加载中...
共找到 14,541 条相关资讯
Operator: Thank you for standing by. My name is Carly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Enterprise Financial Services Corp. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Jim Lally, President and CEO. Please go ahead. James Lally: Good morning, and thank you all very much for joining us for our 2025 third quarter earnings call. Joining me this morning is Keene Turner, our company's Chief Financial Officer and Chief Operating Officer; and Doug Bauche, our company's Chief Banking Officer. Before we begin, I would like to remind everybody on the call that a copy of the release and accompanying presentation can be found on our website. The presentation and earnings release were furnished on SEC Form 8-K yesterday. Please refer to Slide 2 of the presentation titled Forward-Looking Statements and our most recent 10-K and 10-Q for reasons why actual results may vary from any forward-looking statements that we make today. The third quarter was another very solid quarter for our company. As we expected, we saw loan growth return to an annualized level of 6% while deposit growth continued well above this level. This was a continuation of our intentional strategy to lean into our diversified geography and national businesses that allows for our team to focus on the business that fits us the best versus settling for transactional business that achieves certain growth targets. In addition to this, we spent considerable time on the recent closing and systems conversion for the acquisition of 10 branches in Arizona and 2 in the Kansas City area. As a reminder, this acquisition garnered us approximately $650 million of well-priced deposits and $300 million in loans but more importantly, enhances an already strong presence in two strong markets for us. We did experience an increase in provision for loan losses in the quarter primarily due to a $22 million increase in nonperforming assets and net charge-offs. Doug will provide much more detail in his comments but I feel good about our ability to work through these issues and expect our NPAs to return to historical levels over the next few quarters. The recapture of transferable solar tax credits in the quarter caused some noise in our income statement. This investment was a component of our income tax mitigation strategy and is not related to our tax credit loan and fee businesses. Keene will provide details on this and walk you through the accounting treatment in his comments. But I want to reiterate that this project is covered by insurance. With that said, we earned $1.19 per diluted share in the quarter compared to $1.36 in the linked quarter and $1.32 in the third quarter of 2024. This level of performance produced a return on average assets of 1.11% in the current quarter and a pre-provision ROAA of 1.61%. Net interest income and net interest margin both saw expansion in the quarter. Net interest income improved by $5.5 million when compared to the previous quarter, and net interest margin improved by 2 basis points to 4.23%. This was the sixth consecutive quarter that we saw net interest income growth. These results reflect our continued focus on pricing discipline on both sides of the balance sheet, combined with overall steady growth. We continue to improve on striking the correct balance of providing a strategic consultative experience for our clients with appropriate growth. I'm confident that this model will continue to provide for our ability to grow NII for the foreseeable future. On an annualized basis, loan growth in the quarter was 6% or $174 million net of $22 million of guaranteed loans that were sold during the quarter, resulting in a gain of $1.1 million. We continue to see really good progress in our Southwest markets with high-quality growth coming from newer markets like Dallas and Las Vegas. Overall, we originated loans in the quarter at a rate of 6.98%, which continues to be accretive to the overall portfolio yield. Deposit growth in the quarter was exceptional. Net of brokered CDs, we were able to grow deposits by $240 million as impressive was the fact that DDA remained at 32%. While our national verticals provided for much of this growth in the quarter, we have experienced deposit growth from all of our regions year-over-year and would expect to see our typical fourth quarter swell from these markets to finish the year strong. Our ability to continue to grow deposits gives us plenty of liquidity to fund future loan growth while keeping our loan-to-deposit ratio at an appropriate level for our company. Our well-positioned balance sheet continues to be a strength for our company. Capital levels at quarter end remained stable and strong, with our tangible common equity to tangible assets ratio of 9.60%, yielding a return on tangible common equity of 11.56%. This return profile and the continued expansion of our tangible book value per common share, which increased over 15% on an annualized quarterly basis. This level of compounding of tangible book value per share far exceeds our 10-year CAGR of just over 10%. Given the strength of our earnings and our confidence in our ability to continue to perform at a high level, we increased the dividend by $0.01 per share for the fourth quarter of 2025 to $0.32 per share. Our asset quality statistics moved slightly higher in the quarter when compared to the linked quarter. Nonperforming assets increased by $22 million, with the largest component of this being a $12 million life insurance premium loan that is adequately collateralized and just needs to work through the collection process to be resolved. I do not expect any loss of principal on this loan. When accounting for this and the previously disclosed 7 commercial real estate loans in Southern California, these two issues, both of which have high certainty of collection account for nearly 60% of our NPAs. This is why I'm confident that we will see the ratio of NPAs to total assets return to more historical levels in the quarters to come. I want to be clear that we have never had any exposure to the private lending business identified in regulatory filings by two other regional lenders and articles in various publications. As stated in our October 16 8-K and previously discussed in our first quarter earnings call, the 7 real estate loans in Southern California totaling $68.4 million that are directly secured by priority first mortgages on the real properties owned by the single-purpose entity borrowers. We have commenced foreclosure proceedings with respect to the real property and expect to collect the full balance on these loans. We will spend the remainder of the year focused on the cultural integration of our new associates who recently joined through our branch acquisition, along with our new clients acquired in the same deal. Additionally, we'll be focused on continuing the strong momentum we have in our regions and specialty verticals, making sure that we enter 2026 with a great deal of confidence and momentum. Before turning the call over to Doug, I want to briefly comment on what we are hearing from our clients. Last quarter, I mentioned that the impetus for our clients' confidence was the passing of the One Big Beautiful Bill, the downward trajectory of short-term interest rates and further clarity of U.S. trade policy. With the September rate cut behind us and several more on the horizon, we are seeing our clients move forward with more confidence than what we had seen in several previous quarters despite continued uncertainty with some larger trading partners. With that said, I can see our onboarding of new clients and loan production maintaining its current level or possibly accelerating slightly from here. We operate in very good markets, many of which continue to have disruption due to M&A. We've invested in many new associates who are embracing our value-added solutions-based approach, and our balance sheet and deposit generating capability has us positioned well to profitably fund the opportunities that will be presented. I'm excited for how 2025 will end and the momentum that we will carry into the new year. With that, I would like to turn the call over to Doug Bauche. Doug? Douglas Bauche: Thank you, Jim, and good morning, everyone. Over the past couple of months, I've spent considerable time in our major geographic markets, and I continue to be encouraged by both the quality and volume of new relationship opportunities we are seeing. Our brand continues to gain traction in our newer markets of North Texas and Southern Nevada, led by our bankers that are well entrenched and connected to those communities, and we continue to capitalize on the strong economic growth throughout our Southwest region. As Jim mentioned, the September rate reduction and further forecasted easing has seemed to spur some cautious optimism among business owners and real estate investors. Discussions with architects, contractors and developers indicate that their new project pipelines are beginning to build momentum heading into 2026. While volatility continues around trade tariffs with China, our C&I clients have largely navigated this challenging period successfully by adjusting supply chains and pricing to maintain operating margins. On the lending side, loans increased in the quarter, $174 million, net of $22 million in SBA loan sales. We continue to prioritize full relationship wins with disciplined structure and pricing. Sector growth in the quarter is broken down on Slide 5 and was well balanced between investor-owned CRE of $79 million, C&I of $31 million, including SBA owner-occupied commercial real estate and sponsor finance and $73 million in our tax credit lending niche. Growth in the tax credit sector was largely related to scheduled fundings on existing affordable housing tax credit bridge loans. New C&I originations were solid and consistent with the linked quarter as we provided senior debt to both existing and new operating companies across our business lines. However, strong originations were somewhat muted by the exit of a quick service food franchise client in our Midwest region, $22 million in SBA loan sales and a reduction in commercial line of credit usage between the end of June and September. As it appears, our clients are working through some of the excess inventory purchases they made in prior periods when tariff and supply chain concerns were more pronounced. Within the specialty lending business lines, SBA production was stable with the prior quarter and in line with expectations. Sponsor Finance originations slowed in the quarter as we continue our fewer but better approach, while we remain disciplined and committed to this space. Originations in this segment were equally offset by payoffs resulting from sponsors exiting portfolio company investments. LIPF originations were seasonally modest with a strong pipeline of activity heading into the historically strong final quarter of the year. This sector continues to perform well on a risk-adjusted basis and has experienced a 12% year-over-year growth rate. Moving to the geographic markets shown on Slide 6. We posted growth in our Midwest and Southwest regions, while we continue to hold serve in our California markets. Growth in our major geographies came from the funding of a market-leading employee-owned electrical contractor, a privately held distributor of high-voltage electrical components, a manufacturer of high-precision metal parts and several new commercial real estate loans with established developers for the acquisition or refinance of industrial and multifamily projects. Turning to deposits on Slide 7. Excluding the addition of $10 million of brokered CDs, client deposit balances grew by $241 million in the linked quarter, and are up $822 million or roughly 7% year-over-year. Noninterest-bearing accounts increased $65 million in the quarter and represent just over 32% of total deposits. Within the geographic markets shown on Slide 8, we are posting solid customer deposit growth on a year-over-year basis across all regions. Growth has continued to come from our holistic approach to new business development, which rewards full banking relationships rather than transactional lending or high-cost idle cash balances. Our specialty deposit verticals posted strong results, up $189 million for the quarter and $681 million or 22% year-over-year. Our specialty deposits consisting of property management, community associations and legal industry escrow and trust services are broken out on Slide 9. Deposits in the community association and property management specialties totaled roughly $1.5 billion each, while deposits residing within the escrow division, reached $844 million. These businesses provide a diverse, growing and overall favorable cost adjusted source of funding that continues to complement our geographic base. Turning to Slide 10. You'll see that our deposit base is intentionally well balanced across our core commercial, business and consumer banking and specialty deposit channels at 37%, 33% and 30% of total customer deposits, respectively. With deposit clients deeply rooted in treasury management and lending relationships, we're encouraged by our ability to rationally adjust pricing in the current rate environment, while continuing to grow balances across the channels. I'd also like to provide some commentary on asset quality. As Jim noted earlier, nonperforming assets increased $22 million to 83 basis points from 71 basis points in the linked quarter. The increase in the quarter is largely centered around a $12 million life insurance premium finance loan that is 100% principal secured by cash value life insurance. We are in the process of liquidating the policy with the life insurance carrier, and we expect full principal collection. Other notable additions to nonaccrual in the quarter included a $6.2 million sponsor finance credit which was charged down by $3.75 million in the quarter with the remaining $2.5 million book balance expected to be satisfied via the sale of business assets. A $2 million single-family residential real estate loan in Santa Monica and two smaller commercial real estate secured loans totaling $2.5 million in aggregate. On October 16, we filed a Form 8-K, reiterating our position relative to the previously reported 7 commercial real estate secured nonperforming loans totaling $68.4 million in the aggregate to 7 special-purpose entities in Southern California. Our recent foreclosure attempt on October 15 was temporarily stalled due to a second bankruptcy filing. However, we remain confident in our security position and ability to collect the balance of these loans in full. With the satisfaction of the $12 million life insurance premium finance loan and $68 million in aforementioned 7 commercial real estate loans, we expect our nonperforming assets to return to our favorable historical norms in the coming quarter. Now I'll turn the call over to Keene Turner for his comments. Keene Turner: Thanks, Doug, and good morning, everyone. Turning to Slide 11. We reported earnings per share of $1.19 in the third quarter on net income of $45 million. Excluding acquisition costs, EPS on an adjusted basis was $1.20. As Jim noted, we had a recapture of $24 million on solar credits that were purchased as part of our tax planning strategies. Solar tax credits, like many other tax credit programs are subject to recapture from the IRS when certain events occur. Unfortunately, the seller of the tax credits went bankrupt and transferred the solar assets in a bankruptcy sale that triggered the recapture in the quarter. When we acquired the solar credits, we also purchased a tax credit insurance policy to mitigate the risk of loss. The recognition of the tax credit recapture and the anticipated recovery from the insurance policy has created some noise in our financial statements. The recapture is recorded in tax expense, while the insurance recovery is included in noninterest income. When you account for the recapture plus the taxes on the anticipated insurance recovery, the gross up in noninterest income and income tax expense is $30.1 million during the quarter. Since there is no impact on net income for the third quarter, we have excluded these items from the earnings per share bridge on Slide 11. Net interest income and margin both showed strong expansion again in the quarter, benefiting from the increase in both loans and securities. In anticipation of the liquidity from branch acquisition that closed in early October, we had increased our security purchases over the past 2 quarters. Excluding the anticipated insurance recovery, noninterest income decreased due to lower tax credit and community development income. The provision for credit losses increased from the linked quarter, primarily due to net charge-offs and an increase in nonperforming loans, along with loan growth. Noninterest expense was higher in the quarter due to an increase in deposit costs from continued growth in the deposit verticals and higher legal and other expenses associated with the increase in and level of problem loans. Turning to Slide 12 with more details to follow on 13. Third quarter net interest income was $158 million, an increase of $5.5 million from the prior period, reflecting the trend of solid asset growth supported by a growing deposit base and disciplined pricing. Loan interest increased by $3.6 million on higher average balances and level yields. Average balances grew $96 million compared to the linked period and a 6.98% rate on loans booked in the quarter supported the overall portfolio yield. Interest on investments was $2.7 million higher compared to the linked period with average balances increasing more than $200 million and the portfolio yield was higher by 7 basis points. The average tax equivalent purchase yield in the third quarter was 4.99%. Interest expense increased only $0.9 million compared to the linked quarter. Deposit expense increased by $1.6 million due to higher average balances, partially offset by lower rates on interest-bearing accounts. Interest expense on borrowings decreased $0.7 million, mainly due to lower Federal Home Loan Bank advances and customer repo balances, along with lower rates on both. Interest expense also reflected the redemption of our subordinated debt in September that was replaced with a new senior note at a 3% lower interest rate. Our resulting net interest margin for the third quarter was 4.23%, an increase of 2 basis points over the linked period. The earning asset yield declined by 1 basis point, mainly due to the change in the overall asset mix from growth in the investment portfolio. Our cost of funds declined by 4 basis points, driven by lower deposit rates and lower cost of Federal Home Loan Bank advances and repo balances, partially offset by an increase in average brokered deposits. We have focused for several quarters on creating an earnings profile that is less susceptible to changing interest rates, and we believe we have made significant strides. We are well positioned for the current rate environment to add profitable growth to enhance earnings. However, we are slightly asset sensitive, and we expect a 0.25 point reduction in the federal funds rate to reduce net interest margin by 3 to 5 basis points. That being said, we anticipate that most of the recent rate cut will largely be mitigated in the fourth quarter as the branch acquisition is expected to be 5 basis points accretive to our overall net interest margin. And one last comment on margin. Despite the Fed reducing interest rates by over 100 basis points in the last year, we have managed to grow net interest margin over the last 4 quarters from 4.17% in the third quarter of 2024 to 4.23% in the most recent period. This speaks not only to a more favorable operating and interest rate environment, but also to the quality of our business model and the discipline in pricing and structure we have employed while achieving nearly 10% asset growth. Slide 14 reflects our credit trends. We had net charge-offs of $4.1 million compared to $1 million in the linked quarter. But importantly, net charge-offs of 4 basis points for the first 9 months of this year continue to trend below our historical average. The provision for credit losses was $8.4 million in the period compared to $3.5 million in the linked quarter. The increase was mainly due to the increase in net charge-offs, a higher level of nonperforming loans and loan growth. Nonperforming assets increased $22 million to 83 basis points of total assets compared to 71 basis points in the linked quarter. Doug provided a lot of details on the movement within our nonperforming assets, but it's worth reiterating that the largest part of our nonperforming assets continues to be made up of two commercial banking relationships where we expect to be made whole. We reaffirmed this expectation in the Form 8-K that we filed a little over a week ago, stating that we expect to collect the balance of these loans because of our senior secured position. Slide 15 shows the allowance for credit losses. We continue to be well reserved with an allowance of 1.29% of total loans or 1.4% when adjusting for government guaranteed loans. On Slide 16, third quarter noninterest income of $47 million includes the previously mentioned $30 million of accrued insurance proceeds related to the recaptured tax credits. Excluding this, noninterest income decreased $4.1 million from the linked quarter to $17 million, primarily due to lower tax credit and community development income in addition to the nonreoccurrence of a BOLI policy payout received in the second quarter. We sold $22 million of SBA guaranteed loans that generated a gain of approximately $1.1 million in the current quarter. Depending on levels of planned growth and activity in the SBA space, we may take the opportunity to continue to sell SBA loans in the coming quarters. Turning to Slide 17. Third quarter noninterest expense of $109.8 million increased $4.1 million from the second quarter. Deposit costs increased roughly $2.4 million from the linked quarter, primarily due to continued growth in the deposit vertical balances. Legal and professional expenses increased as well. Legal and loan expenses grew slightly and remain at elevated levels as we work through certain nonperforming asset relationships. The resulting core efficiency was 61% for the quarter. Our capital metrics are shown on Slide 18. We grew tangible book value by 4% in the quarter and 12% in the past year. Our tangible common equity ratio was 9.6%, up from 9.4% in the linked quarter, while our strong CET1 ratio of 12% is at the highest level in our history. The strength of our capital position supported the branch acquisition that closed earlier this month and also allowed for the redemption of our subordinated debt that was included in total risk-based capital. We also increased our quarterly dividend by $0.01 to $0.32 per share for the fourth quarter of 2025. This is another strong quarter of solid financial performance and we expect to close out the year from a position of strength. The strategic branch acquisition that closed this month will help drive this performance as we expand our footprint in important markets. I appreciate your attention today and we will now open the line for questions. Operator: [Operator Instructions] Your first question comes from Jeff Rulis with D.A. Davidson. Jeff Rulis: Question on -- I guess, to get a little more specific on these credit relationships, just the workout process. I understand you try to give visibility on the Southern California credits. But the resolution that the life insurance loan and these, could you narrow that into -- I thought I heard a resolution in the coming quarter and quarters there was sort of some mixed terms there. Could you just sort of outline that again, how do you expect those to be resolved time line-wise? Douglas Bauche: Yes. Jeff, it's Doug. First of all, in relationship to the Southern California real estate loan, certainly, with the secondary bankruptcy filing that has been made, the timing of that is a little bit difficult to ascertain. We do feel comfortable that we're going to get some fairly quick remediation from the bankruptcy courts on this. But as we maybe indicated in prior periods, we started down the path of both the nonjudicial and judicial foreclosure process in California in anticipation of a potential block like this. So we're moving down the path as quickly as we can. But I wouldn't necessarily say it's going to be in the fourth quarter. I think it's more in the coming quarters that we'll get resolution on the real estate loans. As it relates to the life insurance premium finance loan, I'd just reiterate, we've got a stellar 20-year track record lending in this space without principal loss. This is unfortunate timing, but a co-trustee of the $12 million life insurance policy filed suit against the insurance carrier. And the insurance carrier is simply delaying their recognition of our demand to honor the obligations to surrender the policy and send us proceeds to pay the loan off. So again, this looks like this may be heading through some litigation. And with that said, I think precise timing of the resolution of that case is a bit uncertain. But what is certain is full coverage of cash surrender value covering our principal balance and collectibility. Jeff Rulis: Appreciate it. And Doug, do you have NDFI exposure in the portfolio, just a figure of percent of loans overall? Douglas Bauche: Yes. Let me say this, Jeff. So as it relates to NBFIs, it's a very broad classification that includes credit exposure to bank holding companies, mortgage warehouse originators, capital call lines for private equity funds and a lot of different types of businesses, including those engaged in our state and new market tax credit lending programs. But I think specifically what you might be referring to is more exposure to private lenders. And I would say this, we have, for years, maintained some very favorable relationship with private lending entities where we take assignments of their notes, security instruments, and that's our primary collateral. Today, that portfolio consists of approximately $260 million or $270 million in balances across, I'll call it, 8 to -- 18 to 20 different relationships. So these private lenders specifically are largely engaged in providing first mortgage secured loans to investors in 1 to 4 family residential real estate. So our process here, Jeff, like everything else, right, these are deep relationships. They're highly experienced and quality leaders. We know them well, and we're very disciplined in our credit underwriting and monitoring process. So hopefully, that captures what you're looking for there in terms of exposures to the private lenders. Jeff Rulis: Sure. That helps, Doug. Keene, on the margin. Sounds like you're largely going to offset this most recent rate cut. And then if we carry forward that 3 to 5 basis points pressure per 25 basis point cut, then you detailed the history of the last year plus of really defending margin when you screen asset sensitive, but the reality is you've done much better than that. Is that still the case if we think about a flat margin into the fourth quarter with those cut versus the branch accretion? And then the go forward, is it -- would you say that the net of that is still some modest pressure, I hope to do better than the 3% to 5%? Any commentary on go-forward? . Keene Turner: Yes. Maybe just as I always think about it, when we talk about asset sensitivity, we're also talking about parallel shifts. And I don't think anybody is expecting a parallel shift. I think we're thinking the short end of the curve comes down. And in that case, that's been good for us, and we've been able to defend that fairly well. I think your comments are appropriate. I think that our view, once we get the branches on here, we're pretty neutral. And when I start looking at both net interest margin and pretax income at risk, if we execute on our mid-single-digit loan and deposit growth for next year, we're growing pretax income and essentially defending or growing net interest income because of the branch deal. So I think when you look at last year's year-to-date period, returns are roughly 125 basis points. We're on top of that in the current period with a little bit worse provision. And I think that our view is that -- if we assume that we rotate out of taking gains on SBA loans, that profile sort of remains the same and with the bigger balance sheet, you're growing earnings per share. So I think we generally expect to defend net interest margin. It might drift a little bit, but you're still flirting with a 4.20-ish margin for most of '26 at least as we see it right now. And we've got -- we're using Moody's baseline, so that has Fed funds going to 3% in the third quarter of '26 and 50 basis points here in the fourth quarter. So I feel like that environment or that forecast also doesn't assume that we get better-than-expected loan growth, which I do think will occur if we start to get rates down to that degree. Operator: Your next question comes from Damon DelMonte with KBW. Damon Del Monte: Keene, just a question for you on the expense outlook kind of here in the fourth quarter and how we think about going into '26. Can you give a little bit of guidance on the expectation from the branch deal and the integration of that? Keene Turner: Yes. So total reported expenses here in the quarter were $110 million. There's some run rate adjustment in there. So let's call the run rate here in the third quarter normalized without onetimers $107 million. And then I think in the fourth quarter, you're going to get roughly $4.5 million of expenses related to run rate on the branch acquisition. And then there's probably 2.5 of onetimers in there. And then I think when you think about full year branch acquisition expenses on a run rate basis, it's just under $18 million. So I think when you normalize through all of that and you take the historical enterprise base and you annualize the branch base, I think we think expenses year-to-year will be up roughly 3.5%. That's kind of what we're thinking. And that's got that Moody's interest rate reduction in that plan where the deposit costs essentially are level kind of year-to-year. Damon Del Monte: Got it. Okay. All right. That's helpful. And then on the fee income, obviously, some volatility in the tax credit income line this quarter. Fourth quarter typically is the strongest point of the year. So how do we kind of think about the rebound off of the modest loss this quarter? I mean maybe look at it on a full year basis? Keene Turner: Yes. I think that we kind of went from the maybe the best case scenario of fee income in the second quarter to, -- I don't want to say worst-case scenario, but certainly a baseline here in the third quarter. And I think the fourth quarter comes somewhere in between it. I will say that there is a -- with the shutdown that's occurred right now, the SBA sale is maybe off the table as a lever here in the fourth quarter, but we do expect the CDE to have a little bit better quarter. Private equity should be in there. And if the tax credit delivers any kind of profitability. I think the fourth quarter should be somewhere between where the second and third quarter were. And you will get a little bit of impact from the branch acquisitions. There's roughly $2 million annually of fees that come in. Now we give some fee income holidays around acquisitions. So you'd only maybe have like a month of that, but that will also provide some benefit there. Damon Del Monte: Okay. So the -- somewhere in between the second and the third quarter, that's on a total noninterest expense basis, not... Keene Turner: I think so. And I think that that's -- we're expecting 50 basis points of rate reductions that should help the tax credit line item in addition to activity. I just -- I don't know if there's going to be an opportunity to sell SBA loans, I think we're going to have -- we would have otherwise had a strong quarter. I'm just not sure if those can get funded and sold and all that stuff. Operator: Your next question comes from Nathan Race with Piper Sandler. Nathan Race: Keene, just going back to your previous comments around noninterest expenses. Can you just remind us what your deposit beta assumptions are just in terms of the ECR costs running through expenses? Keene Turner: Yes, it's 40%, and that's been pretty consistent. So 25 is 10. And that's roughly $1 million quarterly for every 25 basis points. Nathan Race: Okay. Great. And then just turning to capital, and I would be curious to maybe get Jim's updated thoughts on management priorities. Obviously, you guys are in a good capital position, and that should continue to build absent any material deployment. So Jim, just curious to hear what you're thinking on the M&A front these days? And just what the appetite for share repurchases as well. James Lally: Yes, sure. Thanks, Nate. Our priority capital really is to continue to funding our growth and focused on the organic growth, given our markets and what have you. From an M&A perspective, as I talked about in my comments, it's about integration at this time. Systems are working great now. It's a cultural and client integration that we're focused on with our new markets and expansion of our markets in Arizona and Kansas. Relative to other M&A, certainly, like a lot of businesses, we talk to a lot of companies and what have you, but we're looking for the fit, if you will, that allows us to continue to improve the right side of our balance sheet, and certainly stay close to the markets that we're in. And to the extent that doesn't come to fruition, certainly, buybacks are on the table for sure. Nathan Race: Okay. Great. And maybe one last housekeeping question. I don't believe you guys disclosed kind of the core deposit intangible goodwill impact from the branch acquisition. Wondering if you could just update us on what we could be expecting there as we think about pro forma tangible book in the fourth quarter? Keene Turner: Yes. I would just say, high level, the dilution is 5%, Nate, and we expect that maybe that depending on how mark's work moves around a little bit, from where we estimated it, it's going to be roughly $70 million of intangibles. Nathan Race: Okay. Great. And that 5% dilution doesn't include kind of the retained earnings impact in the fourth quarter, I presume? Keene Turner: No, that's just sort of a hard line deal math. I think we'll obviously make some profitability. And depending on what happens with securities fair value may not even see a diminution of tangible book value in the fourth quarter. Operator: [Operator Instructions] Your next question comes from Brian Martin with Janney. Brian Martin: Just Keene, one clarification on the expenses. I think if the -- is your suggestion on expenses, at least kind of a run rate to think about for fourth quarter around 112-ish, is that -- I missed the part about -- you said something about a nonrecurring piece. I know you said it was -- the baseline might be 107 and then you had about 4.5 of pickup from the branches, the kind of that 112-ish level is how we think about where you start for 4Q? Or did I miss something there? Keene Turner: No, that's about right. I mean, I think you got sort of 2.5 the 114 minus 2.5 of integration. So you're in that ballpark, like 111 and 113 is kind of where we're thinking. Brian Martin: Got you. Okay. That's helpful. And then just in general, if we think about the fee income line, Keene, I guess I don't know that the tax line is one item, but just in terms of fee income, kind of where you think -- if we just think bigger picture because there's a lot of moving parts and there are some variable pieces, if we think about it as a percentage of revenue, how you think about where that shakes out as you get into maybe next year on an annual basis? Is it kind of current level, is that how we should think about it? Or I guess is there a better way to think about it, given all the moving parts in there that swing around in a given quarter, but just bigger picture annually, the best way to think about it? Keene Turner: Yes. I think -- I'm not sure I think about it relative to percent of revenue necessarily, just -- it's 10%, 11%, but we're going to expect to grow net interest income and maybe falling on my sword a little bit, we're going to outstrip fee income growth because that's kind of a mid-single-digit grower. I think when I look year-to-year at fee income levels, I think we expect generally that if you stripped out gain on sale of SBA loans, the level is consistent and maybe growth just slightly between 2025 and 2026, and then there's an opportunity to sell SBA loans, call it, from $2.5 million to $5 million depending on what production is to solve for some greater profitability. So I think that's more likely. If I look out and say we're going to get Fed funds down to 3%, I think commercial loan growth is going to pick up. And I think SBA production is going to pick up. We've been on our heels a little bit there. We've been being disciplined on credit, and other factors in all spaces, but especially SBA. And I think with rates down, that will improve pricing on gain on sale as well as just the approval rate for borrowers. And so that will give us a greater opportunity, both for production and for sale. So that's an opportunity, but we're not factoring that into what we're thinking, and it's not reflected in my comments about stable ROA and ROATCE from '24 to '25 to '26. Brian Martin: Got it. Okay. And just big picture on the fees, would you expect fourth quarter to be a relatively -- typically, it's an outsized quarter on the tax credit activity mean not getting into the dollars, but still an outsized quarter in 4Q. Did you say that if you... Keene Turner: I didn't say that. Your comment is right. Typically, it's outsized. I think the tax credit line item with rates moving around and also with how we've repositioned that business to be more of a loan business than a fee business. It's gotten a little bit more volatile and a little bit less aggressive. So look, we could come back and have $5 million or $6 million in that line item. That's not what we're planning. We're hoping we get $1.5 million to $2 million. And so my comments, I think, earlier to Damon were that I thought the fourth quarter total fee income would be somewhere between where the second was, which was a high watermark and in the third quarter, which was sort of the baseline kind of clean quarter minimum from my perspective. So somewhere in the middle of that, I think it's a reasonable expectation for 4Q fee income. Brian Martin: Got you. Okay. Sorry about that. I missed that comment to Damon. So -- and then just one last one, maybe just for Jim, I guess, -- did I hear it right, Jim, in terms of -- it sounded as though on the capital front that the M&A might be more of an interest than the buyback in the short term depending on that? And if that was the case, let me ask that, and I can ask a follow-up if I can, Jim, but did I miss that or is that your priority? James Lally: Yes. I'd say this, that to me, the prioritization is growth, as I said, then we would look at buybacks. And if M&A came about. It was a good opportunity for us to improve the right side of the sheet, we'd certainly look at it. But we're certainly not chasing in that space right now. Brian Martin: Okay. So it's more organic and buyback rather than M&A. And if M&A is there, it seems like less of a priority in the short term. Okay. Got you. And then just the last thing for me, was just the strong growth that you guys have put up in the specialty deposits. Can you just give a sense of what's driving that? And just in terms of where that cost -- where those deposit costs typically are? It sounds like they're maybe on the lower side. But kind of how do those costs shake out relative to the total cost of funds? And just if you expect rapid growth to continue? James Lally: So the answer to that, Brian, is yes, we do. I think it's one of the things we've invested in people. We invested in systems, expertise and all three of those verticals is keeps driving it. So we look at it that it's a variable cost model for us, very profitable, but yet we're garnering share from others just by virtue of being in the market like we are in our other businesses and being present and being problem solvers. And we'll continue investing in that space with good producers. Operator: There are no further questions at this time. I will now turn the call back over to Jim Lally for closing remarks. James Lally: Carly, thank you, and thank you all very much for joining us this morning and your interest in our company. And we look forward to speaking with you again in early 2026. Have a great day. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to the V.F. Corporation Q2 Full Year 2026 Earnings Call. [Operator Instructions]. I will now hand the call over to Allegra Perry, Vice President of Investor Relations. Please go ahead. Allegra Perry: Hello, and welcome to V.F. Corporation's Second Quarter Fiscal 2026 Conference Call. Participants on today's call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC. Unless otherwise noted, amounts referred to on today's call will be on an adjusted constant dollar and continuing operations basis, which we've defined in the presentation, that was posted on Investor Relations website and which we use as lead numbers in our discussion because we believe they more accurately represent the true operational performance and underlying results of our business. You may also hear us refer to reported amounts, which are in accordance with U.S. GAAP. Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in the presentation which identify and quantify all excluded items and provide management's view of why this information is useful to investors. Joining me on the call today will be V.F.'s President and Chief Executive Officer, Bracken Darrell; and EVP and Chief Financial Officer, Paul Vogel. Following our prepared remarks, we'll open the call for questions. I'll now hand over to Bracken. Bracken Darrell: Thank you. Thank you, Allegra. We picked a strange day to do a video conference call because many of us were up for 18 straight innings of baseball. And probably the -- even though this is the most important event happening today is our conference call in the world, the second most important event will be one of the two Major League Baseball games that's also happening today because it's never happened, I guess, or maybe rarely. You'll hear more later as Paul talks about it. Let me talk you through the financials, but at a really high level. It was a good quarter. We delivered on our commitments, and we made further progress on our turnaround. And we delivered this performance despite admittedly a pretty uncertain and unpredictable environment around the world. Total revenue was up 2% in reported dollars and down 1% in constant dollars, a little better than planned and showed an improving trend versus last quarter. Operating income was $330 million, well above our guidance range of $260 million to $290 million. Net debt, excluding lease liabilities, was down $1.5 billion versus last year or down 27%. We're focused on returning the entire company to growth. Last quarter, I highlighted that 60% of our business by revenue was growing, up from just 10% in the prior year. In Q2, so this quarter, that figure expanded to over 65%. And if you took out Dickies, that would be almost 70%. Speaking of Dickies, during the quarter, we announced our plans to sell the brand. I'm confident it's a very good move for the company and for our shareholders. As we've said before, we'll always evaluate any offer we receive, reflecting our commitment to shareholder value creation. We had an inbound with a very good price of $600 million. We've done a lot of terrific work behind the scenes on the brand and the product portfolio, and I believe this positions the brand well for growth. This was a unique opportunity. On our end, we'll use the proceeds to pay down debt, consistent with our capital allocation priorities. This allows us to accelerate our path towards our medium-term leverage target of 2.5x or below. We're well on track. Let me now give you some of the highlights from the quarter on our biggest brands. Let's start with the North Face. The brand delivered another quarter of growth with revenue up 4%. All three regions grew versus last year. We grew in wholesale and in DTC. In terms of categories, Performance Apparel was up in every region with momentum in core styles. Transitional outerwear was strong and footwear continues to gain traction and grew double digits in every region. Across categories, product innovation, newness and elevation drove growth as we continue to show the extraordinary reach of the North Face from the summit to the street. We also celebrated 25 years of the Summit series, expanding the collection with innovation, adding exciting new colors and designs. This was supported by an athlete-led campaign, featuring our incredible stable of North Face athletes, including the mountaineer Jim Morrison, who recently with Jimmy Chin became the first person ever to climb and ski down the North Face of Mount Everest. Across our marketing strategy, we're driving high consumer engagement and brand experiences and amplifying that through social channels. In addition to Ultra Trail du Mont Blanc or UTMB, this included ClimbFest in San Francisco, community hiking events in APAC and a Beijing 100K Ultra Trail race. As you know, as good as I feel about the North Face, I can't help but express what an enormous opportunity remains to be realized. We have potential in new categories and ability to develop the women's business and to build across all seasons of the year. Timberland revenue was up 4% in Q2 with growth across both wholesale and DTC as well. Americas was up double digits, reflecting a strong back-to-school period. In terms of product, demand for the 6-inch premium boot remains very strong. But today, the premium 6-inch icon represents only about 20% of our global revenue. So we have a lot of opportunity for growth. We can continue to grow the 6-inch business through colors, materials, innovations, collaborations and more, while we also pursue the huge opportunity to grow this brand across other footwear and apparel categories. Closer to home, the strategy is already showing up with our recent launch of the Timberland 25, a lightweight version of the boot, which is very small now, but it's resonating well in its early weeks in our stores. A step further away from the boot, we're building our growing business around boat shoes. These sales are growing very strongly in all regions as we diversify the product lineup and give the brand more versatility of fire power during the warmer seasons. Timberland's adoption of a social-first marketing strategy has been instrumental in driving brand heat globally. During the quarter, the brand launched its Advice of an Icon campaign with high visibility events in New York, London, Shanghai and Tokyo. Brand interest grew during the summer months with consumer search interest positive in key markets in the U.S. and in EMEA. The opportunity in Timberland is really significant because we can continue to grow the boot, we can grow in other footwear franchises and we can unlock apparel around the world, all at the same time. And in the U.S., especially, this will be supported by expanded and enhanced distribution. We have the game plan to do that now. Altra accelerated further with revenue up over 35% versus last year, the third consecutive quarter of strong double-digit growth for the brand. Key franchises that represent a mix of road running and trail running styles show our broad-based approach to building this brand. The growth opportunity for Altra across both road and trail is significant. We're fueling this growth and driving higher brand awareness with targeted marketing investments, which, as a reminder, our awareness is less than 10% in the U.S. and even lower in other regions. Let me repeat that. Our brand awareness in the U.S. is less than 10%, yet we still have this size business, and it's growing fast. This is helping e-commerce deliver particularly strong growth, driven by higher traffic and stronger conversion. Altra is on track to exceed $250 million in revenue this year, and I'm confident the brand has a long, strong runway for growth for many years to come. Let's turn to Vans. Performance was a little better this quarter with revenue down 11% versus last year. We're really focused on getting the commercial moments right as we upgrade our portfolio of products. I told you that Sun's impact on product to be visible in the back-to-school period, and it is. Product newness across footwear is drawing in new consumers, particularly women, but also youth and kids. In terms of new styles, non-icons are up in the quarter, driven by the Super Lowpro, which continues to perform well. The new skate loafer, which I decided to show you this one because I bet many of you haven't seen it, which had a very strong debut and is sold out in most sizes and the Crosspath XC, which has had a very strong launch. Within existing styles and icons, we're also beginning to realize the impact of elevation, innovation and newness. For example, the Authentic is up globally as a franchise, helped by the halo effect of the Valentino collab, which drove positive search trends in key markets. Within the Old Skool franchise, newness has driven higher sales of women's styles. And just last week at ComplexCon, the largest event for young shoe dogs in the world, I think, mostly guys, by the way, it's in Las Vegas. In that event, Vans had one of the longest, if not the longest line of people waiting for the Pearlized Old Skool shoe we launched there. This is just the start. More newness is coming as we head into holiday and into spring of 2026. In the meantime, our shift in marketing strategy is starting to yield results. Digital traffic trends improved in the Americas and EMEA, particularly during relevant consumer moments like back-to-school, when digital traffic was up in the Americas. And looking ahead, we're excited about the recently announced new partnership with SZA as the brand's first-ever artistic director. It's early days, but in coming season, she'll add her voice and her touch to product and marketing. To wrap it up on Vans, each quarter, we're making great progress. We took actions to clean up the marketplace and set the stage for a very exciting product pipeline that started to roll in and is delivering early results. I'm as confident as ever in Sun and her team leading us to return to growth at Vans. Looking ahead, we're making progress on the turnaround of V.F., and I'm super confident in our ability to deliver both our near-term and our medium-term targets. Our teams are energized for the upcoming holiday season. I'll now hand it over to Paul, who will dive in deeper into the numbers. Paul? Paul Vogel: Great. Thanks, Bracken. Let me first by building on Bracken's comments about Dickies. As he mentioned, this is just a great opportunity for the company. While we are big fans of Dickies, we believe this divestiture will help further accelerate the transformation of V.F. back to being a growth company while also further enabling us to pay down our debt. We believe this will create increased and faster shareholder value. Dickies is a great asset, and we know the work we have done to date sets the brand up for a return to profitable growth. In fact, it is the work we've put in that has created an environment for others to be interested in the asset. With that in mind, the offer we received of $600 million is incredibly attractive. Based on fiscal '26 estimates, this equates to an EV to sales multiple of 1.2x and an EV-to-EBITDA multiple of over 20x. Going a little deeper into the transaction, we will incur deal-related expenses as well as the small tax considerations, but we will also save on future planned capital expenditures as well as see a reduction in our net interest expense. After considering all of these moving parts, we expect the overall cash benefit to V.F. to be greater than $600 million. Importantly, the Dickies sale will help us strengthen the balance sheet and bring us closer towards our medium-term leverage targets. It will also help us focus time, energy and resources on our brands as we continue to make progress towards a return to growth. Now let's turn to the review of the second quarter. We are pleased with our results in the second quarter. Revenue finished slightly ahead of our guidance, while our operating profit outperformed nicely. Back-to-school was encouraging across our key brands. Q2 revenue was $2.8 billion, up 2% on a reported basis. On a constant dollar basis, revenue was down 1% year-over-year, a little bit better than our guidance. By brand, the North Face grew 4%, led by growth in both DTC and wholesale. Vans revenue in the quarter was down 11%, a little better than we expected, but still reflecting the impact of channel rationalization actions, which accounted for more than 20% of the reported decline. And finally, Timberland continued to see good momentum with revenue up 4%, reflecting growth across all channels, in particular, DTC. By region, the Americas region was down 1%, EMEA region was flat and APAC was down 2%. And lastly, by channel, DTC was down 2%, while wholesale was flat. Our adjusted gross margin for the quarter was flat versus last year as the benefit from fewer discounts was offset by FX headwinds. There is minimal impact in our P&L from tariffs in the quarter. Our gross profit dollars were higher than expected on the back of revenue coming in ahead of guidance. SG&A dollars were up 1% year-over-year, but are down 1% in constant dollars. In the quarter, we increased back-to-school marketing year-on-year, which was mostly offset by cost savings across the business. Overall, SG&A was a little bit lower than expected. Our adjusted operating margin for the quarter was 11.8%, up 40 basis points year-over-year. And both interest and tax were up versus last year as per guidance. And finally, our adjusted earnings per share was $0.52 versus $0.60 in Q2 of last year. Now moving on to the balance sheet. Inventories were down 4% or $86 million at the end of the quarter, excluding Dickies from both periods. Excluding the impact of FX, inventories were down 5%. Overall levels are down year-on-year as we continue to improve the quality of our inventories. Free cash flow through Q2 was negative $453 million, in line with our expectations for the year. And as a reminder, given the seasonality and working capital needs of our business, we typically start generating cash in Q3. It is also worth highlighting that first half cash flow includes the payments of roughly $60 million of incremental tariffs in addition to the usual seasonal increase in inventory at this time of year. Overall, we are right where we expected to be for free cash flow. Net debt, including lease liabilities, was down $1.5 billion versus last year or down 27%. Turning to the outlook for the third quarter. Now note, this excludes Dickies in both this year and last year. We expect Q3 revenue to be down 1% to down 3% on a constant dollar basis. We are well positioned across our brands heading into the peak holiday period. Moving down the P&L. We expect Q3 operating income to be in the range of $275 million to $305 million. For reference, last year, Dickies adjusted operating income was approximately $5 million in Q3. Gross margin will be down versus last year, reflecting the initial impacts from tariffs, which are partially offset from lower discounts. While we have taken some initial pricing actions, the majority of these will be reflected starting in Q4. Reported SG&A dollars are expected to be slightly up versus last year. However, on a constant dollar basis, SG&A is expected to be broadly flat versus last year. Finally, we expect Q3 interest of approximately $40 million and an effective tax expense that is approximately double the prior year. This is in line with my recent comments about the increasing trend in our tax rate over the next 1 to 2 years and quarterly fluctuations as a result of the changes in global tax rates and in our geographical mix. As a reminder, this higher tax rate will have minimal impact on cash taxes. Now moving to fiscal '26, we continue to see operating income up versus last year for the year as a whole, inclusive of all known anticipated tariffs. And second, on cash flow, we continue to expect operating cash flow and free cash flow, excluding the sale of noncore assets to be up year-on-year. This includes all expected tariffs and after the negative impact from the sale of Dickies, which we estimate to be $35 million. As I said last quarter, we are working on a number of initiatives that are expected to improve our free cash flow throughout the year, which gives me confidence we will achieve our guidance. And last, we are progressing towards our medium-term targets of $500 million to $600 million of operating income expansion in fiscal '28 and a leverage ratio of 2.5x or below by fiscal '28 that we introduced a year ago. Overall, we've made meaningful progress on simplifying work to unlock creativity, building deep functional capabilities and resetting the culture across the organization. We are confident we will achieve our targets. So in summary, this quarter marks another quarter of meaningful progress. The year and our turnaround are progressing according to plan. While we acknowledge the greater uncertainty in some of our markets as we head into our peak trading period, we are confident in our strategy and ability to execute in any environment. We remain focused on getting each of our brands back to sustainable and profitable growth and continuing to make progress towards our medium-term goals. I will now hand it back to the operator to take your questions. Operator: [Operator Instructions] Your first question comes from the line of Jay Sole with UBS. Jay Sole: My question is about Vans. You talked about how you had some improvement in sell-through in the Americas wholesale channel in the full-price stores. Can you just talk about the path back to growth for Vans. I mean you said you have a lot of confidence in what Sun is doing, can you talk about the path back to growth and maybe within the second quarter guide. Just give us a sense of where you think Vans will be for revenue growth. Bracken Darrell: Second quarter guide? Yes. Our expectation is, it's pretty much the same story we've been giving, which is, we're going to increase the amount of newness. You started to see that coming. In fact this quarter, Super Lowpro, as we said last quarter, it did really well. continues to be very, very strong. In fact, I mentioned it in the script in the beginning, we're also starting to see some pickup even on the Old Skool with women, in particular, with our women's-only styles. It grew strong double digits, I think, over 20%. So our expectation is as we keep rolling in newer and newer product into the stores, we're going to see more and more performance, and yes, we're obviously also upgrading our marketing. If you're watching us on Instagram and TikTok, you're seeing it. If you're not, please do. You'll see a shift away from the skate-only marketing into really that plus a lot more. You'll see surfers, you'll see a lot more product. We've got a lot more product to talk about, especially as we go into Q3 and into Q4 and into Q1 of next year. So we're just going to keep pouring it on. This is a fundamentals business. You got to be in the right places with the right products with the right story. And we think we're really going to have that as we go forward. Paul Vogel: Yes. And then on the numbers, if you look at Q2, down 11% in constant dollars. We talked about 20% of that was related to the actions we've talked about around the value channel. So that would imply sort of a decline of high single digits for the quarter. I would expect Q3 of kind of a similar pace in Q3. Also keep in mind, we mentioned that Q3 will be the last quarter where we really see this impact. So it will be in the quarter, not entirely, but most of that quarter. And then by Q4, the dynamic around the value channel has moderated mostly. Bracken Darrell: Yes. And I'd also add, I feel you can see in our -- we mentioned in the script that we were -- we had traffic up in the -- online during the back-to-school period, which is a good sign. It shows you we're executing better. We're starting to get the message out there. Winning in these commercial moments is really key for Vans, even more than the other brands. Operator: Your next question comes from Jonathan Komp with Baird. Jonathan Komp: Paul, I'm hoping maybe you could give a little bit more color on gross margin, some of the puts and takes in Q2. And then if you could quantify either the tariffs or some of the positive offsets from less discounting. Just any more of the pieces you see? And then maybe bigger picture around the cost discipline and shifting into Phase 2 of some of the savings. Can you share any updates on progress either broadly for the organization or even for Vans specifically as you think about some of the next phase of cost savings? Paul Vogel: Yes, I'll start. So on the gross margin side, there wasn't really that much of note. little negative impact from FX, a little positive impact from lower promotions. That was really most of the puts and takes when you think about the impact of -- on the quarter in terms of gross margin. In terms of -- second part of the question was on just the longer-term initiatives, the medium-term initiatives? Jonathan Komp: Yes, that's right, really shifting to Phase 2 and some of the expectations there. Paul Vogel: Yes. So we're making great progress. We'll hopefully give you guys a more detailed view of how we're doing on all the initiatives at year-end. We actually thought about trying to give some. It's tough to give them out exactly in the middle of the year. But we're -- everything is on plan. As I said, we reiterated our guidance in terms of what we gave at the Investor Day a year ago in terms of our ability to hit those targets, whether it's our debt leverage or our operating margin. So we're on track with all of that. So everything is on pace. Again, we're -- on the gross margin side, we've got the markdown management and integrated business planning. On the SG&A side, we've got things like store management and optimization and things on the technology side as well as the overall SG&A side. So we're making progress on everything. So we feel like we're on pace. And like I said, we'll give you more detail as we get to year-end exactly how we're trending at the end of this year and how we're tracking for fiscal '27 and '28. Operator: Your next question comes from Brooke Roach with Goldman Sachs. . Brooke Roach: I wanted to follow up on John's question to talk a little bit more about promotional recapture, particularly in the Americas business. Paul, can you give us a little bit of a sense of where you are in the promotional recapture journey and the plans for pricing and promos this holiday and the opportunity on a medium-term basis? Paul Vogel: Do you want to take it? Bracken Darrell: I can start. I think generally speaking, we're well on track. We had another good quarter, I think, of really having improvement versus a year ago on our promotion levels. especially around the world. I think as we go forward, we're going to be aggressive though. We're going to make sure if we have to give a little bit back in the Americas in particular, we will. But generally speaking, we continue to think we can operate in a lower promotional environment we have in the past, and that's our game plan. Paul Vogel: Yes. I think we'll continue to see benefit for the rest of the year on the promotional side in terms of the cadence this year versus what we had last year. So that will be part of it. The pricing will kick in, in Q4 in terms of the impact for tariffs. And so you'll see some impact on gross margins more from the tariff side, not the promotional side in Q3. So we need to be clear about what we're going to see in Q3 there. But the promotional environment has -- year-over-year has gotten better, and you'll continue to see that throughout the rest of the year. And as I mentioned kind of on one of the earlier questions, if you look at the gross margin in the quarter, promotional environment actually was a benefit to gross margin, but that was offset by FX, which impacted us negatively on the gross margin side. Bracken Darrell: I'll add one more comment, Brooke. I think on Vans in particular, we're benefiting -- we're going to be in a better position from a promotional standpoint simply because we're not being aggressive in raising price to lower end price points, and so unless we see a requirement to do that, we're going to try to avoid that. Operator: Your next question comes from Michael Binetti from Evercore. [Operator Instructions]. Michael Binetti: I was wondering if you could just dissect Asia a little bit more for us. It's the first time we've seen a negative number there in total in a little while. I'm wondering if there's any kind of a timing element there? Or maybe how do you think about that over the next few quarters? Just to help us understand what you're seeing in that business. And then on -- Paul, I wanted to clarify, I think you said if I take out the 20% Vans from the actions you had in the value channel, gets you down about high singles in 2Q as the underlying run rate and should be about the same in the third quarter. Is that an ex currency comment? And does that take into effect what I think you mentioned before was that some of those mitigation efforts start to wane a little bit in the third quarter before going away in fourth quarter? Maybe just kind of help us so we understand kind of exactly what you're thinking reported revenues should look like in the fourth quarter -- sorry, in the third quarter. Bracken Darrell: Yes, I'll take the first one and Paul will take the second one. I think my experience with APAC in general and especially China within APAC is you have these long periods of run-up and then you kind of stabilize for a while and then you have the long period start again. I think we're in one of those stabilizing periods. We've had a very long run -- long strong run of growth in China, particularly in the North Face. And I think that's going to stabilize for a little while. The good news is we have so much opportunity in the rest of the world, especially in the Americas. I mean I feel really lucky to be in a company right now where, honestly, one of our biggest growth opportunities longer term is the Americas. We're just underdeveloped in many of our brands and in some of our channels. If I take Timberland, for example, we really are terribly underdistributed in the U.S., and yet we're growing very strongly. We got good brand heat. So we're going to address that going forward. And so overall, I feel good about where we're going to be from a global profile. But I think APAC, it wasn't going to grow that strongly forever. It will flatten out for a while and then probably come back. Paul Vogel: Yes. And then just a couple of things. So one, just as, I guess, a blanket statement. All the numbers I quote are, they are almost always in constant dollars. So if it's not that, I will let you know, but it's -- yes, so it is constant dollars. On the Vans side, down 11% in constant dollars. So -- and we -- what I said was about 20% of the decline is related to the actions we've been talking about around the value channel. So that gets you to -- and as well as store closures. That gets you to sort of a negative high single digit for the quarter in terms of an actual run rate. The run rate, we believe, will be kind of similar in Q3 as well. What I also said was the impact from the value channel changes and the door closures will also impact us in Q3, not quite as much as it did in Q1 and Q2 because it starts to -- we start to annualize or anniversary it in Q3. And then by Q4, these impacts we've been talking about for the most part, go away. So it won't be entirely, but mostly a true underlying trend by the time we get to Q4. And hopefully, we'll get away from having to back anything out for you guys. Operator: Your next question comes from the line of Ike Boruchow with Wells Fargo Securities. Irwin Boruchow: Just curious on -- I know it's early in holiday, but any initial signs from how retailers are behaving with orders or order books? Is there any difference by channel or region? Just kind of curious how your partners are kind of looking at the initial holiday season from an orders perspective and a demand perspective. Bracken Darrell: It's a little too early for us to say. It's -- we also have a lot of direct-to-consumer, too. So just a little too early to say. This is always the period when it's really, really exciting in this business because things start to ramp up, it starts to get cold. There's a lot of good things that happen between now and Thanksgiving. So it's a little too early for us to say, but we're really excited about it. We feel like we've got a good plan. We've got good products. And yes, so we're optimistic, but it's too early to say how it's going to play out. There's a lot of -- as you said, there is uncertainty out there about the overall macro environment. There's the shutdown, et cetera. But I think I said in a conference a couple of months ago, the consumer has been stubbornly positive, and I'm hoping that will happen again. Operator: Your next question comes from the line of Adrienne Yih with Barclays. [Operator Instructions] Adrienne Yih-Tennant: Okay. So Bracken and Paul, the 3-year long-range plan was sort of anchored to FY '24. And so we've had 4 quarters -- consecutive quarters of op margin expansion. And this fifth quarter because of tariffs, we now have kind of a reversal of that trend. So historically, you've always kind of talked us to look at half years. And I guess a couple of questions. You talked about back-to-school being strong. Just wondering what you're seeing kind of on the exit of that. You talked about the consumer being still resilient. And then last quarter, you had mentioned sort of like how you think about philosophically demand elasticity. We're going to start to see price increases, Paul, in the mid-single-digit range, low single-digit range, if you can help us out with that. And what are you thinking about with respect to kind of how the volume plays into that? Bracken Darrell: Yes. Why don't I take -- I think your first question was kind of what do we see coming. It's a little hard to answer. Maybe I'll come back to Timberland since it's an interesting one to talk about. I think Timberland, we probably have more growth potential than we're going to get because we're -- you saw this quarter, 4% growth. I think for the rest of the year, you can expect kind of low single-digit growth. That's not because the brand heat is not out there. It's out there. We're just going to really control our expansion. And we're going to make sure that we're very deliberate about executing. Right now, we have only, for example, only 6 full-price stores in the United States where there is very strong demand. We could go out and expand aggressively into our wholesale -- new wholesale, et cetera, but we're really not going to do that. We're going to very deliberately open new stores. It's going to start later in Q3 and into Q4, although they won't really kick in and be high performing until next year. So we're really trying to think in terms of driving growth longer term, not just what we can do this holiday and in Q4 so that's our mindset on this whole business is really how do we -- I hope you're starting to get a feel for that. We're going to execute in the key commercial moments, but our real game plan is longer term than that. We're going to put -- systematically put these building blocks in place that are going to deliver for years and years to come. Paul Vogel: Yes. And on the gross margins, I think I had the question. Bracken Darrell: Elasticity in gross margin. Paul Vogel: Yes. So on the gross margin side, so as you get to the next couple of quarters, so obviously, we've had some good gross margin expansion. We've lapped a lot of the work we've done to reset our inventories, get inventories in a better position. We've talked about a better promotional environment for us in terms of discounting. So that's all been productive. You get into Q3, you do have some impact, as I said, from the tariffs, which we won't really start to mitigate tariffs until Q4 from a pricing perspective. So you will have that. You also are lapping all of the work we've done over the past year or so. So you've got -- you're starting to get tougher "comps" in terms of the gross margin improvement. We still think there's more there, obviously, and we've talked about getting to 55% or better in our longer-term targets. But we did make a lot of progress over the last year and a lot of the reset actions and cleanup we've done. So that will impact us in the next couple of quarters. And then there was one other part to that question. Bracken Darrell: Elasticity. Paul Vogel: Elasticity, yes. Bracken Darrell: Single digit. How much we raised? Paul Vogel: Yes. We don't really get into the exact amount of pricing. But you can think about it a couple of ways. One is there's always going to be a part of this between working with our vendors, working with our wholesale partners and then pricing. So it's going to be a combination of all 3 of those things, which is probably not a surprise to any of you. We'll also be targeted and thoughtful by brand, right? So it's not going to be a uniform price increase across the board. Each brand is going to take it differently in terms of product, in terms of how they do it, in terms of where they do it, and we'll give them the flexibility to do that. And in some areas, as Bracken mentioned, excuse me, you've got places where Vans where maybe it's not so much on the pricing side, but we've been much better on the discounting side, so that can have an effect of better pricing year-over-year just based on lower discounting. Adrienne Yih-Tennant: All right, thank you very much, very helpful. Bracken Darrell: Yes, if you wanted one headline on that, I'd say surgical. We're still assuming pretty normal elasticity, but we're very surgical in the pricing. Adrienne Yih-Tennant: And it's U.S. only, correct? Or is am I incorrect? Bracken Darrell: Yes, generally speaking. I mean, there's always some kind of pricing happening around the world, but certainly U.S. Operator: Your next question comes from Anna Andreeva from Piper Sandler. [Operator Instructions] Anna Andreeva: We had a question on where are we with the number of doors. So you guys have closed own doors globally and also exited a number of wholesale doors in the U.S., but also added some doors. So are we now in a stable kind of a number of doors environment, both in wholesale and DTC? Do you think there's an opportunity to further rein in own doors, especially at Vans, where I think you still have 600 doors or so globally. And then we had a follow-up. Did you quantify the earlier wholesale demand in 2Q? Bracken Darrell: I'll let Paul take the second one. On the number of doors, yes, I think we're pretty stable going in. Now we're going to increase the number of doors, especially in Timberland, but also in North Face. And there will be some -- continue to be churn on Vans. But as I've said before, but the biggest reduction is kind of in the past now. So -- and that will start to dissipate, especially in Q4. Our total number of doors, I think we're in the U.S., we're at about 500 -- 580 globally, I think about 480 in the U.S., which is consistent with what we said before and about 90 in EMEA and not too many in APAC, although we have partner stores in APAC. So most of that looks like our door even if it isn't technically. Paul Vogel: Yes. And then I think just overall in the stores, so I think we're down about 5%, but it's the majority of that is Vans. We're actually growing in North Face and other areas. And then the second question was the question on the wholesale in Q2, how much that impacted the increased demand? Was that the question? Anna Andreeva: Yes, if you can quantify that impact. Paul Vogel: Yes. So it was probably about -- it was about 50, 60 basis points on the revenue side. So if you look at the revenue number and the outperformance relative to our guidance, there are really two main factors. call it, half of it or so was that was that we had some orders where the demand came to ship in September versus October. And the other was just some better DTC, particularly around back-to-school, did a little bit better. Those are the two big factors. Operator: Your next question comes from the line of Matthew Boss with JPMorgan. [Operator Instructions]. Matthew Boss: So maybe 2 questions. Bracken, could you speak to health of the North Face brand and market share opportunity you see across the outdoor channel? And then just to circle back on Vans, underlying revenue is down high singles, excluding the reset actions. I mean, what do you see still constraining the brand despite the product improvements that you've cited? Bracken Darrell: Yes. So on TNF, I think the brand is very healthy. The key now is we just have to keep doing -- playing out the initiatives we've been talking about, which is not just playing in the winter quarters, but really playing year-round, making sure really getting to women, taking full advantage of these categories we're performing in like footwear, for example, where we had strong double-digit growth again this quarter around the world. So really, we've just got opportunity. We've just got to execute right through everything. So TNF, I feel I'm excited about. In terms of Vans, I think it really does come back to -- you asked me to talk about something more than product, but I'll go back to product. It really is -- this is a product business. We got to have great product. And I'm excited about the Super Lowpro I think the skate Loafers is going to do well. You'll see. I see more and more, it's funny when you think you've got something original, you realize you were actually right on a trend and you see it from -- especially in the luxury segment, and we're seeing Loafers come in across the luxury segment. I remember when we were working on this, we were -- I thought, well, this is really original, and I kind of scratched my head and looked at Sun said, "sure, you want to do this." She says, "Oh, yes, it's going to work." And it did really well in very small quantities in the beginning, and we'll see how it does as we go through the holiday season and on into next year. So it's about product, product, product and then making sure our marketing is relevant and powerful. And I think our marketing is getting stronger and will get stronger and stronger as we go through. We're more and more socially centered. I think SZA, both on the product side and the marketing side will be helpful. But getting right product out there for guys and women and kids is the game at Vans, and we're going to keep pouring it on. Operator: Your next question comes from Janine Stichter with BTIG. Janine Hoffman Stichter: A question for Paul, just back on tariffs. I think you had talked about mitigating about 50% of the gross impact this year. Now that you've been going through some of the initial pricing actions. Just any updated thoughts on that? And then I think you had spoken to offsetting tariffs in their entirety at some point in fiscal '27. Just if you could put a finer point on that in terms of timing. Paul Vogel: Yes. The -- on the -- we haven't really raised prices yet. There's very little -- there's really nothing in Q2, very little in Q3. The pricing really comes in Q4. So I really don't have any -- not much I can comment on in terms of the impact of pricing. We'll see it as it comes through. But like I said, we're going to have the impact of tariffs hit us the most in Q3 just from the standpoint of not having the offset of revenue. The offset will come in Q4. And then yes, we think we'll be able to offset tariffs within fiscal '27. We haven't been more specific on that as we get to the end of '26, again, as we see some of the elasticity stuff, so the pricing and see where we end the year, we'll have probably more clarification at year-end. But again, nothing has changed at all from the comments we made last quarter about the impact of tariffs, our ability to mitigate and the timing of when all this comes through. Operator: Your final question comes from Trevor Tompkins with Bank of America. [Operator Instructions] All right. We will move on to John Kernan from TD Cowen. [Operator Instructions] We will move on to Tom Nikic with Needham. Tom Nikic: All right. I want to ask about the ongoing debt deleveraging on the balance sheet. And you've now sold a couple of brands and you've divested some noncore assets. Is it now just a function of fundamental improvement and growing the EBITDA? Or is there kind of anything else you can do from a kind of non-EBITDA perspective to bring the debt leverage down? Bracken Darrell: Let me make a quick comment, and then I'll let Paul answer in a little more detail. Overall, we feel good about our ability to delever down to 2.5x. Now Paul and I have said, we'd like to be below 2.5x because neither one of us is a particularly big fan of debt in general. So -- but 2.5x seems like a reasonable leverage ratio, and we're on a path where in '28, we will be there. As you said, just executing our plan. Do you want to add anything? Paul Vogel: Yes. No, I think a couple of things to be clear. One, we firmly believe we will be able to get to our targets with or without the sale of Dickies. So the sale of Dickies will help speed that up, will help us get there faster. But we 100% believe we would have gotten there on the fundamentals either way. So that's number one. Number two is, yes, I mean, a lot of it moving forward will be continued improvements in EBIT and EBITDA. We will also continue to work on improvements in working capital, better inventory management things that we can bring down. I think we can bring our inventory days down further. I think we can probably improve our overall working capital management as well. So it will be mostly on the pure fundamentals of growing the business. But also, I think there's other things we can do that will help free up cash moving forward. Bracken Darrell: Okay. I guess that was our last question after a couple of extra innings there. Well, look, to close, it was a really good quarter, and we delivered on our commitments again as we try to always do. We made further progress on the entire turnaround plan. And looking ahead, we're going to continue to focus on generating value across our brands and returning the company to sustainable and profitable growth. So we're excited about the future. Looking forward to talking to many of you in meetings throughout the rest of this month and next month here and in Europe and then again next quarter. Thanks again. Paul Vogel: Thank you. