven out in this study that we're planning to get started at the beginning of 2026. So we have watched that program very carefully. And again, a lot of times, it comes down to also execution of a study, and we've conducted many studies in atopic dermatitis. And I think we have an excellent clinical development and clinical operations team. And so I think that will also help us to get a very clear understanding. The [ GWAS ] data and the kind of early like evidence that pushed Lilly into atopic dermatitis still remains. We think that, that's very compelling. And we think the ARQ-234 is the right molecule and atopic dermatitis is the right disease for us to serve further. So we're looking forward to getting that kickoff. Unknown Attendee: Okay. Great. The next question here is on the LCM activity. With vitiligo and HS, the question is, as you're investigating ZORYVE in vitiligo and HS, how do you think about competitive dynamic with other drugs that are already approved or in development for those indications? And then as a second part to this question, can you say more about trial design, example, size, whether or not it's controlled and duration of study? Todd Watanabe: Sure. Yes. Patrick, I think that's probably the best handled by you again. Patrick Burnett: Okay. Sounds good. Yes. So looking at our life cycle management and competitive dynamics with the HS and vitiligo. I think the best place for us to start is to look at these indications where we're already approved and already in a competitive situation with both topical corticosteroids and branded topicals. And here, what are the elements of our profile that have allowed us to be so successful. And it really comes down to efficacy, safety, tolerability once daily in ease of use, pretty much anywhere on the body as well as our commercial execution and our access. So we have a lot of confidence in our clinical development and our commercial execution and our ability to leverage these capabilities for both of these new indications. Now thinking specifically about vitiligo, this is a disease where I believe that once daily dosing is going to be really important for patients. Vitiligo patients have to treat for a long period of time, months typically before they start to see benefit with pretty much any treatment. And so the ability to do that just once a day is going to -- it's typically offered improved compliance compared to daily dosing. Now for the same reason, the rate of repigmentation is another key potential differentiator. So this is something we're going to be looking at really closely as we conduct this next study, and we'll have to see those results once they get into the clinic. So turning to [ hidradenitis suprtiva]. Here, there's a lot of white space for a topical therapeutic that's targeting inflammation. Right now, treatments are primarily topical antibiotics and then patients kind of leap all the way to a systemic therapy. So being able to have an effective topical treatment that could be used in the earlier stage patients as monotherapy and for later-stage patients in as adjunctive treatment to complement their systemic therapy is a very, very strong profile. And that's similar to what we've seen in atopic dermatitis and psoriasis. And in fact, [ hidradenitis Supertea ] systemic therapies leave a lot of room for some adjunctive therapy to really help patients to get to their target treatment. So we're very optimistic about how this profile fits with both of those indications. Unknown Attendee: Perfect. Okay. So moving on to next question here, and this is focused on the results for quarter 3, specifically on net sales. And the question is, can you bridge us from the 13% sequential total prescription demand growth to the 22% sequential revenue growth for the quarter? Todd Watanabe: Yes. Sure. It's a great question. I think that the primary thing that's driving the nonvolume component of the growth of our product revenue is really improvement in gross to net. I think what we saw in the quarter was, if you think about it, if a patient is still in their deductible for the year, we're buying them down to $0 or $35. And so Arcutis is having to pick up that additional cost from their deductible until they reach their annual deductibles. What we saw in Q3 was that patients have progressed through their annual deductibles, probably at a rate higher than we had expected. And so we're seeing reduced usage of our co-pay program, and that directly translates into more revenue per prescription, happened earlier than we had anticipated. But I think that also probably means that there might not be as much improvement in Q4 on that component as we saw in Q3. So I think we expect [ GTN ] to be very stable, probably between Q3 and Q4. And I think it's important to emphasize that all of the other things that can contribute to non-demand revenue growth really were not material in this period. So it's really just the demand growth and then the improvement in gross net, which is driving this outperformance. Unknown Attendee: Okay. Great. The next question here is on the topic of external innovation and business development. The question reads, Frank mentioned sourcing external innovation. Would you elaborate on the stage of development the type of assets from a modality perspective, and then therapeutic categories that you're interested in, specifically, are you looking for something more adjacent to ZORYVE or more distant from ZORYVE from a diversification perspective? Todd Watanabe: Yes, sure. So Patrick is leading all these efforts. So I think I'm going to ask Patrick to take that one. Patrick Burnett: Yes. I think if you look at our pipeline, we have ARQ-234 that's just going to be entering into the clinic and then not spending a lot of time talking about the life cycle management opportunities for ZORYVE. So ideally, we'd be looking for an asset which is kind of fitting in between those 2. But I think we're really opportunistic with regard to most importantly, finding something that we are very confident about, and we're very excited about is fitting an unmet need. Again, we're prioritizing dermatology because we think that fits best with our expertise. But just given the breadth of knowledge across the team and experience outside of dermatology we're not limiting ourselves to dermatology. So we're really looking across inflammation at adjacencies there for assets that would fit very well into our development pipeline. So I think what we're really -- as I mentioned in the discussion, what we're really looking for is the right asset, and we don't feel compelled to necessarily bring one in just because of where we are with our pipeline. Because we feel they are confident about moving 234 forward and all the opportunity that we have with the ZORYVE life cycle management. Unknown Attendee: Okay. Great. And then -- and staying maybe for a moment on 234, A question came in here. Will ARQ-234 target in AD patients overlap with the ZORYVE target population for that indication? Or how should we think about that? Todd Watanabe: Yes, Patrick, that's probably back to you again. Patrick Burnett: Yes. So our approved indication for atopic dermatitis, goes down to the age of and is in the mild to moderate space. So development in systemics and biologics, in particular, typically focuses on moderate to severe. So there is some overlap between the 2 of them. But I think most importantly, one of the advantages of the ZORYVE profile is that whether it's label, with its safety profile, it's not excluded from being used with systemic therapy. And so that's one of the areas that we've heard from a lot of our customers that they found it to be helpful. And oftentimes, patients who are in that moderate to severe area will get pushed down into a more mild to moderate category where they would be, while on a biologic or systemic would be appropriate for use with ZORYVE. So we don't see them necessarily as competitive just as we don't see ourselves competing with systemic treatments, but more as complementing each other in the kind of ability to be able to maintain a patient for this chronic disease for their lifetime without having them resort to topical corticosteroids. Unknown Attendee: Okay. Great. The next question here is back on the topic of BD, and I think we hit on this a little bit, but given your foothold in dermatology offices, would you consider adding a biologic against a novel dermatology target to develop or would you also consider partnering one already in the development for U.S. rights, just to better kind of titrate on what we're looking at there. Todd Watanabe: So that was a 2-part question, right? I think the question was would we consider a biologic in AD? And would we consider partnering commercial stage product? Unknown Attendee: Correct. Todd Watanabe: Yes. So look, on the first one, we absolutely would consider partnering a biologic in the space in and I think that's really the long and the short of what Patrick was just talking about. We're really agnostic to modality and our Arcutis treatment modality. So whether it's an oral and injectable or a topical, we can work on any of those. And so we're evaluating that full landscape in terms of our business development efforts. In terms of partnering on something that's already commercial stage and in the marketplace, I wouldn't say never, but it's probably not the highest priority. We've built an exceptionally strong development organization at Arcutis across clinical and manufacturing. You think about 9 successful Phase IIIs, 6 FDA approvals and I think this team has proven time and again, its ability to execute development programs and create shareholder value. And part of our thinking around business development is how we continue to leverage this really very strong development engine that we've built. In a commercial stage is more leveraging the commercial organization that we have, but the commercial organization we have is pretty busy with launching all these various indications for ZORYVE. So I would say that's probably a lower priority for us in terms of the business development and commercial stage products. Unknown Attendee: Okay. Great. And then another one here, staying on the BD topic, and this one is more about how we think about potential size constraints. So is there any limit in terms of size that we would consider? And then depending on the size, different considerations from financing strategy to support that? Todd Watanabe: Well, I would say with the stock performance today, we -- it's probably a little bit bigger. But Latha, you want to maybe take that one? Latha Vairavan: Absolutely. So I think -- our core focus is on the balance sheet is based on ZORYVE trajectory [ builds], we will, as I said, focus on our milestone of hitting cash flow breakeven in Q4 of this year. And from more focus on our grow and expand, as Frank outlined today, and funding those activities. And then next, if you think about innovative BD, we have quite a bit of flexibility with our debt facility with SLR and also depending on the asset and the quantum and as Frank said, based on today's stock price, we'll think about the funding mechanisms that are optimal to our capital strategy and how to allocate them for BD. Unknown Attendee: Okay. Great. Next question here is going back to the topic of life cycle management for ZORYVE. And this is a 2-part question. First, across the different indications that we highlighted in the presentation earlier, how do we think about prioritizing those? Kind of what is the framework for choosing where we would go next? And then the second is -- how do you think the addition of new indications will potentially benefit your commercial efforts in psoriasis, sebderm in atopic dermatitis? Todd Watanabe: Yes. So maybe I'll take the second half of that question and then Patrick, I'll turn it over to you to talk about the first one. I think that as you think about really replacing topical steroids as the go-to topical therapy in dermatology. The more opportunities the doctor has to write our product, the better it starts becoming a habit. It's the default treatment choice, right? And you see that in the data that we presented before in terms of what happens when a doctor goes from writing ZORYVE for 1 indication to 2 indications to 3 indications, right? It doesn't go up in steps that goes up exponentially. 1 to 2 is threefold. 2 to 3 -- 1 to 3 is a tenfold increase in their prescribing. And we would expect to see a similar kind of dynamic when they're using -- when they can use ZORYVE for almost every patient they have walking through their office door. So I think that there will be a synergistic effect with our existing indications as doctors use ZORYVE even more and more. And one of the things that we've actually found, particularly in the access front, I would say, is the more doctors use ZORYVE, the more they use ZORYVE, right? Because they know how effective it is, how well tolerated it is, and most importantly, I think how easy it is to get for their patients there's a growing confidence with familiarity. And I think expanding indications, we should see something very similar happen with that in addition to the growth from the new indication itself. And then Patrick, do you want to maybe address the prioritization question? Patrick Burnett: Yes, absolutely. So as we think about prioritizing and we're starting with HS and vitiligo. But those are not the extent of the indications that we're looking at, and we shared kind of this broad list. And I think that is one of the key components for replacing steroids as you can't replace steroids if they work across many, many indications with a treatment that only works across 1 or 2. So I think that's a really critical part of our topical corticosteroid replacement. As we think about prioritizing those, it really comes down to what's the clinical profile that we're seeing? What's the efficacy and the safety that we're seeing and that will come from both -- are studies that we're conducting as well as from reports coming in from the field. And every day, we're hearing more and more about those, and that shapes our kind of understanding of what's the level of unmet need. And what is the kind of profile and efficacy that we expect to be able to see. And then it's combining that with the commercial assessment so that we can really understand how that profile fits. And I touched on that just a little bit with the kind of the first question we had about life cycle management, about what do we want to see in vitiligo, what do we want to see in HS. And that really gets at trying to fit in that commercial assessment to make sure that we're developing in an indication where we're going to have a market when we get to the other side. But we know for both HS and vitiligo that these are very favorable. We'll do the same kind of activity as we look towards new indications beyond those. Unknown Attendee: Very good. So turning now to the recent launch of ZORYVE Foam 0.3 and scalp and body involve plaque psoriasis. So the recent growth for the cream 0.3% was more muted compared to the foam. This is in quarter 3. Is this a result of plaque psoriasis switching to foam from cream? Or how do you see that dynamic playing out between the 2 products? Todd Watanabe: Yes. We've gotten this question on a number of occasions. And I think it's very unlikely that a patient who is stable on the cream is going to switch to the foam. I certainly have heard of patients who have received prescriptions for both products, and there's no reason why patients can't -- if you had a plaque on your elbow and a plaque on your scalp, maybe the doctor gives you both although you can use the foam on the body and it works just the same as the cream. I think we continue to see growth in [ NRxs ] for the cream. So I don't think that we get this question about cannibalization. I don't think there's any cannibalization going on because the cream is still growing. What I do think we're probably seeing is that for new patients who haven't been on ZORYVE yet, more patients now, especially psoriasis patients are getting the foam and those in some cases are patients maybe who might have gotten the cream in the past. I think it's also important to emphasize and I've said this before, but from a shareholder standpoint, it really doesn't matter which SKU they get as long as they're getting ZORYVE, right? The COGS is essentially the same across the products. The price is the same. The access is very similar. So as long as total ZORYVE volume is growing, shareholders are benefiting from that growth. And I think having both the cream and the foam has options in psoriasis and now having 2 different presentations for atopic dermatitis tailor for those patients and having the phone for seb derm is we're just giving doctors more and more opportunities to use ZORYVE treat their patients with inflammatory skin diseases. Unknown Attendee: Okay. And then we probably have time for just one more question here, and this final question will be on the incremental data generation opportunities that Patrick was referring to in the presentation earlier. And the question is for the data generation opportunities in your current indications, the patient figures indicated on the slide, are those incremental new patients that will be covered and add to the market opportunity? Or how do we think about that? Todd Watanabe: Yes. Another great question. So in terms of incremental data generation, those are really patients that are already in our serviceable obtainable market. So for example, the nail psoriasis patient population, we talked about 3 million to 5 million psoriasis patients having nail crisis. That is part of the already targeted psoriasis market that we talked about. But what we do expect is that will drive a differentially greater uptake in these subpopulations, particularly the really hard subpopulations, nail psoriasis is one of the hardest things to treat. Even with a biologic, it often doesn't clear palmoplantar psoriasis is another form of plaque psoriasis that is often very difficult to treat. And so if we can generate very strong data on ZORYVE's efficacy in those very tough to treat patient population, you would expect to see even greater adoption of ZORYVE in those subsets of patients. And that's why we think that this incremental data generation is so important. And Patrick, I don't know if you have any other thoughts that you wanted to add to that? Patrick Burnett: No, I completely agree. If you see a patient come in with psoriasis and you always check their nails, every psoriasis patient gets their nails and elbows checked. And you've seen nail psoriasis and the first thing that you think about is that ZORYVE is going to benefit that and nobody else with a topical therapy, and you might not have to stick them on a systemic therapy. I think that is a huge advantage for us and really kind of changes someone's perception of the profile in an even more favorable way. So I totally agree with what you said, Frank. Unknown Attendee: Okay. Great. And that will take us to time for the Q&A session. We'd just like to thank you all again for making time in your busy schedule today to join us for this Investor Day.
Operator: Welcome to Seacoast Banking Corporation's Third Quarter 2025 Earnings Conference Call. My name is Desiree, and I will be your operator. Before we begin, I have been asked to direct your attention to the statements at the end of the company's press release regarding forward-looking statements. Seacoast will be discussing issues that constitute forward-looking statements within the meaning of the securities at Exchange Act, and its comments today are intended to be covered within the meaning of that act. Please note that this conference is being recorded. I will now turn the call over to Chuck Shaffer, Chairman and CEO of Seacoast Bank. Mr. Shaffer, you may begin. Charles Shaffer: All right. Thank you, and good morning, everyone. As we proceed with our presentation, we'll refer to the third quarter earnings slide deck, which is available at seacoastbanking.com. Joining me today is Tracey Dexter, our Chief Financial Officer; Michael Young, our Chief Strategy Officer; and James Stallings, our Chief Credit Officer. The Seacoast team delivered another exceptional quarter, which clearly demonstrated the progress we are making towards enhancing our return profile, while delivering strong growth on both sides of the balance sheet. Our competitive transformation has fully taken hold with loan and deposit growth near 8%, the result of a focused effort to recruit the most qualified and capable bankers across our footprint. I was particularly pleased with the growth in noninterest-bearing DDA accounts and a balanced approach to loan growth with our commercial production spread across C&I and CRE with multiple asset classes and industries. The team also delivered strong performance across multiple revenue streams, including a record-breaking quarter in Wealth Management, and solid performance in treasury management fees, SBA, interchange and insurance agency income. And impressively, the team accomplished all this while successfully closing and converted the Heartland transaction as well as closing the Villages transaction on October 1. Asset quality remains sound, nonperforming loans declined and net charge-offs were lower than our prior guidance, reflecting our continued focus on disciplined underwriting and proactive risk management. We have very limited exposure to shared national credits or NDFI. And just to remind you, our portfolio is almost entirely franchise quality relationships made to borrowers in our footprint, including consumers, businesses, nonprofits and municipalities that we have deep relationships with. And lastly, capital and liquidity are industry-leading, and our liquidity profile will be further enhanced with the Villages transaction. We remain committed to our fortress balance sheet principles and continue to operate one of the strongest banks in the industry. And in closing, I want to express my sincere appreciation to our dedicated associates for their commitment to advancing our growth and profitability goals. Their focus and executions continue to drive our success. We operate one of the best banking teams in the Southeast across some of the best markets in the United States with an exceptionally strong balance sheet. I remain confident in our growth outlook and our ability to continue to deliver continued improvements in returns into 2026. With that, I'll turn the call over to Tracey Dexter to walk through our financial results. Tracey? Tracey Dexter: Thank you, Chuck. Good morning, everyone. Directing your attention to third quarter results, beginning with Slide 4. The Seacoast team delivered a strong quarter with adjusted net income, which excludes merger-related charges increasing 48% year-over-year to $45.2 million or $0.52 per share. Organic deposits, excluding brokered and Heartland acquired deposits, grew $212 million, or 7% annualized and that organic growth included $80 million in noninterest-bearing deposits. Loan production continued to be strong with organic growth in balances of 8% on an annualized basis. The pipeline has reached a record high, reflecting the success of recent hiring and the increase in the balance sheet following the completion of the Villages acquisition in October. Net interest income was $133.5 million, an increase of 5% from the prior quarter, and net interest margin excluding accretion on acquired loans expanded 3 basis points to 3.32%. Tangible book value per share increased 9% year-over-year to $17.61, remarkable given that the Heartland acquisition included 50% cash consideration. Our capital position continues to be very strong. Seacoast's Tier 1 capital ratio was 14.5%, and the ratio of tangible common equity to tangible assets is 9.8%. We completed our acquisition of Heartland Bancshares on July 11, adding 4 branches and approximately $824 million in assets. The technology conversion was fully completed in the third quarter. And on October 1, we finalized our acquisition of Villages Bancorporation, adding 19 branches and over $4 billion in assets. We expect the full technology conversion to happen early in the third quarter of 2026. Turning to Slide 5. Net interest income increased by $6.6 million or 5%, compared to the prior quarter and by $26.9 million or 25%, compared to the prior year quarter. The net interest margin declined 1 basis point to 3.57% and excluding accretion on acquired loans expanded 3 basis points from the prior quarter to 3.32%. In the securities portfolio, yields increased 5 basis points to 3.92%. Loan yields declined 2 basis points to 5.96%. Excluding accretion, loan yields increased 3 basis points to 5.61%. The cost of deposits remained near flat with only a 1 basis point increase during the quarter to 1.81%. And overall cost of funds is down 3 basis points from the prior quarter. With strong momentum in loan growth, deposit costs now lower and stabilizing, additional liquidity and accretive acquisitions, we expect net interest income to continue to grow. Consistent with our previous guidance, we expect to exit the year with the core net interest margin reaching approximately 3.45%, inclusive of recent acquisitions. Moving to Slide 6. Noninterest income, excluding securities activity was $24.7 million, increasing 5% from the prior year quarter. Fee revenue continues to benefit from our investments in talent and expansion of treasury management services to commercial customers with service charges on deposits increasing 12% from the prior quarter. Our wealth management team delivered a record quarter in new AUM, continuing its strong performance and reinforcing its position as a key growth driver for the organization. $258 million in new AUM was added in the third quarter, the highest quarterly result in the division's history and $473 million in new AUM in 2025 year-to-date. BOLI income increased to $3.9 million in the third quarter and included $1.3 million in benefits. Other income totaled $6 million, and included higher gains on SBA loan sales and higher loan swap fees. Looking ahead to the fourth quarter, we expect noninterest income in a range from $22 million to $24 million. Moving to Slide 7. Again, the Wealth division continues to grow entirely organic and with significant referrals from our commercial teams, with total AUM increasing 24% year-over-year and a 25% annual CAGR in the past 5 years. On Slide 8, noninterest expense in the third quarter was $102 million, an increase of $10.3 million, and the third quarter included $10.8 million in merger-related expenses. Higher salaries and wages reflect continued expansion and the addition of Heartland as well as higher performance-driven incentives. Outsourced data processing costs totaled $9.3 million an increase of $0.8 million, reflecting higher transaction volume and growth in customers, including from the acquisition of Heartland. Other categories of expenses were in line with expectations. Our adjusted efficiency ratio improved to 53.8%, down from 55.4% in the second quarter, demonstrating continued operating leverage. We continue to remain focused on profitability and performance and expect continued disciplined management of overhead and the efficiency ratio. With the addition of the Villages beginning in October, we expect adjusted expenses for the fourth quarter, excluding direct merger-related costs to be in the range of $110 million to $112 million. Turning to Slide 9. Loan outstandings, excluding the impact of the Heartland acquisition, increased at an annualized 8%. The Pipelines increased 30% to $1.2 billion, and we continue to see strong broad-based demand across our markets. Loan yields declined 2 basis points with lower accretion on acquired loans with the prior quarter impacted by elevated payoffs. Excluding the effect of accretion, yields increased 3 basis points from the prior quarter to 5.61%. Looking forward, the pipeline remains strong, and we expect continued high single-digit organic loan growth in the coming quarter. With the addition of the Villages in the fourth quarter, we expect loan-to-deposit ratio at year-end 2025 to be below 75%, allowing significant continued growth opportunities. Turning to Slide 10. Portfolio diversification in terms of asset mix, industry and loan type has been a critical element of the company's lending strategy. Exposure is broadly distributed, and we continue to be vigilant in maintaining our disciplined, conservative credit culture. Nonowner-occupied commercial real estate loans represent 34% of all loans and are distributed across industries and collateral types. As we have for many years, we consistently managed our portfolio to keep construction and land development loans and commercial real estate loans well below regulatory guidance. These measures are significantly below the peer group at 32% and 223% of consolidated risk-based capital, respectively. We've managed our loan portfolio with diverse distribution across categories and retain granularity to manage risk. Moving to credit topics on Slide 11. The allowance for credit losses totaled $147.5 million, with coverage to total loans remaining flat at 1.34%. The allowance for credit losses, combined with the $102.2 million remaining unrecognized discount on acquired loans, totals $249.7 million or 2.27% of total loans that's available to cover potential losses. Moving to Slide 12, looking at quarterly trends in credit metrics, which remain strong. We recorded net charge-offs of $3.2 million during the quarter or 12 basis points annualized. Nonperforming loans declined by $3.6 million during the quarter and represent only 0.55% of total loans. Accruing past due loans moved slightly higher to 0.19% of total loans. The level of criticized and classified loans stands at 2.5% of total loans, generally in line with prior periods. As Chuck mentioned in his opening remarks, Seacoast continues to have very limited exposure to shared national credits or nondepository financial institutions. We have no exposure to private equity debt funds. Moving to Slide 13, and the Investment Securities portfolio. Net unrealized losses in the AFS portfolio improved by $36 million during the third quarter, driven by changes in long-term rates. The portfolio yield increased 5 basis points to 3.92%, reflecting $385 million in purchases of primarily agency mortgage-backed securities with an average yield of 5.03%. Turning to Slide 14, and the Deposit portfolio. Seacoast continues to benefit from a diverse deposit base. Customer transaction accounts represent 48% of total deposits which continues to highlight our long-standing relationship-focused approach. Our customers are highly engaged and have a long history with us and low average balances reflect the granular relationship nature of our franchise. On Slide 15, organic deposit growth, excluding changes in brokered deposits and the acquired Heartland deposits, was $212.3 million, or 7% annualized, of which $80.4 million was noninterest-bearing deposit growth. Cost of deposits increased slightly by 1 basis point to 1.81%. The Heartland acquisition added over $700 million in a strong core deposit franchise and the #1 market share in Highlands County. We continue to build share across our markets with a focus on core relationship deposits. For the fourth quarter 2025, we expect low to mid-single-digit organic deposit growth. And finally, on Slide 16, our capital position continues to be very strong. Tangible book value per share has grown to $17.61, and the ratio of tangible common equity to tangible assets held strong at 9.8%. As expected, return on tangible common equity decreased reflecting the impact of the Heartland acquisition. And in the fourth quarter, we'll see the initial impact of the Villages acquisition on these metrics. Into the first quarter of 2026 and moving forward, we expect to see meaningful improvements in return on equity measures. Our risk-based and Tier 1 capital ratios remain among the highest in the industry. Results this quarter reflect our ability to deliver strong sustainable performance. Our balance sheet is well positioned and our capital position is strong. We'll continue to execute on our organic growth and profitability goals as we integrate recent acquisitions and grow the franchise. I'll now turn the call back over to Chuck. Charles Shaffer: All right. Thanks, Tracey. And operator, I think we're ready for Q&A. Operator: [Operator Instructions] And our first question comes from the line of Will Jones with KBW. William Jones: So I just wanted to start on the growth outlook. It's impressive in a quarter where you're closing and converting a deal and closing another one that you're still able to just so consistently produce this mid- to high single-digit growth. And as I look back on the first half of the year, it's so consistent with what you produced this quarter. But at the same time, it feels like pipeline momentum being at all-time highs and then just kind of the added flexibility you're going to have with the Villages balance sheet, that there may be opportunity to kind of accelerate growth as you look into 2026. Could you just maybe talk about your willingness to scale up the growth opportunity to the extent that, that does present itself next year? Charles Shaffer: Thanks for the question, Will. And that was one of the things I thought was most impressive about the quarter is not only did the team grow strongly both sides of the balance sheet, we also converted a Heartland transaction, which went exceptionally well. And we continue to move with tremendous momentum. When you look at the building the pipeline, the