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the PHINIA Third Quarter 2025 Earnings Call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Kellen Ferris, Vice President of Investor Relations. Kellen Ferris: Thank you. Good morning, everyone. We appreciate you joining us. Our conference call materials were issued this morning and are available on PHINIA's Investor Relations website, including a slide deck that we will be referencing in our remarks. We're also broadcasting this call via webcast. Joining us today are Brady Ericson, CEO; and Chris Gropp, CFO. During this call, we will make forward-looking statements, which are based on management's current expectations and are subject to risks and uncertainties. Actual results may differ materially from these statements due to a variety of factors, including those described in our SEC filings. We caution listeners not to place undue reliance upon any such forward-looking statements. And with that, it is my pleasure to turn the call over to Brady. Brady Ericson: Thank you, Kellen, and thank you, everyone, for joining us this morning. I'll start with some overall comments on the third quarter and then provide some thoughts on the remainder of the year and beyond. Chris will then provide additional details on our third quarter financials and discuss our updated 2025 guidance. We will then open the call for questions. The highlights of the third quarter include the closing of our acquisition of Swedish Electromagnet Invest or SEM, our first acquisition as a public company, delivering our second quarter in a row of year-over-year net sales growth with Q3 being over 8% higher than prior year. This led to a record quarter for adjusted sales and adjusted EBITDA dollars as a public company. For the first time, our results are mostly being compared like-for-like against the prior year quarter as we had substantially exited all TSAs and contract manufacturing from our former parent in the third quarter of 2024 and nearly all of our corporate structure and costs were fully in place. And finally, with our strong adjusted free cash flow, we were able to acquire SEM and returned $41 million to shareholders via dividends and share repurchases while maintaining ample liquidity and our net leverage of 1.4x EBITDA. Let's start with SEM. In June, we announced plans to acquire the company, and we were able to quickly close the transaction in August. SEM is a 100-year-old leading provider of an advanced natural gas, hydrogen and other alternative fuel ignition systems, injector stators and linear position sensors to the commercial vehicle and off-highway sectors. With SEM, we have expanded our ignition and electronic control capabilities, broadening our system offerings. By combining PHINIA's expertise in engine management systems with SEM's deep knowledge of advanced ignition technologies, we are creating a powerful platform for innovation and efficiency. We're excited to welcome SE to the PHINIA family and look forward to growing with them. Moving to our results. Our third quarter performance reflects steady progress in executing our strategic priorities and our ongoing commitment to returning value to shareholders in the form of dividends and share buybacks. We are executing several structural initiatives to enhance efficiency and data visibility. We are consolidating 4 ERP systems into a single global SAP S/4HANA platform, which we will phase in across the globe over the next several years. Additionally, the integration of SEM and our ongoing cost savings initiatives are laying the groundwork for a more agile, efficient organization. Although the macroeconomic and industry outlook remain uncertain, we are focused on what we can control through operational and cost efficiency initiatives, providing value to our customers and driving sustainable performance across all our markets. Net sales in the quarter were a record $908 million, up 8.2% from the same period of the prior year as we benefited from the SEM contribution, favorable FX, customer pricing related to tariff recoveries and increased volume in Asia and the Americas. Excluding SEM and FX, revenue increased 5%. This is the second consecutive quarter where both segments reported higher year-over-year sales. We reported adjusted EBITDA of $133 million with a margin of 14.6%, a 30 basis point year-over-year expansion. The margin expansion was primarily due to lower R&D expenses and strong performance from our Fuel Systems segment. This was partially offset by unfavorable product mix and increased employee costs. The $133 million of EBITDA was also a quarterly record as a stand-alone company. Fuel Systems delivered a strong quarter with adjusted operating income up 33% and the margin expanding 190 basis points, which is partially diluted from the SEM acquisition. AOI was driven by research and development savings, overhead cost control measures and efficiencies. Those are partially offset by unfavorable product mix. Aftermarket margin was down 80 basis points. The decrease was primarily due to unfavorable product mix. Our combined Fuel Systems and Aftermarket segment adjusted operating margin was 14%, an 80 basis point increase when compared with the third quarter of 2024 and a new record for a quarter as a stand-alone company. Adjusted earnings per share, excluding nonoperating items as detailed in the appendix of our presentation, was $1.59, up from $1.17 in the same period of the prior year. Finally, as we disclosed in an 8-K last week, we reached an agreement with our former parent company to equitably resolve our litigation and move forward in a positive manner. We expect that a substantial portion of the settlement payments will be offset by collection of pre-spin VAT refunds, tax credits and various other tax recoveries. As a result, we do not believe that the settlement will have a material impact to our capital allocation strategies, liquidity or our net leverage ratio. This quarter marks an important milestone for PHINIA. It's our first quarter of fully comparable year-over-year results since the spin with all transitional service agreements and contract manufacturing now complete and nearly all corporate costs were in place. The third quarter reflects the true underlying performance of our business. As a general overview and consistent with recent quarters, our results in the third quarter highlight the strength and resiliency of our business in the face of a challenging and unpredictable environment. This is consistent with the benefits of having a truly diversified industrial business with diversity in customers, markets, industries and regions in which we support. Our innovation strategy remains at the center of our growth story. We continue to invest heavily in R&D, roughly $200 million annually or about 6% of sales, and our customers reimburse us for about half of that through software and calibration services, demonstrating our position as a true development partner. In turn, we are making important investments in our business that are advancing our competitive position in the key markets and allowing us to capture incremental growth opportunities and support our customers. Our brand is strong in the market and customer preferences for our products remain high. Our excellent service is supporting our growth with both new and existing customers. Let me highlight a few of the new business wins on Pages 6 and 7. The new next-generation canister technology with leak detection devices for a leading North American OEM on two hybrid light commercial vehicle programs. a brushless alternator for industrial applications to a leading off-highway OEM in Asia for mining haul trucks; a conquest gasoline direct injection, or GDi, fuel rail assembly and controller for a light passenger vehicle applications, securing our first win and new business with a major Chinese OEM. Moving next to our aftermarket business, as shown on Slide 7, we're winning both new business and expanding relationships with existing customers. Importantly, these wins are across diverse geographies. Expanding our market-leading product coverage and grew share of wallet with a major Middle Eastern customer, signed an agreement with a new large customer in the United Kingdom for braking and suspension components new starter and alternator business with additional distributors in North America. Our value proposition is differentiated and continues to attract new customers as well as deepen relationships with existing customers. As shown on Slide 8, our business is diverse by end markets and geographies. Most recently, we've expanded into the aerospace and defense industries. As I've mentioned on prior calls, this is an emerging and exciting adjacency for us. We're launching multiple programs with a key aerospace customer that leverages our existing engineers and manufacturing infrastructure. We have started initial shipments on our first aerospace business award and expect our second program to launch in early 2026. These wins validate our strategy to extend core combustion and control technologies into adjacent markets. Now moving on to Slide 9 for a discussion of capital allocation. We have taken a disciplined approach to capital allocation while remaining opportunistic about M&A. We will continue to evaluate selective M&A opportunities that enhance our product offerings in precision machine components and assemblies, electronics and controls as well as increasing our presence in key markets and industries such as aerospace, commercial vehicles, off-highway, industrial and the aftermarket. Our approach remains opportunistic and disciplined. Consistent with our capital allocation priorities to invest in our business for long-term profitable growth, we invested $26 million in capital expenditures during the third quarter with funds expended primarily on new tooling and equipment. Also on the capital allocation front, during the quarter, we returned $41 million to our shareholders, including $11 million in quarterly dividends and $30 million in share repurchases. We have $194 million remaining under our current repurchase authorization, and we expect to continue to evaluate the best use of capital on a quarterly basis. Since the spin-off in July of '23, we repurchased approximately 20% of our outstanding shares. Even with the acquisition of SEM, capital investment in our operations and capital return to shareholders, our balance sheet remains solid with cash and cash equivalents of $349 million, total liquidity of approximately $900 million and our net leverage ratio remaining at 1.4x, which is under our target of approximately 1.5x. This was possible due to our strong adjusted free cash flow of $104 million in the third quarter. As we look to the remainder of the year, we see some market and tariff risk as CV tariffs are coming into effect on November 1. Importantly, we will continue to work with our customers on recovery and similar to the auto tariffs, we expect to substantially recoup the costs from our customers because CV OEMs are also qualifying for the same 3.5% rebate as are the auto OEMs. We have adjusted our 2025 outlook to account for the SEM acquisition and some external factors. On the revenue front, the midpoint of our outlook is up $40 million from our prior guide, driven by approximately $15 million from SEM and the remainder from favorable FX, volumes and pricing. The midpoint of our adjusted EBITDA guidance is up slightly as it continues to be constrained by tariff-related revenue that carries 0 margin. Adjusted free cash flow has been a good story for us, and we're raising the midpoint of our 2025 outlook by $10 million. To wrap up, we've continued to build momentum across our diversified end markets while maintaining disciplined cost and cash management. Our teams are executing our long-term strategy that is focused on product leadership, stable growth, financial discipline and total shareholder returns. With that, I'll hand it over to Chris, who will walk us through our Q3 results and discuss our outlook for this year. Chris? Chris Gropp: Thanks, Brady, and thank you all for joining us this morning. As a reminder, reconciliations of all non-GAAP financial measures that I will discuss can be found in today's press release and in the presentation, both of which are on our website. Beginning on Slide 11. Our financial results in the quarter were solid and include the contribution from SEM, which closed in August, as Brady mentioned. The external environment has not changed dramatically from the prior quarters. However, we continue to see strength in our OE sales across the globe, enhanced by strength in aftermarket sales in select markets. We are pleased that the teams have responded appropriately and delivered strong revenue and EBITDA in the quarter. Specifically, we generated $908 million in net sales, an increase of 8.2% versus a year ago. Our top line benefited from favorable foreign exchange tailwinds of $19 million and an $8 million contribution from SEM. Excluding these impacts, net sales increased 5%, a result of better pricing, tariff recovery and increased volumes in Asia and the Americas. Let me now bridge our adjusted revenue and adjusted EBITDA for the third quarter, which you can find on Pages 11 through 13 in the presentation. Fuel Systems segment sales were up 13.4%, including prior year contract manufacturing sales or 13.7%, excluding the effect of contract manufacturing, which ended in Q3 of 2024. The increase in Fuel Systems revenue was also attributable to foreign exchange, customer tariff recoveries and the contribution from SEM of $8 million. Segment margin was 13.3%, up 190 basis points year-over-year, primarily due to supply chain savings, productivity improvements and reduced engineering costs. Our aftermarket segment sales were up slightly year-over-year on positive European results, combined with a small amount of tariff recovery. This revenue was partially offset by lower volumes in North America and Asia. With respect to profitability, the aftermarket segment margin of 15% was down 80 basis points from the prior year and impacted by unfavorable product mix. On a consolidated basis, our Q3 segment adjusted operating margin and adjusted operating income were healthy at 14% or up 80 basis points and 11.1% or up 70 basis points year-over-year, respectively. Our teams worked hard to cut costs and improve productivity despite some volatile market conditions. Our adjusted net earnings per diluted share in the third quarter were $1.59, an increase of $0.42 per share for the quarter. These amounts exclude nonoperating items, which are described in the appendix of our presentation and influenced by lower share count as we continued share repurchases. On August 1, our team was excited to welcome new colleagues to the PHINIA family with the close of the SEM acquisition. Total paid was $47 million, comprised of $15 million in cash proceeds to seller and $32 million used to extinguish debt assumed through the acquisition. While we expect SEM to contribute sales annually of approximately $50 million and adjusted operating income of $10 million, we anticipate the first year sales and resulting returns may face some initial headwinds given SEM's reliance on a challenged CV market and potential distractions from ongoing integration efforts. In addition to SEM, we settled a claim regarding the tax matters agreement with our former parent following the close of the quarter. Our full year 2025 guidance, which we will discuss, has incorporated the impacts of this settlement appropriately. We expect that a substantial portion of the settlement payments will be funded through refund payments we receive from various tax authorities related to certain indirect tax payments made prior to the spin-off with the remaining portion funded with available liquidity. As described in last week's 8-K, the settlement with our former parent also provides clarification on the company's ability to obtain and use the benefit of certain tax attributes. This has the potential of providing us with additional flexibility as we continue to optimize our tax structure. Intense focus by our teams delivered a strong balance sheet, providing substantial current liquidity despite all the extra activities in the quarter. Cash and cash equivalents were $349 million, while available capacity under our credit facility remained at approximately $0.5 billion for a resulting liquidity of approximately $900 million. Cash flow from operations was $119 million in the quarter, and adjusted free cash flow was $104 million, a significant increase from $60 million in the same period of the prior year. We continue to remain confident in our ability to generate free cash flow to support our capital allocation priorities. As such, we paid $11 million in dividends and repurchased $30 million in our stock in Q3, bringing our year-to-date returns to shareholders to $202 million. This balance consists of $32 million in dividends and $170 million in share repurchases. Now moving to Slide 14 for a discussion of our refined full year 2025 outlook. As Brady indicated, we have adjusted our outlook slightly to account for the acquisition of SEM, minor tariff changes and other macroeconomic factors. We are adjusting our 2025 sales guide, increasing the high end of the guide to $3.45 billion and bringing up the low end of guide to $3.39 billion for an increased midpoint of $3.42 billion. We are narrowing our adjusted EBITDA range with a high end of $480 million and low end of $465 million for a slightly higher midpoint of $473 million. In addition, we are taking the midpoint of our adjusted free cash flow up by $10 million to $190 million and improving our tax rate for the second quarter in a row. Our expected adjusted tax rate is now projected to be in an improved 33% to 37% range from the prior projection of 36% to 40% as ongoing tax structuring projects gain traction and progress. We do not expect this change to have a material impact on cash taxes in 2025. Overall, we continue to be confident in delivery of solid returns as we deal with 0 or low-margin tariff recoveries, choppy markets and foreign exchange movements. As Brady mentioned, as we look forward, we are also disclosing implementation of a strategic effort to align our legacy structure to more effectively match the business as it develops globally. As such, we anticipate a step-up in restructuring charges, approximating $35 million in infrastructure rightsizing, professional fees and other costs to yield an estimated $25 million in annual savings, a less than 2-year payback once all projects are fully implemented. This is complementary to our normal ongoing work to ensure our operations and corporate functions are agile and meet the future needs of our invested constituencies. We are operating from a strong financial foundation and executing on clear strategic priorities. In closing, we remain firmly committed to building sustainable value for all our stakeholders. Thank you all for your attention today, and we will now move to the Q&A portion of our call. Operator, please open the lines for questions. Operator: [Operator Instructions] We'll take our first question from Bobby Brooks at Northland Capital Markets. Robert Brooks: So excluding the acquisition and currency impact, sales were up 5.1% year-over-year, a really, really healthy number. I was just curious if we could dive a little bit deeper into that 5.1%. Like how much of that was pricing and tariff recoveries versus increased volumes or even just new products being shipped out? Brady Ericson: Yes. I mean it's a balance between kind of all three of them. I mean pricing and tariffs is going to be about the same as volume is the same. There's a little bit of FX kind of headwind. So not a lot of difference between the three. It's kind of equally balanced. Robert Brooks: Got it. Got it. And then just with the pricing, is that pricing -- like you said pricing and then tariff recovery, so it seems like those are two separate silos. On the pricing, is it reasonable to think that, that's going to be sticky moving forward? Or how should we think about that? Brady Ericson: Yes. I mean obviously, they're linked directly because as we have tariffs, we're passing on price, and so that's the bulk of it. And that's going to be sticky because unless the tariffs are going away, it's going to stay there. And again, that's one of the reasons why our EBITDA is not going up as much is because those are basically at breakeven EBITDA or margin and a little bit of headwind in that. But we don't see it going away. We think it's going to be there. We just got to continue to drive productivity and other efficiency improvements to get our margin back to where we expected. Chris Gropp: Bobby, on the tariffs, one of -- some of the things that we have been doing is in lieu of tariff pass-through, we've actually gotten concessions on some other areas. So I mean, we've gotten pricing. Obviously, on the aftermarket, it is more of a price increase game. But it's not huge. It's not material. It's just a couple of million dollars when you look at the pricing and strip out just the tariff going through, just trying to make sure we get recovery on all of those. Robert Brooks: Got it. That's very helpful color. And then last one for me. It's great to hear you begin shipping components for your first aerospace program. That's really exciting news. Do you think achieving this milestone will sort of serve as a cowbell to alert other aerospace companies, your legit and certified potential supplier? And maybe asked a different way, do you feel there are potential customers waiting in the wings to see you successfully deliver those components for the first couple of projects before stepping in and placing an order? Brady Ericson: Yes. And absolutely true. I think ever since we've announced them and then at the Paris Air Show in June, the level of interest, the RFIs and RFQs coming to us has gone up substantially. And as I mentioned, I think in the last call, we fully expect to get additional awards here in the coming quarters that will continue to support that expansion. And so we're having conversations with pretty much every of the major engine manufacturers out there and see some good opportunities for us to continue to grow in that space. Operator: We'll move next to Joseph Spak at UBS. Joseph Spak: I wanted to -- I had a couple of questions. I guess, one, maybe just on the implied guidance in the fourth quarter, maybe a little bit softer than expectations. Just wondering if you could give us a little bit more detailed commentary on the organic end market. And then related to the guidance, but also just want to understand the business going forward, it implies the guidance about $7 million in the fourth quarter from SEM, which is, I guess, $1 million below the third quarter despite it being a full quarter in the fourth quarter. So is that -- is there some seasonality to that? Or is that some of that sort of softer demand you talked about and for that first year of owning the business? And if so, is $7 million, $8 million a good sort of run rate to start to think about for '26? Brady Ericson: Sure. On Q4, I think we're -- we always talk about seasonality in general, and we haven't had a normal season for a while. But I think this is looking to be more a normal seasonality where Q1 and Q4 are lighter. I think our Q1 this year was probably lighter than normal. I think Q4 typically is anywhere from 5% or so lighter than Q2 and Q3. And so I think we're kind of getting back to that normal seasonality. Obviously, still a little bit of noise here in Q4 on volumes on what people are going to do around shutdowns. So we're kind of taking that into account as well and making sure that we're in a good position on Q4 in general. SEM, we're still kind of learning their seasonality. We are finding that their second half of the year is a lot lighter than their first half of the year, along with a little CV softness. They tend to -- they shut down in the summer and don't come back until later in August and the expectation they're probably going to shut down earlier in December. So their windows in the second half tend to be a little bit lighter. We're still confident that they're going to -- as we mentioned earlier, around that $50 million. we're confident they're going to kind of get back there when the market recovers a bit and see them delivering on our expectations. We just have the initial kind of hit right now. We've got a number of folks kind of going in there, getting their systems and processes up to speed and probably adding more cost to their cost structure and then beginning to kind of ramp them up to what our expectations are. So not a lot of material difference to the overall company, but we do see them coming back stronger next year as the market recovers, and we'll provide more insight in our Investor Day meeting next year as we give guide for 2026, and we'll give that additional clarity on SEM as well. Chris Gropp: And Joe, I'll add a little bit to it because I think that with so much going on in the market, our units are just being very, very cautious on what they're putting out there because you named the issue. I mean we are not being hit materially by any -- like the JLR issues. That's not a big issue for us. But -- CV tariffs coming in, there's a lot of things out there. None of them hit us materially, but our units get a little cautious. And so we're just trying to be a little conservative in Q4... Brady Ericson: The other one is the aluminum supply issue for Ford. Joseph Spak: Very fair. Fair enough. I guess just in the quarter, Chris, you sort of talked about some of the factors driving the results. Specifically in Fuel Systems, I just want to understand, you had plus $37 million volume mix only $1 million flowed through to EBIT. And I know you sort of talked about negative mix, but it feels like there has to be something more than that in there. Is there anything else we should be thinking about that sort of really weighed on the flow-through there? Chris Gropp: No. A lot of it, Joe, has to do with -- if you see, we actually specifically call out ECU because as a part of the separation from BorgWarner, we sell ECU from them, and that literally has no margin on it. Now those contracts are coming up in the next couple of years or those restrictions come out, and we're relooking at that. But at the end of the day, ECUs, those components are very expensive, and they just -- if we're going to pass them through or we're looking for other ways of do they sell directly. So that's part of it. But if you also look, yes, the contribution margin is low, but the units -- the contribution is based on standard. If you look at the other two lines where you see really good productivity and other costs, those are coming in much better, which means my standard is going to get better next year. So it will shift. As long as my units are covering it, whether if my contribution margin is low and they're covering it with productivity and other cost reductions, I'm okay with that because it just means that I'm getting better, my products are getting cheaper because the units are doing what they should be doing. Joseph Spak: That's helpful color on these. If I could sneak one more in. Just on Slide 8, I noticed you put in power generation and maybe that's been in there all along, but there's definitely been a little bit more focus on turbochargers into power generators and almost all modern turbos have direct injection. Is there -- has there been any increased inquiries into that business? Or is that a growing opportunity and pipeline for you? Brady Ericson: Yes. I mean we're -- that's kind of we throw that in the industrial side as well, whether that's the power generation, the linear generator that we are working on for hydrogen to gen sets, both small to medium and large plug-in or range extending EV power generation units. That's an area we're starting to pick up more business. And again, I think we'll -- as we may have highlighted, we'll probably going to split out our CV and other OE next year as well because that's starting to become a meaningful portion of our revenue. So we'll probably add some more disclosure on that as we head into next year. Operator: [Operator Instructions] We'll go next to Jake Scholl at BNP. Thomas Scholl: Congrats on a strong quarter. I just wanted to circle back to the Ford fuel pump recall from a few months ago. Now that you guys have had a chance to work through that, can you talk about kind of what impact you're seeing on the business, especially on the cash side? Brady Ericson: No cash impacts, no update, still no concerns on our side. We haven't adjusted our warranty accruals and no cash impact at this point. Thomas Scholl: All right. And then can you just provide some color on the timing of the restructuring program you announced? When do you expect that to come out? And then when do you expect to fully realize the $25 million in savings? Brady Ericson: Yes. I mean we see that it's starting to roll out now. We're starting to get -- I think the initial go-live, I think it's starting in 2026. It's going to take us a few years. There's a number of different sites that are at different stages of I guess, their system capabilities that we'll be kind of rolling out. But I think it's fully, I think, Chris, and fully completed by 2028 over that time period. So we see it's going to be a multiyear. It was just -- it was a bigger number than normal. And so we thought it was prudent to go ahead and kind of call it out given the multiyear nature of it and the benefits that we expect to see. And this is also just, I would say, the next stage of us just continuing to drive efficiency and rightsizing the number of data centers, the number of complexity we have in software and systems and really just consolidating that, consolidating them into one instance, one reducing the number of redundant software systems that we have and licenses and really driving a lot of efficiency in our operations and in the systems that we're using. So when we got spun out, obviously, it was old DELCO REMY, old DELPHI Automotive, parts of BorgWarner and now SEM. They're all kind of different. And so we're going to establish a kind of a core standard that then is going to be the standard template that we will roll out for future acquisitions and future locations as well and make it a lot simpler for us. Operator: And that concludes our Q&A session. I will now turn the conference back over to Brady for closing remarks. Brady Ericson: Great. Thanks, everybody, for joining. And just again, a shout out to all of our PHINIA employees, a really great quarter. As we mentioned, with record sales, some great cash flow, first acquisition, continuing to give cash back to our shareholders through dividends and repurchases and still maintaining a very robust balance sheet. And actually, I think our cash balances are up from the prior quarter after the acquisition and the share repurchases and the dividend. So really proud of the team. Looking forward to closing out the year in a very positive manner and continuing the momentum that we have. So thank you very much for joining. Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning. My name is Taryn, and I will be your conference facilitator. At this time, I would like to welcome everyone to the TWO Third Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the call over to Maggie Karr. Margaret Field: Good morning, everyone, and welcome to our call to discuss TWO's third quarter 2025 financial results. With me on the call this morning are Bill Greenberg, our President and Chief Executive Officer; Nick Letica, our Chief Investment Officer; and William Dellal, our Chief Financial Officer. The earnings press release and presentation associated with today's call have been filed with the SEC and are available on the SEC's website, as well as the Investor Relations page of our website at twoinv.com. In our earnings release and presentation, we have provided reconciliation of GAAP to non-GAAP financial measures, and we urge you to review this information in conjunction with today's call. As a reminder, our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are described on Page 2 of the presentation and in our Form 10-K and subsequent reports filed with the SEC. Except as may be required by law, TWO does not update forward-looking statements and disclaims any obligation to do so. I will now turn the call over to Bill. William Greenberg: Thank you, Maggie. Good morning, everyone, and welcome to our third quarter earnings call. In August, we reached a settlement in the litigation with our former external manager arising from our internalization in 2020. In particular, we agreed to make a onetime payment of $375 million in exchange for a release of all claims, including ownership claims related to our intellectual property. The settlement payment was funded through a combination of portfolio sales, cash on hand, and available borrowing capacity. Importantly, we continue to have ample liquidity following the payments, and our risk metrics are in line with how we have managed the portfolio historically. With this matter now fully behind us, we are glad to move forward with clarity and certainty of purpose. During the quarter, we took a number of steps to adjust our portfolio, largely on a pro rata basis, to address our lower capital base and higher structural leverage. We sold some agency securities, bringing the RMBS portfolio to $10.9 billion from $11.4 billion. We also sold $19.1 billion UPB of MSR and another approximately $10 billion of UPB that will settle at the end of this month, in both cases slightly above our marks. Furthermore, these sales were done on a servicing-retained basis with a new subservicing client, establishing a significant and important relationship. These transactions validate our efforts to meaningfully grow our third-party subservicing business and confirm the thesis that we envisioned when we first acquired RoundPoint, specifically that given our history as MSR investors, we are an ideal subservicing partner for other MSR owners. With those additions, we will have roughly $40 billion of true third-party clients using RoundPoint as a subservicer. In addition, RoundPoint will soon be set up to service Ginnie Mae loans, too, allowing further growth in our subservicing business. Additionally, we intend to redeem the full $262 million UPB of our outstanding convertible notes when they mature in January 2026, which will reduce our structural leverage to be in line with historical levels. We plan to fund this redemption with cash on hand and by drawing down our MSR facilities. If we were to pay down the convertible note today, we would still have in excess of $500 million of cash on our balance sheet. Lastly, the reduction in our capital base has also had the effect of increasing our expense ratio. While we are always intently focused on improving efficiencies and lowering costs, we are acutely aware of the impact today. We have already undertaken efforts to reduce our cost structure in light of the settlement payment, and we have line of sight into significant amounts of savings already. We will have more to say about this in coming quarters. We are confident that after all of our portfolio adjustments, we will continue to be well positioned to execute on our MSR-focused investment strategy to enhance and grow our servicing and origination activities and to deliver long-term value for our stockholders. Please turn to Slide 3. For the third quarter, including the litigation settlement expense of $1.68 per share, we experienced a total economic return of negative 6.3% and a positive 7.6% without the expense. For the first 9 months of the year, this results in a total economic return on book value of negative 15.6% and positive 9.3%, excluding the expense. Please turn to Slide 4. Performance across the fixed income market was positive in the third quarter. Though inflation readings continued to run above the Fed's target and the full impact of recent increases to tariffs on forward inflation were still unclear, the Fed cut rates by 25 basis points in September, the first cut since November 2024, as Chair Powell cited emerging downside risks in the labor market. The Fed's own guidance of another 50 basis points of cuts by year end aligned with the market consensus, as you can see in the blue line in Figure 1. Net changes across the yield curve were small over the quarter, as you can see in Figure 2, with 2-year yields lower by 11 basis points to 3.61%, and 10-year yields down by 8 basis points to 4.15%. Equity markets were also buoyed by Fed cuts, with the S&P 500 up almost 8% by quarter end after setting all-time record highs early in the quarter. Please turn to Slide 5. As I mentioned earlier, in the third quarter we signed a term sheet with a new subservicing client which will bring our combined subservicing UPB to approximately $40 billion and will bring the total of our own servicing down to approximately $165 billion. We are particularly encouraged by the robust growth in our direct-to-consumer originations platform, especially since most of our portfolio is not economically incentivized to move or refinance. Our originations team recorded the most-ever locks for the month of September and in the third quarter we funded $49 million of UPB in first and second liens, and which gives us increasing confidence that our DTC efforts are working as intended and can provide a meaningful pickup in portfolio recapture and economic returns. Indeed, at quarter end, we had an additional $52 million UPB in our origination pipeline. Additionally, we brokered $60 million UPB in second liens in the quarter, a significant pickup from the $44 million we did in Q2 and also a record high for us at RoundPoint. As interest rates have trended lower post quarter end, we are very optimistic about the additional value that RoundPoint can bring to shareholders. Lastly, I want to mention again the improvements that we are making in the technology platform at RoundPoint. AI and other applications continue to allow us to improve customer and borrower experiences and quality. These efforts allow us to achieve more economies of scale and to recognize the benefits of our investments immediately, which are important components of our drive to reduce servicing and corporate costs. Looking ahead, we now have a clean slate to capitalize on opportunities in our MSR and MBS portfolio and to drive growth in servicing and originations. We believe that with our stock trading at a discount to book, it is significantly undervalued. With the uncertainty created by the litigation behind us, with the quality of assets that we hold, and with several of our peers trading at premiums to book, we see no reason why we should trade at an 11% discount to book as we were at quarter end. We still see mortgage spreads as being very attractive despite the recent tightening. However, we view the risks to MBS performance as being symmetrical and therefore very supportive of our strategy, in particular with its large allocation to hedged MSR, which is designed to have less sensitivity to fluctuations in the mortgage spreads than portfolios without MSR. We're very optimistic about the attractive investment opportunities available in the market for our strategy. And with that, I'd like to hand the call over to William to discuss our financial results. William Dellal: Thank you, Bill. Please turn to Slide 6. This quarter, in connection with the settlement agreement with our former external manager, we recorded $175.1 million litigation settlement expense, or $1.68 per weighted average common share. This expense is the difference between the $375 million cash payment made to our former external manager, less the related loss contingency accrual recorded in the second quarter of $199.9 million. You can see this reflected on this slide in the callout boxes. Including this expense, our return on book value is a negative 0.63%. Excluding this expense, our return on book value would have been a positive 7.6%. Please turn to Slide 7. Including the litigation settlement expense, the company incurred a comprehensive loss of $80.2 million, or $0.77 per share. Excluding the expense, we would have generated comprehensive income of $94.9 million, or $0.91 per share. Net interest and servicing income, which is the sum of GAAP net interest expense and net servicing income before operating costs, was slightly higher in the third quarter by $2.8 million, driven by higher float and servicing fee income and lower financing costs. This was partially offset by lower interest income on agency RMBS. Mark-to-market gains and losses were higher in the quarter by $111.3 million. As a reminder, this column represents the sum of investment securities net gains and losses and changes in OCI, net swap and other derivative gains and losses, and net servicing asset gains and losses. In the third quarter, we experienced mark-to-market gains on agency RMBS, TBAs, and swaps partially offset by mark-to-market losses on MSR and futures. You can see the individual components of net interest and servicing income and mark-to-market gains and losses on Appendix Slide 21. Please turn to Slide 8. On the left-hand side of the slide, you can see a breakdown of our balance sheet at quarter end. After the litigation settlement payment of $375 million and after the sale of $19.1 billion UPB of MSR, we ended the quarter with cash on balance sheet of $770.5 million. As Bill mentioned, we plan to redeem the full $261.9 million of our outstanding convertible notes when they mature on January 15, 2026. As a reminder, in the second quarter we defeased part of this maturing debt with the issuance of a baby bond for net proceeds of $110.6 million. Until the maturity of the convertible debt, we will use the cash on balance sheet to lower our MSR borrowings. Our MBS funding markets remained stable and available throughout the quarter with repurchase spreads at around SOFR plus 20 basis points. At quarter end, our weighted average days to maturity for agency RMBS repo was 88 days. We financed our MSR, including the MSR asset and related servicing advance obligations across 6 lenders with $1.7 billion of outstanding borrowings under bilateral facilities. We ended the quarter with a total of $939 million in unused MSR asset financing capacity. Our servicing advances are fully financed, and we have an additional $78 million in available capacity. I will now turn the call over to Nick. Nicholas Letica: Thank you, William. Please turn to Slide 9. Our portfolio at September 30 was $13.5 billion, including $9.1 billion in settled positions and $4.4 billion in TBAs. After adjusting the portfolio for our lower capital base, we slightly increased our economic debt to equity to 7.2 times. We are comfortable at this current leverage level. Though spreads have contracted, they still look attractive on a levered basis versus swaps, especially in the context of diminished interest rate and spread volatility. Furthermore, positive demand technicals such as robust flows into bond funds and buying by REITs are likely to persist as the Fed continues to cut interest rates. That said, spreads have normalized quite a bit, and while they are less volatile, we see spread changes to be more 2 sided. Consequently, by quarter end, we reduced the portfolio's sensitivity to spread changes from 4.2% to 2.3% of common book value if spreads were to tighten by 25 basis points, which you can see in Chart 3. This quarter, despite leverage increasing, we actually reduced our risk exposure. You can see more details on our risk exposures on Appendix Slide 18. Please turn to Slide 10. Given the stability of rates and broad consensus that the Fed is on a gradual path toward lowering rates further, implied volatility declined to its lowest level since mid-2022. As you can see in Figure 1, our preferred volatility gauge of 2-year options on 10-year swap rates, shown by the green line, closed the quarter at 84 basis points, down 10 basis points and back to just above its average level over the past 10 years. If you look back to 2022 when volatility was last here, spreads versus swaps were tighter. We see attractive static returns with volatility at this level between 15% and 19% for the securities portion of our portfolio, which you will see in the return potential slide shortly. RMBS performance was positive across the 30-year coupon stack, with the best performance concentrated in the belly coupons such as 4 1/2%s and 5%s. The excess return of the Bloomberg U.S. Mortgage Backed Securities Index was positive. 82 basis points, the best performance since Q4 2023. You can see spreads across the curve, both nominally and on an option-adjusted basis, in Figure 2. During the quarter, the nominal spread for current coupon RMBs tightened by 26 basis points to 145 basis points to the swap curve, while option-adjusted spreads finished 14 basis points tighter at 67 basis points. Please turn to Slide 11 to review our agency RMBS portfolio. Figure 1 shows the performance of TBAs and specified pools we owned throughout this quarter. Specified pools outperformed TBAs led by 4 1/2%s and 5%s. We rotated the portfolio down in coupon, reducing our 6% to 6 1/2% position in TBAs and specified pools by approximately $1.8 billion, and increased our 5% to 5 1/2% position by approximately $1.6 billion. We also opportunistically sold approximately $1.3 billion of specified pools versus TBAs across several coupons. You can see this detail on Appendix Slide 17. We have continued this downward rotation into this quarter as the rally in rates continues. In September, primary mortgage rates dropped to their lowest levels of 2025, finishing the quarter for a sustained period around 6.25%, aided by the drop in U.S. treasury rates as well as the strong performance of current coupon RMBS spreads and firm primary-secondary mortgage spreads. We are seeing the effects of the rate drop on refinancing activity with large month-over-month increases for refinanceable coupons' prepayment speeds as reported in early October. Thus far the pickup in speeds has followed the pattern seen in recent prepayment episodes such as when rates dropped about a year ago. With rates remaining about here, we expect to see further pickups and speeds as borrower refinance activity fully works its way through closings. Figure 2 on the bottom right shows our specified pool prepayment speeds by coupon, which despite the drop in primary rates decreased to 8.3% from 8.6% CPR. This is a result of having the majority of our pool holdings in lower coupons as well as in call-protected securities that did not experience the large increases seen for generic collateral. Please turn to Slide 12. You can see that the volume of MSR in the bulk market has remained lower than in prior years. The market continues to be well subscribed, with bank and nonbank portfolios continuing to compete for greater scale in MSRs. Figure 2 is a chart we periodically update, which shows that with mortgage rates at their current level, still only about 3% of our MSR portfolio is considered in the money. If mortgage rates were to drop to 5%, the portion of our portfolio in the money would rise to about 9%. As Bill highlighted, RoundPoint's direct-to-consumer originations platform has been growing consistent with the market opportunity to recapture loans in our portfolio that may refinance. When interest rates dropped in September, we saw the benefits of these efforts and our platform is poised and ready to do more. Please turn to Slide 13 where we will discuss our MSR portfolio. Figure 1 is an overview of our portfolio at quarter end, further details of which can be found on Appendix Slide 24. In the second quarter we settled about 700 million from flow acquisitions. As Bill said, we also committed to sell approximately $30 billion UPB of low gross WACC MSR on a servicing-retained basis as part of our portfolio reallocation. Being able to sell it retained with a large, new subservicing client benefits us not only by being able to leave those loans at RoundPoint and retain the economies of scale, but also gives us an important lever in efficiently managing our assets. Though we like our MSR portfolio, should we want to redeploy capital away from low gross WACC MSR into, say, high gross WAC MSR, selling it to a subservicing client is ideal. The price multiple of our MSR was down slightly quarter over quarter to 5.8x, in line with the drop in mortgage rates, and 60-plus day delinquencies remained low at under 1%. Figure 2 compares CPRs across implied security coupons in our portfolio of MSR versus TBAs. Quarter over quarter, our MSR portfolio experienced a de minimis pickup in prepayment rates to 6%. Importantly, prepays have remained below our projections for the majority of our portfolio, which is a positive tailwind for returns. Finally, please turn to Slide 14, our return potential and outlook slide. This is a forward-looking projection of our expected portfolio returns, which incorporates all of our recent portfolio adjustments. Please note While the $262 million convertible note is shown in the table, the projections assume that it is redeemed at its maturity in January. As you can see on this slide, the top half of the table is meant to show what returns we believe are available on the assets in our portfolio. We estimate that about 68% of our capital is allocated to servicing, with a static return projection of 11% to 14%. The remaining capital is allocated to securities with a static return estimate of 15% to 19%. With our portfolio allocation shown in the top half of the table and after expenses, the static return estimate for our portfolio would be between 9.1% to 12.6% before applying any capital structure leverage to the portfolio. After giving effect to our unsecured notes and preferred stock, we believe that the potential static return on common equity falls in the range of 9.5% to 15.2%, or a prospective quarterly static return per share of $0.26 to $0.42. With agency securities showing a higher range of prospective static returns in MSR, astute investors might ask the question as to why we don't sell more MSR and rotate into MBS. One reason is that the marginal cost of owning MSR is lower than its average cost and so lowering our exposure there would have the effect of increasing costs. Another reason is that we believe that the quality of the returns on the MSR side is higher, mostly consisting of very low rate, easy-to-hedge cash flows, with lower convexity risk than MBS. While we do think there is a lot of opportunity in MBS, especially given the level of implied volatility, we think our capital allocation is just where we want it to be. To conclude, returns remain attractive in support of our core strategy of low mortgage rate MSR paired with agency RMBS. The MSR market continues to benefit from historically high levels of interest and participation from bank and nonbank originators and investors. Though mortgage rates have dropped and prepayment rates for refinanceable coupons are on the rise, our low mortgage rate MSR portfolio remains hundreds of basis points out of the money. Thus far the exposure the portfolio has to higher rate, newer production servicing has grown very modestly. Given RoundPoint's capability to refinance and recapture these loans, we look forward to continued growth in this part of our MSR portfolio. We continue to be optimistic that our portfolio construction of MSR, paired with agency RMBS, should generate attractive risk-adjusted returns over a wide range of market scenarios. Thank you very much for joining us today and now we will be happy to take any questions you might have. Operator: [Operator Instructions] We'll take our first question from Bose George with KBW. Bose George: Actually, first, what are the key drivers of the increase in the EAD in the third quarter relative to the second quarter? And then can you just remind us what are the drivers that take you from the low end to the high end of your guided range? William Dellal: On the EAD, I think it's the -- if we look at the cost of our financing securities, that's what has come down to allow the EAD to go up. The asset yields on EAD are roughly constant, but the financing rates have come down. Of course, there's no mark-to-market. So this is just as a result of rejiggering the portfolio. Bose George: And actually just as a follow up to that. With short rates coming down as the Fed cuts, does that trend continue or just in terms of what happens to the EAD over the next, say, quarter or two? William Dellal: I don't think it's a trend that will continue. It's largely as a result of the change in the mix of the liabilities between TBAs and -- the financing on TBAs and spec pools. Bose George: And then can you give us an update on your book value quarter to date? William Greenberg: Bose, as of last Friday, our book value was up about 1%. Operator: We'll take our next question from Doug Harter with UBS. Douglas Harter: I know leverage is just one metric you look at, but can you talk about the various risk metrics as you think about the size of the portfolio following the settlement? Nicholas Letica: Doug, this is Nick. Thank you for the question. Yes, as you know, we look at a lot of risk metrics in managing the portfolio. And as I said in my prepared remarks, this quarter our economic debt-to-equity did go up while we, by quarter end, had taken down our overall spread risk. It's a slew of things that we look at when we manage a portfolio. It's clearly first and foremost the returns that are available on the asset classes that we have in the portfolio and what seems to be the ideal mix in the context of the market that we are in. All of those things come into play, whether it's the amount of leverage that's available in the market, the financing rates clearly, but just most importantly, the asset yields versus the risk that each security sector has. And each quarter and each and every day we look to maximize the return that we can generate from the portfolio versus the amount of risk that each asset has. William Greenberg: I might just add here, Doug. Nick made a comment in his prepared remarks about the difference between leverage ticking up a little bit while our mortgage spread risk went down. And that's a good example of not being too focused on one metric versus another. Both of those things are important as we look at the overall leverage, the overall liquidity, overall what I will call drawdown risk, different scenario analyses that we look at depending on volatility of interest rates, the volatility of spreads, and so forth. So all those things get mixed into our decisions about how we manage the risk of the portfolio, especially in the context of the returns available, as Nick said. Douglas Harter: And Bill, you mentioned that you were looking at -- to try to implement some cost saves on the corporate expense side. On your return potential slide, does that factor in potential cost saves, or is that where your costs are today or there's potential up...? William Greenberg: No, that's where they are today. Douglas Harter: So there would be potential upside to that number as those cost saves are realized? William Greenberg: Yes, I think so. Operator: We'll take our next question from Rick Shane with JP Morgan. Richard Shane: In looking at Slide 17, what stands out to me is that for the third quarter in a row at least, you are tactically net short the coupon 50 basis points below the coupon where you are you have the highest concentration. Can you help us understand -- again, as an equity guy, I'm just trying to understand what's going on there, what drives that strategy. Nicholas Letica: Rick, thank you for that question. A lot of what drives that coupon exposure, and we do manage it, of course, but it is how rates move and where the current coupon sits relative to our risk exposures and our MSR and the rest of our portfolio. So as rates rally, you can see in that table we do show what we believe is the effective offset to our mortgage longs by the current coupon exposure of the MSR and other negatively derated assets in our portfolio. And as rates rally, that negative number migrates down in coupon, and we manage that through time. And as I said in my prepared remarks, we had gone down in coupon in terms of our mortgage holdings and a lot of that was just in response to the fact that rates are rallying, and we need to offset the current coupon risk in our MSR portfolio as that happens. So I will say that we don't get overly -- I think the word I typically use is -- fussed with 50 basis point coupon swap. There are times when there can be an extreme value difference in 50 basis points. But the truth of the matter is that we look at these risks a little bit on a bucketed basis, and there's not really a -- I wouldn't say that there's a strong strategic reason why that 50 basis point exposure is the way it is. It's just looking at the overall context of where spreads are and where spec pools are for those respective coupons and managing that risk on an overall basis. But we try to keep the exposure relatively tight around those current coupons because if tomorrow we walked in and rates were up 25 basis points, that exposure in our MSR would shift up in coupon and that chart would change to a reasonable degree. So we look at it in that sense of nearby coupons rather than just looking at a specific coupon, if that makes sense. Richard Shane: It totally does. And I have learned 2 new words to add to my mortgage glossary, derated and fuss. Operator: We'll take our next question from Trevor Cranston with Citizens JMP. Trevor Cranston: Can you guys give us a little bit of color in terms of what you're seeing on growth opportunities of the subservicing business? And in particular, I guess I'm curious if you think further growth in subservicing is likely to be in combination with MSR sales like we saw this quarter, or if you're seeing other opportunities beyond that. William Greenberg: Yes, thanks very much for the question. I think growing a subservicing business typically takes a long time. These are pretty sticky relationships that people have with their subservicers. And so we've been doing the hard work of maintaining and developing relationships and explaining to the world why we are an ideal partner for this sort of thing. So I think as other consolidation has occurred in the subservicing market, there are opportunities for us to pick up either some clients that are dissatisfied with their current subservicer or people who might feel that they have too much concentration risk as the number of subservicers in the world has decreased. And so we're out there trying to attract those customers with the value proposition that as investors ourselves, as MSR owners, as someone who can be more nimble with the portfolio and who knows where the money is contained in subservicing and can extract that for the benefit of owners, I think that's a story that's resonating and starting to resonate with other subservicing clients. We sold $30 billion of MSR to a client to seed a relationship like this. That was good. We sold the amount of servicing that we wanted to sell at this time. That's not to say that we wouldn't be open in the future for other sorts of opportunities to seed other subservicing relationships. One way that we can effectuate being able to modify our servicing portfolio, say, if we wanted to move up in coupon from low gross WACC to high gross WACC, one very good way to do that would be to see another subservicing relationship and then recycle that capital into new servicing that's higher WACC, that gives us different opportunities, or might be cheaper in some ways. So it's another tool in our toolbelt in order to be able to manage the portfolio and to grow the business together. Trevor Cranston: And then looking at the return estimates on Slide 14, I was just curious specifically on the securities portfolio. Looks like it went up a couple hundred basis points from last quarter, even though spreads are tighter. I was wondering if you just walk us through the math on why that went up. Nicholas Letica: Trevor, I'd be happy to do that, and that's a very good question. I just want to remind everyone that the spreads that we use in that calculation are actually on our -- it's on our actual portfolio at quarter end, as opposed to a stylized version of a levered spread that you see elsewhere in the market. And as you know, there's a wide variation of mortgage spreads available. And for mortgage-backed securities, it depends where you are on the coupon stack. Obviously, lower coupons have tighter static returns. Higher coupons have higher static returns, generally. So from quarter to quarter as the portfolio shifts around and spreads shift around, even if spreads move in one direction or another those numbers can go in opposite directions. And of course, it does include, as I said, everything we have in our portfolio. Our portfolio is predominantly mortgage-backed security pools, TBAs, things of that nature. But we do have other things in our portfolio like DUS bonds. We have derivatives like IOs or inverse IOs, for example. And that's a sector that we have added to in the last 6 months. Still a small portion of the portfolio, but have added to that. All those things mix in to generate those yields from quarter to quarter. And of course, we also have assumptions that we apply to generate those ranges. As we've said before, we have some financing assumptions up and down, we have some leverage assumptions up and down, and some prepay assumptions up and down. And all of those things go into that mix to generate that return estimate that you see on that page. Operator: We'll take our next question from Harsh Hemnani with Green Street. Unknown Analyst: Maybe on the direct-to-consumer origination platform, originations have been growing, and I think the strategic story there is, as prepayment speeds rise, the origination business could be a good hedge to MSRs. Given the cost saving strategies you've highlighted, does that impede the ability at all of the origination business to ramp up at the right time to be able to provide that hedge? William Greenberg: Harsh, thanks for the question. I have 2 thoughts about your question. The first is that we've always said that the DTC platform isn't meant to hedge the entire interest rate risk of the MSR portfolio, but only to hedge that part of it which is faster than expected speeds. And so we all know that when rates go lower, prepayments are going to go up and originations are going to go up and MSR values are going to go down. And we hedge that with financial instruments. It's only the part where speeds are faster than expected that we are expecting the DTC origination business in order to be able to add materially. Look, certainly I'm well aware that you can't cut cost -- you can't cut your way to growth. And we have to be very smart about how we're going to invest in technology and our ability to scale as mortgage rates go lower. And so that's why it's not a simple exercise of just cutting a certain amount across the board. Technology investments and improvements are going to be key to be able to maintain or retain that ability in order to get those benefits as rates fall. And so we're going to be careful about that and continue to make the investments that we need to make as well. One thing I will say about the DTC platform and the recapture rates that we've seen so far, while it is small, Nick said in his prepared remarks that only 3% of our portfolio is refinanceable from a rate and term perspective with mortgage rates here. But we've already seen recapture rates, not just record amounts in absolute levels, as I said in my prepared remarks, but also the recapture rates are higher than we have been modeling into our cash flows for these level of rates and for the portfolio composition that we have. So we're real excited and optimistic about the benefits that program is already producing. Unknown Analyst: And then maybe as I look at the coupon positioning, it seems like the higher coupons, you mentioned this in the prepared remarks, there seems to be a [ spread trade ] there where your long-specified pools and short TBAs to be able to capitalize on differences in prepay speeds there. But it seems like it's not necessarily the opposite but somewhat flipped in the intermediate coupons at the 5%s and the 5 1/2%s where exposure to TBA is higher. Can I maybe read into that, assuming that where current mortgage rates are, you feel like for the next quarter or so they hang out around [ here ]. Nicholas Letica: Harsh, no, I don't think you should read into that that conclusion. The TBAs, as I mentioned, rates have moved a reasonable amount, and we did rehedge -- with rates going down, we did migrate our exposure down along with our MSR and current coupon exposure. As far as the TBA concentration in those 5%s, 5 1/2%s, it's a mix of the fact of adjusting the portfolio a moment in time and also just how we see where specified pools are relative to TBAs at that juncture. We do employ a lot of TBAs to hedge our current coupon risk because it's easy to transact, easy and fast, and just allows us maximum flexibility with that stuff. But it's not necessarily a long-term commitment or a statement to how we feel about the specific -- the tradeoffs between spec pools and TBAs and those coupons. It's a moment in time, and as we see value in specified pools and depending on how rolls are trading, we'll make the determination as to whether we want that exposure in one or the other. But we do typically leave a fair amount of TBA exposure in those current [ coupon-esque ] type securities, so we have that flexibility. Operator: We'll take our next question from Merrill Ross with Compass Points Research. Merrill Ross: I wanted to talk about the MSR sales first. It seems like that was broken into [ $19 billion ] in the third quarter and there's a balance that will be transacted or has been transacted in the fourth quarter here. Is that right? William Greenberg: That other $10 billion is scheduling the end of this month. Merrill Ross: Okay. And then what were the characteristics of those MSRs? As I look at it, it seems like this is a financial investor, right? That makes sense. And they're looking for a very low coupon. Is that correct? William Greenberg: These were low-coupon sales, yes. Look, our entire portfolio is really centered around the low coupon. This was in that part of the portfolio for sure, yes. Merrill Ross: It just seems that the ones that you added on a flow basis can't be that low because mortgage rates are not that low anymore. So you've got a little bit of a rotation from these sales into slightly higher coupons. But it seems from what you said, you're willing to do that because the DTC is a better hedge against that decline in MSR value that you spoke about. Is that right? William Greenberg: That's correct. In fact, if you look at Slide 13, you can see the gross coupon rate of our portfolio increased from 3.53% to 3.59%. So this is a small change given that the additions that we've added weren't that big. But it also speaks a little bit to the fact that we sold generally stuff that was on average lower than the average -- at lower rate. And so that was the impact was the 6 basis point rise in the gross coupon. But given what I said about the DTC thing, this is something that we are totally comfortable with and desirous of because we think that higher coupon part of the MSR curve can be attractive to us given the recapture rates that we're seeing on the portfolio that we have. Merrill Ross: And so the sales that are going to settle will be pretty similar and have a smaller but directionally correct impact on the gross coupon, right? William Greenberg: Yes. Operator: We'll move to our next question from Eric Hagen with BTIG. Eric Hagen: Maybe following up a little bit there. How do you see MSR valuations responding to a further drop in interest rates? MSR valuations seem to be really strong right now. Do you see the same sources of demand holding up in a refi event? And how would you guys potentially respond to even higher MSR valuations at lower interest rates? William Greenberg: Yes. So, first of all, I would say that with our gross WACC of our portfolio at 3.60%, that is still almost 300 basis points out of the money. So at these level of mortgage rates, even 50 bps lower, 100 bps lower, this is still not going to have large impacts on the refinanceability of that portfolio. Certainly the way the MSR market and the mortgage market works is that when rates decline, prepayment expectations do go up, even albeit slightly given the gross WACC of the portfolio, but the MSR prices will go down. And we all know that. And it's in our models, in our estimates, it's in the way that we hedge the asset. And so, that seems to be something that I'm not worried about at the moment. If you're asking about how I think supply or demand will function in a 50 bps lower, 100 bps lower, I don't see it particularly changing given, what I said, the low gross WACC nature of it, the cash flows are still slow and stable and easy to hedge. Typically, what you see in refinance environments is that originators are able to hold their MSR as they're originating it. And the supply-demand switch really only reverses once rates start to rise after refi waves. So I think we're a long way from that. There continues to be very strong demand from various market participants for the low gross WACC MSR that we hold. Nicholas Letica: Yes, and I'll follow up with what Bill said, Eric, and that's just that if you look at the progression of technology and the ability to reach mortgage holders and be able to recapture, I think that there has been substantial improvements in that, I think, across the industry. So I think there's a greater ability by holders of servicing to recapture and retain the value of MSR compared to other points in the last 20 years of refi events. Not that it's perfect, but it is definitely better. So I completely agree with everything Bill said. I think that the hands that the MSR are in are very solid. Eric Hagen: On that point about market evolution, a question about the MSR repo financing. It feels like the MSR market has matured a lot. The size and the scale for you guys has improved considerably. Can you remind us the maturity on that MSR repo and the revolving credit facility. And do you think there's going to be any opportunities to maybe optimize the financing there next year? William Dellal: Our maturities are roughly in the range from 1 to 2 years. They do roll. When they roll closer, we do renew them. We will look for opportunities to see if we can improve the yield on the MSR, but basically it seems to be static right now. William Greenberg: Yes. To follow up on that, we continue to field incoming calls from people wanting to enter this space and provide financing on the asset. So I agree with your comment there, Eric, that the market has matured a lot since the financing on the asset really opened up in 2018-2019, and there continues to be more and more participants wanting to participate. And spreads are well supported. I wouldn't say that they're really going down a lot here, but they're well supported and stable at the levels that we're at. Operator: [Operator Instructions] We'll move to Bose George with KBW for our next question. Bose George: Just wanted to follow up on the MSR discussion. What's the valuation of the flow MSRs that you are originating versus your existing portfolio? And also can you remind us, can you reflect the value of recapture in the value of the originated MSR? And how does that differ for originated versus bulk MSR that you purchase? William Greenberg: Well, so I'm not sure I understood the second part of the question about whether we include recapture in our valuations. We mark our portfolio to the market price to where we think the thing would transact in the market. And so whether the cash flows include recapture cash flows or not is something that impacts the yield or the prospective return of the thing. It doesn't impact the price or the mark, if that makes sense. Bose George: Yes, it does. But I guess there's not a specific recapture assumption that goes in there. There's just a broader cash flow assumption that has an embedded recapture feature. Is that a way to think about it? William Greenberg: Yes, I guess. But again, I would just reiterate that that doesn't impact the mark that we value the asset at. Because if we had a different assumption, we would have other different assumptions, typically in discount rates, which would get us to the same market price estimates. Bose George: And then just in terms of the valuation, where is the originated MSR valued at now versus the lower coupon stuff? William Greenberg: Yes. If you look at the price multiple that we have on the whole portfolio, it's 5.8x on a weighted average basis for the whole portfolio. And there's a whole curve of price multiples as coupons change. So certainly, as the WACC -- as the note rate increases, that [ mult ] on those servicing levels will go down. So high WACC stuff over long periods of time, you can look at-the-money servicing typically trades on average between 4.5x and 5x [ mult ] depending on lots of things. But as a base rule of thumb, that's something where at-the-money servicing always trades, and this market is not inconsistent with that level. Operator: There are no further questions at this time. I'd like to turn the conference back over to Bill for any additional or closing remarks. William Greenberg: I'd like to thank everyone for joining us today and thank you as always for your interest in Two Harbors. Operator: This concludes today's call. Thank you again for your participation. You may now disconnect and have a great day.
Operator: Greetings, and welcome to the Leggett & Platt Third Quarter 2025 Webcast and Earnings Conference Call. {Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Stephen West, Vice President of Investor Relations. Thank you. You may begin. Steve West: Good morning, everyone, and welcome to Leggett & Platt's Third Quarter 2025 Earnings Call. With me today are Karl Glassman, CEO; Ben Burns, CFO; Tyson Hagale, President of Bedding Products; and Sam Smith, President of Specialized Products and Furniture, Flooring and Textile Products. This call is being recorded, and a replay will be available on the Investor Relations section of our website. Yesterday, we issued our press release and a set of slides containing third quarter financial results. Those documents supplement the information we will discuss this morning, including non-GAAP financial reconciliations. Remarks today concerning future expectations, events, objectives, strategies, trends or results constitute forward-looking statements. Actual results may differ materially due to risks and uncertainties, and the company undertakes no obligation to update or revise these statements. For a summary of these risk factors and additional information, please refer to sections in yesterday's press release and our most recent 10-K and 10-Q filings entitled Risk Factors and Forward-Looking Statements. And with that, I will turn the call over to Karl. Karl Glassman: Thank you, Steve, and good morning, everyone. I'm pleased with another quarter of solid results, reflecting nearly 2 years of disciplined cost structure improvements despite an ongoing soft demand in residential end markets. Importantly, we are reaffirming the midpoint of our full year sales and adjusted EPS guidance, which Ben will discuss in more detail later. Our third quarter was also marked by significant progress on our key strategic initiatives. Our team has done a terrific job driving results through the execution of our restructuring plan, disciplined cost management and improving operational execution. These efforts have culminated in improved cash flow, which allowed us to significantly strengthen our balance sheet. On August 29, we completed the divestiture of our Aerospace business, aligned with our goal of optimizing our portfolio. We used proceeds from the sale, along with a portion of our operating cash flow to pay down all of our remaining commercial paper and substantially lower our net debt to trailing 12-month adjusted EBITDA ratio. Our restructuring plan is nearing completion and is meeting or exceeding our initial expectations. We made considerable progress on the second phase of the flooring consolidation during the quarter and expect the consolidation to be completed by the end of the year. In Hydraulic Cylinders, we completed the rightsizing of our U.K. facility. Beyond our formal restructuring plan, in early September, we announced the consolidation of our Kentucky adjustable bed manufacturing operation, which will be consolidated into our Mexico operation by the end of this year. This decision was driven by lower volume and tariffs on imported components, which resulted in a cost disadvantage for our domestic production in a category that primarily competes with imported products. Throughout the quarter, we continued to navigate a very dynamic environment. We still believe tariffs will be a net positive for us, but remain concerned that wide-ranging tariffs could drive inflation, hurt consumer confidence and pressure consumer demand. We are actively mitigating some of the negative impacts experienced in a few of our businesses, such as supply chain disruptions that can have an indirect impact on us and our customer demand disruptions. Our teams are actively engaged with customers and suppliers across our global footprint to reduce tariff exposure and minimize impacts. In general, import issues are an ongoing risk, especially for our Bedding Products segment, but we are encouraged that some recent enforcement actions support fair competition for domestic manufacturers and importers alike. U.S. Customs and Border Patrol recently dismantled a Chinese mattress transshipment scheme estimated to have evaded more than $400 million in duties. The Consumer Product Safety Commission has also recently issued recalls and product safety warnings for certain imported mattresses that fail mandated U.S. flammability standards. Now more than ever, misclassification of shipments and understated product values are additional problems that domestic manufacturers face when competing against imports. While we continue to believe that imports have a role in the U.S. bedding market, the domestic industry must be able to compete on a level playing field. Amid these initiatives and macroeconomic challenges, our teams remain focused on providing high-quality innovative products to our customers, keeping our employees safe and continuously improving at everything we do. I'll now turn the call over to Ben. Benjamin Burns: Thank you, Karl, and good morning, everyone. Third quarter sales were just over $1 billion, down 6% year-over-year due primarily to continued soft demand in residential end markets as well as sales attrition from both the divestiture of our aerospace business and our restructuring efforts. Looking at sales by segment, Bedding product sales decreased 10% year-over-year but improved 3% sequentially versus the second quarter and sales accelerated through the quarter. Specialized product sales declined 7%, while Furniture, Flooring and Textile product sales were flat year-over-year. In Bedding Products, as anticipated, sales weakness at a certain customer and retailer merchandising changes drove volume declines in adjustable bed and specialty foam. U.S. spring unit volume was in line with both mattress consumption and domestic mattress production volumes, both of which we estimate declined low single digits. U.S. mattress industry production improved sequentially versus the second quarter, marking the second consecutive quarter of improved domestic production volume. While we are encouraged to see sequential improvement, third quarter domestic volume remained negative year-over-year. It is worth noting that the improvements we have seen are not consistent across the industry. Certain channels and market participants are performing better than others. We have also started to see stabilization in demand patterns between holiday promotional periods. In the fourth quarter, we expect U.S. domestic mattress production to slow sequentially due to normal seasonality and to remain negative on a year-over-year basis. Total market consumption for the full year is now expected to decline low single digits with domestic production down mid- to high single digits. Within our Specialized Products segment, we experienced modest sales declines in automotive and hydraulic cylinders with the divestiture of Aerospace making up the largest sales drag during the quarter. Looking ahead, multiple global automotive supply chain risks such as availability of aluminium, certain semiconductors and access to rare earth minerals have materialized as we moved into the fourth quarter and has begun impacting both the industry and our business. However, we have experienced no material impact to date. Finally, within Furniture, Flooring and Textiles, continued sales growth in textiles and Work Furniture was offset by declines in home furniture and flooring. We anticipate continued year-over-year strength in the geo-component side of our textiles business, while current trends and seasonality will likely continue in the other businesses within the segment through the remainder of the year. As mentioned last quarter, aggressive competitive discounting, particularly in Flooring and Textiles has led to pricing adjustments that will negatively impact us in the fourth quarter. Third quarter EBIT was $171 million and adjusted EBIT was $73 million, a $3 million decrease year-over-year, primarily from lower volume, partially offset by metal margin expansion and restructuring benefit. Third quarter earnings per share were $0.91. On an adjusted basis, third quarter EPS was $0.29, a $0.03 decrease year-over-year. Third quarter operating cash flow was $126 million, an increase of $30 million versus the third quarter of 2024. This increase was primarily driven by working capital benefits. Moving to the balance sheet. We reduced debt by $296 million in the third quarter to $1.5 billion, bringing our total debt reduction for the year-to-date to $367 million. As Carl noted, we reduced our commercial paper balance to 0, significantly strengthening our balance sheet and lowering our net debt to trailing 12-month adjusted EBITDA ratio to 2.6x. Excluding Aerospace on a pro forma basis, the ratio is about 0.3x higher. At September 30, total liquidity was $974 million, comprised of $461 million of cash on hand and $513 million in capacity remaining under our revolving credit facility. We ended the quarter with adjusted working capital as a percentage of annualized sales down over 200 basis points year-over-year. Moving to our restructuring update. We have nearly completed the execution of the plan, which has delivered significantly better EBIT contribution with lower associated costs than originally announced. We remain on track to realize EBIT benefit of $60 million to $70 million on an annualized basis. This positive EBIT contribution is despite approximately $60 million in sales attrition. And we remain on track to generate real estate proceeds of $70 million to $80 million. Since plan inception, we have realized $43 million of proceeds and now expect up to an additional $17 million in the fourth quarter of 2025 with the balance in 2026. Despite the current dynamic operating environment, I'm pleased to say we are reaffirming the midpoint of our sales and adjusted EPS guidance while narrowing the previous guidance range. Sales are now expected to be $4.0 billion to $4.1 billion or down 6% to 9% versus 2024. Earnings per share of $1.52 to $1.72 and adjusted earnings per share of $1 to $1.10. Adjusted EBIT margin is expected to be between 6.4% and 6.6% and cash from operations is expected to be approximately $300 million. Our CapEx will be lower than usual this year at $60 million to $70 million, which is primarily due to customer-driven delays of some growth initiatives and due to our focus on executing and wrapping up our restructuring plan. Annual CapEx should return to more normalized levels going forward. In the near term, we plan to continue to use most of our excess cash flow to reduce net debt while also considering other uses such as small strategic acquisitions and share repurchases. Longer term, our priorities for use of cash remain consistent, investing in organic growth, funding strategic acquisitions and returning cash to shareholders through dividends and share repurchases. With that, I'll turn the call over to Karl for his closing remarks. Karl Glassman: Thank you, Ben. In a relatively short time, we have made significant progress on our strategic priorities. We have strengthened our balance sheet by adjusting our capital allocation to prioritize debt reduction. Through our restructuring plan, we have created a leaner manufacturing footprint that can meet customer demand when it rebounds and support strong incremental contribution margins. We have simplified our portfolio through recent divestitures to improve focus on core operations. All of this has been accomplished with a consumer who has seemingly been in a recession for more than 3 years, compounded by the complexities of a dynamic tariff landscape. Leggett & Platt has been at the forefront of innovation for a very long time. Today, we have a robust innovation pipeline and relatively new products that are just gaining traction. We have also closely partnered with many of our customers to develop innovative products designed to meet their specific needs. These efforts, combined with meaningful cost reductions and operational improvements position us well to aggressively pursue longer-term profitable growth opportunities that will create value for our shareholders. With that, I would like to thank all of our employees for their continued hard work and dedication to position Leggett & Platt for a very bright future. Operator, you may now open the line for Q&A. Operator: [Operator Instructions] Our first questions come from the line of Susan Maklari with Goldman Sachs. Susan Maklari: My first question is, I want to talk a bit more about the benefit that you're seeing from the cost actions and the restructuring that you've undertaken in the last 2 years or so. It seems like you're really getting a nice lift from that in the margins despite the volume and the demand environment that we're in. Can you just help us kind of parse out how those are coming through, what the upside is as we think about the forward quarters? And anything else that's notable as it relates to that? Benjamin Burns: Yes, Susan, this is Ben. Thanks for the question. As we said in the prepared remarks, our teams have done a great job executing the restructuring plan, and we're really nearly complete at this point. And as we look at the metrics that we laid out at the beginning in our original expectations, -- we're meeting or exceeding them in really all categories, including EBIT benefits, costs, sales attrition and real estate sales. So really good execution. With all of that, we've had no customer disruptions. And it's important to remember, this touches not only our Bedding segment, but also we've had significant actions in home furniture and flooring, hydraulic cylinders and also an initiative to reduce our corporate G&A expenses. So as we look forward, we're very confident in our $60 million to $70 million of annualized EBIT benefit. I think in 2025, we'll end up around $60 million of that benefit already realized with another up to $10 million coming next year. The sales attrition that we laid out at the beginning, we thought was about $100 million. Now we've got that down to $60 million. So that's good news. And then from a real estate perspective, we still expect $70 million to $80 million of cash proceeds. We've had $43 million to date, and we expect up to $17 million possibly later this year with the remainder coming in 2026. So really good execution. And then the other thing I would say is these are all cost outs. As we think about going forward and volume recovery, contribution margins should be strong for us. We think 25% to 35% as we go forward with that incremental volume. So we can't say enough about how appreciative we are of all of our employees' efforts in this area. Susan Maklari: Yes. Okay. That's great color, Ben. And then I want to turn to Bedding. Can you talk about the demand environment and how that came through during the quarter? I think you said that you did see things improve each month in the third quarter. But it seems like that's coming despite the headwinds that we are seeing in the housing market and the volatility in consumer confidence. How do we sort of weigh those different factors out there? And can you just talk a bit about what you think is actually going on out on the ground? Karl Glassman: Susan, thanks for the question. Before we go down that path, though, I'm going to turn it over to Tyson, but I want to stop for just a second and congratulate Tyson and his team for the tremendous job that they've done in the Bedding segment. The restructuring has been a challenge, the demand headwinds. The team has come together. We have an innovation pipeline that is more robust than it's ever been in our history. And when you think of -- they still have issues, Tyson will be very candid on these issues regarding specialty foam and adjustable bed. But when you look at the financials, you can see to your earlier question, the restructuring benefits, you can see cost management, operational efficiency improvements, metal margin expansion through the trade sale of trade rods. And like I said, the early in the year, we talked about the benefit of customer product launches. We're seeing that. It's ramping up. But most notable is what the teams have coming into the near future. 2026 is going to be really robust from innovation, evidence of our team's capabilities. So with all of that, Tyson, why don't you go ahead? J. Hagale: Sure. And thanks, Karl. Susan, I'll start just with some comments about the market. And I think we would characterize things right now as more stable than seeing a lot of recovery, although in both the second and third quarter, Ben mentioned this, but we saw sequential improvement in both quarters, which was coming off a pretty tough first quarter, but still that's a trend we haven't seen in quite some time. But really, it's getting us back to more of a stable place, but still in the third quarter, especially looking at the domestic market, down low single digits when we talk about units. A few things, though, that I think are worth mentioning. Kind of within that stability, first of all, we've talked about this in some past calls that we see some pretty high peaks when we get to the promotional holidays and then some pretty tough valleys when we come off of those. But we're seeing more stability month-to-month. So we see some improvement around the promotions, but we don't see quite the big drop-offs, which I think is notable and something we'll continue to watch. The other thing is that although things are reaching more of a stable level, we don't see consistent performance across all retail channels and brands. It is pretty choppy. And from our view, that's coming from a variety of factors with industry consolidation that's been going on, new program launches, advertising changes. All of those things are resulting in a lot of movement, which makes it a little more difficult to track exactly what's going on, but I think that's another thing we'll watch going forward. But big picture, I think we still have to continue to watch it. You mentioned it, Susan, but the big macro factors that tend to drive bedding and furniture are still a pretty big challenge. Karl talked about this, too, the consumer is dealing with a tariff environment, but still pretty tough housing, wages dealing with inflation and just general consumer confidence. Those are all big picture things that for us to plan for an actual more recovery type environment, we have to see those things start to flip to be more positive. Susan Maklari: Yes. Okay. And then maybe turning to the cash and the balance sheet. It's really nice to see how the leverage has come together. You mentioned, Ben, that the CapEx is going to be lower this year. How do we think about your plans for spend in 2026, some of the growth opportunities that maybe are coming in there and then maybe the potential for some resumption of shareholder returns? Benjamin Burns: Yes, sure. Thanks, Susan. Yes, our CapEx is a little bit lower based on the factors I mentioned in the prepared remarks. As we go forward, with a smaller, leaner footprint, we do think a more normalized level of CapEx is something like what we started to guide the year on this year, which was about $100 million. So obviously, there'll be puts and takes in any given year and timing factors in, but that $100 million is probably a decent way to think about it. And then as we think about growth initiatives going forward, as -- as Karl mentioned in his remarks as well, we do have some opportunities that we're pursuing. And so we'll continue to fund those. We've been funding whatever growth opportunities come along. And we'll provide more specific outlook on 2026 in the next call. Susan Maklari: Yes. Okay. And then, Ben, I'm going to sneak one more in for you. Can you just walk through how you're thinking about the segment margins for this year? Benjamin Burns: Sure thing. On the bedding side, we now believe segment margins will be up 200 basis points. I think the last call, we were saying 150 basis points. So we're seeing a little bit more improvement there. On the Specialized segment, we are saying margins should be up about 50 basis points year-over-year. And then on the Furniture Flooring and Textile side, we're now predicting margins to be down 150 basis points. which is compared to what we said previously of 100 basis points down. Operator: Our next questions come from the line of Peter Keith with Piper Sandler. Alexia Morgan: This is Alexia Morgan on for Peter. My first question is on the Furniture segment. It looks like there was some sequential improvement within Home Furniture, down -- volumes were down 5% in Q3 versus down 12% in Q2. I was wondering how you interpret that sequential improvement and if you think it indicates any underlying improvement within the broader category. R. Smith: Go ahead, Karl. Karl Glassman: No, I was going to say go ahead, Sam. R. Smith: Okay. This is Sam. So if you remember back to last quarter, we talked about how those April 2 tariffs really upended our home furniture business and caused a pretty significant drop in volume year-over-year. So what we saw this quarter is more of a normalization, a return to kind of business at a more consistent volume level. And I'll just kind of comment a little bit on the volume versus where I think the market is. And I've read some really interesting Q3 retail surveys and some credit card data that I'm going to refer to. One survey suggested that year-over-year retail sales could be up 6% to 7% with the surveyed retailers. And it also showed that tariffs caused those same retailers to raise their prices and that weighted average price increase was up 9% to 10% -- so if you take the 6% to 7% sales increase, compare that back to the 9% to 10% price increase, and I think you could say that unit volume for that survey is down probably around 3%. And then next to the credit card data that I saw, it showed that retail furnishing sales were up about 2%. Again, I think you got to apply some level of price increase to mitigate those tariffs. And when you apply the price increase to mitigate the tariffs, I think you can also assume unit volumes down low to mid- digits, and that's pretty much in line with our performance year-over-year. And I think from a positive news standpoint, we started up our new factory in Vietnam at the end of Q3, and we started shipping product from it early this month. And as we ramp up that plant, our products are going to be in a favorable tariff position, and that's really good for our customers and it's good for us. Alexia Morgan: Okay. And then staying within Furniture, could you elaborate on any shift you've noticed in end customer behavior across different price points? Specifically, are you still observing a divergence in performance between the lower price points versus the middle and the higher price points? R. Smith: Yes, we are. We still continue to see the higher price points be more stable on a week-to-week, month-to-month basis. And there continues to be a lot of pressure at those lower price points. It's very consistent with what we were seeing last quarter with the exception that tariff announcement in April seems to have passed us by, and we're past that now. Alexia Morgan: Great. And then one more. Moving to the Bedding segment, it looks like steel rod volume dropped off significantly, inflecting negative to down 20% in Q3. Can you talk about the drivers for that inflection? J. Hagale: Sure. Happy to. And it's really -- it's pretty simple. Actually, trade rod volumes were pretty stable. The biggest change, and we've talked about this in the past, we also sell some semi-finished products called billets from time to time. And last year, we had a relatively strong amount of billet sales in the third quarter. And this year, because of both internal and external demand, we haven't had to resort to selling billets. So really, the full drop there is just an elimination of the billet sales. And overall, actually, our trade rod mix was pretty strong and helpful for us because it trended towards high carbon rather than low carbon. So although the headline there looks negative, it actually was a pretty strong result for us with the rod mill. Karl Glassman: Which is a contributor to the profitability of the segment because the non-value-added of selling a billet versus the value added of selling a rod. And someone may question, why did you sell billets last year? And the answer was to keep the rod mill going, keep our employees employed. We don't have that problem right now. Volume is pretty darn good. Operator: Our next questions come from the line of Bobby Griffin with Raymond James. Robert Griffin: This is Alessandra Jimenez on for Bobby. First, I just wanted to touch on kind of the growth opportunity for here -- from here. Now that the majority of restructuring is near complete, where do you see the most opportunities for organic growth, assuming the macro environment is supportive? Karl Glassman: Well, longer term, I'm going to surprise you a little bit. I appreciate the question. Longer term, I see our largest growth opportunity probably in finished bedding. It's a long tail to sell that product through, but we're gaining momentum. We're replacing some lost volume. So again, I'm not calling this being a fourth quarter or first half of next year even. But longer term, that private label work that we're doing on finished bedding, I think will reap significant benefit. J. Hagale: And this is Tyson. I agree with Karl. The private label finished mattress opportunity, especially with where we've seen the biggest volume declines in our bedding business, but also as we see consumers get more confident in returning to bedding and furniture products, Karl referenced this in his opening comments, but some of the investments that we're seeing in innovation and giving consumers a reason to come back and do some shopping, we feel pretty good about those right now. And this is purely anecdotal. There's not a lot of data to support it, but just seeing the workload that our teams have right now in bedding, they are really busy working with our customers right now. And at least from a feel standpoint or gut, it seems like this is as busy as we've been working on new product development since at least the start of the pandemic. I mean, since then, it's been a lot of VA/VE or just trying to spec products to replace things in the supply chain, but we're seeing more activity around getting new products into the market, which hopefully is a signal of our customers getting ready to put more products on retail floors. R. Smith: Alessandra, I'll add on to that from a home furniture perspective. I was at the High Point Furniture market this past weekend. We had a big team there. We got a showroom, and we have a tremendous amount of customers to exhibit there. So as we walk through our customers' showrooms, we -- Home Furniture had more new product in our customer showrooms than we've had in quite a few years. Our teams have been really, really working hard and working closely with our customers in driving product innovation that's going to matter to consumers. And this -- these slow times have been a great time to do it. And I think we're in a great position for profitable growth when our residential markets recover. And from a Work Furniture standpoint, we continue to have a lot of new near-shoring opportunities that our team are working through and winning some programs that I think will feel the impact for in 2026 and as we move into 2027 as well. Robert Griffin: Okay. Awesome. That is very encouraging. And then I wanted to switch to kind of a follow-up on capital allocation. With the rest of the long-term debt termed out pretty well, could you remind us on like the long-term leverage targets? And then any further details on capital allocation priorities? And maybe a follow-up on like what areas do you see an opportunity for potential bolt-on acquisitions? Benjamin Burns: Sure. This is Ben. I'll be happy to answer that. So yes, our long-term net debt leverage target is 2x. So our capital allocation strategy will continue to be to reduce that net debt as we go forward. But we're also considering other uses of cash, including small strategic acquisitions. So to your question there, I think the most likely area would be in our textiles business. We've been very successful at having fairly modest purchase price acquisitions and bringing those in and driving immediate synergies. And then we'll also be considering share repurchases as we look forward. No specific timetable on that at this point, but that's on the top of our mind as well. Operator: [Operator Instructions] Our next questions come from the line of Keith Hughes with Truist Securities. Keith Hughes: Question on the -- just back to bedding. U.S. Spring was only down a point or 2 in the quarter. That's starting to feel like what you're saying in the industry is, do you think it will start to track more what the industry does over the next near term? J. Hagale: Keith, this is Tyson. Yes, that's something we've talked a lot about. It's been tough to track with all the moving parts. But we've talked about, especially some of our higher-value products have tracked really closely with the market. And overall, with more stability in open coil when you kind of get the total mattress cores, it sort of feels like we're trending kind of in the same direction with the domestic mattress market. And even within kind of the big picture view of our unit volumes, there are some pretty encouraging things that are going on. We've talked about our content gains, which goes back to the long-term decline of open coil, but then the addition of our Comfort Core products and some other things we've been introducing in the market. And starting to see that come through, especially in the third quarter, and that's where you see some of our profit improvement as well. But we're really starting to see some momentum from that. In the third quarter, we saw a significant boost in our Quantum share of Comfort Core, but also our semi-finished business grew more than 20% versus last year. So even when you look at the volume comparisons unit per unit, we think we're tracking pretty well, but also picking up some content. Karl Glassman: Keith, if you don't mind, Tyson, while we're on that subject, much has been written about lost market share. Talk about that, if you don't mind. J. Hagale: Well, and I think a lot of that comes from the moving pieces with the imported finished mattresses and how much are actually being consumed within the course of the year. It's been a tough thing to track, but we're seeing more stability with the imported finished mattresses, especially after some of those things were loaded up in the first part of the year ahead of tariffs. So it's a little easier to get a view of that now, Karl. But on top of that, we've seen some different moves with some of the brands and industry consolidation, but that's where we feel at least from the U.S. Spring point of view. Keith Hughes: And if you look at adjustable and specialty, I know there's a customer issue. When do you lap that, when will that start to look more like a chance to do better than the industry or like the industry? J. Hagale: Yes, Keith. So it is a consistent commentary from what we shared last quarter. I'll talk just a little bit more about it. It's largely 2 customers, and they're the same ones for specialty foam and adjustable bed. The first one is Mattress Firm. And once the consolidation has been complete, with specialty foam, there was a private label mattress program that was taken internal. And then second to that, with our adjustable bed business, we still sell some product there, but we've seen a change in the merchandising plan and where some of the sourcing of that product is coming. So those have been both impactful to both specialty foam and adjustable bed. And it will really take fully through next year before we'll fully get through that part of it. The second big challenge again for both businesses is not a market share loss, but it's more just of a headwind of a large customer of ours that impacts both foam and adjustable bed. Now it's hard to say exactly when we anniversary those because it's more of just a specific customer challenge, but not lost market share. Keith Hughes: Okay. And I think it was Karl, your commentary on the sector, you were seeing some retail do better than others. Could you talk about that a little bit more of what type of retail is seeing some at least sequential improvement? I was still down year-over-year? And what areas are still struggling? Karl Glassman: Yes, that was actually Tyson. Go ahead, Tyson. J. Hagale: Sure, Keith. Well, it's probably what you would suspect. On the online channel, see quite a bit of strength in some of the lower-end online e-commerce. There's a lot of volume moving through there. In brick-and-mortar, see quite a bit of activity happening in big box and through Mattress Firm. But it's not as we've kind of talked about here, it doesn't seem to be a rising tide lifting everybody at the same level. It is inconsistent, but see stronger unit volumes at least through those channels. Keith Hughes: Okay. And one other question on textiles. It was up in the quarter, up several quarters now. I think you talked about potential price pressure there along with flooring. I think I know what's happened in flooring, but if you could talk about textiles, where you see that going? R. Smith: Yes. Sure, Keith. This is Sam. We've got a little bit of bifurcation in our textile business. The traditional side that services furniture, bedding, fabrics, that's where we're seeing a tremendous amount of price pressure, just as you would see in flooring as these markets continue to be down from demand standpoint. So that's kind of where we see that. Where the growth is really coming from is from our GEO side. The U.S. civil construction is up really nicely year-over-year and what we call our engineered materials markets, which are automotive, filtration, some building -- some specific building products outside of geotextiles. Those volumes are looking really good for us and helping drive some of that growth. Operator: Our next questions come from the line of Susan Maklari with Goldman Sachs. Susan Maklari: I just have a couple of follow-ups. The first is just building on Keith's question on textiles. You have seen a lot of really nice growth in there. And I think, Ben, you mentioned that as a potential for some bolt-on M&A. Can you talk a bit more about how you're thinking about the future trajectory of that business? What kind of deals you could possibly be interested in and how we should think about what that will mean for growth? R. Smith: Sure. And do you want to say? Or do you want me to jump in? Benjamin Burns: Well, I'll start off, Sam, if you want to pile on, that would be great. But Susan, just to answer your question, I think what we've seen in that business for over 20 years is really our ability to acquire small businesses, bolt them on and really drive immediate synergies through our purchasing, which we do really well with. So I think that is something that has been very successful for us. We look for applications of the raw materials and how we can convert them and really service customers on a just-in-time basis. And a lot of it also can be a geographic strategy to serve areas, new geographies with similar products. But Sam, what would you add on to that? R. Smith: I think you covered it perfectly, Ben. Benjamin Burns: Yes. Susan Maklari: Okay. And then going back to Bedding, you've talked a lot about innovation and the product pipeline that you have, and it sounds like that's gaining some really nice momentum. As we look out, how do we think about the benefit that you can see from a price mix perspective? And what that could mean for the business even if we remain in a tougher macro where we have those continued headwinds on overall broader demand? J. Hagale: Yes, Susan, I kind of referenced this a little bit already. But even with the semi-finished and content gains we've seen in U.S. Spring, you're kind of seeing some of it now. I mean versus third quarter last year, roughly half of our EBIT improvement comes from just fixed cost reductions and restructuring. The other half is mostly from margin enhancement. Some of that from trade rod business. But the other part is just from exactly what you said, of already seeing the benefits of improved content through our spring business, and that comes from products we talked about on previous calls. But on top of that, when I talked about working with our customers and our customers starting to lean in more towards differentiating their product line, a lot of that comes through improving the content, the comfort or even just the inclusion of specialty foam along with the innerspring units. So all of those end up being multiples in terms of the selling price for us versus kind of more the historic innerspring business that you think about. And that's where even as we've seen some volumes be even down slightly or where we've been in the last couple of years, that's where we see the opportunity for profit improvement and feel more of that is possible going into the future. Operator: There are no further questions at this time. I would now like to turn the floor back over to Stephen West for closing comments. Steve West: Thanks, everyone, for joining us this morning, and we look forward to hosting you next quarter as well. And we are scheduled to issue our fourth quarter earnings release on February 11 after the market closes, and our conference call will be on February 12 at 8:30 a.m. Eastern Standard Time. In the meantime, if you have any questions, just reach out to me any time. Thanks. Operator: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and enjoy the rest of your day.
Laura Moon: Thank you, operator, and good morning, everyone. We appreciate you joining us today for Piedmont's third quarter 2025 earnings conference call. Last night, we filed our 10-Q and an 8-K that includes our earnings release and unaudited supplemental information for the third quarter of 2025 that is available for your review on our website at piedmontreit.com under the Investor Relations section. During this call, you will hear from senior officers at Piedmont. Their prepared remarks, followed by answers to your questions will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements address matters which are subject to risks and uncertainties, and therefore, actual results may differ from those we anticipate and discuss today. The risks and uncertainties of these forward-looking statements are discussed in our supplemental information as well as our SEC filings. We encourage everyone to review the more detailed discussion related to risks associated with forward-looking statements in our SEC filings. Examples of forward-looking statements include those related to Piedmont's future revenue and operating income, dividends and financial guidance, future financing, leasing and investment activity and the impacts of this activity on the company's financial and operational results. You should not place any undue reliance on any of these forward-looking statements, and these statements are based upon the information and estimates we have reviewed as of the date the statements are made. Also on today's call, representatives of the company may refer to certain non-GAAP financial measures such as FFO, core FFO, AFFO and same-store NOI. The definitions and reconciliations of these non-GAAP measures are contained in the earnings release and supplemental financial information, which were filed last night. At this time, our President and Chief Executive Officer, Brent Smith, will provide some opening comments regarding third quarter 2025 operating results. Brent? Christopher Smith: Thanks, Laura. Good morning, and thank you for joining us today as we review our third quarter 2025 results. In addition to Laura, on the line with me this morning are George Wells, our Chief Operating Officer; Chris Kollme, our EVP of Investments; and Sherry Rexroad, our Chief Financial Officer. We also have the usual full complement of our management team available to answer your questions. After nearly 4 years of steady losses, U.S. office demand turned around in the third quarter. According to CoStar's data, about 12 million more square feet of office space was occupied than returned to landlords in the third quarter, the first positive figure since late 2021. More impressive was that it was also the largest total since the second quarter of 2019. The broader leasing data continues to validate what Piedmont has been experiencing on the ground. Pent-up demand is resulting in record levels of leasing across the Piedmont portfolio. In fact, 5 of our operating markets experienced positive absorption with Washington, D.C. and Boston being the exceptions. In addition, new tenant leasing velocity has materially strengthened in 2025. The third quarter's total square footage leased on new agreements in the United States, excluding renewals, is estimated to have reached about 105 million square feet and is now within 10% of the 2015 to 2019 national quarterly average of about 115 million square feet. No doubt, after a challenging 4 years, the office sector is turning the corner. One explanation for this sector shift is a surge in large tenant leasing. The limited availability of large blocks of premium space typically sought by major occupiers and corporate tenants is accelerating the decision-making process. Despite generally slow hiring and an uncertain economic outlook, the upward trend in leasing volume signals that tenants still have a strong appetite for office space. With the supply pipeline contracting and prime availability is becoming scarce, more demand continues to chase a rapidly reducing supply landscape. According to JLL, the cycle of footprint reductions is tapering off as today's users of over 25,000 square feet are cutting just 2.2% of their footprint at renewal. Inventory for high-quality space, either new or renovated is increasingly scarce and office construction has been reduced by an additional 20% from the second quarter with new supply not a factor in most of our markets. These market dynamics have limited high-quality supply and growing demand are allowing Piedmont to materially increase rental rates across its portfolio. And with asking rents still ranging from 25% to 40% below the rates required for new construction, we believe existing high-quality office has a long, long runway for rental rate growth. Within the Piedmont portfolio, which comprises newly renovated, highly amenitized buildings paired with our hospitality-driven service model, we are experiencing multiple tenants competing for full floor spaces, providing the backdrop for Piedmont to increase rental rates at our projects by as much as 20% during the year. By way of example, at our Galleria on the Park project in Atlanta, we executed our first $40 per square foot gross rental rate at the end of 2024. In this quarter, we completed numerous transactions in the mid-40s and have increased rents now to $48 per square foot. Across our portfolio, our hospitality-driven environments have allowed us to increase rental rates to such an extent that we now estimate that more than half the portfolio's in-place rents are at least 20% below market. Our strategy to strengthen the Piedmont brand within the tenant community as the landlord of choice is driving more than our fair share of leasing demand, and it's been reflected in our transaction volumes. Having now leased over 10% of the portfolio over the last 2 quarters, more than 1/3 of the portfolio in the last 2 years and an astounding 80% of the portfolio since the beginning of 2020, equating to almost 12 million square feet since the pandemic. Delving into the numbers, we are thrilled with our third quarter results, exceeding consensus FFO by 3% and achieving record levels of leasing. Most exciting is that all the leasing the team has accomplished this year is positioning Piedmont for sustainable earnings growth. Our backlog of uncommenced leases have reached almost $40 million on an annualized basis and substantially all of those leases will commence by the end of 2026. Piedmont executed approximately 724,000 square feet of total leasing during the quarter, including over 0.5 million square feet of new tenant leases. This new tenant leasing represents the largest amount of new tenant leasing we've completed in a single quarter in over a decade and brings our total year-to-date leasing to approximately 1.8 million square feet. Importantly, over 900,000 square feet of our 2025 new leasing relates to currently vacant space, and it's likely this number will reach over 1 million square feet by the end of the year. That level of absorption equates to $0.10 to $0.15 per share of incremental annualized earnings, an indication of the growth we believe our portfolio is poised to experience. Of note, the 3 largest leases completed during the third quarter related to our out-of-service Minneapolis portfolio, where we're experiencing incredible demand, as George will talk more about in a moment. Our leasing success during the third quarter pushed our in-service lease percentage up another 50 basis points quarter-over-quarter now to 89.2%, bolstering our confidence in achieving our year-end goal of 89% to 90% leased. While not reflected in our lease percentage, our out-of-service portfolio, again, comprised of 2 projects in Minneapolis and 1 in Orlando has experienced astounding market receptivity as differentiated amenitized workplaces continue to garner the majority of leasing in the market. At the end of third quarter, Piedmont's out-of-service portfolio stood at over 50% leased and is approaching 70% leased, including those that are in legal stage today. We couldn't be more excited that the leasing pipeline and continued tenant demand for our buildings positions both the in-service and out-of-service portfolios to achieve 90% leased next year. Furthermore, we anticipate the out-of-service assets will reach stabilization by the end of 2026. In addition to the overall volume, third quarter leasing, as expected, resulted in favorable economics with rental rates for space vacant less than a year, reflecting almost 9% and just over 20% roll-ups on a cash and accrual basis, respectively. In fact, as a result of the repositioning of the portfolio, in the past 2 years, Piedmont leased over 5 million square feet with rental rate roll-ups of approximately 9% and 17% on a cash and accrual basis, respectively. Finally, cash basis same-store NOI also turned positive this quarter as some previously executed leases began to reach the end of their abatement period. With over $35 million of annualized revenue currently in abatement and due to start paying cash in 2026, we expect same-store cash metrics to continue to improve. As George will touch on, leasing momentum remains strong, including over 150,000 square feet of leases signed during the month of October and a robust pipeline with approximately 400,000 square feet currently in the legal stage. I cannot emphasize enough that the broader macro factors, along with our successful portfolio repositioning and elevated service model has and should continue to drive Piedmont's ability to grow FFO organically. We're still on track to meet or exceed our 2025 financial and operational goals with confidence in our ability to deliver mid-single-digit FFO growth or better in 2026 and 2027. Before I hand the call over to George, I want to mention that we have once again achieved a 5-star rating and Green Star recognition from GRESB, placing us in the top decile of all participating listed U.S. companies for this prestigious recognition. I hope that you'll take a moment to review our recently published corporate responsibility report, highlighting the team's hard work and many accomplishments that went to achieving this record. The report is available on our website under the Corporate Responsibility section. With that, I will now hand the call over to George, who will go into more details on the leasing pipeline and third quarter operational results. George Wells: Thanks, Brent. Strong demand for Piedmont's well-located hospitality-inspired workplace environments generated exceptional operating results for the third quarter. A record 75 transactions were completed for over 700,000 square feet, well above our historical average for the second quarter in a row. New deal activity surged, accounting for 75% of total volume and topping last quarter's record amount. Like last quarter, large users are driving new deal activity to record-breaking levels with 9 full floor or larger leases executed this quarter with another 6 large deals in late stage. Around 15% of new leases signed this quarter will begin recognizing GAAP revenue this year with the remaining 85% throughout 2026. Our weighted average lease term for new deal activity stayed consistent at approximately 10 years. As we've experienced now for 5 straight quarters, expansions exceeded contractions largely to accommodate customers' organic growth. Atlanta and Dallas were the driving forces behind strong economics. As Brent mentioned, we posted a 9% and 20% roll-up for the quarter on a cash and accrual basis, respectively. Our overall weighted average starting cash rent of nearly $42 per square foot was essentially unchanged from the previous quarter, though we do anticipate more rental growth as our portfolio crosses into the low 90s lease percentage. Leasing capital spend was $6.76 per square foot, up slightly when compared to our trailing 12 months as this quarter's leasing volume was dominated by new tenant activity where leasing concessions are generally higher than renewals. Net effective rents came in at $21.26 per square foot, reflecting a 2.5% increase from the previous quarter. Sublease availability held steady at 5% with a modest amount expiring over the next 4 quarters. Atlanta was our most productive market during the third quarter, closing on 27 deals for 250,000 square feet or 1/3 of the company's overall volume with new lease transactions accounting for 75% of that amount. Most notable, our local team mitigated a large fourth quarter 2025 expiration at Medici with a 35,000 square foot headquarter requirement and achieved the highest cash roll-up for the quarter at 30%. Medici is uniquely located within a luxury mixed-use development catering to wealth managers and ultra-high net worth family offices. We anticipate additional cash roll-ups there, 20% or more as another 40,000 square feet is expiring soon, and our pipeline remains strong. At 999 Peachtree in Midtown, we continue to experience encouraging activity to backfill Eversheds's remaining 150,000 square foot expiration in May of 2026. We currently have 4 proposals outstanding, which total 125,000 square feet at significantly higher rental rates. 999 Peachtree has set a new standard for repositioning assets in Midtown Atlanta, and we remain confident in our ability to backfill this known vacancy at very favorable economic terms. Minneapolis once again was our second most active market, capturing 8 deals totaling almost 200,000 square feet, the vast majority of which was new deal flow into our redevelopment portfolio. The Piedmont redevelopment strategy underway at Meridian and Excelsior is generating tremendous interest with another 125,000 square feet in the proposal stage. Our team has moved asking rental rates up another 5% from last quarter with rates now in the low 40s up 15% from pre-redevelopment phase at the beginning of the year and the highest within its submarkets. We continue to be the clear landlord of choice in the Minneapolis suburbs as many once competitors surrounding projects are now either dated, uninspiring or financially impaired. Meanwhile, downtown is experiencing noticeably more foot traffic as 2 of Minneapolis' top 10 employers, Target and RBC Wealth Management recently increased their mandates to 4 days a week. Deal flow at our U.S. Bancorp is growing, and we're close to signing a new deal that would backfill 1 of the 3 floors being vacated next quarter. Dallas is quite active for us as well with 16 transactions for 156,000 square feet. Most notable was a 56,000 square foot deal with a global data center service provider in one of our 1.5 million square feet Las Colinas portfolio, which has experienced a surge of leasing activity for the year, moving up from 82% at the beginning of the year to 91% at the end of the third quarter with another 35,000 square feet of deals close to being signed. Additionally, we're exchanging proposals to renew Epsilon and the subtenants for roughly 50% of its footprint. Our local team has pushed asking rates there up 15% to 20% over the last 6 months. Overall market conditions in Las Colinas are improving rapidly and led all Dallas submarkets in net absorption for the quarter and year-to-date. With Wells Fargo's 850,000 square foot new campus in Las Colinas being delivered this quarter and no other development underway, Piedmont is poised to see additional rental growth here over the next several quarters. At 60 Broad, we continue to work with the Department of Citywide Administrative Services regarding New York City's long-term extension for substantially all of its space. Unfortunately, additional delays during the planning process will result in the execution of a potential lease to spill over into early 2026. Coming back to the overall portfolio, we remain bullish about our near-term leasing prospects. Our leasing pipeline remains robust even after 2 straight quarters of record new leasing activity. And as Brett mentioned earlier, now has over 400,000 square feet in the late-stage phase with insurance, legal, accounting and financial services driving demand for new deals. Outstanding proposals remain steady as well, sitting at 2.4 million square feet for both our operating and out-of-service portfolios and comparable to last quarter's volume. As I noted on our last call, we have seen a large uptick in full floor users ranging from 25,000 to 50,000 square feet across a wide range of industries and throughout most of our markets. Considering our leasing momentum and a modest number of expirations in the fourth quarter, we remain comfortable in achieving our lease percentage guidance of 89% to 90% for our operating portfolio. Our redevelopment portfolio, which is on track to meaningfully contribute towards 2026 and 2027 FFO growth, saw its lease percentage spike for the second quarter in a row from 31% to 54%. Based on early and late-stage activity, we project this portfolio to reach 60% to 70% by year-end. I'll now turn the call over to Chris Kollme for his comments on investment activity. Chris? Christopher Kollme: Thanks, George. As we have said for several quarters, we remain focused on pruning certain noncore assets throughout our portfolio. We are under contract on 2 of our land parcels. Both are contingent on time-consuming rezonings. So if these are approved, neither will close in 2025. We are actively marketing another small noncore asset that could potentially close around the end of the year. The rationale for this disposition is entirely consistent with recent sales. There are no assurances that any of these will close, and as is our custom, acquisitions and dispositions are not included in any of our projections. On the acquisitions front, we are certainly seeing elevated interest in the sector among more traditional institutional investors. The debt markets continue to improve and differentiated office environments have proven their resilience and durability over the past few years. High-quality office is no longer redlined, and liquidity is growing in the sector. Dallas, in particular, has seen a handful of sizable fully priced transactions over the past 6 months. We remain active in reviewing opportunities in Dallas and elsewhere. We will be disciplined and patient. Rest assured, our team is thinking creatively around compelling opportunities, including evaluating potential transactions alongside institutional capital partners. We do intend to put ourselves in a position to be more active on the transaction front in 2026. With that, I'll pass it over to Sherry to cover our financial results. Sherry Rexroad: Thank you, Chris. While we will be discussing some of this quarter's financial highlights today, please review the earnings release and accompanying supplemental financial information, which were filed yesterday for more complete details. Core FFO per diluted share for the third quarter of 2025 was $0.35 versus $0.36 per diluted share for the third quarter of 2024, with a $0.01 decrease attributable to the sale of 3 projects during the 12 months ended September 30, 2025, and higher net interest expense as a result of refinancing activity completed over the past 12 months. This was offset by growth in operations due to higher economic occupancy and rental rate growth. As I have mentioned on the last several calls, our lease with Travel and Leisure in Orlando commenced in September and will contribute meaningfully to our fourth quarter results. AFFO generated during the third quarter of 2025 was approximately $26.5 million. It was a relatively quiet quarter from a financing perspective. However, as previously announced, we did amend our revolving credit facility and term loan during the quarter to remove the credit spread adjustment from the SOFR-based interest rates applicable to those 2 facilities, thereby lowering the all-in rate on each facility by 10 basis points. As we've highlighted before, we currently have no final debt maturities until 2028 and approximately $435 million of availability under our revolving line of credit. We continue to evaluate balance sheet management options, including traditional bonds and hybrid instruments to smooth our maturity ladder and reduce our interest costs. Based on the current forward yield curve, we expect all of our unsecured debt maturing for the remainder of this decade could be refinanced at lower interest rates and thus be a tailwind to FFO per share growth. To illustrate how powerful this tailwind could be, I'll use the example, if we were to refinance the remaining $532 million of our outstanding 9.25% bonds at current rates, we would generate approximately $21 million of interest savings and be $0.17 accretive to FFO per share. At this time, I'd like to narrow our 2025 annual core FFO guidance from a range of $1.38 to $1.44 to $1.40 to $1.42 per diluted share with no material changes to our previously published assumptions. Please refer to Page 26 of the supplemental information filed last night for details of major leases that have not yet commenced or currently in abatement. As of September 30, 2025, the company had just under 1 million square feet of executed leases yet to commence and an additional 1.1 million square feet of leases under abatement that combined represent approximately $75 million of future additional annual cash rent, which will fuel the mid-single-digit future earnings growth that Brent mentioned earlier, although it does demand additional capital spend in the short term. With that, I will turn the call over to Brent for closing comments. Christopher Smith: Thank you, George, Chris and Sherry. Our portfolio of recently renovated, well-located hospitality-inspired Piedmont places continue to set the standard for the office market, helping us to drive leasing volumes to all-time highs. On that point, you may recall that we started 2025 with an operational goal to lease a total of 1.4 million to 1.6 million square feet, which was inclusive of approximately 300,000 square foot renewal by the New York City agencies. Today, we reiterated our revised guidance of 2.2 million to 2.4 million square feet, but note that, that does not anticipate the completion of the New York City lease this year. In effect, we're on pace to lease 1 million more square feet than we anticipated at the start of the year, and much of that leasing was for currently vacant space, an astounding accomplishment I want to commend the Piedmont team for. With office vacancy declining for the first time in years, quality space is becoming harder to find and new developments are becoming more expensive for occupiers. We believe that the recent investments that we've made in our portfolio, combined with our customer-centric place-making mindset will continue to set us apart in the office sector, enabling us to push rents to all-time highs across the portfolio and generate consistent earnings growth. We will continue to concentrate our resources on driving lease percentage above 90% and increasing rental rates while opportunistically refinancing above-market rate debt to further drive FFO and cash flow growth. With that, I will now ask the operator to provide our listeners the instructions on how they can submit their questions. Operator?[ id="-1" name="Operator" /> [Operator Instructions] Our first question is coming from Nick Thillman with Baird. Nicholas Thillman: Maybe for Brent or George, you commented a little bit on just expansion versus contraction. So I just wanted to clarify, is that within the Piedmont portfolio when you're quoting those numbers? And then as you look at the new leasing and the strength there, has that been more new-to-market requirements? Or has that been market share gains in flight to the Piedmont portfolio? Just a little bit of color there would be helpful. Christopher Smith: In my prepared remarks, Nick, I was referring that 2.2% with the JLL report noting that large users, 25,000 square feet or greater on the U.S. data set was reducing footprint substantially less. So that's that comment, not specific to our portfolio. But George can talk a little bit more to that. We are seeing more expansions than contractions for sure. George Wells: Thank you. It's amazing. It's been 5 quarters in a row we've had expansions. I mean this past quarter, we had 16 expansions versus 2 contractions for a net positive 40,000 square feet. But if you look at the totality for the past 5 quarters, looking at 55 expansions versus 15 for a net of about 120,000, 130,000 square feet. So the dynamics in our portfolio have been quite positive. And in terms of where new leasing activity is coming from, the second part of your question, Nick, I would say that it's mostly intra-market moves in terms of those users wanting to upgrade to higher quality space. Christopher Smith: I think the exception to that might be Dallas, where we continue to see a robust inbound activity. Atlanta, a little less so, still up from where we were pre-pandemic, but Texas does seem to have a little bit more inbound and particularly Dallas. Nicholas Thillman: And those larger requirements, the 25,000 to 50,000 square feet, are those -- if you look at what they're currently in place, what's the size change there? Is that a downsize? Or is it keeping the same sort of footprint? Just trying to get a better understanding of kind of larger tenant behavior. We're hearing about slowing hiring. Just -- I guess, how far are we along in the rationalization of just office utilization as you kind of look within the markets for larger usage. George Wells: This is George, again. Absolutely. Well, let me first hit this. We had -- last quarter, we had 15 deals that were 25,000 square feet or larger for aggregately about 800,000 square feet. And this quarter, we have in terms of proposals outstanding 18 that are fit that size. So it continues to grow within our overall portfolio. I would say it's mixed. I mean in a couple of instances, we're hearing about some consolidations. In other words, companies wanting to create a cost to bring their employees back together for increased collaboration. In some other cases, it might be a small deduct, which is they used to justify moving to a higher quality space and paying higher rents. Christopher Smith: I think that's one thing we continue to see within the marketplace is the desire to upgrade the quality of your space to bring your people back. And that means having an environment and an offering that is compelling. And that's where our renovations and what we've implemented across the portfolio in terms of our service model, while we're garnering our more than fair share of that leasing. Nicholas Thillman: That's helpful. And Brent, you alluded to this runway you have for occupancy growth and mid-single-digit FFO growth at a steady state over the next 2 years. You guys touched a little bit on some of the larger expirations of the portfolio and the coverage you have there. But maybe anything over 100,000 square feet, you guys touched on the Piper, you touched on the Epsilon, you touched on 999. Anything else that we should be looking at as we kind of look at roll over the next 2 years? Christopher Smith: I think from our perspective, the chunky ones, if you will, in 2026 are well known, which does give us the confidence to be able to look into '26, given the prior leasing success, even with those known move-outs to feel confident that there's going to be earnings growth next year. Unfortunately, office REITs were a battleship. It takes a lot to move. But when you do start going, the momentum can carry. As we look ahead into '27, there are a couple of larger expiries. It's a little early to tell overall. They're in Atlanta, which is also our headquarters location and where we have the most depth in the market. So I feel very good about where we're positioned with those, but it's still 20, 24 months out for those. And so it's going to still take a little bit of time to get clarity, but we think we are well positioned for renewal. [ id="-1" name="Operator" /> Our next question is coming from Anthony Paolone with JPMorgan. Anthony Paolone: Brent, just following up on just the conviction level that earnings will grow next year. I know you'll give more specifics when you actually provide guidance. But just wondering, do you think that comes by way of some of the debt refinancing that Sherry talked about potentially existing? Or do you think the core in and of itself can move higher? Christopher Smith: Great question, Tony. And I want to clarify that is organic growth only within a static portfolio. It assumes no acquisitions, dispositions or refinancings. As you know, we don't have any debt maturities really for several years until 2028. But as Sherry noted on the call, we do have a pretty large embedded mark-to-market benefit if we were to refinance those bonds, which she outlined in her prepared remarks. And we will capture that at some point between now and when those mature in '28. But rest assured, from a risk management perspective, the team is very focused on optimizing that transition from high-cost debt to lower cost debt. And what we've laid out in terms of FFO growth, again, is just from organic lease only. The comments that Sheri made is upside on top of what I described as operating growth. Anthony Paolone: Got it. And then maybe, Sherry, on the debt refinancing, what -- I guess, what are the gating factors to doing something there? Because, I mean, you kind of laid out the spread is pretty clear. Just what would it take to kind of go do something there? Sherry Rexroad: Well, as we've discussed before, there are a variety of ways in which you can refinance the 9.25% bonds that are outstanding. You can do a purchase them in the market, you can do a tender or you can do a make-whole. There's no gating factors related to that, but there are processes in place and there are periods of time where you can or cannot be in the market. And so that's really kind of the variables that we'll be considering as we go forward. The spread right now between the 9.25% and where we would refinance if we did alongside is about 400 basis points. And that's what's behind the math whenever we said, if you hypothetically could buy back all of them, that you would achieve an interest savings of about $21 million or $0.17 a share. Anthony Paolone: Got it. Okay. And then just last one, if I could. You kind of talked about being out in the market looking at potential deals out there and the liquidity coming back to office and so forth. I mean what does a typical acquisition that Piedmont might be looking at, at this point look like in terms of cash on cash, type of assets, going in occupancy versus maybe the opportunity? Just kind of what is the type of stuff you're looking at right now? Christopher Smith: Great question, Tony. As we continue to canvass the market, not only the existing markets we're in, but as we've talked about in the past, select other Sunbelt markets where we would consider growing if we took a dot off the map elsewhere. We really see 2 buckets of opportunities within those markets. The first would be, I would call, an opportunistic set. That's the situation where we've talked about in the past of looking for a partner, which we have identified several partners who would be looking for more like 20% IRRs or greater and really probably going in with a lower yield, higher vacancies and a significant amount of capital that needs to go into those. And so that's why we continue to think about a partner in that situation because it would be an earnings drag and an FFO drag and an occupancy drag to bring it in-house initially. But we always have a mindset if we're going to put any capital to work and our time and effort, it would be something we'd want to bring into the REIT over time. And so those situations, we have looked at a few to swung at buying some debt on some situations didn't work out in that scenario. But we continue to work with those partners. I'd say that bucket right now, kind of comes and goes or off-market deals. But right now, I'd say it's in the $500 million range in terms of opportunity set that we're looking in that bucket. And then the other category would be more on balance sheet, what I would consider more value-add in nature, very similar to what we've done in our Galleria project in Atlanta or 999 in that it's going to be on balance sheet. It's going to be a little bit lower IRR, probably call it mid-teens. You'd have an opportunity to go in that would probably be really close to where we trade, maybe a little bit below or a little bit above, but with more importantly, the opportunity to grow that yield by, call it, 300 basis points over a couple of years. again, through our leasing model, our service model and leveraging the platform to drive that value. So they may start with GAAP yields in the 8.5% to 10% range and drive from there and cash might be, let's say, 50 basis points less. But those assets are going to be probably 70-ish percent leased, like I said, and give us a good opportunity to lease up. One thing that we do think is unique about the Piedmont story is while other groups may be chasing particularly private capital, long-term wall, brand-new assets, we do feel like there is a dearth of capital chasing well-located, good bones, but older vintage assets like a Galleria here in Atlanta, where we've had admit success or a 999. And so those campus, large kind of unique ability to create your own environment interest us and then highly accessible, walkable mixed-use environments also interest us. And there are very good opportunities set around that bucket. I'd say right now, we're looking at roughly $800 million or so that I would characterize as that value-add on balance sheet component. And unfortunately, right now, given our cost of capital, we're not able to move on those immediately, but we continue to keep them warm and continue to have dialogue so that when we do feel like we have a green light from the market to grow externally, we're prepared to do so in pretty short order. [ id="-1" name="Operator" /> Our next question is coming from Dylan Burzinski with Green Street. Dylan Burzinski: Most of my initial questions have been asked, but I guess just one quick one. In the past, you guys have sort of talked about taking some noncore assets to market. Just sort of curious where you guys are at in that process and if you're starting to sort of see capital market side of things clear up a little bit as the recovery story in terms of the fundamentals start to pick up here. Christopher Smith: Dylan, thanks for joining us today. And in regards to dispositions, it's kind of -- it's tough. It's still challenging, honestly, given the mindset in the office sector that everybody deserves a deal. And if it's not 10 years of WALT and just built the last 4 years, I would say it doesn't price efficiently, which is great if you're buying assets, not optimal if we're trying to sell. But we continue to be focused on pruning, as you noted, the noncore assets that can sell into this market and/or just we don't have conviction that we'll have and be able to drive long-term value. So we do have an asset in the district that we're in the market with. I would say we continue to feel like the district remains a challenging market that will not likely turn around in D.C. And so we will hopefully execute on that asset and continue to pair back our exposure in the district itself, still very much have conviction in Northern Virginia, and we're seeing good leasing velocity there and uptick in our assets in terms of absorption. But the other markets that we would consider noncore are those where we have very few assets and we can't seem to grow and/or want to grow. And of course, that would be Houston, which has long-term WALT on one of the assets and then Schlumberger great credit in another. We're going to continue to look to dispose those in '26 as well. They've been in the market, and we'll reintroduce them again, hopefully in a more constructive environment. But on that environment, it takes leasing really to give investors the conviction to underwrite an asset, vacant space roll in a constructive manner. And so what does give us positive, if you will, hope that we'll be able to execute on some of this in '26 is that we are seeing more leasing in our markets, and that should give a better underwriting conviction in terms of rates and absorption and not just underwriting vacant space stays there forever. And then finally, we do have our asset in New York City, as we've noted, and that will likely be something we would look to monetize upon a long-term lease at that asset. The overall environment as well as improving, particularly for that asset in the debt capital markets. It would be a chunkier disposition. And so having the ability and you're seeing the strength right now in the secured debt markets will also improve execution, particularly on that New York City asset and when we monetize it. [ id="-1" name="Operator" /> [Operator Instructions] Our next question is coming from Michael Lewis with Truist Securities. Michael Lewis: I'm sorry if I missed this, but did you say why New York City was pushed back again? And with that lease expiration now kind of almost right on top of us, is there any reason for concern there that they might do something surprising, give back space or anything else? Christopher Smith: Michael, it's Brent. Thanks for joining us today. Great question. We hadn't touched on it in specifics. And given it's a live transaction, I don't like to get into a lot of detail. But as we've noted on prior calls, and we are still very highly engaged with both DCAS, the Department of Citywide Administrative Services who runs the leasing process for the city. They're working with OMB. And of course, there's also 3 different agencies within that block. So there are a lot of moving pieces and groups that need to weigh in. As we've noted on prior calls, though, it is a unique envelope that is their own entrance, their own elevator bank, a building within a building, if you would add, you would say. And so the other note would be downtown in Manhattan, there are very now a few large blocks, competitive buildings that we would historically have been competing with. Some of them have been converted to residential as well. And so we feel like it's, I guess, not as much a concern as they would go elsewhere in lower Manhattan. And then the fact that there's an $8 million holdover penalty on top of their current rental rate that's on an annual basis. But if they do trip over into holdover, we reiterated to them as a public company, we will be upholding that in the pandemic, we were a little bit more immediate on that. Of course, if they renew, we're not going to enforce that. But it is a pretty heavy stick that also goes with the care of a building that really suits the agencies well. We do recognize there is a new administration coming in. However, given the Department of Homeless and the other agencies there seem to be more geared towards helping the community, we think there is a strong likelihood that they will continue to stay engaged in this location. But at that point, that's all I can share, and we still remain very positive on a renewal sometime in the early part of '26. Michael Lewis: No, that's helpful. And as far as the $75 million of cash rent that's kind of pending signed but not paying yet. You give a lot of great detail in the supplemental package, but there's a lot of detail. Could you -- at a high level, how should we think about that $75 million coming online, for example, what percentage of that might be might be paying by the end of the first half of '26 versus the back half? And can you just kind of, at a high level, kind of frame how that will flow through? Sherry Rexroad: So Michael, thanks for your question. And the -- most of it is going to hit in the middle of the year. I recommend about 70% within 2026. And note that those numbers are annualized numbers. So I'm trying to see what other clarity I can give you. Does that help? Michael Lewis: Yes. No, yes, that's helpful. And then just my last question. Christopher Smith: I might add real quick -- sorry, Michael, I might add, you think about that $75 million, it's really split into 2 buckets, right? There's $40 million of yet to commence. And that's a pretty wide margin historically that we would say that would be 3% of the portfolio. It's now approaching, I think, almost 5% of the portfolio. And so we're expecting a lot of that, if you will, the $40 million commit next year more towards the middle of the year to the end. So we might realize roughly about $26 million of that $40 million within 2026 itself. On the cash component, which is about $35 million, that's going to lead in on a similar pace as well. So again, $35 million is your annualized number, not all that's going to start paying cash next year. But on that same kind of ratio of about 60% of it, a little bit higher than that, say maybe 70% of it will be realized next year. Michael Lewis: Got it. And then lastly for me, this might be beating a dead horse. You talked about all the office leasing demand. Given the jobs numbers, I guess, back when we used to get jobs numbers, but what we know about jobs numbers and then AI, there was a headline recently layoffs now at Amazon. I saw an article that said more layoff announcements this year in any year since 2000. Is some of the leasing velocity, is it just that REITs like yourself, you had more space to fill, and so that helps explain why there's more new leasing volume? Or it sounds from your comments like it's really a stronger demand, just more space out there looking for a home. Any way to kind of reconcile those 2 things I just said, the jobs and the layoffs and everything that's happening in the broader economy with this -- what feels like a surge in office demand? George Wells: Well I'll start with that. Michael, this is George. It's interesting. We keep seeing announcements with layoffs. But as I kind of reconcile that to what we're seeing in our portfolio, we just -- I'm not seeing that affect us yet. And I get back to the comment that I made earlier, people are still looking to upgrade their space because collaboration and innovation just happens a lot quicker when you were working together. So just to give you some statistics that supports that theme in terms of why we don't see a letdown at all in overall leasing. We talked about overall proposals earlier at 2.4 million square feet overall. That's quite comparable to what we've seen for the past several quarters. But most notable is 2/3 of that is for new space, right? And so that is amazing considering how much new leasing activity we've done for the past 2 quarters that we continue to backfill that pipeline. And then looking even further out, the tour activity is an interesting early indicator of what's happening for demand in our portfolio. We did hit a low point in July for 34 tours, but that's kind of more seasonal than anything else. It recovered in August to 45 tours. September, 41 tours. And here we are sitting 27 days in October at 43 tours with 4 more days to go. So we're just not seeing it right now. Getting to your point about Amazon, it is interesting. It's new information we'd like to absorb. But although we have a large hub in Dallas, for them. They lease a tremendous amount of space through WeWork in other submarkets, which are more on the short-term situation. So if I were to guess, I suspect that those short-term contracts in these co-working operations would probably be first to go. Christopher Smith: And I'd add on that, Michael, really taken a step back, 2 things I think about our portfolio have linked to our success, and they're not just because we had more space available. The first is we don't lean in or have floor plate and buildings designed heavily for just tech use. It is much more of a professional services, fire, conducive amenity set, finish level, floor plate size, et cetera. And so as tech has pulled back from the -- being kind of the incremental lessor in a lot of markets, our assets have continued to perform because we were never beholden specifically to that group. As George noted, we do have tech in our portfolio, particularly in Dallas and Boston, but it's buildings that fit well for a law firm as well. And so that would be one factor. I think the other one is if you look at our portfolio and our strategy of having great assets, amenitized location, but we don't cost as much as new construction. So if you're a firm, a national firm or a local kind of regional firm, if you want to create a presence, regional headquarters, et cetera, and you want it to be fabulous space to bring your people back, but you don't want to pay $65 to $80 gross, you come to a Piedmont building. And so we are much more appealing to a larger segment of the market, in my opinion, and I think the data set shows that. And that's why we also have had so much uptick into our assets. And then you layer on the fact that a lot of landlords are kind of stuck in the capital structure that doesn't allow them to think creatively work with the clients and create the environment in the common areas that are necessary to lease space. So trophy is full and our set of assets are very compelling. I'll give you one last anecdote. We are working our buildings in Minneapolis at Meridian and having great receptivity in the marketplace. A tenant toured that building before the renovations were completed about 4 months ago. end up going to new construction and entering a lease on that new construction, they did come back to us. We don't have that deal, but they are very compelled now to see the completed product and the fact that, that's a 30%, 40% discount to new construction rents that they are about to enter a lease into. And we'll see if we'll get that 60,000 square foot user. But I think there's an opportunity to stag that because our environments are so compelling, we can compete with new construction, and we don't have to charge as much. And again, that goes to my point on our ability to push rate across a lot of the portfolio given we've done this investment, and we've got a service level that is truly differentiated, and it's not just that we have more available space. Michael Lewis: I can't argue with those leasing results. [ id="-1" name="Operator" /> As we have no further questions on the lines at this time, I would like to turn the call back over to Mr. Brent Smith for any closing remarks. Christopher Smith: Thank you. I appreciate everyone joining us this morning. I do want to remind you of 2 important dates. First, this Friday, Happy Halloween to all those. And then the second is in December, we are going to be at the NAREIT event in Dallas on the 8th. We're going to hold an office tour where we'll be sharing and showing off all the success we've had in our Dallas Galleria project. We'll also have additional brokers and others from the investment community, giving their thoughts and insights on the office sector. So please join us, reach out to either Sherry or Jennifer if you're interested in joining that tour and discussion and dinner. Hope everyone has a great week. Again, thank you again. [ id="-1" name="Operator" /> Thank you. Ladies and gentlemen, this does conclude today's call. You may disconnect your lines at this time, and have a wonderful day, and we thank you for your participation.