building growth, we have a slide in there that shows the net loan growth quarter-to-quarter, and you're seeing consistent improvement. When you kind of combine the liquidity we're picking up with the Villages transaction, which just to remind you, is a very granular, diverse, lower-cost deposit portfolio and connect that with what I think now is one of the strongest commercial banking teams across Florida and maybe in the whole Southeast is a really strong combination to put together to drive earnings as we move forward. The team we've built over the last 3 years has matured now. And if you recall, we've been pretty hard at work recruiting consistently now for a good 36 months. We've moved past solicitation constraints and other things that the bankers would have had in terms of contractual arrangements. And they're now fully available to go out and call and build business. We've also moved to the point of where from a lending perspective, some of the very low-yielding loans that were kind of locked into some of those balance sheets that would be moving business from have reached maturity and/or have amortized down to the point where they're willing to refinance those arrangements. And so when you put all that together, I just feel very confident about our ability to deliver our guide, which was high single digit as we move forward. I think I'd stick with that guide for now. I think that's an appropriate guide as we move through time. But I feel really confident in our ability to deliver that in the coming quarters. Michael Young: And Will, this is Michael. I just wanted to add, I think when you compare that to what you're seeing in the industry right now, we did a lot of work over the last 2 years, and we're derisked kind of our portfolio, made sure that everything that we have is what we want to have going forward. I think a lot of others are going through that right now. And so just our production is leading to more net growth as we add new relationships and grow the book. William Jones: Yes. That's fair enough. Certainly an envious position to be in. And I guess, maybe more holistically, as you think about 2026 and the flexibility that villages will provide to you, as we kind of think about the size of the balance sheet next year, do you -- would you characterize 2026 more as a year of optimization and maybe you don't need as intensive of deposit growth to kind of just leverage the balance sheet on the loan side? Or do you still expect to see some modest balance sheet growth in 2026? Michael Young: Will, yes, let me -- I'll take that one. This is Michael. I'll call out one trend in the fourth quarter quickly, and then I'll move to 2026 for a little bit of color there. So in the fourth quarter, we did add a little bit of leverage in the third quarter to prebuy some securities for the Villages restructuring about $350 million that was purchased that Tracey mentioned earlier. So we have about $167 million of brokered deposits at about 4.2% that will run off in November and another $175 million of FHLB advances at about 4.2% that will run off in November as well. So -- we will delever just a little bit here in the fourth quarter at higher yields and expanding margin. But then as we move to 2026, we really think that across the franchise, there's a lot of deposit growth opportunity. We've opened about 5 to 6 new locations by year-end across the footprint here. And then also with the villages continued expansion and growth with them opening new town centers and having a lot of net new and migration there as well. There's just a lot of tailwinds to deposit growth. So we will remix a little bit, but deposits are still likely to grow at a pretty decent clip in 2026. So the balance sheet will be expanding kind of in line with that deposit growth that we forecast for 2026. William Jones: Yes. Okay. I appreciate that detail, Michael. And then just lastly for me. You guys have been expanding into Atlanta more recently, and correct me if I'm wrong, maybe your first meaningful expansion outside the state of Florida, just in terms of where you have boots in the ground, that wholesale market that's seen quite a bit of M&A turnover in the past couple of months here. Maybe, Chuck, if you could just frame what you would like to see in terms of the build-out of Atlanta and where there may be opportunity to add talent here? Charles Shaffer: Sure. Thanks, Will. And you're right, what we see in that market and what we see as we entered it a few years ago is the opportunity to take advantage of what we think will be significant consolidation in the Northern Arc of Atlanta. We, about 3 years ago, began to enter that market carefully with the commercial real estate team. We saw a lot of success uniquely or maybe not uniquely, but interestingly, we found a lot of connectivity between Atlanta and Florida with a lot of -- particularly on the commercial real estate side, some of the institutional quality commercial real estate investors and developers doing a lot of work in Florida. So it's a natural segue. As that continued to build, we've bolted on a C&I team that continues to grow in that market. I would expect us to ultimately open a handful of branches in the probably 3- to 5-year period as we move through the coming years and expand into the market. We've had a lot of success at this point. We're onboarding a lot of high-quality customers. And so I would expect us to build out that Northern Arc. Beyond that, I don't think we have any plans outside of that at this point. That's kind of our focus in Atlanta. And then we still have markets to fill in around Florida that we're focused on as well. We're still getting a lot of inbound demand by bankers and banking teams wanting to join the franchise. We're carefully taking advantage of that as we move through time. And potentially, as there is more of market disruption consolidation, we'll have very good opportunities to bring on really high-quality talent. Operator: Our next question comes from the line of David Feaster with Raymond James. David Feaster: I wanted to touch on the Villages deal. I just kind of hoping to get maybe some of an update. I mean this is a transformational deal and an extremely exciting time for you all. How has the deal gone early on, right? I mean we're only a couple of weeks into it, I know. But where are you seeing the most opportunity to add value near term, the time line to cross-sell some additional products across the existing footprint? And then just maybe how are you prepping for that conversion to minimize disruption and ensure a seamless integration? Charles Shaffer: Great question, David. It's the most exciting thing that's ever happened to Seacoast. I really -- I am not overstating that. We are really excited to be in the Villages MSA. We've had a very great -- good reception in that market. The team there is -- fits incredibly well within Seacoast. The cultures are very much aligned, very customer focused. We've been really excited to have the team join us. It's gone incredibly smooth. Having done a lot of these through my career, this one is a good one, and it's going exceptionally well. As we look at that market, as you mentioned, the most important thing we can do is have a very clean, smooth, easy conversion for the Villages customers. Citizens First customers, and that's what we're focused on. That will happen about July next year. We gave ourselves plenty of time to do lots of data integrity work, lots of mock conversions, lots of work. There's a full team here that is heads down on that. It is the most important thing we can do as we come into that year. And the quality of that customer franchise we're acquiring is tremendous. And so we want to make it incredibly smooth for them, incredibly smooth for the Villages community in general and highly focused on that. We're also doing -- going to be doing lots of coffee meetings and training for the customer. I mean we have all kinds of things planned, events, cocktail parties, everything you can imagine. So we're going to be deeply involved in the Villages and the growth of the Villages. And then we want to get this one right because we have Villages too coming that we're going to build alongside with. So lot of upside to getting that right, a lot of benefit in the coming years. We think we can build a bank that is twice the size of the bank there over time as it gets built in that market. And so we're super excited on it. That's step one. Step 2 will be building around that franchise in terms of wealth management. We've got a wealth team built at this point. We've acquired a full team up in that market that is now calling in that market, and we're starting to already win business, particularly on the trust side. So we're off the races up there. Things are going incredibly well. I think the balance sheet came in a little bigger than we expected. Deposits are growing, and we're probably outperforming a bit of our model at this point. David Feaster: That's terrific. And then on the other side, too, I mean, we touched on it a bit, but the pipelines continue to grow. It's at record levels. How much of that is just, a, I mean, obviously, Florida is a really strong market. How much of that is just the market backdrop versus maybe more confidence from your clients to start investing and maybe down rates some projects might pencil today that didn't before versus just like you talked about market share gains from your new hires. And then just how is the complexion of the pipeline today, just both by segment and geography? Just kind of curious where you're seeing the most opportunity. Charles Shaffer: Yes. Market is strong. Demand is strong. We're seeing sort of broad-based demand, C&I and CRE. Pipeline is a mix of about 50-50 CRE and C&I. So it's pretty wide. It's pretty broad. The industries are pretty wide, too. So kind of across the board, market demand remains really good. It really hasn't slowed down as a result of tariffs or anything, we're still seeing quite a bit of demand. We've seen no real impact in terms of demand as a result of that. So we're feeling very good about market demand. And then probably more importantly, what we're seeing a significant amount on is offloading customers out of larger bank balance sheets onto our balance sheet as we continue to have the banking team mature into the investments we made a number of years ago. And I'll just reiterate what I said to Will's question. A lot of those loans were locked in at very low rates. Customers are coming up on their terms. They've got to refinance and rather than going back to the bank they're at, they're falling their banker to Seacoast. And that is very exciting as we move forward. Combining that with the liquidity we're bolting on through the M&A is incredibly accretive in the years to come. David Feaster: Okay. And then maybe just stepping back, kind of a higher-level question. I mean you've had pretty massive growth over the past several years. We went from -- looking back at the start of 2020, you were a $7 billion asset bank. Today, you're north of $21 billion in just 5 years organically and through the inclusion of several community banks. Just given that massive growth, right, as you step back and look where you stand today and you think about how are you going to compete maybe against more some of your larger brethren -- curious, is there anything that you're missing or that you need to invest in, especially as you continue to move upstream, whether that be technology, infrastructure, product offerings? Just kind of curious what you're working on today and being a much larger institution, if there's anything that you need to add or where you're looking to invest? Charles Shaffer: I would say the good thing or the smart thing we did over the last few years is we invested heavily in building out our Line 2, Line 3 risk function. So we have a very strong ERM function that supports being a larger midsized bank. We continue to make investments over that period of time. I feel very confident in where we stand in regard to our overall enterprise risk management, our governance, the structure of the organization. We've also made a lot of investments on the technology side, particularly customer-facing technology. There's probably some things we need to continue to build on, particularly around our commercial treasury stack that we remain focused on here as we move forward. We're working on getting Zelle for business inside the company. That's an important technology product that's important to our small business customers in particular. So there are things we're bolting on, David, that we'll be doing in the coming years. But I think at this point, the good news around our size is that $21 billion, we have the ability to compete up market in a meaningful way. So we've brought in large regional bank quality talent into the organization, combine that with a really high-quality treasury management team, and you see that pulling further in our TMCs, and then we're letting them go to work and have the ability, the capacity now to go out and compete on market and win business. And so I largely feel like we're there. There's investments we need to make, we'll continue to make. There's investments we need to make to continue to harden and build our IT infrastructure and other things as we get larger. But I think we've got that all in the plan. I think we've managed that and pace that appropriately and feel very good about our investments in the coming year and our earnings profile. Operator: Next question comes from the line of Russell Gunther with Stephens Inc. Russell Elliott Gunther: I wanted to start on the margin discussion. So I think the core NIM for this quarter came in a little bit lighter than this guide. Could you walk us through the glide path that gets us from 3.2% to that 3.45%? Maybe touch on where the September NIM shook out, if you could? And then what does this consider for continued excess liquidity deployment going forward? Michael Young: Russell, this is Michael. I'll take that one. Yes. So we've been talking about a 3.45% NIM in the fourth quarter for a while. We were kind of unsure of the date of the close of the legal transaction with Villages that came in a little earlier. So that's certainly beneficial. I mentioned the wholesale funding that will pay off here in November, early November that will benefit the margin as well into the fourth quarter. And then I think from there, just the completion of the securities restructure in the fourth quarter will be the other main driver. We are down in cost of funds. Our September cost of funds was about 1.92% versus 1.96% reported for the quarter. So we're already benefiting from the rate cut that happened in September, and then we'll add on the low-cost deposits from Villages as well that we talked about would add roughly about 10 basis points in total to the fourth quarter cost of funds improvement and therefore, NIM. So I think we're right on schedule. Obviously, if we get a couple of rate cuts here, if we get October and December, that's beneficial to our slightly liability-sensitive balance sheet. So those give you some of the moving pieces, I think, as you move through the fourth quarter. And we still expect expanding margin, obviously, into 2026 with the securities reposition behind us and the low-cost deposit franchises that we've acquired. Maybe one other piece there as you look out, while we're not giving 2026 guidance yet, we do expect the deposit beta to come down a little bit. We've really outperformed there at about a 48% deposit beta through these first 100 basis points of cuts through late last year. But we would expect with the lower cost deposit franchise, maybe we're closer to 30% beta going forward. Obviously, we hope to outperform that, but that's probably where we would model going forward. Russell Elliott Gunther: Okay. Super helpful, Michael. And then maybe just a reminder in terms of what's left to do on the securities restructure, where that sort of pro forma securities to average earning asset contribution would likely shake out in 4Q? And then the type of progress you would expect to make toward ratcheting that down over '26? Michael Young: Sure, Russell. So high level, we closed the deal October 1, and we began restructuring the securities book at that time. We've made a lot of great progress there, and we'll continue to do so throughout the fourth quarter with a focus on best execution versus speed to completion. But we're in good shape there and no real changes versus our initial expectations. The one positive is that original modeling of the deal, we recall that in April of this year, the tariff tension was going on and credit spreads were much wider and rates were higher at that point in time as well. And so as those have compressed to deal close, we would expect a lower AOCI than what we originally anticipated. So we should have a little higher book value and capital, which we hope will make the deal less dilutive. And then getting more detailed into kind of the timing of the repositioning of the balance sheet in total in the fourth quarter, we expect the loan-to-deposit ratio, as Tracey mentioned, to be below 75%. But as we grow throughout 2026, we would expect some positive remix. Again, if you did just a high single-digit loan growth number for next year, that would be about $300 million more than kind of a low to mid-single-digit deposit growth number. So that kind of gives you an order of magnitude on what could happen next year. Obviously, with higher loan growth, we might remix faster. Russell Elliott Gunther: Yes. Okay. Absolutely. Very helpful, Michael. And then just last one for me. I appreciate the look at where 4Q expenses could shake out. As we think about the pro forma franchise, maybe bigger picture, how should we contextualize sort of a decent core growth rate for Seacoast going forward? Michael Young: Russell, this is Michael again. I think what we've said historically and continue to expect to be the case on just the organic side would be something in pace and in alignment with inflation, kind of a 3-ish, 3% to 4% growth rate on the core underlying. And then it depends on the success in sort of banker hires from there. As Chuck mentioned, we do expect some merger disruption across our footprint in the Southeast broadly. So we may see a better appetite and a better opportunity to invest. As Chuck has mentioned before, we've had a lot of pipeline of opportunities to hire bankers, but we wanted to balance that hiring with profitability delivery to shareholders. I think you'll see, obviously, into '26, we're going to have strong profitability delivery to shareholders. So it gives us more capacity and ability to continue to expand and hire bankers and expand our commercial banking franchise. So I think those are kind of the things you want to think about. We're not giving 2026 guidance yet. We'll give more color on that in January. Operator: Next question comes from the line of Stephen Scouten with Piper Sandler. Stephen Scouten: So appreciating you're not giving 2026 guide at all, but in the same vein, you did give like a 2026 kind of high-level run rate number in the Village slide deck. Do you feel like that [ 250 ] number you kind of disclosed there is probably on pace and maybe it even sounds like potentially ahead of schedule based on the deal closing sooner, better loan growth and those sort of things. Is that kind of a fair way to think about expectations versus that disclosure? Michael Young: Yes, Stephen, this is Michael. I think we feel really comfortable with what we laid out originally. I think what you may see is, again, given kind of the rate movement, we may see better book value or less dilution than we initially expected, but we're still finalizing those rate marks, obviously, and everything right now. But that's -- as we currently model, that would be the biggest change on the earnings front, we still feel really comfortable with where we're headed and what we have initially laid out. Some obviously variability with how many rate cuts we get and what you all are modeling, but we feel really comfortable with the 246 number. Charles Shaffer: Yes. If you go back to that deck, Stephen, just to reiterate with some confidence, that's where we expect to land. Stephen Scouten: Fantastic. Perfect. And then just thinking about the balance sheet remix path over time, you guys have highlighted a couple of times this 75%-ish loan-to-deposit ratio, so a ton of potential to remix over time. Does that lead you to pursue any different paths? I mean I think the answer is no based on knowing you guys over time. But do you think about any loan portfolio purchases? Or I mean, you've always had a really low CRE exposure with this Atlanta push, do you think about maybe adding more CRE than you have in the past? Just kind of any changes to strategy around loan growth given all the dry powder you have to put to work? Charles Shaffer: I think a high single-digit guide is still appropriate, Stephen. We'll be disciplined and focus on granularity, focus on diversity and be thoughtful over time. Certainly, we'll have a lot of capacity to lend. But the way I'd describe it is we'll do it prudently and thoughtfully over the coming years. Stephen Scouten: Okay. Fair enough. And then just lastly for me, on the fee side of things, it looks like SBA had a particularly strong quarter. Were any of the hires in the recent past within that division? Is that something that we could see like sustainable strength in? Or was that more episodic in nature? Charles Shaffer: Within the Wealth Management division you focus on, or SBA. Stephen Scouten: SBA. Charles Shaffer: No, we've not added anything there, just volumes that come back. Teams remain focused, but it's the same group we've been operating with for a couple of years. Unknown Executive: Yes. Gain on sales spreads there, Stephen, have gotten a little bit better, which is probably one of the drivers in that line item this quarter. Stephen Scouten: Okay. Great. And I guess the last thing is the conversion, I think you said is set for maybe third quarter '26 on Villages. So is that where we would expect to see more of the lion's share of the cost saves come out at that point in time? Tracey Dexter: That's right. The conversion is currently planned for early in the third quarter of '26. So looking still to achieve all those cost saves in the second half of '26. Operator: Next question comes from the line of David Bishop with Hovde Group. David Bishop: A quick question. Chuck, maybe comment on what you're seeing out there in the market in terms of loan pricing and spreads. I know it's still pretty competitive with credit holding in fairly nicely. Just curious what you're seeing on credit spread for us? Charles Shaffer: It's really low. It's definitely gotten hypercompetitive. I would say we're cautious around that, being thoughtful. But yes, credit spreads are incredibly tight, particularly for high-quality stabilized commercial real estate and really high-quality, strong cash flowing operating companies. It's remarkably tight. And it's -- everybody is back in the game in a big way. We saw after '23, some of the banks pull back. Now it feels like everybody is back in. And so credit spreads are super tight. We're navigating that carefully, picking our spots carefully, but it is -- credit spreads are remarkably low across the board. Unknown Executive: Particularly in low-risk areas where we're most involved. David Bishop: Got it. And you had mentioned the opportunity for the Villages 2 build-out. Just remind us of the time line and maybe I don't know if you ring-fenced the deposit or loan opportunity there? Just curious, just some more details around the Villages2 . Charles Shaffer: Yes. We think Villages 2 probably builds out over the next 10 to 15 years. It will take some time. They've got, Michael, correct me if I'm wrong, I think 2 town centers open at this point. We are opening our branch in that town center now currently. So I would expect -- I think they -- largely, if you think about it this way, they grew a $4 billion bank in Villages 1 with some inflation just on money in general, you could probably grow a $4 billion to $6 billion bank in Villages 2 over the next 10 years. David Bishop: Got it. And final question, Chuck. It doesn't sound like it to this point, but obviously, there's a lot in media and papers about the impact of rising insurance costs in Florida. Are you seeing any sort of impact in that impacting shovels in the ground or borrower behavior? Charles Shaffer: Not really. It's noise. It's complicated. We actually are seeing insurance premiums stabilize, if not coming back down at this point. We've had premiums got to the point of where it brought a bunch of new entrants back into the market as well as there was some tort reform that went on about 18 months ago that, that's pulling through at this point as well. So we've seen a fair amount of start-up capital come back into the market to provide insurance buydown policies from the state of Florida Citizens Win Pool. And so I do feel like insurance is still expensive. I mean, on a relative basis for sure, but it's stable. And in some cases, we're seeing it come down. It's still challenging for older properties, that's going to be your most expensive spot. But if you're buying or building a brand-new home, it's actually really inexpensive at this point. So it's kind of bifurcated inside the marketplace, but it isn't near as bad as it was, call it, 24 months ago. Operator: That concludes the question-and-answer session. I would like to turn the call back over to Mr. Chuck Shaffer for closing remarks. Charles Shaffer: Okay. Thank you all for joining us this morning. I just want to reiterate my thanks, appreciation to the Seacoast team. Proud of our company. We produced an amazing quarter. I think our outlook is really good and just super, super excited to be where we are. So thanks to our team for everything they've done. Thanks to our shareholders for supporting us, and thank you all for joining this call. That will wrap us up, operator. Thank you. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.
Operator: Good day, and welcome to NextEra Energy, Inc. Q3 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mark Eidelman, Director of Investor Relations. Please go ahead. Mark Eidelman: Thank you, Steve. Good morning, everyone, and thank you for joining our third quarter 2025 financial results conference call for NextEra Energy. With me this morning are John Ketchum, Chairman, President and Chief Executive Officer of NextEra Energy; Mike Dunne, Executive Vice President and Chief Financial Officer of NextEra Energy; Armando Pimentel, President and Chief Executive Officer of Florida Power & Light Company; Brian Bolster, President and Chief Executive Officer of NextEra Energy Resources and Mark Hickson, Executive Vice President of NextEra Energy. John will start with opening remarks, and then Mike will provide an overview of our third quarter results. Our executive team will then be available to answer your questions. We will be making forward-looking statements during this call based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements, if any of our key assumptions are incorrect or because of other factors discussed in today's earnings news release and the comments made during this conference call and the Risk Factors section of the accompanying presentation or in our latest reports and filings with the Securities and Exchange Commission, each of which can be found on our website, www.nexteraenergy.com. We do not undertake any duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the slides accompanying today's presentation for definitional information and reconciliations of historical non-GAAP measures to the closest GAAP financial measure. With that, I'll turn the call over to John. John Ketchum: Thanks, Mark, and good morning, everyone. NextEra Energy delivered strong third quarter results with adjusted earnings per share increasing 9.7% year-over-year. In addition, through the first 9 months of the year, our adjusted earnings per share has increased 9.3% year-over-year. The continued strong financial and operational performance at both FPL and Energy Resources positions our company well to meet its overall objectives for the year. America is in a golden age of power demand. The country needs more electricity than ever. New electrons can't get on the grid fast enough. NextEra Energy is uniquely positioned to help lead this pivotable moment for our sector. We develop, build and operate all forms of energy infrastructure. At our core, we're a development company. We have a world-class platform that enables us to quickly build low-cost generation and electric and gas transmission. We're not just recontracting around existing assets, we're also building new energy infrastructure needed to power America. Our 2 world-class companies, Florida Power & Light Company and NextEra Energy Resources are the perfect complement to one another. Day in and day out, we are powering today and building tomorrow. Importantly, we are in a terrific position to continue delivering near-term and long-term value to our customers and shareholders. As we discussed with you earlier this month, our long-term earnings growth drivers are extensive, both inside and outside Florida. Simply put, we have many ways to grow across our platform, both this decade and the next. We are excited to discuss this in much more in greater detail with you at our investor conference on December 8. The Florida economy continues to see significant economic growth and Florida Power & Light Company continues to make smart long-term investments to serve that growth, while keeping bills low and reliability high. We put our customers first and the results speak for themselves. FPL customers experienced top decile reliability that's nearly 60% better than the national average. And typical FPL residential bills are 20% lower than they were 20 years ago when adjusted for inflation. And that's not by accident. FPL's nonfuel O&M costs are 70% lower than the national average and over 50% lower than second best in our industry. And approximately 90% of FPL's power generation comes from the nation's largest gas-fired fleet and 4 nuclear units. This baseload power is the backbone of our system, giving us the flexibility to meet our customers' needs with the lowest cost forms of energy right now, solar and storage. Remember, a robust gas and nuclear fleet means we don't necessarily need nighttime electrons. We need more low-cost electrons to meet our daytime peak, which is why solar and storage are the perfect complement and choice for FPL system and customers today. FPL is also preparing for the future, which will require even more baseload gas generation and perhaps further down the road, nuclear generation. And it's all happening in a state that needs more electricity, not less, just like America. Florida is one of the nation's fastest-growing states and the world's 16th largest economy. It's why FPL plans to invest approximately $40 billion over the next 4 years in new all-the-above energy infrastructure, including 5.3 gigawatts in solar, 3.4 gigawatts in battery storage and a gas peaker plant that is pending regulatory approvals. We look forward to continuing the successful multi-decade approach of adding low-cost generation to meet Florida's growing need for power, while also increasing reliability and keeping customer bills low. This approach is at the heart of our new 4-year rate proposal. As a reminder, on February 28, we initiated FPL's 2025 base rate proceeding for new rates effective in January 2026. We reached a proposed settlement agreement in August with most of the intervenors in the proceeding, reflecting a broad set of constituents across our customer base. The 4-year proposed agreement would provide an allowed midpoint regulatory return on equity of 10.95% with a range of 9.95% to 11.95%. There would be no change to FPL's equity ratio of 59.6%. The proposed agreement also includes a rate stabilization mechanism similar to what we filed in February. The proposed settlement also includes 2 new large load tariffs that are designed to ensure large load customers pay for the incremental generation needed to serve them. We believe the proposed settlement is fair, balanced and constructive and supports our continued ability to provide highly reliable, low-cost service for our customers through the end of the decade. If the proposed agreement is approved, typical residential customer bills would increase only about 2% annually between 2025 and 2029. This means bills would remain well below the current national average, providing our customers with the economic certainty that comes from a 4-year rate agreement. We completed evidentiary hearings earlier this month and expect the Florida Public Service Commission to provide a final decision on the proposed settlement agreement on November 20. This summer, we received a constructive outcome on federal tax credits, providing policy certainty for our renewables build at Energy Resources. We expect to receive tax credits for our renewable development plans through 2030, while our suppliers are positioned to be FEOC compliant. We've also been able to reduce development risk for a large part of our planned build. That's because Energy Resources has approximately 1.5x coverage of the project inventory required to support its development expectations through 2030. This provides us the runway we need to continue delivering low-cost power solutions to our customers, who need power today and tomorrow. Renewables are just the start. We also plan on delivering power through battery storage, gas-fired generation and nuclear. Over the second and third quarters alone, we have originated 2.8 gigawatts of new battery storage opportunities, as we continue to grow the world's leading storage business backed by a domestic supply base with batteries made in America. We're also leading the much-needed development of linear transmission infrastructure, both electric and gas, and our customer supply business has proven integral to serving data center customers. We're tying it all together through our AI-driven world-class development platform and decades of experience. And we are doing it at a time when the combination of development capabilities and a strong balance sheet are more important than ever. It's why we are ideally positioned to work with hyperscalers, who are increasingly looking to power their business by bridging -- by bringing their own generation. We are unique in that we combine a national footprint, a strong balance sheet, supply chain capabilities and experience in building all forms of generation and transmission, together with unmatched customer relationships and an industry-leading team on a development platform second to none and that's what we believe it takes to serve this new customer class, which is investing tens of billions of dollars per project. Hyperscalers, data center operators and load serving entities continue to tell us they need solutions for large load today and tomorrow to address growing energy demand across America. As a leader in serving this demand, I am pleased to announce that we have entered into a 25-year power purchase agreement with Google that pending regulatory approvals, enables us to recommission our Duane Arnold Energy Center nuclear plant in Palo, Iowa, just outside of Cedar Rapids. The 615-megawatt plant is just the beginning and will help power Google's growing cloud and AI infrastructure in Iowa once it returns to operation, which we expect to occur no later than the first quarter of 2029 and perhaps as early as the fourth quarter of 2028. Duane Arnold shut down in August 2020 after safely and reliably serving Eastern Iowa for decades. And because we carefully and methodically went through the decommissioning process, we have confidence in the investment required to restart it. During our evaluation of recommissioning Duane Arnold, we collaborated closely with the plant's minority owners, Central Iowa Power Cooperative, known as CIPCO, which provides power to the local community and Corn Belt Power Cooperative. As part of that collaboration, CIPCO will purchase 50 megawatts of the plant's output on terms and conditions consistent with the Google PPA, and we have signed definitive agreements to acquire CIPCO and Corn Belt's combined 30% interest in the plant, which will bring our ownership to 100%. Restarting Duane Arnold marks an important milestone for NextEra Energy. Our partnership with Google not only brings nuclear energy back to Iowa, it also accelerates the development of next-generation nuclear technology. With the support of the Trump administration, Google and NextEra Energy are creating more than 1,600 jobs and adding more than $9 billion to local economy, creating a win for the U.S., a win for both companies and a win for Iowa. As a demonstration of the pride of working at Duane Arnold and for NextEra Energy, a significant number of Duane Arnold's previous workforce are looking to return to work at the facility. And our team working to recommission Duane Arnold includes many of the same employees who decommissioned the plant 5 years ago. Beyond the nuclear plant, we have ample land available to provide additional power and capacity solutions, including battery storage to support data center build and potential future expansion. As part of the agreement, NextEra Energy and Google have also signed an agreement to explore the development of advanced nuclear generation to be deployed in the U.S., which will help power America's growing electricity needs. Of course, to move that forward, we'll be certain to appropriately mitigate and limit our financial exposure as new nuclear technologies continue to advance. We expect Duane Arnold will be eligible for a nuclear production tax credit with a 10% energy community bonus. And once restarted, we expect Duane Arnold to contribute up to $0.16 of annual adjusted EPS on average over its first 10 years of operation. Duane Arnold is one example of data center hubs we are developing across the country. When you put it all together, our opportunity set is not contained to a single utility service territory. NextEra Energy has a national footprint. We serve America and have relationships with all types of customers, including cooperatives, municipalities and utilities of all sizes looking to attract data center load to their service territories. We are committing to building new infrastructure and building energy for our customers where and when they want it. And I believe there is no team and no company in this country with a comprehensive set of skills and balance sheet better positioned to get the job done. Bottom line, we have many ways to grow, and we remain well positioned not just for the rest of the decade, but into the next decade as well. We look forward to sharing many more details with you in December. With that, I'll turn the call over to Mike to walk you through detailed results from the quarter. Michael Dunne: Thank you, John, and good morning, everyone. For the third quarter of 2025, FPL's earnings per share increased by $0.08 year-over-year. The principal driver of this performance was FPL's regulatory capital employed growth of approximately 8% year-over-year. FPL's capital expenditures were approximately $2.5 billion for the quarter, and we expect FPL's full year capital investments to be between $9.3 billion and $9.8 billion. For the 12 months ending September 2025, FPL's reported return on equity for regulatory purposes will be approximately 11.7%. During the third quarter, we reversed approximately $218 million of reserve amortization, leaving FPL with a balance of roughly $473 million. Looking forward, we expect to use a portion of the remaining reserve amortization balance for the remainder of the year. FPL's third quarter retail sales decreased 1.8% from the prior year comparable period due to milder weather. On a weather-normalized basis from the prior year comparable period, retail sales increased by 1.9% due to an increase in customer growth and underlying usage. Now let's turn to Energy Resources, which reported adjusted earnings growth of approximately 13% year-over-year. At Energy Resources, adjusted earnings per share increased by $0.06 year-over-year. Contributions from new investments increased $0.09 per share, primarily driven by continued growth in our renewables portfolio. Contributions from our existing clean energy portfolio remained unchanged year-over-year despite weaker wind resource due to better performance at our nuclear fleet. Wind resource for the third quarter of 2025 was approximately 90% of the long-term average versus 93% in the third quarter of 2024. The comparative contribution from our customer supply business increased by $0.06 per share, primarily driven by timing of origination activity during the quarter. All other impacts decreased by $0.09 per share, driven by asset recycling during the third quarter last year as well as higher financing costs, mostly related to borrowing costs to support our new investments. Energy Resources had a strong quarter of new renewables and storage origination, adding 3 gigawatts to the backlog. With these additions, our backlog now totals nearly 30 gigawatts after taking into account more than 1.7 gigawatts of new projects placed into service since our last earnings call. We expect the backlog additions will go into service over the next few years and into 2029. This marks the sixth consecutive quarter that Energy Resources has added 3 or more gigawatts to its backlog. We continue to see strong customer demand for ready now capacity solutions as we had our strongest quarter ever in battery storage origination with 1.9 gigawatts of additions to our backlog. Turning now to our third quarter 2025 consolidated results. Adjusted earnings per share from Corporate and Other decreased by $0.04 per share year-over-year. Our long-term financial expectations remain unchanged. We will be disappointed if we're not able to deliver financial results at or near the top end of our adjusted earnings per share expectation ranges in 2025, 2026 and 2027. From 2023 to 2027, we continue to expect that our average annual growth in operating cash flow will be at or above our adjusted earnings per share compound annual growth rate range. And we also continue to expect to grow our dividends per share at roughly 10% per year through at least 2026 off a 2024 base. As always, our expectations assume our caveats. This concludes our prepared remarks. And with that, we will open the line for questions. Operator: [Operator Instructions] The first question comes from Steve Fleishman with Wolfe Research. Steven Fleishman: Congrats on the Duane Arnold news. Maybe just on that topic, John, can you give us any sense on what the cost of restart might be and also the buy-in price of the 30% that you're buying in of Duane Arnold? John Ketchum: Yes. Thanks, Steve. Appreciate the question. So first of all, just the sensitivities, we're not going to go into the CapEx number on this call. But needless to say, we feel very good about our ability to build this to recommission Duane very efficiently. The plant is in great shape. As I said before, the team that will be doing the recommissioning is the same team that did the decommissioning. I've been out there recently tour the facility. It's in good shape. So we'll provide more details on that as we move forward. On your second question on the 30% buyout of CIPCO and Corn Belt, it's really pretty straightforward. I mean that buyout was done in exchange for us assuming their decommissioning liability. It's pretty much that straightforward. And from our standpoint, we have more than ample decommissioning funds that had already been set aside. So I think it's attractive for us. I think it's attractive for CIPCO and Corn Belt as well win-win for all parties involved. Steven Fleishman: Okay. And then one other question, different topic. Just -- it was great to see another 3 gigawatt quarter add, but there was a gigawatt removed from the backlog. Could you maybe just talk about that 1 gigawatt removal and what's driving that? John Ketchum: Yes, absolutely, Steve. This is pretty straightforward. So as you said, we added 3 gigawatts. I mean, another really strong quarter of origination, and we are just seeing a lot of demand for renewables and storage in the market. And remember, so out of that 3 gigawatts, we put 1.7 gigawatts into service in the quarter. And really, I think what you're referencing is the 900 megawatts. Let me just break that down. So we removed 650 megawatts from backlog, which was pretty conservative by us. I think you know we're pretty conservative on how we manage the backlog. We did that for various development reasons. And this is really on some smaller projects that we are really -- that we're continuing to manage, as we move forward. I think we're going to get it all back in '26 and '27 on that 650 megawatts. So it will just come a little bit later. And then there was another 250 megawatts that we just had a little bit of a permitting delay on. So we're just shifting that from '25 to '26. And when you put that 900 megawatts together, it's what, call it, 130 of the backlog, but feel good about getting all of that back. It just comes a little bit later in time. Otherwise, had you included that, we would have been at the bottom end of the '24, '25 range. And I think as investors saw, we've reaffirmed our expectations through '27, including the fact we'd be disappointed not to be at the high end of the range. And so these moves really just don't have any impact on our ability to meet our financial expectations that we've communicated to investors. And as you look out, a lot of positives to see in the backlog. I mean '28 and beyond are shaping up unbelievably well. We just got a great head start on those years. So overall, we're in really, really good shape where we sit now. And I have no concerns about where the backlog sits, and it's as strong as it's ever been. Operator: The next question comes from the line of Shar Pourreza with Wells Fargo. Shahriar Pourreza: John, I just -- I know you kind of mentioned to Steve, you didn't want to get into the actual CapEx numbers at Duane Arnold, but let me try to maybe ask it a little bit differently and just get into the qualitative part of the plant. I know there's obviously a bogey of $1.6 billion for a Pennsylvania plant that's kind of under budget now. You kind of mentioned that this current plant is in good shape. Can you just maybe directionally talk about what you're seeing with that plant and how we should view it without going into the numbers? John Ketchum: Yes. Thanks, Shar, welcome back, by the way. Good -- great to have him back. Shahriar Pourreza: Thanks for having me back. John Ketchum: Yes. Yes, it's great to hear from you. So sure. I mean I'll just kind of -- without going into the numbers, again, we've spent a lot of time going through Duane Arnold, a lot of diligence. And one -- I'm going to go back to what I said before, having the same team that did the decommissioning, leading the recommissioning is an enormous advantage because folks know exactly what was done. And so the plan that we have, we have a lot of certainty around, right? And so I think the scope is pretty well defined, and we know what needs to be done. The facility is, like I said, in really good shape. I mean when I went through it, it was like we just kind of put a lock on the door and got the keys out and opened the lock back up, and then we're going back through it. And there's obviously some things -- some work that has to be done to bring the plant back online. But the plant is in good shape, and we feel very good about our ability to execute against what's in front of us. Shahriar Pourreza: Fantastic. And then, John, just one last one is just, I guess, given the lack of additional nuclear sites to kind of repower for you guys, do you see kind of the next wave of deals moving to CCGTs for energy resources? Are you seeing demand there, especially given the partnership you have with GE? John Ketchum: Yes. Thanks, Shar. So we have many ways to grow, which we talked about a month ago. And I'll talk more about those in a minute. But one of those ways to grow is through new gas-fired technology. Nobody has built more gas-fired generation in this country in the last 20 years than NextEra has. And so we've got a lot of experience at it. And we're really a natural to get back into that area because of our development platform. It's so easy for us to take what we already have in terms of land agents, permitting, all the supply chain capability that we have. You mentioned the partnership that we have with GE Vernova and the strong relationship that we have there, the customer relationships, all the things that go with that development platform, it's easy for us to pivot into gas. And I've said before, we have roughly a 20-gigawatt pipeline already developed because of that development platform and the efficiency that's built into it. And we're excited about what we're seeing on the combined cycle side and some of the opportunities that we have. And we'll talk more about this in December, but a unique advantage that we have is -- because it takes a little longer time to build gas-fired generation, call it, 4, 5, 6 years, a huge leg up that we have that we haven't talked as much about, and again, we'll focus on this in December, is all the renewables and storage that we have. And so when data centers want to get online now and quickly and they want to secure a load interconnect by bringing their own generation, we can accommodate that because we have the solar and the storage that's ready to go and then the gas can come behind it. So we're in a bit of a unique position there in terms of our ability to really kind of hook and anchor data center build-out, as we position our portfolio for these larger scale data center build-outs, we call, data center hubs that can be followed on by gas, maybe SMR technology going back to the collaboration nationally that we have with Google. So just a lot to be excited about. Operator: The next question comes from the line of Nicholas Campanella with Barclays. Nicholas Campanella: I just wanted to ask going back on nuclear. There's a lot of momentum right now for AP1000. And just curious what your appetite would be in participating in something like that? Or if in terms of new nuclear, should we be solely kind of focused on SMR and restarts of current large-scale plants? John Ketchum: Yes. I think for us right now -- I mean, we have Duane Arnold that we talked about. We have Point Beach, we have Seabrook. We have -- we'll be turning our attention to those 2 facilities as we optimize. But one thing that's really exciting is that we probably have 6 gigawatts of SMR capacity across those 3 sites, not to mention back to the development platform. And we are a nationwide development company, right, that has a national footprint. So we also are looking at greenfield sites as well going back to that anchor point around having existing generation ready to go that can accommodate Phase 1, 2, 3 of a data center build-out, as we wait for gas-fired generation to come or SMR technology to come behind that. And we're doing a lot of work around SMRs, and we'll talk more about in December. But I also want to go back to what I said about SMRs, which is that we're going to be very disciplined in our capital allocation strategy and making sure that we have the right commercial and financial structure where we limit any financial exposure that we have, as we invest in those facilities. But when you think about NextEra, I mean, we're really unique because the hyperscaler is investing tens of billions of dollars. This is not like the business 4 or 5 years ago, competing against a lot of small developers. They can't do this, right? The folks that can do this are large-scale developers like NextEra that have a strong balance sheet, a track record, the credibility to be able to match what the hyperscaler needs and the ability to build across generation types, whether it's renewables, whether it's storage, whether it's gas, whether it's nuclear, whether we need to bring a transmission solution to bear, whether we need to build a gas pipeline lateral to enable a gas build-out. I mean, all the things that we bring to the table are pretty unique. And again, combined with that large balance sheet, the team and the customer relationships and the ability to secure load interconnects and work with utilities and co-ops and municipalities, I mean, that really kind of puts us in a pretty small group of folks. And so as we look at the market, really, I think -- I look at the DOE letter that was sent recently over to FERC and more of a focus on bring your own generation. I mean I think that just absolutely plays to all of our strengths and advantages. And it's -- the future is exciting. Nicholas Campanella: That's great. I really appreciate that. Good points. And I know that you've been doing this 6% to 8% outlook for a long time. You've basically been beating that every year. And you look at some other premium companies out there now doing 7% to 9%. What's your philosophy and how you're thinking about long-term growth? And is that a consideration at all, as we are thinking about what could be out there on the Analyst Day? John Ketchum: All great questions, and we'll address those on December 8. Operator: The next question comes from the line of Julien Dumoulin-Smith with Jefferies. Julien Dumoulin-Smith: Congratulations, team. Good to hear from you. Look, I just wanted to follow up on a couple of things here. First, with respect to the gas and contracted gas strategy, can you speak a little bit to what you're expecting or what success you've had thus far? I know this may be digging a little bit into the December update. But to the extent possible, can you discuss a little bit of the latest progress? And should we expect more of these hyperscaler type announcements like Google, but to be parlayed back into contracted gas? And is there a cadence that you'd be care to share as you think about this ramps up? I mean, I know it's early days in that longer-dated 2030-plus time frame, but how would you begin to characterize that opportunity, as it is -- as it stands today? John Ketchum: Yes. So a lot in the hopper is how I would describe it, Julien. A lot of different things that we are working on. And I mentioned our data center hub strategy, which I don't want to spend too much time on today because, again, we're going to get into that in December. Obviously, building out combined cycle units is a big part of that. We think the things that we have in front of us are attractive across the class of hyperscalers that we see. We think the position that we have around our existing renewable portfolio is an enticing way to secure an early-stage load interconnect, as the gas comes later. And so the ability to provide gas with renewables and storage or with SMR technology, the ability to build out the infrastructure necessary to accommodate all that, whether it's transmission, whether it's gas pipelines, I think all plays to our strengths and our advantages together with the supply chain capability that we have. And so in terms of cadence, look -- we look forward to kind of laying this out for you guys in December, but I feel really good about the competitive positioning that we have today because, again, I go back to the fact that there are very few folks that can actually garner the trust, the confidence, the balance sheet, all the things that you saw with the partnership that we have with Google that we're having a lot of success with other hyperscalers as well that looks promising for our future. So more to come. Julien Dumoulin-Smith: Excellent. I appreciate it. And then related here, just to elaborate a little bit further on that net originations discussion here. Can you elaborate a little bit? I mean, obviously, there's been some media attention around Esmeralda and Jackalope, for instance. Can you speak a little bit how that fits in? Were they in your backlog or the position? I mean just trying to juxtapose the broader media conversation, which isn't particularly articulate about this versus what we're seeing in the quarterly update. John Ketchum: Yes, absolutely. So Esmeralda is just a development project. It was not in our backlog. It was a development project for the future on BLM land. I think the BLM was actually pretty clear that -- while they were not looking to permit this as one large project, they were going to entertain applications around individual projects. But remember, we have a massive pipeline, right? So this was just one piece of it. We spent no money on Esmeralda. It's a project in development that we could develop someday down the road. So really, there's really nothing to see there. And then on Jackalope, that project, we'll extend out a little bit more. We continue to work with the customer there. And we'll see what happens. But I mean, again, that's just one small project in the grand scheme of things for a massive backlog that we have. And again, don't forget, I mean, that's why we have 1.5x coverage on our inventory. I don't worry about it at all. We can easily draw from other projects in our pipeline to be able to satisfy customer needs as we go forward. And that puts us in incredibly good position. Operator: The next question comes from the line of Carly Davenport with Goldman Sachs. Carly Davenport: Maybe just another quick follow-up on the backlog. A lot of the additions this quarter coming beyond the 2027 time frame. So just as we think about that potential pull forward in demand related to the tax credits rolling off that you all have referred to, is that strictly a 2028 plus opportunity? Or is there any opportunity to see that impact '26, '27 as well? John Ketchum: Yes. I think -- the pull forward of demand, Carly, I think it just escalates as you get closer to 2030. So you just continue to see step-ups there. And so for '26 and '27, we feel very good about where we sit right now. I think we've got more quarters to go in terms of filling the '27 piece. But again, we look at our financial plan for '26 and '27 in good shape. And what I'm really focused on is that '28, '29, '30 because there's just so many opportunities, as you look to the back end of that decade and that natural pull forward that you mentioned that we've seen historically where we could see a lot of customer demand, not only in '28, but in '29 and '30, and we're so well positioned around FEOC and around our safe harbor position. I think we have some very unique competitive advantages that we will highlight and spend more time on in December. So as I look at the pipeline shaping up around 30 gigs and the way it's shaping up by year, I feel very good about where we sit. Carly Davenport: Great. And then maybe just back on Duane Arnold. The $0.16 of average accretion that you mentioned in the first 10 years of the PPA, is there any color that you can provide on the cadence or if there's significant variability year-to-year that we should be thinking about? John Ketchum: There is not significant variability year-to-year. The reason we said that is -- remember, there's refueling outages for nuclear. And in refueling years, it's not that significant of an impact, but it moves around a little bit around refueling outages. So that's why we use that language. Operator: Next question comes from Bill Appicelli with UBS. William Appicelli: Just going back to follow up on Carly's question around the pull forward. And just maybe you can speak to the development capabilities, right? You've sort of been averaging around this -- around 3 gigs a quarter on the low end of that. Where can that go potentially in terms of just from a capability, supply chain perspective? John Ketchum: Well, we're really well positioned on our -- not only on our supply chain and the things we've been able to do around batteries and the supply chain positioning we have around the rest of the parts and equipment that we plan to purchase. You guys know well, I mean, transformers, electric switchgear, other parts of the supply chain. I mean, I think that's going to create a natural competitive advantage, which goes with having a strong balance sheet and a world-class supply chain capability as we go into '28, '29, '30 that uniquely positions us for the opportunity that can come there, right, which -- because we can do some things that others can't. So I feel very good about, and if you look historically on pull-forward years, we have fared very well on a market share basis compared to our competition there. And also, as we start thinking about being able to not only do what I call kind of the bread-and-butter business around origination, but then also adding on being able to fold in renewables and storage into large load solutions as I've mentioned a couple of times on this call, I mean, it's really an incremental opportunity that we haven't had before, as you think about serving that large load customer. So the demand pull forward is something that we're obviously very focused on and have positioned the business around. And I think we're going to be uniquely capable and positioned to capitalize on the opportunity it's going to bring. William Appicelli: Great. And then just shifting gears on -- at FPL, the large load growth. I guess how is the valuation of that going? I think you've talked about maybe 3 gigs of initial sites or capability. I'm sure you'll speak more to this in December, but any color there around tariff structure or sort of the work and the conversations around bringing those customers in? John Ketchum: Yes, I'll turn that over to Armando. Armando Pimentel: All right. Thank you. So we've got a couple of tariffs that are up for approval at the commission that we are going to hear about on November 20. Regardless of that, we've had folks that have been pinging us all year on availability of getting onto our system, when can they get on to our system and so on. So we are no different at Florida Power & Light than many of the utilities that you guys follow around the nation. These hyperscalers and these data center operators are looking to figure out where they can plug in and how quickly they can plug in. I think what John and Mike Dunne have mentioned before is that this is a potential opportunity at FPL later this decade. And I think for now, that's right. That could certainly change. But we are spending a lot of time doing engineering studies for everyone that you could imagine. And we hope that the environment here in Florida is one that the hyperscalers and data center operators will come to embrace. I mean, why not? We've got a great system at a low cost. So we feel really good about it. Operator: The next question comes from the line of David Arcaro with Morgan Stanley. David Arcaro: I was wondering if you could talk about how renewables are interacting with data centers, especially over the next couple of years for projects that you've been working on. I was curious if there's any percentage of power needs that you find are typically covered by renewables when you're powering data centers? Are you seeing any colocation opportunities? And how does battery storage get involved? So curious if you could give kind of a sense of the typical relationship or design that you're seeing there. John Ketchum: Yes, David, what we're seeing there is data centers want to get going immediately, right? And so they want to build out the initial phases of their campus, which could be -- end up being 1,000 -- 3,000, 4,000, 5,000-acre campuses. Every 1,000 acres is about a gigawatt of capacity. But as they think about permitting and constructing their facility, I mean, the first thing they're looking for is load interconnect. And a lot of parts of the country in securing a load interconnect, you've got to bring your own generation. And so what's unique, I think, about what we can do around renewables is we can get them over the hump over those first few years of being able to identify a site, being able to identify a generation solution that's sufficient to get them that load interconnect, whether it's through a combination of renewables or renewables and battery storage. We've seen that in a number of places. We've also seen the ability to leverage like grid alliance, where we can do upgrades on a system that can actually free up additional megawatts needed to secure that initial load interconnect. But that's the key. You got to get the load interconnect to be able to take the power off the grid to be able to satisfy the initial phases. And many of the load serving entities are saying, well, bring your own generation to make that happen. And we're able to do that with renewables, with storage, with grid alliance. And then the plan is to bring the baseload generation behind it. And so when you can combine a comprehensive solution for the hyperscaler, that's what they're looking for and a trusted partner that they know can get it done over time. And we can grow right alongside with them as they're expanding their existing facility. David Arcaro: Got it. Makes sense. That's helpful. And I was wondering if you could talk about what you're seeing in terms of project returns, the trajectory there? And is there a case for higher returns too as we go forward through the end of the year? John Ketchum: Yes, that's a great question. And I said this a month ago, returns have been higher than I've ever seen them in this industry. And I think that's due in part to the unique competitive advantage that we have, and it's exciting for us because as I think about all the opportunities that we have, not only this decade but into the next, recontracting is a big piece of that. And so we have a lot of existing generation that rolls off a contract by the end of the decade that we're going to be able to recontract into the market at much higher premiums. But look, it's just supply and demand. It's that simple. There's a lot of demand out there, and there's just not as much supply to match it. And so that's commanding premiums in the market and high and attractive returns. And that's why it's great to be in a position where we have a really strong pipeline and a really strong supply chain position. And I think we're going to be uniquely positioned going forward to be able to capitalize on what is going to become just a growing market demand, particularly as we get to the end of this decade and into the next. Operator: The next question comes from the line of Nick Amicucci with Evercore ISI. Nicholas Amicucci: Just wanted to touch upon kind of the evolution that we just kind of left upon. So as we kind of think about over the balance of this decade into the next, how should we be thinking about the kind of the portfolio, the kind of culmination of that and kind of if we think about it by energy and generation source, obviously, we saw storage kind of tick up here from a backlog perspective. Just interested in kind of hearing your thoughts around it. John Ketchum: Yes. I mean -- so as I think about the next decade, we've always had Florida Power & Light. And Florida Power & Light benefits from being in fastest-growing state in the United States, 16th largest economy in the world, strong growth as we accommodate all that population that continues to move into Florida. Don't see that slowing down next decade. But as you think about our regulated businesses, it's not just what I call kind of the baseload Florida Power, it's the large load with the large load tariff that we have not had before. It's electric transmission. There's an incredible demand for transmission around the country. We have the leading competitive transmission business in NextEra Energy Transmission. So a lot of CapEx opportunities and growth opportunities for NEET as we go forward. And then you add on gas transmission as well, not only around the existing pipeline assets that we own today, but also, I think, some long-haul greenfield opportunities that we'll be talking more about gas laterals to accommodate hyperscale build-outs. So that really helps to frame even a larger regulated business than we have had historically. And then you think about all the other levers and ways to grow that we have on the Energy Resources side, not just the renewable business that just gets stronger and stronger as we get into the next -- the end of this decade, and then that will carry into the next, but storage as well. We are in a capacity short market. Storage is economically advantaged. It's flexible. It can be built very quickly in 16 to 18 months, whereas gas-fired peakers take 4 to 5 years in many cases. So very flexible, very low cost. And that we are the world's leader in storage and have a unique position with our battery supply agreement that's all domestic and is derisked from a FEOC standpoint. And then I think about nuclear, the agreement that we announced today not only around Duane Arnold, but the collaboration around advanced nuclear nationwide, all the opportunities we have around Point Beach, we have around Seabrook and then greenfield advanced nuclear build-out and then gas-fired generation as well, having been the leader in gas-fired generation development over the last 20 years, leveraging the development platform that we have today, the 20-gigawatt pipeline that's in place. And then you combine all those capabilities into serving the large load customer, which really, as I said before, creates a unique position for us when you combine all the capabilities we have around generation, all the capabilities we have around electric transmission and gas pipelines and also our customer supply business because remember, whenever you're trying to secure a load interconnect, you've got to have a retail energy capability to get that load interconnect from load-serving entities. The customer supply business plays a very important role. You have to be able to do many, many things to be able to enable a large load transaction, and you have to have the balance sheet and you have to have the team. And we also have a 50-state footprint to be able to execute against that, which is really, really unique, given that we've been doing that for 20 years. And then the recontracting opportunity that I mentioned before. I mean we have a massive long power position that becomes open as we get to the end of this decade. And then all the artificial intelligence things that we're doing to really help drive efficiencies and cost savings across the business and revenue opportunities for us as well. So you put all those pieces together, we are in really good shape post 2030. Nicholas Amicucci: Perfect. Yes, that makes a ton of sense. And then just one last quick one for me, too. As we kind of think about now, obviously, just topic du jour with Duane Arnold and the potential restart. How are you guys seeing the nuclear fuel supply chain kind of shape up, as we kind of think about it going forward, just knowing that Russia is going to be coming offline from an enriched uranium capacity in 2028? John Ketchum: Yes. I mean I think the U.S. government is very focused on that. The industry is very focused on that. And we've been very disciplined in terms of how we secure our long-term fuel going forward. So I feel good about where we stand. We baked into our numbers that we gave you on Google our position around where nuclear fuel sits today. Operator: This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you.