Operator: Ladies and gentlemen, welcome to the Analyst and Investor Call Half Year 2025 Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Christian Waelti. Please go ahead, sir. Christian Waelti: Thank you, Sandra, and good afternoon, good morning, everyone. As you know, earlier today, Landis+Gyr issued its results ad hoc release and related presentation for the first half year 2025, which are available on our website. This session will follow the structure of the earnings presentation, so we encourage you to follow along. We'll conclude with Q&A, where Sandra will provide further instructions and where you will be able to ask questions. Please take a moment to review the usual disclaimer on Slide 2 of the presentation. A brief note on reporting before starting. The results of the EMEA operations are presented as discontinued operations for all periods. Unless stated otherwise, the figures we are sharing reflect Landis+Gyr's continuing operations only. After the short introduction, I'd like to hand the floor over to our CEO, Peter Mainz. Peter Mainz: Thank you, Christian. Good morning and good afternoon, everyone. And thank you again, Christian, for reminding us to consider our financials from a new perspective. I'm here with Davinder, our Chief Financial Officer, and we are pleased to present our half year 2025 financial results. With that said, let's now start with a review of the highlights of our performance in the first half of 2025. Let's move to Slide 3. The first half of our financial year 2025 was marked by solid commercial momentum, as you can see. We are pleased to report a strong order intake of $595 million, resulting in a book-to-bill of 1.1, driven by key grid edge tech wins in the Americas. We're also particularly happy with the resulting order backlog that reached a new record for our company with close to $4 billion, building a very solid base and a clear outlook for long-term growth. Both our net revenue and EBITDA are noticeably improving compared to the second half of financial year 2024 when we started our strategic journey. At the end of September, we announced the divestment of our EMEA business, concluding a process we talked about every time we stepped in front of you since late 2024, and that our outcome allows us to return the proceeds to our shareholders through a share buyback program. Let's move to Slide 4. More information on this point specifically. We are very happy to have completed and fulfilled the commitment that we announced about 1 year ago. It was a very competitive process where the investment in preparation we made delivered a strong financial outcome. The 13.4x EBITDA multiple of 2024 actual adjusted EBITDA is a strong indicator in this regard. But outside the numbers, it is also a great outcome for our customers as this makes us comfortable continuing to perform over the next period. And most important, it is a great outcome for our employees who were very positive and welcomed this decision. Credit of this positive outcome goes to our EMEA team led by Rob Evans for their dedication and focus to deliver exceptional operational performance while in parallel dedicating time and energy to the sales process. As previously indicated, this allows us to return the proceeds from the divestment to our shareholders with a share buyback program for which we have announced concrete parameters, namely $175 million on the first trading line. This program will start as of tomorrow. Let's move to Slide 5. Last year, at the occasion of our half year results presentation, we announced 3 strategic initiatives. I'm pleased to report that we have now successfully executed 2 of them. And as we move forward, our focus on the Americas will remain a key priority. As mentioned, the divestment of EMEA on which our teams together with the buyer are currently working hard to carve out the business with the aim to close the transaction in the second quarter of 2026. The current priority is and remains the Americas with a focus on advancing high-quality business built around grid edge intelligence solutions and delivering value to utilities across the globe. The focus on this business will elevate both our EBITDA and cash profile, with very low capital intensity, creating a very different financial profile of the business. While we focus on the Americas, we remain a global business, and we're excited about the global appeal of the offering that we have. And with that in mind, we keep on working towards the U.S. listing in 2026, aligning capital markets with the majority of our business activity. Moving on to Slide 6. We are focusing on the Americas as we believe there is a tailwind that is exceptionally strong with electricity demand growing again after 10 to 15 years of basically 0 growth. There is a real fundamental load growth, thanks to AI and data centers, manufacturing, reshoring and industrial hydrogen production. An assessment we can also see in the utilities capital expenditures going up substantially, which is validated in every single CEO conversation I'm having at the moment. Peak demand growth leads to peak demand no longer supported by permanent energy resources, a secondary tailwind further driving the need for our technology. Let's move to Slide 7 and how this trend translates into business for us. The strength that we continue to see in our pipeline translates into our order intake, and we're excited about that. In the first 6 months, we won close to $600 million of new business with a strong book-to-bill ratio of 1.1. Contrary to last year, when we won some very large orders, this time, we have received a multitude of orders, which speaks to the solid pipeline that we have. Our backlog increased by 30% over the past 12 months and stands at a record $4 billion. We are very pleased about the fact that 43% of the backlog is recurring in nature for our software and services business. In Asia Pacific, the backlog has nearly doubled over the past 12 months, leveraging the same technology platform as in the Americas and benefiting from the region's unique drivers. A recent example of this is the PLUS ES contract in Australia we have recently announced, introducing our grid edge platform on this continent as well. And now I will give the floor to Davinder, our CFO, that will run us through the financials in more detail. Davinder Athwal: Thank you, Peter. Good morning and good afternoon, everyone, and thank you for joining us today. Let's begin with our consolidated key financial results on Slide 8. Our net revenue for the first half was $535.9 million, reflecting a year-over-year decline. This is primarily due to early milestone completions in the Americas and the wrap-up of a major APAC project in the prior year period. However, on a sequential semester basis, we saw solid growth momentum with meaningful improvements in both revenues and margin. As anticipated, the lower sales volume impacted both gross margin and adjusted EBITDA on a year-over-year basis, driven by reduced operating leverage in the current half year and the absence of a onetime gain recorded on the sale of real estate in India in the prior year period. That said, both metrics improved by more than 200 basis points each compared to the second half of fiscal '24, thanks to disciplined execution and the realization of operational efficiencies. Let's now turn to our regional performance, starting with the Americas on Slide 9. Revenue in the Americas declined by 16% year-over-year, largely due to the early completion of deliverables on a large software project in Japan last year as well as lower sales of certain legacy meters in the current period. The lower software revenue in the current half year, in particular, caused a drop in both gross margin and profit. Despite these headwinds, adjusted EBITDA margin held strong at 17.5%, even after a temporary 100 basis point impact from tariffs in the half year-to-date. This margin resilience reflects our sharpened focus on operating expenses, which were reduced by nearly $14 million year-over-year. Now let's move to APAC on Slide 10. APAC revenue declined by 17.4% year-over-year, largely because the prior year period saw a peak in sales related to an AMI project in Hong Kong that completed together with a delayed project rollout in Bangladesh in the current half year. We do, however, see improved momentum in Singapore and New Zealand as well as consistent performance in Australia. APAC's adjusted margin was impacted by lower operational leverage and mix when looking at a normalized view, excluding the one-off real estate gain in India. Now let's review our liquidity position on Slide 11. We ended the half year with net debt balance of $209.3 million. Key movements since the prior year-end included $41.1 million in dividends paid in July, $37.7 million in cash generated from operations, $12.9 million in capital expenditures focused on growth and efficiency projects and $10.1 million in transformation expenses tied to our key strategic initiatives. We closed the year with a net debt to adjusted EBITDA leverage ratio of 1.4x, providing us with the balance sheet strength to fund future growth. That concludes my prepared remarks. Thank you again for joining us today and for your continued interest in Landis+Gyr. I'll now hand it back to Peter to walk through our remaining fiscal '25 guidance. Peter? Peter Mainz: Thank you, Davinder. Before addressing the guidance, let me close by commenting on the improved look of our high-quality global business and the new starting point we have created. Let's move to Slide 12. On this slide, we have depicted the impact on both revenue and adjusted EBITDA from removing the EMEA business from full year 2024 financials. It invigorates that we are now paving the path towards a more focused and efficient operating model with a portfolio weighted towards higher-margin business as seen through the immediate 300 basis point improvement in adjusted EBITDA. After selling the EMEA business, this marks a fresh start for our high-quality company with significant predictable recurring revenue and substantial improvements across every financial metric. This is reflected in the guidance discussed on our next slide. So let's move to Slide 13. For net revenue, we confirm our 5% to 8% growth guidance we gave in May this year for the continuing Landis+Gyr business. We expect a strong top line performance in the second half, driven by the momentum built in the first half. For the adjusted EBITDA margin, we increased our forecast from initially 10.5% to 12% to now 13% to 14.5% of revenue. This raise in margin is a result of the focused high-quality business we have created with the strategic transformation. In fiscal year 2025, we will carry $10 million to $15 million of dis-synergies, mainly corporate costs that will go with EMEA after closing. For fiscal year 2025, we need to think about this on a pro forma basis, and it will elevate our profitability further in 2026 and beyond. Let's move to Slide 14. Let me wrap up why we believe Landis+Gyr is exceptionally well positioned for the future. We are a trusted leader in energy technology with a platform deeply embedded in our customers' operations and a track record of being invited back again and again. Across our core markets, we hold substantial share and benefit from a record $4 billion backlog, representing more than 3 years of revenue for the continuing business. This gives us strong visibility in an ever-growing base of recurring revenue. Our financial profile has strengthened significantly. We have sharpened our focus, increased EBITDA and cash generation and lowered our capital intensity, in essence, improving every single financial metric. We are returning value to our shareholders with $175 million buyback and staying disciplined in our execution. With structural demand drivers across electrification, grid modernization and AI, Landis+Gyr is focused, aligned and ready to lead the next era of intelligent energy. And now we'll open the call for questions. Sandra, please. Operator: [Operator Instructions] Our first question comes from Akash Gupta from JPMorgan. Akash Gupta: I have a few questions, and I'll ask one at a time. My first one is on North American growth. So if we look at your full year guidance and look at what you delivered in the first half, on my back-of-envelope calculation, it looks like you are guiding for mid- to high teens sequential growth in second half in North America. Maybe if you can start with what is driving it? How much visibility do you have? And what are the risks in delivering this strong growth that you're expecting in the second half? Peter Mainz: Yes. Thank you, Akash. So obviously, what is driving it, it starts with the backlog that we have on hand. And if you look at the growth rate that you mentioned, that's also -- we saw a similar growth rate in the first half of this year compared to second half of last fiscal year. And part of the substantial growth we also see in the second half, the first couple of months of this first half was a bit impacted by the tariffs, and we had to shift our supply chain a bit, but it's really driven by the momentum that we have created and the momentum manifesting itself in the best way in the backlog that we have as we start the second half of this year. Akash Gupta: And my second question is on tariffs. I mean you mentioned that you got hit by $5 million. Maybe if you can talk about, is this gross impact or net impact? And what sort of protection do you have in your contracts if something changes materially on tariff fronts in the future? Peter Mainz: Okay. So the most important thing, if you recall, at the beginning of the year, we said tariffs will have a minimal impact on our financial performance throughout the fiscal year, and that is still true. And the number that you see, the net impact of about $5 million, that's really what we've seen in the first 2 months or so, I would say, of the year when we said we needed to make some sourcing changes to be compliant with USMCA. And as the rules of the game became a bit clear as we started the year, we needed a couple of weeks to clarify that. So we incurred costs in the first, I would say, 2 to 3 months. And we expect those costs to be in the rear mirror here. Akash Gupta: And my last question is on more of the big picture question. When I look at your Slide #6, where you talk about U.S. power demand and growth. I think what I want to understand is that a substantial part of this growth is coming from data centers. And as we hear, there are -- most of the data centers may have their own power generation on top of grid connection. So the question is that how does this adoption of data centers, both directly and indirectly going to impact your business? Maybe you can give us some examples to better understand how do you expect the demand to change because of this data center growth in U.S. power market? Peter Mainz: So it's still -- obviously, we'll see a mix how data centers will be powered. But when I speak with utility executives, data center and onshoring is still a substantial growth for the capital expenditures that they have to spend to bring those users of energy life on the grid. So it's driving them substantially, and we believe only a smaller portion will be powered independently. And even if they are powered independently, they need to be connected to the grid and require what we provide flexibility. So we see it as a consistent driver in the capital expenditures and where we see it the most as utilities look at their increasing capital expenditures, they look at which capital expenditures make the most sense. If they are pushed by the utility commission to adjust their capital expenditures, then they go back, which are the expenditures with the highest return on capital and that's where investments in our technology come up being on top over and over again. So we see that as one driver. And the second driver is also -- is the one as we see this peak demand growth and it's turning more into a peak plateau versus a peak. We also see that with some of the permanent energy resources are no longer sufficient to provide that. And again, that's the second driver providing substantial flexibility in the grid to provide the resilience to do that. So those are the 2 drivers that we see. And every time we engage with utilities, they bring that up over and over again. Resilience in light of the demand growth is a big driver. So that's the big driver we see. Operator: [Operator Instructions] We have now a question from Jeffrey Osborne from TD Cowen. Jeffrey Osborne: Just a couple of questions on my side. I was wondering if you could split up the recurring revenue that you mentioned between services and software. What's the mix between the 2? I assume it's more weighted to services. Peter Mainz: So we haven't broken that one out specifically. I don't think you're right with that statement, but we have not broken that one out specifically. So I couldn't provide you a percentage here on this call. Jeffrey Osborne: Got it. I'm just trying to think of the margin implications as we move forward as that revenue is recognized over the next 3 to 5 years. I assume that would have a pretty pronounced impact on EBITDA for the Americas segment. Is that true or no? Peter Mainz: Yes. We don't have Microsoft margins on our software. We have industrial software margin, but they're definitely accretive to the overall margin that we see for the business in the Americas. Jeffrey Osborne: Got it. And then can you just update us -- I think on the last call, 6 months ago, there were a couple of customers that had transitioned from the legacy technology to the new and you had taken a $20 million inventory write-down. Have those customers started ramping up with the newer Revelo platform? Or is that still something to come here in the second half? Peter Mainz: So when I look at the pipeline and I look at the order intake, that is more or less exclusively Revelo and grid edge technology today. When we look at the execution customers that signed contracts 3 years ago or so, they're still deploying the technology of that generation at that time. But we see a dramatic shift to grid edge to Revelo. Jeffrey Osborne: Got it. And just 2 quick last ones. What needs to go right to be at the high end of the guidance of 5% to 8% growth? If you could just respond to that? And then I didn't see any wins announced in the order, it sounded -- or in the quarter, the half. It sounded like you mentioned Australia, but is it the right way to think that you just had quite a few smaller wins and not any sort of marquee investor-owned utility wins in the quarter? Peter Mainz: So as we said, like different from the last time, we didn't have the one big one in our order intake. We had a multitude of orders. I think the largest one was close to $200 million. That was the largest one. So I think we had a good plan and a good mix of order intake. And as I say, every time we are not landing one of those big ones, being close to one is an exceptional result. So I think it's -- the order intake is more a testimony to the strength of the pipeline as it came in than to a single order. So we quite like that one. And between you asked the 5% to 8%, what moves us to 8% versus the 5%, I think it's execution until the last day of March of our fiscal year. Jeffrey Osborne: But I assume you're not hoping for any type of regulatory decisions between now and March to go your way that everything would be in backlog and it's more around execution and timing of implementation? Or is there still wins that you need to get from a turns business? Peter Mainz: No. I think anything you need regulatory approval today to wait for revenue. I think we're a bit too far advanced into the fiscal year for this to happen. So it's -- what we need to ship and execute is part of the $4 billion of backlog that we articulated today, and then you have a small portion of just business that comes in day in, day out from the existing customer base we have. So we feel quite good about the starting point. Operator: We have a follow-up question from Akash Gupta from JPMorgan. Akash Gupta: The first one is on the share buyback announcement that you plan to spend up to $175 million for share buyback. And the question I had was the consideration of share buyback over, let's say, bolt-on M&A. We often hear that some of your smaller competitors in North America, which are part of large organizations, they are kind of struggling in their smart meter business. And there is some speculation in the market that some of them might come in the market. So maybe can you talk about rationale of share buyback over bolt-on M&A? And if there will be any good interesting assets on the block, would you consider changing your capital allocation? Peter Mainz: So we've been fairly consistent from the time we announced that we're looking for options for the EMEA business that with the proceeds, we want to return it to the shareholders. And if you look at the list of activities that we still have in front of us for the next, I would say, 6 to 12 months, we still need to close the EMEA business. We're looking at the listing at the U.S. that consumes a tremendous amount of resources. So for M&A throughout that period of time, there would just be exceptional risk, and that's really not at the forefront of capital allocation for us for that period of time. So I think that's really the answer for the next 12 months period. Akash Gupta: And lastly, I think you announced in the release that you will be now providing quarterly trading update for third quarter in January. So I think that's a welcome step. But just wondering what sort of information shall we expect in the quarterly trading update? Peter Mainz: Well, you're certainly going to see revenue and gross margin when it is customary for a trading update, I guess, order intake. I think those would be the key numbers that we'll provide -- to provide comfort that we are on track for the full year numbers. Operator: [Operator Instructions] Gentlemen, so far, there are no further questions. Back over to you for any closing remarks. Peter Mainz: Looks like with our presentation, we tackled most of the questions that everyone had. So thank you again for joining us today. I appreciate your time and interest in Landis+Gyr, and I look forward to meeting all of you soon, either virtually or in person. Goodbye. Have a great day. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Good morning and good afternoon, and welcome to the Novartis Q3 2025 Results Release Conference Call and Live Webcast. [Operator Instructions] The conference is being recorded. [Operator Instructions] A recording of the conference call, including the Q&A session, will be available on our website shortly after the call ends. With that, I would like to hand over to Ms. Sloan Simpson, Head of Investor Relations. Please go ahead, madam. Sloan Simpson: Thank you, Sharon. Good morning and good afternoon, everyone, and welcome to our Q3 2025 earnings call. The information presented today contains forward-looking statements that involve known and unknown risks, uncertainties and other factors. These may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements. Please refer to the company's Form 20-F on file with the U.S. Securities and Exchange Commission for a description of some of these factors. The discussion today is not the solicitation of a proxy nor any -- nor an offer of any kind with respect to the securities of Avidity Biosciences or SpinCo. The parties intend to file relevant documents with the U.S. SEC, including a proxy statement for the transactions and a registration statement for the spin-off. We urge you to read these materials that contain important information when they become available. Before we get started, I want to reiterate to our analysts, please limit yourselves to one question at a time, and we'll cycle through the queue as needed. And with that, I will hand over to Vas. Vasant Narasimhan: Great. Thank you, Sloan, and thanks, everybody, for joining today's conference call. If you turn to Slide 5, Novartis delivered solid sales and core operating income growth. And I think importantly for us, important pipeline milestones through quarter 3. Sales were up 7%. Core operating income was up 7% with our core margin at 39.3%. And in the quarter, we were able to deliver some important approvals, including Rhapsido, our FDA approval in CSU for our BTK inhibitor. As well as important Phase III results, which we'll go through in a bit more detail, Ianalumab, Pluvicto, Kisqali's 5-year data as well as positive opinions for Scemblix and then also positive data that came out relatively recently on Cosentyx in PMR and Fabhalta in IgAN. Now moving to Slide 6. Our priority brands drove robust growth in the quarter. So I think really, while we, of course, are contending with our LOEs that particularly Entresto, but also Tasigna and Promacta, what I hope we can get the focus to be on is on our strong underlying growth of our key growth drivers. Here, you can see growing 35%, really excellent performance from Kisqali, Kesimpta, Pluvicto, Scemblix, solid performance from Leqvio and Fabhalta. So I think we're on a solid track to drive growth through the coming years. Now moving to Slide 7. Now taking each brand in turn, Kisqali grew 68% in quarter 3, outpacing the market and our CDK4/6 competition. If I could draw your attention to the center panel, our total to brand NBRx now, as you can see, is in a market-leading position, particularly driven by the early breast cancer launch. Our U.S. growth was up 91% in quarter 3. We are the metastatic breast cancer leader in NBRx and TRx. And in early breast cancer, our share is 63%, and we're leading both in the overlapping populations with our competitor and the exclusive population. In particular, I see -- I'd say we see significant growth potential in that exclusive population where we estimate more than 60% of patients are currently not on a CDK4/6 inhibitor. Outside of the U.S., we saw 37% growth in constant currency. We are the NBC leader in NBRx and TRx share across our key markets. Our early breast cancer indication now is approved in 56 countries. And so we'll start to see the effect of the early breast cancer launch in the next few quarters ex U.S. Now I think it's a good indicator of what we see as possible outside the United States. Our Germany NBRx share is already at 77%. And I think that helps demonstrate the kind of power that we have to drive Kisqali's utilization and enable women to prevent breast cancer recurrence across the globe. I'll close by just reminding you, we have a Category 1 NCCN guideline support as the only preferred CDK4/6 inhibitor with the highest score in early breast cancer and metastatic breast cancer. Now moving to Slide 8. Just wanted to say a word about Kisqali's 5-year data, which we showed at ESMO. There was a 28.4% reduction in the risk of recurrence in the broadest population of early breast cancer patients that have been studied. You can see here the data is very consistent across tumor Stage 2 or Stage 3 in node-negative patients and node-positive patients. I'd also note that our OS data, while still maturing, has reached a hazard ratio of 0.8, and we see a narrowing confidence interval, as you can see here in the third bullet, just a little bit above 1 on the upper bound of the confidence interval. So a clear trend favoring Kisqali. The safety is consistent. We also had some notable important trends in the data continue to demonstrate a reduction in distant recurrence to distant metastases, which is excellent to see. So we'll continue to follow these patients and continue to provide updates on this data as it matures. Now moving to Slide 9. Kesimpta grew 44% in quarter 3, and this was primarily demand-driven growth, particularly in the United States. U.S., we had 45% growth in Q3, robust TRx growth outpacing both the MS and B-cell markets. We have broad first-line access now almost 80% of the patients receiving Kesimpta are first line or first switch. Outside of the U.S., we had 43% growth, and we're the leader in NBRx share in 8 out of the 10 major markets that we participate in. And we see a significant opportunity now looking ahead for Kesimpta outside of the U.S., where approximately 70% of disease-modifying treated patients are not currently being treated with a B-cell therapy. So as we continue to get that B-cell class up with Kesimpta having leading share in many markets, we see the opportunity to drive dynamic growth ex U.S. We did present some additional data at ECTRIMS that show the benefit of Kesimpta. I think I'd highlight that 90% of naive patients receiving Kesimpta showed no evidence of disease activity at 7 years, really demonstrating the durability of the response to this medicine. Now moving to Slide 10. Pluvicto grew 45% in constant currencies in quarter 3. That's really momentum driven off of the pre-taxane castrate-resistant prostate cancer approval, which we recently achieved. The U.S. growth is driven -- so the Q3 sales in the U.S. were up 53%, driven by new patient starts increasing to 60% versus prior year. 60% of our new patients in the pre-taxane setting are -- with market share already surpassing chemotherapy. So really driven now by the pre-taxane launch. The key enablers to sustain our growth now in the U.S. is really to drive community adoption. We have 60% of our TRx in the community. We have 9 out of 10 patients within 30 miles of a treating site, so over 730 sites. We believe that we need to get to around 900 sites to also support the HSPC indication. So we're well on our way. Our rollout of the pre-filled syringe is really positive, around 70% of sites using the pre-filled syringe already. And outside of the U.S., the rollout continues. We see good growth in the post-taxane setting in Europe, Canada, and Brazil. And we also received a Japan approval and expect the China approval in quarter 4. So all on track for Pluvicto to reach its peak sales potential. Now moving to Slide 11. We presented last week the PSMAddition data, where we demonstrated that Pluvicto plus standard of care reduced the risk of progression or death for standard of care alone by 28%. The primary endpoint was met, clinically meaningful 28% reduction in these patients with a compelling p-value, a clear positive trend in OS with a hazard ratio of 0.84, and that's even with crossover. So I think that really demonstrates we're having the attended effect the time to progression to castrate-resistant prostate cancer was delayed, which demonstrates we are achieving disease control. And overall, the Pluvicto tolerability profile was consistent with the Phase III trials in PSMAfore and VISION. So we would see global regulatory submissions in quarter 4 of this year. So moving to Slide 12. Leqvio was up 54% in the quarter, on track for over $1 billion in sales in the year. In the U.S., we're up 45%, outpacing the advanced lipid-lowering market. We had solid TRx gains of 44% versus prior year. And our key focus is particularly in Part B accounts and accounts that have a high interest, of course, in using the buy-and-bill Leqvio model to drive more depth in those accounts, particularly as we've now evolved our field model to better support those accounts. Outside of the U.S., we see a continued strong performance, 63% growth. driven by a number of markets, particularly China out of pocket, but we also see strong uptake in Japan, strong uptake in the Middle East and the Gulf countries. So all of that taken together, I think, really portends well for Leqvio in the medium to long term. We did achieve some important regulatory and clinical trial highlights. Our U.S. monotherapy label expansion, removing the statin prerequisite in the primary prevention population was added to the label. The V-DIFFERENCE data was presented at ESC, which showed Leqvio helps patients get to goal faster. I'd also note that our pediatric submissions are on track, which, of course, supports our longer-term LOE profile. Now moving to Slide 13. Scemblix grew 95% in constant currencies in quarter 3. It's on track to be the most prescribed TKI by NBRx in the U.S. Focusing on the middle panel, you can see that our all line of therapy, NBRx has now reached 39% and is steadily climbing built off of that first-line approval. In first line specifically, we've reached 22% share. So we're now approaching NBRx leadership in first line. We already are the NBRx leader in second line and third line plus with 52% and 53% share, respectively. Outside of the U.S., our focus currently is on the third line plus setting, where we have 68% share. But we do have the early line now approved in 26 countries, including China and Japan and a positive CHMP recommendation from October. So we would expect now to start to see our ability to reach patients in the first-line setting picking up outside of the United States. As an indicator of that, you can see here our strong launch momentum in Japan, first-line share already up to 18%, second line at 25%. So we continue to be very optimistic about the outlook for Assembly. Then moving to Slide 14. Now Cosentyx had a mixed quarter. Our growth was impacted by a onetime effect in quarter 3, which I'll go through in a moment. But most importantly, we remain on track for mid-single-digit growth in full year 2025 and are confident in the peak sales potential of the brand. So you can see that in constant currencies, our growth was down 1%. In U.S. dollars, we're more or less flat. Now when you remove the onetime RD adjustment of $74 million, our global sales growth was around 4% in constant currencies. In the U.S., when we adjust for that onetime RD, our growth goes from plus 1% to plus 9%. Cosentyx continues to be the #1 prescribed IL-17 across indications. In HS, now we see a stabilization of the performance, 52% share in naive and 50% overall. So when the competitor came in, we did see a dip in that share, but that's now stabilized. And we are better able now to manage patients alongside physicians to achieve step-up dosing rather than switching off of Cosentyx. And I think that will be important. And so we can really turn our focus to market expansion in HS with the stable share that we've been able to achieve. Outside of the U.S., we were down 3% in constant currencies, but this again was driven by a onetime price effect in the prior year. Importantly, we saw 4% volume growth, and we're the leading originator biologic in Europe and China. So overall, I think the key message is we're confident in the $8 billion peak sales potential. We expect continued market growth in our core indications and rollout of the recent launches in HS and IV. But I think also importantly, we did achieve a positive Phase III readout in polymyalgia rheumatica. It's the second most common inflammatory disease in adults over 50, an estimated 800,000 patients in the U.S. and 1 million patients in Europe to have the condition. So this is a market that's on par with the HS market when you think about the size of the segment. We have global regulatory submissions planned in the first half of 2026, and we'll be working to accelerate them as well and really hope to drive rapid uptake in PMR. We believe the data is compelling. We demonstrated, as you saw in the press release, a positive clinically meaningful primary endpoint, and we also hit all of the secondary endpoints. So we're looking forward to presenting that data and taking this launch forward. Now moving to Slide 15. Our renal portfolio continues to gain traction in the U.S. We had a positive Fabhalta eGFR data, really the first oral therapy to generate such compelling eGFR data. So looking forward to presenting that. We see steady growth in the U.S. Our IgAN portfolio grew 98% versus market growth of 23%. Our NBRx share is now 18% climbing steadily. We see strong uptake as the first approved therapy in C3G. Outside of the U.S., we're beginning to get the key approvals, particularly in China, where there's a large market for IgAN therapies. And turning to the Phase III APPLAUSE-IgAN study, we saw a statistically significant clinically meaningful improvement in eGFR slope versus placebo. It's the longest renal function data for IgAN to date. So we're excited to present that data at a future meeting. And this data should support a full approval -- traditional approval with FDA. Now moving to Slide 16. Rhapsido was approved by FDA as the only oral targeted BTK inhibitor for CSU. I think many of you know the medicine well. It's something we're quite excited about. It's indicated for the treatment in adult patients who remain symptomatic despite antihistamine treatment. And we estimate that patient population to be around 400,000 patients uncontrolled out of 1.5 million treated patients. We achieved a clean safety profile with this medicine, no box warning, no contraindications, no requirements for routine lab or liver monitoring. oral administration, 25 milligrams twice daily with or without food. So a really good profile for these patients. I would want to highlight as well. We're very excited to have a medicine with rapid onset in a highly symptomatic condition. These patients have to deal with itch, loss of sleep, discomfort. And so if you can have a medicine that has a really rapid efficacy benefit that's really, I think, something that could drive rapid uptake. Our initial patient -- physician feedback is excellent, and we're already seeing a steady increase in start forms. Our goal will be to improve the access environment for the drug as fast as possible, and then we would start -- expect to see rapid uptake over the course of next year. And then lastly, in both EU and China, we've completed our submissions and our Japan submission is slated for also later this year. And moving to the next slide. Ianalumab, we announced our positive Phase III studies earlier in the quarter. Yesterday, we released our top line data. The full data set will be presented soon, I think, tomorrow. And then our Analyst Day to discuss this data as well as the Rhapsido data as well as other immunology data, including our CAR therapy platform for immunology. Immune reset platform will be on Thursday. So I hope you'll be able to join that, and we'll give you a lot more detail on the secondary endpoints, on post half endpoints, on biopsy data, et cetera. But here, just on the top line, the Phase III endpoint was met in both studies, statistically significant improvement in ESSDAI. I do want to highlight here, there's a lot of focus, a lot of report on the aggregate ESSDAI from a patient standpoint and a physician standpoint, what matters is where the individual patients are and how much we're able to improve their relative disease. And also what is the starting point for the ESSDAI score. So the fact that we've achieved two positive Phase III trials, I think, will really enable us to roll this out to patients. And then as patients see the symptom benefit given their profile, they'll hopefully be able to get the benefit and stay on the medicine. We have consistent numerical endpoints, improvements in the secondary endpoint, a favorable safety profile. And as I mentioned, the data will be provided shortly. So regulatory submissions are on track for the first half of '26. And moving to Slide 18. Overall, I think a strong innovation year for the company. You can see all the various milestones that we've reached. Also, we've been, I think, the leading player in the sector in terms of deals bringing in medicines at all stages from preclinical to Phase I to late-stage assets, also continuing to bolster our technology platform. So we'll look forward to giving you a full innovation update and technology update at Meet the Management in November. So with that, let me hand it over to Harry. Harry Kirsch: Thank you very much, Vas. Good morning, good afternoon, everybody. As usual, I will take you through the financial results now for the third quarter, the first 9 months and the full year guidance. And as always, unless otherwise noted, all growth rates are presented in constant currencies. So if we go to our Slide 20, you see a summary of the financial performance. In the third quarter, net sales grew 7% versus prior year. Core operating income was also up 7%. In the U.S., we had some negative gross to net true-ups first time since the year. Prior, we had mostly positive. But they were mainly related to Medicare Part D redesign, which was new for the industry this year based on invoices for prior periods, mainly quarter 2. And excluding these true-ups, the underlying growth would have been 9% on the top line and 11% on the bottom line as the priority brands and launches continue to offset the increasing generic erosions, mainly for Entresto, Tasigna, and Promacta in the U.S. Our core margin was 39.3% in Q3 and core EPS came in at $2.25, reflecting a 10% increase and free cash flow totaled $6.2 billion. For the first 9 months, obviously, as we had less generic erosion, net sales grew 11%, core operating income 18% and the core margin expanded 250 basis points to reach 41.2% and with core EPS at $6.94, up 21%. Free cash flow reached after 9 months already $16 billion, growing 26% in U.S. dollars versus prior year. Moving to next slide. Speaking of free cash flow, up 26% billion, as I mentioned, already close to actually prior year full year $16 billion after 9 months. So it really shows continued strong conversion from profits to cash flow. And of course, cash flow remains a strategic priority as it increased further our ability to convert strong core operating income growth and robust free cash flow and gives us the capacity to reinvest in our business organically, pursue value-creating bolt-ons like the proposed acquisition of Avidity and return attractive shareholder -- attractive capital levels to our shareholders through growing dividends and share repurchases. Speaking of capital allocation, let's go to the next page, right? It's really unchanged. And again, based on very strong free cash flow, we really can optimize both a significant investment in the business to drive top and pipeline and returning capital to our shareholders at attractive levels. In the first 9 months, aside from Avidity, we have executed multiple bolt-on M&As, smaller in size, but still very important and -- which strengthened our key platforms and pipeline for our four therapeutic areas. And of course, we also continue to invest in our internal R&D engine. On the capital return side, we successfully completed our up to $15 billion share buyback program early July and have launched a new up to $10 billion buyback program targeted for completion by the end of 2027. We also have distributed $7.8 billion in dividends during the first half of this year as part of our annual dividend. Turning to the next slide. We reaffirm our full year guidance. We expect high single-digit growth in net sales and low teens growth in core operating income, even after accounting for negative gross to net true-ups in the third quarter. And to complete our outlook, we now anticipate the core net financial expenses is slightly higher at $1.1 billion before we had $1.0 billion, a bit higher hedging costs. But overall, nothing dramatic. And the core tax rate continues to be in this range of 16% to 16.5% so far in the first 3 quarters at 16.2%. Now let's move to the next slide. So usually, we don't provide so much level of quarterly guidance, right? Quarters are a bit more volatile than the full year usually. But given that we have U.S. generics entry in the middle of the year for three of our brands, of course, the biggest being Entresto, but also Promacta and Tasigna were, of course, blockbusters, it results in very different quarterly dynamic this and next year. And so as a reminder, in quarter 4 of last year, we benefited from significant positive gross to net adjustments, which added back then about 3 points of growth. So it makes for a very high prior year base. Adjusting for these one-timers, we expect quarter 4 underlying growth to be low single digit on the top line and mid-single digit on the bottom line, reflecting the increasing generic erosion from a full year impact of Entresto U.S. generics but better, obviously, than what we expect to report, including the prior year gross to net adjustments. We provide full year guidance for 2026, of course, next quarter with the full year results, but you can imagine it will be a year of two halves. The first half of 2026 will be depressed due to the impact of generics with still a high prior year base, but we expect to emerge much stronger in the second half, but much more on that as we go -- as we report our full year results early February. Now let's move to our currency estimate impact of currencies should -- currencies remain where they are basically late October. Then we expect a full year in '25 impact of 0% to 1% on net sales and minus 2% points on core operating. You see also the quarter. And we roll this forward to '26. So in '26, we would expect with these exchange rates, a slight positive 1% point on net sales and basically no material impact on core operating income. And as you know, we publish this on a monthly basis as it is quite difficult to forecast this from the outside in, and we hope you find it helpful. And then lastly, I hope you were able to join our presentation on the proposed acquisition of Avidity yesterday. If not, I would encourage you to listen to the replay. And -- adding Avidity, as we mentioned yesterday, raises our '24 to '29 sales average growth rate from 5% to 6%. But of course, even more importantly, further supports our mid-single-digit growth over the long term with main impacts, of course, in the 2030s and beyond. And it brings, of course, these near-term product launches two with multibillion blockbuster potential with LOEs in the 2040s and no IRA impact. Now we also mentioned yesterday that we do expect some short-term core margin dilution given Phase III trials are basically now starting to run or up and running shortly in the range of 1% to 2% points for the next 3 years. But we are confident that we return to the 40% margin, which we already achieved this year also will return them back to that in 2029. And please make sure that you also model this 1 to 2 points core margin dilution as you finalize your 2026 models for us. This deal, of course, overall is expected to deliver very strong sales and profit contributions post -- starting in '29 and then even more and therefore, driving significant shareholder value with a small price to pay over the next 3 years on the margin dilution as part of the investment. That's all I had for now and handing back to Vas. Vasant Narasimhan: Great. Thank you, Harry. So moving to Slide 28. In summary, solid sales and core operating income growth in the quarter despite generic headwinds. So I think we're navigating that well with strong underlying performance of our priority brands, which is reflecting the strong execution, a strong pipeline progress. We delivered strong pipeline progress in the quarter. And we also reaffirm our 2025 guidance and remain highly confident in our mid- to long-term growth, which is further bolstered by our proposed acquisition of Avidity, not just through the end of the decade, but into the next decade and beyond. I want to just quickly remind you as well, we have our immunology pipeline update on October 30, and our Meet Novartis Management on November 19 and 20, in person in London. So thank you again, and we'll open the line for questions. Operator: [Operator Instructions] We will now take the first question. And the question comes from Matthew Weston, UBS. Matthew Weston: I hope you can hear me. It's a question about policy, Vas. And we've seen now two companies do deals with the White House around Medicaid and tariffs. And I wondered from your perspective, how much you felt we could see the industry do a cookie cutter of those deals or whether there are meaningfully greater challenges for some companies and when we should expect something from Novartis? And if Harry, I can steal, I guess, an extension of the same question. Can you walk us through CapEx over the next 5 years given the investments that you've announced in the U.S. and how we should think about modeling that as part of cash flow? Vasant Narasimhan: Thank you, Matthew. So I think from an industry-wide perspective, I think the pharma industry's view is that the proposed negotiations or proposed actions are not going to address the underlying issues here, which, of course, we believe are PBMs, 340B and importantly, perhaps most importantly, G7 countries and related countries outside the United States properly rewarding innovation and properly assessing the appropriate price for innovation. That said, I think, as you point out, there are I think now three companies that have reached agreements with the administration. I'd say Novartis has -- I can't speak to what other companies are doing. We've been in conversations with the administration since the beginning of the year as we've had the various turns in these discussions. And I'd say we're meeting with the administration weekly to look at what are the best solutions we can come up with. It is important to note that the President was very clear on the four parameters, and I think those are the four parameters that are in discussion. And we'll have to see in the coming weeks and towards the end of the year if we can come to a proposed approach that makes sense for all involved. And in terms of CapEx, Harry? Harry Kirsch: Matthew, I think as we mentioned when we also introduced the $23 billion over the 5 years commitment, we made it clear that the majority is actually not CapEx. Majority is R&D OpEx, where we have the choice to invest in the U.S. or anywhere else in the world. And we choose, of course, to have a strong commitment also for R&D in the U.S. And then there's a portion, yes, it's CapEx, but it's actually part of our overall worldwide financing plan also for -- and we choose basically incremental to invest in U.S. to build up there our manufacturing base to supply the U.S. from the U.S. instead of further expanding, for example, European sites. So from that standpoint, overall, I don't expect a significant or meaningful CapEx increase. We are always in this range of 2.5% to 3% of sales, actually quite a low end of the industry given our very focused and efficient manufacturing setup. And it's always -- there can be annual fluctuations, but nothing meaningful. Also, we have further opportunities in cash flow and inventory. They are usually on the high side. We keep that as a bit of a buffer in certain times. So overall, in short, I would not expect a significant CapEx increase. And I would expect free cash flow to grow roughly in line with core operating income growth. Operator: Your next question comes from the line of Peter Verdult from BNP Paribas. Peter Verdult: Pete Verdult, BNP. Only one, so I'll keep it topical for Vas. Just on the market reaction to that ACR abstract, I think you've alluded to it being disappointment and you perhaps sharing a different view. So just pushing you on -- do you think the market depreciation of the data set will improve once we see the full details tomorrow? And just could you remind us, I'm sorry to get technical, of the 12 domains that make up the ESSDAI index, which ones are seen as the most important to patients and physicians? Vasant Narasimhan: Yes. Thanks, Peter. I mean, I think for us, the most important thing is that we make a compelling proposition to patients and physicians. And then if we deliver a strong launch, then I think, obviously, the markets will do what the markets will do, but presumably will follow. I think -- we will present detailed data on Thursday, and I think that will help at least understand where our conviction comes from. I think very important for us is the individual patient benefit. I think practicing physicians and patients don't measure an ESSDAI. They're actually looking for symptomatic benefits in things like fatigue, in salivary flow, in activities of daily living. And I think looking at that -- the global assessment of physicians and how they see patients benefiting is going to be really important for this launch. It's a highly variable disease. So a lot of this will depend on finding those groups of patients that have a significant benefit. And I think important for these patients as well is to feel like they don't need the same level of steroids that they typically are using, which can be hugely disruptive for their lives. Sleep is another topic as well. So we'll present that information. But I think we feel confident that there is a high willingness even from the physicians that we're talking to now in Chicago, a high interest and a high willingness to make this option available for patients. And assuming we can make patients materially feel better versus the current standard of care, which is frankly just high-dose steroids, we expect to be able to drive significant growth from this medicine. Operator: Your next question comes from the line of Stephen Scala from TD Cowen. Steve Scala: It seems like there may be a subtle change in the messaging on Cosentyx in HS. While Novartis grew overall market share quarter-over-quarter on Slide 12 of the Q2 deck, Novartis noted continued HS market growth. And in the Q3 slide deck, that was not stated explicitly. It's clear Novartis has been playing defense on share. But with that now stabilized, is the point that you need to grow the market and it's not growing at the pace that you expected? So is that the contour of the market? This would seem to be a factor in whether Novartis grows earnings in 2026. And when Harry was talking about 2026, he didn't say that specifically. Vasant Narasimhan: Yes. Thanks, Steve. So what I can say is that we feel confident that our share has stabilized after the competitor entry. I think we have not seen the market growth that we had originally hoped for that we -- there's clearly a lot of patients who can benefit from biologic therapy with HS. We continue to see this as a $3 billion to $5 billion-plus market, but it's clearly going to take longer for that market to develop. And so I think we probably did not do the careful analysis that you did on our slides, and I'll look to our IR team to do that more carefully in the future. But I think your point is absolutely on that we need to see -- we need to grow this market, and that's what really both companies should really be focused on and get more patients on these therapies. Now with respect to earnings, we don't comment on 2026. We're focused on clearing out 2025. And so once we get there in January, we can provide you our outlook. I would say that I think I would focus much more on the dynamic growth you saw in the quarter on Kisqali, Pluvicto, Scemblix, Kesimpta, all of which, to my eyes, were ahead of consensus. And I think that's where I think the focus should be now looking ahead for the company. Next question, operator? Operator: Your next question comes from the line of Shirley Chen from Barclays. Xue Chen: Can I ask about Pluvicto. So congrats on a great quarter. Could you please help frame where you are in the launch curve for pre-taxane new label? And how do you expect the inflection in 4Q and also next year? Can you remind us your peak sales ambition of this drug? And when do you expect Pluvicto to reach at the full potential within the PSMAfore population and also potentially PSMAddition population? And also in addition, you -- I think you previously mentioned a few challenges for commercialization, such as reimbursement, education of staffing and referral networks. And how do you find where you are tackling these challenges? Vasant Narasimhan: Yes. Thanks, Shirley. So for Pluvicto overall, I think we're on the steep part of the curve right now. We see -- as you saw, very strong growth in quarter 3. We would expect very solid growth in quarter 4. It's important to note in quarter 4, we always have a slowdown in the Thanksgiving and Christmas holidays. So in effect, lose 2 to 3 weeks because of those holidays, simply because patients don't want to "have a nuclear medicine, radioactive medicine that prevents them from being around children or family members, so for a period of time." So important to note that. But that said, we do expect continued strong performance in quarter 4. And then going into next year, we would expect solid growth, but I think as always with these launches, good growth, but maybe not the same levels of growth you're seeing in quarter 3 and quarter 4, kind of an S-shaped curve. And then our plan would be to bring on the HSPC indication, which will then propel us, we believe, to the $5 billion peak sales that we've guided to. So we fully are confident on that. We see high levels of now receptivity. And that, I think, brings me to your point on the structural challenges, which I think we've successfully tackled now with the PSMA and VISION launch, we struggled to get into the community in a way that was scaled. Now through years of effort by our U.S. commercial team, we've successfully, as I noted, have over 700 prescribing clinics across the country. 9 out of 10 patients are very close to a center that can provide Pluvicto. We're adding centers just to be on the safe side. We've done careful mapping to know the referral pathways. Physicians are much more comfortable now using the PFS, a pre-filled syringe and dealing with some of the other logistics associated with radioligand therapy. So we're in a very good spot in that sense. And that's what gives us confidence that the pre-taxane launch can propel us into the $3 billion-plus range and then the HSPC launch will propel us into the $5 billion-plus range and will be where we expect. We continue in the as well in the oligometastatic setting as well to go earlier. We also have a number of Phase IV studies, including in the mCRPC setting in combination with ARPIs to give physicians even more options. So we're doing all of the work as well to fully build out the data package to maximize this medicine. I think while I'm on Pluvicto, I think all of that builds the base for our radioligand therapy platform more broadly. We have that full range of 10 -- around 10 different indication medicines that are advancing in the clinic. And now as we bring those forward, we have that infrastructure built in the U.S. and now increasingly Japan, China, and other markets to make those other launches successful. So I think all on the right track. It was a very important element for us to strategically solve. And in my view, we have solved the challenge of rolling out radioligand therapy in the United States. Next question, operator? Operator: Your next question comes from the line of Florent Cespedes from Bernstein. Florent Cespedes: A question on Rhapsido. Could you maybe share with us how you see the ramp-up of the product as you have a clean safety profile, convenient administration? And do you have any feedback from the Street even though it's still early days? And any thoughts for the situation in Europe, the adoption knowing that the product will be compared with much cheaper drugs? Vasant Narasimhan: Yes. Thank you, Florent. So we're in the early stages of the launch. Right now, our focus is on sampling through patient start form, getting through patient start forms and negotiating with payers to ensure broad access in the early part of next year. I think once we get to the early part of next year, we get that base up through sampling in this initial phase, we would then start to expect a more rapid uptake through Q2 forward next year, where I think there will be the opportunity then to really drive uptake. We would expect initial uptake to be in patients who are not responding to biologic. But then our goal very much is to be positioned pre-biologic. That's really where the opportunity is for this medicine, and that's what we're going to be our long-term focus in the U.S. and really around the world. I think in Europe, you raised an important point. I mean, a lot of this will come down to our payer negotiation. And I think in light of the current situation in the U.S., it will be absolutely our goal to hold the line and ensure that Rhapsido is appropriately reimbursed for the innovation it's bringing and not have it be compared to old generic drugs, but really compared to what it is a pureless oral twice-a-day option for patients that really need a rapid onset of action. And we're hopeful that European payers will realize that and then appropriately reward it, and then we'll be willing to be patient to achieve that. But then I think once we get access, all of our indications, there's a lot of enthusiasm in both the allergists and the derm community for a safe oral option, and we should see rapid uptake there as well. So I think overall, very excited about the medicine. As you know, we're progressing as well in CINDU. We would expect that readout next year. We're progressing in food allergy. We're progressing in HS. So we have a number of opportunities now ahead of us as well for this medicine. Next question. Operator: Your next question comes from the line of James Quigley from Goldman Sachs. James Quigley: I've got a follow-up on Ianalumab, please. So one question we've had is that, obviously, the slide suggests in NEPTUNUS-1 that statistical significance was only achieved in the last two blocks of data. Was that just because of when the tests were run? Or is that sort of what you're expecting as well in terms of when you're planning the study? And a second quick one on Ianalumab as well, hopefully not to preempt tomorrow or Thursday. But you talk about the sort of secondary endpoints and fatigue and salivary flow being more important, but the secondary endpoints were not statistically significant. So again, was this a case of hierarchical testing or anything else? How can you show that when you -- when the drug hopefully gets approved and you talk to physicians about the data? Vasant Narasimhan: Yes, absolutely. I mean, I think the endpoint here is at 52 weeks. And so I think we were trying to indicate all of the time points to reach nominal significance. But given that endpoint, the goal here is 52 weeks, and both studies achieved the prespecified primary endpoint at 52 weeks in the independent analysis and in the pooled analysis. So no issues there. And so we feel from a regulatory standpoint, we've -- 48 weeks, excuse me, 48 weeks the standard. So I think you can see here on Slide 17, 48 weeks was hit in both trials. And then -- separate from that, there is hierarchical testing here as often is the case. And so if one of the secondaries are hit, even if they hit from a nominal standpoint and lower the hierarchy, it's no longer valid from a pure statistical hierarchy standpoint. It could be nominally statistically significant, but wouldn't reach the threshold from a regulatory standpoint. That said, I mean, I think as I've tried to articulate, there's the regulatory standpoint here. And in a disease that's never had an approved drug, there's really what our patients and physicians looking for. And we've really tried to understand once we hopefully can get the regulatory approval, then what do we need to educate physicians and patients on. So you'll hear more about that on Thursday, but our team has done a range of analyses to look at secondary outcomes, look at post-hoc outcomes, look at also biopsies and really try to demonstrate that you're seeing the benefits that patients want. I myself have spent time talking to patients with Sjögren's. And I think what really matters to them is quality of life metrics and very specific quality of life metrics that varies patient to patient. So I don't think that for them that the ESSDAI score is going to make the difference. It's going to be whether or not their symptoms are getting better and they can live their daily life day in and day out better. Next question. Operator: [Operator Instructions] Your next question comes from the line of Richard Vosser from JPMorgan. Richard Vosser: One on Kesimpta, please. Just whether you're seeing any impact in the U.S. from the OCREVUS subcutaneous launch. It doesn't seem like it, but just wondering what you're seeing here. And linked to that, there's some discussion from you about your new formulation. Just wondering on details of treatment interval, whether this could be a new BLA and how this could protect from potential biosimilars down the line. Vasant Narasimhan: Yes. Thanks, Richard. So on OCREVUS subcu, we don't see an impact to date, as you can see on our overall performance. We're holding share in a growing market. I think -- the overall market growth for multiple sclerosis drugs has been solid. Within that, the B-cell class continues to steadily increase with a bigger opportunity outside of the U.S., but still we see the opportunity. I think 25% of patients in the U.S., give or take, are still not on B-cell therapies that could be. And so we're really benefiting from the market growth. We are doing a lot of work now to get better at targeting physicians that we think would be more amenable to a patient self-administered administration rather than the various other options available. But I think overall, this is a growing market where the medicine is holding its share, performing really well. It's all volume-driven growth. From a life cycle management standpoint, we are advancing our Q2-month formulation. And so we'll keep you updated as we progress, but that's something that's a trial that's currently on rolling. And then we're exploring other options, no details I can get into at this point to get into longer intervals as well potentially with novel technologies. And I think as those progress and if there is the opportunity to get those launched before biosimilar entry, that's something that we're highly, highly focused on, absolutely. But I think it's premature to comment on that at this point. Next question, operator? Operator: Your next question comes from the line of Thibault Boutherin from Morgan Stanley. Thibault Boutherin: Just a question on abelacimab, the injectable Factor XI acquired with Anthos. I think we're getting the first Phase III data in AFib next year. This is for patients at high risk of bleeding and for whom oral anticoagulants is not adequate. Can you just sort of frame the opportunity in terms of size? And are you looking to potentially go into a broader patient population with this asset? Vasant Narasimhan: Yes. Thanks, Thibault. So this is the -- as you know, the antibody that we acquired back from Anthos is originally a Novartis-originated antibody. So we know it quite well. As you know, the study next year will be in patients who are ineligible for DOACs, NOACs. And so the opportunity here is for these patients, which is a reasonable sizable patient population to provide them a significant option with monthly dosing. I think the opportunity here will really -- the size of the opportunity, we believe is multibillion, but the scale of that multibillion-dollar opportunity will really depend on how the oral Phase III program from one of our competitors performs. I mean, clearly, if that oral medicine, which is an all comers in a very large study, if that is unsuccessful, then we would have a very significant potential with our medicine. I think with an oral and an antibody, we'll be much more than focused on these more refractory patients and the opportunity won't be quite as large. But I think in either case, it will be a multibillion-dollar asset we can bring into our cardiovascular portfolio. And we're -- yes, we're quite excited about it. Next question, operator? Operator: Your next question comes from the line of Michael Leuchten from Jefferies. Michael Leuchten: If I could please go back to Cosentyx. Could you tell us, please, what your pricing assumptions, the net pricing assumptions are for the U.S. into the fourth quarter? Do you expect any drag? And just trying to understand the increase in step-up dosing comment on your slides around HS, the 25% utilization. Could you put that into context? What was that maybe at the half of the year? And how has that developed? Vasant Narasimhan: Yes. Thanks, Michael. So on Cosentyx pricing, we don't expect any shifts going into quarter 4. And I'd say, overall, we expect stable gross to nets as well going into next year. I mean it's relatively mature brand, but also with multiple new indications and a solid payer position. So I think we should be stable on that front. We are also monitoring the impact of the Part D redesign, but most of the impacts we've seen on Part D redesign have actually been on Entresto earlier in the year, and then I think that will fade away now as generics enter. On HS, this really referred to the fact that early on with the competitor launch, what we were seeing is with patients who were on the monthly dosing, if they weren't seeing the effect that they are, physicians weren't seeing the effect that they hoped for, the effect was wearing off, they were switching rather than updosing Cosentyx every 2 weeks. And so now we see about 25% of patients on Cosentyx moving up to that every other week dosing. And that's something we'd like to get even higher over time because I think that really demonstrates patients are persisting on Cosentyx, and that's going to be important for us to retain our greater than 50% NBRx share and then the correlating TRx share as well. So that's very much in focus for us. And then I'd come back again that we also just need to work on growing the market. I think if this ends up being two competitors just trading the same group of patients, that would be disservice to this patient community. I think we have to get better now at reaching patients who have either fallen out of the system or for whatever reason are being identified as biologic appropriate patients and get them on therapy. Next question, operator? Operator: Your next question comes from the line of Simon Baker, Rothschild & Co Redburn. Qize Ding: I hope you can hear me okay. So this is Qize Ding speaking on behalf of Simon Baker. So I have one quick question. So one quick question on the rebate adjustment. Is there anything you can call out other than the Cosentyx? And also, did any drug benefit from the rebate adjustment in the Q3? Vasant Narasimhan: Yes. Thank you for the question. I'll hand that to Harry. Harry Kirsch: Yes. Thank you for the question. So overall, of course, when you see the amount that is prior period is roughly $180 million. You see that this has about this 1.5 almost rounding the 7% to 9%, if you will, effect on the quarter. And Cosentyx is a big piece of it. Another big piece of it is Entresto actually where patients got quicker into the catastrophic as part of the Medicare Part D redesign. And of course, that part really should go away as Entresto kind of goes away. And there has been some smaller elements, including like really going back into '24 with some inflation penalty part. But the two biggest ones are Cosentyx and Entresto. Vasant Narasimhan: Thank you, Harry. So Sharon, next question. Operator: [Operator Instructions] And your next question comes from the line of Rajesh Kumar from HSBC. Rajesh Kumar: Just trying to understand the margin cadence over 2026. I know you're not giving a '26 guidance at the moment. But very helpfully, you said it will be a year of 2 halves. So given what you know about Part D now and how generics are coming and what sort of operational gearing you're getting on your Kesimpta, Pluvicto, and other, drugs which are growing. If you were not cutting the costs, would the cadence be a lot more steeper? And what have your actions done to offset that impact? So what is the mix impact versus self-help? If you could help us quantify as well as the seasonality of Part D cadence? Because this year, you have done a prior period adjustment that might not be the next year because you have some accrual history now. So you will base your quarterly accruals on the evidence you have. So it would really help us model out first half, second half for '26. Harry Kirsch: Yes. Thank you, Rajesh. A very thoughtful question, of course. And so in our business with our mix, we usually do not have Medicare kind of related different gross to net levels quarter-by-quarter other than when we have a gross to net true-up, right? So when channel mix changes, when a product goes quickly into the catastrophic and those -- if there are -- I mean, there are always some deviations, right? We have over 20 billion RDs in U.S. But when these are significant or meaningful, then we let you know, right, how much it is, like in quarter 4 of last year, it was 3 points of growth, which is now impacting as a high base. Quarter 1 was 2 points to the positive and quarter 3 is now 2 points to the negative. So we show you that stuff. But that's basically true-ups. The underlying is not changing quarterly dynamics for us. So for next year, you will have a very high base Q1 right, with the 2 points of growth that we got from the -- and you will have a relatively low base in Q3 from the 2 negative points this year. And other than that, it's all about launch uptake and generic erosion of the three main products. Maybe long-winded, but I hope it was addressing your question. Vasant Narasimhan: And we'll do our best, I think, at the full year earnings as well to provide more guidance on how best to think about the full year 2026. Next question, Sharon. Operator: Your next question comes from the line of Matthew Weston, UBS. Matthew Weston: It's just a quick follow-up actually to one of the prior questions. Harry, Kesimpta looks like a very strong quarter in Q3 that looks somewhat off trend. And I'm just making sure that as we go into Q4, we aren't going to learn that it was lumpy one way versus the other. Can you just confirm that was underlying operational growth? Vasant Narasimhan: Absolutely. Harry? Harry Kirsch: Yes, it was mainly underlying operational growth, a little bit of inventory, but not much. Vasant Narasimhan: Just a strong global volume, I think, in both U.S. and ex U.S. for this matter. Next question. Operator: Your next question comes from Simon Baker, Rothschild & Co. Redburn. Qize Ding: Just one quick question on the Ianalumab in Sjögren’'s disease. So we observed the placebo response in the Sjögren’'s trial tend to be plateau at week 48. So why did it reverse in the first trial of those two Phase III trials, please? The Phase III trial is called NEPTUNUS 1. Vasant Narasimhan: Yes. I think the question is regarding the placebo response. I mean I think -- look, I think these were both adequately controlled, well-designed studies, global studies. This is just a highly variable disease. And so you're going to see some variability in how the placebo responds. When we look at background therapy as well, it's very comparable across the studies and so also versus normal standard of care. You do see as well that the month data looks much better than the Q3-month data, but you do see as well the dose response that we would expect. So I think that's all positive. And so we'll have our experts on the line on Thursday. So if you want to get into more detail, and they'll also be able to go through some of the background on the study design and baseline characteristics. But I think, obviously, I can't comment more until the full data is presented. Next question, Sharon? Operator: Your next question comes from Stephen Scala from TD Cowen. Steve Scala: Novartis raised the long-term revenue guidance yesterday, half of which was attributed to the existing business. Of the half attributed to the existing business, how much is due to currently marketed products? And how much is due to higher sites for the pipeline agents? Vasant Narasimhan: Yes, Steve, I think we can provide better midterm guidance on that and meet the management. But most of that is in-line brands. Obviously, you see the strong performance of Kisqali, Kesimpta, Pluvicto, Scemblix, I think solid performance on Leqvio. And there is probably some in there of what we expect will be a strong launch for remibrutinib, so Rhapsido and the label expansion for Pluvicto. Yes, I think that's roughly the breakdown more or less. I think any other pipeline assets we would expect to have limited ramp in this period, just given how long it takes to ramp up these launches when you think out to '29. And we will provide guidance as well out to 2030, as I said yesterday, and meet the management as well as update our peak sales guidance on our various brands where appropriate. Next question, Sharon? Operator: Your next question comes from the line of James Quigley from Goldman Sachs. James Quigley: Just a quick one for me. I mean you may have already answered it, Harry, but again, it's coming back to the Cosentyx, the rebate adjustment. Which prior periods does that relate to? Is that a Q1, Q2 this year? Or is that a 2024 thing? I'm just trying to think in terms of modeling for next year as we look at Cosentyx. Is there a slight headwind from where there was a higher price that you realized in Q1 and Q2 that then reversed out in Q3? And also what does that mean sort of going forward into 2026? Again, I appreciate there is going to be other dynamics with PMR and HS, but just wanted to clarify that from a modeling perspective. Harry Kirsch: Thank you, James. It's mainly quarter 2 this year, most of it. And -- but the quarter 3 underlying, that's why we gave you the quarter 3 underlying is what the underlying is already taking into account if such channel mix would continue to prevail. So from that standpoint, it gives you a good basis for future modeling. Vasant Narasimhan: I think, Harry, if I'm correct, if you net out the prior period upside versus this that really the year-to-date is relatively clean. Harry Kirsch: Across the whole portfolio. Vasant Narasimhan: Across the whole company, the year-to-date is close to red. Harry Kirsch: Quarter 1, we had 2% upside. Now we have almost 2% downside, right? It's a bit different brand by brand. But that's why we've given you on the brand that has most of it and is -- Entresto is deteriorating, of course, but this one, of course, is a brand that will stay long with us. That's why we gave you the underlying, which gives you the real underlying at the moment for quarter 3. Vasant Narasimhan: Sharon, next question. Operator: Your next question comes from the line of Sachin Jain from Bank of America. Sachin Jain: So firstly, just a clarification on margins for Harry. So 3Q margins were a little bit below Street. I guess, partly on gross margin, which is sort of first impact from generics. I wonder if you could just talk about gross margin, EBIT margin as we think about a full year of Entresto impact in '26. My simple question is, can you maintain margins stable next year through the full year of generics before we model the underlying Avidity dilution? And then given, I might just take an additional one on pipeline for Vas. You flagged good uptake in IgAN. You have the Phase III for the APRIL, BAFF next year. So I wonder if you could just talk to your excitement on that and differentiation and what's the competitive landscape? Vasant Narasimhan: Great. Harry? Harry Kirsch: So on the margins, of course, when you have a product like a small molecule, high-priced products like the 3 going off patent, especially Entresto being so big, there's a slight negative mix effect. Now Kisqali is also a super high-margin product, right, and growing significantly. So that's partly offsetting. But we have also a significant productivity efforts, especially in our manufacturing and supply chain. So as I mentioned before, there will be, as we go forward, some pressures on the gross margin. On the other hand, we do also expect that our SG&A becomes even more efficient as we go forward, offsetting that. Now for the next couple of years, this year, we will be around 40%. And quarter 4 is usually a bit lower. Historically, we have been in the first 9 months at 41%. So Q4 bring that in the range of around 40%. And then for the next 2, 3 years, we said because of the Avidity proposed acquisition, 1 to 2 margin points down from the 40% and returning to 40% in 2029. So with that, basically -- but it's driven by development investments. And overall, to close that long answer on a short question, basically, the gross margin headwinds, I do expect to be offset by SG&A productivity. Vasant Narasimhan: And then Sachin, was your second question around the anti-APRIL antibody, I didn't catch it. Sachin Jain: Yes. Sorry, in the introduction, you talked about the strength of the existing IgAN launches, but I wonder if you could touch on the APRIL BAFF with data next year and how that wraps out your portfolio. Vasant Narasimhan: Yes, absolutely. So first to note, ours is an anti-APRIL antibody. Our competitors are anti-APRIL, BAFF. And so I think one question, of course, will be to see the profile of those two drugs and does BAFF add anything and also differences in safety profile. But I would say, overall, we expect to see proteinuria in the range, we hope of what the others have seen. And certainly, our Phase II data -- final Phase II data indicated we have very strong proteinuria reductions. We will be third to market in all likelihood. And so for us, it's really going to come down to a portfolio opportunity that we bring to patients, physicians, payers, firstly physicians' offices and payers because we'll have the opportunity to have an endothelin antagonist with Vanrafia. We have the Factor B inhibitor with iptacopan and then with Fabhalta, and then we have the anti-APRIL antibody and bringing that entire solution set to the clinic and then also the opportunity for us to run combination studies. So we're already now evaluating what would be the right combination studies to run, generate that combination data so that nephrologists know what would be the right combination agents to optimize care for these patients. So these are all the opportunities I think we're looking at. But it's going to be important for us to think through those given that at least in the anti-APRIL space, we'll likely be third to market. Next question, Sharon. I think it's the last question, if I'm not mistaken. Operator: It is. Your final question for today comes from the line of Stephen Scala from TD Cowen. Steve Scala: Given the proof of concept established by the CANTOS trial 8 years ago, what new evidence compelled Novartis to go down the same pathway and acquire Tourmaline at this time? Vasant Narasimhan: Good question, Steve. So I think we clearly understand that IL-1 beta and hitting the inflammasome has a powerful effect on cardiovascular risk reduction. But in that trial, where we did an all-comers study of patients who had a prior event without, I think, focusing down, you saw the challenge of having a significant CVRR. Now IL-6 has the opportunity to be a little bit further downstream of IL-1 beta. And the idea here is to get within the first few months to max 6 months to a year after an event when -- if patients are at that point in time with an elevated hsCRP, the knocking down that CRP can lead to a significant -- we believe the opportunity exists to lead to a significant impact on cardiovascular risk. So I think it's really -- we've learned from the CANTOS study. We understand a lot more about the biology based on that. And we think by targeting now prospectively patients right after an event who are at elevated CRP levels as a marker of elevated inflammation, we can then have a much more compelling cardiovascular risk reduction than the kind of 14%, 15% that we saw in the CANTOS study. Now we do have a competitor ahead of us, but a lot of our focus is designing, we think with our expertise, a study that can really maximize the opportunity for the IL -- the Tourmaline asset, the anti-IL-6. All right. Well, thank you all very much for attending two calls in 2 days, but we have another call coming day after tomorrow. So we hope you will attend that as well to learn more about our immunology portfolio. We will talk about Rhapsido. We'll talk about our Ianalumab data and importantly, also talk about our immune reset portfolio, which I think is quite exciting. So thank you again for your interest in the company, and we look forward to catching up soon. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning and good afternoon, and welcome to the Novartis Q3 2025 Results Release Conference Call and Live Webcast. [Operator Instructions] The conference is being recorded. [Operator Instructions] A recording of the conference call, including the Q&A session, will be available on our website shortly after the call ends. With that, I would like to hand over to Ms. Sloan Simpson, Head of Investor Relations. Please go ahead, madam. Sloan Simpson: Thank you, Sharon. Good morning and good afternoon, everyone, and welcome to our Q3 2025 earnings call. The information presented today contains forward-looking statements that involve known and unknown risks, uncertainties and other factors. These may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements. Please refer to the company's Form 20-F on file with the U.S. Securities and Exchange Commission for a description of some of these factors. The discussion today is not the solicitation of a proxy nor any -- nor an offer of any kind with respect to the securities of Avidity Biosciences or SpinCo. The parties intend to file relevant documents with the U.S. SEC, including a proxy statement for the transactions and a registration statement for the spin-off. We urge you to read these materials that contain important information when they become available. Before we get started, I want to reiterate to our analysts, please limit yourselves to one question at a time, and we'll cycle through the queue as needed. And with that, I will hand over to Vas. Vasant Narasimhan: Great. Thank you, Sloan, and thanks, everybody, for joining today's conference call. If you turn to Slide 5, Novartis delivered solid sales and core operating income growth. And I think importantly for us, important pipeline milestones through quarter 3. Sales were up 7%. Core operating income was up 7% with our core margin at 39.3%. And in the quarter, we were able to deliver some important approvals, including Rhapsido, our FDA approval in CSU for our BTK inhibitor. As well as important Phase III results, which we'll go through in a bit more detail, Ianalumab, Pluvicto, Kisqali's 5-year data as well as positive opinions for Scemblix and then also positive data that came out relatively recently on Cosentyx in PMR and Fabhalta in IgAN. Now moving to Slide 6. Our priority brands drove robust growth in the quarter. So I think really, while we, of course, are contending with our LOEs that particularly Entresto, but also Tasigna and Promacta, what I hope we can get the focus to be on is on our strong underlying growth of our key growth drivers. Here, you can see growing 35%, really excellent performance from Kisqali, Kesimpta, Pluvicto, Scemblix, solid performance from Leqvio and Fabhalta. So I think we're on a solid track to drive growth through the coming years. Now moving to Slide 7. Now taking each brand in turn, Kisqali grew 68% in quarter 3, outpacing the market and our CDK4/6 competition. If I could draw your attention to the center panel, our total to brand NBRx now, as you can see, is in a market-leading position, particularly driven by the early breast cancer launch. Our U.S. growth was up 91% in quarter 3. We are the metastatic breast cancer leader in NBRx and TRx. And in early breast cancer, our share is 63%, and we're leading both in the overlapping populations with our competitor and the exclusive population. In particular, I see -- I'd say we see significant growth potential in that exclusive population where we estimate more than 60% of patients are currently not on a CDK4/6 inhibitor. Outside of the U.S., we saw 37% growth in constant currency. We are the NBC leader in NBRx and TRx share across our key markets. Our early breast cancer indication now is approved in 56 countries. And so we'll start to see the effect of the early breast cancer launch in the next few quarters ex U.S. Now I think it's a good indicator of what we see as possible outside the United States. Our Germany NBRx share is already at 77%. And I think that helps demonstrate the kind of power that we have to drive Kisqali's utilization and enable women to prevent breast cancer recurrence across the globe. I'll close by just reminding you, we have a Category 1 NCCN guideline support as the only preferred CDK4/6 inhibitor with the highest score in early breast cancer and metastatic breast cancer. Now moving to Slide 8. Just wanted to say a word about Kisqali's 5-year data, which we showed at ESMO. There was a 28.4% reduction in the risk of recurrence in the broadest population of early breast cancer patients that have been studied. You can see here the data is very consistent across tumor Stage 2 or Stage 3 in node-negative patients and node-positive patients. I'd also note that our OS data, while still maturing, has reached a hazard ratio of 0.8, and we see a narrowing confidence interval, as you can see here in the third bullet, just a little bit above 1 on the upper bound of the confidence interval. So a clear trend favoring Kisqali. The safety is consistent. We also had some notable important trends in the data continue to demonstrate a reduction in distant recurrence to distant metastases, which is excellent to see. So we'll continue to follow these patients and continue to provide updates on this data as it matures. Now moving to Slide 9. Kesimpta grew 44% in quarter 3, and this was primarily demand-driven growth, particularly in the United States. U.S., we had 45% growth in Q3, robust TRx growth outpacing both the MS and B-cell markets. We have broad first-line access now almost 80% of the patients receiving Kesimpta are first line or first switch. Outside of the U.S., we had 43% growth, and we're the leader in NBRx share in 8 out of the 10 major markets that we participate in. And we see a significant opportunity now looking ahead for Kesimpta outside of the U.S., where approximately 70% of disease-modifying treated patients are not currently being treated with a B-cell therapy. So as we continue to get that B-cell class up with Kesimpta having leading share in many markets, we see the opportunity to drive dynamic growth ex U.S. We did present some additional data at ECTRIMS that show the benefit of Kesimpta. I think I'd highlight that 90% of naive patients receiving Kesimpta showed no evidence of disease activity at 7 years, really demonstrating the durability of the response to this medicine. Now moving to Slide 10. Pluvicto grew 45% in constant currencies in quarter 3. That's really momentum driven off of the pre-taxane castrate-resistant prostate cancer approval, which we recently achieved. The U.S. growth is driven -- so the Q3 sales in the U.S. were up 53%, driven by new patient starts increasing to 60% versus prior year. 60% of our new patients in the pre-taxane setting are -- with market share already surpassing chemotherapy. So really driven now by the pre-taxane launch. The key enablers to sustain our growth now in the U.S. is really to drive community adoption. We have 60% of our TRx in the community. We have 9 out of 10 patients within 30 miles of a treating site, so over 730 sites. We believe that we need to get to around 900 sites to also support the HSPC indication. So we're well on our way. Our rollout of the pre-filled syringe is really positive, around 70% of sites using the pre-filled syringe already. And outside of the U.S., the rollout continues. We see good growth in the post-taxane setting in Europe, Canada, and Brazil. And we also received a Japan approval and expect the China approval in quarter 4. So all on track for Pluvicto to reach its peak sales potential. Now moving to Slide 11. We presented last week the PSMAddition data, where we demonstrated that Pluvicto plus standard of care reduced the risk of progression or death for standard of care alone by 28%. The primary endpoint was met, clinically meaningful 28% reduction in these patients with a compelling p-value, a clear positive trend in OS with a hazard ratio of 0.84, and that's even with crossover. So I think that really demonstrates we're having the attended effect the time to progression to castrate-resistant prostate cancer was delayed, which demonstrates we are achieving disease control. And overall, the Pluvicto tolerability profile was consistent with the Phase III trials in PSMAfore and VISION. So we would see global regulatory submissions in quarter 4 of this year. So moving to Slide 12. Leqvio was up 54% in the quarter, on track for over $1 billion in sales in the year. In the U.S., we're up 45%, outpacing the advanced lipid-lowering market. We had solid TRx gains of 44% versus prior year. And our key focus is particularly in Part B accounts and accounts that have a high interest, of course, in using the buy-and-bill Leqvio model to drive more depth in those accounts, particularly as we've now evolved our field model to better support those accounts. Outside of the U.S., we see a continued strong performance, 63% growth. driven by a number of markets, particularly China out of pocket, but we also see strong uptake in Japan, strong uptake in the Middle East and the Gulf countries. So all of that taken together, I think, really portends well for Leqvio in the medium to long term. We did achieve some important regulatory and clinical trial highlights. Our U.S. monotherapy label expansion, removing the statin prerequisite in the primary prevention population was added to the label. The V-DIFFERENCE data was presented at ESC, which showed Leqvio helps patients get to goal faster. I'd also note that our pediatric submissions are on track, which, of course, supports our longer-term LOE profile. Now moving to Slide 13. Scemblix grew 95% in constant currencies in quarter 3. It's on track to be the most prescribed TKI by NBRx in the U.S. Focusing on the middle panel, you can see that our all line of therapy, NBRx has now reached 39% and is steadily climbing built off of that first-line approval. In first line specifically, we've reached 22% share. So we're now approaching NBRx leadership in first line. We already are the NBRx leader in second line and third line plus with 52% and 53% share, respectively. Outside of the U.S., our focus currently is on the third line plus setting, where we have 68% share. But we do have the early line now approved in 26 countries, including China and Japan and a positive CHMP recommendation from October. So we would expect now to start to see our ability to reach patients in the first-line setting picking up outside of the United States. As an indicator of that, you can see here our strong launch momentum in Japan, first-line share already up to 18%, second line at 25%. So we continue to be very optimistic about the outlook for Assembly. Then moving to Slide 14. Now Cosentyx had a mixed quarter. Our growth was impacted by a onetime effect in quarter 3, which I'll go through in a moment. But most importantly, we remain on track for mid-single-digit growth in full year 2025 and are confident in the peak sales potential of the brand. So you can see that in constant currencies, our growth was down 1%. In U.S. dollars, we're more or less flat. Now when you remove the onetime RD adjustment of $74 million, our global sales growth was around 4% in constant currencies. In the U.S., when we adjust for that onetime RD, our growth goes from plus 1% to plus 9%. Cosentyx continues to be the #1 prescribed IL-17 across indications. In HS, now we see a stabilization of the performance, 52% share in naive and 50% overall. So when the competitor came in, we did see a dip in that share, but that's now stabilized. And we are better able now to manage patients alongside physicians to achieve step-up dosing rather than switching off of Cosentyx. And I think that will be important. And so we can really turn our focus to market expansion in HS with the stable share that we've been able to achieve. Outside of the U.S., we were down 3% in constant currencies, but this again was driven by a onetime price effect in the prior year. Importantly, we saw 4% volume growth, and we're the leading originator biologic in Europe and China. So overall, I think the key message is we're confident in the $8 billion peak sales potential. We expect continued market growth in our core indications and rollout of the recent launches in HS and IV. But I think also importantly, we did achieve a positive Phase III readout in polymyalgia rheumatica. It's the second most common inflammatory disease in adults over 50, an estimated 800,000 patients in the U.S. and 1 million patients in Europe to have the condition. So this is a market that's on par with the HS market when you think about the size of the segment. We have global regulatory submissions planned in the first half of 2026, and we'll be working to accelerate them as well and really hope to drive rapid uptake in PMR. We believe the data is compelling. We demonstrated, as you saw in the press release, a positive clinically meaningful primary endpoint, and we also hit all of the secondary endpoints. So we're looking forward to presenting that data and taking this launch forward. Now moving to Slide 15. Our renal portfolio continues to gain traction in the U.S. We had a positive Fabhalta eGFR data, really the first oral therapy to generate such compelling eGFR data. So looking forward to presenting that. We see steady growth in the U.S. Our IgAN portfolio grew 98% versus market growth of 23%. Our NBRx share is now 18% climbing steadily. We see strong uptake as the first approved therapy in C3G. Outside of the U.S., we're beginning to get the key approvals, particularly in China, where there's a large market for IgAN therapies. And turning to the Phase III APPLAUSE-IgAN study, we saw a statistically significant clinically meaningful improvement in eGFR slope versus placebo. It's the longest renal function data for IgAN to date. So we're excited to present that data at a future meeting. And this data should support a full approval -- traditional approval with FDA. Now moving to Slide 16. Rhapsido was approved by FDA as the only oral targeted BTK inhibitor for CSU. I think many of you know the medicine well. It's something we're quite excited about. It's indicated for the treatment in adult patients who remain symptomatic despite antihistamine treatment. And we estimate that patient population to be around 400,000 patients uncontrolled out of 1.5 million treated patients. We achieved a clean safety profile with this medicine, no box warning, no contraindications, no requirements for routine lab or liver monitoring. oral administration, 25 milligrams twice daily with or without food. So a really good profile for these patients. I would want to highlight as well. We're very excited to have a medicine with rapid onset in a highly symptomatic condition. These patients have to deal with itch, loss of sleep, discomfort. And so if you can have a medicine that has a really rapid efficacy benefit that's really, I think, something that could drive rapid uptake. Our initial patient -- physician feedback is excellent, and we're already seeing a steady increase in start forms. Our goal will be to improve the access environment for the drug as fast as possible, and then we would start -- expect to see rapid uptake over the course of next year. And then lastly, in both EU and China, we've completed our submissions and our Japan submission is slated for also later this year. And moving to the next slide. Ianalumab, we announced our positive Phase III studies earlier in the quarter. Yesterday, we released our top line data. The full data set will be presented soon, I think, tomorrow. And then our Analyst Day to discuss this data as well as the Rhapsido data as well as other immunology data, including our CAR therapy platform for immunology. Immune reset platform will be on Thursday. So I hope you'll be able to join that, and we'll give you a lot more detail on the secondary endpoints, on post half endpoints, on biopsy data, et cetera. But here, just on the top line, the Phase III endpoint was met in both studies, statistically significant improvement in ESSDAI. I do want to highlight here, there's a lot of focus, a lot of report on the aggregate ESSDAI from a patient standpoint and a physician standpoint, what matters is where the individual patients are and how much we're able to improve their relative disease. And also what is the starting point for the ESSDAI score. So the fact that we've achieved two positive Phase III trials, I think, will really enable us to roll this out to patients. And then as patients see the symptom benefit given their profile, they'll hopefully be able to get the benefit and stay on the medicine. We have consistent numerical endpoints, improvements in the secondary endpoint, a favorable safety profile. And as I mentioned, the data will be provided shortly. So regulatory submissions are on track for the first half of '26. And moving to Slide 18. Overall, I think a strong innovation year for the company. You can see all the various milestones that we've reached. Also, we've been, I think, the leading player in the sector in terms of deals bringing in medicines at all stages from preclinical to Phase I to late-stage assets, also continuing to bolster our technology platform. So we'll look forward to giving you a full innovation update and technology update at Meet the Management in November. So with that, let me hand it over to Harry. Harry Kirsch: Thank you very much, Vas. Good morning, good afternoon, everybody. As usual, I will take you through the financial results now for the third quarter, the first 9 months and the full year guidance. And as always, unless otherwise noted, all growth rates are presented in constant currencies. So if we go to our Slide 20, you see a summary of the financial performance. In the third quarter, net sales grew 7% versus prior year. Core operating income was also up 7%. In the U.S., we had some negative gross to net true-ups first time since the year. Prior, we had mostly positive. But they were mainly related to Medicare Part D redesign, which was new for the industry this year based on invoices for prior periods, mainly quarter 2. And excluding these true-ups, the underlying growth would have been 9% on the top line and 11% on the bottom line as the priority brands and launches continue to offset the increasing generic erosions, mainly for Entresto, Tasigna, and Promacta in the U.S. Our core margin was 39.3% in Q3 and core EPS came in at $2.25, reflecting a 10% increase and free cash flow totaled $6.2 billion. For the first 9 months, obviously, as we had less generic erosion, net sales grew 11%, core operating income 18% and the core margin expanded 250 basis points to reach 41.2% and with core EPS at $6.94, up 21%. Free cash flow reached after 9 months already $16 billion, growing 26% in U.S. dollars versus prior year. Moving to next slide. Speaking of free cash flow, up 26% billion, as I mentioned, already close to actually prior year full year $16 billion after 9 months. So it really shows continued strong conversion from profits to cash flow. And of course, cash flow remains a strategic priority as it increased further our ability to convert strong core operating income growth and robust free cash flow and gives us the capacity to reinvest in our business organically, pursue value-creating bolt-ons like the proposed acquisition of Avidity and return attractive shareholder -- attractive capital levels to our shareholders through growing dividends and share repurchases. Speaking of capital allocation, let's go to the next page, right? It's really unchanged. And again, based on very strong free cash flow, we really can optimize both a significant investment in the business to drive top and pipeline and returning capital to our shareholders at attractive levels. In the first 9 months, aside from Avidity, we have executed multiple bolt-on M&As, smaller in size, but still very important and -- which strengthened our key platforms and pipeline for our four therapeutic areas. And of course, we also continue to invest in our internal R&D engine. On the capital return side, we successfully completed our up to $15 billion share buyback program early July and have launched a new up to $10 billion buyback program targeted for completion by the end of 2027. We also have distributed $7.8 billion in dividends during the first half of this year as part of our annual dividend. Turning to the next slide. We reaffirm our full year guidance. We expect high single-digit growth in net sales and low teens growth in core operating income, even after accounting for negative gross to net true-ups in the third quarter. And to complete our outlook, we now anticipate the core net financial expenses is slightly higher at $1.1 billion before we had $1.0 billion, a bit higher hedging costs. But overall, nothing dramatic. And the core tax rate continues to be in this range of 16% to 16.5% so far in the first 3 quarters at 16.2%. Now let's move to the next slide. So usually, we don't provide so much level of quarterly guidance, right? Quarters are a bit more volatile than the full year usually. But given that we have U.S. generics entry in the middle of the year for three of our brands, of course, the biggest being Entresto, but also Promacta and Tasigna were, of course, blockbusters, it results in very different quarterly dynamic this and next year. And so as a reminder, in quarter 4 of last year, we benefited from significant positive gross to net adjustments, which added back then about 3 points of growth. So it makes for a very high prior year base. Adjusting for these one-timers, we expect quarter 4 underlying growth to be low single digit on the top line and mid-single digit on the bottom line, reflecting the increasing generic erosion from a full year impact of Entresto U.S. generics but better, obviously, than what we expect to report, including the prior year gross to net adjustments. We provide full year guidance for 2026, of course, next quarter with the full year results, but you can imagine it will be a year of two halves. The first half of 2026 will be depressed due to the impact of generics with still a high prior year base, but we expect to emerge much stronger in the second half, but much more on that as we go -- as we report our full year results early February. Now let's move to our currency estimate impact of currencies should -- currencies remain where they are basically late October. Then we expect a full year in '25 impact of 0% to 1% on net sales and minus 2% points on core operating. You see also the quarter. And we roll this forward to '26. So in '26, we would expect with these exchange rates, a slight positive 1% point on net sales and basically no material impact on core operating income. And as you know, we publish this on a monthly basis as it is quite difficult to forecast this from the outside in, and we hope you find it helpful. And then lastly, I hope you were able to join our presentation on the proposed acquisition of Avidity yesterday. If not, I would encourage you to listen to the replay. And -- adding Avidity, as we mentioned yesterday, raises our '24 to '29 sales average growth rate from 5% to 6%. But of course, even more importantly, further supports our mid-single-digit growth over the long term with main impacts, of course, in the 2030s and beyond. And it brings, of course, these near-term product launches two with multibillion blockbuster potential with LOEs in the 2040s and no IRA impact. Now we also mentioned yesterday that we do expect some short-term core margin dilution given Phase III trials are basically now starting to run or up and running shortly in the range of 1% to 2% points for the next 3 years. But we are confident that we return to the 40% margin, which we already achieved this year also will return them back to that in 2029. And please make sure that you also model this 1 to 2 points core margin dilution as you finalize your 2026 models for us. This deal, of course, overall is expected to deliver very strong sales and profit contributions post -- starting in '29 and then even more and therefore, driving significant shareholder value with a small price to pay over the next 3 years on the margin dilution as part of the investment. That's all I had for now and handing back to Vas. Vasant Narasimhan: Great. Thank you, Harry. So moving to Slide 28. In summary, solid sales and core operating income growth in the quarter despite generic headwinds. So I think we're navigating that well with strong underlying performance of our priority brands, which is reflecting the strong execution, a strong pipeline progress. We delivered strong pipeline progress in the quarter. And we also reaffirm our 2025 guidance and remain highly confident in our mid- to long-term growth, which is further bolstered by our proposed acquisition of Avidity, not just through the end of the decade, but into the next decade and beyond. I want to just quickly remind you as well, we have our immunology pipeline update on October 30, and our Meet Novartis Management on November 19 and 20, in person in London. So thank you again, and we'll open the line for questions. Operator: [Operator Instructions] We will now take the first question. And the question comes from Matthew Weston, UBS. Matthew Weston: I hope you can hear me. It's a question about policy, Vas. And we've seen now two companies do deals with the White House around Medicaid and tariffs. And I wondered from your perspective, how much you felt we could see the industry do a cookie cutter of those deals or whether there are meaningfully greater challenges for some companies and when we should expect something from Novartis? And if Harry, I can steal, I guess, an extension of the same question. Can you walk us through CapEx over the next 5 years given the investments that you've announced in the U.S. and how we should think about modeling that as part of cash flow? Vasant Narasimhan: Thank you, Matthew. So I think from an industry-wide perspective, I think the pharma industry's view is that the proposed negotiations or proposed actions are not going to address the underlying issues here, which, of course, we believe are PBMs, 340B and importantly, perhaps most importantly, G7 countries and related countries outside the United States properly rewarding innovation and properly assessing the appropriate price for innovation. That said, I think, as you point out, there are I think now three companies that have reached agreements with the administration. I'd say Novartis has -- I can't speak to what other companies are doing. We've been in conversations with the administration since the beginning of the year as we've had the various turns in these discussions. And I'd say we're meeting with the administration weekly to look at what are the best solutions we can come up with. It is important to note that the President was very clear on the four parameters, and I think those are the four parameters that are in discussion. And we'll have to see in the coming weeks and towards the end of the year if we can come to a proposed approach that makes sense for all involved. And in terms of CapEx, Harry? Harry Kirsch: Matthew, I think as we mentioned when we also introduced the $23 billion over the 5 years commitment, we made it clear that the majority is actually not CapEx. Majority is R&D OpEx, where we have the choice to invest in the U.S. or anywhere else in the world. And we choose, of course, to have a strong commitment also for R&D in the U.S. And then there's a portion, yes, it's CapEx, but it's actually part of our overall worldwide financing plan also for -- and we choose basically incremental to invest in U.S. to build up there our manufacturing base to supply the U.S. from the U.S. instead of further expanding, for example, European sites. So from that standpoint, overall, I don't expect a significant or meaningful CapEx increase. We are always in this range of 2.5% to 3% of sales, actually quite a low end of the industry given our very focused and efficient manufacturing setup. And it's always -- there can be annual fluctuations, but nothing meaningful. Also, we have further opportunities in cash flow and inventory. They are usually on the high side. We keep that as a bit of a buffer in certain times. So overall, in short, I would not expect a significant CapEx increase. And I would expect free cash flow to grow roughly in line with core operating income growth. Operator: Your next question comes from the line of Peter Verdult from BNP Paribas. Peter Verdult: Pete Verdult, BNP. Only one, so I'll keep it topical for Vas. Just on the market reaction to that ACR abstract, I think you've alluded to it being disappointment and you perhaps sharing a different view. So just pushing you on -- do you think the market depreciation of the data set will improve once we see the full details tomorrow? And just could you remind us, I'm sorry to get technical, of the 12 domains that make up the ESSDAI index, which ones are seen as the most important to patients and physicians? Vasant Narasimhan: Yes. Thanks, Peter. I mean, I think for us, the most important thing is that we make a compelling proposition to patients and physicians. And then if we deliver a strong launch, then I think, obviously, the markets will do what the markets will do, but presumably will follow. I think -- we will present detailed data on Thursday, and I think that will help at least understand where our conviction comes from. I think very important for us is the individual patient benefit. I think practicing physicians and patients don't measure an ESSDAI. They're actually looking for symptomatic benefits in things like fatigue, in salivary flow, in activities of daily living. And I think looking at that -- the global assessment of physicians and how they see patients benefiting is going to be really important for this launch. It's a highly variable disease. So a lot of this will depend on finding those groups of patients that have a significant benefit. And I think important for these patients as well is to feel like they don't need the same level of steroids that they typically are using, which can be hugely disruptive for their lives. Sleep is another topic as well. So we'll present that information. But I think we feel confident that there is a high willingness even from the physicians that we're talking to now in Chicago, a high interest and a high willingness to make this option available for patients. And assuming we can make patients materially feel better versus the current standard of care, which is frankly just high-dose steroids, we expect to be able to drive significant growth from this medicine. Operator: Your next question comes from the line of Stephen Scala from TD Cowen. Steve Scala: It seems like there may be a subtle change in the messaging on Cosentyx in HS. While Novartis grew overall market share quarter-over-quarter on Slide 12 of the Q2 deck, Novartis noted continued HS market growth. And in the Q3 slide deck, that was not stated explicitly. It's clear Novartis has been playing defense on share. But with that now stabilized, is the point that you need to grow the market and it's not growing at the pace that you expected? So is that the contour of the market? This would seem to be a factor in whether Novartis grows earnings in 2026. And when Harry was talking about 2026, he didn't say that specifically. Vasant Narasimhan: Yes. Thanks, Steve. So what I can say is that we feel confident that our share has stabilized after the competitor entry. I think we have not seen the market growth that we had originally hoped for that we -- there's clearly a lot of patients who can benefit from biologic therapy with HS. We continue to see this as a $3 billion to $5 billion-plus market, but it's clearly going to take longer for that market to develop. And so I think we probably did not do the careful analysis that you did on our slides, and I'll look to our IR team to do that more carefully in the future. But I think your point is absolutely on that we need to see -- we need to grow this market, and that's what really both companies should really be focused on and get more patients on these therapies. Now with respect to earnings, we don't comment on 2026. We're focused on clearing out 2025. And so once we get there in January, we can provide you our outlook. I would say that I think I would focus much more on the dynamic growth you saw in the quarter on Kisqali, Pluvicto, Scemblix, Kesimpta, all of which, to my eyes, were ahead of consensus. And I think that's where I think the focus should be now looking ahead for the company. Next question, operator? Operator: Your next question comes from the line of Shirley Chen from Barclays. Xue Chen: Can I ask about Pluvicto. So congrats on a great quarter. Could you please help frame where you are in the launch curve for pre-taxane new label? And how do you expect the inflection in 4Q and also next year? Can you remind us your peak sales ambition of this drug? And when do you expect Pluvicto to reach at the full potential within the PSMAfore population and also potentially PSMAddition population? And also in addition, you -- I think you previously mentioned a few challenges for commercialization, such as reimbursement, education of staffing and referral networks. And how do you find where you are tackling these challenges? Vasant Narasimhan: Yes. Thanks, Shirley. So for Pluvicto overall, I think we're on the steep part of the curve right now. We see -- as you saw, very strong growth in quarter 3. We would expect very solid growth in quarter 4. It's important to note in quarter 4, we always have a slowdown in the Thanksgiving and Christmas holidays. So in effect, lose 2 to 3 weeks because of those holidays, simply because patients don't want to "have a nuclear medicine, radioactive medicine that prevents them from being around children or family members, so for a period of time." So important to note that. But that said, we do expect continued strong performance in quarter 4. And then going into next year, we would expect solid growth, but I think as always with these launches, good growth, but maybe not the same levels of growth you're seeing in quarter 3 and quarter 4, kind of an S-shaped curve. And then our plan would be to bring on the HSPC indication, which will then propel us, we believe, to the $5 billion peak sales that we've guided to. So we fully are confident on that. We see high levels of now receptivity. And that, I think, brings me to your point on the structural challenges, which I think we've successfully tackled now with the PSMA and VISION launch, we struggled to get into the community in a way that was scaled. Now through years of effort by our U.S. commercial team, we've successfully, as I noted, have over 700 prescribing clinics across the country. 9 out of 10 patients are very close to a center that can provide Pluvicto. We're adding centers just to be on the safe side. We've done careful mapping to know the referral pathways. Physicians are much more comfortable now using the PFS, a pre-filled syringe and dealing with some of the other logistics associated with radioligand therapy. So we're in a very good spot in that sense. And that's what gives us confidence that the pre-taxane launch can propel us into the $3 billion-plus range and then the HSPC launch will propel us into the $5 billion-plus range and will be where we expect. We continue in the as well in the oligometastatic setting as well to go earlier. We also have a number of Phase IV studies, including in the mCRPC setting in combination with ARPIs to give physicians even more options. So we're doing all of the work as well to fully build out the data package to maximize this medicine. I think while I'm on Pluvicto, I think all of that builds the base for our radioligand therapy platform more broadly. We have that full range of 10 -- around 10 different indication medicines that are advancing in the clinic. And now as we bring those forward, we have that infrastructure built in the U.S. and now increasingly Japan, China, and other markets to make those other launches successful. So I think all on the right track. It was a very important element for us to strategically solve. And in my view, we have solved the challenge of rolling out radioligand therapy in the United States. Next question, operator? Operator: Your next question comes from the line of Florent Cespedes from Bernstein. Florent Cespedes: A question on Rhapsido. Could you maybe share with us how you see the ramp-up of the product as you have a clean safety profile, convenient administration? And do you have any feedback from the Street even though it's still early days? And any thoughts for the situation in Europe, the adoption knowing that the product will be compared with much cheaper drugs? Vasant Narasimhan: Yes. Thank you, Florent. So we're in the early stages of the launch. Right now, our focus is on sampling through patient start form, getting through patient start forms and negotiating with payers to ensure broad access in the early part of next year. I think once we get to the early part of next year, we get that base up through sampling in this initial phase, we would then start to expect a more rapid uptake through Q2 forward next year, where I think there will be the opportunity then to really drive uptake. We would expect initial uptake to be in patients who are not responding to biologic. But then our goal very much is to be positioned pre-biologic. That's really where the opportunity is for this medicine, and that's what we're going to be our long-term focus in the U.S. and really around the world. I think in Europe, you raised an important point. I mean, a lot of this will come down to our payer negotiation. And I think in light of the current situation in the U.S., it will be absolutely our goal to hold the line and ensure that Rhapsido is appropriately reimbursed for the innovation it's bringing and not have it be compared to old generic drugs, but really compared to what it is a pureless oral twice-a-day option for patients that really need a rapid onset of action. And we're hopeful that European payers will realize that and then appropriately reward it, and then we'll be willing to be patient to achieve that. But then I think once we get access, all of our indications, there's a lot of enthusiasm in both the allergists and the derm community for a safe oral option, and we should see rapid uptake there as well. So I think overall, very excited about the medicine. As you know, we're progressing as well in CINDU. We would expect that readout next year. We're progressing in food allergy. We're progressing in HS. So we have a number of opportunities now ahead of us as well for this medicine. Next question. Operator: Your next question comes from the line of James Quigley from Goldman Sachs. James Quigley: I've got a follow-up on Ianalumab, please. So one question we've had is that, obviously, the slide suggests in NEPTUNUS-1 that statistical significance was only achieved in the last two blocks of data. Was that just because of when the tests were run? Or is that sort of what you're expecting as well in terms of when you're planning the study? And a second quick one on Ianalumab as well, hopefully not to preempt tomorrow or Thursday. But you talk about the sort of secondary endpoints and fatigue and salivary flow being more important, but the secondary endpoints were not statistically significant. So again, was this a case of hierarchical testing or anything else? How can you show that when you -- when the drug hopefully gets approved and you talk to physicians about the data? Vasant Narasimhan: Yes, absolutely. I mean, I think the endpoint here is at 52 weeks. And so I think we were trying to indicate all of the time points to reach nominal significance. But given that endpoint, the goal here is 52 weeks, and both studies achieved the prespecified primary endpoint at 52 weeks in the independent analysis and in the pooled analysis. So no issues there. And so we feel from a regulatory standpoint, we've -- 48 weeks, excuse me, 48 weeks the standard. So I think you can see here on Slide 17, 48 weeks was hit in both trials. And then -- separate from that, there is hierarchical testing here as often is the case. And so if one of the secondaries are hit, even if they hit from a nominal standpoint and lower the hierarchy, it's no longer valid from a pure statistical hierarchy standpoint. It could be nominally statistically significant, but wouldn't reach the threshold from a regulatory standpoint. That said, I mean, I think as I've tried to articulate, there's the regulatory standpoint here. And in a disease that's never had an approved drug, there's really what our patients and physicians looking for. And we've really tried to understand once we hopefully can get the regulatory approval, then what do we need to educate physicians and patients on. So you'll hear more about that on Thursday, but our team has done a range of analyses to look at secondary outcomes, look at post-hoc outcomes, look at also biopsies and really try to demonstrate that you're seeing the benefits that patients want. I myself have spent time talking to patients with Sjögren's. And I think what really matters to them is quality of life metrics and very specific quality of life metrics that varies patient to patient. So I don't think that for them that the ESSDAI score is going to make the difference. It's going to be whether or not their symptoms are getting better and they can live their daily life day in and day out better. Next question. Operator: [Operator Instructions] Your next question comes from the line of Richard Vosser from JPMorgan. Richard Vosser: One on Kesimpta, please. Just whether you're seeing any impact in the U.S. from the OCREVUS subcutaneous launch. It doesn't seem like it, but just wondering what you're seeing here. And linked to that, there's some discussion from you about your new formulation. Just wondering on details of treatment interval, whether this could be a new BLA and how this could protect from potential biosimilars down the line. Vasant Narasimhan: Yes. Thanks, Richard. So on OCREVUS subcu, we don't see an impact to date, as you can see on our overall performance. We're holding share in a growing market. I think -- the overall market growth for multiple sclerosis drugs has been solid. Within that, the B-cell class continues to steadily increase with a bigger opportunity outside of the U.S., but still we see the opportunity. I think 25% of patients in the U.S., give or take, are still not on B-cell therapies that could be. And so we're really benefiting from the market growth. We are doing a lot of work now to get better at targeting physicians that we think would be more amenable to a patient self-administered administration rather than the various other options available. But I think overall, this is a growing market where the medicine is holding its share, performing really well. It's all volume-driven growth. From a life cycle management standpoint, we are advancing our Q2-month formulation. And so we'll keep you updated as we progress, but that's something that's a trial that's currently on rolling. And then we're exploring other options, no details I can get into at this point to get into longer intervals as well potentially with novel technologies. And I think as those progress and if there is the opportunity to get those launched before biosimilar entry, that's something that we're highly, highly focused on, absolutely. But I think it's premature to comment on that at this point. Next question, operator? Operator: Your next question comes from the line of Thibault Boutherin from Morgan Stanley. Thibault Boutherin: Just a question on abelacimab, the injectable Factor XI acquired with Anthos. I think we're getting the first Phase III data in AFib next year. This is for patients at high risk of bleeding and for whom oral anticoagulants is not adequate. Can you just sort of frame the opportunity in terms of size? And are you looking to potentially go into a broader patient population with this asset? Vasant Narasimhan: Yes. Thanks, Thibault. So this is the -- as you know, the antibody that we acquired back from Anthos is originally a Novartis-originated antibody. So we know it quite well. As you know, the study next year will be in patients who are ineligible for DOACs, NOACs. And so the opportunity here is for these patients, which is a reasonable sizable patient population to provide them a significant option with monthly dosing. I think the opportunity here will really -- the size of the opportunity, we believe is multibillion, but the scale of that multibillion-dollar opportunity will really depend on how the oral Phase III program from one of our competitors performs. I mean, clearly, if that oral medicine, which is an all comers in a very large study, if that is unsuccessful, then we would have a very significant potential with our medicine. I think with an oral and an antibody, we'll be much more than focused on these more refractory patients and the opportunity won't be quite as large. But I think in either case, it will be a multibillion-dollar asset we can bring into our cardiovascular portfolio. And we're -- yes, we're quite excited about it. Next question, operator? Operator: Your next question comes from the line of Michael Leuchten from Jefferies. Michael Leuchten: If I could please go back to Cosentyx. Could you tell us, please, what your pricing assumptions, the net pricing assumptions are for the U.S. into the fourth quarter? Do you expect any drag? And just trying to understand the increase in step-up dosing comment on your slides around HS, the 25% utilization. Could you put that into context? What was that maybe at the half of the year? And how has that developed? Vasant Narasimhan: Yes. Thanks, Michael. So on Cosentyx pricing, we don't expect any shifts going into quarter 4. And I'd say, overall, we expect stable gross to nets as well going into next year. I mean it's relatively mature brand, but also with multiple new indications and a solid payer position. So I think we should be stable on that front. We are also monitoring the impact of the Part D redesign, but most of the impacts we've seen on Part D redesign have actually been on Entresto earlier in the year, and then I think that will fade away now as generics enter. On HS, this really referred to the fact that early on with the competitor launch, what we were seeing is with patients who were on the monthly dosing, if they weren't seeing the effect that they are, physicians weren't seeing the effect that they hoped for, the effect was wearing off, they were switching rather than updosing Cosentyx every 2 weeks. And so now we see about 25% of patients on Cosentyx moving up to that every other week dosing. And that's something we'd like to get even higher over time because I think that really demonstrates patients are persisting on Cosentyx, and that's going to be important for us to retain our greater than 50% NBRx share and then the correlating TRx share as well. So that's very much in focus for us. And then I'd come back again that we also just need to work on growing the market. I think if this ends up being two competitors just trading the same group of patients, that would be disservice to this patient community. I think we have to get better now at reaching patients who have either fallen out of the system or for whatever reason are being identified as biologic appropriate patients and get them on therapy. Next question, operator? Operator: Your next question comes from the line of Simon Baker, Rothschild & Co Redburn. Qize Ding: I hope you can hear me okay. So this is Qize Ding speaking on behalf of Simon Baker. So I have one quick question. So one quick question on the rebate adjustment. Is there anything you can call out other than the Cosentyx? And also, did any drug benefit from the rebate adjustment in the Q3? Vasant Narasimhan: Yes. Thank you for the question. I'll hand that to Harry. Harry Kirsch: Yes. Thank you for the question. So overall, of course, when you see the amount that is prior period is roughly $180 million. You see that this has about this 1.5 almost rounding the 7% to 9%, if you will, effect on the quarter. And Cosentyx is a big piece of it. Another big piece of it is Entresto actually where patients got quicker into the catastrophic as part of the Medicare Part D redesign. And of course, that part really should go away as Entresto kind of goes away. And there has been some smaller elements, including like really going back into '24 with some inflation penalty part. But the two biggest ones are Cosentyx and Entresto. Vasant Narasimhan: Thank you, Harry. So Sharon, next question. Operator: [Operator Instructions] And your next question comes from the line of Rajesh Kumar from HSBC. Rajesh Kumar: Just trying to understand the margin cadence over 2026. I know you're not giving a '26 guidance at the moment. But very helpfully, you said it will be a year of 2 halves. So given what you know about Part D now and how generics are coming and what sort of operational gearing you're getting on your Kesimpta, Pluvicto, and other, drugs which are growing. If you were not cutting the costs, would the cadence be a lot more steeper? And what have your actions done to offset that impact? So what is the mix impact versus self-help? If you could help us quantify as well as the seasonality of Part D cadence? Because this year, you have done a prior period adjustment that might not be the next year because you have some accrual history now. So you will base your quarterly accruals on the evidence you have. So it would really help us model out first half, second half for '26. Harry Kirsch: Yes. Thank you, Rajesh. A very thoughtful question, of course. And so in our business with our mix, we usually do not have Medicare kind of related different gross to net levels quarter-by-quarter other than when we have a gross to net true-up, right? So when channel mix changes, when a product goes quickly into the catastrophic and those -- if there are -- I mean, there are always some deviations, right? We have over 20 billion RDs in U.S. But when these are significant or meaningful, then we let you know, right, how much it is, like in quarter 4 of last year, it was 3 points of growth, which is now impacting as a high base. Quarter 1 was 2 points to the positive and quarter 3 is now 2 points to the negative. So we show you that stuff. But that's basically true-ups. The underlying is not changing quarterly dynamics for us. So for next year, you will have a very high base Q1 right, with the 2 points of growth that we got from the -- and you will have a relatively low base in Q3 from the 2 negative points this year. And other than that, it's all about launch uptake and generic erosion of the three main products. Maybe long-winded, but I hope it was addressing your question. Vasant Narasimhan: And we'll do our best, I think, at the full year earnings as well to provide more guidance on how best to think about the full year 2026. Next question, Sharon. Operator: Your next question comes from the line of Matthew Weston, UBS. Matthew Weston: It's just a quick follow-up actually to one of the prior questions. Harry, Kesimpta looks like a very strong quarter in Q3 that looks somewhat off trend. And I'm just making sure that as we go into Q4, we aren't going to learn that it was lumpy one way versus the other. Can you just confirm that was underlying operational growth? Vasant Narasimhan: Absolutely. Harry? Harry Kirsch: Yes, it was mainly underlying operational growth, a little bit of inventory, but not much. Vasant Narasimhan: Just a strong global volume, I think, in both U.S. and ex U.S. for this matter. Next question. Operator: Your next question comes from Simon Baker, Rothschild & Co. Redburn. Qize Ding: Just one quick question on the Ianalumab in Sjögren’'s disease. So we observed the placebo response in the Sjögren’'s trial tend to be plateau at week 48. So why did it reverse in the first trial of those two Phase III trials, please? The Phase III trial is called NEPTUNUS 1. Vasant Narasimhan: Yes. I think the question is regarding the placebo response. I mean I think -- look, I think these were both adequately controlled, well-designed studies, global studies. This is just a highly variable disease. And so you're going to see some variability in how the placebo responds. When we look at background therapy as well, it's very comparable across the studies and so also versus normal standard of care. You do see as well that the month data looks much better than the Q3-month data, but you do see as well the dose response that we would expect. So I think that's all positive. And so we'll have our experts on the line on Thursday. So if you want to get into more detail, and they'll also be able to go through some of the background on the study design and baseline characteristics. But I think, obviously, I can't comment more until the full data is presented. Next question, Sharon? Operator: Your next question comes from Stephen Scala from TD Cowen. Steve Scala: Novartis raised the long-term revenue guidance yesterday, half of which was attributed to the existing business. Of the half attributed to the existing business, how much is due to currently marketed products? And how much is due to higher sites for the pipeline agents? Vasant Narasimhan: Yes, Steve, I think we can provide better midterm guidance on that and meet the management. But most of that is in-line brands. Obviously, you see the strong performance of Kisqali, Kesimpta, Pluvicto, Scemblix, I think solid performance on Leqvio. And there is probably some in there of what we expect will be a strong launch for remibrutinib, so Rhapsido and the label expansion for Pluvicto. Yes, I think that's roughly the breakdown more or less. I think any other pipeline assets we would expect to have limited ramp in this period, just given how long it takes to ramp up these launches when you think out to '29. And we will provide guidance as well out to 2030, as I said yesterday, and meet the management as well as update our peak sales guidance on our various brands where appropriate. Next question, Sharon? Operator: Your next question comes from the line of James Quigley from Goldman Sachs. James Quigley: Just a quick one for me. I mean you may have already answered it, Harry, but again, it's coming back to the Cosentyx, the rebate adjustment. Which prior periods does that relate to? Is that a Q1, Q2 this year? Or is that a 2024 thing? I'm just trying to think in terms of modeling for next year as we look at Cosentyx. Is there a slight headwind from where there was a higher price that you realized in Q1 and Q2 that then reversed out in Q3? And also what does that mean sort of going forward into 2026? Again, I appreciate there is going to be other dynamics with PMR and HS, but just wanted to clarify that from a modeling perspective. Harry Kirsch: Thank you, James. It's mainly quarter 2 this year, most of it. And -- but the quarter 3 underlying, that's why we gave you the quarter 3 underlying is what the underlying is already taking into account if such channel mix would continue to prevail. So from that standpoint, it gives you a good basis for future modeling. Vasant Narasimhan: I think, Harry, if I'm correct, if you net out the prior period upside versus this that really the year-to-date is relatively clean. Harry Kirsch: Across the whole portfolio. Vasant Narasimhan: Across the whole company, the year-to-date is close to red. Harry Kirsch: Quarter 1, we had 2% upside. Now we have almost 2% downside, right? It's a bit different brand by brand. But that's why we've given you on the brand that has most of it and is -- Entresto is deteriorating, of course, but this one, of course, is a brand that will stay long with us. That's why we gave you the underlying, which gives you the real underlying at the moment for quarter 3. Vasant Narasimhan: Sharon, next question. Operator: Your next question comes from the line of Sachin Jain from Bank of America. Sachin Jain: So firstly, just a clarification on margins for Harry. So 3Q margins were a little bit below Street. I guess, partly on gross margin, which is sort of first impact from generics. I wonder if you could just talk about gross margin, EBIT margin as we think about a full year of Entresto impact in '26. My simple question is, can you maintain margins stable next year through the full year of generics before we model the underlying Avidity dilution? And then given, I might just take an additional one on pipeline for Vas. You flagged good uptake in IgAN. You have the Phase III for the APRIL, BAFF next year. So I wonder if you could just talk to your excitement on that and differentiation and what's the competitive landscape? Vasant Narasimhan: Great. Harry? Harry Kirsch: So on the margins, of course, when you have a product like a small molecule, high-priced products like the 3 going off patent, especially Entresto being so big, there's a slight negative mix effect. Now Kisqali is also a super high-margin product, right, and growing significantly. So that's partly offsetting. But we have also a significant productivity efforts, especially in our manufacturing and supply chain. So as I mentioned before, there will be, as we go forward, some pressures on the gross margin. On the other hand, we do also expect that our SG&A becomes even more efficient as we go forward, offsetting that. Now for the next couple of years, this year, we will be around 40%. And quarter 4 is usually a bit lower. Historically, we have been in the first 9 months at 41%. So Q4 bring that in the range of around 40%. And then for the next 2, 3 years, we said because of the Avidity proposed acquisition, 1 to 2 margin points down from the 40% and returning to 40% in 2029. So with that, basically -- but it's driven by development investments. And overall, to close that long answer on a short question, basically, the gross margin headwinds, I do expect to be offset by SG&A productivity. Vasant Narasimhan: And then Sachin, was your second question around the anti-APRIL antibody, I didn't catch it. Sachin Jain: Yes. Sorry, in the introduction, you talked about the strength of the existing IgAN launches, but I wonder if you could touch on the APRIL BAFF with data next year and how that wraps out your portfolio. Vasant Narasimhan: Yes, absolutely. So first to note, ours is an anti-APRIL antibody. Our competitors are anti-APRIL, BAFF. And so I think one question, of course, will be to see the profile of those two drugs and does BAFF add anything and also differences in safety profile. But I would say, overall, we expect to see proteinuria in the range, we hope of what the others have seen. And certainly, our Phase II data -- final Phase II data indicated we have very strong proteinuria reductions. We will be third to market in all likelihood. And so for us, it's really going to come down to a portfolio opportunity that we bring to patients, physicians, payers, firstly physicians' offices and payers because we'll have the opportunity to have an endothelin antagonist with Vanrafia. We have the Factor B inhibitor with iptacopan and then with Fabhalta, and then we have the anti-APRIL antibody and bringing that entire solution set to the clinic and then also the opportunity for us to run combination studies. So we're already now evaluating what would be the right combination studies to run, generate that combination data so that nephrologists know what would be the right combination agents to optimize care for these patients. So these are all the opportunities I think we're looking at. But it's going to be important for us to think through those given that at least in the anti-APRIL space, we'll likely be third to market. Next question, Sharon. I think it's the last question, if I'm not mistaken. Operator: It is. Your final question for today comes from the line of Stephen Scala from TD Cowen. Steve Scala: Given the proof of concept established by the CANTOS trial 8 years ago, what new evidence compelled Novartis to go down the same pathway and acquire Tourmaline at this time? Vasant Narasimhan: Good question, Steve. So I think we clearly understand that IL-1 beta and hitting the inflammasome has a powerful effect on cardiovascular risk reduction. But in that trial, where we did an all-comers study of patients who had a prior event without, I think, focusing down, you saw the challenge of having a significant CVRR. Now IL-6 has the opportunity to be a little bit further downstream of IL-1 beta. And the idea here is to get within the first few months to max 6 months to a year after an event when -- if patients are at that point in time with an elevated hsCRP, the knocking down that CRP can lead to a significant -- we believe the opportunity exists to lead to a significant impact on cardiovascular risk. So I think it's really -- we've learned from the CANTOS study. We understand a lot more about the biology based on that. And we think by targeting now prospectively patients right after an event who are at elevated CRP levels as a marker of elevated inflammation, we can then have a much more compelling cardiovascular risk reduction than the kind of 14%, 15% that we saw in the CANTOS study. Now we do have a competitor ahead of us, but a lot of our focus is designing, we think with our expertise, a study that can really maximize the opportunity for the IL -- the Tourmaline asset, the anti-IL-6. All right. Well, thank you all very much for attending two calls in 2 days, but we have another call coming day after tomorrow. So we hope you will attend that as well to learn more about our immunology portfolio. We will talk about Rhapsido. We'll talk about our Ianalumab data and importantly, also talk about our immune reset portfolio, which I think is quite exciting. So thank you again for your interest in the company, and we look forward to catching up soon. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning, and welcome to Forestar's Fourth Quarter and Fiscal 2025 Earnings Conference Call. [Operator Instructions] And please note, this conference is being recorded. I will now turn the call over to Mr. Chris Hibbetts, Vice President of Finance and Investor Relations for Forestar. Sir, the floor is yours. Chris Hibbetts: Thank you, [ Ole ]. Good morning, and welcome to the call to discuss Forestar's fourth quarter and fiscal year results. Thank you for joining us. Before we get started, today's call includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although Forestar believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to Forestar on the date of this conference call, and we do not undertake any obligation to update or revise any forward-looking statements publicly. Additional information about factors that could lead to material changes in performance is contained in Forestar's annual report on Form 10-K and its most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission. Our earnings release is available on our website at investor.forestar.com, and we plan to file our 10-K in the next few weeks. After this call, we will post an updated investor presentation to our Investor Relations site under Events and Presentations for your reference. Now I will turn the call over to Andy Oxley, our President and CEO. Anthony Oxley: Thanks, Chris. Good morning, everyone. I'm also joined on the call today by Jim Allen, our Chief Financial Officer; and Mark Walker, our Chief Operating Officer. As always, we appreciate your interest in Forestar and taking the time to discuss our fourth quarter and fiscal year results. The Forestar team finished the year strong, generating over $670 million of revenue in the fourth quarter and $1.7 billion of revenue for the full year, which was above the high end of our most recent guidance range. Despite the challenges for new home demand due to ongoing affordability constraints and cautious consumer sentiment this year, we grew annual revenues by 10% and increased our book value per share to $34.78, up 11% from a year ago. We achieved these results, all while maintaining a strong balance sheet and ending the year with $968 million of liquidity. Over the last 5 years, Forestar invested more than $7.3 billion in land acquisition and development and delivered more than 75,000 finished lots to approximately 60 local, regional and national homebuilders. During the same period, our book value per share has increased 92%. These results reflect the strength of our business model and our market-leading teams we have built out across our national footprint. Thank you to all the Forestar team members for your efforts this year. In fiscal 2026, we will continue to execute our strategic plan by investing for future growth, turning our inventory, maximizing returns and consolidating market share in the highly fragmented lot development industry. Our unique combination of financial strength, operating expertise and diverse national footprint enables us to provide essential finished lots to homebuilders and effectively navigate current market conditions. Jim will now discuss our fourth quarter and fiscal year '25 financial results in more detail. James Allen: Thank you, Andy. In the fourth quarter, net income increased 7% to $87 million or $1.70 per diluted share. For the year, net income totaled $167.9 million or $3.29 per diluted share. Revenues for the fourth quarter increased 22% to $670.5 million. The current quarter includes $103.4 million in tract sales and other revenue, which was primarily for sales of residential tracts and to a lesser extent, our first sale of a multifamily site. Revenue increased 10% to $1.7 billion in fiscal 2025, which includes $118.1 million of tract sales and other revenue. In the fourth quarter, we sold 4,891 lots with an average lot sales price of $115,700. And for the year, we sold 14,240 lots with an average lot sales price of $108,400. We expect continued quarterly fluctuations in our average sales price based on the geographic location and lot size mix of our deliveries. Our gross profit margin this quarter was 22.3%, down 160 basis points from a year ago. Our gross profit margin in the prior year fourth quarter was positively impacted by lot sales from an unusually high-margin project. Our fourth quarter pretax income increased 4% to $113.1 million, and our pretax profit margin was 16.9%. Pretax income for the year totaled $219.3 million, and our pretax profit margin this year was 13.2%. Our pretax income and profit margin for the quarter and the year were positively impacted by a gain on sale of assets of $4.5 million. Chris? Chris Hibbetts: SG&A expense for the fourth quarter was $42.7 million or 6.4% as a percentage of revenues. And for the year, SG&A expense was $154.4 million or 9.3%. Our average employee count for fiscal year 2025 increased 24% compared to the prior year, which has supported the continued expansion of our platform, including entering new markets and increasing community count. Roughly 90% of new hires in fiscal 2025 were in our local market operations. We are pleased with the progress we have made building our team and our ability to attract high-quality talent. We remain focused on efficiently managing our SG&A while investing in our teams to support our continued growth. Mark? Mark Walker: New home sales have been slower than last year as continued affordability constraints and cautious consumer sentiment continue to weigh on demand. However, mortgage rate buydown incentives offered by builders are helping to bridge the affordability gap and spur demand for new homes, mainly at more affordable price points. Our primary focus remains developing lots for new homes at prices for entry-level and first-time buyers, which is the largest segment of the new home market. The availability of contractors and necessary materials remain solid and land development costs have been stable. We have also seen improvement in cycle times despite continued governmental delays. Our teams utilize best management practices and work closely with our trade partners to develop lots to drive operational efficiency. Jim? James Allen: D.R. Horton is our largest and most important customer. 15% of the homes D.R. Horton started this year were on a Forestar developed lot. With a mutually stated goal of 1 out of every 3 homes D.R. Horton sells to be on a lot developed by Forestar, we have a significant opportunity to grow our market share within D.R. Horton. We also continue to work on expanding our relationships with other homebuilders. 17% of our fiscal 2025 deliveries or 2,489 lots were sold to other customers, which includes 927 lots that were sold to a lot banker who expects to sell those lots to D.R. Horton at a future date. We also sold lots to more than 20 different homebuilders this year, including 6 new customers. Chris? Chris Hibbetts: Forestar's underwriting criteria for new development projects remains unchanged at a minimum 15% pretax return on average inventory and a return of our initial cash investment within 36 months. During the fourth quarter, we invested $347 million in land and land development, of which approximately 80% was for land development and 20% was for land. For the full year, we invested approximately $1.7 billion in land and land development, of which 2/3 was for land development and 1/3 was for land. In fiscal 2026, we currently expect to invest approximately $1.4 billion in land acquisition and development. Mark? Mark Walker: Our lot position at September 30 was 99,800 lots, of which 65,100 or 65% are owned and 34,700 or 35% are controlled through purchase contracts. 8,900 of our owned lots are finished, which is down 11% from the third quarter. The majority of our finished lots are under contract to be sold. Consistent with our focus on capital efficiency, we target owning a 3- to 4-year supply of land and lots and manage our development in phases to deliver finished lots at a pace that matches market demand. Owned lots under contract to sell increased 13% compared to a year ago, 23,800 lots or 37% of our own lot supply. $193 million of hard earnest money deposits secure these contracts, which are expected to generate approximately $2.1 billion of future revenue. Another 27% of our owned lots are subject to a right of first offer to D.R. Horton based on executed purchase and sale agreements. Jim? James Allen: We have significant liquidity and are using modest leverage to keep our balance sheet strong. We ended the quarter with $968 million of liquidity, including an unrestricted cash balance of $379 million and $589 million of available capacity on our undrawn revolving credit facility. During September, we redeemed the remaining $70.6 million of 3.85% senior unsecured notes that were due in 2026. Total debt at September 30 was $803 million with no senior note maturities until fiscal 2028, and our net debt-to-capital ratio was 19.3%. We ended the quarter with $1.8 billion of stockholders' equity, and our book value per share increased 11% from a year ago to $34.78. Forestar's capital structure is one of our biggest competitive advantages, and it sets us apart from other land developers. Project-level land acquisition and development loans are less available today and have continued to be more expensive, which impacts the majority of our competitors. Other developers generally use project-level development loans, which are typically more restrictive, have floating rates and create administrative complexity, particularly in an elevated interest rate environment. Our capital structure provides us with operational flexibility, while our strong liquidity positions us to take advantage of attractive opportunities when they arise. Andy, I'll now turn it back over to you for closing remarks. Anthony Oxley: Thanks, Jim. Fiscal 2025 was another successful year for Forestar. We delivered revenue growth of 10% and increased our book value per share by 11%. We continue to execute our strategy to expand the business through significant investments in land and land development and growth of our team. These investments helped us enter 7 new markets and increase our community count by over 10%. We further strengthened our balance sheet through extending near-term debt maturities and increasing our liquidity. As we look forward to fiscal 2026, based on current market conditions, we expect to deliver between 14,000 and 15,000 lots and to generate $1.6 billion to $1.7 billion of revenue. We currently expect our first quarter will be our lowest delivery quarter of the year, and we expect our revenues in the second half of fiscal 2026 to be higher than the first half. We are closely monitoring each market as we strive to balance pace and price to maximize returns for each project. While we expect home affordability constraints and cautious homebuyers to continue to be near-term headwinds for new home demand, we are confident in the long-term demand for finished lots and our ability to gain market share in the highly fragmented lot development industry. We are well positioned to continue success with our lot portfolio across our diverse national footprint, operating expertise and strong balance sheet. [ Ole ], at this time, we'll open the line for questions. Operator: [Operator Instructions] Our first question today is coming from Trevor Allinson with Wolfe Research. Trevor Allinson: Looking at your '26 guidance, it looks like you're expecting deliveries to be up low single digits. That's roughly the same growth as your largest customer. As we think about you deepening your penetration with Horton, why would you not grow faster as we look into next year? Is it an expectation that sales to other builders come down? Or is it just some conservatism? What's driving kind of the in-line growth with Horton? Anthony Oxley: Thanks, Trevor. It's just their size. They -- if they grow at low single digits, we need to grow at mid-single digits just to maintain pace with them. So they've entered some new markets. We've entered 6 or 7 new markets for the year. We are growing market share in the markets where we are in, but it's just a matter of us catching up with them in those additional markets. We have the land. We have the team in place. So we are positioned. If the market is there, we could increase those units, but it's really going to depend on the spring selling season to see what the year gives us. Trevor Allinson: Okay. Makes sense. That's helpful. And then you talked about employee count being up 24% in fiscal '25. You built out your teams ahead of some anticipated growth here over the next couple of years. With that in mind, how should we think about your headcount moving forward and your leverage on SG&A in fiscal '26? James Allen: Well, our headcount has remained basically flat since the first quarter of fiscal '25. Most of that increase in headcount actually occurred in fiscal '24, but only partially recognized in fiscal '24. I would expect our headcount to continue to remain flat or maybe even drift down slightly as we move into fiscal '26. Operator: [Operator Instructions] Our next question is coming from Anthony Pettinari with Citigroup. Asher Sohnen: This is Asher Sohnen on for Anthony. I just wanted to ask, I think last week, we saw a builder talking about how they were getting some cost concessions and extended takedown schedules on their lots. So I was just wondering with Horton or your third-party customers, are you seeing any pushback on lot prices or maybe extended takedown schedules or anything like that? Mark Walker: Yes. From a land acquisition perspective, we've been successful renegotiating time and terms, but not so much land value. Throughout the years, our teams and we have developed a proven underwriting due diligence and market research strategy that helps us ensure that we're purchasing land at current market rates. In terms of lot pricing, lot pricing has -- we haven't seen a whole lot of pushback on our lot pricing today. Again, we manage that project by project to maximize returns. Asher Sohnen: Okay. That's helpful. And then I just wanted to drill down a little bit. I think you guys have a big presence in Texas and Florida. I was wondering if you can talk geographically around those regions specifically, what kind of trends you're seeing there? Anthony Oxley: Yes. We are seeing some pressure in some markets in Texas. It's choppy. Probably see a little bit more pressure in Florida, parts of Florida. But those are really large markets and particularly at the affordable price point where we tend to concentrate our business, we're still seeing good absorptions. Asher Sohnen: Great. That's helpful. And then if you won't mind me sneaking in one more, just a modeling question. In terms of the cadence of deliveries in 2026 in your guide, I think 2025 was pretty back half weighted. I'm just wondering if there's any thinking around '26. Unknown Executive: Yes. I mean, I think we're projecting '26 to be a similar cadence of '25. Certainly, our deliveries will be larger in the second half of the year, similar to this year. Operator: [Operator Instructions] Okay. As we have no further questions on the lines at this time, I'd like to turn the call back over to Mr. Andy Oxley for any closing remarks. Anthony Oxley: Thank you, [ Ole ], and thank you to everyone on the Forestar team for your focus and hard work. As we enter fiscal 2026, continue to stay disciplined, flexible and opportunistic while focusing on consolidating market share. We appreciate everyone's time on the call today and look forward to speaking with you again in January to share our first quarter results. Operator: Thank you. Ladies and gentlemen, this does conclude today's call. You may disconnect your lines at this time, and we thank you for your participation.