Operator: Good morning, and welcome to the Seven Hills Realty Trust Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the call over to Mr. Matt Murphy, Manager of Investor Relations. Please go ahead. Matt Murphy: Good morning. Joining me on today's call are Tom Lorenzini, President and Chief Investment Officer; Matt Brown, Chief Financial Officer and Treasurer; and Jared Lewis, Vice President. Today's call includes a presentation by management followed by a question-and-answer session with analysts. Please note that the recording, retransmission and transcription of today's conference call is prohibited without the prior written consent of the company. Also note that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on Seven Hill's beliefs and expectations as of today, October 28, 2025, and actual results may differ materially from those that we project. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call. Additional information concerning factors that could cause those differences is contained in our filings with the Securities and Exchange Commission, or SEC, which can be accessed from the SEC's website. Investors are cautioned not to place undue reliance upon any forward-looking statements. In addition, we will be discussing non-GAAP financial numbers during this call, including distributable earnings and distributable earnings per share. A reconciliation of GAAP to non-GAAP financial measures can be found in our earnings release presentation, which can be found on our website at sevnreit.com. With that, I will now turn the call over to Tom. Thomas Lorenzini: Thank you, Matt, and good morning, everyone. On today's call, I will provide an overview of our third quarter performance and recent developments, and I will then turn the call over to Jared for an update on our pipeline and market trends; followed by Matt, who will review our financial results before opening the line for questions. We delivered solid third quarter results supported by a fully performing loan portfolio and disciplined capital deployment. Distributable earnings for the third quarter were $4.2 million or $0.29 per share, which came in at the high end of our guidance range. And earlier this month, our Board declared a regular quarterly dividend of $0.28 per share, which equates to an annualized yield of 11% on yesterday's closing price. Recent transaction activity during the quarter included the closing of a $34.5 million first mortgage loan secured by 100% leased mixed-use retail and medical office property in Manhattan's Upper West side. In addition, we also executed a loan application for $37.3 million secured by a student housing property at the University of Maryland, which we expect to close in the next few days. Student housing assets at major universities continue to perform well while allowing for enhanced spreads when compared to traditional multifamily. As of quarter end, our portfolio consisted of $642 million of floating rate first mortgage commitments across 22 loans with a weighted average all-in yield of 8.2% and a weighted average loan-to-value of 67% at close. Our weighted average risk rating at the quarter end was 2.9, with all loans current on debt service, no 5-rated loans and no nonaccrual balances. During the quarter, we received a full repayment of 2 loans totaling $53.8 million, and we may see one additional loan repaid before year-end with an outstanding balance of $15.3 million, but the majority of near-term repayments are expected to occur in 2026. Full year portfolio growth is estimated to be approximately $100 million net from year-end 2024. We continue to see a more active lending environment as short-term rates move lower and investors anticipate further rate cuts before year-end. This has led to greater borrower engagement and transaction volume across our pipeline, which we expect will continue to grow over the coming quarters. As SOFR continues to decline, we will see our SOFR floors begin to become active, providing a benefit to earnings and helping to partially offset the impact from declining rates. While competition remains elevated, we continue to find compelling opportunities that meet our return thresholds and align with our underwriting standards. Overall, we believe our disciplined approach, strong sponsor relationships and underwriting and asset management expertise will allow us to continue generating attractive risk-adjusted returns. With borrower demand and transaction activity improving, we remain focused on deploying capital into opportunities that we believe offer the best relative value in the current environment. Our platform is well positioned to deliver consistent execution and drive sustainable value creation as market conditions evolve, and we look forward to sharing our continued progress in the quarters ahead. With that, I will now turn the call over to Jared for an overview of current market conditions as well as our pipeline. Jared Lewis: Thanks, Tom. During the third quarter, we saw a notable improvement in market sentiment following the Fed's rate cut in September, which helped to drive new financing activity. The initial rate cut prompted many borrowers to move forward with financing decisions that had previously been placed on hold and with expectations of 2 additional rate cuts before year-end, buyer and seller expectations are beginning to come into closer alignment, which has led to an increase in overall transaction volumes. Demand for floating rate bridge financing remains strong driven primarily by 2021 and 2022 vintage floating rate multifamily loan maturities, which will continue well into 2026. In most cases, borrowers are choosing to refinance debt but continue to require flexible floating rate debt solutions to allow time for business plans to play out and property operations to stabilize. We are also beginning to see more instances of new buyers acquiring properties at a reset basis that better reflects current rent growth and operational expectations, helping drive additional transaction volumes. While multifamily continues to account for the majority of current opportunities, it also remains most competitive. CRE CLO issuance has accelerated meaningfully over the year and debt funds, mortgage REITs and insurance companies are all pursuing similar loan opportunities. Furthermore, the material tightening of corporate bond spreads has made real estate credit an attractive relative value investment, which has resulted in an influx of capital to the CRE debt sector providing liquidity and causing competition among lenders. Despite these competitive dynamics, we remain selective and disciplined in our approach to new originations. We continue to find opportunities in industrial, necessity-based retail, hospitality and student housing. We are seeing more attractive spreads on loans with strong credit characteristics. Furthermore, with transaction volumes expected to increase in the first half of 2026, we expect to see significant opportunities for lenders with flexible capital to invest. Our pipeline is robust and well diversified, and we are currently evaluating over $1 billion of loan opportunities. Importantly, the composition of our pipeline has shifted toward a higher proportion of acquisition financing compared to refinancing activity, a trend that we view as a key indicator of renewed market confidence and a constructive environment for new lending. Our disciplined investment process supported by the broad RMR platform will allow us to identify attractive opportunities to maintain strong credit performance as market dynamics continue to unfold. I will now turn the call over to Matt for an overview of our financial results. Matthew Brown: Thank you, Jared, and good morning, everyone. Yesterday, we reported third quarter distributable earnings of $4.2 million or $0.29 per share coming in at the high end of our guidance and in line with consensus estimates for the quarter. As it relates to third quarter distributable earnings, loan repayments since April 1 impacted distributable earnings by $0.06 per share whereas loan originations over the same period contributed $0.03 per share. The $53.8 million of loan repayments in July contributed $0.01 of distributable earnings to third quarter results. We expect the loan originated in September and the loan origination under application to contribute $0.03 of distributable earnings per share in the fourth quarter. Overall, we expect fourth quarter distributable earnings to be in the range of $0.29 to $0.31 per share, taking into account this loan activity and current SOFR expectations based on the curve. As Tom mentioned, all but one of our loans contain interest rate floors ranging from 0.25% to 4% with a weighted average floor of 2.59%. With continued decreases in SOFR, certain of our loans will be subject to the floor, providing SEVN with earnings protection, whereas none of our secured financing facilities contain floors. At quarter end, none of our loans had active interest rate floors. However, with SOFR now hovering just below 4%, certain of our floors have become active. Please refer to Page 17 of our earnings presentation for further details. We ended the quarter with $77 million of cash on hand and $310 million of capacity on our secured financing facilities. Our portfolio has an all-in yield of SOFR plus 397 basis points and a weighted average borrowing rate of SOFR plus 215 basis points. Our CECL reserve remains modest at 150 basis points of our total loan commitments, unchanged from last quarter and is supported by a conservative portfolio risk rating of 2.9, which is also unchanged from last quarter. Our portfolio remains well diversified by property type and geography and all loans are current on debt service. We did not have any collateral dependent loans or loans with specific reserves. This highlights the strength in our underwriting and asset management functions to provide long-term value for shareholders. That concludes our prepared remarks. Operator, please open the line for questions. Operator: [Operator Instructions] We have the first question from the line of Matthew Erdner from JonesTrading. Matthew Erdner: Could you rehash through the repayments that you were expecting for the remainder of the year? I picked up the $15.3 million, but was there another loan that I was missing in there? Thomas Lorenzini: No, Matt, that's the only one that we expect to come back potentially before year-end. Everything else really will be 2026 with the bulk of our scheduled repayments in Q3 and Q4 of '26. Matthew Erdner: Okay. Got it. Yes, that makes sense. And then based off of the College Park loan closing, I've got the portfolio around $680 million, seeing that last year at the end of the year was about $640 million. So that leads me to believe that you guys are expecting a couple more loans to close throughout the year. Could you talk a little bit about how you guys are sourcing those. And just speak a little more on the competition of what's causing you guys to win loans over certain people and just the characteristics that you guys are bringing to the table. Thomas Lorenzini: Sure. So I'll start with how we're sourcing those loans. The majority of the transactions are coming in through the traditional channels, such as the mortgage banking community, the JLLs, the CBs, Newmarks of the world, et cetera. A certain percentage of our transactions also come in direct from sponsorship. It's probably 80% from the brokerage, 20% direct, something along those lines. And as far as how we're winning those transactions, really, I think that a couple of things. I think we have a solid reputation in the marketplace that we deliver as advertised, which is critical to sponsors today and especially to the brokerage community. They certainly want to align themselves with lenders that will close as advertised. And also, I think we're also -- we've been very judicious about trying to uncover loans with a little bit higher yielding. We can follow upon the expertise here at the broader platform, learn something about the asset, the market and really lean in and take the deal away from a competitor because maybe we have a better understanding of it. So all that translates really across the product types for everything that we're looking at currently. As you saw, we're just -- we're under app on the student deal. We like that business. We continue to chase multifamily, grocery-anchored retail, select hospitality opportunities certainly exist out there as well. So for the foreseeable future through the end of the year, I think we're looking at probably another 3 to 4 loans that we're comfortable with that we're going to close upon. Operator: [Operator Instructions] We have the next question from the line of Christopher Nolan from Ladenburg Thalmann. Christopher Nolan: For Matt, does the CECL reserve change or does the requirements under CECL for the allowance go down with lower rates, lower SOFR specifically? Matthew Brown: They could. There's a lot of factors that impact the CECL reserve. I think it's important to note that we add back any CECL reserve to our distributable earnings because it is a noncash item, and we have not -- we do not have a history of recording any loan losses for SEVN. So there's macroeconomic factors. There's factors with our existing portfolio based off property level performance, repayment activity, origination activity. So it's a blend of factors that are driving that. Overall, we're 1.5% of total loan commitments, which we think is very conservative for our business. Christopher Nolan: Because my thinking is if SOFR is going down and your loans are spread over SOFR from that, we can -- it's an increased probability that the allowance reserve as a percentage of loans will go down. Is that -- does that follow or not? Matthew Brown: It does. But like I said, there are a lot of factors that go into it in addition to just SOFR. Christopher Nolan: Got it. Okay. And Jared, thank you for the overview of the market. For multifamily and your comments on multifamily debt, does this also imply increased demand for multifamily equity as well? Or is there sort of -- is that a different market in terms of its dynamics right now? Jared Lewis: Well, I would say there's certainly always a demand for equity capital. Given the amount -- just the sheer volume of loan maturities from '21 and '22 vintage assets, a lot of those deals are going to require either additional equity. So if you're refinancing a property and if it doesn't refinance the current standards, then it may require additional equity capital. So sponsors and borrowers are outsourcing additional equity for those opportunities. But then there's also on the acquisition side, plenty of capital that's been raised over the years that is seeking to be deployed in the multifamily sector because of its attractiveness and liquidity. So that's going to also help drive financing activity. So it's sort of a 2-way street. Yes, there's going to be the requirement for new debt going forward in the multifamily sector. But with that comes the requirement of additional equity as well. So I think there is a lot of capital chasing those opportunities because of the underlying fundamentals. And so I expect that to continue into 2026 and '27. Christopher Nolan: Great. And final question on that line. In your observation, are you seeing banks become less participant in multifamily, debt markets or more? Any characterization there? Jared Lewis: Yes. So the larger banking community, the money center banks are very active today and they've become competitive, and they're another cohort of lenders that are chasing these opportunities, specifically in the multifamily space. Smaller regional banks may not be as active. As you've read in headlines, I mean, there's still a concern or questions over bank balance sheets in certain sectors. And so I think some are still taking a more conservative approach. But generally speaking, the larger banks are active, smaller banks are a little bit more selective. Operator: We have the next question from the line of Chris Muller from Citizens Capital Markets. Christopher Muller: Congrats on a solid quarter. So cash balances jumped up a little bit in the quarter. I guess the question is, is that due to timing of repayments coming in? Are you guys holding a little bit of extra liquidity ahead of some of those originations you expect in Q4? Matthew Brown: It's really driven by the sources and uses of the quarter. We had $54 million of repayments come in, in July, and we only put out about $34 million of new loans. As we noted, we do have a $37 million loan opportunity that we expect to close in the near future. But that cash balance also allows for the additional originations that Tom noted through the end of the year. Christopher Muller: Got it. And I guess, I like the slide you guys have with the EPS bridge in the deck. Does that $0.03 include origination fees? And then I guess, a follow-up question on that is, what does a typical quarter look like for origination fees? Is it kind of that $0.01, $0.02, $0.03 type number? Or can we see that ramp up if you guys can really start deploying capital in 2026? Matthew Brown: Yes. The origination fees are baked into the yield. Christopher Muller: Got it. And is that just like a $0.01 or $0.02 a quarter? Is that the right way to think about that? Matthew Brown: Yes. At best, it's probably $0.01 a quarter is my guess. Christopher Muller: Got it. And I guess just the last one I have here. So on the NIM compression, the other slide you guys have in your deck, it's been trending lower since the peak of the market when rates were at 0, which makes sense. But do you guys feel that you're either at or near a trough on NIM compression there? Or could there be some more pressure in the coming quarters? Thomas Lorenzini: Yes. I don't -- I think we're at the -- I would say that we're probably at the trough there. Part of that really just comes down to us identifying the appropriate transactions to invest in, right? So we're certainly mindful of that. And again, I think we've been very good about sourcing outsized returns when we're able to do so. And that's obviously the goal going forward. So we're expecting that to bottom out and if not, almost reverse itself. Christopher Muller: Got it. Appreciate you guys taking the questions and congrats again on a solid quarter. Operator: Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Tom Lorenzini, President and Chief Investment Officer, for any closing remarks. Thomas Lorenzini: Thank you, everyone, for joining today's call. Please reach out to Investor Relations if you are interested in scheduling a call with Seven Hills. Operator, that concludes our call. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings, and welcome to the Amerant Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Laura Rossi, Head of Investor Relations. You may begin. Laura Rossi: Thank you, Kate. Good morning, everyone, and thank you for joining us to review Amerant Bancorp’s third quarter 2025 results. On today's call are Jerry Plush, our Chairman and CEO; and Sharymar Calderon, our Senior Executive Vice President and CFO. As we begin, please note that discussions on today's call contain forward-looking statements within the meaning of the Securities Exchange Act. In addition, references will also be made to non-GAAP financial measures. Please refer to the company's earnings release for a statement regarding forward-looking statements as well as for information and reconciliation of non-GAAP financial measures to GAAP measures. I will now turn it over to our Chairman and CEO, Jerry Plush. Gerald Plush: Thank you, Laura. Good morning, everyone, and thank you for joining us today to discuss Amerant's third quarter 2025 results. First, I want to thank everyone for adjusting their schedules to accommodate the rescheduling of our earnings call this quarter. We intend to establish this new time frame as when Amerant will report going forward. So our team has the appropriate time to prepare each quarter end. We greatly appreciate your understanding. So similar to the approach we implemented last quarter during today's call, I'll start with some overall comments, and then Shary will provide commentary on results and asset quality. Then I'll provide several prepared remarks on some strategic updates in order to allow time for Q&A. You will note today that there are several new slides in the deck this quarter that we think show capital levels and asset quality quarter-to-quarter comparisons in an easier to follow format. So, while we continue to make progress in key areas of our strategy, our primary focus this quarter was on asset quality over loan growth. I'll provide more details on this in a minute, but the increase in nonperforming asset levels must be immediately addressed, and I will cover the plan here in the fourth quarter to approach achieving reduced levels in the coming quarters. Clearly, the higher provision from a detailed loan-by-loan review kept us from achieving consensus or better overall results this quarter. We will also provide some color on progress so far here in the fourth quarter on this call. Otherwise, you will see solid performance as shown by an outstanding net interest margin and higher net interest income. Shary will cover the other P&L items in detail shortly. But I do want to note in advance that while core expenses rose $2 million over the prior quarter. This increase was from legal expenses related to trust services and to asset quality resolution efforts as well as higher consulting expenses in connection with our AI governance build-out and ERM enhancements, and we do not expect a continuation of expense at these levels in the fourth quarter. Regarding expenses, please note that in my closing remarks, I'll also provide more color on our planned expense reduction initiatives already underway, which will begin to be seen in the fourth quarter and throughout 2026. On the funding side, our core deposits increased while total deposits remained stable given the planned reduction in broker deposits we previously indicated on last quarter's call. We continue to focus on the quality and mix of deposits as a priority. International Banking continues to strengthen its presence across LatAm. It is worth noting that approximately 50% of the new accounts opened during the third quarter of 2025 originated from other countries, most notably Argentina, Guatemala, Costa Rica, Bolivia and Peru. This expansion reflects the success of our business development initiatives, client relationship management and targeted marketing efforts throughout the LatAm region. Loans declined by 3.4% quarter-over-quarter, as again, our focus was on AQ over growth, but our pipeline build is underway here in the fourth quarter. Approximately $288 million of the loan decline in 3Q was related to payoffs and asset quality-related sales. So as I promised earlier, we'll turn back to asset quality and addressing asset quality head on was and will continue to be our top priority. 3Q was the quarter with the highest volume of annual and limited reviews along with covenant testing with over $3.5 billion in loans review. We did see continued deterioration in both classified and criticized. And while we exited $35 million in nonperforming loans through third-party refinancing payoffs, charge-offs, transfers to OREO and upgrades, as I previously noted, additional downgrades to NPLs were primarily driven by the receipt of borrowers' updated financials and certain covenant failures in the quarter. We are all in on driving progress post quarter end, and we believe we have a line of sight on several significant opportunities to do so already. So for example, we just, as in this past Friday, received an $11.8 million full payoff, which results in an $8.7 million recovery of previous charge-offs, $341,000 of interest income to be recorded in the fourth quarter as well as a recovery of $188,000 in legal expenses, and again, all of which will be recorded in 4Q. Our coverage of reserves over NPLs is at 0.77x due to the increased level of NPLs. However, please note that all NPLs with balances over $1 million were individually evaluated for exposure to charge-offs and our reserves, which explains the increase in provisioning for credit losses in 3Q and in specific reserves quarter-over-quarter. While Shary will provide additional detail on this, I wanted to just put this upfront, and we'll go through more detail in NPLs, ACL and the specifics on the provision for credit losses. Let's turn to capital. And if you look at capital, all levels remain very strong. Our Board declared a quarterly cash dividend of $0.09 per share, reinforcing confidence in Amerant's long-term outlook and capital strength. We also intend to resume share buybacks post earnings when the blackout period ends under the existing remaining authorization and 10b5-1 plan as we continue to execute on our strategy going forward. So with that, let me turn it over to Shary now to cover 3Q results in detail. Sharymar Yepez: Thank you, Jerry, and good morning, everyone. Let's turn to Slide 3. Here, you will see the highlights of our balance sheet. Total assets reached $10.4 billion as of the close of the third quarter. As we guided in the second quarter, we offset lower loan originations, loan payoffs and paydowns with purchases of investment securities. Total investment securities were $2.3 billion, up by $336.8 million, all of which are highly marketable securities and were classified as available for sale. Total gross loans were down by $247.4 million to $6.9 billion, primarily driven by increased prepayments and the sale of a large substandard loan, which more than offset loan production in the quarter as well as the focus on asset quality over production, which delayed the business pipeline materializing. On the deposit side, total deposits were relatively flat, only down by $5.6 million to $8.3 billion, although core deposits increased by $59.4 million. Additionally, as we previously guided, we reduced brokered deposits by $93.7 million and partially replaced this funding with FHLB advances, which increased by $66.7 million. Brokered to total deposits now stand at 6.6% of total deposits, well below our maximum of 10%. Also, in the third quarter, we restructured $210 million of fixed rate FHLB advances and changed the original maturity at lower interest rates. We incurred an early termination and modification penalty of $3.4 million, which was deferred and is being amortized over the term of the new advances as an adjustment to the yields. The net effect is an improvement in the cost of this source of funding. Our assets under management increased $104.49 million to $3.17 billion, primarily driven by higher market valuations. As I've shared in past calls, we continue to see this as an area of opportunity for us to grow fee income going forward. Looking at the income statement on Slide 4, you will see that we had a strong net interest margin, which was higher than projected at 3.92% due to higher average rates for both loans and securities, lower average rates on deposits, lower average balances in interest-bearing deposits, including broker deposits. NIM increases were partially offset by higher average balances in the investment securities portfolio, lower average loan balances and placements as well as higher average balances on time deposits and FHLB advances. Net interest income was $94.2 million, up $3.7 million, primarily driven by higher average rates on loans and securities and lower average balances and rates on deposits. Noninterest income was $17.3 million, while noninterest expense was $77.84 million. On a core basis, however, core noninterest income was $17.5 million, while core noninterest expense was $75.9 million. We had guided noninterest expense for this quarter to be approximately $73 million. The variance to actual results was primarily driven by $2.4 million in expenses on professional fees, as Jerry just described, and $1.4 million in higher other expenses primarily related to earnings credits, which are provided to certain commercial deposits in the mortgage banking industry to help offset deposit service charges incurred. Also adding to the variance of noninterest expenses were noncore expenses of $2.0 million recorded during the quarter, which I will describe in the next slide. Pre-provision net revenue was down at $33.6 million in 3Q '25 compared to $35.9 million in 2Q '25, and core PPNR was $35.8 million, a decrease of $1.4 million or 3.7% compared to $37.1 million in 2Q '25. The core PPNR impact was primarily from the higher expenses we do not project occurring again at the same level in the fourth quarter, as I just referenced. A reconciliation of core PPNR and the impact on key ratios is shown in Appendix 1 included in this presentation. Next up in Slide 5, you can see ROA and ROE this quarter were 0.57% and 6.21% compared to 0.90% and 10.06%, respectively, and our efficiency ratio was 69.84% compared to 67.48%. These ratios were primarily impacted by the decrease in net income and the increase in expenses during the quarter, respectively. This quarter, we had $2 million in nonroutine noninterest expenses, which included $900,000 in losses on loans held for sale carried at the lower of cost or fair value in connection with the sale of one substandard owner-occupied loan, $500,000 in net losses on sale and valuation expense of an OREO in Houston, a single-family property and $600,000 in expenses