Operator: Good morning. Thank you for joining The Sherwin-Williams Company's review of the third quarter 2025 results and our outlook for the full year of 2025. With us on today's call are Heidi Petz, President and CEO; Allen Mistysyn, Chief Financial Officer; Paul Lang, Chief Accounting Officer; and Jim Jaye, Senior Vice President, Investor Relations and Communications. This conference call is being webcast simultaneously in listen-only mode by ACCESS Newswire via the Internet at www.sherwin.com. An archived replay of this webcast will be available at www.sherwin.com beginning approximately 2 hours after this conference call concludes. This conference call will include certain forward-looking statements as defined under the U.S. Federal Securities laws with respect to sales, earnings and other matters. Any forward-looking statement speaks only as of the date on which such statement is made, and the company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. A full declaration regarding forward-looking statements is provided in the company's earnings release transmitted earlier this morning. After the company's prepared remarks, we will open the session to questions. I will now turn the call over to Jim Jaye. James Jaye: Thank you, and good morning to everyone. Sherwin-Williams delivered solid third quarter results as we continue to execute our strategy in a demand environment that remains softer for longer, as we have previously described. Throughout the quarter, we continue to serve our customers, invest f success, control our costs, take advantage of a unique competitive environment and execute on our enterprise priorities. On a year-over-year basis, consolidated sales increased at the high end of our guided range. Paint Stores Group and Consumer Brands Group exceeded expectations and Performance Coatings Group was in line. Gross margin and gross profit dollars expanded. SG&A growth in the quarter moderated to the low single-digit percentage level we expected, driven by ongoing control of general and administrative expenses and inclusive of restructuring costs and new building costs. We remain on track for our original guidance of a low single-digit percentage increase in SG&A for the full year, including our targeted growth investments. Adjusted EBITDA margin expanded 60 basis points to 21.4%, and adjusted diluted earnings per share grew by 6.5%. We also returned $864 million to shareholders through share repurchases and dividends. Let me now turn it over to Heidi, who will provide some additional color on the third quarter before moving on to our outlook and your questions. Heidi Petz: Thank you, Jim, and good morning to everyone. Let me begin by thanking our employees for delivering a solid quarter as we continue to navigate a very choppy demand environment across every one of our end markets. Our strategy continues to resonate with professional painting contractors and manufacturers who now more than ever are looking for partners that can provide them with predictability and reliability. Sherwin-Williams provides customers with differentiated solutions that makes them more productive and profitable. This is even more valuable at a time when competitive offerings are inconsistent. We know what works, and we're investing in it while continuing to assess, adapt and control what we can control. We remain confident our approach is the right one to continue winning near term and it leaves us well positioned for when the demand cycle eventually turns. Let me now provide some color on our third quarter segment performance. Sales in Paint Stores Group increased by a mid-single-digit percentage, with price mix up at the high end of low single digits and volume up low single digits. This solid top line performance is not due to any market improvement in demand, but rather clear evidence that our growth investments are delivering a return. Given the market data we track, we believe we outperformed the market in all segments that we serve. Protective and marine increased by low double digits. This was the fifth straight quarter we have delivered high single-digit growth or better in this end market. In residential repaint, sales again grew by mid-single digits. We have grown this business by at least this level in every quarter since the start of 2022, a period during which existing home sales have been negative almost every month. We also outperformed in Commercial, where sales were up mid-single digits in a quarter where multifamily completions were down double digits for the 2 months of available data. Our systematic approach to capturing new opportunities in this segment, created by recent competitive actions is working. In new residential, sales increased by low single digits in a quarter when single-family completions were down slightly for the 2 months of available data. Property maintenance and DIY sales both increased by low single-digit percentages. Exterior sales were slightly better than interior sales, and both were up mid-single digits. We opened 23 net new stores in the quarter and 61 year-to-date, which is ahead of last year's pace. We've also added a commensurate number of sales reps to serve new accounts and customers through these stores. Even as we continue to make these growth investments, we continued to drive profitability. Segment profit in the quarter grew by a mid-single-digit percentage and segment margin increased by 40 basis points. With segment gross margin being flattish, this increase reflects leverage on SG&A, with over 30% incremental margin on low single-digit volume growth. Moving on to Consumer Brands Group. Sales beat our expectations with price/mix up low single digits, volume down mid-single digits and FX, a slight headwind. Sales reflect continued softness in North America DIY and unfavorable FX in Latin America, partially offset by growth in Europe. Adjusted segment margin increased primarily due to a favorable product mix shift and good cost control, partially offset by supply chain inefficiencies from lower production volumes. Severance and other restructuring expenses also reduced segment margin by 85 basis points. We're also very pleased to have closed on Suvinil acquisition earlier this month, and I want to take this opportunity to officially welcome this highly talented team to Sherwin-Williams. This business is an outstanding addition to the Consumer Brands Group Latin America portfolio, and we're excited by the many profitable growth opportunities ahead for our combined offerings. Additionally, we continued our channel optimization efforts in this region during the quarter, closing 8 net Sherwin-Williams stores and shifting that volume into selected qualified dealers. In Performance Coatings Group, sales were in line with expectations. Volume, acquisitions and FX all increased by low single-digit percentages but were partially offset by unfavorable price/mix. Regionally, segment growth in Europe and North America was partially offset by decreases in Latin America and Asia. From a division perspective, packaging remained our strongest performer with double-digit growth, inclusive of an acquisition. We're also pleased with mid-single-digit growth in Auto Refinish, inclusive of high single-digit growth in North America. This growth was driven by share gains that more than offset continued lower insurance claims. Sales in Coil, Industrial Wood and General Industrial all decreased by low single-digit percentages. PCG segment profit and margin decreased due to lower gross margin, primarily from unfavorable product and region sales mix and higher costs to support sales. Severance and other restructuring expenses also reduced segment margin by 30 basis points. I would also like to note the continued good work in our administrative function to control costs. Excluding the corporate portion of restructuring costs and the new building costs, administrative SG&A was down by a low double-digit percentage in the quarter. Before moving on to our outlook, I want to address the topic that some of you have asked about, and that was our very difficult decision to temporarily pause the company matching contributions to our 401(k) benefit plan effective October 1. I want to be very clear, this is not a decision made lightly, nor was it made without deep appreciation for its impact on our people. It was a decision made after implementing a number of cost-saving initiatives, and completing significant restructuring actions, all at a time when we have and continue to face a period of prolonged demand and macroeconomic uncertainty. Our goal was to preserve as many jobs as possible in the near term, while also protecting the company with targeted customer-facing investments at a time of unprecedented competitive opportunity. Our goal is to reinstate the match as soon as possible, just as we have done successfully in the past. We are focused on delivering the performance that enables us to do so while also building long-term value for all of our stakeholders. With that, let me move on to our outlook for the remainder of this year, along with some initial considerations related to 2026. The slide deck issued with this morning's press release provide specific sales guidance for the fourth quarter, which reflects our normal seasonality. This sales guidance includes the Suvinil acquisition, which we expect will increase the company's consolidated sales by a low single-digit percentage in the quarter, with an immaterial negative impact to diluted earnings per share, given transaction closing costs and purchase accounting items. Given our third quarter sales performance and the addition of Suvinil, we are updating our full year 2025 sales guidance to be up by a low single-digit percentage versus 2024. Our second half EPS is in line with what we were expecting in July, excluding the immaterial headwind of Suvinil. We are narrowing our earnings outlook and now expect adjusted diluted net income per share to be in the range of $11.25 to $11.45 per share with a prior midpoint of $11.35 remaining unchanged. Additionally, we remain on track to open 80 to 100 North America Paint Stores for the year. We will also continue to manage production and inventory closely over the rest of the year, on pace with customer demand. We remain laser-focused on our strategy of driving our customers' success. As far as 2026, our teams have begun working through our annual operating plan process. We'll provide you with a more definitive outlook in January as we typically do. But at this time, we can provide some initial expectations that may be helpful. From a demand perspective, it appears that a very challenging environment will persist through the first half of the year and most likely beyond that. In other words, softer for longer and continued choppiness across most end markets. The leading indicators we track point to minimal positive catalysts at this time. We will continue to focus on our new account and share of wallet initiatives and driving continued returns on the growth investments we have made. Our initial view of raw material costs is that they will be up low single digits, inclusive of tariffs with varying costs for individual commodities. We also expect other parts of the cost basket to inflate, particularly health care, which will increase by a low double-digit percentage in wages, which we expect to increase by a low single-digit percentage. We also expect to continue investing in growth initiatives, including stores and reps to win new business and support existing customers and strategic retail partners as the competitive environment continues to inflect in our favor. We will continue to counter cost headwinds through efficiency and simplification initiatives, and disciplined pricing actions. Specifically, we have announced a 7% price increase in Paint Stores Group effective January 1, along with targeted increases in our other segments. Effectiveness in Paint Stores should be in our typical historical range, but likely will be tempered by market dynamics and segment mix. We will continue to be very aggressive in growing the business, and in controlling general and administrative expenses, so we do not see a reason to be heroic in our initial guidance. We expect interest expense will be higher given our new headquarters financing arrangement and refinancing of debt at higher rates earlier this year. We remain on track with the restructuring initiatives we've previously called out, and we expect a total benefit in 2025 of approximately $40 million in savings. We expect our actions to result in savings of approximately $80 million on a full year basis going forward. On a very exciting note, we've begun the move into our new headquarters and R&D center in Cleveland, and we expect the process to be completed in the spring. As a result, we anticipate our CapEx returning to a more typical range of around 2% of sales next year. These new world-class facilities are investments in our people and our customers that we are certain will deliver strong returns and there will be multiple chances for you to come visit in the coming year. All in, including our new and current buildings, we would expect a modest cost headwind next year. We will provide more details on our January call. 2025 is not over, and we know we still have work to do. You should expect us to continue acting with discipline and urgency during the remainder of the year. Beyond that, we expect the demand environment to remain soft well into 2026. We are not immune from these persistent challenging market conditions, which leads us to focus even more intensely on differentiated solutions that help our customers become more productive and profitable. With our success by design mindset and a deeply experienced team, we see this as a great time to continue demonstrating what makes Sherwin-Williams so unique and outperform the market, and that's exactly what we plan to do. This concludes our prepared remarks. And with that, I'd like to thank you all for joining us this morning, and we'll be happy to take your questions. Operator: [Operator Instructions] Your first question is coming from Ghansham Panjabi from Baird. Ghansham Panjabi: Heidi, could you just give us a bit more color on the 7% price increase for Paint Stores Group? How did you come about that number? I mean raw materials looks like they're going to be flat this year, up low single digits next year. I know you have wage increases, et cetera, but the demand environment seems pretty tepid. So how do we get to the 7%, which is, I think, the highest since the COVID inflation spike? Heidi Petz: Ghansham, I'm going to hand it to Al here in a moment, but let me start with -- this is more about our pricing philosophy in general, you and I've had this discussion when we need to go to the market, our customers understand that we need to go to the market. And so we work the entire year before that to make sure that we're demonstrating value and earning the right to do that so we can continue to make the investments that I referred to in my earlier remarks. But I'll let Al give you a little bit of color on why the 7%. Allen Mistysyn: Ghansham, this is Allen Mistysyn. The -- how we got to the 7% is it's really driving it because of higher year-over-year increases. You talk about our initial view of raw material costs being up low single digits as compared to being flattish in the current year. And the other basket -- cost basket increases. But I think what I would like to also add to that is Heidi mentioned in her opening remarks about being -- the effectiveness being in our typical range but being tempered by market dynamics and segment mix. As you said, we're going to -- in this environment, a slow growth, choppy demand environment, we're going to be very aggressive in growing the business with new account growth and share of wallet. And why is that important to us is because when we look -- as I talked about a year ago on this similar call, we look at price mix as 1 bucket and we report on that metric quarterly. And we've got a number of pro-architectural segments that perform at varying levels. And as an example, in our third quarter, we saw commercial property maintenance, new residential improve and perform better. They have similar operating margins, but they do dilute the price/mix realization. And if you look at our third quarter price/mix realization, it was up at the upper end of the low single digits, which was compared to a mid-single-digit percentage in the second quarter. And I've said before, we're focused on growing operating margin. In the third quarter -- our net sales and volume growth was better in the third quarter than we expected. So even though we have flattish gross margin, we experienced SG&A leverage. We grew our operating margin and saw strong incremental margins of 30-plus percent on that low individual -- low single-digit volume gain. So my point here is it's a balance. We are going to go strong after volume. We're going to come out of the other end of the price increase with our customers, but we're going to balance both. Operator: Your next question is coming from Jeff Zekauskas from JPMorgan. Jeffrey Zekauskas: 30-year mortgage rates have come down. I think they're about 6.4% now. Where do you think those rates need to go to really catalyze demand in the Paint Stores Group? Allen Mistysyn: Yes, Jeff, I think I can go back [ because it sticks out ] in my head where mortgage rates dipped to around 6% in October of last year. We saw a nice bump in applications. So I think when you look at the pent-up demand and depending on what number you look at and how long it's been with existing home turnover being flat or down and now it's starting to turn, there's a lot of pent-up demand. So when we get towards 6% and certainly, we've seen the 10-year dip below 4% for a day, which was exciting. But I think that around 6% or a little bit below should drive stronger existing home turnover since the homebuilders have been paying down the rate to get more people and more traffic into their homes already. Heidi Petz: Jeff, 1 piece, I think I would add to that too, 6% seems to be the magic number, but we spent a lot of time with our national and regional homebuilders. And not a surprise, I think everybody is squarely focused on affordability. And while they're trying to reduce upfront construction costs, redesigning floor plans, even looking at lot sizes and the actual product, the biggest impact is obviously affordability. Rates will certainly have an impact. So we are all hoping that the Fed makes some shifts here in the future. Operator: Your next question is coming from Vincent Andrews from Morgan Stanley. Vincent Andrews: Heidi and Al, I wanted to ask on the investment spending. We're a bit more than 2 years into it. I think we can all look and see the positive results that are coming from it in terms of market share gains and how it's manifesting itself in your volume results. I think what's less clear to us from the outside is just how you define the efficiency of the spend. And you can look at it both ways. You can say, could you get the same results spending less? Or could you get better results if you were spending more. And so I think it would be helpful if you could just sort of talk to a little bit of a look-back analysis on this as we're a little bit more than 2 years in. And what defines and what helps you understand what the right level of spend is and what causes you to add more or presumably you've pulled back at the same time in other areas where you haven't seen the effectiveness. So some detail there would be helpful. Likewise, as we look into '26, if we don't get the help from the Fed that we all want and things remain choppy, what causes you to continue to make the incremental investments? Allen Mistysyn: Yes, Vincent, I think it always starts and ends with how we get a return for the investments we make. We have a very disciplined process around new store adds, rep adds, and we look for stores on what's the time to get to a normal -- steady-state profit? And how long that is. And that gives us some idea, are we in a saturated market or not? And I would tell you that each of the stores we add, including in our densest markets get to profitability faster as we continue to invest in our least dense markets. For our reps, we look at residential repaint in the mid-single-digit growth we've had in residential repaint through this year, through most of the last year. And we look at the investments we made in the second half of 2023, we can look by territory, by sales growth, by margin growth, and I would tell you without a fact -- without a doubt that we are getting a return on those investments, and what dictates how fast or slow you go, and this has been very consistent over many years. We put a plan in place, 80 to 100 stores, similar or a little bit higher number of reps. We look at our performance through the first half. We look at outlook for the second half. We think sales are going to be stronger if we think our gross margin is going to be stronger than we had planned. we are willing and able to invest heavier typically on the rep side. It's a little harder to invest more on the store side. But typically, on the rep side, and they're more focused on res repaint. And again, we look very, very tactically and look at each of those reps and see what kind of return they're getting. But a ton of confidence that we are getting a return for those based on the sales performance we're seeing in a very difficult, I would argue, down market in res repaint. Heidi Petz: And it's a huge testament to our team. They're out every day belly to belly with these customers. And while the market may have gotten kind of worse in some pockets here, I think Al makes a great point on res repaint, we continue to outperform in what I would also consider a highly unprecedented competitive environment. So in that 2-year span, Vincent, obviously, as you well know, there's a lot of gallons up for grabs and we're going to be relentless to grab them. Operator: [Operator Instructions] Your next question is coming from John McNulty from BMO Capital Markets. John McNulty: Maybe an early 1 on Suvinil. Can you help us to think about some of the actions you plan on taking there? How to think about maybe some of the opportunities around synergies and where we might be looking at the profitability levels as we look to 2026. Heidi Petz: Yes. John, I'll start and then hand it over to Al to talk a bit about kind of further out as we think about profitability. But I'm thrilled, I'm beyond excited on this acquisition. I'm going to be out with our team in Brazil here shortly, of course, getting in front of some customers. Really proud of the team's joint effort and their laser focus on business continuity, where we can create more value together as 2 great companies. So a lot of opportunity both commercially and operationally. It's early days. The teams are just getting started. I wish I had all the answers laid out, but I can tell you we've got the right people, the right leaders that are going to help us to realize that value at an accelerated rate. Allen Mistysyn: Yes, John, let me just start impact on the fourth quarter, Suvinil will increase consolidated sales of low single-digit percentage. It increases our consumer brand sales, a low 20% -- 20 percentage. How you talk about an immaterial headwind in the fourth quarter, predominantly due to onetime transaction costs and inventory step up. We'd be accretive in the quarter, slightly accretive in the fourth quarter. As you look out, and we'll give you more detail on our January call. But as you recall, we talked about a $525 million business, mid-teens EBITDA. And I would expect, as we implement our systems, tools and processes and realize the synergies across both organizations because as you recall, we talked about being somewhat of a reverse integration. We'd expect to see that growth into the high teens, low 20s over a midterm period of time. Operator: Your next question is coming from Alexi Yefremov from KeyBanc Capital Markets. Aleksey Yefremov: Heidi, I wanted to ask you about your comments on the second half of next year. I realize it's pretty far away, but are you seeing anything specific to found maybe a little less hopeful about recovery? Or is this just looking at current trends and being conservative? Heidi Petz: Yes. I think it's more a function of our current sight line given how far out we can see relative to backlogs, overall pipeline of the business is honestly more of the comments there. But I will go back to the statements regarding -- we are not yet seeing consistent data points that really telling a story that there's this catalyst coming anytime soon. So I don't believe it's conservatism. I think it's pragmatism. But I can assure you, if the market rebounds faster, we will be prepared for it. Operator: Your next question is coming from Duffy Fischer from Goldman Sachs. James Jaye: You might be on mute, duffy. Why don't we move on? We'll come back to Duffy later. Operator: Certainly. Your next question is coming from Mike Harrison from Seaport Research Partners. Michael Harrison: I was wondering kind of piggybacking on the last question, if you could give some more detail on what you're hearing from your contractor customers about their backlogs and about visibility over the next 3 to 6 months. And I'm just curious within Paint Stores Group, what submarkets are your contractors sounding maybe a little bit more confident? And what submarkets are giving you a more cautious outlook? Heidi Petz: Yes. Mike, I'll start. Let me -- I'll point to the Commercial segment, within that includes the multifamily starts. Again, you're seeing a continued outperformance here for the company. We are seeing some improvement on starts, but I would tell you that we're looking more for trends and a sustained view of some of these positive signals. So we need to see more of that. This also comes over some soft comps over the last 2 years. Our sight line in this area is more like 9 to 12 months. And so when that does start to pick up, it would likely be late back half, if not early '27. Some of that movement is accounted for in our current commercial outlook. Any additional comments, Al, you would like to share. Okay. Operator: Your next question is coming from Matthew [ Deo ] from Bank of America. Unknown Analyst: Can we just flesh out briefly the 4Q implied guidance and the deceleration in year-over-year growth? Is that because it's harder to grow a seasonally weaker quarter? Is there a regional mix issue there? Or is there anything else that might point to higher cost or decel? Allen Mistysyn: No, Mike. I think when you look at our fourth quarter sales guide, our consolidated is expected to be up low to mid. And Paint Stores Group up low to mid. I think we saw -- we beat our third quarter forecast for stores on the back of better exterior gallon sales. I'd say, our fourth quarter sequentially smaller and exterior is really going to be dependent, as we've talked about in the past of Southeast and Southwest and how those pan out. I don't think we're expecting anything dramatically changed. It's more of the same across each of the other segments within stores. I think consumer is a similar kind of outlook including -- or excluding Suvinil and then our PCG group has been in line with our second half guide. So I don't think there's anything to read into that other than exterior being stronger, both in stores and in consumer in our third quarter, and then we'll see how that pans out in our fourth quarter. Operator: Your next question is coming from Mike Sison from Wells Fargo. Michael Sison: Your pricing capture this year has been better or higher than in the past. What do you think pricing capture would be in '26 and going forward? And do you think it's structurally better than you've had historically? Allen Mistysyn: Yes. Mike, I think I'll just touch on '26. Going further than '26 in this environment, it's a little hard to see. We've talked about market dynamics and going out with a higher rate to cover the higher costs that we're experiencing. But in this softer for longer demand environment and the dynamics in the market with our competitors and some of the actions they've taken, we've talked openly about this on each of our calls this year. We're just going to be very aggressive on gallons and balance the gallon growth with the price increase effectiveness. And what I talked about earlier is what we report on with price/mix as one bucket can be impacted by changes in segment sales. Like we saw in our third quarter. So if you look at our third quarter versus our second quarter, we said price/mix was up low single digits. We said on our second quarter, it was up mid-single digits. The price effectiveness itself is similar quarter-to-quarter, but we had better performance in commercial new res and property maintenance. And that's what kind of tempered the effectiveness of that price/mix bucket. Operator: Your next question is coming from John Roberts from Mizuho. John Ezekiel Roberts: Could you talk about where you think industry gallons are down in the U.S. by subsegment, just in buckets here, which subsegments are down low single digit percent [ gallons ] against for the industry, mid-single digit. And are any of the subsegments down high single-digit in your opinion. James Jaye: Yes, John, this is Jim. I think this is another year where gallons -- obviously, we're not through the year, but I think the gallons this year are likely going to be down again, which is what we've seen since we've come out of COVID. I'm not going to get into the specifics by end markets, I would say. But if you look at the different signals that we look at, for example, existing home sales, the starts on single-family, some of the property maintenance, which has remained neutral. I think you can say that gallons are probably challenged across most of our end markets. I think the good takeaway is as Heidi said in her prepared remarks, we're outperforming in all of those, which is our North Star, right, at above-market performance. So it's further evidence of the investments we've made, delivering a return. And even in a down market, we've been able to grow our volumes. Operator: Your next question is coming from Arun Viswanathan from RBC Capital Markets. Arun Viswanathan: Maybe I could get like a little bit of an early read on next year. You do have some share gains coming to you. You've announced the price increase. So in Paint Stores Group, I know you've also signed up some exclusive new contracts. So do you think a mid-single-digit comp is reasonable? Or should we push maybe to high single digits, given that 7% price increase. Heidi Petz: Well, I'll start with what we just covered in the last question, which is we don't expect any help from the market whatsoever anytime soon. We do hold ourselves to higher expectation as you should expect as well. We don't often hold a yardstick based on what's happening in the competitive landscape where we really push ourselves. We talk about what's possible often in our organization and really push to think differently and think outside of the box. So when I think about this environment, our ability to go demonstrate value with these contractors and gain some exclusivity, I think, is a testament to our differentiation on display. In this environment, these contractors in the stores are looking for predictability and reliability to partner, and that's exactly what we're setting out to accomplish. Allen Mistysyn: Arun, the only thing I would add to that is, as we have typically done, we're headed into our 2026 operating plan process where we sit down with each of the divisions and the field sales organizations and field sales teams to talk about what's happening in their individual markets and by segment. And it gives us a much better idea of the trends that we expect. We'll -- they'll be having conversations with their customers on the price increase, and we'll see how those are progressing and that will give us a clear picture what to expect on the full year when we look at sales volume, and we certainly will give you an update on that in January. Heidi Petz: We're going to continue taking share, but we're not immune from what's happening in the market. Operator: Your next question is coming from Patrick Cunningham from Citi. Patrick Cunningham: Maybe just a question on Performance Coatings. Can you help square the negative operating leverage despite the positive sales? Maybe just some color around the mix drag and higher costs there. And then it seems like you're pretty firmly guiding for low single-digit growth across that segment for 4Q. Should we expect similar margin declines with some of these similar mix dynamics? Just any sort of framework there would be helpful. Allen Mistysyn: Yes, Patrick. On the adjusted segment margin, we talk about the unfavorable mix by region and by business. We look at North America, which is our most mature market, and our sales were only up low single digits. And when you look at Europe, which we have grown quite a bit through acquisitions, and we were up a high single digit at a differing margin -- operating margin performance along with Latin America being down, which is typically a better market for us. So those combinations drove that -- our gross margin down, drove the profit margin down and offset by higher volumes. I think looking at our fourth quarter, my expectation is we're planning to see some moderation in that mix, unfavorable mix. We're looking at -- I expect to see some gross margin expansion due sales volume, I think, our -- as we continue to maintain good cost control, and that team has done a terrific job all year controlling their costs. I'd expect to see some leverage on SG&A and segment profit margin improving in our fourth quarter. And we'll see how it goes into '26. And again, we're going through the planning process now, and we'll give you an update on '26 in January. Heidi Petz: We don't see any strong catalyst for market recovery, but we're not waiting for that either. I think there's some really good bright spots to point to. We mentioned in my prepared remarks, I'd point to Auto Refinish as a great example being up mid-single digits, and we are confident in taking market share, especially in North America, where we're up high single digits. [ I'd point ] to certainly the direct business, but our branches continue to demonstrate value. The large A shops are improving. The larger shops, some of the small and medium shops continue to see declines, but we are being very bullish right now, making sure that our Collision Core continues to build momentum. Adoption continues to grow, very proud of the team's efforts there. There are a number of different examples to point to across the portfolio, but just to reinforce Al's point, a lot of confidence in the team's focus on both growing volume and significant cost control. Operator: Your next question is coming from Josh Spector from UBS. Joshua Spector: This might be redundant, but I'll try again here around Paint Store volumes. I guess if we look at the first half, your organic volumes same-store sales down maybe 3% to 4% depending on where you landed on pricing. Your second half guide is closer to flat, maybe plus or minus 50 basis points on the volume side. So as we think about a lower for longer environment and maybe some acceleration in share gains in commercial and multifamily, should we be thinking about a flattish volume environment for '26 as the base case? Or would you go back to what we might have thought a quarter ago, which is maybe down low single digits? Allen Mistysyn: Yes, Josh, I don't want to give you a firm outlook today for 2026. But from quarter-to-quarter or half to half, you look at how like in our third quarter exterior sales performed better than it did in the first half, which gives us a little bit of tailwind on volume. So when we look at our forecasting models, depending on the timing of how commercial comes in, is property maintenance CapEx is going to come back or still stay soft. You're looking up or down low single digits. And I think initially in our first consideration is starting there and then working with our teams to see how we can accelerate the share gains both the new account activity and share of wallet and see how we can build those in to get to a sustainable up low single-digit volumes with all the good actions they've taken as a team to control their G&A costs while still putting in stores, still putting in reps. We have 95 more reps year-over-year -- our stores year-over-year. We have over 110 more reps year-over-year and their SG&A, we got leverage in SG&A in the third quarter. So I think there's a combination of things that we're looking at. But segment by segment, we'll look at and see where we end up. But initially, right now, it's probably up or down low single digits until we get a better line of sight coming out of the year. Operator: Your next question is coming from David Begleiter from Deutsche Bank. David Begleiter: Heidi, just on your price increase, given the challenges we're seeing now in Pittsburgh Paint, why wouldn't you not raise prices next year just to apply maximum pressure on Pittsburgh Paint and really step on their neck while they were down. And sorry to be so graphic. Heidi Petz: That was very graphic. David, I'll go back to a comment Al made earlier and completely this guides how we're thinking about the current operating environment, which is about balancing gallon growth with price increase effectiveness. We are going to be extremely aggressive on volume. I mentioned there's a lot of gallons up for grabs. We need to go earn that. It doesn't just come our way naturally. The team is out there across the Paint Stores organization, every store manager, assistant manager, our reps, they're fighting tooth and nail every day to make this happen, and I'm very proud of the team's achievement that allows us to kind of beat the market. But it is a balance. And I think what you'll find, as we've always done historically, when we come out with price, we want to do it the right way. We want to get out in front of our customers, give them time to plan, get ahead of the bidding season. We don't want our customers start absorbing this and helping them to pass that along. But the timing of the increase is of strategic importance, but we're going to be extremely aggressive on volume. So if there's a way to thread the needle, it is going to be a little bit of art and science to balance the two. Allen Mistysyn: And David, I'd just add. I appreciate the comment on PPC. But we have a disciplined approach to how we look at pricing, how we approach our strategy. And we just aren't going to react to each competitor's actions in the market that we can't control. We've done very well. We've been very successful on managing what we can manage and sticking to the things that we know how to do. So we're going to stick with that. It's been a successful formula for us, and it's going to be going forward. Operator: Your next question is coming from Kevin McCarthy from Vertical Research Partners. Kevin McCarthy: Do you have any price increases on the table that you care to call out for consumer brands or across the Performance Coatings Group. Just trying to get a sense of whether there might be a potential for any price acceleration on those platforms relative to the 7% that you called out for Paint Stores? Allen Mistysyn: Yes, Kevin, based on the overall cost basket dynamics and increasing, we have targeted price increases across each of the businesses in each of the regions to help offset that and keep moving us forward. Heidi Petz: And to move forward by investing in our customer success. And so it's going to be incumbent that we get that accomplished. Operator: Your next question is coming from Chris Parkinson from Wolfe Research. Christopher Parkinson: Great. Understanding there are a lot of moving parts heading in 2026. So when we think of all the dynamics between price cost and manufacturing. Is there a scenario out with for which you see Sherwin consistently being at or above 50% gross margin absent any material volume recovery. Have those dynamics or puts and takes really changed since last year's Analyst Day? Allen Mistysyn: Yes, Chris, can we sustain sustain 50% gross margin implies volume growth. And like we talked about, there's going to be choppiness across each of the segments, each of the businesses and regions. And one thing I will say is, I believe Paint Stores Group will grow faster, excluding Suvinil acquisition, but will grow faster than the other segments over the next year over the midterm at a higher gross margin that helps drive an overall consolidated gross margin improvement. We did experience a headwind in our supply chain this year because of the lower production volumes. And I would say that the global supply chain team has done a really terrific job trying to offset these low- to mid-single-digit production gallon decreases by controlling their costs and being really creative on how we control our costs. So we're not losing people because we are confident in our strategy. We're confident that, that volume will return. And we want our people there when it does return and we bring hours back and we fill our factories back up to more efficient capacity utilization. So I don't want to commit to above 50% until I understand we have a consistent, sustained volume growth but we've certainly positioned ourselves very well to get there when volume does come back. Operator: Your next question is coming from Greg Melich from Evercore. Gregory Melich: Maybe on -- following up on that point, Al, could you help us understand this year, if we look at the full year or just the third quarter, how much volume hurt gross margin rate? And what sort of volume growth you'd need to get 100 bps of leverage out of margin? What's the variable margin there? Allen Mistysyn: Yes, Greg, I think the -- you're talking gross margin impact with the supply chain inefficiencies are in the low 10, 20, 30 bps. And Greg, I'm glad you asked that follow-up question because it gives me an opportunity to talk about our focus on driving operating margin and not just the gross margin. And we saw that in our third quarter with the gross margin expansion. We got leverage on SG&A to help drive the operating margin forward on an adjusted consolidated basis. I think you know volume is the #1 driver of operating margin expansion. And all the things, the good things each of our groups and divisions have done to get their cost base down, I would tell you that a low single-digit volume growth or any volume growth will be accretive, and we'll see operating margin expansion. And I'm trying to -- what I'm trying to say is it will be less today than it would have been 2 years ago, if that makes sense to you. We'll get better leverage on future incremental volume than we would have had prior to coming into the cycle. Operator: Your next question is coming from Garik Shmois from Loop Capital. Garik Shmois: Just wanted to follow up on that last point. You said the 30% incremental margins on the low single-digit volume growth in Paint Stores that you got in this quarter. Just wondering if that's a good benchmark moving forward, just given what you just mentioned, both for that segment and maybe help us think about incremental margins and volume in the other segments when demand does start to improve more consistently? Allen Mistysyn: Yes, Garik, I think with Paint Stores Group, historically, what we've said is we expect mid-20% incremental margins on lower volume growth, low single-digit volume growth. I think you saw the benefit that, that group, all the actions they've taken throughout the year to get their costs lower, while still investing. So we've got SG&A leverage in the quarter and flattish margins, and that's what helped drive that. I think drove the 30%. I think as we go forward, we'll consistently look at the outlook. And if we think our volumes are higher, we'll lean in like we've done in previous years and add more selling -- sales reps to take advantage of the market share opportunities that we have. I think it's -- our Performance Coatings Group, I think, is dependent on -- because of the difference in business region mix, that one's a little harder to say. If you told me that our volume growth would be predominantly in North America, our largest region, our most mature region and by definition, our highest operating margin region. Then yes, I'd say our float -- incremental margin will be in that 20s, in that 30s, depending on -- so if it's the other regions, we're going to get varying degrees. And then Consumer Brands Group, I would just point to the strong volume we had in 2020. And the strong incremental margins that we had there and the strong volume will also help supply chain efficiencies to help their operating -- incremental margins growth. So we have examples. We just have to see sustained volume growth as we come out of this. Heidi Petz: Garik, 1 piece I would add to that as well, we launched a few years ago, we talked about Success by Design, but our 6 enterprise priorities, one of them is simplification. And we've done a lot of work globally to understand where are the costs sitting that we're not getting paid for. So the team's credit, you've heard the expression, don't let the downturn go to waste or don't let a crisis go to waste. We're saying, don't let a downturn go to waste. There's a lot of self-help that we can do to make sure we're continuing to improve our cost position. So I'm confident that there's good progress, but there's a lot more ahead. Operator: Your next question is coming from Eric Bosshard from Cleveland Research. Eric Bosshard: On the consumer brand side, I'm curious what organic growth you saw in that business. And then if you zoom back, I'm interested in the volume and pricing in '25 and how you think about that in '26? Heidi Petz: I'll start us off here. Not a lot of organic growth. I think DIY is still very much under pressure. And as a reminder, the DIY segment is a very important part of our long-term strategy. It represents about 40% of the available gallons in the market. So very important certainly within our stores, but absolutely our strategic retail partners as well. The Pros Who Paint, we continue to see some good progress in movement here. We like how we're positioned here. It continues to be a growing segment on a smaller basis, but it is an area that we're continuing to invest in people, products, services to support our strategic partners. So we're good trajectory. We just need more volume. Allen Mistysyn: Eric, the only thing I would add color around for the quarter is we did see adjusted operating margin expansion and predominantly, even though we had our volume backwards, the sales volume we had in the quarter was more skewed to exterior sale gallons and also our premium product gallons grew faster than the total, which was a nice head -- tailwind for us in the quarter and more than offset the supply chain inefficiencies that we saw with the lower production volumes in the quarter. So I know that team is continually pushing for driving the premium side of the business, and we saw it in our third quarter, and you can see the positive results with that. Operator: Your next question is coming from Chuck Cerankosky from Northcoast Research. Charles Cerankosky: Great quarter. I'd like to ask about a portion of the res repaint market, if that's how it's categorized, there seems to be a lot more activity based on our work around investors buying houses and doing very significant rehab of those properties and then selling them back into the existing home market. Is that how it flows through the housing numbers and how significant is that business for Sherwin's contractors? Heidi Petz: Well, remodeling is definitely, I think, more favorable than what we're seeing relative to the new residential side and the building side. There has been certainly increasing activity. By and large, though, the market does still continue to be choppy. So I don't believe that, that subsegment is enough to offset the core of the residential repaint contractor in general. But we're certainly going to take advantage of that subsegment. Allen Mistysyn: Yes. Chuck, I think the only other thing I would highlight there is, again, we continue to invest in the res repaint Segment. It's our largest segment. It's our fastest-growing segment, and it's our largest opportunity in that situation you talked about would be part of that res repaint segment. And again, we're being aggressively going to the new account and share of wallet growth. Operator: Your next question is coming from Laurence Alexander from Jefferies. Laurence Alexander: In the past, you've spoken about when a recovery occurs, you expect to get an amplification effect or an acceleration in the rate of share gains or the delta that Sherwin outperforms. If we do have another year or so of softer for longer, and you're leaning heavily into share gains to -- in a tougher environment, are you pulling forward some of the share gains that we would normally see in a recovery? Or do you still expect that amplification effect? And do you expect that even to be larger because you're taking more share in the downturn? Heidi Petz: So Laurence, that was a 2-part question because I answered your first question. So no, we do not believe it's a pull forward on market share. The expectation is that regardless of where the market is, that we are at a minimum of 1.5 to 2x the market. So we are taking share gains. I also would point to some of the exclusive contracts that we're picking up across different end markets on the store side. We're doing that quietly. I believe that when the market starts to move that you will see that we've created structural competitive advantage given some of the additional wins we have here. Operator: Your next question is coming from Duffy Fisher from Goldman Sachs. Patrick Fischer: So question on the SBUs within Paint Stores. So if you look, both of the resi businesses have been pretty flat -- I mean sequentially flat as far as their improvement, so they're not accelerating. The other 4 businesses all accelerated in the third quarter in their growth rate. And so I was just wondering, is that delayed pricing rolling through, is that that those markets actually accelerated in demand themselves? Or is that basically where the overlap on your competitive advantage is taking share? What's driving those for with the acceleration in Q3. Heidi Petz: Duffy, it's not the pricing piece that you referenced. It is our opportunity in this unprecedented environment to demonstrate the value that Sherwin-Williams can provide. And I would tell you, across every one of our end markets our teams are out, they're responding. Our employees understand how to -- in this environment, how to rapidly adapt and adjust to make sure that we are anticipating what it is that our customers and our contractors are needing. When we talk about bringing differentiated solutions, it's in these times when I think our differentiation is even more on display because we're committed to our strategy. We are steadfast in putting our customers first, and we have their success in mind. So we're going to continue bringing new solutions even in these times. Al used the word creative earlier and our team's willingness to be creative in this environment is why this is such an important quarter for us, and Sherwin-Williams is weathering this softer for longer environment, we're going to continue to do that. Operator: Thank you. That concludes our Q&A session. I will now hand the conference back to Jim Jaye for closing remarks. Please go ahead. James Jaye: Yes. Thank you again, everybody, for joining our call today. And thanks to all the employees of Sherwin-Williams for all of their hard work. As Heidi said, we continue to operate here in a really challenging demand environment, and we expect that's likely going to continue well into next year. But at the same time, we see challenge as opportunity. So we've got a lot of confidence in our strategy, controlling what we can control: serving our customers, focusing on their success, making our targeted growth investments and controlling our G&A spending. That's the recipe, that's the playbook. So we are focused on finishing '25 strong, and we're going to continue to build on our momentum hopefully, that will propel us well into '26. So thanks again. As always, we'll be available for your follow-up calls and appreciate your interest in Sherwin-Williams. Operator: Thank you. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.
Operator: Welcome to the Crane Company Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Allison Poliniak, Vice President of Investor Relations. Allison Ann Poliniak-Cusic: Thank you, operator, and good day, everyone. Welcome to our third quarter 2025 earnings release conference call. I'm Allison Poliniak, Vice President of Investor Relations. On our call this morning, we have Max Mitchell, our Chairman, President and Chief Executive Officer; Alex Alcala, Executive Vice President and Chief Operating Officer; and Rich Maue, our Executive Vice President and Chief Financial Officer; along with Jason Feldman, Senior Vice President, Treasury, Tax and Investor Relations, who is on for Q&A. We will start off our call with a few prepared remarks from Max, Alex and Rich, after which, we will respond to your questions. Just a reminder, the comments we make on this call will include some forward-looking statements. We refer you towards the cautionary language at the bottom of our earnings release and also in our annual report, 10-K and subsequent filings pertaining to forward-looking statements. Also during the call, we will be using some non-GAAP numbers, which are reconciled to the comparable GAAP numbers in tables at the end of our press release and accompanying slide presentation, both of which are available on our website at www.craneco.com in the Investor Relations section. Now let me turn the call over to Max. Max Mitchell: Thank you, Allison, and thanks, everyone, for joining the call today. We are proud to report another strong quarter with results coming in ahead of our expectations. Adjusted EPS was $1.64, driven by an impressive 5.6% core sales growth, primarily reflecting broad-based strength at Aerospace & Electronics and continued strong execution at Process Flow Technologies. This quarter's results yet again underscore our differentiated technologies and operational discipline. In addition to our continued long-term investments in new technology and solutions, the Crane Business System, the machine that we described in great detail at our March Investor Day, combined with our unique culture, enables our teams to adapt to the many unforeseen events that we're all facing every day and deliver on the results. Our pending acquisition of Precision Sensors & Instrumentation from Baker Hughes remains on track to close at year-end, and our strategic outlook for these businesses has only improved over the last 3 months. Many work streams are already well underway to ensure a seamless integration and create shareholder value starting day 1. Our balance sheet remains very strong. Our pipeline of acquisitions remains robust, and we remain very active on the M&A front. And there's a tremendous amount of momentum and continued innovation happening at Crane that Alex will cover off. As we exit 2025, we are once again raising, but also narrowing our full year adjusted earnings outlook to a range of $5.75 to $5.95 from our prior view of $5.50 to $5.80, given our backlog, consistent execution and year-to-date performance. That reflects 20% adjusted EPS growth at the midpoint compared to 2024. Another outstanding year for Crane and our shareholders. And as we look to 2026, our consistent investment thesis remains firm. The strength of our underlying business, our strategy and our capabilities, in both operational execution and commercial excellence, support our 4% to 6% organic growth assumptions, leveraging on average of 35% into next year. We will provide greater detail on 2026 expectations as well as PSI in early January, once we officially close on the acquisition. Now let me pass it over to our Chief Operating Officer, Mr. Alex Alcala to provide some color on the current environment and segment performance. Alejandro Alcala: Thanks, Max. First, let me comment on the pending acquisition of PSI. As Max said, the acquisition remains on track to close January 1, and the integration planning is well underway and progressing smoothly with the existing Baker Hughes and Crane teams. As you would expect, my team and I, as well as the PSI leadership have been intimate with all closing details and integration planning to accelerate strategic execution in 2026. As we discussed last quarter, each brand will contribute a robust and complementary technology, further strengthening the Crane portfolio. Combined with the power of the Crane Business System, PSI will be accretive to our financial profile, both margins and growth, within the next few years, and our confidence in what we'll deliver has only increased as we work closely with the PSI team on a daily basis planning for day 1. In terms of further M&A, our funnel of opportunities remains full. The deals we are working on today include opportunities in both Aerospace & Electronics as well as Process Flow Technologies. And most range in deal-size purchase price from $100 million to $500 million. Now some thoughts on the segments in the quarter. Starting with Aerospace & Electronics. Aerospace and defense markets remain very strong. The backlog we built and new programs and opportunities our teams have won provide a strong visibility into 2026 and beyond. On the commercial side of the business, activity remains healthy with Boeing and Airbus continuing to ramp up production and aftermarket activity continued at elevated levels. On the defense side, we continue to see solid procurement spending and a continued focus on reinforcing the broader defense industrial base, given heightened global uncertainty today. Looking ahead to the balance of 2025, we now anticipate core sales growth for the year to be up low double digits compared to our prior view for core growth to be up single digits to low double digits. And that growth will be leveraged at 35% to 40% for the full year. Our guidance assumes growing year-over-year OE sales, partially offset by decelerating year-over-year growth rates in commercial aftermarket in Q4 that we previously highlighted. Overall, a really outstanding year. We also continue to win new business and pursue new opportunities across the segment. That gives us confidence that we will continue to see above-market growth for the remainder of this decade. Let me highlight a few examples. First, Crane continues to win funded next-generation military demonstrator programs for our brake control systems for both fixed and rotary wing platforms. Second, we continue to advance our vehicle electrification solutions. Heightened by the launch of our new 200-kilowatt traction motor inverter generator controller product at the Association of the United States Army or AUSA trade show in October. We remain actively engaged with defense vehicle OEMs regarding collaboration on the Common Tactical Truck and new combat vehicle programs. Related to this, I would comment that over the past 2 years, customer vehicle development efforts were fragmented with numerous concepts in play and uncertainty around government funding. This year at AUSA, however, the landscape was noticeably different. The focus was clear, industry attention is now centered on competing for the XM30 and the CTT. This shift aligns precisely with the strategic direction we've defined for our defense power business. With government funding priorities now well established, vehicle primes are concentrating their efforts almost exclusively on winning these programs. Very exciting for us. And last, activity around air defense systems remains very robust. Golden Dome is still being defined by the DoD. However, we strongly believe we will benefit directly through existing positions held today on systems like LTAMDS radar system and Patriot missile programs, among others that will certainly be part of Golden Dome solution, let alone pure increased demand drivers. We also anticipate additional growth from new emerging opportunities that our technology is well suited for. Specifically in the scaling and upgrades of radar, counter unmanned aerial systems, high-power energy and space-based assets for Golden Dome. With a record backlog and pipeline of opportunities, Aerospace & Electronics remains poised to well outperform its markets over the next decade. Very proud of our team. Our Process Flow Technologies, similar to Q2, end markets are stable, and we remain well positioned to outgrow across the cycle. We continue to see strength in segments such as wastewater, pharmaceuticals, cryogenics and also power, while chemical markets remained soft, yet stable. As a reminder, we have systematically repositioned our portfolio over the past decade around our core end markets where we have the strongest competitive position and the most differentiation, enabling sustainable market outgrowth. Tactically, we have proven our ability to react to any changes in demand quickly, and we will remain nimble, taking any necessary and appropriate price and productivity measures required. Our focus and discipline enabled us to continue to win in this segment despite the slower growth environment, and that was reflected in Q3. For example, our municipal wastewater pump business is on track for double-digit growth driven by strong momentum in new product adoption. At WEFTEC this year, we introduced the high efficiency SyFlo wastewater pump, featuring advanced non-clog and [ pellet ] technology with leading efficiency metrics. Shipments began in Q3. And as we head into 2026, a robust sales funnel gives us confidence in delivering another year of strong growth for this business. Also, our cryogenic business continues to execute commercially with a number of orders across aerospace and defense, space launch, satellite production and semiconductor investments. Overall, we secured double-digit growth in new orders in the quarter within cryogenics, reflective of our front-end engineering support and manufacturing capability as a differentiator in the market. Additionally, we won a [ 6 million ] large pharmaceutical orders supporting capacity expansion to manufacture GLP-1 drugs. Our ability to deliver high-performance solutions for critical pharmaceutical application continues to differentiate us in a competitive market and positions us well for future growth in this space. And lastly, despite the headwinds facing the chemical industry, our teams continue to secure targeted opportunities largely tied to preventative maintenance and technology upgrades. Looking ahead to the balance of 2025, given our line of sight today, we maintain our view for core growth to fall at the lower end of our low to mid-single-digit growth range that we guided to last quarter, but with greater margin expansion as core volumes will leverage at the higher end of our targeted range for the full year despite tariff headwinds. Overall, both our businesses remain well positioned to continue to deliver outstanding results into 2026. Now let me turn the call over to our CFO, Mr. Rich Maue for more specifics on the quarter. Richard Maue: Thank you, Alex, and good morning, everyone. As we were getting ready for our Q3 earnings release this past month, and as I reflected on the consistency of our execution and overall results, generally, a movie quote came top of mind that one of our investors mentioned at a recent sell-side conference in describing our consistency. One of my favorite actors, Ryan Reynolds, had this moving quote while portraying AAA-rated executive protection agent, Michael Bryce, in a romantic and touching comedy, the Hitman's Bodyguard, when describing his job. Boring is always best. I have heard from many of you and appreciate all the movie quote suggestions that you have all sent over the last year. So feel free to send me your best thoughts on lines in the future that tie to Crane in your view. And anyone suggesting a quote that we actually use on our call will receive a free Crane coffee mug autographed by me. In all seriousness, while the environment is certainly not boring, our story remains unchanged and our teams continue to execute to win, driving results above expectations in the most consistent and boring manner possible despite the well-documented headwinds we are all facing every day. And with that, let me start off with total company results. We drove 5.6% core sales growth in the quarter, driven primarily by the ongoing strength within Aerospace & Electronics. Adjusted operating profit increased 19%, driven by continued strong net price of -- net price and solid productivity. In the quarter, core FX-neutral backlog was up 16% compared to last year, reflecting continued strength at Aerospace & Electronics and core FX-neutral orders were up 2%. From a balance sheet perspective, while we are in a net positive cash position, at the end of the quarter, we completed financing with our bank partners for our pending acquisition of PSI. We entered into a credit agreement that included a $900 million delayed draw term loan and a $900 million revolving credit facility, both maturing on September 30, 2030. We expect to finance PSI primarily with the proceeds of the term loan and cash on hand, leaving the $900 million revolving credit facility available for further M&A and normal working capital management. And consistent with our prior commentary, after the PSI transaction, our net leverage will be just over 1x, still well below our 2x to 3x targeted range, leaving us well positioned for further M&A. With respect to tariffs, we continue to expect the gross cost increase to be roughly $30 million for the year, inclusive of the impact of the Section 232 tariffs, so no change there. And as we said last quarter, we expect to offset tariff impacts through price and productivity and our teams are prepared to react appropriately to any further changes that may occur in this dynamic area. A few more details on the segments in the quarter. Starting with Aerospace & Electronics, sales of $270 million increased 13% in the quarter, nearly all of that organic growth. And even with the continued high level of core sales growth, our record backlog of just over $1 billion, up 27% year-over-year, was up slightly sequentially. Core orders were up 5%, in line with our expectations as some orders that we anticipated later in the year were received in the first half. Again, no surprises and continued strong demand broadly. Total aftermarket sales increased 20% with commercial aftermarket up 23% and military aftermarket up 12%. And OEM sales increased 10% in the quarter with both commercial and military up 10%. Adjusted segment margin of 25.1% expanded 160 basis points from 23.5% last year, primarily reflecting strong net price, solid productivity and the impact from the higher volumes. We expect operating margin to be modestly lower in Q4 due to typical seasonality and less favorable mix between commercial OE and aftermarket. At Process Flow Technologies. In Q3, we delivered sales of $319 million, up 3% with flat core performance in the quarter, along with a 1.6% benefit from the Technifab acquisition and 1.5 points of favorable foreign exchange. Compared to the prior year, core FX-neutral backlog decreased 5% and core FX-neutral orders were down slightly as expected. Adjusted operating margin of 22.4% expanded again and in the quarter was 60 basis points higher than last year, driven by strong productivity, mix and net price inclusive of tariff headwinds in the quarter. Moving to guidance. There were a couple of nonoperational changes below the segments. We now expect corporate expense of $85 million, modestly above our prior view of $80 million during -- due primarily to M&A activity. We also now anticipate net nonoperating income to be closer to $7 million, up from $4 million due to higher investment income on our cash balances. And a quick reminder that this nonoperating income also includes about $9 million of business interruption insurance recovery recorded in other income expense related to Hurricane Helene, around $6.7 million of which has been recognized year-to-date and with $2.7 million in the quarter. And last, our tax rate for the full year will be slightly lower with us now estimating a 23% tax rate for the full year versus our prior estimate of 23.5%. Those three nonoperational items net to a very slight benefit of about $0.01 with the other $0.19 of the guidance increase at the midpoint coming from the segments. Operationally, we didn't change the full year core growth guidance range of 4% to 6%, but we now expect to be in the upper half of that range given the strength at Aerospace & Electronics, and that growth should leverage at our normal rates on a full year basis. So given our excellent results to date and our current view on Q4, we are raising adjusted EPS guidance by $0.20 at the midpoint and narrowing the range to be within $5.75 to $5.95, again, reflecting 20% growth year-over-year at the midpoint. Overall, another outstanding quarter, another outstanding year against a very dynamic macro backdrop. And with that, operator, we are now ready to take our first question. Operator: [Operator Instructions] Our first question is coming from Matt Summerville with D.A. Davidson. Matt Summerville: A couple of questions. First on PFT. Can you talk about -- if the expectation is that the business is up organically low single digits for the year, if you look at the nonchemical portion of PFT, how does that look relative to that low single-digit number? And then on the chemical side, what specifically you expect out of that end market this year? And maybe how you're thinking about that exposure, which is fairly large for the segment through, say, an 80-20 type of overlay? And then I have a follow-up. Alejandro Alcala: Yes, Matt, thank you. This is Alex. So just to frame up the markets and what we're seeing in responding to your question, I think regionally is different then by market is different. As a reminder, we're in PFT, primarily almost half or a little bit over half on Americas-based business, which is a positive in this environment. So first, speaking to the nonchemical markets, wastewater, for example, North America based, we're seeing double-digit growth in that business, driven by just investment in the aging infrastructure and environmental. So that's been strong. We expect that to continue to be strong going into next year. Cryogenics through our new acquisitions in various applications, semiconductors, electronics and space launch I mentioned last quarter, just driven by that commercial aerospace market of launch, and we participate in the platforms and the build-out of platforms, that's been growing also double digits, and we're gaining significant share as well. Just recently visited with the team there, and they were highlighting their commercial excellence in the front end where they have a tablet now on their own site, they're able to sketch the project, convert it into a drawing with this application, send it into the front end and really reduce the lead time, which is important to our customers. So doing very well. Also highlight pharma, in particular, in North America, strong growth there this year. We are seeing this reshoring activity happening in North America. We expect that to continue in the U.S. A big project that we won with a key customer related to the deal GLP-1 drug as they're expanding and producing in the U.S. We expect more of those investments to happen. And also in power, very North American-based, driven just by the demand in power that everybody knows about, AI, data centers. So those are all the nonchemical markets that I will highlight, that are positive, and we continue to see positive going into next year. When we think about chemical, also varying by region. So North America, we've seen some good projects this year, good activity on expansions, productivity. As a reminder, in -- Americas has the advantage of this feedstock and cost advantage. So even though there's capacity globally, customers have advantage to investing in the U.S. and expanding and getting more output. So that's moving in a positive way. And also Middle East, those are the two markets that I would highlight in chemical that have been positive and then softer Europe and China as well have been down. As far as our exposure in chemical, how we think about it, to answer your question -- your second part of your question. Look, the chemical market, there's a lot of things that we like in the applications that we play, very critical, corrosive, toxic, abrasive applications that give us an opportunity to differentiate, add value for our customers. And so we like that. Obviously, the cyclicality of the market sometimes is a challenge. So as you know, over the last decade, we've worked to reshape the portfolio, investing in cryogenics, organically, inorganically, wastewater and we'll continue to do so. Highlighting our recent PSI acquisition as well in the markets where they play, in nuclear, in aerospace, differentiated technology, also wastewater. So we'll continue to invest in these higher-growth markets, but maintain our current presence in chemical and keep building on that. And overall, we'll continue to shape that [ underlying ] growth in our PFT segment. Matt Summerville: And then just another one on PFT, the margin upside you saw in the quarter, can you maybe help parse out what the key drivers of that upside may have been, whether it be price, cost, mix or just cost out and then how we should be thinking about those various levers at a high level as we think about next year? Alejandro Alcala: Yes. So as we think about PFT, the journey we've been on, right, for the last decade, growing and delivering more than 100 basis points, or close to 100 basis points on average, really is driven by several factors. One is our continued innovation, new product launches that we've highlighted in the past, our new product sales keeps growing as a percent of our portfolio. The new products are in these target markets more differentiated and we're able to have higher margin because of that. And then we're driving commercial excellence, value pricing, standing up for the technology and the problems we're solving for our customers. And third, this traditional relentless focus on operational excellence and waste elimination, which is core. So I think I would highlight those three elements. I think what's different in this environment is this tariff dynamic, which I've been very, very pleased with how the teams have been able to manage that through both price and supply chain, which I think is a real differentiator for us to be able to do that and not only maintain, but expand our margins even in this environment, just speaks to the quality of our portfolio and the quality of execution from our teams. Operator: Our next question comes from Justin Ages with CJS Securities. Justin Ages: I was hoping -- you mentioned in PFT some softness in chemicals. But just wondering if you could comment, maybe you're seeing signs of ongoing stabilization or maybe return to growth? Just trying to get a sense of when that might rebound? Alejandro Alcala: Yes. So we're definitely seeing it stable, right, throughout the year. In the first half, we hit some big projects, projects continue to move more so in Middle East and North America. MRO globally has been stable throughout the year. So that's been a big part of our success. So definitely no signs of deterioration, stability. And it's just a matter of when this will start recovering at some point, we expect next year for chemical. But no clear inflection yet, but stable and expected to improve next year. Max Mitchell: Justin, as I think about what's taking place globally, and we've and everyone else has had to react to changes in the tariff structure and other news that happens on a daily basis. But again, I'm pleased with how we continue to stay very agile to react as appropriate. I'm one that -- I mean, within our control -- I'm incredibly proud of what we continue to drive within our control. If I look at the broader market, I'm more on the bullish end just generally because I believe that while there's a lot of noise right now that we're all having to deal with, I believe that this will be settling out here towards the end of the year into next. Just my own reading of the tea leaves and the administration's approach, and I'm more optimistic and planning around it for our teams in terms of what that means. It's still early days. We have our plan meetings coming up here in the month of November to really kind of lock in what it means for 2026. But I'm more optimistic of where all this shakes out and then what that means for the broader global economy. For what that's worth, my opinion is not worth anything more than anyone else's. Justin Ages: Yes. It's worth a lot. I appreciate the answers. And then switching to the PSI, just back of the envelope, the margins a little bit under Crane. So can you just talk about applying the Crane Business System or the machine to PSI and what you're expecting to see in margin improvements once you've integrated them? Alejandro Alcala: Yes, Justin, this is Alex. So we haven't closed the business yet -- we haven't closed the deal. We expect that on January 1. So we'll provide more details after. But generally speaking, these businesses have incredible technology, very stable aftermarket. We expect these businesses to become one of our best businesses within Crane from a margin and growth standpoint in our portfolio. And the improvements that we'll drive are not different than what we've been able to do, particularly on the PFT side through driving overall CBS. So these will become accretive to our profile over the years. They have all the fundamentals, and I'll speak into more detail of how the different elements will play out or how we see them play out with the coming year. But I can tell you, I'm very, very confident that we will deliver with this acquisition. Very pleased with everything I'm seeing and our preparation to execute. Operator: We will move next with Damian Karas with UBS. Damian Karas: Congrats on the progress. So I wanted to ask you a follow-up question related to margins and in particular, your guidance for the year, it seems like it's -- baking in a step down in fourth quarter margins, definitely a notable break from the strength you've been exhibiting so far the first 3 quarters of the year. And I think even on a year-over-year basis, the incremental margin is definitely well below kind of the 35% to 40% plus you guys aspire to. So could you just maybe provide a little bit more color around that margin expectation for the fourth quarter? Any moving pieces there? Richard Maue: Yes, sure. Damian, this is Rich. The primary area would be similar to what we talked about the last couple of quarters with respect to the year-over-year headwinds that we're going to see in commercial aftermarket. Now I would admittedly say that we actually had a little bit of a better quarter here in Q3, and so we didn't see as much of that headwind. We do expect that in the fourth quarter. A couple of items that I would point to is that we did see a few initial provisioning orders that we benefited from in Q3. We saw a decent claim recovery. So we did see a few things that did benefit us here in the quarter. And then what I would also say is two other things. One, we're continuing to see the OE build rates continue. And so that's a natural mix, unfavorable mix element, although we are excited about it. And then the second item would be when you look at the fourth quarter, we tend to have lower production hours. So there's a little bit of seasonality in what we would typically exhibit in the fourth quarter at A&E. Now all that said, I would tell you that on a full year basis, we're going to probably be at the higher end of our targeted leverage range for A&E and will exceed at PFT. So yes, we had a great 9 months. We still expect a great fourth quarter, but it will be a little bit more muted for those reasons. Damian Karas: Understood. That's really helpful. And sorry if I missed any comments related to this earlier, kind of hopping around a bunch of calls today, but would you guys give us your thoughts on the U.S. government shutdown? Are you seeing or expecting any impact from that? And just kind of thinking about that, should this continue into the extended future? Richard Maue: Yes. I mean, right now, we don't -- it's not impacting us today. So the things that we would look to are paying bills and things like that, and we've got no signals of that at all. So far, so good in terms of any impacts to Crane. And at this point, there's nothing on the horizon that would suggest any impact to us here even as we get into the first quarter. Operator: Our next question comes from Scott Deuschle with Deutsche Bank. Scott Deuschle: Alex, you mentioned power and data center demand as being a supportive market for PFT in response to Matt's question, I think. I guess, can you share a bit more detail there on what you're seeing in that market and how it's benefiting Crane? Alejandro Alcala: Yes. For sure. So power, primarily U.S.-based for us, less than 10% really our portfolio in PFT. We've been in this business for a very long, long time with our valve portfolio primarily. And what we're seeing is these power demand that is well documented and the investment in combined cycle -- natural gas combined cycle plant around the country. I think just this year, there's more than close to 30 power plants that are moving forward. So we see content there. Natural combined cycle plants are still a very economic ways to produce electricity, very reliable. And as you know, abundance of natural gas in the United States. So that is our participation there with our valve portfolio, and we expect that to continue into next year. Max Mitchell: Funnel has been increasing, projects are up. Alejandro Alcala: Funnel has been increasing. I think they can't build them fast enough basically on the natural gas side. Scott Deuschle: And do you have any content on smaller reciprocating engines like those that Caterpillar makes? Alejandro Alcala: No. No, we don't have content in that. Scott Deuschle: Okay. And then, Max, are you investing organically at PFT to increase your shipset content on AP1000? Obviously, some big news out this morning. So I was curious if that can maybe be a bigger driver for you all than your historical content suggested? Max Mitchell: Yes. Thanks, Scott. Well, you could argue that Reuter-Stokes long term is absolutely aimed at gaining content on the AP1000. We -- the team is already underway with technology investments to penetrate the pressurized water reactor in addition to boiling water. So long term, absolutely, as we continue -- the current team is doing a phenomenal job and has done as we have when we first won AP1000 content many, many years ago to the tune of about $10 million per shipset. We're identifying another 30% increase in content right now that we're bidding on capturing additional share gain also. So both organically as well as inorganically as we move forward for sure. And there was an exciting announcement today -- exciting announcement that I think in addition to just the announcement today related to the $80 billion investment that the government announced in support, I think you're just seeing this change over time that will continue this trend of nuclear as part of a broader global solution to clean and efficient power that will continue to bode well for us and our position also. Operator: Our next question comes from Nathan Jones with Stifel. Nathan Jones: I'm finding it a bit hard to concentrate with the promise of a signed Rich Maue Crane coffee mug, I guess. I guess, just another question on the PSI businesses. Max, you -- one of the comments you made was that you, from a strategic perspective, are more bullish on that business than you were 3 months ago. Maybe you could just talk a little bit more about what you've learned in the last 3 months that makes you strategically more positive on the outlook for that business? Max Mitchell: Well, I'll let Alex chime in as well. But it starts with the team itself. And I think we just continue to be impressed with the caliber of the talent that's going to be joining Crane. I just love the openness and transparency that we've been met with to date. So that feels really good in terms of integration, integration planning, working well together. It's what I know is taking place already. This is not a team that has stood still. They've been investing for growth, and we're going to get -- quickly get aligned strategically as we're moving forward. It just all feels very, very positive from that standpoint. Sharing of data, kind of getting clarity strategically on what we're going to be working on together from day 1. It's been a fantastic relationship. What else would you highlight, Alex? Alejandro Alcala: Yes. I think over these months, Nathan, just getting more clarity on the specifics of how we're going to collaborate and work together, the detailed plans and the opportunities, just having a very clear line of sight to the gains, starting with the aerospace in Druck, in the nuclear, also with Panametrics, and just a level of detail that we've been able to get and the plans of what we're going to prioritize, and we're going to -- where we're going to be able to have quick gains gives us these higher confidence where we were 3 months ago. So it just keeps increasing as those plans get more defined and more details get clarified. Nathan Jones: And I guess I'll just ask a broader question about 2026. You guys have always been pretty willing to share your outlook. So I mean, are -- you're obviously going to get towards the top end of the growth, 4% to 6% growth target this year. We have seen organic growth slow down a bit as we've gone through the year. Maybe you could just talk about, do you think we're in the 4% to 6% range next year? Maybe it will be a little more towards the middle of next year? Or just any thoughts you have on how the growth outlook might shake out for next year? Max Mitchell: Well, it's still early days. We've got our plan meetings coming up. There's a lot to monitor here in the fourth quarter. Having said all that, based on what I know today, based on what we feel today based on thinking through the end markets and how that will continue to play out, it still feels like our investment thesis holds into next year, Nathan, from that standpoint. Nathan Jones: Okay. I guess we'll wait for the 4Q update. Operator: Our next question comes from Jordan Lyonnais with Bank of America. Jordan Lyonnais: On defense and aero, how should we think about the opportunity for you guys if we start to see announcements for F/A-XX CCA downselection and some of the larger Group 4, 5 drones have been kind of previewed? Alejandro Alcala: Yes, Jordan, this is Alex. On the F-XX or the -- just the NGAD platforms, we are very well positioned on all the demonstrators really. So we've been successful in having multiple horses in the race. So we're going to see strong benefit from that. On the CCA activity, I think we've mentioned we've already secured a position with one of the leading emerging players in that space with CCA, which is going to start ramping up here in the years to come. And then in general, in drones, right, we're actively involved overall. I think, as you know, there's a wide range of drones that exist from the small battery-powered [ hand-launched ], those that are called like Switchblade or Phoenix, and we do not participate in that small. Where we do play is on the medium or larger drones that are part of that CCA, like those that you see called out like Fury, Global Hawk, Predator. So we're well positioned there with various solutions, and we expect to benefit that as that market continues to grow. Jordan Lyonnais: Got it. And then two on -- so how strong demand has been book-to-bill in Aerospace & Electronics, how are you guys thinking about the current capacity you have in place to meet that demand? Alejandro Alcala: As far as capacity, we're -- we've been -- we're well prepared to meet the demand and the ramp-up rates of the OEMs, both Airbus and Boeing. I think teams have done a really nice job preparing for that, even taking advantage of preparing inventory buffers to execute at a very high level to support those ramp rates. So quite confident in our ability to support. Operator: Our next question comes from Tony Bancroft with Gabelli Funds. George Bancroft: Congratulations on the great quarter and all your great work. I recently toured a new facility and was pretty overwhelmed by the amount of automation that was going into it. And I just want to get your view on sort of automation and you've talked a lot about -- it looks like you have a lot of backlog growing and I mean, on the commercial side, it sounds like you're ready to go with capacity, but it sounds like there's a lot of growth on both sides of the businesses and in other areas, obviously, things like Golden Dome and all that. Maybe you could just talk about how you view automation in the long term? And what could that get you maybe on a margin basis? And then just maybe overall ability to grow faster? Max Mitchell: I'll take a stab and then if Alex has anything else. Look, we've always looked at enhancing productivity, easing the work by trying to error-proof and take out cycle time. What's manual, how can we automate? We have a lot of success with cobots across the organization on a localized level. I would be completely honest, Tony, I'm not sure what the technology is that you saw, what type of facility. There are certain technologies that just warrant themselves to complete automation from start to finish and that level of investment. There is no one Crane site that I can think of that would have that type of vision. It will continue to be -- while automation is clearly a direction that we will go down, it tends to be very spot-based and specific to very specific tasks that continue to take out variation, overburden on our associates. At some point in the future, do you link work centers to begin to get flow, cells that flow. The human element for us will always be important in the near future with the type of work that we do across the organization. So I see it as part of the broader strategy for us holistically as we drive productivity on a number of fronts. But that is not one that you would say Crane is going to go down a path of completely automated facilities. Alejandro Alcala: Yes. Just to add to Max, like he said, very specific areas where work is difficult, to make it more reliable. So we have a lot of projects in that, not factory-wide automation. Then the second area where we're investing in automation is just where skilled labor is difficult to get, like welding. So we're trying to get more and more automated in various welding applications. So again, to summarize, more focused on specific tasks that are difficult to maintain and then trying to address skilled workforce gaps more so than fully automating a particular factory. Operator: [Operator Instructions] We have a follow-up from Scott Deuschle with Deutsche Bank. Scott Deuschle: I'm going to be beat up on Rich with a few follow-ups. First is the F-16 brake retrofit program still on track to hit that $30 million revenue target for 2026? Richard Maue: Yes, it is. Scott Deuschle: Okay. And then for 2025, there's essentially nothing in the base, right? Richard Maue: Correct. Scott Deuschle: Okay. And then Rich, is it fair to think that A&E organic growth accelerates next year, given what seems to be a story of acceleration across commercial OE, military OE and military aftermarket? Richard Maue: I would say that when you think about how our external guidance over the long term has been 7% to 9%, I think it's safe to say we'll be at the high end of that range at this point, Scott. Max Mitchell: Commercial OE continues to be a positive. I think what we're continuing to -- we're going to be meeting with our teams on -- from a plan standpoint is on the aftermarket discussion, right, which is -- it's been much stronger than we even anticipated coming into this year. Does that pace year-over-year on a comp basis continue? Or what does that mix look like? I think that is the unknown for us right now. Is that fair? Richard Maue: Yes, I do think that's fair. I think our algorithm there still holds. But what elements would be OE versus aftermarket is going to be something that we'll be teasing out over the next couple of months. But as you're thinking about it, Scott, I would look at that long-term algorithm in the way I positioned it where we think we're going to fall. Scott Deuschle: Okay. And then just one last one to corporate costs. Is this level -- this $85 million number, is this a level you think you can hold for next year? Or is that going to want to grow next year with PSI coming in and things like that? Richard Maue: Yes. No, we don't see it growing next year, to be frank with you. You look at what our rate is today, it's like, I don't know, 3.8%. I would expect that to go down and we're going to leverage the growth, and you'll see it closer to 3% next year, all up, all in. Operator: And this concludes the Q&A portion of today's call. I would now like to turn the call over to Max Mitchell for closing remarks. Max Mitchell: Thank you all for joining us today. We often talk about the Crane Business System that is our foundational and holistic operating system. Many companies claim to have some form of an operating system, and I often get the question from investors as to what makes ours unique. We believe it is the intensity of the culture, people and processes and how we apply the principles to our processes down to the smallest details, which makes the Crane Business System unique. Results are celebrated, but never good enough. And every detail is important to us moving forward. As the late great Giorgio Armani said, to create something exceptional, your mindset must be relentlessly focused on the smallest detail. At Crane, our teams are relentless with the details, building a stronger and more exceptional Crane. Thank you all for your interest in Crane and your time and attention this morning. Have a great day. Operator: Thank you. This concludes today's Crane Company Third Quarter 2025 Earnings Conference Call. Please disconnect your line at this time, and have a wonderful day.