related to the downsizing of Amerant Mortgage. Turning to Slide 6. As you can see, we have added a new slide, as Jerry referenced, showing the quarter-over-quarter comparison of our capital ratios. As you can see, our capital ratios are very strong and continue to reflect improvement across the board. Our CET1 was 11.54% compared to 11.24% last quarter, mainly driven by lower risk-weighted assets and from net income during the quarter, while partially offset by $10 million in share repurchases and $3.8 million in dividends. We paid our quarterly cash dividend of $0.09 per share of common stock on August 29, 2025, and our Board of Directors just approved a quarterly dividend of $0.09 per share payable on November 28 of this year. During the third quarter, we also repurchased 487,657 shares at a weighted average price of $20.51 per share compared to tangible book value of $21.56 as of June 30. Moving on to asset quality. We added 2 new slides here as well this quarter. As you can see on Slide 8, nonperforming assets increased to $140 million or 1.3% of total assets compared to $98 million or 0.9% of total assets in the prior quarter. I will cover the drivers of this increase in the next slide. Additionally, special mention loans totaled $224.4 million, with the increase primarily driven by 3 commercial loans totaling $106 million, 2 CRE loans totaling $25 million and 3 owner-occupied loans totaling $20 million. All loans have acceptable mitigants in place, including adequate loan-to-value ratios, interest reserves, personal guarantees and other structural enhancements. These increases were partially offset by $31 million in further downgrades to classified loans and $30 million in payoffs. These increases are the result of rigorous efforts by portfolio management, credit and credit review complemented by an independent third-party firm brought in to ensure timely reviews of updated financial information and risk rating, including identification of any possible deteriorated conditions to allow us to be more proactive in expediting resolution. Through these reviews, we covered approximately $3.5 billion in the loan portfolio through covenant testing or annual or limited financial reviews. We expect to continue to prioritize efforts on proactive credit quality measures, including continuing to use independent third-party assistance. Moving on to Slide 9. The increase in nonperforming loans was primarily driven by the downgrade of 3 CRE loans totaling $31 million, of which one is a single-tenant property that is currently vacant and the other 2, which missed contractual milestones. Please note that all 3 loans have adequate collateral coverage and did not require reserves. Adding to the increase in nonperforming loans were 9 commercial loans totaling $38.9 million, downgraded due to updated financials and missed projections as well as other smaller loans totaling $7.2 million. These additions were partially offset by the payoff of 2 commercial loans totaling $21.2 million, charge-offs for the quarter totaling $9.5 million and other net reductions of $4.1 million, which include loan transfers to OREO, upgrades and paydowns. In addition, substandard loans and accruing status increased by $84 million, primarily driven by 2 CRE loans totaling $49.5 million, one due to updated financials and the other due to missed contractual milestones. Both loans have adequate collateral coverage. Adding to the increase were 6 commercial loans totaling $37.1 million, primarily due to updated financials. Important to note that the majority of these loans exhibit adequate payment performance or have other acceptable mitigants in place, including adequate loan-to-value ratios, interest reserves, personal guarantees or other structural enhancements, which support the continued accrual status. These increases were partially offset by $78.2 million from payoffs and $30.5 million in the sale of one substandard loan. In the next slide, we show the drivers of the provision recorded in 3Q and impact to the allowance for credit losses. The provision for credit losses was $14.6 million in the third quarter, including the release of $700,000 in loan commitments. The provision was comprised of $7.8 million in additional specific reserves, $8.9 million to cover charge-offs, $3.6 million due to credit quality and macroeconomic factors, offset by releases of $2.3 million due to the reduction in loan balances and $2.7 million due to recoveries. During the third quarter of 2025, gross charge-offs totaled $9.5 million related to 2 commercial loans totaling $4.1 million, several small business commercial loans totaling $1.8 million, 1 CRE loan totaling $1.3 million, indirect consumer loans totaling $1.8 million and other smaller balance loans. Lastly, the allowance for credit losses coverage ratio increased to 1.37% of total loans, up from 1.20% in the second quarter. Excluding specific reserves, the coverage ratio rose from 1.17% to 1.23%. In the next slide, I'd like to provide some details on our expectations for the fourth quarter of 2025. In terms of loan growth, we currently have a pipeline for 4Q of approximately $350 million via organic production and $150 million via our newly launched syndications program. As we continue to focus on asset quality, we expect some of this loan production and purchases of syndications to be partially offset by reductions in criticized assets as well as payoffs and maturities with the net loan growth for the quarter being between $125 million to $175 million. This represents approximately a 2.5% increase from 3Q 2025. Regarding deposits, we expect growth to be in line with loan growth. We will evaluate a further reduction in brokered as well as other higher cost deposits. Looking at profitability, we project our net interest margin to be approximately 3.75% for the fourth quarter. We continue to project noninterest income to be between $17.5 million and $18 million in 4Q. Regarding expenses, we expect them to decrease to the range of $74 million to $75 million. We expect the efficiency ratio to be in the high 60s given the lower growth from payoffs and asset quality-related reductions. And finally, we project core ROA to be between the mid-80s and low 90s, although we could possibly get closer to 1% given recoveries on collections from previously charged off substandard loans like the one Jerry just referenced. And with that, I pass it back to Jerry for additional comments and closing remarks. Gerald Plush: Thanks, Shary. Finally, turning to the final slide we will cover. I'd like to provide some color on the topics shown here. So first, regarding expense reduction initiatives. We've launched an expense reduction initiative with an initial goal of achieving a baseline of $2 million to $3 million in savings per quarter in 2026. Again, this is a baseline and the analysis of additional opportunities are in process. There's going to be more to come on this. You'll begin to see the start of these reductions in the fourth quarter. Examples of items that we are either evaluating or already implementing include contract reviews, transferring certain tasks from third parties to in-house resources and just outright expense elimination. And again, please note, we're in the process of evaluating every opportunity by detailed line item reviews for additional reductions. So next, regarding commercial banking leadership. I've asked Mike Nursey to step into the Head of Commercial Banking role recently vacated by our former Chief Commercial Banking Officer, as previously announced during the third quarter via Form 8-K. Mike is a seasoned leader with over 35 years of banking experience and is well known and respected in the Florida marketplace. We also intend to further build out our commercial teams in both Palm Beach County and the Greater Tampa market in the coming months. Also, as we just announced last week, the addition of Angel Medina to bolster our in-market leadership and business development efforts here in the Greater Miami County marketplace, and it's been well received as Angel is well known and respected here as a senior leader. He just started with us this week, and we anticipate that he will be a significant contributor to growth opportunities in this marketplace. Next, the heightened emphasis we're placing on reducing nonperforming assets. There is no question this is job one. We are realigning even more select personnel in order to drive resolution as prudently and expeditiously as possible and aligning more personnel to proactively address upcoming covenant testing and financial statement updates. We've complemented our in-house reviews with a well-known third party to expedite risk rating testing in the third quarter and to assess a very significant portion of the portfolio, as I previously mentioned, for any signs of potential concerns. We expect to continue to invest in these reviews in the fourth quarter to ensure timely completion of the review scheduled for 4Q. We've also launched an extended multi-hour all-hands leadership weekly meeting to address special assets as a working group to monitor and drive progress. We will be looking to provide a mid-quarter update on progress via our investor presentation, which we will file ahead of the upcoming Piper Sandler Conference in mid-November. Now, turning to buybacks to give an update. With respect to capital management, while we'll continue to take a prudent approach, carefully balancing the need between retaining capital to support growth initiatives or growth objectives compared with buybacks and dividends to enhance returns, we intend to utilize the $13 million remaining in our current authorized buyback program this quarter, given where our stock is currently trading. In 3Q, we utilized a 10b5-1 plan to repurchase 487,000 shares for $10 million in the quarter, as Shary previously noted, and we intend to do the same thing here in the fourth quarter. So as we wrap up today's comments, I want to underscore the priorities we've outlined and emphasize a number of key underlying strengths here, strong capital levels and outstanding net interest margin, opportunities for additional fee income from growing AUM levels, a heightened focus on driving expense discipline and most importantly, increased focus on accelerating progress on asset quality. We've taken decisive steps this quarter to strengthen risk oversight, and we'll continue to allocate resources and leadership focus to accelerate progress. While this quarter reflected the impact of this proactive approach to credit risk, we remain confident in the strength of our franchise and the opportunities ahead. With leadership changes in commercial banking, further strengthening of bank strength in special assets and credit, targeted growth initiatives in key markets and lines of business and a clear plan for cost reductions and capital deployment, we are positioning Amerant for the better in the coming periods. I'd just like to thank you for your continued support as we execute on these commitments. So with that, I'll stop, and Shary and I will look to answer any questions you have. Kate, please open the line for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Michael Rose with Raymond James. Michael Rose: Maybe I'll just start off with the same question I feel like I've asked the past 2 quarters, just on kind of the lay of the land, where you guys think you are on credit. I know the migration is probably as frustrating to you as it is to us. But if I go back to when you raised capital about a year ago, I think the expectations were for much stronger financial performance. And it looks like the resolution of some of these credits over the next couple of quarters is certainly going to weigh on growth performance, et cetera. So Jerry, I guess the question is, when do you think we kind of hit the inflection point on credit? And when do you think realistically you can get back to a more sustainable, durable 1% plus ROA? Gerald Plush: Sure. Appreciate the question and totally understand where you're coming from. Look, I think the third quarter was the highest peak in terms of -- and I referenced that it was over $3.5 billion in the portfolio, right? So you're basically over half the portfolio was evaluated either for annual reviews, limited reviews or covenant tests in the quarter. It is substantially lower here in the fourth quarter. And as I said, Michael, earlier, I think we've got a very good line of sight. I did give a specific example of a very significant resolution. And I believe both in special mention and in substandard, we are well on our way working through these. Look, the most challenging part, Michael, is the timing of resolution on these items, right? That's the piece that has clearly less predictability. And you can see, look, you're just 3 weeks, almost 4 weeks after quarter end, we have a resolution of a material item. We've got a number of these with a good line of sight. I think with all the comments that I made around -- and I think Shary shares the same belief, the bench strength that we've done, the teamwork that across the areas that's being approached on this, we're heading into having a much better line of sight and a much better path to early identification and resolution rather than seeing the type of flow that's going through the stages that obviously we saw this quarter. And I do think, Michael, a couple of other things. The expense initiatives are critical. We will give more color on that in a couple of weeks at the upcoming investor conference. And as I said, I believe we are a very low baseline that we just wanted to let people know that all of that's identified, and we can apply those reductions in as we look at projections going forward. And we believe there is significant additional opportunity for us. And again, I think that's just realigning priorities that -- and I guess the other good thing to say is you also heard in terms of there's a rebirth on the credit side. We've already had some nice outstandings booked so far in the fourth quarter. And as Shary referenced, you're going to see the beginnings of not just organic growth coming back in, but also the launch of the syndication program, which is critical for us because, again, remember, we're not just looking to buy, we're looking to participate. And so given the size of exposures, we think that, that's smart for not only growth, but also prudent risk management. Michael Rose: Okay. I appreciate all that commentary. Shary, just a quick one for you. The margin guide for the fourth quarter implies a step down. I'm sorry if I missed this, it's a busy morning. But what's going to specifically drive that step down from this quarter's level? Sharymar Yepez: Sure, Michael. So the guidance that we gave for the fourth quarter is close to the 3.75%. A couple of drivers into that number compared to 3Q is we're now going to see a full quarter's worth of repricing on the asset side on the floating rate loans. After the rate cut that occurred in September, we now will see the full quarter showing that impact. We're also including an update in terms of an additional rate cut happening now, which will impact 2 out of the 3 months of the quarter. And then that would be offset by the repricing of our deposits. We continue to see a beta close to [ 40 ] as we did in the past. So we definitely see the assets repricing faster than the deposits. The other thing, Michael, is that within the number that you see in 3Q, we have collections on some special assets, which created a higher level of the NIM. We do expect some of those things to happen in the fourth quarter as we continue to collect on those, but the guidance we're giving is more on the normalized NIM. Gerald Plush: Yes. Michael, and I just would like to add to Shary’s comments that I think you're also going to see production given the rate decrease that happened in September, the anticipated decrease, that will result in lower yields on new production coming in as well. And what it does not include is if there's any recoveries, as I just referenced on that one credit of interest income that previously had been reversed. So if we have recoveries on interest income, that could obviously be a positive. And of course, as we've done previously, we'll disclose all of that as part of it. Michael Rose: Okay. I appreciate the color. And maybe just one last one for me, and this is back to you, Jerry. You've been in the seat for a bunch of years now. I know you're not happy with the performance. I know investors aren't. But just given the health of M&A markets at this point, is there a point in time where you might want to consider strategic alternatives? Gerald Plush: Yes. Look, Michael, I think we've stated all along, we're a publicly traded organization. The way we have to think about things is -- and I think the way the Board needs to think about things, is our ability to execute and drive the results. Obviously, if there are opportunities, that has to be weighed, right? But I mean, our focus right now is on getting things on the right track and getting back to the kind of returns that Shary referenced here in the fourth quarter as a step in the right direction. We do believe we're taking all the right steps given where we are. But look, I mean, I think, obviously, everything has to be evaluated as it comes up. Operator: Our next question comes from the line of Russell Gunther with Stephens. Russell Elliott Gunther: I wanted to just start on the loan growth discussion. I appreciate all the color there. Jerry, maybe as you think about what the kind of go-forward organic opportunity is and the sustainability of that kind of $125 million to $175 million net loan growth guidance. And then maybe just more specifically on the syndication activity. I know you gave us some color as to what we would expect from a growth perspective in 4Q. How should we think about sort of the ebbs and flows participating in versus participating out? Gerald Plush: Yes. Great question. I think it depends on, Russell, the opportunities that the business development, the RMs generate. Our Head of Syndication is working closely on a lot of different opportunities already with the team. Clearly, we demonstrated -- we've participated in our first big deal. I'm sure you saw the participation in the raise acquisition financing where we were also a syndication agent. I think that was a great way to announce that we're willing and able to look at deals like that and be an active participant and also actually participate in helping get the deal syndicated. And I think that's one of the reasons why when we brought Jack on board, we were so excited to be able to attract someone with his contacts and experience. As I look at it on a go forward, I think it is -- again, it's a great tool for 2 ways, right? We did stay upfront that the volume was going to be more purchased than us actively participating away. But my expectation in '26 is you'll see that become a bigger piece because part of what we're trying to do is start to get hold sizes back into the sub-$30 million range on deals. And we are seeing much larger opportunities. And so we think this, again, is a great way for us to not only help assist on the growth side, but I think prudent risk management and maintaining lower hold sizes on a go-forward basis. Sharymar Yepez: And Russell, to complement that, the way we see it is on the short term and short term, I mean, now in the fourth quarter, we're focused on the buy side and creating that 2-way 3 relationship. And then starting 2026, the efforts will be more on the sales side and making sure that when we get opportunities that come to our table, we're able to participate some portions out and be there. Russell Elliott Gunther: Got it. Okay. I appreciate it. And then how should we think about the size of the investment portfolio kind of alongside the net loan growth guide you guys are expecting? Gerald Plush: Yes. Look, Russell, I think -- and again, we gave previous guidance that in the absence of loan growth or I should say to supplement the balance sheet, we elected to expand growth in the portfolio. I think on a go-forward basis, it's pretty clear we would much rather be deploying those funds into loan growth than any continued growth in investments. So if you do see some additional growth this would be the, in my opinion, the last period. And frankly, there probably could be some contraction in this period. One of the scenarios we're actually looking at along the way is how much of that do we still even want to maintain here in the fourth quarter. So more to come as we continue to do analysis there. But I think with the reemergence of the pipeline, the launch of the syndication program here in this quarter with something already done and under our belt, I think you'll start to see that it will be back to the growth coming on the loan side, certainly not on the security side. Sharymar Yepez: Yes. And Russell, to that, the investment portfolio and the way the purchases were made in the last few quarters were on the fixed rate side. So valuation has been really good, and it provides an opportunity for liquidity to be able to redeploy wherever we want, like from a loan perspective or to repay off some higher cost deposits. Russell Elliott Gunther: Got it. Okay. Super helpful. And then just the last one for me would be a follow-up on the asset quality discussion. Charge-offs came in pretty darn close to what you had expected for this quarter. As you address sort of the inflow that occurred in 3Q, what is the outlook for realized loss content over the next couple of quarters? Gerald Plush: Yes. I mean we'll both give some color on that. But in my remarks, what we did was go through credit by credit and do the analysis. And if there was a need for either a charge-off or the addition of specific reserves, they were set. Russell, the one way to potentially think about it is the establishment of specifics maybe where you might see charges. But again, it's already been reserved for. But otherwise, I think our look on charge-off activity, and I'll let Shary go ahead and answer. But on the business book, coupled with the rest of the indirect, it would be back into the... Sharymar Yepez: So we're seeing something close to the 30 to 35 basis points. A portion of that is related to the amount that we still have in the indirect consumer portfolio and some small commercial loans. And then the excess out of that would be if we were to charge off some of the loans that currently have some specific reserves. Operator: Our next question comes from the line of Stephen Scouten with Piper Sandler. Stephen Scouten: I guess maybe one more kind of follow-up around credit would be, I guess my question is, can you give us any color on kind of the vintages of credits that saw maybe incremental reserves or these specific reserves you were just referencing? Trying to get a feel for if this is just lingering credit issues from the past or if these are actually maybe some issues that are burgeoning up on some of the faster growth that we've seen over the last couple of years. Gerald Plush: Yes. Look, I think it's a mix. You can look back to where it was a much lower rate environment. So let me give a good example, where we've looked at credits that are either sort of going into the pass watch or special mention category. We're obviously evaluating given the low rates they're at, what would the potential refinancing risk be, right, under current rates as these things are looking to mature. So I mean, I think you're looking at anywhere from in the 2020 to 2024 range because, again, you're looking at a lower rate environment in those earlier years and then obviously, a higher one more recently. Stephen Scouten: Got it. Okay. And I guess the follow-up to that is and maybe this is just the depth of the portfolio review we spoke to, Jerry, but what gives you confidence today that the worst could be behind us here after, I think, maybe hoping to feel that way like a year ago around this time? And then do you keep a lid on loan growth until maybe there's greater certainty that these issues are kind of in the past? Gerald Plush: Yes. Look, and I'll take the last point you made first, which is kind of where the prioritization was in 3Q. The emergence that you'll see in loan growth, I think we've -- we will tell you, it's much more selective in terms of industry type. We're not really looking -- it's more in the C&I side. It's not really looking at significant growth at all in the commercial real estate side. And I do think that, again, when you look at some of that, a big piece of this would come through as we just referenced on syndication as well. Look, asset quality, I keep coming back to we've allocated more personnel. I think we've got a really proactive effort going on across the organization right now that I think the way we're working through that is probably, to your question, why I have greater confidence on resolution because the open communication and line of sight and proactively going to each of these and working through solutions is really becoming more and more evident in sort of the feeling, I think we have across the organization, certainly internally at this point. Stephen Scouten: Okay. And maybe just last thing for me, just around expenses and the potential expense initiatives. I know -- sorry, you noted some of the expenses this quarter were a bit elevated and shouldn't repeat in some of those categories. But I want to make sure I heard you right. I heard -- I think, Jerry, you said like $2 million, $3 million a quarter. I'm assuming that's like $2 million, $3 million annualized. But kind of how do you think about where you hope the expense base to get in 2026? Is the hope to kind of keep it flat? Or do you think we could see actual net reductions in the overall expense base? Just kind of framing up that potential. Sharymar Yepez: Sure. So I'm going to start first with driving from the 3Q to the 4Q expectation. As I mentioned, there were some expenses that we're not expecting to be recurring like downsizing of mortgage, some legal expenses on the trust side, including surrendering the license in Cayman and some investments in governance like AI and ERM, that takes us to a more, I want to call it, the normalized level of the $74 million. But on top of that, then we are expecting some additional reductions through some initiatives, and this includes things like reviewing third-party contracts. Do we need them? Do we need them at that same level? When we're working on a co-source or outsource approach and we have the knowledge and skill set to do that internally, can we shift that back? And that leads us to the $2.5 million to $3 million. It would be per quarter, not annualized of what Jerry just mentioned. So with that, we're still working into finalizing numbers, but we do expect a net reduction starting 2026. Gerald Plush: Yes. And Stephen, to add to that, the disciplined way that we are approaching it is the $2 million to $3 million were early identification items. The process we're going through right now is a very stringent line by line, component by component are there opportunities? And again, whether it's bringing anything we've done third party internally, do we still need the level of help that we have? I mean it's all over the -- it's -- every single thing is being analyzed and scrutinized and it's a team-wide effort across all of the functions in the organization. At the same time, the one area where we're going to continue to build out and make sure is, obviously, whatever we need on the risk side, we're going to implement. I also referenced that we have business development opportunities to expand in both Tampa and Palm Beach. There are areas of priority where we would [ patent ]. So that puts a heightened emphasis on us to find offsets to those plus to continue to look for reductions to get a greater savings than that [ $2 million or $3 million ] a quarter that we've established as a baseline. So as I referenced, more to come. We'll probably have some additional color, frankly, at the upcoming conference that's in mid-November that I referenced. Operator: Our next question comes from the line of Woody Lay with KBW. Wood Lay: Just had another follow-up on credit. I was just interested, have you all used third-party reviews in the past? Or is this really the first quarter that you've used the third party? Gerald Plush: In the third quarter of last year, we had a limited review. This year, it was a more considerable effort. And our view is that it is designed to give some comfort on accuracy of risk rating and timeliness of risk rating. And so Woody, a lot of this is the scrutiny that you get by being in the regional bracket. This is all part of the build that we wanted to ensure. But frankly, there is a lot of opportunity for -- internally for the teamwork that I've referenced between the line, between credit, between credit review and being in a very proactive way about it. And this was -- I do want to reference again, this was the highest quarter, right, for annual reviews, limited reviews and covenant testing to be done. It's basically over half the portfolio. So it's much less significant in the other 3 quarters of the year. Wood Lay: Yes. So I think just about 50% was reviewed in the third quarter. How much of the loan portfolio do you expect to be reviewed in the fourth quarter? Gerald Plush: Yes. I want to say it's in the [ $1.3 billion to $1.5 billion ] range. And remember, a lot of that is quarterly covenant testing, right? You've probably gone through the bulk of annual reviews at this stage. Wood Lay: Got it. And then when you look at -- I think it was [ 12 ] credits downgraded to NPA in the broader industry, we see some weakness in the subprime consumer and especially auto. When you look at your downgrades, are you seeing any overlying trends that's impacting these borrowers? Or do they seem unconnected? Gerald Plush: Yes. I don't think you see the exposure in a material way that others have. Again, we're not someone that had the exposure that others did to NDFIs. We didn't have any impact from some of the big issues that others have reported on this quarter. We were not involved. I think when you look at ours, particularly, I think, on the commercial real estate side and just where there's probably construction underway, it's whether there's -- are they still on track timing-wise and that sometimes because of delays creates issues. We also -- and I already referenced, do we anticipate there could be some refinancing risk over the next 12 to 24 months. And so we've done early identification of those as well. So just examples on the commercial real estate side. Sharymar Yepez: Yes, Jerry, to complement that, I think it's important that it's not only on the industry side that we're seeing that these loans are across multiple industries, but also the drivers for these items are different, whether it's a covenant that was missed, a milestone in a construction project or a milestone in the repositioning of one. So I think it's important that there's no concentration in terms of that risk. Wood Lay: Got it. Do you feel like -- this is my last follow-up. Do you feel like you're being more aggressive with some of the downgrades than you have been in the past? Or has the strategy been pretty consistent? Sharymar Yepez: Yes. Yes, I think we are. And the -- what we're seeing here is that timeliness and being proactive makes a difference. The earlier we get in front of a customer and try to get to a resolution, the better outcome that we expect to have. So that's what's driving this level of reviews and the timeliness of these things that we're doing. Operator: This now concludes our question-and-answer session. I would like to turn the floor back over to management for closing comments. Gerald Plush: Yes. Thank you, Kate, and thank you, everyone, for joining us today to review Amerant’s third quarter results. I hope all of you have a great day. Thank you. Operator: 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 Polaris Third Quarter 2025 Earnings Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to J.C. Weigelt. Please go ahead. J.C. Weigelt: Thank you, Chuck, and good morning or afternoon, everyone. I'm J.C. Weigelt, Vice President of Investor Relations at Polaris. Thank you for joining us for our 2025 third quarter earnings call. We will reference a slide presentation today, which is accessible on our website at ir.polaris.com. Joining me on the call today are Mike Speetzen, our Chief Executive Officer; and Bob Mack, our Chief Financial Officer. Both have prepared remarks summarizing our 2025 third quarter as well as our expectations for 2025. Then we'll take your questions. During the call, we will be discussing various topics, which should be considered forward-looking for the purpose of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections in the forward-looking statements. You can refer to our 2024 10-K and other filings with the SEC for additional details regarding risks and uncertainties. All references to 2025 third quarter actual results and future period guidance are for our continuing operations and are reported on an adjusted non-GAAP basis unless otherwise noted. Please refer to our Reg G reconciliation schedules at the end of the presentation for the GAAP to non-GAAP adjustments. Now I will turn it over to Mike Speetzen. Go ahead, Mike. Michael Speetzen: Thanks, J.C. Good morning, everyone, and thank you for joining us today. As we previewed a couple of weeks ago, we delivered strong third quarter results. Sales in the quarter were $1.8 billion, driven by stronger-than-anticipated shipments to meet improved retail and a solid mix of Off-Road vehicles, especially RANGER side-by-sides. Equally important, we made a significant strategic move with the announced sale of a majority stake in Indian Motorcycle. This move allows us to sharpen our focus on our core business where we see the greatest potential for profitable growth across our portfolio. From more efficient plant operations to healthy dealer inventory and improved working capital, the Polaris team is delivering results in the areas we can control. This gives me great confidence that we will move through the stage of the current economic environment. Polaris is positioned to deliver strong earnings and higher returns for shareholders. Sales were up 7%, driven by a richer mix of shipments in the Off-Road segment and higher shipments in Marine, partially offset by increased promotions. Shipment volume and ORV were up approximately 5%, excluding Youth product. North American retail rose 9%, led by strong Off-Road performance, resulting in approximately 3 points of market share gain in ORV. We led the industry by making a commitment over a year ago to reduce dealer inventory, and this last quarter marked a turning point. Dealer inventory is now down 21% year-over-year. Flooring expenses are materially lower for dealers, down over 50% in some cases, and days sales outstanding for Polaris inventory is as low as I can remember, excluding the pandemic era. Not only is our dealer inventory substantially lower, but it is also healthier with aged units and dealer inventory down approximately 60% relative to 6 months ago. This gives us confidence that dealers and Polaris are in a great spot to capitalize on growth and margin expansion when the market normalizes and improves. Adjusted EBITDA margin was under pressure compared to last year, driven by increased tariffs and normalized incentive comp. We continue to manage costs carefully and drive lean and operational efficiencies across our business to exceed our goal of $40 million in structural operational efficiencies this year. Some examples of these efficiencies include lower labor costs driven by lean activities that have increased efficiency and improved material flow in all areas of the plant and lower raw materials and the elimination of a warehouse in Mexico, driven by improved forecasting and demand planning as we see improved material flow. These are just a couple of examples of the many improvements we've seen throughout our plant network. We're still in the early stages of lean deployment, which gives me great confidence in the efficiencies we have in front of us. Adjusted EPS came in at $0.41, driven by a strong mix and operational efficiencies, partially offset by tariffs and normalizing incentive compensation. As we look ahead to the remainder of the year, we're reintroducing full year 2025 guidance. We're closely monitoring consumer health indicators like unemployment, confidence, debt and discretionary spending as well as developing supply chain constraints resulting from global trade tension. Our Q4 expectations are for sales to grow sequentially. However, mix and operating expenses are expected to negatively impact sequential EPS as is increasing tariff costs. Bob will walk you through the details shortly. Looking at the details from this last quarter, retail was up 9%, led by strong growth in Polaris RANGER and crossover vehicles. As expected, Youth experienced headwinds due to our shift in production out of China. We anticipate Youth will continue to be a challenge early in Q4 as we begin to build inventory throughout the quarter and into the holiday season. This summer, we reintroduced the Polaris factory authorized clearance program for the first time since 2019. It was a success with dealers and customers, driving growth without significantly increasing promotional spend. FAC was a powerful marketing tool that successfully reengaged customers and drove increased dealership visits, which resulted in a significant drawdown in our non-current dealer inventory. On-Road was down mid-single digits as we lapped a strong comp with the launch of the new Indian Scout motorcycle in 2024. Within Marine, pontoon retail in the quarter was down low double digits compared to last year. We gained share across Off-Road and On-Road in the quarter. Within our Off-Road utility segment, our family of RANGER side-by-sides continue to grow and take share with the broadest offering of vehicles in the utility side-by-side category. From the all-new Polaris RANGER 500 to the extreme duty Polaris RANGER 1500 XD, we have continued to create and redefine the category that remains unmatched by our competitors. Despite recent product launches from our competitors, the Polaris 1500 XD continues to be the highest performing utility side-by-side in the market. Why does this matter? Because our leadership and product allows us to take over 5 points of market share this quarter in the utility side-by-side segment, which is the largest category of vehicles in the ORV industry. Remember last quarter, when I talked about the Polaris XPEDITION and how this product has helped shape the largest share capture story in ORV over the past 5 years. Well, we continue to write new chapters as we gained an estimated 10 points of share in the quarter within the crossover category. Again, despite recent product launches from our competitors, the Polaris XPEDITION continues to be the only product of its kind in the market. As the industry leader, Polaris sets the bar, and we continue to play offense, bringing innovation that is winning at dealerships. In addition to inspiring current customers to return to dealerships, innovation also brings new customers to the industry. An excellent example of this is the recent launch of the RANGER 500, our new entry-level utility side-by-side that launched in July. To date, over 80% of the customers who bought the RANGER 500 were new to Polaris. This tells us that this is the right vehicle at the right price to get customers into the dealership and in a Polaris vehicle. As you know, I regularly carve out time to get into the field and visit dealers and take part in dealer council meetings. This feedback we received during these meetings is instrumental in helping us keep a pulse on dealer sentiment across the industry. They share what's working, what's not and what they're hearing from customers. Inventory levels have been a regular topic over the last 2 years. My recent takeaways are that dealers are more comfortable with their inventory positions in ORV and are embracing our NorthStar Reward program in record numbers. Given these conversations with dealers and the data we have on dealer inventory, we believe we have reached a point where production, ship and retail should be aligned. While there is still work to do in Snow, which we believe will normalize this quarter, this is a big win for Polaris and our dealers. We continue to have an intense focus on winning at the dealerships with unmatched offerings across vehicles, PG&A, service and financing. We are the global leader in powersports and take that responsibility seriously as we continue to push the industry forward while expanding the addressable market. One way to show leadership is through proven race performance. Recently, Polaris RZR Factory Racing solidified its dominance in desert racing with a third straight victory at the Baja 400, sweeping the UTV overall podium and a commanding performance. This dominance redefines what is possible in racing as we continue to raise the bar even when our largest competitor races their latest top-end performance vehicle. Another way to prove leadership is innovation. Our innovation pipeline is showing no signs of slowing with last week's second wave of 2026 ORV product launches. Leading the charge is the all-new RZR XP S. It is Polaris' most capable trail machine yet, engineered for riders who want to conquer wide open terrain with confidence and style. With a bold 72-inch stance, 25 inches of usable suspension travel and a rugged RZR Pro S driveline, it is built to dominate the toughest trains while delivering a smooth, responsive ride. We also introduced the largest display in the industry with a 10.4-inch screen for RIDE COMMAND on the RZR Pro R. On the utility side, we launched several limited edition Polaris Ranger XD 1500s with the NorthStar Texas and the NorthStar Mountaineer editions tailored to meet the specific needs of customers in key regions. In snowmobiles, we have a robust product pipeline of innovation that we will bring to market in the coming years. And in Marine, we just launched a full redesign of our flagship QX Bennington pontoon. The QX lineup blends timeless design with intuitive technology and thoughtful innovation, again, setting a new standard in the pontoon industry. Another example and one that my family and I will be attending is the upcoming annual Camp RZR event in Glamis. It was one of my favorite weekends of the year and an incredible opportunity to witness our customers' passion for riding and what the Polaris brand stands for. The energy and enthusiasm at Camp RZR is a powerful reminder of the deep connection our community has with our products, and it continues to inspire our team as we innovate for the future. One leaves Glamis feeling confident in who the true leader in powersports is and what a company's impact on the industry can mean. It's an honor to be part of such an amazing company that is the global leader in powersports continues to support the long-term health of the industry with the largest and best dealer network, a team that delivers rider-driven innovation, providing great customer experience and a strategy built to generate shareholder value. Let's shift to the Indian Motorcycle transaction. We announced a definitive agreement to sell a majority stake in Indian Motorcycle to Carolwood with the deal expected to close in Q1 2026. Indian Motorcycle will become a stand-alone business, and we will hold a small equity stake in the company. This move is expected to unlock the full potential for both Polaris and Indian Motorcycle. Carolwood brings strong capital backing and a commitment to investing for the long term, and they brought in an experienced leadership with their selection of Mike Kennedy as CEO. They are poised to take Indian to the next level. We've built something incredible, the #2 motorcycle brand in the U.S., the #1 brand in customer satisfaction, over 600 dealers, over 900 dedicated and talented employees and a strong lineup of motorcycles exemplified by being the market share leader in the mid-sized category. Now it's time for Indian Motorcycle's next chapter and Carolwood is the right partner. For Polaris, the decision allows us to focus on our most promising high-margin growth opportunities. Innovation is key, and we're doubling down, accelerating investment and devoting resources to critical priorities and initiatives, which is very exciting given the product pipeline we have in ORV, Snow, Marine and Slingshot. The focus continues to be on enhancing the customer experience with rider-driven innovation. Shareholders should be excited as well. Post separation, we expect the transaction to be accretive to adjusted EBITDA by approximately $50 million and to adjusted EPS by approximately $1. It's a win-win. Right now, teams are focused on standing up Indian Motorcycle to operate independently from Polaris, and we are committed to making this a smooth transition for Indian Motorcycle dealers and customers. I want to shift gears and talk about what we're seeing related to trade policy as it continues to evolve. Our gross tariff impacts for the year rose by $10 million since July, driven by international retaliatory policies and increased commodity exposure. Despite this, given deferrals and mitigating actions, we don't expect a material change to our 2025 P&L outlook and now expect the impact from new tariffs to be approximately $90 million. We're executing our mitigation strategies effectively with an urgent focus on our China spend with a long-term plan to drastically reduce our spend on all China parts and components. These efforts take time to find suppliers, tool production and validate parts. By the end of 2027, we expect our actual China spend to be down by approximately 80% relative to 2024, which equates to less than 5% of our cost of goods sold coming from China. It's an aggressive strategy that will take time to show up in the financials, but I can assure you that we have a very capable team focused on these efforts and ultimately believe that we will have a more resilient and efficient supply chain because of the moves. I'm going to turn it over to Bob to provide you with more details on the financials. Bob? Robert Mack: Thanks, Mike, and good morning or good afternoon to everyone joining us today. Let's start with the third quarter financial results. Adjusted sales for the quarter were up 7%. This was stronger than our expectations, driven by higher shipments and a richer mix of Off-Road vehicles. Net pricing was neutral with price increases offsetting elevated promotions. International sales grew 2%, led by strength in Europe. PG&A sales were up 20% with record performance in parts, especially oil, which is a great indicator that our customers are actively using their vehicles. Gross profit margin benefited from mix and operational efficiencies as compared to last year, but that was more than offset by $35 million in new tariffs, volume declines and higher incentive compensation relative to last year's depressed level. Accordingly, adjusted EBITDA margin contracted year-over-year as expected due to the previously noted issues impacting gross profit, along with the year-over-year incremental incentive compensation impact in OpEx. As you may recall, we made temporary cuts to incentive compensation in the second half of 2024 due to challenging market conditions. It is important to note this year-over-year headwind in incentive compensation includes cash and stock-based compensation and is mainly recorded at the corporate level. Despite these pressures, we generated $159 million in operating cash flow this quarter, reflecting strong earnings quality and improved working capital management. Year-to-date, we've delivered over $560 million in operating cash flow and approximately $485 million in free cash flow, which is a testament to our strong execution and our low working capital business model. Off-Road sales rose 8%, supported by a richer mix of ORV vehicles, strong commercial volume and PG&A growth. Dealer inventory continues to improve across the industry. As Mike mentioned, we've turned a corner in our core ORV business and now plan to ship in line with retail demand. There are a couple of exceptions to note. For used vehicles, we recently moved production out of China, which may cause some volatility in retail estimates and dealer inventory as we rebuild stock. Snowmobiles are another exception. We reduced ship this year to help manage dealer inventory following 2 seasons of low snowfall in the flatlands. Overall, we expect dealer inventory across the portfolio to be well positioned relative to demand as we head into 2026. We gained about 3 points of market share in ORV this quarter, led by Polaris Ranger and Polaris XPEDITION. Importantly, our successful FAC program didn't require heavier promotional spending than what we incurred in the second quarter. Gross profit margin improved by 104 basis points despite tariff headwinds. Key drivers included operational efficiencies, a better mix of vehicles and positive contributions from warranty and dealer floor plan financing. Moving to On-Road. Sales during the quarter were down 3%, driven by ongoing softness in the broader motorcycle market and within our Slingshot business. Adjusted gross profit was down 23 basis points, impacted by negative mix and tariffs. This was partially offset by a stronger performance at Exim. Marine sales were up 20% against a low comparable last year when we took action to rightsize dealer inventories coming out of the prior selling season. The increase in sales was driven by positive shipments of new boats, including the new entry-level Bennington pontoon. The September SSI data shows that market share held steady for our pontoon business in the third quarter. However, the broader marine industry continues to face pressure from elevated interest rates and macroeconomic uncertainty. We continue to actively manage dealer inventory, which is down 17% relative to the third quarter of 2024. Gross margin declined due to mix, though this was partially offset by positive net pricing. Moving to our financial position. We generated approximately $159 million in operating cash flow this quarter, translating into $142 million of free cash flow. Working capital has been one of the ancillary benefits from our ongoing efforts to reimplement lean in our plants. Through the improvements we have seen in our retail forecasting and clean build rates, we have been able to better align our supply chain and manufacturing processes, reducing inventory across the board. This, along with efforts to optimize payables and receivables, should continue to drive attractive cash generation metrics over time. We expect 2025 ending working capital as a percentage of sales to be in line with pre-pandemic levels with opportunity to improve from there as we continue the lean work in our plants and further localize our supply chain. We remain committed to maintaining investment-grade credit metrics and ended the third quarter well below our covenant thresholds given strong year-to-date cash generation. With our strong performance on cash generation and ongoing tariff mitigation efforts, we are moving to a more balanced split between investments for growth and debt paydown. While we will continue to focus on reducing our debt levels, we will also invest in high-return opportunities to widen our competitive moat in an industry where we already have a strong position with the most innovative portfolio of vehicles. We also continue to remain committed to the dividend and our Aristocrat status. Clearly, the global trade and tariff environment remains dynamic, but we are seeing more consistency in customer demand. Given that, we are reintroducing full year guidance. While this only covers 1 quarter, we believe it helps reduce uncertainty from an investor standpoint and build confidence in our outlook. Although the evolving trade environment required us to withdraw full year guidance earlier this year, we are pleased that excluding added tariff costs, our full year guidance results remain aligned with the expectations we initially set in January. We expect full year adjusted sales between $6.9 billion and $7.1 billion, with growth in Marine and PG&A offset by declines in On-Road. Off-Road sales are expected to be flat. Industry retail is projected to be flat, but we anticipate gaining share, thanks to our strong product portfolio. Adjusted gross profit margin is expected to be around 19% with tariffs representing a 1 point headwind. Other margin pressures include negative net pricing and incentive compensation, partially offset by lower warranty costs and operational efficiencies. For the fourth quarter, there are a few sequential headwinds contributing to our expectations that fourth quarter adjusted EPS will be lower than our third quarter adjusted EPS. Within the gross profit line, tariffs are expected to be $5 million higher and mix is tracking negatively with the timing of seasonal products such as Youth, Snow and Marine. Within OpEx, the timing of certain costs in engineering and legal are sequentially higher. All in, we expect fourth quarter adjusted EPS of approximately $0.05. This assumes no new tariffs that would have an immediate impact on raw material and component costs and that supply chains are not significantly disrupted by trade disputes and other government actions. For the year, we expect adjusted EPS to be a loss of approximately $0.05. Excluding new tariffs, we would expect adjusted EPS to be close to our original estimate of $1.10. In summary, we delivered strong Q3 results in a challenging environment. We have momentum to finish the year strong with a positive outlook on operations, dealer inventory and innovation. The expected sale of a majority stake in Indian Motorcycle will free up resources that we plan to fully dedicate to higher growth and higher-margin opportunities. We remain focused on what we can control and believe this disciplined execution will drive higher margins, stronger cash flow and improved returns on invested capital, ultimately increasing shareholder value. With that, I will turn it back over to Mike to wrap up the call. Go ahead, Mike. Michael Speetzen: Thanks, Bob. I'm proud of our team's performance this quarter. This continues to be a challenging environment, and the Polaris team remains focused on closing out 2025 strong. Let me wrap up with a few final comments. We believe dealer inventories are at healthy levels given our demand outlook. Therefore, outside of a few smaller product lines, we believe build, ship and retail should be aligned going forward. Our team continues to execute against our strategy to improve operations within our plan, and we are on track to exceed our commitment to deliver $40 million in operational savings this year, building on the more than $200 million in savings last year. This cannot be overlooked. We have worked hard over the last 2 years. And while there is still work left to do, we have seen the results and the opportunities ahead of us that should provide a meaningful tailwind to margins when volume returns. The rationale behind our decision to sell a majority stake in Indian Motorcycle allows us to put added focus and resources on our most profitable growth opportunities. We're working to close the Indian Motorcycle transaction in Q1 2026, and we believe it's a win for both companies. Lastly, we remain committed to our long-term strategy to be the global leader in powersports and believe we have established a solid foundation to grow from and increase shareholder value when the industry recovers. Innovation is strong, dealer inventory is rightsized, and we are running more efficiently than before. These are the pieces to build from, and we stand ready to deliver on our goal of higher sales growth, greater earnings power and stronger returns. We appreciate your continued support. And with that, I'll turn it over to Chuck to open the line for questions. Operator: [Operator Instructions] And the first question will come from Noah Zatzkin with KeyBanc Capital Markets. Noah Zatzkin: Maybe first on ORV retail strength and kind of the magnitude of outperformance versus the industry in the quarter, up 9% versus up low single digits, particularly on the utility side. Wondering if you could share any thoughts around what drove those share gains in the quarter as well as thoughts around industry retail and kind of the share gain opportunity looking ahead? Michael Speetzen: Yes. Thanks, Noah. I think there's a lot at play. I think we've obviously rightsized our inventory. So we've got the right product at the right dealers at the right price. So that's an important starting point. I think when you look at the RANGER lineup, and I talked about it in my prepared remarks, we've got a breadth that many of our competitors just can't cover. You start with the RANGER 500, as I talked about, brought a lot of new customers, 80% new to Polaris into the fold up to the XD 1500, which at this point is unmatched in the industry and remains a very popular vehicle. And you couple that with the massive improvements we've made in quality. It shows up in much lower warranty costs. We are now hearing dealers play back to us that quality is not something that they have to try and explain. It's something that is a strength and getting associated with our brand. And then as we track customers, we know that the short-term repurchase rates have started to creep up. which says people are out using the vehicles. We can see that with the repair order activity we track, tire consumption, oil consumption. And we know ultimately that people are out using the product. And so they get to a replenishment cycle given a lot of the innovation that we've put out into the marketplace. I talked a little bit about the NorthStar rewards program in my prepared remarks. We had the highest level of what we call 4 and 5 star, which is the highest 2 levels of our dealer program. And that isn't just important from the perspective of dealers earning more holdback. It reflects the fact that the dealer network is performing at a higher level. And I mentioned that because it provides a better customer experience. And that's really important when you get customers in, given the tremendous amount of innovation we have. That can fall apart if the dealer isn't performing on their end. And we see a tremendous amount of retail coming out of these 4- and 5-star dealers. You couple that with the tremendous innovation we've got in the marketplace with the broadest portfolio in that utility segment, and it's not a surprise that we outperformed the industry. Noah Zatzkin: Very helpful. And maybe just one more. Hoping you could share any early thoughts on fiscal '26, either from an industry perspective or Polaris specifically. Obviously, as it relates to Polaris, there are some puts and takes next year. The deal, I think, is expected to be $1 of EPS benefit. And on the tariff front, it seems like maybe mitigation this year is a bit better than expected. So just any high-level thoughts around '26 would be helpful. Michael Speetzen: Yes. I'd kind of look at it in this order. I mean, clearly, the Indian deal is probably going to have the largest impact. It obviously takes about $450 million of revenue away, but it is going to add roughly $50 million in EBITDA and $1 of EPS. So that single event is going to be pretty significant. I mentioned in my prepared remarks that build will equal ship, will equal retail. We're not prepared to make a call on where we think the industry is. But if you think about a flat industry and having ship equal retail, you're talking about several hundreds of millions of dollars of uplift just from being able to ship into the channel, which obviously will provide improved absorption at our plants and additional fall-through. We look at the promo environment. From a competitive standpoint, our largest competitor is pretty much in the same region we are from a dealer inventory standpoint, which is very helpful. We've seen significant improvements amongst the Japanese competitors. They're not perfect yet, but we've seen some of the dramatic things that were being done with rebates and incentives essentially cease, which is good. So we think promo is going to be kind of net neutral as we get into 2026. And then as you indicated, from a tariff standpoint, it's going to be additional cost because we're going to be lapping '25. And if you remember, we barely had any tariff impact in Q1 and Q2. And as we said, we think tariffs are going to be about a $90 million incremental hit in 2025. As we move into 2026, we think tariffs are going to be just north of $200 million. That's all in. That's inclusive of the 301 tariffs that have been in the business since back in 2018. The team is working hard on that. Obviously, we're watching the negotiations that are underway with China right now, but we're not going to wait. We're moving aggressively. As I talked about in my prepared remarks, we're making a dramatic reduction in the amount that we're sourcing out of China by 2027. And we think we're going to be south of 5% of our cost of goods sold by the time we get into 2027, and that will be a pretty massive reduction and certainly a benefit to the business. Operator: The next question will come from Craig Kennison with Baird. Craig Kennison: I wanted to start with a follow-up on RANGER 500. I know it's early, but what can you tell us about the consumer profile of that product line? Are they new to powersports overall, younger? Are they first-time buyers? Just looking for a profile. Michael Speetzen: Yes. I mean you kind of hit on all of it, Craig. And they are prospective customers that have wanted to have a Polaris product, but they really couldn't find the right entry point. Until we introduced this product, you really couldn't get into a Polaris vehicle for under realistically $14,000, $15,000. And this vehicle is perfectly suited for someone who has an acre or 2 wants to use the vehicle to drag trash cans down to the curb and go get the mail. And so that's really what we see is these are either new to Polaris, meaning they might have bought a brand that we don't even talk about as a competitive set that are sold through some of the big box retailers or there are people that would have used a golf cart or something like that and now see an opportunity to own the #1 powersports brand. We think that's great because we view that as an opportunity to continue to evolve them up the product family down the road. Craig Kennison: And then I guess, with respect to that particular customer profile, we have seen some cracks emerge in the subprime auto space. And I'm just wondering with respect to your consumer, if you're seeing any changes in credit availability among that particular credit tier. Robert Mack: Yes. We really haven't, at least. in Q3. Credit metrics were good. Through-the-door FICOs were only -- they were down 2 points relative to 2024. Actually, 12-month losses in the portfolio actually improved versus last year. So we feel like that's peaked from a credit quality standpoint. We're starting to trend back in a positive direction and pen rates and things like that have stayed pretty consistent. Availability of subprime has been decent. We're not seeing a fallout from the lenders. So we're not experiencing that, I think, to the degree auto is right now. Operator: The next question will come from Joe Altobello with Raymond James. Joseph Altobello: I guess first question on retail. Obviously, the FAC was very successful. Any sense or concern that, that might have pulled demand forward? I'm curious what you're seeing in October. I know the FAC, I think, is still ongoing, but it's probably waning in terms of the impact. So I'm just curious if you're concerned there and what you're seeing here in Q4. Michael Speetzen: Yes. I mean the FAC was -- as I talked about in my prepared remarks, it really didn't drive incremental spend. We viewed it as just a way to generate a little bit of excitement, get people kind of reengaged and coming into the dealership. I mean, at the end of the day, door swings of foot traffic are what drive retail. And ultimately, it worked. We didn't add a bunch of cost. The good news is we were able to move, as I talked about, we've drawn down our greater than 180-day old inventory. We've drawn that down 60%. And a lot of what moved in the third quarter was that noncurrent inventory. As we're looking at October, results are pretty good. We continue to see strength in areas like Ranger XD, XPEDITION, ATV. Youth, as we indicated, is going to be a headwind for probably the next month or 2 as we ramp up production down in Mexico heading into the holiday season. And we think retail, excluding youth and ORV in the fourth quarter is going to be up low single digits. And certainly, in October, we're seeing trends that support that performance. Joseph Altobello: Okay. Got it. Perfect. And then just moving on to tariffs. I think, Mike, you mentioned that you expect next year to be all in just north of $200 million, which is only slightly higher, I think, than what you're expecting this year if you include the $301 million. So maybe what's the incremental net impact next year? And what do you think a good incremental margin is for '26? Robert Mack: Yes. I mean we're not ready to start giving guidance for '26 yet. I would say that the incremental is over $100 million versus '25. And as we really got to start to see and get a little closer to the end of the year, see what inventories look like, work through our -- the amount of moves we have coming out of China and the timing of those moves to really get a good incremental number related to 2025. So kind of a $200 million plus all-in for 2026 is sort of where we see it right now. We'll have more detail when we talk again in January. Michael Speetzen: And Joe, remember that also includes pulling Indian Motorcycle out. So there's a number of puts and takes. And as Bob indicated, when we get to January, we'll have a little bit better walk for everyone. Operator: The next question will come from James Hardiman with Citigroup. Sean Wagner: This is Sean Wagner on for James Hardiman. I guess, first, I think initially, fourth quarter was expected to be maybe a lot better than third quarter. Was there any shift in earnings power between the 2? Robert Mack: Yes. A few things, and we alluded to some of it on the -- in the prepared remarks. I mean if you look at Q4, I would say sort of 25% of the impact really is in GP, and that's some incremental tariffs. Tariffs will be the highest for the year in Q4. That's just as they build into inventory and start to flow through the P&L. Vol/mix, volume is okay in the quarter, but mix is negative. Mike talked about Youth. And it's negative quarter -- sequentially for the quarters and year-over-year. Last year, we had a big fourth quarter in Youth, and that's partly because we had had vehicles on hold in '23. And so we had really good retail performance in '24. We're kind of back to that a little bit this year where we'll be shipping really in Q4. We didn't ship any in Q3. Normally, a lot of the youth stuff would have showed up in Q3. But with the move to Mexico, that's