Operator: Good morning or good afternoon. My name is Adam, and I will be your conference operator today. At this time, I would like to welcome everyone to the SoFi Technologies Q3 2025 Earnings Conference Call. [Operator Instructions] With that, you may begin your conference. Unknown Executive: Thank you, and good morning. Welcome to SoFi's Third Quarter 2025 Earnings Conference Call. Joining me today to talk about our results and recent events are Anthony Noto, CEO; and Chris Lapointe, CFO. You can find the presentation accompanying our earnings release on the Investor Relations section of our website. Unless otherwise stated, we'll be referring to adjusted results for the third quarter of 2025 versus the third quarter of 2024. Our remarks today will include forward-looking statements that are based on our current expectations and forecasts and involve risks and uncertainties. These statements include, but are not limited to, our competitive advantage and strategy, macroeconomic conditions and outlook, future products and services and future business and financial performance. Our GAAP consolidated income statement and all reconciliations can be found in today's earnings release and the subsequent 10-Q filing, which will be made available next month. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release and our subsequent filings made with the SEC, including our upcoming Form 10-Q. Any forward-looking statements that we may make on this call are based on assumptions as of today. We undertake no obligation to update these statements as a result of new information or future events. And now I'd like to turn the call over to Anthony. Anthony Noto: Thank you, and good morning, everyone. We had an excellent third quarter. Our one-stop-shop strategy is firing on all cylinders as we continue to deliver exceptional financial performance while also investing in our business to drive durable growth and strong returns over the long term. In fact, our focus on product innovation and brand building has never been stronger. There's more happening at SoFi today than at any other time in my 8 years with the company. We are stepping on the gas to accelerate the investment in our existing businesses and entering new areas, like crypto and blockchain, AI, SoFi Pay, providing fiat and crypto banking services and so much more. I'll discuss some of these efforts momentarily. But first, let me cover our key results for the quarter. Starting with the drivers of our durable growth. We added a record 905,000 new members in Q3, increasing total members by 35% year-over-year, a slight acceleration to 12.6 million SoFi members. We also added a record 1.4 million new products, also representing an acceleration of growth to 36% year-over-year and over 18.6 million products. Cross-buy reached its highest level since 2022, with 40% of new products opened by existing SoFi members. Our cross-buy rate has increased in each of the past 4 quarters demonstrating the effectiveness of our one-stop-shop strategy. Our strong member and product growth powered our revenue growth in the third quarter. Adjusted net revenue was a record at $950 million, up 38% year-over-year. Together, our Financial Services and Technology Platform segments generated revenue of $534 million, which is up 57% year-over-year and now represents 56% of total revenue. This is the first time these segments have generated more than $0.5 billion of quarterly revenue. In our Lending segment, adjusted net revenue grew 23% year-over-year to $481 million, driven by strong originations in this segment of $6.6 billion, up 23% from the prior year. Combined with a very strong $3.4 billion of originations in the loan platform business, total originations reached a record of $9.9 billion for the third quarter. This is an increase of $1.2 billion from our prior record. I'm also proud to report that total fee-based revenue across our business was also a quarterly record at $409 million, up 50% from the prior year, driven by strong performance from our loan platform business, origination fees, referral fees, interchange revenue and brokerage fee revenue. On an annualized basis, we're now generating over $1.6 billion of fee-based revenue, reflecting the deliberate diversification of our business towards more capital-light revenue streams. In addition to delivering durable growth, we delivered strong returns and profitability. In the third quarter, adjusted EBITDA was a record at $277 million, up nearly 50% year-over-year. Our adjusted EBITDA margin for the quarter was 29%. Our incremental EBITDA margin was 35% as we continue to balance reinvesting in the business to deliver long-term growth and delivering profitability. Net income for the quarter was $139 million at a margin of 14%. Earnings per share were $0.11. Finally, our tangible book value ended the quarter at $7.2 billion, which includes the benefit from a successful opportunistic capital raise during the quarter. Over the past 2 years, we have more than doubled our tangible book value. Our diversified business is uniquely built to deliver a winning combination of growth and returns. One way to measure this success is the Rule of 40 calculation, which is revenue growth plus EBITDA margin. We've beaten the Rule of 40 benchmark every quarter since going public, that's 17 straight quarters. Over that time, our average Rule of 40 score is 58, making us a top performer among fintechs and technology companies more broadly, and this quarter, we hit 67%. Despite these exceptionally strong results, I know that we are just getting started. The addressable markets across each of our products are massive in the United States, let alone in addition to international markets. In 2026 and beyond, we will uniquely start to benefit from both of the technology super cycles in AI and blockchain where almost every other industry only benefits from one. And with nearly 13 million members, the unmatched capabilities of our technology and the business scale of $3.8 billion in annualized revenue and a $45 billion balance sheet, we have a rock solid foundation to build on. Given these dynamics, I've never been more optimistic about our prospects than I am today. This is why we are further accelerating our level of investment to make our existing products even better by providing the best speed, selection and experience to build new products to help our members get their money right and to further strengthen our trusted brand name. Our investments will power our durable growth and drive stronger returns as we continue to scale. Let me now spend a moment discussing our brand building efforts, which are key to driving new members to SoFi and create a halo effect across our entire offering. During the third quarter, we launched an exciting new partnership with the NFL's most valuable player, Josh Allen, to promote the most valuable product in financial services, SoFi Plus. Our partnership with Josh is resonating with NFL fans, driving a 35% increase in unaided brand awareness among that target audience. Along with our broader marketing efforts, we drove unaided brand awareness to an all-time high of 9.1% during the quarter, up from last quarter's record of 8.5% and more than 4x higher than it was when we went public. Turning now to our product innovation. Last quarter, I spoke about how are in an unprecedented point in time with 2 technology super cycles taking place in crypto, blockchain and AI. These super cycles have the power to completely reinvent the future of financial services, and we have moved fast to take advantage of these opportunities. I'm pleased to report that this week, we launched our first payment product that leverages blockchain technology to provide fast, seamless, low cost and safe international payments with the launch of SoFi Pay. SoFi Pay gives members the ability to seamlessly send money in local fiat abroad by leveraging a layer 2 blockchain network and delivering local fiat into the account of the recipient. It's fully automated in the SoFi app at significantly faster speeds and lower costs compared to traditional services. Members will first be able to send money to Mexico with planned stage rollouts in Europe and South America in the near future. The SoFi Pay wallet will over time integrate SoFi USD stable coin that we hope to launch in 2026. We also have plans to offer the SoFi Pay app natively in the international markets for foreign citizens to send money to the U.S. and many other international markets. This is another addition to our unprecedented money movement offering, which allows members to seamlessly send money through person-to-person payments with a phone number, e-mail address as well as Zelle, ACH, self-serve wires and now the ability to send money international with SoFi Pay. I am also excited to share that this quarter, we'll be launching -- actually relaunching the ability to buy, sell and hold crypto assets, which will give members access to dozens of tokens directly in our SoFi app. Beyond offering the best selection, we will also be providing the best speed and convenience. Members can instantly fund buying cryptocurrencies from their FDIC-insured SoFi Money account, all within the integrated SoFi app. Members will also have the ability to transfer the crypto assets to SoFi and benefit from our broad range of products that are seamlessly integrated with our SoFi North American bank. And because many of our members may be new to crypto investing, we will support them with the best content to help them understand crypto investing and provide them with a peace of mind that comes from working with a regulated bank. But this is just the beginning of our ambitious crypto and blockchain product road map that will continue to come to life in 2026. I could not be more excited about the product road map and the multitude of use cases we have for our planned stablecoin, SoFi USD, and our ability to differentiate a stablecoin like no other company, given our unique bank license, technology capabilities, portfolio products and technology platform services. Turning now to the other supercycle AI. We continue to test and implement a number of AI applications across our business. Behind the scenes, AI technology has been key to streamlining our operations to better serve our members. This has included using AI through higher-quality engagement and giving our frontline member service team AI-driven tools to more quickly identify and resolve member issues. AI is also now being used to directly support members. Our AI support chat is helping members resolve questions in an efficient way, driving a noticeable impact on member satisfaction. It's currently integrated with our money and card products and will be rolled out across the entire SoFi platform this quarter. We have also launched the AI-driven Cash Coach to qualifying members. Here's how it works. From the home screen, members see a button saying cash to optimize. By tapping that button, the Cash Coach will look across both their SoFi and external accounts to see where cash utilization is suboptimal and provide them with personalized financial suggestions. For example, if a member is earning just 2 lousy basis points of interest on deposits with a big bank, it may suggest moving that cash to a SoFi account earns 3.8%. Paying down a big bank credit card balance from a big bank that has a 25% interest rate. Cash Coach is just the beginning. Next year, we will launch a more comprehensive SoFi Coach that incorporates insights across all areas of financial activity, not just cash, which will be able to help members understand how to spend less than they make and invest the rest by breaking down what they must do, what they should do and what they can do every day across their entire financial lives. For example, they could ask the SoFi Coach questions like, how has my credit score changed? How can I reduce my cost of debt? How much do I spend on subscriptions? How diversified is my portfolio? How is my investment compared to others my age? Over time, SoFi Coach will be able to do even more, like provide investment and lending options to choose from, help set up and track goals and simplify processes like canceling subscriptions and optimizing reward points. We are so excited about how this AI-driven tool will help engage members and help them spend less than they make so they can invest the rest. Ultimately, SoFi Coach will supercharge our financial services productivity loop and lead to a deeper relationship that drives a higher lifetime value. Turning now to product innovation within our segments, starting with the Financial Services segment and the loan platform business. LPB has been a game-changer for SoFi, diversifying our lending activity in a capital-light, low-risk way. It's a prime example of how we can leverage our unique tech customer acquisition and operations capabilities to build a differentiated platform at scale. During the third quarter, we originated $3.4 billion of loans through our loan platform business, an increase of over $900 million from just last quarter. On an annualized basis, after just 1 year, this business is now running at a pace of over $13 billion of originations and $660 million of high-margin, high-return fee-based revenue. Importantly, we continue to increase the loan platform business near-term volume that is outside of our traditional credit box effectively monetizing more of the roughly $100 billion of loan applications that we were not able to meet each year. Looking ahead, the opportunity for this business remains significant and demand from our partners continues to increase. Recently, as some concerns have emerged within the private credit markets, we've actually seen our LPB partners lean in to do more with SoFi, not less, reflecting a flight to quality and durability through interest rate and economic cycles. We have worked hard over the last 8 years to develop unique skills in underwriting, marketing, pricing, insights and data. And as such, we are benefiting from this flight to quality. Turning to invest. Earlier this month, we launched Level 1 Options, which has been consistently a requested feature by our members. Options are another way we are providing access to our members that they otherwise wouldn't have so they can build portfolios that align with their financial goals. As part of this rollout, we also provide educational resources explaining how options work, the risks involved and how to integrate them responsibly into a diversified investment strategy. Beyond options, we're also expanding our unmatched selection in the third quarter by providing access to IPOs like StubHub, Klarna and Figma and by launching the SoFi Agentic AI ETF. During the quarter, we also improved our features to make our invest products more intuitive and engaging. For example, we launched 24/7 instant transfers between invest and money, and we launched embedded rollovers and an enhanced rollover tracker giving members full visibility and control over their 401(k) rollover process. In the fourth quarter, we'll be making a number of additional enhancements. We are very excited about the progress made to build an investment platform that provides their members with way more options than what they would typically have access to. Turning now to SoFi Money, which has been a core part of our financial services productivity loop. In 3 years after acquiring our banking license, we have 6.3 million products and $33 billion of deposits. Our attractive APY is a compelling reason for members to make us their primary financial institution, but members also come to us for our best-in-class products and continued innovation. For example, we will soon be launching the SoFi Smart Card, a new card that brings together the best features to help our members spend, save and pay better. It will be part of our SoFi Plus offering, and it will serve as a platform for continuous innovation. The card will offer 5% back on food, our highest interest rate on deposits, credit builder capabilities, borrowing capabilities and so much more. This is yet another way in which we are pushing the limits on what is possible with banking products. Turning now to our Lending segment. Lending is the most tenured core capability of SoFi and it's how our business got its start. Since that time, we have made significant progress strengthening both our member acquisition and our underwriting capabilities. For loans that we hold on our balance sheet, we focus exclusively on high prime and super prime borrowers with strong cash flow and FICO scores. In fact, the average FICO score of our personal loan borrower is 745, and our student loan borrower is 773, but we don't stop at credit scores. We use tried and true underwriting techniques to assess each individual borrowers' cash flow and their ability to repay the loan. We are able to do this effectively at scale because of our innovative originations platform that leverages advanced technology and digitally-enabled processes. The result is excellent credit performance that continues today. In fact, during the third quarter, we saw our net charge-off rates improve, even as there has been moderate signs of stress showing up for some other companies. For both personal loans and student loans, net charge-offs were down more than 20 basis points in the third quarter. We also have a strong track record of building great lending products that help our members create a better future. For example, our innovative personal loan product allows members to refinance observably expensive credit card debt held at other institutions to save their hard-earned money. No longer will overachievers be suckered into chasing rewards only to realize they are paying over 20% interest on unpaid principal balances while earning essentially no interest on that same bank's deposit account. We've recently made this product even more attractive to our members by rolling out an interest-only period to raise awareness of the personal loan product and help ease the transition from making credit card payments to making personal loan payments. Similarly, in student lending, we have completely changed the game, becoming the preeminent company for refinancing student debt at more affordable rates. Our student loan refinance product can reduce some member's interest rate by a couple of hundred basis points, which will have a meaningful impact with a $40,000 loan balance. In fact, we estimate that we will save our members over $100 million in interest expense just on the student loans we refinanced during the third quarter. This is why we've made our product even more attractive by rolling out a feature that allows for the gradual step-up in payments to help members find their footing. We look forward to helping even more members refinance their student loans as interest rates come down in the future. Turning now to home lending, where we are seeing very strong results. In the midst of the higher rate environment, we built and launched a home equity loan product to help members take advantage of their equity that has been built up in their homes particularly over the last few years. In the third quarter, just 1 year after launch, we originated over $350 million of home equity loans, helping us set a record of $945 million of originations for all of home lending. In fact, Q4 will likely be the first quarter where we generate more revenue from home loans than from student loan refinance, which was our first product and the largest product prior to COVID. At the same time, we are preparing for lower rates to further accelerate our home loans business in 2026. We've not only strengthened our operations, but we have also enhanced our product to make them very attractive to estimated 3 million members, who currently have mortgages elsewhere and to those who may be first-time homebuyers. We believe our offering will drive strong growth as the market opens up. Turning to our Tech Platform segment. This business has been instrumental in our ability to innovate across the SoFi platform, and it's now allowing a broader range of companies to bring innovative programs that drive greater loyalty and engagement to their customers. In fact, today, we are incredibly excited to announce our newest partnership with one of the largest airlines in North America, Southwest Airlines, to power their Rapid Rewards debit card, which combines the convenience of debit payments, while earning points on everyday purchases. We have also signed on two major consumer brands, our largest yet, which will be announced in due course. These partnerships are a reflection of the strong and growing demand for our market-leading technology to power embedded financial products at scale for some of the most well-known brands around the world. As you can see, it was an eventful third quarter at SoFi. And we are as energized as ever as we wrap up the year and head into 2026. With that, let me now turn the call over to Chris. Chris Lapointe: Thank you, Anthony. We've delivered another strong quarter as we continue to drive durable growth and strong returns on the way to delivering record revenue in our eighth consecutive profitable quarter. For the quarter, revenue grew 38% year-over-year to a record $950 million. Adjusted EBITDA was also a record at $277 million and a margin of 29%. Net income was $139 million at a margin of 14% and earnings per share was $0.11. Similar to the last 2 quarters, this included a small benefit related to a lower tax rate. An important driver of our growth was the increased contribution from capital-light nonlending as well as fee-based revenue sources. Our nonlending businesses generated $534 million of revenue, up 57% year-over-year, and we also generated record fee-based revenue across all segments of $409 million, up 50% year-over-year. Turning now to our segment performance. In terms of financial services, for the third quarter, net revenue was $420 million, up 76% year-over-year. Contribution profit was $226 million, up nearly 2.3x from last year. Contribution margin was 54%, up from 42% last year. Net interest income for the segment was $204 million, up 32% year-over-year, which was primarily driven by growth in member deposits. Noninterest income grew nearly 2.6x to $216 million for the quarter, which equates to over $860 million in high-quality fee-based income on an annualized basis. Importantly, improved monetization continues its strong contribution to revenue growth. Financial services revenue per product surpassed $100 for the first time, reaching a record $104 in the third quarter. That's up over 28% year-over-year, and we see continued upside as newer products mature. In Q3, our loan platform business generated $168 million in adjusted net revenue, up 29% from just last quarter. Of this, $165 million was driven by the $3.4 billion of personal loans originated on behalf of third parties as well as referrals. Additionally, LPB generated $3 million from servicing cash flows, which is recorded in our lending segment. The growth opportunity for this business continues to be very strong. Beyond our LPB revenue, we continue to see healthy growth in interchange, up 55% year-over-year, driven by close to $20 billion in total annualized spend in the quarter across money and credit card. Shifting to our tech platform. For the third quarter, we delivered net revenue of $115 million, up 12% year-over-year. Contribution profit was $32 million at a contribution margin of 28%. Revenue growth was driven by continued monetization of existing clients, along with new deals signed in new client segments. Turning now to our Lending segment. For the third quarter, adjusted net revenue was $481 million, up 23% from the same period last year. Contribution profit was $262 million with a 54% contribution margin. These strong results were primarily driven by growth in net interest income, which increased 35% year-over-year to $428 million. During the quarter, we had record total loan originations of $9.9 billion, up 57% year-over-year. Personal loan originations were a record at $7.5 billion, of which $3.4 billion was originated on behalf of third parties through LPB. In total, personal loan originations were up 53% year-over-year. Student loan originations were $1.5 billion, up 58% from the same period last year. And home loan originations were a record $945 million, a year-over-year increase of nearly 2x. Capital markets activity was very strong in the third quarter. We sold and transferred through our loan platform business, a record $4.6 billion of personal, home and student loans. In terms of personal loans, we closed $175 million of sales in the whole loan form at a blended execution of 106.4%. All deals had similar structures to other recent personal loan sales with cash proceeds at or near par, and the majority of the premium consisting of contractual servicing fees that are capitalized. These sales included a small loss share provision that is above our base assumption of losses and immaterial relative to the exposure we would have had otherwise if we held on to the loans. Additionally, we sold $90 million of late-stage delinquent personal loans. By selling these loans, we're able to generate positive incremental value over time versus selling after they charge-off, both from our improved recovery capabilities and by maintaining servicing. In terms of home loan sales, we closed $585 million at a blended execution of 102.9%. And in terms of student loan sales, we closed $377 million at a blended execution of 105.9%. In addition to our loan sales, we executed a $466 million securitization of loans originated through our loan platform business. This channel provides our partners with meaningful liquidity to support their ongoing investment in the loan platform business. The transaction priced at industry-leading cost of funds levels with a weighted average spread of 98 basis points. Turning to credit performance. The health of our consumer remains strong and our credit continues to improve. Our personal loan borrowers have a weighted average income of $157,000 and a weighted average FICO score of 745, while our student loan borrowers also have a weighted average income of $157,000 with a weighted average FICO score of 773. For personal loans, the annualized charge-off rate declined by more than 20 basis points to 2.6% from 2.83% in the prior quarter. Had we not sold any late-stage delinquencies, we estimate that including recoveries between 90 and 120 days delinquent, we would have had an all-in annualized net charge-off rate for personal loans of approximately 4.2% versus 4.5% last quarter. The on-balance sheet 90-day delinquency rate was 43 basis points, consistent with the prior quarter. For student loans, the annualized charge-off rate also declined more than 20 basis points to 69 basis points from 94 basis points in the prior quarter. The on-balance sheet 90-day delinquency rate was 14 basis points, consistent with the prior quarter. The data continues to support our 7% to 8% net cumulative loss assumption for personal loans in line with our underwriting tolerance, although we continue to trend below these levels. Our recent vintages originated from Q4 2022 to Q4 2024 have net cumulative losses of 4.4% with 39% unpaid principal balance remaining. This is well below the 6.08% observed at the same point in time for the 2017 vintage, the last vintage that approached our 7% to 8% tolerance. The gap between the newer cohort curve and the 2017 cohort curve widened by a more favorable 29 basis points after a widening improvement of 19 basis points in Q2. Additionally, looking at our Q1 2020 through Q2 2025 originations, 60% of principal has already been paid down with 6.7% in net cumulative losses. Therefore, for life-of-loan losses on this entire cohort of loans to reach 8%, the charge-off rate on the remaining 40% of unpaid principal would need to be approximately 10%. This would be well above past levels, further underscoring our confidence in achieving loss rates below our 8% tolerance. Turning to our fair value marks and key assumptions. As a reminder, we mark our loans at fair value each quarter, which considers a number of factors, including the weighted average coupon, the constant default rate, the conditional prepayment rate and the discount rate comprised of benchmark rates and spreads. At the end of the third quarter, our personal loans were marked at 105.7%, in line with the prior quarter. This was primarily a function of a lower benchmark rate, which was mostly offset by higher prepayments and a modest change to the weighted average coupon as well as a modest change to the annual default rate, which was driven by loan vintage seasoning, not changes to the individual loan loss assumptions. At the end of the third quarter, our student loans were also marked at 105.7%, down 9 basis points from the prior quarter. This was a function of a modest decrease in the weighted average coupon, partially offset by a lower benchmark rate. Turning to our balance sheet. In July, we raised $1.7 billion of new capital in the form of common equity. This opportunistic raise significantly increased our capital levels and allowed us to reduce our higher cost debt by $1.2 billion, making our balance sheet even stronger and giving us great flexibility to pursue growth opportunities. In the third quarter, including this new capital, total assets grew by $4.2 billion. This was driven by $2.7 billion of loan growth and approximately $1.2 billion of growth in cash, cash equivalents and investment securities. Total company-wide cash at quarter end was $3.7 billion. On the liability side, total deposits grew by $3.4 billion to $32.9 billion primarily driven by growth in member deposits. Net interest margin was 5.84% for the quarter, down 2 basis points sequentially. This included a 7 basis point decrease in average yields as we saw a modest mix shift from personal loans to home and student loans and a 3 basis point increase in cost of funds, which was mostly offset by strong growth in interest-earning assets. We continue to expect healthy net interest margins above 5% for the foreseeable future. In terms of our regulatory capital ratios, we remain very well capitalized. Our total capital ratio of 20.2% at quarter end is well above the regulatory minimum of 10.5% as well as our additional internal stress buffer. Tangible book value grew $1.9 billion sequentially to $7.2 billion, including the benefit from the new capital raised. Intangible book value per share at quarter end is $5.97, up from $4.08 a year ago, a 46% increase. Let me now finish by providing our revised outlook for 2025. As we head into fourth quarter, for the full year 2025, we now expect to add approximately 3.5 million members, which represents approximately 34% year-over-year growth, above our prior guidance of 3 million members and 30% growth. We now expect adjusted net revenue of approximately $3.54 billion, above our prior guidance of $3.375 billion. This equates to year-over-year growth of approximately 36%, an increase from our prior guide of 30%. We now expect an adjusted EBITDA of approximately $1.035 billion, above our prior guidance of $960 million. This represents a 29% margin. We now expect adjusted net income of approximately $455 million, above our prior guidance of $370 million. And adjusted EPS of approximately $0.37, above our prior guidance of $0.31. This equates to fourth quarter adjusted EPS of approximately $0.12, which assumes a Q4 tax rate of approximately 10%. We now expect growth in tangible book value of approximately $2.5 billion for the year, above our prior guidance of around $640 million. We've had a great year thus far and look forward to a strong finish. Let's now begin the Q&A. Operator: [Operator Instructions] Our first question comes from the line of Dan Dolev at Mizuho. Dan Dolev: Chris, Anthony, amazing job. Very, very proud of you guys. Wanted to know, I mean, the question we're getting from investors for the past like month or so is consumer credit. I mean you guys have done incredibly well looking at NCOs coming down. But can you give us an overview of what's going on, maybe there's a FICO sort of differentiated thing here that helps SoFi? Just maybe an overall view of like how the health of the consumer credit across the different FICO trenches would be great. And congrats again. Anthony Noto: Sure. Thank you, Dan. The first message is our credit is performing very well. We have very strong performance by our members across each of the products, not just the performance of credit, but the spending that we see in SoFi Money, the engagement that we see in SoFi Invest and general behavior overall. We've been in the lending business for a pretty long period of time. When I joined in 2018, one of our key priorities is focused on quality of our loans over quantity and to make sure that those loans are durable through an economic cycle and through an interest rate cycle and any liquidity dislocations. And so we're constantly making changes to what marketing channels we're in. The trade-up between pricing and credit approvals, the unit economics of a loan, we focus on having a 40% to 50% variable profit margin on our loans and so sometimes we can drive more volume, sometimes we can drive higher margin. But it's a constant data science opportunity for us to perfect our loans. And the strength of the consumer loans performance speaks for itself, it's in the numbers. You can see our net charge-offs declined, i.e., improved versus last quarter. If you go back over the last couple of years, you'll see that we made a lot of credit changes to ensure that performance stayed high quality when we went through a 500 basis point interest increase and now we're seeing rates come down. So we're seeing really strong trends in the channels and great demand from high-quality borrowers. And we feel really confident. If anything changes, we'll make the adjustments accordingly. To remind everyone, we focus on a life loan loss between 7% and 8%, and all indications are that we're below that, as Chris has mentioned in the past. Chris Lapointe: And the only other thing I would add to Anthony's point is that we're also seeing really good demand from capital markets partners, which we view as a flight to quality. So all in all, we remain vigilant as always, but our balance sheet is strong with high-quality loans, excess capital and solid liquidity, and our partners are active and looking to expand their relationships with us, and that's a true testament to the credit that we're underwriting. Operator: The next question comes from John Hecht from Jefferies. John Hecht: Congratulations on a good quarter. I guess my question is predominantly around the rate environment, decreasing rates if you think about the forward curve. I'm wondering if you guys could talk about how the lower rate environment will affect the volume mix on the lending side? And particularly at what point do you think that could be a pretty big spike in student loan refinance activity? And then second, unrelated is maybe talk about what you guys expect in terms of deposit beta and what that means for NIM over the next few quarters? Anthony Noto: Thank you, John. We've said this in the past, our business is diverse, not because we woke up and said we should make our business diverse, but because of our strategy of being a one-stop shop. We've scaled our businesses across the portfolio of products that we offer being a one-stop-shop to a level that in environments, we can drive different businesses based on the characteristics of that environment. When rates were high, we took a specific strategy. As rates are coming down, we're taking alternative strategy and it's working. If rates stay exactly where they are, I think our business continues to operate incredibly well. I couldn't be more optimistic about our near-term trends and what we'll do in 2026 relative to our prior long-term guidance. So I don't worry about the environment we're in right now. I do worry about things like credit. I do worry about things like heightened inflation. We look at asset flows, et cetera, et cetera. So it's not like we're not worried about things. We just feel really good about the positive things versus the things that could cause a problem. As rates come down, I think our business only gets better. If we stay with unemployment below 5% to 5.5% and inflation is at 3%, I think we're in a really great environment. I'm not a student of believing inflation should be 2%. I think 3% is perfectly fine. I think we have global stability that will also be important. I think about things that could disrupt us as, one, economic, i.e., unemployment; two, financial liquidity. Rates are coming down, not going up; and then three is the macroeconomic factors that are at our control and exogenous events. As rates go down, our student loan business will benefit meaningfully. Rates have been very high for the last 3 years. Federal student rates are high, and we can give them a significant savings on a $70,000 balance. So we'll benefit from lower rates in student loan refinancing, for sure. The home equity market, the home loan market, the real estate market more broadly, will benefit from lower rates, both in refinancing as well as purchase. As it relates to refinancing, less than 5% of our members that have mortgages have been with us. So if you take everyone that's on our platform that's using SoFi and you look at the number of those people that have home loans or mortgages, only 5% of those with mortgages are with us. It's a huge opportunity for us to market lower cost of a mortgage to them. And we have the technology to know where the rates are, to deliver personalized messages to them, and we've built the back end and operational capabilities to deliver reliable mortgage in a specific period of time. So we feel really great about that. As it relates to SoFi Money, I've said this in the past, I'll say it again, it's starting to show itself now. In a high-rate environment, nonbanks can compete with us on interest rate. Many choose not to because they're trying to make more money with NIM, but it's easy when rates are high, when Fed funds are high. When Fed funds is low, it's going to be really hard for nonbank and nonlending companies to compete with us. Our competitive advantage will come through and show the world that we have the highest lifetime value in a broad based portfolio of products allows us to give a superior yield when others are struggling to provide that yield because of the fact that we have both lending and we're insured deposit institution, and we have a broad-based membership that we can market to efficiently for cross-buy. In the most recent quarter, 40% of our product growth came from cross-buy, that's with our members growing 35%. Chris, would you add anything? Chris Lapointe: Yes. The only other thing I would add, John, to your comments on deposit betas and NIM over the next few quarters, we've been really successful in maintaining healthy NIM margins. This last quarter, we were at 5.84%. Maintaining these strong margins has been a function of the loan pricing betas that we have as well as obviously, our cost of funds. What we've demonstrated on the loan pricing beta front is in rising-rate environments, we've been able to outpace rates and maintain really strong pricing. In down-rate environments, we've been able to maintain solid pricing above where rates have gone. And then from an asset yield perspective, we've been able to maintain strong asset yields and reduce our overall cost of deposits, all while maintaining healthy growth in member deposits last quarter. Historically, we've been at about a 65% to 70% deposit beta. We would expect that to continue going forward. Operator: The next question comes from Kyle Joseph from Stephens. Kyle Joseph: Just wanted to get your thoughts on the competitive environment. Obviously, we saw your guidance for membership growth go up, which is obviously a positive. Is that a function of just kind of internal marketing efforts and brand awareness? Or can we step back and think about things potentially getting less competitive out there? I think you talked about capital providers and the flight to quality you're seeing. So I just want to get your commentary there. Anthony Noto: It's a function of many factors, first, unaided brand awareness. Our goal is to drive unaided brand awareness higher. It provides productivity across our digital marketing capabilities and performance marketing. And so we talked about the 9.1% unaided brand awareness that we achieved in Q3, that we expect to continue into Q4. We have a number of new product launches that will also contribute, that will not just contribute directly because they're new products, but they'll also contribute indirectly after raising awareness that we're a one-stop shop. Specifically, our goal is to launch buy, sell and hold crypto by the end of the year. We'll continue to roll out SoFi Pay to other international markets. And so the second bucket is new products. And then the third, we have a pretty good understanding of what channels to market what product is in and have a good read on customer acquisition costs by channel. And so we're just ensuring that we continue to add more marketing at an efficient rate, focused on profitability and growth, and it's our confidence in being able to do that in a bigger way in Q4 than we did in Q3 in addition to the new product launches that we'll have, and the benefit from a brand awareness. So that's driving our confidence. I will tell you our goal is to continue to move along a linear curve to make sure that we're not falling off that efficient frontier of marketing and brand awareness and spending. But there's a lot of upside from spending at efficient rates if we chose to grow even faster. Operator: The next question comes from Andrew Jeffrey of William Blair. Andrew Jeffrey: Anthony, as you see faster growth in the nonpersonal loans business, which I think is really encouraging from a diversification standpoint, does that change your thought on how you fund that growth on balance sheet deposit driven versus the loan platform business? And are there opportunities in the loan platform business for nonpersonal loans? Just trying to think about what the funding mix looks like as the origination mix shifts a little bit? Anthony Noto: Sure. There are definitely opportunities in the loan platform business from nonpersonal loans, and Chris and the capital markets team is working on that. Funding off of deposits is definitely an element that drives our durability and our confidence in lending. The dependency on deposits will likely reduce over time and our cost of funds will also likely come down over time based on a bunch of decisions that we make as it relates to how to spend our capital. I do think you'll continue to see us drive revenue streams that are not connected to capital. 56% of our revenue is now coming from our tech platform and financial services business, and that's up pretty meaningfully over time. And you can see the benefit to our profitability line and our ROE and our tangible book value growth related to that. So there's a number of initiatives that we have, that we haven't talked about publicly that will also help as we leverage blockchain technologies in the lending space specifically that will help drive strong diversification of funding for our balance sheet. Operator: Next question comes from Kyle Peterson at Needham & Company. Kyle Peterson: Nice results. I wanted to drill down in the loan platform business, in particular. I know there's at least another fintech lender that kind of recently said that at least some of the loan buyers and such on from institutional investors were kind of consolidating purchases to kind of fewer platforms. I guess the strength this quarter, was it broad-based in terms of you guys adding participants on the platform on the funding side? Or was it fairly concentrated with existing partners? Just any color there. And if you guys are seeing anything similar would be really helpful? Chris Lapointe: Thanks, Kyle. So we saw growth across both new partners as well as existing partners who have partnerships with us. What we actually saw is a bit of a flight to quality where existing partners -- a number of existing partners came to us and asked to upsize their commitments, not only in Q3 but Q4. So we expect continued momentum to occur in the last quarter of the year. And then we also saw some growth in new partners as well as extended credit. So net-net, it was growth across the board. Operator: The next question comes from Reggie Smith at JPMorgan. Reginald Smith: Great quarter. I guess I had a follow-up on the loan platform business as well. Is there a way to kind of frame the number of buyers on the platform and kind of what your mixed full quarter capacity looks like? And then also talk about the process, I think you mentioned this a second ago, Chris, about how companies upsize their commitment? Chris Lapointe: Kind of out there at the end, Reggie, but I think you asked about the process for how companies upsize their commitments. In terms of your first question about the number of buyers on the platform and what the next quarter's capacity looks like, we aren't going to disclose the number of buyers that we have. We have disclosed a few publicly with Fortress and Blue Owl, but we have a number of partners on the platform. What capacity looks like next quarter? We did $3.4 billion of originations on behalf of others this past quarter in Q3. We expect that to continue to grow heading into Q4. In terms of how companies upsize their commitments, they typically come to us intra-quarter if they have excess capacity or demand for incremental loans. And if we're able to fulfill by the end of the quarter, we'll do so. Anthony Noto: The behavior we're seeing of consolidation down to higher quality that you mentioned, we think we're benefiting from that based on the activity we've seen from those partners. Operator: The next question comes from Peter Christiansen from Citigroup. Peter Christiansen: Nice trends here for sure. Anthony, I was just wondering, can you remind us where we are in your investment cycle, perhaps not just like the marketing or performance marketing, branding, those sorts of things, but maybe more so on capabilities? I know you're going to be onboarding some new clients on the tech platform pretty soon and now building out crypto, whether that's partnered or native. Just if you could frame for us where we are in the investment cycle. Anthony Noto: I would like to invest a lot more than we're investing, but we're trying to balance both growth and being responsible for delivering profitability and good returns. We don't want to go after penny less growth. And so the gating factor that we've put on and talked about publicly is to have at least a 30% incremental EBITDA margin. And I say the word at least because if the business does well relative to expectations, it's hard to spend back in a quarter. We may accelerate some hiring, but that really doesn't impact the near-term quarter, it impacts the next quarter. And we've hired a lot more people in 2025 than we set out at the beginning of the year because we've been driving both strong top line growth and really strong incremental profitability. I would love to spend every dollar we could down to that 30% incremental EBITDA margin. It's not always possible to do that. That 30% incremental EBITDA margin will be the standard until we see our growth drop below, call it, 15%. I think as long as we're growing above that, we should invest in the business to make the top line as large as it can be. And then over time, we can slow down our spending and drive margin expansion, but we're definitely not in the mode of driving margin expansion unless we outperform compared to the 30% incremental EBITDA margin. The areas we're investing is we'll continue to iterate our existing products. We're focused every day on 5 things of our existing products, fast, selection, content and convenience and then make them better together. There are some products that are new that we'll increase the investment in, such as SoFi Plus. We're really pleased with the progress we've made there. There will be additional things that we add into SoFi Plus as it relates to value, one of which is the smart card. We think it's the best of any card. It will have high rewards, 5% on food. They'll also have high interest or highest APY. In addition to that, you can also build your credit score and you'll be able to use that relationship with us to potentially borrow both ahead of time and post transactions. And that will be an evolving feature set after we launch, that will continue based on how we learn our members want to use the product, but focusing on the smart things that they want, and making it have the best of everything. We talked about Cash Coach on the call. There's a number of AI initiatives to help people spend less than they make and invest the rest. It is a unique formula that we can deliver on in addition to the investing piece. One of the things that's interesting about our buy, sell and hold for crypto is that the way we'll launch this product is going to be pretty novel. Someone will open up the SoFi Money account. If they don't have a SoFi Money account, they'll fund that SoFi Money account and then all their purchases are drawn from that SoFi Money account. What's the benefit of that? Well, that SoFi Money account has FDIC insurance. And we've added additional insurance for our members if they opt in, up to $2 million, not just $250,000. So someone can have an FDIC-insured bank account where they keep their funds and seamlessly be able to buy cryptocurrency and the money moves from one entity to the next seamlessly behind the scenes. A very efficient process that I think will be very differentiated, and we'll be the first bank to offer buy, sell and hold crypto. We've mentioned stablecoin on the call. I can just tell you, every day, there's a new opportunity for us to leverage the SoFi USD stablecoin that we'll plan to launch. And we have some unique advantages that we're already a Tier 1 bank. What do I mean by that? Because we are a Tier 1 insurer deposit institution, we could take the reserves of our stablecoin and put them at the Fed and earn Fed funds. What does that mean? Zero credit risk, zero liquidity risk. There's not a stablecoin provider in the United States that can make that claim. Very differentiated, super excited about it, and there's a number of other applications there. You can imagine that Fed funds that we earn on those reserves, they can be given back to the consumer. They can be given to businesses to accept our payment at point of sale, and it can provide a lot of different benefits to other ecosystem partners that cause them to want to partner with us as opposed to a non-Tier 1 nationally licensed bank. So we're going to invest as much as we can to that 30% incremental EBITDA margin and sustain high levels of growth until it slows down and then will drive profitability. Operator: The next question comes from Moshe Orenbuch from TD Securities. Moshe Orenbuch: Maybe a little bit about the competitive dynamic in the personal loan business. I saw one of your close competitors got acquired by a large bank. First, do you think that makes the business kind of a better competitive dynamic if that happens? Or maybe just talk about that a little bit? And if you could also just address, you talked about becoming more capital light. How much of that do you think comes out of the personal loan business in terms of doing less for your balance sheet or proportionately more in the loan platform side? Anthony Noto: In terms of competition for PL, I'd say it's generally been a competitive environment. But from entities that are not large national banks or the top 10 banks in our country, they just don't offer this product. I think there's a lot of reasons for why they don't offer this product. It's a gap in their portfolio that allows us to really gain, I think, more members at efficient costs. I think the reason why they probably don't offer their product is because they gouge people so about on credit cards, and it's such a great ROE product that they don't want to cannibalize the credit card. The way you make money in the credit card business is to revolving balances. Well, credit cards average in the United States over 20% interest on those revolving balances. If you actually had a prime member or super prime member, and told them they're going to charge 20%, they wouldn't sign up for that any day. But if you put that behind a fancy name of the card and all these benefits and high rewards, no one sees the high interest rate that they get. And they chase those reward points thinking they're getting some benefits from it. Then they end up with a balance that they can't pay off after 1 month. And then they said they'll do it after 2 months. And before you know, it's been 6 months. They now have a $10,000, $15,000 balance, they're paying 20% to 30% interest on it. Would you refinance them with a personal loan at 12%? Probably not. So I think this is a product that we're going to own from a leadership standpoint. We'll continue to fight away at these huge balances where people are paying over 20% interest when they can come to us and pay 12%, again, prime and super prime customers. Chris Lapointe: And then what I would say on your point about being capital light and how much of it comes out of the PL business, what I would say is total personal loan originations were up 53% this past quarter year-over-year and 7% sequentially to a record of $7.5 billion. So we don't see much in terms of overall cannibalization, given our current market share, which is about 15% of total unsecured loans out there within our credit box and that doesn't even scratch the surface of all of the outstanding credit card debt, as Anthony mentioned. So we're seeing really good momentum on the LTV side, and we're adding loans to the balance sheet at a pace that we are comfortable and happy with. This past quarter, we added about $2.7 billion of personal loans to the balance sheet, which is a good healthy clip for us. Operator: Our final question today comes from Devin Ryan, Citizens Financial Group. Devin Ryan: I want to come back to the student loan opportunity. Obviously, you talked about kind of the outlook moving into a better place there with the rate environment. Can you talk a little bit about how you see some of the actions of this administration driving kind of a better environment, whether it's the Big Beautiful Bill? And then a few weeks ago, there was, obviously, headlines around the government exploring, selling some of its $1.7 trillion in balances, which would seem pretty interesting for you guys. So love to get some thoughts on that. I'm not sure if you can speak to it directly, but just more broadly, if you can, just what you think that means for the market and kind of the direction of travel? Anthony Noto: Yes. I think it's all very positive for SoFi. I think we benefit from all of those decisions as they get made. We look at assets from time to time that are for sale. If the government decides to sell their student loan portfolio, we'll absolutely dig into it. It'd be a great customer acquisition tool, not to mention the fact that we can make a significant profit on that portfolio of assets. As it relates to potentially reducing the amount someone can borrow in order to go to college or grad school or business school or medical school or a law school, we'll be there to fill the hole. We want to help our members achieve the financial independence so they can live their ambitions. Paying for college, paying for a home is absolutely a critical decision they make. And we have to be there for all those major decisions they make. So we'll absolutely be there. If they need a solution that the federal government is not providing, then that will also be a great business. Our in-school business for loans is a very profitable business that's very attractive and doing more of that would be even better than the student loan refinancing. It's higher rates, it's backed by credit of another person and people really do want to pay back the benefit that they receive from getting a college education. So that would also be an opportunity. I would say more broadly, as we think about our educational system and think about the changing needs from a technology standpoint, AI, there may be new types of loans that we could get into from a student loan perspective that's outside of a 4-year type of experience, that's more suited for the professional environment new graduates will enter into. So I think we'll actually see some innovation because of what the government is doing and because of the impact technology is having on hiring undergrounds. Operator: And that concludes -- back to you. Anthony Noto: Thank you, operator. Sorry about that. As you can see, it was an eventful quarter at SoFi and we are energized as we wrap up 2025 and headed 2026. Today's results reflect the durability of the foundation our team has been tirelessly building over the last 8 years. It was not clear before today. I think it's safe to say that our results demonstrate that we truly have become a one-stop shop for your financial needs all in 1 digital platform. Many others have talked about achieving this strategy, but to date, no one else has come close to the breadth of products or complexity of operations that we have, not to mention the revenue scale we have, the profitability we're generating and the durability and broad diversification of revenue across our portfolio of products. This success positions us the best to benefit from the two tech super cycles unfolding and the continued strong sector transition globally from traditional finance companies to fintech companies. Suffice it to say, I'm more confident than ever that our strategy and our execution will continue to deliver our sustainable competitive advantage with the highest lifetime value and we'll accelerate our investment to ensure we maintain our lead. Along the way, we will remain guided by the SoFi Way. We are all operating as founders, problem solvers and partners to bring the best products and services to our members so we can have a meaningful impact on their lives, and lead them to a better, more secure financial future. By acting in the best interest of our members, we will build deeper relationships across our one-stop shop platform that will lead to durable growth and strong returns for our shareholders for decades to come. Thank you for joining our call, and we look forward to talking to you next quarter. Operator: This concludes today's conference call. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the IQVIA Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. As a reminder, this call is being recorded. Thank you. I would now like to turn the call over to Kerri Joseph, Senior Vice President, Investor Relations and Treasury. Mr. Joseph, please begin your conference. Kerri Joseph: Thank you, operator. Good morning, everyone. Thank you for joining our third quarter 2025 earnings call. With me today are Ari Bousbib, Chairman and Chief Executive Officer; Ron Bruehlman, Executive Vice President and Chief Financial Officer; Eric Sherbet, Executive Vice President and General Counsel; Mike Fedock, Senior Vice President, Financial Planning and Analysis; and Gustavo Perrone, Senior Director, Investor Relations. Today, we will be referencing a presentation that will be visible during this call for those of you on our webcast. This presentation will also be available following this call on the Events and Presentations section of our IQVIA Investor Relations website at ir.iqvia.com. Before we begin, I would like to caution listeners that certain information discussed by management during this conference call will include forward-looking statements. Actual results could differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business, which are discussed in the company's filings with the Securities and Exchange Commission, including our annual report on Form 10-K and subsequent SEC filings. In addition, we will discuss certain non-GAAP financial measures on this call, which should be considered a supplement to and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in the press release and conference call presentation. I would now like to turn the call over to our Chairman and CEO, Ari Bousbib. Ari Bousbib: Thank you, Kerri, and good morning, everyone. Thank you for joining us today to discuss our third quarter results. We delivered another strong quarter. Revenue and profit were towards the high end of our guidance, reflecting solid operational performance. Free cash flow was particularly impressive this quarter. It was actually the highest quarterly free cash flow ever, even when you consider the large advances we got during the COVID era for vaccine trials. This strong free cash flow, of course, reflects a good and disciplined working capital management by the team, but also an improved overall industry backdrop. On the clinical side, net bookings in the quarter totaled exactly $2.6 billion, which resulted in a net book-to-bill ratio of 1.15x, also reflecting the improving trends in customer demand that we started seeing in the second quarter as well as, of course, solid execution from our sales teams. In fact, our third quarter net bookings were 5% higher sequentially 13% higher than a year ago and 21% higher than the trough that we experienced in Q1 this year. Key demand metrics were also strong in the quarter. The EBP funding momentum is building this year with each quarter delivering steady sequential growth, reaching $18 billion in Q3 according to BioWorld. Our qualified pipeline was up 6% year-over-year, driven by large pharma and EBP segments. You will recall that in the second quarter, we had high single-digit sequential RFP flow growth and low teens growth year-over-year. This quarter, we saw again high single-digit RFP flow growth sequentially and 20% growth year-over-year with growth across all segments. Importantly, client decision-making time lines have been improving sequentially. Finally, our backlog reached a new record of $32.4 billion at the end of the quarter, showing growth of 4.1% compared to the prior year. On the commercial side, TAS continued to perform well in the third quarter and delivered strong results despite tougher year-over-year comparisons. In fact, if you look historically at sequential revenue growth, Q3 is generally flat to down versus Q2, and we were slightly up this quarter. This was driven by ongoing momentum from drug launches and the strength of our broader commercial portfolio. I do want to mention the good growth we had this quarter in CSMS, about 1/3 of which was from an acquisition. We decided to increase our capabilities in this segment, as we are seeing a developing trend of large pharma clients increasingly looking to outsource commercial operations for established brands in specific markets. These tend to be large multiyear engagements, typically spanning across therapies and geographies, and IQVIA is uniquely positioned to capitalize on this trend by combining our information and analytics and domain knowledge with a local sales force footprint. Let me turn to the results of the quarter. Again, strong revenue and profit results. Revenue for the third quarter came in at the high end of our guidance range, representing year-over-year growth of 5.2% on a reported basis and just under 4% at constant currency. Third quarter adjusted EBITDA was up 1.1%. Third quarter adjusted diluted EPS of $3 increased 5.6% year-over-year. Let me just now, as I usually do, share a few highlights of business activity. Let me start with TAS. New drug launches continue to be a key area of strength for IQVIA. A few examples: a biotech client awarded us a multiyear integrated partnership to support faster product launches. This win includes a full suite of information assets and analytics capabilities. A top 10 pharma client awarded IQVIA a program to support the launch of a novel oncology therapy. Top 20 pharma client awarded IQVIA a contract to support the launch of a dual indication metabolic therapy utilizing AI capabilities to integrate advanced patient insights into product utilization and patient response. A top 10 pharma client selected IQVIA to provide launch support for a new autoimmune disorder therapy. The engagement includes advanced AI-enabled patient level solutions that enable performance tracking and analytics near real time and integrate specialty pharmacy data and payer insights. A good example of the commercial outsourcing trend I mentioned earlier was a very large award from a top 5 pharma clients to manage end-to-end commercialization and promotion of an established brand portfolio in a very large overseas market. We're progressing as planned to deploy highly specialized industry AI agents. So far, we have approximately 90 agents in development covering 25 use cases across commercial, real world and R&DS. We, in fact, are seeing growing demand to help our clients accelerate AI adoption. We are increasingly helping our clients build data infrastructures that are robust and AI-ready by leveraging IQVIA's health care-grade AI ecosystem, combining advanced information management, integrated platforms, security, safety and privacy, along with domain expertise. Let me share a few examples of key wins in the quarter. A top 20 pharma client selected IQVIA to deliver a next-generation information management solution that streamlines hundreds of sales data feeds into an AI-enabled centralized simplified global warehouse. Another top 10 pharma client awarded IQVIA a contract to deploy a next-generation AI-enabled SaaS platform to optimize global compliance reporting. A biotech client chose IQVIA to deploy a new global master data management program to enhance AI-enabled omnichannel marketing and analytics operations. Our real-world business continues to perform well. Here are some examples. Top 10 pharma client selected IQVIA to lead a post-market commitment study evaluating treatment outcomes in African-American patients with lung cancer. A biotech client selected IQVIA to lead a prospective real-world study supporting a regulatory commitment to a rare oncology disease. Biotech client selected IQVIA to deliver a retrospective real-world study supporting post-marketing commitments for their newly approved drugs to fulfill regulatory requirements. Turning to R&D Solutions. The positive momentum that we saw in Q2 continued to build through Q3. A few standout wins with our biotech customers first. In oncology, a first-time sponsor selected IQVIA to lead the Phase I trial for a novel leukemia treatment. Another biotech client selected IQVIA to lead a complex Phase I and Phase II trial in hematologic-oncology targeting multiple cohorts across 2 indications. We were also selected as the exclusive CRO partner for a biotech's entire cardiovascular program. And of course, this recognizes our leadership in cell and gene therapy and cardiovascular research as well as our ability to execute globally. Large pharma was also strong in the quarter. We were, for example, selected to lead a Phase II study in stroke therapy demonstrating our deep neuroscience expertise and global trial capabilities. Another top 10 large pharma client selected IQVIA to manage a global Phase III MASH program, leveraging AI-enabled pathology tools and a robust site network to accelerate execution. We were also selected to lead a Phase III ovarian cancer study, highlighting our deep therapeutic expertise and the strength of the integrated delivery model we built in partnership with the clients. Now before I turn it to Ron for details on our financial performance in the quarter, I want to say a word about the CFO transition we've announced some time ago. As you know, Mike Fedock will step into the CFO role on February 28, 2026, succeeding Ron Bruehlman, who will retire after a remarkable tenure. Ron -- and that's the good news. Ron will stay on as a senior adviser to continue to help us on specific projects and to help ensure a smooth transition. Ron has been a highly valued leader of this company for many years. In fact, Ron and I have been working together for over a quarter century. Ron has been instrumental in shaping IQVIA's financial strategy, driving its transformation into a leading global organization. He was here for managing the IMS Health IPO in 2014, through the Quintiles merger in 2016. And of course, he returned in 2020 to help us navigate the pandemic. His steady leadership and strategic long-term vision have been essential in building a high-performance global finance organization and in helping IQVIA remain resilient during unprecedented times over the past few years. Mike brings deep industry experience, and he has held key financial leadership roles across IQVIA, including as CFO of our R&D Solutions business, and prior to that as CFO of our IQVIA Laboratory business. He's worked closely with me and the senior team for years now and is very well positioned to lead our finance function into IQVIA's next phase of growth. Let me now turn to Ron for more details on our financial performance. Ronald Bruehlman: Thanks, Ari, and good morning to everyone. Let's start by reviewing revenue. Our third quarter revenue of $4.1 billion grew 5.2% on a reported basis and 3.9% at constant currency. Now excluding COVID-related work from this year and last, revenue grew 4.5% at constant currency, and this included about 1.5 points of contribution from acquisitions. Technology & Analytics Solutions revenue for the third quarter was $1.631 billion. That was up 5% reported and 3.3% at constant currency. R&D Solutions third quarter revenue was $2.26 billion, growing 4.5% reported and 3.4% at constant currency. Now excluding the step-down in COVID-related revenues, R&DS revenue grew 4.5% at constant currency. And lastly, our Contract Sales & Medical Solutions business, or CSMS, grew revenue of $209 million -- had revenue of $209 million, and that was up 16.1% reported and 13.9% at constant currency. Year-to-date revenue for the company was $11.946 billion. That's up 4.4% reported and 3.7% at constant currency. And excluding all COVID-related work, our year-to-date growth was approximately 4.5% at constant currency. Tech & Analytics Solutions revenue was $4.805 billion year-to-date. That's up 6.7% reported and 5.8% at constant currency. R&D Solutions year-to-date revenue of $6.563 billion was up 2.5% at actual FX rates and 1.9% at constant currency. Excluding COVID-related work from both periods, revenue grew approximately 3.5% at constant currency. And lastly, CSMS year-to-date revenue of $578 million was up 6.8% reported and 5.9% at constant currency. Let's move down the P&L now. Adjusted EBITDA for the quarter was $949 million, representing growth of 1.1%, while year-to-date adjusted EBITDA was $2.742 billion. That's up an even 2% year-over-year. Our third quarter GAAP net income was $331 million and GAAP diluted earnings per share was $1.93. Year-to-date, GAAP net income was $846 million or $4.86 of diluted earnings per share. Adjusted net income was $515 million for the third quarter and adjusted diluted earnings per share was even $3. Year-to-date adjusted net income was $1.48 billion or $8.50 per share. Now as already noted, we had strong net new bookings this quarter, confirming the improved demand environment we started to see in the second quarter. The R&DS backlog at September 30 was $32.4 billion, up 4.1% year-over-year. And next 12-month revenue from backlog was $8.1 billion, that up 4.0% year-over-year. Reviewing the balance sheet. As of September 30, cash and cash equivalents totaled $1.814 billion, and gross debt was $14.957 billion. That resulted in net debt of $13.143 billion. Our net leverage ratio ended the quarter at 3.52x trailing 12-month adjusted EBITDA. And third quarter cash flow from operations was $908 million and capital expenditures were $136 million, which resulted in record free cash flow for the quarter of $772 million. Now I'll turn it over to Mike Fedock, who will share details on our guidance. Mike? Michael Fedock: Thanks, Ron, and good morning, everyone. Let's start with our full year guidance. We are confirming our full year 2025 guidance and are narrowing the ranges for revenue, adjusted EBITDA and adjusted diluted earnings per share and are maintaining the midpoint of our prior guide. We expect revenue to be between $16.150 billion and $16.250 billion, representing year-over-year growth of 4.8% to 5.5% or 5.2% at the midpoint. This revenue guidance includes approximately $100 million of COVID-related revenue step down entirely in R&DS, approximately 100 basis points of tailwind from foreign exchange and approximately 150 basis points of contribution from acquisitions. These assumptions are unchanged from the prior guide. We expect adjusted EBITDA to be between $3.775 billion and $3.8 billion, growing 2.5% to 3.1% year-over-year or 2.8% at the midpoint. We expect adjusted diluted EPS to be between $11.85 and $11.95, up 6.5% to 7.4% versus prior year or about 7% at the midpoint. Now turning to the fourth quarter. We're expecting revenue to be between $4.204 billion and $4.304 billion, which represents year-over-year growth of 6.2% to 8.7%. Adjusted EBITDA is expected to be between $1.033 billion and $1.058 billion, representing growth of 3.7% to 6.2% versus prior year. And adjusted diluted EPS is expected to be between $3.35 and $3.45, which represents year-over-year growth of 7.4% to 10.6%. And this guidance assumes that foreign currency rates as of October 27 continue for the balance of the year. So to summarize, in the third quarter, we delivered strong top and bottom line results as well as record high free cash flow. R&DS net bookings were $2.6 billion, growing 13% year-over-year and resulting in a net book-to-bill ratio of 1.15x. The forward-looking demand metrics in the clinical business continue to trend in the right direction with 20% RFP flow growth year-over-year and sequential improvement in client decision-making time lines. TAS performed well and delivered solid results, driven by ongoing momentum from drug launches and the strength of our broader commercial portfolio, and we reaffirmed our full year 2025 guidance. With that, let me hand it back to the operator for Q&A. Operator: [Operator Instructions] Your first question comes from the line of David Windley from Jefferies. David Windley: Ari, I wanted to ask you about what I think you call your see more, win more strategy and how that has played out through the middle of the year or through this year in terms of contributing to the RFP flows improvement that you're highlighting as well as your win rate and how we should think about an amount, if any, price competitiveness you're applying in that strategy and how that plays out through the P&L as that business converts to revenue? Ari Bousbib: Okay. Well, usually, we keep the best for the last, but you started with a big strategic question. So let's start with that. Okay. Well, look, the strength in bookings momentum and RFP flow, I think we have to say, and we could see it in the industry in general, I think reflects a reduction in the level of uncertainty in the market environment and the macro political environment. I think there have been a few developments that have sort of helped tilt decision-making at large pharma on certain programs favorably. And the climate overall has improved. That's undeniable in our sector. So that certainly is a big driver of our growth. The specifics of our see more, win more strategy, which we started earlier this year, which, as you know, now has a lot of imitators, has borne fruit as well in the sense that we've been looking at markets that we previously hadn't been touching and had left some more marginal players essentially in a quasi-monopoly situation in those segments, and we've decided to go after that. The pricing conversation is a little bit overdone in my opinion. In a climate where market dynamics were unfavorable with a lot of uncertainty and less deals to be had, there was more competition on pricing and all we did in the first part of the year was to align to those pricing discounts that were being offered as opposed to walk away in order to continue to build our book of business. We don't see that trend continuing. It hasn't been an issue at all. Certainly this past quarter, the opposite. We've walked away from deals. And we think that the sector in general is a lot healthier in terms of market dynamics. The level of uncertainty has gone down and pricing has returned to normal levels. You had a question, a follow-up on P&L implications. Look, we have a $32-plus billion backlog and only a tiny portion of that was subject to a few discounts that we did earlier in the year. The revenue associated with those things are going to bleed over our P&L over the next 5 years, and we do not expect that to have any impact whatsoever on our P&L going forward. Operator: Your next question comes from the line of Justin Bowers from Deutsche Bank. Justin Bowers: So Ari, it sounds like the business environment is improving, funding is up, consumer confidence is improving. And both of the segments, TAS and R&DS are strengthening, at least on a 2-year stack basis. Is this a momentum that we should expect to continue over the next few quarters and into 2026? And maybe if you could just give us a glimpse of how you're thinking about those two? Ari Bousbib: Yes. Well, look, I don't have a crystal ball here, and I'm not going to give you 2026 -- this was a clever way of asking me about 2026 guidance. We're not going to do that here. As you know, we usually provide guidance for the year concurrent with the release of our fourth quarter and full year earnings early in the year. So end of January or early February, we'll provide that. We are in the midst of our planning process and it's still early, we're still in October. But look, what I can tell you is, we are going to deliver this year over 5% in top line revenue growth, which, frankly, given what we've been through, and the environment we've been in, in the past 1.5 years, 2 years, I think is a very, very strong performance. And you could see that compared to our larger -- certainly the larger CRO peers, we are doing very, very well. So I cannot tell you yet what '26 will be in the next few quarters. But I mean, look, I would be surprised if revenue growth in '26 is not at least the same or better than the growth that we are seeing this year. So I say that with a certain amount of confidence. Operator: Your next question comes from the line of Elizabeth Anderson from Evercore ISI. Elizabeth Anderson: Congrats, Ron, on your retirement. I was wondering if you could talk a little bit, Ari, about some of the differences between what you're seeing on the pharma side versus the biotech side. I think you covered the biotech side nicely in the see more, win more answer, but just sort of wanted to peel back the onion a little bit on the pharma side as well. Ari Bousbib: You mean the large pharma side? Elizabeth Anderson: Yes. Ari Bousbib: Look, large pharma went through a lot of transformation internally in terms of their investment programs. Going back to the IRA, there was this whole phase of reprioritization of programs and reviews of their pipelines, which led to an elevated level of cancellations due to this reprioritization activity. That lasted for 1 year, 1.5 years, beginning mid of '23 and certainly continuing through '24. We see that activity as having essentially been completed. And we haven't seen any further cancellations as a result of that type of activity. So we think that the pipelines are now fully sanitized. Of course, there continue to be cancellations, but they are all like more business as usual due to futility or other reasons and nothing unusual. Large pharma, actually, the RFP flow for large pharma is very strong. I mentioned that our RFP flow growth year-over-year is 20%. And that applies to large pharma and to EBP equally. I mean, there's a strong, strong momentum. And again, that's helped by the more calming environment and perhaps more certainty around what's coming. And it's also helped by the fact that these reprioritizations have been largely completed. And the programs are now on the table are programs that our clients want to engage in and want to go forward with. Our cancellations, I always say, in recent years were about $0.5 billion a quarter, plus or minus a couple of hundred million dollars. So they could range between $300 million and $700 million in a given quarter. So a couple of billion dollars plus year in, year out. In '24, we had more than 50% higher cancellation than that, right, over $3 billion in '24, because of these reprioritizations from large pharma. That essentially is behind us. And year-to-date, our cancellations follow the regular pattern. I think somewhere between $500 million, around on average about $550 million per quarter I saw the numbers yesterday. I think nothing much to talk about. This quarter, I think we were a little bit towards the higher end of our range. But again, not because of reprioritization, it's simply normal course of business. Our gross bookings were very strong, very, very strong this year. And you could see that also in our $2.6 billion of net bookings, which were up 13% year-over-year, up sequentially mid-single digits. And the trough we experienced Q1 probably was the trough. We don't see that in the near term. So again, large pharma dynamics returning to normal business conditions, trending towards normal business conditions and biotech funding improving, which as you know, is a driver of EBP growth. And that, again, is reflected in our bookings and in our RFP flow as well. Operator: Your next question comes from the line of Michael Cherny from Leerink Partners. Michael Cherny: Maybe if I can ask a little bit about TAS. Nice growth against obviously a tough comp. As you think about the pathway forward, what do you see as the contributions you're getting from some of your inorganic advancements? And where do you see the best opportunities to continue to expand that business above and beyond your own R&D, talk AI, talk anything along that vein, that would be great. Ari Bousbib: Thank you, Michael. Well, you spoke about inorganic. I think we said 1.5 points of contribution from acquisitions to the company as a whole. And as you know, as always has been the case, the bulk of that is in TAS, although I think in this past quarter, we did a large acquisition that was in R&DS and SMO. I think that we spent $485 million that we spent in total. And most of that is one acquisition called NEXT Oncology, which is an SMO specialty in oncology, very attractive business. We acquired this end of Q3. So not much contribution in Q3. And the inorganic contribution to R&DS will be a few million dollars, I guess, in the double digits, like $50 million or thereabouts of revenue to R&DS in Q4. With respect to TAS, we didn't do much in Q3. And so I guess the acquisition contribution for the year, well, we did a CSMS deal as well, right, which is small, obviously, but since CSMS is a small segment, it was a large piece of it. So not much in TAS in Q3. In general, we try to buy technology companies, companies that can add capabilities to our suite of products, analytics companies. There's a lot of innovation, as you know, in the AI space. Michael Fedock: Medical affairs... Ari Bousbib: Yes. Medical affairs, real world. Real world is a very strong -- real world evidence was really very, very strong in the quarter, and we expect that to continue into the future. So yes, I mean, for the year, again, 1.5 points, I would say 50%, 60% of that will be TAS and the rest -- for the year, right, 2025, and then the rest R&DS and then a little bit CSMS. Operator: Your next question comes from the line of Shlomo Rosenbaum, Stifel. Shlomo Rosenbaum: Ari, before I ask you a question, I just want to also commend Ron. So Ron, I've seen you retire before, and I'm not fully convinced you're gone right now. Ari Bousbib: Right. It's the wrong word to describe Ron, not retiring. Shlomo Rosenbaum: Yes, you've dragged him out of retirement in the past, Ari. So I don't know. Ari, I want to ask you to talk a little bit about the subcomponents in TAS and how they're growing in terms of real-world evidence and consulting and analytics. And just some of the trends that you're seeing there. I know consulting often kind of leads the trend in terms of you see that picking up, that means that the environment is getting better. And maybe you could just talk a little bit about each of the components and what you're seeing and maybe what that says about the market. Ari Bousbib: Yes. So look, the growth rate in Q3, it's hard to derive big trends because as you know, Q3 in general is the weakest quarter in the year. But specifically this year, we had a tough compare with last year. What was the growth of TAS? Q3 last year was like 8.6%, I want to say 8.6% growth last year. So we knew we had a tough compare this quarter. But as I mentioned in my introductory remarks, sequentially, we're slightly up. And usually, because Q3 is the toughest quarter given nothing happens for 6 weeks in Europe, it used to be 3 weeks, then it's 4, now it's 6, and it's going to 8 whereby nobody is working. So I think that the performance this quarter was very strong. It was led largely by the real-world evidence, which was very, very strong. And everything else was -- obviously, data is usually low single digits and everything else was between low to kind of mid-single-digit growth, again, against very tough compares. Same for consulting. Shlomo Rosenbaum: Are you seeing a pickup in that consulting? Ari Bousbib: You will recall that -- I know you're asking consulting because it's kind of the most discrete, and it's positive in terms of leading indicator when things were trending negative territory, consulting went down very rapidly in the '24 -- end of '23, the first part of '24 time frame, consulting was down, actually negative. One of the quarters, I think it was negative double digits. But it's positive this quarter. And again, everything outside real-world evidence in aggregate was mid-single digits or thereabouts. Operator: Your next question comes from the line of Eric Coldwell from Baird. Eric Coldwell: Ari, I'll stick on the TAS question here just to make sure we're all level set for the fourth quarter. Back in February, you guided to $6.3 billion to $6.5 billion. That was quite a while ago. A lot of things changed. But if I use that original range and I take out what you've done year-to-date, that would put the implied fourth quarter revenue guidance about $100 million to $300 million below the Street on TAS. That's a big range and obviously a lower number than where consensus lies today. So I'm just hoping you can give us a little specificity on what you're thinking for TAS in the fourth quarter, so we aren't ahead of our skates here. Ari Bousbib: Yes. I'm not sure, you're talking about our targets and then you talked about the Street. Eric Coldwell: You guided in February to $6.3 billion to $6.5 billion. And the year-to-date number through 3 quarters is $4.8 billion, a little over $4.8 billion. So that leaves less than $1.5 billion to less than $1.7 billion to get to the full year, if I've done the math right. Ari Bousbib: Yes. I was going to talk to the finance team here asking. I don't have the numbers in front of me. But what you were suggesting that TAS would be lower than our guidance, I don't see that. Eric Coldwell: Well, I'm not really suggesting anything. I'm hoping you can tell us... Ari Bousbib: Okay. We can take that on a... Eric Coldwell: Yes. I'm hoping you'll tell us that things have changed since the February numbers, but it is possible that maybe the Street is just a little high on the segment. I mean it looks like you'll cover it with R&DS and CSMS, but I just want to make sure we're... Ari Bousbib: Again, Eric, I think you -- we are delivering on guidance. Is that -- am I... Michael Fedock: Eric, we'll help you with some of the Q4 details. But on a full year basis, there's been no change all year with TAS, that the full year CFX growth rates were between sort of 5% and 6%. So there's no change there. So we can help you with the numbers. Ari Bousbib: We always said 5% to 6% growth year-over-year, correct? Michael Fedock: CFX. Ari Bousbib: CFX, correct. Eric Coldwell: I think you said 5% to 7% constant currency and I think I believe it was 5% to 7% on February 6 was the range? Michael Fedock: We narrowed our guide in the last call there. So we're still sticking with the 5% to 6%. There's no change from the prior guide and no change where TAS is going to land in the full year. Ari Bousbib: Yes. Well, there's no change, Eric. Michael Fedock: Yes, we'll help you with that with the Q4, but there's been no change. Eric Coldwell: Just want to make sure we're not ahead of our skates. I appreciate that very much. Ari Bousbib: And anything else you had on this clarification? Eric Coldwell: I had 42 questions, but you told us to stick to one. Let me... Ari Bousbib: I am going to give you a special discount, because that wasn't really a question. Eric Coldwell: Well, look, I mean... Ari Bousbib: That was like a commentary. You were trying to... Eric Coldwell: I appreciate it. So I'll sneak 2 in. I'll take advantage and give an inch, I'll take a mile. Two things just quickly. One, do get some ongoing questions on those couple of mega trials that you mentioned earlier this year. I'm just curious if you can tell us what the status is. I think one was definitely ramping back up here in the back half, and I believe the other was still pushed out until next year if happening at all. So maybe just an update on the mega trials. And then secondarily, Ari, in your prepared commentary, you highlighted some interesting wins. And you mentioned Phase 1 a couple of times. And my historic interpretation of past conversations was that you weren't really a big Phase 1 shot, maybe you partnered with some others. But I'm curious on what your involvement is these days in actually managing or even having Phase I CPU units. Maybe give us a little more color on what you're doing there. Ari Bousbib: Yes. It's a very good observation, Eric. We are seeing a lot of demand for Phase I work. And we are the network partners, we don't have any significant presence in that segment, but we are expanding, and this is why I chose to highlight a couple of examples. It's also, by the way, part of our see more, win more strategy. And it happens to me that there is more demand. Things are getting sort of restarted again and the pipelines are strong. And so we are seeing more demand, and we are ourselves being more present in the segment. Ronald Bruehlman: Yes. And Phase I in oncology is a little bit different, because you're not dealing with healthy volunteers. So it tends to feed your later business than other Phase I trials. So there is some distinction there. And that's what NEXT Oncology was Phase I oncology. Ari Bousbib: Yes. And then the 2 trials. Ronald Bruehlman: Yes, the 2 trials, no change there. We don't have anything factored into our fourth quarter guidance for revenue burn from either of them. So I suppose that's a slight change from what we said. Ari Bousbib: It's basically all pushed out of the year. And it's not contemplated in the guidance. Yes. Bear in mind that we mentioned this, what is it, like a year ago at this time because it caused us at the time to change our guidance for R&DS. These were fast burning and had already gotten started and they were interrupted. And so that caused us to change our guide for R&DS in the fourth quarter -- for the fourth quarter of last year. And so we had to mention it. We only mentioned specific trials to the extent we can, and we try to be very careful because we are mindful of confidentiality for our clients and so on. So we cannot say very much. But we do mention it when there is a significant event attached to one trial, in this case, it was two, and that caused us to change anything in our numbers. But bear in mind, at any point in time, we're working on a couple of thousand trials. And we keep building backlog, as you saw. And thankfully, we have had very positive momentum on our bookings, and it's continuing. So we feel good about that and it continues to stagger on our book of business. So yes, -- which again enabled us to continue to deliver and do even better on R&DS even without those trials resuming this year. Thank you, Eric. Michael Fedock: Next question, operator. This will be our last question. Operator: Your last question comes from the line of Jeff Garro from Stephens. Jeffrey Garro: I want to ask more about AI and maybe I'll try and make it a 2-parter. First part being if you have any insights how AI is changing your customers' business models and specifically their appetite for outsourcing? And then the second part would be how is IQVIA using AI internally to deliver results for clients that may be a little bit more efficiently and whether you have any visibility into potential gross margin improvements from those internal use cases? Ari Bousbib: Yes. So thank you, Jeff. We've spoken about this in the past. And so far, we have about 90 AI agents in developments that cover 25 use cases, and we continue to progress that. By early '27, we plan to develop 500 highly specialized agents. And what these do is they essentially eliminate a lot of physical labor from the tasks that we perform for our clients. So internally, and to take the second part of your question first, certainly, that will help improve our margins longer term. Now it takes time to deploy, obviously, and it takes time to translate that into margin improvements. We've had great examples on the commercial side. We use, for example, AI tools to compare patient cohorts to each other and highlight differences in natural language output, which leads to improvements in cycle times from several weeks to a couple of weeks. We really have a lot of examples and it takes a long time to recite those. But we see significant value in continuing to do more with less through deploying agents within our internal processes. For our clients, I gave a number of examples in my introductory remarks. Our clients are very interested, of course, in using AI. So early, early on, before we get involved in discovery, there's a lot of focus from our clients in the discovery space to try to use AI to sort out molecules and try to identify "the most likely to succeed" trials to tackle a specific disease. We participate a little bit with some models and some tools that we have. But later on, look, the issue on the clinical side is that it's highly regulated, and you get to go through standard processes that are defined by regulations and you have to use the intermediary spaces between those regulatory interactions to utilize and deploy AI. At the sites, it's very helpful. And our clients are using, of course, AI in all the technology tools that some of which are our tools that they use commercially. They use AI, I gave a few examples, to manage their promotion campaigns, marketing campaigns. They use AI to get patient insights in the real world. Real world, I mean is a big area for us, and one of the reasons we experienced such great growth is we've got very advanced capabilities given our vast information assets in real world patient data. Using AI tools and try to evaluate how the drug behaves in the real world using AI becomes a great, great opportunity. So these are the areas. Now with respect to the margin, as you know, we've had a lot of -- we have some margin headwinds certainly this year because of more pass-throughs largely because of the FX tailwind, all of which comes without profits and a little bit of the mix. For example, in Q3, CSMS was stronger and CSMS is lower margin. So when you have market headwinds like that, certainly, we're counting on our usual cost reduction programs, offshoring and so on. But longer term, certainly AI enablement will help mitigate those headwinds and help us long term improve margins. Thank you. And I think the team will be available for follow-up questions as always. Thank you. Thank you for taking the time today. Operator: Mr. Joseph, I turn the call over to you. Kerri Joseph: Thank you. Thanks for taking the time to join us today, and we look forward to speaking with you again on the 2025 fourth quarter and full year earnings call. The team will be available the rest of the day to take any follow-up questions you might have. Thank you. Operator: This concludes today's conference call. You may now disconnect.