been delayed a little bit. So that has probably the most pronounced impact. And then Q4 is always a bit tough from a mix standpoint because we ship a lot of Snow and we ship Marine coming off their dealer meetings. And those are just structurally lower GPs than ORV, whereas in Q3, it was heavy, heavy ORV. Plant performance is a little better, so that helps offset it. The real story is in OpEx, and it's a couple of things. I mean it's the highest quarter as it relates to the incentive comp compensation issue on a kind of year-over-year basis. And then the timing of some engineering, legal and IT spend that is higher in Q4 than it is in Q3. So those are the big pieces as it relates to the -- why Q4's earnings look the way they do. Michael Speetzen: Sean, maybe I misheard you, but I thought in your question, you had said that it sounded like it was worse than we were expecting. We did not guide fourth quarter. I mean we had pulled our guidance. If you go back to some of the prepared remarks that Bob had, you pull the impact of the tariffs out, we are largely executing against what we had conveyed at the beginning of the year when we provided guidance before all the tariff noise came into the environment. So I think some of this is that there are numbers out on the street that were not necessarily based on things that we had said. And as we look at the buildup of our financials and where we knew we were going to be delivering snowmobiles and things like that, I wouldn't say that anything in the fourth quarter is a big surprise from our standpoint. Sean Wagner: Okay. Fair enough. I guess piggybacking off of that from a high level, now that you've round tripped the '25 guide, excluding tariffs, is it anything outside of tariffs that has fundamentally changed this year or any big lessons that you guys have taken away from the year? Robert Mack: Yes. I mean, I think if we sort of step back and look at the year in total, I mean, excluding tariffs, Promo was heavier than we expected it to be for the year. Mix was probably a little -- was better as we continue to really outperform in our -- as Mike talked about, at the high end of these categories, the XD 1500, the XPEDITION, we don't -- the competition doesn't really have anything to go against us there. So those vehicles continue to sell really, really well. That customer base is really strong. And then the plants really outperformed where we had pegged it. We were at $40 million for the year. We're on track to meet or exceed that. And just good solid performance out of the plants in a challenging environment. I would say those are the 3 big things that stick out. Michael Speetzen: Yes. And I just want to add to the last one Bob mentioned, Sean. When I think about going back 2 or 3 years ago, operational execution was not our strong suit. We've realized we were not as lean or as good as we thought we were. And when I look at this year, and I look at the fact that our operational teams have not only met what they originally laid out, but they've exceeded it. And they've done that in an environment where we've had to make some interplant product transitions as a result of the tariffs as well as contending with the tariffs and the mitigation work. It's -- we didn't bring on extra people to do that. We've got our supply chain and operational people working those plans. And the fact that the Polaris organization was able to step up to the challenge and not let the operational improvements waiver and, in fact, accelerate them and put us in a position to exceed, I think, is pretty impressive, and I think gives me a lot of excitement about the future and where we think we can take the company and how much opportunity we have in front of us to improve execution. Operator: The next question will come from Tristan Thomas-Martin with BMO Capital Markets. Tristan Thomas-Martin: One kind of qualification question. Your comment plan to ship in line with retail. Is that just Off-Road? Or is that consolidated Polaris? Michael Speetzen: I think as it relates to Q4, it's really Off-Road. You mean as we -- the comments I made around moving forward, build equals ships equals retail? Tristan Thomas-Martin: Yes, correct. Michael Speetzen: Yes. I think you can take it broadly. I mean the reality is that we have timing differences given the seasonality of our businesses within that. But when we start looking at the macro picture around the business, and Bob hit on some of the stats. You look at how much we've pulled down the Marine inventory, where we're at from a motorcycle inventory, obviously, that will be moved out of the business as well as then ORV and Snow. We feel really good about where we're at. And when you look at it on a full year basis, those -- the build equals ship equals retail should hold. Robert Mack: Yes. As it pertains to the fourth quarter, which as I said in my comments, it's really an ORV comment. Motorcycles obviously ships more in the first part of the year as they get into their seasonality, Snow ships more in the fourth quarter and Marine ships kind of more fourth quarter, first quarter as they look at their season. So -- but on a full year basis, to Mike's point, in '26, that's an across-the-board comment when you look at the full year. Tristan Thomas-Martin: Okay. And then just one more. It kind of sounds like everyone is coalescing around a little more of a conservative industry outlook for next year, but also everyone is expecting to take share. You talked a lot about products. So kind of outside of that, what other levers do you have to kind of protect the share you've gained in the last 2 quarters? Michael Speetzen: Innovation. I think it starts with product, and you can see the results of that. And I think in many instances, our competitors are going to have to catch up in a couple of categories. I think after that comes the strength of the dealer network. We have spent a lot of time, not just tactical things like getting the inventory rightsized, but spending time with our dealers, understanding what works well, what doesn't, what do we need to change. I think our NorthStar program is the best program in the market. We can see it in terms of the dealer engagement. And that starts with somebody walking through the door to look at a new product to somebody coming into the service bay to somebody coming in to buy parts or accessories for their vehicle or shopping online, getting financed, getting an extended warranty agreement. And I think you have those 2 things together. It's a pretty powerful equation, and I think it will work well for us as we head into '26 and beyond. Robert Mack: Yes. I think there's a lot of -- to Mike's point, a lot of maturity in the management of the dealer network right now, a lot of focus on dealer profitability. We're not out trying to add dealers. We're trying to optimize the structure we have, work with those dealers as people want to get out of the industry, working with the strongest dealers out there to take over those points and then looking at how do you have more kind of multi-dealer structures that allow the dealer to optimize how they run their business and how we deliver to their business. So I feel like all of those things are going to help us, and I think we're the farthest along in terms of how we work with the dealer network. Operator: The next question will come from Robin Farley with UBS. Arpine Kocharyan: This is Arpine for Robin. Your margins came in better than expectations, and you, of course, called out sort of favorable mix and positive contribution from warranty expense for the quarter. Could you maybe walk through whether those are recurring benefits to margin as we look into Q4 and more importantly, 2026? I know you mentioned mix reverses to less favorable in Q4. But just thinking about those drivers for next year? And then I have a quick follow-up. Robert Mack: Yes. Certainly, warranty has been a positive story really for all of '25, and I think that trend will continue into '26. The quality of our products continues to improve. We hear that from the dealer base. We see it in the numbers. And you all see it in the warranty as it impacts from a cost standpoint. Plants, obviously, the big step was in '24, but continued improvement in '25, and we think we'll outperform the $40 million that we had as a target. That work will continue. We're still in the early phases of our reimplementation of lean in the plants. And so there's continued work to do there to drive more profitability out of the plants, and we'll see some more benefits of that as volume improves. And mix is kind of a quarterly thing. I mean there's inter-business mix in terms of the different parts of the company and because different businesses have different GP profiles. But in general, mix continues to be a strong story for us given our outperformance given our innovation at the high end of the product lines. So we think mix overall will continue to be a positive as we move forward. Arpine Kocharyan: Great. And then just really quickly, any comments you could give us in terms of early reads into retail environment for 2026? So some of the things that you're looking at that shape your outlook for demand for next year? And maybe any initial comments on cadence of new product intros and where you see opportunity maybe for you to grow a bit above industry growth range for next year? Michael Speetzen: Yes. I mean we're -- we won't get into specifics, but safe to say you can look at the cadence of innovation we've had over the past several years, and we don't expect that to slow down. So we think there will be plenty of innovation opportunities for us as we head into '26. I think it's really more of the same relative to the macro. I think there's a lot of uncertainty around where inflation is headed and resulting interest rate moves. We're not going to pontificate on how many rate cuts and all that type of stuff. But certainly, higher interest rates are a challenge for this category. It's been encouraging to see rate cut direction, and we think we're going to need more of that. And I think that will come as a result of easing inflation, which will be good for our consumers. I talked about in my prepared remarks that we're looking at things like the debt levels and things like that with our customer base. But we also think time plays in our favor. We look at the customer demographics in terms of in terms of purchases and repurchase rates. And we're now past, call it, 5 years past the bubble that was created during the pandemic. And we expect that those customers will start coming back. We know they're using the product. And given the cycles of innovation we've had since those products were purchased as well as time, we fully expect that they'll start to come back into the fold. So we think there's a number of different things. But ultimately, this is going to be a macro-driven phenomenon. I do think people are looking at next year from a cautious perspective. But I think the work we did this year to get dealer inventory rightsized to put us in a position, quite frankly, if the industry is flat, we still believe we can grow just given the position we are from a dealer inventory as well as the innovation we have in the pipeline. Operator: The next question will come from David MacGregor with Longbow Research. Joseph Nolan: This is Joe Nolan on for David. You guys had strong success with the factory authorized clearance program. Just wondering if you can give an update on what sort of promotional activity you're seeing from competitors and just how that develops into fourth quarter and 2026? And also, just in past quarters, you've given an update on competitor channel inventories, if you can give an update there as well. Michael Speetzen: Yes. I'll kind of wrap them all together. We and our next largest competitor, when we look at our DSOs and current, noncurrent, we look very similar, which is helpful because the 2 of us make up a large portion of the industry. The Japanese have been moving in the right direction. We've definitely seen the large promo to move very old product or kind of onetime incentives that were going on in the marketplace. We've seen a lot of that essentially slow down or exit the market. As we head into the fourth quarter and into next year, at this point, we don't see anything that's outsized relative to what has been going on here more recently. And as long as the dealer inventory stays in a good spot or continues to improve with some of our competitors, we expect that promo environmental settle down. We talked about '26. We're assuming that the promo environment will be kind of flattish year-over-year, and we'll see how that continues to evolve given some of the competitors that are still catching up on their inventory levels. Robert Mack: Yes, I would say there's been some talk of lower promo in the industry, but the behaviors haven't demonstrated that that's going to happen. And so right now, our view is that things will remain sort of flat with where they are right now. Hopefully, if we see the level of interest rate cuts that folks are talking about, that may allow some things to normalize as we get into mid-2026, but it will take a while for that to play out. So tough to really forecast right now. Operator: This concludes our question-and-answer session as well as our conference call for today. Thank you for your participation and attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Third Quarter 2025 Zebra Technologies' Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mike Steele, Vice President, Investor Relations. Please go ahead. Michael Steele: Good morning, and welcome to Zebra's third quarter earnings conference call. This presentation is being simulcast on our website at investors.zebra.com and will be archived there for at least 1 year. Our forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially, and we refer you to the factors discussed in our SEC filings. During this call, we will reference non-GAAP financial measures as we describe our business performance. You can find reconciliations at the end of the slide presentation and in today's earnings press release. Throughout this presentation, unless otherwise indicated, our references to sales performance are year-on-year on a constant currency basis and exclude results from recently acquired businesses for 12 months. This presentation will include prepared remarks from Bill Burns, our Chief Executive Officer; and Nathan Winters, our Chief Financial Officer. Bill will begin with a discussion of our third quarter results, Nathan will then provide additional detail and discuss our outlook. Bill will conclude with progress on advancing our strategic priorities. Following the prepared remarks, Bill and Nathan will take your questions. Now let's turn to Slide 4 as I hand it over to Bill. William Burns: Thank you, Mike. Good morning, and thank you for joining us. Our team executed well in the third quarter, delivering results above our outlook driven by solid demand, lower-than-expected tariffs and strong operating expense leverage. For the quarter, we realized sales of $1.3 billion, a 5% increase from the prior year, and adjusted EBITDA margin of 21.6%, a 20 basis point improvement, and non-GAAP diluted earnings per share of $3.88, which was 11% higher than the prior year. We realized solid growth in our Asia Pacific, Latin America and North America regions and had relative outperformance in printing, mobile computing and RFID. Our retail and e-commerce end market was a bright spot. Healthcare cycled a strong compare and manufacturing remained relatively soft. We achieved double-digit earnings growth by driving operational efficiencies as we continue to invest in our leading portfolio of solutions. While we see growth across most of our business, our customers continue to navigate in uncertain macro environment, resulting in uneven demand across some geographies and vertical markets. As we look at our broader business prospects, we are excited about our profitable growth opportunities, including our recent acquisition of Elo Touch Solutions which enables us to accelerate our vision for the connected frontline. Our strong balance sheet and free cash flow profile also enables us to commit $500 million to share repurchases over the next 12 months as we drive long-term value for our shareholders. I will now turn the call over to Nathan to review our Q3 financial results and Q4 outlook. Nathan Winters: Thank you, Bill. Let's start with the P&L on Slide 6. In Q3, total company sales increased approximately 5%, with growth across most product categories and services and software recurring revenue business grew modestly in the quarter. Our Enterprise Visibility & Mobility segment grew 2%, led by mobile computing, and our Asset Intelligence & Tracking segment grew 11%, led by RFID and printing. As we disclosed in our earnings press release this morning, please note that effective in the fourth quarter, we are reporting under 2 new segments: Connected Frontline and Asset Visibility & Automation. Bill will cover how this view aligns to our strategy and how we manage the business. Historical results have been recast in the appendix. We realized strong sales growth across most of our regions. In North America, sales grew 6% with double-digit growth in mobile computing and RFID, offsetting weakness in Canada. Asia Pacific sales increased 23%, led by Australia, New Zealand and India. Sales increased 8% in Latin America with broad-based growth across the region. In EMEA, sales declined 3%. Regional performance was mixed, with softness in Germany, balanced with relative strength in Northern Europe. Adjusted gross margin declined 90 basis points to 48.2%, primarily due to higher U.S. import tariffs. Adjusted operating expenses as a percent of sales improved by 110 basis points. This resulted in second quarter adjusted EBITDA margin of 21.6%, a 20 basis point year-on-year improvement. Non-GAAP diluted earnings per share were $3.88, an 11% year-over-year increase and above the high end of our outlook. Turning now to the balance sheet and cash flow on Slide 7. Year-to-date, we generated $504 million of free cash flow. As of the end of Q3, we held more than $1 billion of cash with a modest debt leverage ratio of 1 and $1.5 billion credit capacity. We have been deploying capital consistent with our allocation priorities. Through October year-to-date, we have repurchased more than $300 million of stock and acquired 3D machine vision company, Photoneo and Elo Touch Solutions with cash on hand and our existing credit facility. We continue to maintain excellent financial flexibility for investment in the business and return of capital to shareholders. And as Bill highlighted, we are planning $500 million of share repurchases through the third quarter of 2026. On Slide 8, we provide an update on the anticipated impact from tariffs on our products imported to the United States and our progress on mitigation. For the full year 2025, we're now assuming approximately $24 million for gross profit impact after mitigation with a $6 million net impact expected in Q4, which is an improvement from our prior guidance. Our forecast assumes the current effective rates and exemptions remain in place. We have a track record of successfully navigating supply chain challenges, including tariffs and expect to substantially mitigate the current U.S. import tariffs entering 2026 as a result of actions taken by our team, including previously announced pricing adjustments, yielding about 1 point of sales growth, reducing U.S. imports from China to less than 20%, rationalizing our product portfolio and strong progress on driving overall supply chain efficiency and resilience. Let's now turn to our outlook. We anticipate between 8% and 11% sales growth in the fourth quarter, including approximately 850 basis points of contribution from our Elo and Photoneo acquisitions and favorable FX. Our second half demand assumptions have not changed from our prior business update. Our fourth quarter adjusted EBITDA margin is expected to be approximately 22% which assumes a $6 million net impact from U.S. import tariffs and non-GAAP diluted earnings per share is expected to be in the range of $4.20 to $4.40. Our fourth quarter outlook translates to full year sales growth of approximately 8%. Our full year adjusted EBITDA margin is expected to be approximately 21.5% and non-GAAP diluted earnings per share is expected to be approximately $15.80 based on our Q4 guide, a 17% year-on-year increase. Please reference additional modeling assumptions shown on Slide 9. With that, I will turn the call back to Bill. William Burns: Thank you, Nathan. As we turn to Slide 11, Zebra remains well positioned to benefit from secular trends to digitize and automate workflows and with our portfolio of innovative solutions, including purpose-built hardware, software and services. Our solutions intelligently connect people, assets and data to assist our customers with business-critical decisions. I would like to spend a minute on our new reporting segments. Zebra operates in a greater than $35 billion served addressable market, encompassing the connected frontline and asset visibility and automation. Each segment has a 5% to 7% organic growth profile over a cycle, supported by megatrends, including artificial intelligence, mobile and cloud computing and the on-demand economy. The connected frontline is about equipping the front line of business with tools and digital touch points necessary to drive efficiency, optimize collaboration and improve the consumer experience. Our solutions portfolio includes enterprise mobile computing, rugged tablets, frontline software and AI agents. Our acquisition of Elo adds key capabilities in self-service and point of sale, increasing our addressable market in this segment to greater than $20 billion. Asset visibility and automation is primarily focused on digitizing environments and automating operations across the supply chain through advanced data capture, printing, machine vision, RFID and other solutions. These are complementary and synergistic segments that digitize and automate operations and solve our customers' biggest challenge. Turning to Slide 12. Zebra solutions enable our customers across a broad range of end markets to drive productivity and efficiency and improve service to their customers, shoppers and patients. I would like to highlight RFID, which has been a consistent bright spot in our portfolio, growing double digits over the past several years. As a market leader, we are encouraged by the continued momentum we are realizing. Our largest customers in retail and e-commerce as well as transportation logistics and manufacturing have been expanding their adoption of Zebra's RFID solutions to additional workflows and categories due to the improved business outcomes they are achieving. Supply chain visibility, inventory accuracy, increased productivity, improved profitability and reduced waste are key outcomes that are driving increased adoption of the technology deeper into all end markets. RFID continues to be an important area of growth for us, enhancing our broader set of solutions offerings and demonstrating how our evolving portfolio enables us to solve increasingly complex challenges. Turning to Slide 13. Our industry leadership puts us in a unique position to be the supplier of choice of AI solutions for the frontline. We can deliver an entirely new experience for frontline workers through mobile computing, coupled with wearable solutions and the cognitive capabilities of AI. Imagine handheld and wearable solutions that can see, hear and understand the environment while interacting with the frontline worker in a conversational way. This is the direction AI for the front line is headed and we are starting this journey with our Zebra companion offerings. We are excited by the opportunity to transform the way work gets done as we collaborate with our strategic partners across the AI ecosystem. Last month, more than 100 senior leaders of companies representing a variety of industries attended our inaugural frontline AI Summit. During the event, we presented our AI vision and the benefits Zebra can bring to our customers to accelerate AI adoption and impact across their frontline operations. We have active pilots with our customers, validating the benefits of our new AI solution. A specialty retailer is actively utilizing an advanced pilot of our AI companion agents to provide assistance with product recommendations, resulting in better sales conversions and upsells, faster employee onboarding and elevated shopping experience. We believe that our AI agents will be attractive to any customer who strives to improve the productivity and effectiveness of their frontline associates. A large transportation logistics company is digitizing and accelerating proof of delivery with immediate feedback and enhanced compliance powered by our on-device AI suite, a digitized environment, leveraging AI is fundamental to transforming workflows across a multitude of industries. These are early examples of the significant benefits our AI solutions can deliver to our customers. And elevate Zebra, as a leading AI solutions provider for the front line of business. We are looking forward to demonstrating our solutions with the National Retail Federation trade show in January. Turning to Slide 14. We are excited about the opportunity to enhance the connected frontline experience with our recent acquisition of Elo Touch Solutions. Our combined capabilities enable us to offer more ways to digitize operations across more touch points and drive increased business with our enterprise customers. Elo is a pioneer in touchscreen technology and a leading provider of point-of-sale solutions, self-serve kiosks, interactive displays and industry tailored offerings. Elo's modular solutions deliver cross-generational compatibility and their enterprise-ready platform and software tools seamlessly integrate into customers' existing ecosystem. Together, we can deliver better customer experiences through the intersection of frontline mobility and self-serve technology. This acquisition further elevates our strategic positioning across retail, hospitality, quick-serve restaurants, healthcare and manufacturing through the breadth and depth of our complementary portfolio of solutions. Over time, Zebra will offer a common platform across mobile and fixed digital touch points that improve frontline efficiency. Together with Elo, we are better positioned to deliver a complete solution and leverage AI to empower associates and elevate consumer experience. In closing, our confidence in sustainable long-term growth is underpinned by several themes that drive demand for our solutions, including labor and resource constraints, track and trace requirements, increased consumer expectations, advancements in artificial intelligence and the need for intelligent operations. We are well positioned to address these critical requirements in our customers' operations with our leading portfolio of solutions. As we move forward, we remain focused on advancing our industry leadership with our innovative solutions that digitize and automate our customers' workflows and driving profitable growth. I'll now hand it back to Mike. Michael Steele: Thanks, Bill. We'll now open the call to Q&A. We'll have to 1 question and 1 follow-up to give everyone the chance to participate. Operator: [Operator Instructions] The first question comes from Andrew Buscaglia with BNP Paribas. Andrew Buscaglia: So demand trends seem strong and -- are relatively strong in Q3. And I noticed your Q4 guidance implies organic growth somewhat decelerating. I know you're facing a tough comp, but I'm wondering if you can kind of walk through what you see demand-wise and just additional commentary by end market would be helpful. William Burns: Yes. I would say that if we look at Q3, the team executed well, driving sales near the high end of our outlook. And that was backed up by kind of solid demand across the business. I would say the second half is really playing out as we expected with some customers that bought products early to deliver their peak season a bit earlier than we had originally expected. I would say that if you look across the regions, we saw solid growth across North America, AsiaPac and Latin America. If we think of the vertical markets, really, the quarter was led by retail and e-commerce from an end market perspective. And as we called out in Q2, weakness in EMEA continued through Q3. I would say from a product perspective, relative strength in mobile computing and printing, and RFID a bright spot. But I would say overall, second half is playing out as we expected, just the timing of those orders coming a little early into Q3. Andrew Buscaglia: I see, helpful. And can you comment on EVM, the growth was rather modest in the quarter. What are you seeing specifically in that segment? And can we still expect that to grow exiting the year? William Burns: I would say EVM from a mobile computing perspective, we saw strong growth in Q3 with large deals in North America, Asia Pacific and Latin America continue to be positioned for long-term growth and opportunities across mobile computing, including device in the hands of more associates overall. Next-generation product deliverables around wearables and RFID technology. We continue, as we talked about in the prepared remarks, an opportunity mid- to longer term inside AI as we see opportunities there to leverage AI in the front line. I would say that from a data capture perspective, which is also the other element of the largest -- the second largest element of that is we saw decline based on a difficult compare, I would say, across the scanning portfolio. So I think that really was the story of EVM, a combination of strong mobile computing, but difficult compare from a scanning perspective, which then impacted overall EVM in Q3. Operator: The next question comes from Piyush Avasthy with Citi. Piyush Avasthy: With the understanding that you're not providing 2026 guidance, but it would be helpful if you could provide some puts and takes on the construct itself, like how different or similar to 2026 be from your long-term financial targets? I know that visibility is somewhat limited, and there is still some macro uncertainty but based on your conversations with your clients, how would you characterize the demand outlook heading into '26 across your different verticals? William Burns: I'd say today, while our customers remain cautious in the near term, and we're experiencing some uneven demand across different environments, I think EMEA and then overall places like Canada. So we're seeing uneven demand manufacturing from a vertical market perspective across our different vertical markets. Our solutions basically remain fundamental to our customers, and they remain essential for digitizing and automating environments. So longer term, AI represents an opportunity to continue to advance our solutions. And we're well positioned to drive sustainable profitable growth into next year is what I'd say. Piyush Avasthy: Got it. And you guys mentioned digital AI features. Again, like I understand it's like very early, but how soon can these features become a catalyst for growth for the company? I think you have talked about a refresh cycle at some point. Do you think -- do you get the sense that there is demand and appetite from your customers to invest in software, which means when the next refresh cycle comes, it translates to not only hardware upgrade, but also like strong software. Any comments there? William Burns: Yes. I would say from an AI perspective, we see 2 opportunities, as you've called out. One is certainly the hardware environment with next-generation handheld devices, coupled with -- we're the leader today in wearable technology inside the enterprise. So we see that playing out as the way AI is delivered to the front line. It starts with mobile devices, and it's likely coupled with wearable technology from a hardware perspective. We're in pilot now, as we talked about in our prepared remarks, with our Zebra companion and our AI suite overall in different applications with customers in retail and T&L as we talked about. So that creates a software opportunity for us across our AI agents and early customer pilots or they're seeing significant value to those. I would say first revenues likely in '26 and then ramping in '27 and beyond is where we'd see as we're -- want to get through the pilots, demonstrate the value to our customers ultimately and then begin to drive revenue and scale those into our customers. But the opportunity, as you said, is in 2 areas: hardware, upgrade of those hardware, new hardware in the idea of wearable and then ultimately in software as well. Operator: The next question comes from Damian Karas with UBS. Damian Karas: I was wondering if you could maybe speak a little bit to the large project funnel, what you're seeing out there, what conversations you're having? Has there been any -- obviously, the fourth quarter, it doesn't appear you're expecting much large project activity. But just in terms of the funnel, is there any increase in customer conversations? And any hope that maybe you could see some of that stuff get awarded in the fourth quarter? Or are we likely going to be waiting sometime longer? William Burns: Yes, I'd say as we've talked about, I would say the demand trajectory has remained pretty consistent with our outlook from the prior quarter. And I would say customers have generally maintained their capital spending for the most part and projects continue to move forward. I would say some have -- and I think we talked about this last quarter as well, some have spread projects and purchases over multiple quarters, again, driven by caution that still remains out there as our customers are navigating the global macro uncertainty and specifically some of the ultimate ramifications to a certain trade policy that's in place today. I would say this has driven this uneven demand across some verticals and geographies. But we feel good about the business overall and continuing to extend our lead. But the demand environment hasn't changed much. I think we saw some orders earlier in the year than we anticipated. We continue to monitor our customers and not only opportunities for year-end, but what's happening across EMEA, the tariff situation, government shutdown. So there's a lot of things happening in Q4 that we feel good about our guide being balanced for the quarter and overall. Damian Karas: That makes sense. And Bill, on your point about some of this pull-forward demand, in the third quarter, -- any particular reason why you think some orders might have come in earlier in the second half? Anything to do with tariffs or sort of price optimization on the part of your customers? Just curious why that might be. William Burns: Yes. No, I would say, again, the timing is always -- isn't always exact, right? And we anticipated Q3, we called the guide for that. We overachieved that guide really is some customers just need a product earlier to meet their peak demand. I think that's a good thing, right? We're seeing e-commerce demand, retail continue to be strong in Q3, and I think that drove some earlier orders. I wouldn't call it pull in as much as just timing of the need for the product when they would have normally ordered a bit later. They said, Hey, I'd like to have this product earlier to meet the Q3 demand for peak. And I think that's the balance between Q3 and Q4, it's just played out in a timing perspective. I think the demand is as we expected. I mean I think we feel good about the year overall. We're going to deliver almost 6% organic revenue growth, 17% EPS growth. So the year is kind of playing out as we expected as well. So I think we feel good. It's just timing, not really pulling as much. Operator: The next question comes from Tommy Moll with Stephens. Thomas Moll: For the fourth quarter, I want to unpack the assumption around budget flush. So maybe we could take it in 2 parts. Can you quantify what you're assuming for Elo from a top line perspective in Q4? And then if we back that out, what does the sequential quarter-over-quarter look like there? I think typically, you see some year-end flush, but I just want to hear you talk about what you're assuming for this year. Nathan Winters: Yes, Tommy, I'll take that. I think as Bill mentioned, we're -- I would say the first thing is holding the full year organic growth rate consistent to what we had guided back in August, and we believe that provides a balanced view of the current environment that Bill had talked about relative -- and with some of the -- some of those orders being realized a bit earlier ahead of the quarter. So if you look at our Q4 guide, 9.5% growth, as we said in the prepared remarks, about 8.5 points of that is just due to the Elo as well as Photoneo and FX. Elo, we have in the guide of $100 million, so in line with what we had talked about last quarter in terms of their overall revenue profile. And we're getting about 1 point of price, which really leaves that organic demand flat if you look at it from a year-on-year perspective. And I'd say the way to think about it is we see year-end spend just similar levels as we saw last year. If you recall, we had a nice year-end as we exited 2024, and we're seeing similar levels of spend and pipeline here as we go towards the year-end. So that's obviously one we're playing close attention to as well as, as Bill mentioned, monitoring what's going on within Europe, the government shutdown and everything else that's going around the world. But I think that's the way to think about the Q4, which is excluding FX, pricing and M&A, you really have kind of a flat demand really driven by that year-end project spend being at similar levels to last year. Thomas Moll: Thank you, Nathan. I wanted to ask about RFID. You framed some of the recent success there. There's been a pretty high-profile announcement recently in the fresh category from one of the omnichannel leaders. I'm curious, are you able to comment if your business should benefit from that recent update? Or maybe if you're not, anything you can do to comment on forward visibility on RFID? Are there things in your pipeline that are continuing to suggest some of those elevated growth rates? William Burns: Yes. I'd say, Tommy, we clearly have seen strong double-digit growth rates on RFID over the past several years, and we continue to see a pipeline of opportunity across the entire supply chain, whether it's across retail or now T&L continues to deploy projects across RFID, manufacturing, government. I would say in retail, we're seeing grocery, as you said, fresh opportunities. So in retail beyond general merchandise, opportunities into quick-serve restaurants, into health care. So I would say the broader track and trace across supply chains, across multiple verticals, all creates growth opportunities for us. As you know, we're the -- we have the broadest set of RFID solutions in the market today across fixed and handheld readers across new releases of our mobile computing devices that have RFID integrated within them, our printing portfolio, the labels associated with that. So all of that allows us to continue to be excited about RFID and moving forward. And yes, I think things like fresh and grocery and others just create more and more demand for our solutions. I think the customers that have deployed solutions to date continue to see value and continue to expand the use cases that they've deployed already inside their environment. So RFID, I think, continues to be a growth driver for us moving forward. Operator: The next question comes from Keith Housum with Northcoast Research. Keith Housum: Bill, I just want to unpack a little bit more of your commentary regarding AI and the opportunity there, understanding that it's the long game here. It sounds like the opportunity from a hardware perspective is adding more wearable devices, but also perhaps an acceleration of the refresh cycle. I guess, one, is that true? And then second, will these devices under the AI world, will they need a more higher-end device compared to what perhaps they're using today? William Burns: Yes. So I think you hit it spot on. I think the opportunity is certainly with higher premium devices, higher-end devices, which we look to drive higher ASPs. And over time, we would see that being a driver for the refresh cycle as new technology would be that. So think faster processor, more memory on mobile devices. We see that we're the global leader today in wearable technology for enterprise, and we see there's an opportunity there as well to pair, think body cam type devices with a mobile device, things that can sense the environment, see the environment. So we'll be leveraging the mobile device in certain applications, but also wearable technology could be almost watch-like technology that we've released recently as well. So different form factors and wearables as we're seeing across the customer base today. So hardware clearly, mobile computing and wearable and then software offerings. So I think if we kind of wind all the way back, Zebra solutions of digitizing and automate the environment become kind of fundamental for AI collecting data on the front line that allows this sense analyze act, right? -- sense what's happening at the point of productivity, so you can analyze it with AI and take the next best action within your business. So our solutions fundamentally drive models in AI. That's what we do, provide data. So you got to start there, AI used throughout multiple solutions today across different applications of software, robotics, 3D quality inspection today. So traditional AI used across our portfolio, the revenue you talked about from mobile devices and wearables and then software on top of that. So think of our Zebra companions and what we're doing in our AI suite that layers on top of software offerings on the mobile device to either manage those models for our customers. So think models on the device need to be managed or think of it actually applications that Zebra provides in the idea of AI agent all create opportunities for us. And as I said, likely first revenues in '26 and scaling from there. Keith Housum: Great. I appreciate that detail. And just as a follow-up, retail and e-commerce probably run a fifth or sixth quarter at least of contributing to the growth of the company. Is there a visibility to how long that's sustainable? And you looking at historical information, is that you see over a 2-year period that these things go through a refresh cycle, then kind of another vertical is going to be expected to kind of take over and drive growth from there? William Burns: Yes, not necessarily. I would say that we've seen strength in retail and e-commerce, but we got to remember that e-commerce continues to grow, right? So that -- we talked about some of this product being used for peak, it really driven some of that by the e-commerce players as they continue to deploy devices to meet peak demand. I would say this whole idea of refresh cycle, everyone is on a different time frame and cycle, whether that's retail or T&L or postal or others. And they're all on their own cycle, meaning that every retailer is on a different cycle and every e-commerce is more -- they don't do that same type of refresh. They buy over time. But I would say T&L the same way. So I don't think it switches from one vertical to the other. I think, look, we'd like all geographies and all vertical markets to be up all at the same time. It just doesn't quite work that way. Today, we're seeing strength in retail and e-commerce. Transportation logistics has gone to more normalized levels, and we're seeing growth there. Manufacturing pretty flat, tough compare in health care. So I think that while we'd like to see everything up in the right all the time, I don't think there's a transition away from retail and e-commerce to something else. I think we'd like to see growth across all of them, and there's no reason why not. But I think things like manufacturing remains pretty challenging in the short term. Operator: The next question comes from Jamie Cook with Truist Securities. Jamie Cook: I guess my first question, just the margin divergence between the 2 segments, Asset Intelligence and Tracking, the margins seem to be doing better this year, whereas last year, the 2 segments were flat. So just if you could sort of unpack that as tariffs hitting one of the segments more than the other? And then I know you talked about being able to cover tariffs for the most part in 2026. Any nuances on how would it impact the segments? And I guess we can talk about it within the new segmentation, but any color on that for '26 as well? Nathan Winters: Yes, Jamie, I wouldn't say there's anything specific driving the gross margin difference between the 2 verticals in terms of unique. I think just some of that is a bit of the mix within the portfolio. You see the strong growth in AIT. So you're getting nice volume leverage there across our printing portfolio. That's also where you have the RFID growth. kind of coming through in terms of the higher margin profile. So I think some of it just timing of mix between the portfolios. As Bill mentioned, data capture was down in Q3 in the EVM segment, which has, again, nice operating -- nice gross margin profile. So again, I think that more just mix within the portfolio quarter-to-quarter versus, let's say, a fundamental shift between the 2. Yes. And I think as we mentioned, we expect to fully mitigate tariffs as we go into next year. So you'd expect maybe a modest amount in Q1, but fully mitigated as we go into the second quarter with some additional actions the team has been working. Again, I think primarily, that will be benefiting within the AIT segment. So that's, again, where we have -- across EVM, that's where we have the mobile computing exemption today. So most of that benefit you'll see in AIT as we cycle into next year with some of the additional actions we have planned later this year and early part of next. Jamie Cook: Okay. I guess. And then just my second question, just on Elo. So I think you said for the fourth quarter, that contributes $100 million in revenues, which is in line with the $400 million of annual sales that you talked about when you announced the acquisition last quarter. Any thoughts -- I mean, I think that's a business that you've said has grown 5% to 7% through the cycle, similar to you guys. Any thoughts on Elo as you're thinking about 2026? William Burns: Yes. I would say that we continue to be excited about the acquisition. It certainly further positions us as a strategic partner to our customers across multiple vertical markets. And the breadth and depth of their portfolio married with ours gives us more strategic partnering opportunities with our customers overall. I would say that as you said, similar growth profile to Zebra, similar value proposition as well, purpose-built hardware, enterprise-ready platform just like our mobility DNA, software tools that seamlessly integrate into an enterprise environment, all those are the reasons why our customers buy mobile computing from us. And it's the same reason why customers buy Elo solutions. We closed in early Q4, I would say, performing as expected in overall at the moment, and we don't see any change to that. We see opportunities into next year, including continued POS rollout or point-of-sale rollout solutions at a very large retailer. We continue to see new opportunities and new wins from their business in the self-serve kiosk and some of the largest quick-serve restaurants around the world. We're continuing -- we're working closely with them, our teams together and progressing our operational synergies, both on the revenue and the cost side. And those are early days, but progressing as we expected. So we feel good overall about their business, their growth profile as we enter Q4 or go through Q4 and then into '26. Operator: The next question comes from Meta Marshall with Morgan Stanley. Unknown Analyst: This is Mary on for Meta. I have 2 questions for you. The first is on the pricing actions related to tariffs. So given the pricing actions that were taken to offset the tariff costs, what kind of impact are you seeing from these pricing actions on customer demand? And then my second question is on the OBBBA tax impact. Can you walk us through how the OBBBA is expected to impact your effective tax rate and cash taxes going forward? Nathan Winters: Yes. So on the first one, maybe I'll speak to the pricing impact. So we're seeing some nice benefit from the pricing actions we announced back earlier this year. So we increased from our prior guide the expected annual benefit, which now expect to be around $60 million or 1 point of growth on an annual basis from our prior guide of $40 million. So again, some nice momentum here as we work through the third quarter in terms of overall price realization. I'd say we haven't really seen that dramatic of an impact on demand. I mean, as Bill mentioned, the year has pretty much played out as we expected, both from first half, second half. So we haven't seen a major shift or pullback in demand. And I think what we hear from our channel partners is that the pricing actions we've taken are in line with a lot of our competitors across the industry where tariffs have had an impact. So again, we feel good about the momentum there. And again, as we said, trying to fully mitigating the impact of the current tariffs as we go into next year. If you look at the impact on the new tax bill, as we said in the last guide, this year, we expect about a $50 million, $60 million reduction in our cash taxes due to the ability to amortize the current R&D deduct R&D and the full amount of that. We expect about over $200 million over the next 2 years, a little over $200 million in the next 2 years of incremental cash benefit from the change in the tax bill. But it did result -- if you noticed in our guide, we increased our expected tax rate to 18%. Part of that is just reflecting the impact of the tax bill with some of the new permanent rate effects as well as just a shift in income. So a modest impact on the overall tax rate. But again, a bigger benefit on the lower cash taxes expected over the next 2 years. Operator: The next question comes from Joe Giordano with TD Cowen. Joseph Giordano: So when you talked last year into the fourth quarter, I felt like you had guided in a way that took the market risk largely out, right? You were guiding to things that were in hand in backlog and kind of volumes came in better than you expected and it was upside to your guide. Now this quarter, you're talking about flows similar to last year, but is that element of like we're not baking in much in terms of what we're not seeing directly in the market? Is that still a fair way to categorize like the nature of how you're guiding? And just curious what the EPS accretion you have from Elo in there is? And then I have a follow-up. William Burns: Maybe I'll start and hand to Nate. I would say that, Joe, overall, customers are generally moving ahead with planned projects. I would say they're hesitant to accelerate future projects. based on kind of macro uncertainty and the trade policy and the secondary impacts of the trade policy clearly on their business. Parcels slowing, for instance, in transportation logistics because of the trade policy, right, is an example of that. So I think while they're generally moving ahead, there's -- we haven't seen an acceleration of projects or moving in projects based on this uncertainty. But I think the discussions with our partners and customers hasn't fundamentally changed. That's why we're saying the demand trajectory feels about the same as it did when we talked last quarter and the need for our solutions certainly hasn't changed as you saw some buying early in peak to be able to meet their demands of our customers. So we're still essential A lot of it's about timing. So I think we saw above the -- close to the high end of our guide for Q3. I think we see Q4 playing out as we expected for the year. I mean, again, as I said earlier, nearly 6% organic revenue growth, 17% EPS growth for the year. But I think that overall, I think the macro environment and the trade policy uncertainty and the ramifications of their business is having customers hold back a little bit on do I advance future projects. Nathan Winters: Joe, maybe a little additional color. I think I'd characterize the guide we had last year, which was, to your point, we assumed very little year-end spend in terms of above and beyond what we kind of had clear line of sight to. And obviously, that came in better than expected as we exited the year, where this year, we're assuming a similar level of year-end spend as we did last year. So obviously, some of that we have in hand, but the team has to go convert pipeline here over the next 6 weeks 6 to 8 weeks to close out the year. So I think characterize -- that's how I'd characterize the difference between this year's guide and last year is in terms of those expectations around year-end. And then just your question on the Elo EPS impact, it's about $0.10. So if you look at the -- for the full year, we raised the guide about $0.30. Some of that was better tariffs, basically split 1/3, 1/3, 1/3 between lower tariff Elo and a little bit of favorability on overall interest rates and share count. Joseph Giordano: And then the follow-up, and we kind of talked about this a little bit, but as you think into next year, I'm not trying to pin you down, but like as we're coming off, you had the big COVID deployments, and you had kind of a multiyear decline as we're kind of bouncing modestly off that, like what reasons, if any, would you kind of like talk us off of thinking that next year, at least from where we're sitting now, like shouldn't be at least in the range that you would see in a cycle? William Burns: Yes. I mean, again, we're not guiding to '26, as you acknowledged. I think that today, we're clearly seeing customers remain a bit caution in the near term. And because of that, we're seeing some uneven demand environments overall. EMEA example, manufacturing across different vertical segments. Some cases, it's just tough compares in case of DCS. But I'd say we feel good about driving sustainable profitable growth into next year across the business. And I think we've got to play out Q4 here, and we'll provide more guidance come first quarter. Operator: The next question comes from Rob Mason with Baird. Robert Mason: Bill, I just wanted to touch on thinking about demand as you go into next year or finish up fourth quarter. A couple of your geographies, you've already talked about EMEA being softer. We saw some of that in the second quarter and it continued on here. I'm just curious maybe what the month-to-month or quarterly trend look like in that region as you entered the fourth quarter? And then also if you could address maybe conversely, just Asia Pac, that's been double digit now for, I guess, 5 quarters. Is that broadening out your customer base there? Is it kind of project specific? I'm just kind of curious what's driving the strength and how you see Asia Pac as you look forward as well. William Burns: Yes. Maybe cover all the geographies. I would say North America, strength in mobile computing and printing, tough compare in DCS, we talked about. Peak demand is -- we're already covered in retail and e-commerce in Q3, a bit of pull in there. Continued strength in RFID, as we talked about the use cases there, large and mid-tier customers and orders were up in North America. I would say, again, as we talk about trade policy, Canada, demand softer in Q3 in North America. EMEA, I would say, about the same as we saw in Q2 when we called out. It's really mixed performance in EMEA, if I added color. I would say Northern Europe continues to do well in retail and transportation logistics. where places like Germany and manufacturing or France retail continues to be challenged. But I'd say mixed throughout EMEA, but ultimately down in Q3. Asia Pacific, you called it out, strong growth in Asia Pacific. We talked about opportunities around the world and leveraging our go-to-market. And we talked about the investment in Japan. So Japan was a strength as we focused in that focus there, new applications in the postal service in Japan, where we won early device wins for postal carriers. Now we're deploying devices in post offices. So again, speak to the strength of our go-to-market organization, shifting resources into places where we have lower market share and want to drive growth. So that's a good example in Asia. Another is India. So we continue to see growth in the India market as others have called out as well, I think around the globe, stronger GDP in India. Australia and New Zealand continues to be a strength in Asia. So feel good there. We don't talk a lot about it, but Latin America, record quarter in Latin America and broad-based strength in the Latin America region. So we feel good about Latin America, even though we don't talk a lot about it typically. So that's kind of the spread and the difference across the different geographies. Robert Mason: That's helpful. Just as a follow-up, you -- obviously, you talked about taking your -- or committed to share repurchases over the next 12 months. You did -- you have seen the stock comp tick up. Nathan, I was just curious if you could kind of address that, how that will trend? Any thoughts into '26 and kind of what's driving the increase in the stock comp? Nathan Winters: Yes. So I think 2 things. We talked earlier in the year was somewhat of just a change in the design of the plan that had us accelerate some of the expense within the P&L. So no change in the overall comp, but just from an accounting perspective, we had to accrue a bit more of it early in the year. So as you see that play out over the next couple of years, you'll see the offset. And then this quarter, in particular, was just a true-up with coming out of our strat plan, truing up the performance and some of the performance shares and doing a kind of an accumulative catch-up. So I think this year -- this quarter was a bit of an anomaly in terms of the higher expense, and we'd expect that to normalize back out as we go into Q4 and then next year start to more normalize back to historical levels. Again, this year had some changes based on the accounting change as well as now just the true-up on the performance shares. Operator: The next question comes from Guy Hardwick with Barclays. Guy Drummond Hardwick: Great job on the supply chain, navigating supply chain challenges. Obviously, it stands out that you intend to take China to below 20% of U.S. imports. Where do you think that goes to long term? And what do you think the kind of the footprint of contract manufacturers will look like, say, a year from now? Nathan Winters: Yes, I can take that. I think -- look, as you mentioned, I think the team has done a phenomenal job over the last -- really, you probably say 6 years, driving that from, as we talk over 80% concentration for North America in China now down to 20% and below that as we go into next year. Look, I think there'll be a certain portion that will remain for -- it's hard to see an exit, just particularly around some of the components that are -- really, there's only one source for those, and we still use those and need to import those for service -- and those types of things. So -- we're probably getting close into the teens where you start to get a -- outside of some major shifts in component manufacturing, you kind of hit a baseline there. So -- but again, I think what we focused on is broader resilience, making sure we have multiple options, whether that's with our supply base, with our contract manufacturers so that, again, whether it's tariffs or any other natural disaster what you might have is a resilient supply chain that we can mix and move production around the world to navigate those challenges. Because that's the one thing I think we've learned over the last 5 years is that there will be something, and we need to have a resilient supply chain to manage through those. And again, I think the team has done a great job of balancing resilience with cost to get us to the footprint we have today. Guy Drummond Hardwick: And just as a follow-up, I know, Bill, you answered a couple of questions on this, but what point does technological obsolescence on the installed base in EMC actually force customers to drive to upgrade if they really want to benefit from Agentic AI, whether it's your products or Zebra products or other people's products? William Burns: Yes. I think that if you're -- again, it creates an opportunity -- AI clearly creates an opportunity for technology-driven refresh on the mobile devices as you want to move to faster processing speeds and more memory, if you want to run the models on the device, which we're seeing many of our customers want to do. We see a combination of leveraging AI on the device and leveraging AI in the cloud depending on the specific application. But in both cases, we think this leads and attributes to the refresh cycle upcoming. The number of mobile devices continues to grow in the marketplace since pre-pandemic. And we see that our customers all upgrade on different refresh cycles, and this will be another reason to go do that. Things like health of their device, longevity, how long it's been in the marketplace, devices just get broken, they get older and others. Technology moves on. Cybersecurity is another driver. But from a technology perspective, AI is going to be one of those. I think we see the refresh cycle opportunity as being really multiyear and driven by driving sustainable growth for our growth profile as a company. And we don't see it the kind of pandemic-based compressed concentrated acceleration cycle. We see it more driving sustainable growth for us as a business, and there will be lots of factors into that and AI will be one of them. Operator: The next question comes from Brad Hewitt with Wolfe Research. Bradley Hewitt: So as it relates to the $500 million buyback that you expect to execute over the next 4 quarters, how dynamic is that number? Should we think of that as more of a minimum threshold? And then how do you think about cadence of deployment and why not execute this as an ASR? Nathan Winters: Yes. So again, I think right now, we're just committed to the $500 million. We'll see that. I think the best way to think about that is spread out over the next 4 quarters, and we'll be dynamic taking advantage of opportunities that we see in the volatility in the stock. But again, making sure we show more of that consistent return over the next several quarters and really wanted to commit to that given we've been kind of silent on the commitment as we move into future periods, but we felt like it was the right time to make that commitment given the overall profile we have and our debt leverage ratio here as we exit the year. And I think we just think that doing it through the open market right now provides more of a benefit, lets us more manage the return and the timing of that versus uploading upfronting that through an ASR. Bradley Hewitt: Okay. That's helpful. And then as we think about the Q4 outlook, it looks like the implied incremental margins are about 25%, both on a year-over-year basis and sequential basis compared to typical 30% plus incrementals. So I guess curious just is that margin outlook embedding a little bit of conservatism? Or is there anything that you would expect to limit the drop-through in Q4? Nathan Winters: No, I think the only thing typically, in Q4, we see a little bit higher mix of large deals. So you see a little bit of mix dynamic as we go from Q3 to Q4, but nothing unusual, I'd say, from a timing or margin profile within either one of the quarters to call out. Operator: The next question comes from Brian Drab with William Blair. Brian Drab: Can you talk a little bit more about the machine vision business? And I know you talked about softness in manufacturing. How has that business been doing? And then kind of the bigger picture is, are there any of these other like RFID and other growth engine type businesses that you'd call out that are in that double-digit growth range or high single-digit range that are being the growth drivers that we want them to be? William Burns: Yes. I would say that from a machine vision perspective, we saw growth in machine vision software as we've got leveraging our differentiation in our software across machine vision. I would say overall, machine vision declined in the quarter for us, really pressured in the areas in which we compete. So we've seen now stabilization in kind of semiconductor manufacturing where we're embedded in those solutions. So that's a positive news moving forward, but certainly negative in the quarter. And then some new areas that we had -- the focus of the go-to-market team has been diversification away from semiconductor manufacturing into new markets. One of those markets was a lot of spend was happening in new builds of EV auto manufacturing, but that has now slowed. So another driver of the weak quarter. I would say that our focus is really on go-to-market initiatives to expand specific markets that are growing. And leverage our advanced technology into use cases where we're leveraging this strength of our software portfolio, along with things like 3D vision to be able to win new opportunities and customers and to be able to then get a footprint in those customers and expand it from there. That's really the focus of our go-to-market teams. We're excited about this market longer term, clearly, doing more in manufacturing from our perspective is important to us, and we think that continues to be an opportunity for us. We talked about RFID already. RFID continues to be a strength for us across the vertical markets. I would say, inside other segments, I think the tablet opportunity within our mobile computing is another opportunity for us. I think the next generation of task management in software is an area we've been focused. So we're a leader in task management software. We see next-generation opportunities to that as we evolve task management into more communication collaboration with our customers to drive software growth over time, leverage with our mobile devices. Operator: The last question comes from Katie Fleischer with KeyBanc. Katie Fleischer: I just had one question just to kind of go back to the margins for 4Q. Is there anything that we should think about for the segments that's different from this quarter? Or is it fair to assume that those margins are pretty steady? Nathan Winters: Yes, they're pretty steady between the segments between Q3 and Q4. So I wouldn't -- we don't see any major changes around the gross margin profile between the segments quarter-to-quarter. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Bill Burns for any closing remarks. William Burns: Yes, I'd like to thank our employees and our partners as they delivered a strong Q3 results. And ultimately, I would like to extend a warm welcome to the Elo team as we kick off our exciting journey together moving forward. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.