Operator: Good morning, everyone, and welcome to Sysco's First Quarter Fiscal Year 2026 Conference Call. As a reminder, today's call is being recorded. We will begin with opening remarks and introductions. With that, I would now like to turn the call over to Mr. Kevin Kim, Vice President of Investor Relations. Please go ahead, sir. Kevin Kim: Good morning, everyone, and welcome to Sysco's First Quarter Fiscal Year 2026 Earnings Call. On today's call, we have Kevin Hourican, our Chair of the Board and CEO; and Kenny Cheung, our CFO. Before we begin, please note that statements made during this presentation that state the company's or management's intentions, beliefs, expectations or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act and actual results could differ in a material manner. Additional information about factors that could cause results to differ from those in the forward-looking statements is contained in the company's SEC filings. This includes, but is not limited to, risk factors contained in our annual report on Form 10-K for the year ended June 28, 2025, subsequent SEC filings and in the news release issued earlier this morning. A copy of these materials can be found in the Investors section at sysco.com. Non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliation of these non-GAAP measures to the corresponding GAAP measures is included at the end of the presentation slides and can also be found in the Investors section of our website. During the discussion today, unless otherwise stated, all results are compared to the same quarter in the prior year. [Operator Instructions] At this time, I'd like to turn the call over to Kevin Hourican. Kevin Hourican: Good morning, everyone. We appreciate you joining our call today. I'm pleased to report that Sysco delivered a strong financial quarter to start fiscal 2026 with solid performance on the top and bottom line. Most importantly, we have inflected positive in our U.S. Broadline local business, and we are building momentum in our local business across the board. During our call today, we will share insights into the progress that we are making and highlight key growth initiatives that are fueling our performance improvement. After my update on our business progress, Kenny will highlight our financial results, and he will communicate why we are confident that we will deliver our full year financial guidance. In fiscal 2026, we plan to deliver profitable growth across USFS, International and our SYGMA segments, even in a macro backdrop that is less than compelling. So let's get started with our financial results on Slide 4. In Q1, we exceeded our financial plan and delivered our second consecutive beat relative to consensus expectations. For the quarter, our strong performance was driven by volume improvement, coupled with expanded gross margins and solid expense control. Most importantly, in the quarter, our local volumes improved sequentially every month of the period. During the quarter, our rate of local volume improvement was more than 2x the overall industry traffic rate of improvement. The positive inflection versus industry traffic was the strongest in September, once again conveying the progress that we made throughout the quarter. Our Q1 results were driven by sales growth of 3.2% on a reported basis and up 3.8% to last year when excluding the divestiture of Mexico. Gross profit grew 3.9% and adjusted EPS grew 5.5%. Our financial outcomes were anchored by another compelling performance from our International segment, excellent work by our merchandising teams on gross profit expansion, strong productivity improvement from our supply chain and a sales organization that is increasing their stride and growing our local business. Momentum is building at Sysco across the board, and we are confident we will accelerate that momentum throughout 2026. Given the importance of our local street business, I would like to go a bit deeper on our performance as seen on Slide #8. The chart displays our meaningful sequential progress in U.S. local over the past 3 quarters. Our Sysco Broadline local business inflected positive in the quarter, delivering volume growth of 0.4%. The USBL performance was 130 basis points stronger than our Q4 results which significantly outpaced the improvement in restaurant traffic during the quarter. Per Black Box, restaurant traffic in Q1 improved by 60 basis points. As a result, Sysco improved more than 2x the overall industry in the quarter. We are pleased that industry traffic improved, and it is even better to see Sysco improving at a faster clip. As I mentioned earlier, September was the strongest month of the quarter for Sysco and the strongest month of positive variance versus the industry. Importantly, Sysco has continued to make progress in October. Given the strong start to Q2, we anticipate that we will improve our total U.S. local by at least an additional 100 basis points in Q2 versus Q1, continuing our positive momentum. In Q1, our USFS total local business posted a negative 0.2% case volume result in the period. A friendly reminder that our U.S. Foodservice volume reporting includes an ongoing negative impact from an intentional business exit within our FreshPoint business, as previously communicated on our Q4 call. In Q1, the FreshPoint business exit negatively impacted our total local performance by over 50 basis points. When excluding this headwind from this quarter, our USFS total local business grew 0.3%. Turning from local to our International segment. We are extremely pleased with the performance being delivered by our International team. We delivered outsized sales growth of 4.5% on a reported basis and up 7.9% when excluding the divestiture of Mexico. International continues to deliver positive customer mix benefits, growing the local segment much faster than our total book of business. In fact, our International business posted local case volume growth of approximately 5% for the quarter. The customer mix shift to local helped drive adjusted operating income growth of 13.1% and representing the eighth consecutive quarter of double-digit profit growth. The P&L strength was delivered from every single region in our International portfolio. Sysco's International portfolio is delivering strong top and bottom line growth within every major market we operate. Sysco's International business is a strong standout in the overall food-away-from-home industry, and will be a tailwind for Sysco for many years to come. It is equally important to note, as Kenny has said previously, over the past 3 years, we have doubled the profit margin rate of our International business and we will continue to work to increase International profitability while simultaneously taking share and growing the top line. We call this performing for today, while transforming for tomorrow. Sysco's International team is doing a great job of embodying that ethos. Before I segue into a brief update on our growth initiatives, I would like to do a quick shout out to our entire supply chain organization. Year-to-date, in 2026, we have greatly improved our customer service levels, on time and in full. And we have improved our health and safety performance by reducing accidents in our warehouses and on the road. Additionally, our operators have reduced product shrink, and they have increased colleague productivity across the board. In my 6 years at Sysco, this is the strongest quarter our supply chain has delivered from a service and cost perspective. I thank our entire supply chain for the great job they are doing. I have full confidence that the strong results will continue throughout 2026. Doing so will help us win new business and increase the retention of the customers we serve today. I would like to now transition into a brief update on select growth initiatives that highlight the progress that we are making as a company. Let's start with our colleague population. In our first quarter, sales consultant retention improved meaningfully versus 2025 and versus our exit velocity of Q4. We have fully stabilized our sales colleague population, and we expect the overall productivity of our sales force to improve throughout 2026. As outlined in our recent proxy, our colleague engagement scores have strongly improved. Our colleagues are expressing positive sentiment in regards to overall engagement, team inclusion and working in a rewarding and motivating culture with a compelling compensation program. These engagement drivers improved strongly year-over-year. We are bullish about our ability to continue our local progress momentum given the stability of our sales force. Our sales organization is stable, and many talented industry sales professionals are becoming increasingly interested in working at Sysco. During our recent quarter, we introduced AI360, our AI-empowered sales tool, and we are very pleased with the initial impact in colleague receptivity. Approximately 90% of our SCs are actively using the tool on a daily, weekly basis. While it remains early days, our outcomes data suggests that there is a strong correlation between high colleague engagement with the tool and improved volume and selling performance by those same colleagues. The work our sales teams do every day is hard. Each sales consultants serve dozens of customers, and the day of an SC is very dynamic. Throughout an average day, SCs answer questions, provide consultative services to restaurants, solve problems for their customers and they actively sell. AI360 helps balance these activities and improve overall customer service levels while simultaneously increasing time for selling activities. The customer could ask if there are gluten-free options for their menu. They could ask for advice on seasonally relevant proteins for their upcoming menu change, or they could ask for cost savings ideas and suggestions given the overall inflation in the food basket. Our best SCs are seasoned at answering these types of questions while proactively selling. AI360 helps all sales colleagues to manage these conversations productively, reducing administrative barriers and increasing the amount of time that they can spend actively prospecting and selling. Another important initiative is our customer loyalty program, Perks 2.0. Perks targets our local street customers that buy the most, buy the most often, and deserve the absolute best from Sysco. Over the past quarter, we have enrolled all eligible customers into the new Perks program, introduced the benefits to our customers and have greatly increased our colleague visit frequency to these accounts. We have improved supply chain service levels to Perks accounts and our 24/7 help desk is resolving Perks questions in the first time, 98% of the time. In Q1, we experienced an improvement in customer retention with Perks customers versus our broader book of business. Over time, we are very confident that Perks will be a differentiator for these customers. And as such, we will improve customer retention rates and Perks will help us penetrate these customers with additional lines. In Q1, we can see the green shoots of positive impact of these initiatives on our local business. During the quarter, we increased the number of new accounts opened versus prior year and we simultaneously decreased the number of lost accounts versus prior year. That performance enabled an increased spread between new and lost of more than 220 basis points versus the prior year. The new-lost positive spread was an incremental improvement of 40 basis points versus Q4 with September being the strongest period of the quarter. Our improved retention of colleagues is also helping us drive increased penetration of lines with existing customers. From Q4 to Q1, our penetration with existing customers improved by 90 basis points. This can be directly attributed to the increased selling skills of our team and the assistance they are receiving from technology tools. As I wrap up my prepared remarks, I submit we are very pleased with our Q1 results. We are building momentum across sales, merchandising and operations. Our team is increasing their pace month-over-month, quarter-over-quarter. We expect this progress to accelerate even further throughout 2026. While the external market is important, the improvement we are delivering at Sysco is being driven by growth initiatives within our control. Sysco Your Way is 3 years live in the market and continues to drive success. Total Team Selling is now 2 years in market and is continuing to accelerate progress in market share. We expect our new initiatives of AI360, Perks 2.0 and Pricing Agility to build upon the success of Sysco Your Way and Total Team Selling and therefore, fuel continued positive momentum in our local business. With that, I'd now like to turn the call over to Ken. Ken, over to you. Kenny Cheung: Thank you, Kevin, and good morning, everyone. Our performance this quarter was strong, representing a continuation of the improved operational momentum we established last quarter. In Q1, results included sales growth of 3.2% and adjusted EPS growth of 5.5%, reflecting continued momentum across customer segments and geographies. This diverse customer and geographic mix is a competitive advantage for Sysco and a leading factor in why our company has grown annual sales in 54 of the past 57 years. Our strong performance highlights the powerful combination of Sysco's portfolio breadth and the ability to drive operational execution necessary to deliver compounding rates of improvement. Our Q1 beat and the momentum with volume growth and margin management gives us confidence to deliver our FY '26 guidance. Our adjusted EPS growth in Q1 included benefits from our disciplined strategic sourcing efforts leading in the delivery of 3.9% growth in gross profit, translating to 13 basis points of gross margin expansion year-over-year. The increase in both dollar and rates reflects structural improvements that we expect to carry over into upcoming quarters. Additionally, we continue to see returns from our investments in sales headcount and capacity expansion alongside benefits from ongoing efforts to optimize cost and prudent tax planning. This ultimately rendered outsized profit growth with adjusted EPS growth of 5.5%, coming in ahead of our expectations. This beat to consensus included higher sales and adjusted operating income as well as net benefit from below-the-line items, of which the majority was driven by a lower effective tax rate. Results this quarter highlights the power of our organization's collective effort to delivering profitable growth, allowing us to weather volatility in the current macro backdrop. Furthermore, our stabilized retention rates, paired with important Sysco-specific initiatives, generated business momentum that accelerated throughout the quarter and are expected to add to compounding improvements over time. The success generated by our International segment is a great example of the power behind the Sysco playbook. The positive momentum over the past few years continued in Q1 with sales growth of 4.5%, gross profit growth of 6.7%, and adjusted operating income growth of 13.1%. Our strategy is driving results across all geographies, underscoring the significant operational advantages enabled by our size and scale. We also recently expanded our specialty capabilities with the successful acquisition of Fairfax Meadow in early October, one of the U.K.'s leading center-of-plate protein suppliers. This addition follows last year acquisition of Campbell's Prime Meat and favorably positions our team in Great Britain to unlock incremental growth by leveraging center of plate and specialty capabilities through Total Team Selling in the North and South regions. We expect our positive momentum in International to continue this year as we leverage our investments to unlock future growth. Now let's discuss our performance and the financial drivers for the quarter, starting on Slide 12. For the first quarter, our enterprise sales grew 3.2% on an as-reported basis, driven by U.S. Foodservice, International and SYGMA. Excluding the impact of our divested Mexico business, sales grew 3.8%. The Total U.S. Foodservice volumes increased 0.1% and local volume decreased 0.2% in the quarter. U.S. Broadline volumes increased 0.6%. These results were sequential improvements as compared to Q4. For our USFS local business, this represents a sequential volume improvement of 120 basis points, outpacing the industry's 60 basis points traffic improvement for the quarter. It remains early in our fiscal second quarter, but I am encouraged to share that we are seeing continued year-over-year momentum in volume growth rates during the month of October. As Kevin highlighted, the benefits of our stabilized colleague population are fueling this performance alongside our newer sales professional, making meaningful contributions as they leverage training and tools to work up the productivity curve. These factors directly contributed to an acceleration in new account growth for the quarter. In fact, this was the highest rate of new account growth over the past 12 months, helping drive continued improvement in new-lost spread. Again, another reason for our confidence in delivering our FY '26 guidance. These sequential volume improvements also benefit our USFS segment results. Stable gross profit performance also included continued investment in our USFS segment. The year-over-year trends are an improvement versus FY '25 results, and we expect to deliver improving financial results in 2026 and beyond. Before moving along, I want to discuss a minor but important upgrade to our case volume reporting. As shown on Slide 14, we are updating our reported case growth figure to now also include volumes related to our center-of-plate Buckhead, Newport meat and seafood specialty platform. Our reported results for this quarter and the prior year period includes the update. Historically, these volumes were measured in pounds sold and therefore, not able to be reflected in our reported case growth figures. The change is relatively minor. And as you can see on the slide, it accounts for an approximate 0 to 10 basis points impact on average over the last 5 quarters. This change enhances our reporting to be more holistically reflective of our entire portfolio with the inclusion of an important growth engine. Important growth projects like Total Team Selling have the opportunity to shift cases from broadline into specialty channel, and this upgraded volume reporting will provide more external visibility to contributions from this program. The reporting it matches the agility of One Sysco world-class service to our customer across our portfolio. Additionally, SYGMA results this quarter were outsized. This included 4% sales growth and 39% operating income growth. While we expect more moderate results for the remainder of the year, SYGMA growth for FY '26 will be driven by operating efficiencies. Sysco produced $3.9 billion in gross profit, up 3.9%; gross margin expansion of 13 basis points to 18.5% and improved gross profit per case performance. This notable margin improvement reflects effective management of product cost inflation and a mentality of continual improvement with cost savings driven by our strategic sourcing initiatives. Inflation rates in USBL were approximately 2.6%. International inflation on a constant currency basis was slightly higher for the quarter at 4.5%. Overall, adjusted operating expense were $3 billion for the quarter or 14.2% of sales, a 14 basis point increase from the prior year. The increase was driven by planned investments in higher growth areas of the business with fleet, building expansion and sales headcount along with lapping $10 million in incentive compensation from the first quarter of the prior year, which negatively impacted adjusted operating expense growth by approximately 100 basis points and adjusted EPS growth by approximately 150 basis points. Corporate adjusted expenses were up 1% from the prior year, reflecting continued investments, lapping incentive compensation from last year and other costs. This was balanced with accretive productivity cost out and corporate efficiencies, including improved insurance costs. Overall, adjusted operating income grew to $898 million for the quarter, reflecting continued strong growth in our International and SYGMA segments. For the quarter, adjusted EBITDA of $1.1 billion was up 0.1% versus the prior year. Now let's turn to our balance sheet and cash flow. Our investment-grade balance sheet remains robust and reflects a healthy financial profile. Our $3.5 billion in total liquidity remains well above our minimum threshold and offers flexibility and optionality. We ended the quarter at a 2.9x net debt leverage ratio. Turning to our cash flow. We generated approximately $86 million in operating cash flow, up 62% on a year-over-year basis, reflecting working capital optimization. Our free cash flow in the quarter was a negative $15 million, reflecting typical seasonality and the timing of CapEx. Now I would like to share with you our expectation for FY '26 as seen on Slide 19. During FY '26, we remain on target with key guidance metrics. This includes reported net sales growth of approximately 3% to 5% and to approximately $84 billion to $85 billion. These assumptions include inflation of approximately 2%, which we are seeing now, volume growth and contributions from M&A. We continue to expect full year 2026 adjusted EPS of $4.50 to $4.60, representing growth of 1% to 3%, which includes an approximate $100 million headwind from lapping lower incentive compensation in fiscal 2025, an impact of roughly $0.16 per share. Similar to last year, we are providing full visibility to the carryover impact from incentive compensation for the year and by quarter as outlined on Slide 20. In Q1, this carryover impact included a $10 million headwind, which equates to approximately $0.02 per share to adjusted EPS. These headwinds impact year-over-year comparability for expenses in FY '26. That being said, we are pleased that our compensation system is a pay-for-performance program and that our structure is in place to properly motivate behavior and drive positive performance in the business and fiscal year 2026. Excluding the negative impact of the incentive compensation on 2026 our outlook for the adjusted EPS growth will deliver approximately 5% to 7%, with the midpoint in line with our long-term growth algorithm. To help with phasing for Q2, based on the current environment, we expect EPS growth of approximately 4% to 6%, with the midpoint in line with the current consensus EPS of approximately $0.98. This includes positive total and local USFS volume performance. As Kevin highlighted, we currently expect our USFS local volume improvement to improve at least 100 basis points sequentially quarter-over-quarter in Q2 of 2026. As previously disclosed, Q2 reported sales growth rates will also be impacted by the divestiture of our Mexico JV, which we fully lapped in December this year. This financial guidance assumes improvements to be driven by our Sysco-specific initiatives with industry foot traffic and macro environment similar to what we have seen over the past couple of quarters. We are proud of our strong track record of dividend growth and dividend aristocrat status. For FY '26, we remain on target for shareholders return through approximately $1 billion in dividends and approximately $1 billion in share repurchase planned for the year. This is all based on our current expectations and economic conditions and could flex based on M&A activity for the year. Specific to our dividend, our expected payout for FY '26 equates to a 6% year-over-year increase on a per share basis. In terms of leverage, we continue to target a net leverage ratio of 2.5 to 2.75x and maintain our investment-grade balance sheet. Now turning to a few other modeling items. For FY '26, we expect a tax rate of approximately 23.5% to 24% and adjusted depreciation and amortization now to be approximately $850 million, reflecting a now relatively longer useful life for our fleet assets balanced against underlying D&A related to continued capacity expansion domestically this year as well as international markets over the coming years. Interest expense is expected to be approximately $700 million, while other expense is now expected to be approximately $65 million. CapEx is expected to be approximately $700 million, representing less than approximately 1% of sales. This includes growth and maintenance CapEx as we grow into our investments we've made over the past few years while also maintaining an eye towards driving ROIC by optimizing spend levels across the enterprise. Looking ahead, we are confident in our position and remain focused on leveraging our strength as the industry leader to drive customer growth while continuing to create value for our shareholders. With that, I will turn the call back to Kevin for closing remarks. Kevin Hourican: Thank you, Kenny. We are pleased with the strong performance we delivered in Q1 and more importantly, the significant progress we are making as a company across sales, merchandising and operations. We posted a strong exit velocity in the quarter, and that momentum has continued into October. Our leadership team placed tremendous focus on improving our local business, strengthening our gross profit through strategic sourcing, and tightly managing our expenses through strong supply chain productivity improvement. The team stepped up and delivered a beat across all 3 areas. The strong performance from sales, merchandising and operations enabled a compelling adjusted EPS growth year-over-year. I'm proud of the team for their performance and the momentum that we are building. As we look toward the remainder of 2026, we expect to build upon the Q1 momentum and deliver against our targets. Our top line results will further strengthen based upon sequential improvement in our local business throughout 2026. We have a diversified business with #1 market share in the non-commercial sectors of food-away-from-home. Non-commercial continues to grow year-over-year, and this segment is much more resilient in a challenging economic cycle. Our strong International segment performance gives us another form of diversification. Food-away-from-home is a good business. It takes share from the grocery channel every year. And as I've said before, the pie is getting bigger and Sysco intends to take a bigger slice of that expanding pie. We are confident shareholders are positioned to benefit from our industry-leading dividend, compelling ROIC, intentional share buybacks and improving financial results. Our performance in Q1 displays strong progress in the early innings of improving our local business. The momentum will continue throughout 2026. I'm thankful for our leadership team and our entire 75,000 colleague population for the strong efforts to start the year. The collective team's hard work is poised to have a positive impact in 2026. With that, operator, we're now ready for questions. Operator: [Operator Instructions] We'll go first this morning to Alex Slagle of Jefferies. Alexander Slagle: A question on the local sales force productivity. If you could talk more about what you're seeing there? And any metrics behind where we are on the curve. I guess specifically, the percentage of new hires that are now over that 12- or 18-month hurdle when productivity really inflects and I know leveraging new tools is a piece of this, but how this tenure and retention really correlates to the local case growth step-up that you saw in September and October because I know the industry was a little more sluggish during that period. Kevin Hourican: Alex, thanks for the question. This is Kevin. Yes, I'll just start with some of the key stats and facts. Plus 130 basis points of progress in Q1, a rate of improvement, 2x the overall traffic improvement to the market, positive inflection in local, really important to communicate what we shared on our prepared remarks, October stronger than Q1, which Kenny then reiterated in his prepared remarks, we anticipate to make at least an additional 100 basis points of progress in Q2 versus Q1 because we're building momentum. That is the main point of our call today is building momentum. It starts and ends, Alex, with your question, which is stabilized retention. We are exceeding our retention target year-to-date for our sales colleagues, which is enabling us to have less churn of our sales force coverage to our customer population. We're absolutely working hard on improving overall productivity of our sales consultant population, and we're pleased with the progress that we're making in that regard with more progress still to be made year to go, as you just annotated because of the percentage of folks that work for us that are new versus what would be historical. We will continue to make progress in productivity. Key growth initiatives are helping in that regard, but I want to be fundamentally clear, it's the stability of the workforce that is creating the biggest force of positive momentum. With that, growth initiatives like Sysco Your Way and Total Team Selling are continuing to produce. We have Perks 2.0 and AI360 that are helping us build momentum. Most notably, as I said, Q2, an additional minimum of 100 basis points of progress that we will make. Kenny, anything else you'd like to share? Kenny Cheung: Yes. So Alex, this is Kenny. I agree with Kevin. I'll add a few more points here. The bumper sticker is we are extremely confident in our momentum in our local case growth. As I said earlier, 100 basis points sequential improvement quarter-over-quarter in terms of volume. And so the question would be, why are you so confident? There's a few proof points from our side to what you just said, our product -- our SCs are becoming more productive as they climb up the productivity curve. And that's the reason why this quarter, you saw the highest increase of new customer onboarding, which is driving that new-lost spread that Kevin spoke about earlier. Number two is, and as you know, there's a trailing benefit as well. Obviously, when you sign up a new customer, they help with a new/loss, but they also drive penetration. And this quarter, we saw that pick up for us, 90 basis points improvement quarter-over-quarter. So that helped a lot as well. Then last but not least, right, the retention playbook that Kevin mentioned earlier, we're seeing that in our 12 to 18 months kind of our new SCs, but we're also seeing that with our experienced SCs. So you have the entire portfolio of SCs climbing up the curve, which drives overall productivity. Alexander Slagle: And I just had a follow-up [indiscernible] a really strong quarter and the outlook for the second quarter looks pretty strong. So I mean is there additional conservatism in the back half guide on earnings? You're up 5%, 6% or so in the first half. So I just wanted to clarify? Kevin Hourican: Yes. Yes. So I guess the question we had, the question is how confident are you in your guidance? And how should we think about the rest of the year? So from our vantage point, we are really confident in our guide as we're coming off of a quarter beat. This is 2 quarters in a row that we beat. And just to clarify, the $0.03 beat this quarter, $0.01 of it was driven by higher expected sales flowing down to OI and the other $0.02 was driven by prudent tax planning below the line. So that's, again, it's a nice beat all around the P&L. In terms of our confidence in the guide, Alex, we are extremely confident, and there's 3 reasons why. Number one is momentum, right? We continue to see, as Kevin said, September being the strongest month for us, and we're seeing the SCs climb up the productivity curve. In our national business, we're also seeing momentum there as well. We're seeing nice recent wins, really strong retention as well, and we have really solid start ship dates coming up, and we expect national to pick up starting with Q2. And we are taking share, and we are taking share profitably. The second piece why we're confident is most of the growth that we expect this year is really driven by initiatives within our control. We expect the macro environment to be similar to the past couple of quarters. So again, this includes the commercial productivity, the supply chain productivity that Kevin mentioned earlier. So again, we feel very, very good about the robustness of our P&L. and then last but not least, just the whole -- just the fact that we have a strong IG balance sheet and a very diversified portfolio that positions us well in any environment. Operator: We'll go next now to Edward Kelly of Wells Fargo. Edward Kelly: I wanted to follow up on -- really on case volumes, I guess. As we think about total case volumes, the improvement there was more modest than what we saw in local. Can you maybe just speak to what you're seeing on the total case volume side excluding the local, maybe what you're seeing by customer type? And then as we think about things moving forward in the guidance, I'm curious, you highlighted local volumes being better by about 100 basis points or so in Q2. Is that what you saw in September and October? And then Kenny, I thought I heard you say something about national account maybe picking up. I'm curious as to how you think about that total local spread moving forward as well, that should be somewhat similar or if local picks up with -- sorry, total picks up again. Kevin Hourican: Okay. Ed, thank you for the questions. This is Kevin. So I'll start. And yes, I will pick up on some of what Kenny mentioned relative to our national sales business. As it relates to your question about September and October, I'm not going to provide additional by-month commentary for Q1 other than to say the following. Every single month in Q1 was better than the prior month. And June was -- excuse me, July was better than June. So it's each month sequentially better exit velocity continuing into October. October being stronger than September. And as Alex mentioned a moment ago, the overall market is not stronger in October versus September, which again shows that the improvement we're making is because of initiatives within our control. September for the overall market was not stronger than August, but September for Sysco was stronger than August. So it's a point of confidence on the progress that we're making is within our control, being driven by the stability of our workforce, being driven by key initiatives. And as I just said a second ago, October is stronger than September and the confidence in our ability to say that Q2 will be at least 100 basis points better is directly fueled by what we're seeing in our performance outcomes quarter-to-date in Q2. As it relates to national sales, just a little bit more color on what Kenny said. We're confident we will improve our volume in national sales year to go for the following reasons: number one, we have an incredibly high customer retention rate in national sales, greater than 98-plus percent. We have an incredibly strong national sales customer retention; number two, noncommercial within national sales continues to perform really well. So that's food service management, travel and hospitality. Our government business, all falling within noncommercial continues to do well. The business that's under pressure within national, and this shouldn't be a surprise to anyone on this call, our large national chain restaurants. That business is down on a year-over-year basis from a traffic perspective and it's down year-over-year from a volume perspective. We're growing our national in total because of strength that we're producing and delivering within non-commercial. To be clear, as it relates to the P&L, national restaurants will be the least profitable portion of the business. And therefore, as you're somewhat communicating in your question, a tilt to growth in local being higher from a contribution perspective is a net positive in the P&L. As we think about the rest of the year from a national sales perspective, Kenny mentioned this a moment ago, I'm just going to reiterate it. We have strong wins already signed that have start ship dates in the year-to-go period. And when we include the strong retention of existing customers, plus the start ship dates that are coming in the year to go, our volumes will pick up in national for the full year. If you think about the year in aggregate, and I believe it's we have national and local growing similarly for the full year. And over the longer course of time, we would anticipate local growing faster than national, but for fiscal 2026 growing roughly in parity. Last comment for me on national. We are definitively taking share in total in the national segment, which includes non-commercial. If I throw in International as a part of the answer to this question as well, similar pattern happening in our global business. I mentioned in my prepared remarks, our local business in International, up 5% from a volume perspective and that growth is happening in every single geography internationally. We're doing extremely well in local, taking share in local in every international geography. And the national segment within International is similar to what we're seeing in the U.S. where national restaurants in the global setting are slightly down, but we are very pleased with the profit growth that we're delivering in large part because of that growth in local internationally. Kenny, is there anything else you'd like to say? Kenny Cheung: Yes. No, I agree with Kevin. Just one thing to add, Ed, is just to clarify, Sysco, we improved every month from a growth rate standpoint in local throughout the quarter, and we inflected versus the market, the greatest actually in September, and that has continued based on the first few weeks of October. And just to recap the phasing for the year in terms of local, first quarter was USFS was down 0.2%. We expect to step up sequentially by at least 100 basis points in Q2. And given the momentum that we have and the initiatives that are within our control, we'd expect that step up even further in the back half of the year for the full year to be positive. Operator: We'll go next now to John Heinbockel of Guggenheim. John Heinbockel: Kevin, two questions. So if you adjust for FreshPoint, right, it looks like Q2 is probably up, I don't know, 1.3%, 1.4%, 1.5%, somewhere in that ballpark. And I know the ambition is to get to close to 4%, right, where you're growing your sales force. Maybe you talk about the ability to get there if the macro backdrop stays this week. I don't know how close you can get to that, if there's anything else to tweak to make up for that. So that's question one. And then two, penetration up 90 bps. What's happening with drop size? Has that now inflected positively? And I would think if it has -- that's going to have a positive impact on profitability in the U.S. soon, if -- or pretty soon, I would think. Kevin Hourican: John, thank you for the question. Just to go back to we're crystal clear on the at least 100 basis points of improvement, that's versus USFS. So the starting place is negative 0.2%. We will improve USFS total local volume by at least 100 basis points in Q2. That is what we're communicating today. And we're building momentum each month better than the prior month. We do not believe that external environment improving is required to continue to perform and to continue to improve because of the stability of our workforce, the lapping of lost customers a year ago and the increased impact of our initiatives that we launched throughout Q1. So that's the clarity on USFS volume. As it relates to penetration, improvement driving drop size improvement, on a year-over-year basis, we increased penetration with existing customers. So absolutely that had a positive pull-through to drop size. And as I said in my prepared remarks, I've been here for 6 years now. It was the, by far, strongest quarter we had from the supply chain productivity perspective and service outcomes perspective. We measure service outcomes as a measure of on time and in full -- addition cost per piece shipped. We had a very strong quarter in our supply chain, fueled by two things. Kenny and I talk about this all the time. Retention improvement in our supply chain has been notable and significant and that started more than 12 months ago, this time a year ago, I was talking about a stable workforce in our supply chain. We are now seeing the benefit of that stability of retention in our supply chain, our drivers are more productive. Our selectors are more productive, they're working more safely. They're having fewer accidents out on the road. Shrink results are improved year-over-year. And when you put all that together, cost per piece improved versus our plan, and we had a beat in supply chain cost per piece versus our own plan for the quarter. And job size is a part of that, John. It is a part of it. The more notable part is the improvement in retention and the improvement in productivity from our supply chain workforce. Kenny, anything to add? Kenny Cheung: Yes. Just one thing to clarify, you mentioned the 4% growth or volume on local. That is in perpetuity, right? Assuming if you grow your sales force by 4%, in perpetuity, your volume increased by 4% as well. For this year, we're not expecting that level given the fact that we have a new cohort coming in, it takes 12 to 18 months for them to get to speed. So that is not -- it's a lower number than 4%, but it is positive for the year. Operator: We'll go next now to Jake Bartlett with Truist Securities. Jake Bartlett: Great. Mine was on the composition of the sales growth guidance that you reiterated. And specifically on the food cost inflation, I think you said that you expect -- continue to expect 2%. It was much more, I think, 3.4% in the first quarter. So one is, I want to make sure we're talking about the same thing, initially. Last quarter, you had said that you were at that 2% as of the time of the quarter, but you reported the 3.4%. So trying to just make sure I understand what the trends are in the product cost inflation and making sure I understand kind of your guidance of 2% relative to the 3.4% currently. Kevin Hourican: Yes, Jake, we understand and appreciate the question. We've guided the full year at approximately 2% from an inflation perspective. You're right to point out that the total inflation rate in Q1 was a bit higher than that, mostly from international, which Kenny can provide some additional color in a second. In the spot moment, in the month that we're in, the rate of inflation in the domestic U.S. business has come down from the number that you reported back to that approximately 2% rate, because we're starting to see some deflation in select categories. So poultry on a year-over-year basis is deflationary, dairy on a year-over-year basis because we're lapping avian flu from a year ago is now deflationary, and produce has been deflationary for going on 12 months now. The beef market continues to be inflationary at the high single-digit rates, but also slightly down from where it was, which was higher previously. So Kenny says this all the time. We have 13 attribute groups. The inflation number that we quote is the aggregate of all of them. Our full year peg is approximately 2%. It came in a little bit hotter than that in Q1. We're seeing it reduce to that targeted 2% rate in the quarter that we are currently in. And we're confident we can grow our business profitably and deliver our operating income and EPS growth. In spite of whatever the inflation or deflation is over time, we've proven that over the past 6 years in an inflation cycle, we can expand GP and even in a deflation cycle we can expand GP. Kenny, is there anything you'd like to add? Kenny Cheung: Yes. Yes. Jake, we're currently operating what I would call a normalized inflationary environment. In Q1, USBL inflation was roughly 2.6%. And to Kevin's point, International was roughly 4.5%. That's really driven by two markets, Canada, which is tariff related as well as GB, which is 7% wage inflation mandated by the government. The real takeaway is that even with this environment, we're seeing total GP up 4% and expansion of GP margins by 13 basis points for our company. As Kevin said, we have a diverse set of product categories. We don't over-index on one or two of them. And long story short, we are operating in this environment that sits around 3%, and that bodes well for the overall industry. And the last one that Kevin mentioned is the center-of-the-plate, we do expect center-of-the-plate to moderate towards the back half of the year as well. Operator: We'll go next now to Jeffrey Bernstein with Barclays. Jeffrey Bernstein: Great. Just curious on the broader restaurant industry. You mentioned easing trends to close the quarter. I think you said, and we've seen industry data that showed September was weaker than August. I think you mentioned that October was weaker than September, yet Sysco going in the opposite direction, which is encouraging. Just wondering if there's any particular drivers of the industry weakness that you've seen, whether by segment or geography or income levels or ethnicity, it seemed like we're moving in the right direction until a couple of months ago. So just wondering the drivers that you've seen that have led to that slowdown? And then I had one follow-up question. Kevin Hourican: Okay. Thank you, Jeff. I'll start. And this data is publicly available. So I'll just reference the Black Box data. Q1 was better than Q4, positive 60 basis points of traffic. So in aggregate, Q1 was better than Q4. It is appropriate to point out that September was softer than Q1 in its entirety, and that has continued into October. It's QSR and larger national chains that are underperforming relative to the overall book of business, independents, this is a good thing for foodservice distributor, independents are performing better. Whether or not that is a secular trend and if that's something that's going to be long -- continued into the future, it remains to be seen. But at the present moment, independents performing better, restaurants independents performing better than large national chains and particularly better than QSR. And you understand our profitability, you understand that, that trend is actually a positive for Sysco. The more important point, though, is our performance relative to the market. While the overall traffic to market was softer in September versus the quarter, we experienced the complete opposite, September being our strongest period of the quarter, which Kenny then referenced as the spread, the positive inflection, the delta between us and the overall market widened and it widened even further in October, and we anticipate that will continue as the year progresses because of the initiatives that we launched, we have an opportunity to take share. Reminder, despite our being the biggest in this space, we have 17% market share. We have a meaningful opportunity to profitably grow our business regardless of the overall macro conditions. You said you had a follow-up, so I'll toss to you for that. Jeffrey Bernstein: Yes. Just on Slide 8, it seems like you guys made a -- draw a line in the sand saying at least 100 basis points of sequential improvement from the down 20 bps in the first quarter. Just wondering whether there's any -- I mean, it sounds like you're encouraged by October. But the industry is clearly volatile. I know some would say it looks aggressive especially when it's not fully in your control. I know you said there's a lot of self-help driven, but your confidence in the 100-plus basis points of the industry were to continue to slow as we've seen in September to October. Again, it seems like a big promise to make with still 2-plus months to go and the industry slowing. Kevin Hourican: We're confident in our ability to deliver the at least plus 100. We're 1/3 of the way through the quarter, October stronger than September despite what the market overall is doing. We have line of sight towards the ability to make progress in the year to go for a host of reasons, the stability of our workforce initiatives, AI360 is not even 45 days old, and our colleagues are increasing their usage of it. They're asking it questions, getting real-time answers. Do you have cauliflower pizza crust in-stock in Cleveland today? It gives them the exact item number, the quantity on hand. They can sell it right then and there. If they want selling tips on how to introduce that product to the customer, they can get the answer to that too. Teach me how to sell this item, on and on and on. And the AI tool gets smarter in each and every at-bat, we have thousands of colleagues using it on a daily basis. So the tool's utility is increasing every day. Just as an example, Perks 2.0, not live for more than 45 days. Our customers are beginning to see the differentiation in the service that they're providing. I want to be really clear about one thing, Perks 2.0 doesn't cost Sysco, any more money. This is about prioritization of these customers over the average book of business that we have. Why? Because they're the most profitable and important customers that we have. So their delivery window is going to be their preferred window. Our on-time rate to that window will be higher. Their fill rate on the products they order will be higher. If they have a damage case on their delivery, we're going to give them credit immediately versus having them have to wait a couple of days. These are thorns in the site in the customer experience. So these initiatives are picking up progress. they're picking up their impact over time. And therefore, we are confident in our ability to deliver on the at least plus 100 in Q2. Kenny, anything you'd like to add? Kenny Cheung: Yes. So agree with Kevin. We're confident Jeff, for two reasons. One is, as you said, right, the majority of our initiatives that yields the 100 basis points improvement is within our control. This is the SC retention. And the other piece is, we're also encouraged by the fact that we continue to see select geographies already hitting our growth expectations, driven by SC additions, improved retention, and that's carrying into Q2 as well. So we have proof points of actual data that certain markets are already hitting that stride. The last thing I would add is that around traffic. Foot traffic, it is a proxy, if you will, of our business, it's important. And we also have a big part of our business that are not tied to restaurants, right? 2/3 of our national portfolio are actually what we called recession-resilient, non-commercial categories, FSM, foodservice management, education, health care and the like. And even within restaurants, if you can think about it, Jeff, right? We have QSR, the casual dining, the fine dining. So we're pretty well diversified from a restaurant, non-restaurant standpoint. And we also have International, which serves as a strategic counterbalance, enhancing the resiliency and stability of our total overall business. Operator: We'll go next now to Sara Senatore at Bank of America. Sara Senatore: I just wanted to -- I guess two questions. The first is I wanted to take maybe the guidance question from a different perspective. Obviously, the top line is very encouraging. But I think, as you said, guidance for 2Q is sort of in line, and you didn't raise the full year. So maybe you could just talk a little bit about the extent to which some of the investments that you're making maybe start to moderate. And so you see a little bit more of that flow through. I don't know if it's later this year or if it's next year? And then I just have a quick follow-up. Kenny Cheung: Yes. Yes. Thanks, Sara, for the question. So your question is more around the investments and what we're seeing around the flow-through around it. So here at Sysco, we are playing the long game, right? We're investing in our business, and we're also seeing incremental return to your point, from the investments we made in previous quarter and periods. So for example, the two biggest investments we made as a company, number one, is the sales force. We've hired 750 people plus in the past couple of years. As we mentioned earlier, we're seeing all of them climb the productivity curve right now and trying new account growth penetration. And that's the reason why you're seeing an outsized growth versus the market in Q1. And we expect that to continue in Q2 and the outer quarters. So nice return on investments and the pacing is there. And we're doing it the right way as well. We're taking share profitably. That's really important, taking share profitably. And that's the reason why you're seeing both dollar expansion on the margin as well as the rate expansion on the margin. In terms of the other big investment that we have in our portfolio, it's the 10 new facilities that we're building around the world, 7 are in the U.S., 3 are in international. And I can tell you firsthand, we have a strong pipeline, robust pipeline that can fill the capacity in the spot, and as time progresses and it kind of goes hand in glove, as SC become more productive, you're still filling the pipeline with accretive cases through our DC. So overall, we feel very confident that, for example, in USFS, as time progresses, we will continue to make strides on operating income, gross profit and volume and achieve leverage in the outer periods. Sara Senatore: Great. And then just on the market share point, I know you talked about having relatively low market share, 17%. I know it's even lower in specialty. As we think about those share gains, should I just think sort of a reversal of what we saw last year, where Sysco obviously ceded some ground just as you have some transition in the SC group. But -- or do you have like a kind of a target market share in mind as you think about whether it's again, broadlines where I think you're closer to the 30% and versus specialty where it's kind of 9% or high single digits. So anything -- any kind of color on how you think about that market share. Kevin Hourican: Yes, Sara, it's Kevin. Great question. To be clear, again, been here 6 years, we've taken market share. We've grown market share each and every year for the past 6 years in total. In the past fiscal 2024 -- excuse me, fiscal 2025, we over-indexed in national, clearly taking share in national, and we underperformed our own expectations in local. This year, we intend to take share in both national and local in total, as evidenced by the positive inflection and we're growing faster than traffic at the present period in our local business. And national, I already addressed earlier with my prepared remarks, so I won't repeat that. As it relates to where will outsized share gains come from, that was the second part of your question, you actually just quoted all the stats. It's going to come from the specialty. We have a very strong, significant and robust broad line business. We have an opportunity to meaningfully grow our specialty produce, our specialty meat, our equipment and supplies, our Asian Foods and our Italian foods businesses. And sometimes, that gets delivered on a broadline truck. So the cases may show up in broadline, sometimes that gets delivered on a specialty truck. The growth is about the following key things: having product available, Kenny talks all the time about these are unique items. These are bespoke items. These are custom cut items. These are the direct request of an end customer items. That's why they're called special. So it's about the product first we definitively have that product available when most broadliners don't. Number two, it's about having a sales colleague, who is an absolute expert in that category, be it produce or protein or any of the other businesses. We have dedicated specialists who know these categories. Part of that incremental headcount investment that Kenny talked about is in that specialty business. The last within specialty is the service model. There are some restaurant customers for those specialty categories want very late in the evening cutoff, and they want to deliver 6, 7 days a week because it's fresh product. They pay for that. We build that into the pricing of those products, which, therefore, have a higher gross margin. And we can check all of those boxes. And we can check those boxes in geographies where broadliners cannot, and we can check those boxes where most smaller specialty entities cannot. And to be crystal clear, that's who we're competing against in specialty. We're not competing against big names. We're competing against thousands of very small companies who have 1 van, 2 vans in a specific geography. To be clear, we buy more local produce, local produce than any other company in the geographies we compete with and we're able to provide that product to our customers in a cost-effective manner. So we're going to meaningfully grow our specialty business. It's approximately a $10 billion business today. We said at our Investor Day, we see $10 billion of growth coming from specialty over the next period of time. Sara, we haven't said what percent of market share that will drive in the next year. We'll save that for a future Investor Day. But we appreciate your question. Operator: And ladies and gentlemen, we do have time for one more question this morning. We'll take that now from John Ivankoe of JPMorgan. John Ivankoe: The question is on independent restaurants and specifically the difference in performance between existing account penetration and new account generation. Certainly, some of the data that we see is that the industry is actually growing at a surprisingly high number of new units and many of those units are actually driven by independents. So firstly, tell us if you see the same? And secondly, it does sound like a number of the tools that you have such as such as AI360 and Perks, sound to be to drive market share at existing business, can you talk about some of the tools that the sales force now have to specifically generate new account penetration? Kevin Hourican: Excellent, John. Thank you for the question. Appreciate it. What we're pleased about in Q1is we saw improvement from the new-lost spread, and we also saw improvement from penetration. We saw a 220 basis point improvement year-over-year in new-lost spread and a 40 basis point improvement in that same metric Q4 into Q1. And the even more important point is that what happened with penetration, we increased our penetration with existing customers by 90 basis points from Q4 into Q1. And I do attribute that to two things, AI360 is increasing our sales colleagues' ability to know what to be selling on that given visit on that given day, to solve problems in a timely manner and to provide suggestions on what could be sold. So it is absolutely a penetration, full direct focused selling effort. Perks is the exact same thing, we are not interested per se in growing the number of Perks customers. We're interested in retaining those customers at a high rate and penetrating even further with those customers because as the other John always says, that's the most profitable case on the truck. So these tools are meaningfully focused on increasing penetration. To the other part of your question, which is, okay, well, what about new? The largest opportunity for improvement there is the incremental headcount investment that we've made. Kenny talked about it, 750-plus people over the past couple of years. Those folks need to build their book of business. We provide them a starter book of business. They need to go fill in that business over time. And the accounts that we seed them with come from existing sales reps. Another thing Kenny talks about is now that existing sales rep can grow their book of business by backfilling that customer that they have transitioned to a net new hire. Equally important, John, by having significantly improved colleague retention year-over-year, we're going to have less account churn at Sysco. So think about last year, if a colleague departed, their book of business was multiple dozens of customers that needed to be reassigned to existing sales reps. That decreased our existing sales rep's ability to go out and prospect. We're now very stable in our turnover. In fact, more new people are interested in working at Sysco than in my 6 years here, that stability improvement increases the ability to be out prospecting. Last but not least, AI360 also includes a tool to help with prospecting. It's essentially a maps app that provides our colleagues with visibility to accounts they should and can be targeting within their selling geography, giving them suggestions on what to sell. For the colleagues that are using that maps app, they are speaking to us specifically saying it's helped them close more customers and helping them do their prospecting work more effectively. Kenny, anything to add to that? Kenny Cheung: Yes. We're really pleased with the progress we've made on AI360 and Perks, right? For example, AI360, we have a correlation usage and the results as well. So that's -- it's a bit early innings right now, but we're definitely seeing a correlation between usage and results. And the other thing I would say is the results is not just driving conversion on sales. It's also reducing -- shortening the lead time, if you will, to be full productive, right? So think of it as a tool that, yes, it can help you identify prospects and drive sales conversion, but it's also a tool that helps the SC learn along the way, a pocket teacher, if you will. So that's a lot of accretion for our P&L as well. So from our standpoint, I think it's going really well and here's an important part. We don't need AI360 or Perks to hit our numbers this year. That's accretion upside to what we currently have. Operator: Thank you, gentlemen. Again, ladies and gentlemen, this will bring us to the conclusion of today's conference call. We'd like to thank you all so much for joining Sysco's First Quarter Fiscal Year 2026 call. Again, thanks so much for joining us and we wish you all a great day. Goodbye, everyone.
Operator: Hello, everyone, and welcome to HNI Corporation Third Quarter Results Conference Call. Please note that this call is being recorded. [Operator Instructions] I'd now like to hand the floor over to Mr. Matt McCall. Please go ahead, sir. Matthew McCall: Good morning. My name is Matt McCall. I'm Vice President, Investor Relations and Corporate Development for HNI Corporation. Thank you for joining us to discuss our third quarter 2025 results. With me today are Jeff Lorenger, Chairman, President and CEO; and VP Berger, Executive Vice President and CFO. Copies of our financial news release and non-GAAP reconciliations are posted on our website. Statements made during this call that are not strictly historical facts are forward-looking statements, which are subject to known and unknown risks. Actual results could differ materially. The financial news release posted on our website includes additional factors that could affect actual results. The corporation assumes no obligation to update any forward-looking statements made during the call. I'm now pleased to turn the call over to Jeff Lorenger. Jeff? Jeffrey Lorenger: Thanks, Matt. Good morning, and thank you for joining us. I'm going to divide my commentary today into 3 sections. First, I will provide some comments about our third quarter results. Non-GAAP earnings per share increased 7% year-over-year, driven by a record third quarter non-GAAP operating margin. Next, I will discuss our expectations for the fourth quarter of 2025. Our full year earnings outlook is unchanged from what we provided on last quarter's call. We continue to anticipate a fourth consecutive year of double-digit non-GAAP earnings improvement. And finally, I will provide additional detail about recent demand activity and how we see our markets playing out in the fourth quarter and as we move into 2026. Following those highlights, VP will provide additional color around our fourth quarter outlook. He will also comment on the strength of our balance sheet, both currently and what we anticipate after the completion of the pending acquisition of Steelcase. I will conclude with some closing comments, including some additional thoughts on our Steelcase transaction before we open the call to your questions. I'll begin with the third quarter. Our members delivered another strong quarter despite ongoing tariff-driven volatility and continuing macro uncertainty. The positive momentum of our strategies, the benefits of our diversified revenue streams, our focus on items within our control and the merits of our customer-first business model continue to deliver strong shareholder value. For the quarter, we delivered non-GAAP diluted earnings per share of $1.10. EPS grew 7% versus last year, which was modestly ahead of our internal expectations. Total net sales in the third quarter increased 3% organically over the same period a year ago and profit margins in the third quarter were strong. Our non-GAAP operating margin expanded 10 basis points year-over-year to 10.8%. This non-GAAP EBIT margin was the highest on record for the third quarter. In the Workplace Furnishings segment, organic net sales increased 3% year-over-year, fueled by growth across all major brands. We delivered similar organic growth rates in our brands focused on small- and medium-sized businesses and on contract customers. From a profitability perspective, Workplace Furnishings' non-GAAP segment operating profit margin expanded 40 basis points year-over-year and exceeded 12%. Third quarter profitability benefited from our profit transformation efforts, recognition of KII synergies and modest volume growth. In Residential Building Products, third quarter revenue was roughly unchanged versus the prior year period. New construction revenue was down slightly, while remodel retrofit sales grew modestly, both on a year-over-year basis. We delivered this top line performance despite continued challenging housing market dynamics as we continue to compete well and our internal growth investments are bearing fruit. Consistent with expectations discussed on last quarter's call, third quarter segment operating profit margin contracted year-over-year driven by continued investment. However, segment operating margin still came in at a strong 18%. Despite expectations of ongoing uncertainty, we remain encouraged about the opportunities tied to the broader housing market, and we continue to invest to grow our operating model and revenue streams, and the consistently strong profit margins in this segment are evidence of the business' unmatched price point breadth and channel reach, along with the benefits of its vertically integrated business model and overall operational agility. To summarize, our third quarter performance demonstrates the strength of our strategies and our ability to manage through varying macroeconomic conditions while remaining focused on investing for the future. We expect strong results to continue, driven by our margin expansion efforts and continued volume growth. That leads to my comments about our outlook for the fourth quarter. Overall, we expect our margin expansion efforts and continued revenue growth will support ongoing year-over-year EPS improvement, all while we continue to invest to drive future growth. In Workplace Furnishings, segment orders increased 2% after excluding the estimated impact of prior quarter pull-forward activity and hospitality orders. We are again excluding hospitality from our adjusted order growth and backlog metrics as the business has experienced meaningful tariff-related volatility over the past 2 quarters, which has temporarily skewed results. Adjusted orders from contract customers performed better than those from small- to medium-sized businesses. Our adjusted segment backlog at the end of third quarter was up 7% from the third quarter of 2024. I will discuss our outlook for our workplace markets, including hospitality more in a moment. Moving to Residential Building Products, orders in the third quarter increased 2% year-over-year. Remodel retrofit orders outperformed and were up mid-single digits from third quarter 2024 levels, while new construction orders were down low single digits. Overall, year-over-year segment order growth accelerated towards the end of the quarter. Builder sentiment has weakened in recent months and continues to reflect the impacts of elevated interest rates, ongoing affordability issues and weaker consumer confidence. And housing trends have broadly followed builder sentiment with permits moving lower. Despite expectations of ongoing uncertainty and headwinds, we remain encouraged about the opportunities tied to the broader housing market, and we continue to invest to grow our operating model and revenue streams. I will finish by making a few comments about our markets and provide additional detail around our elevated EPS growth visibility. On our last few calls, we highlighted an increased focus on investing to drive growth in both segments. Our 2025 to-date revenue strength and encouraging leading indicators have provided added support for our growth initiatives and investments. As we look at our Workplace Furnishings segment, we are encouraged about the developing fundamentals of this business. The macro and industry backdrops have shown consistent improvement in recent months. Return to office data appears to be indicating an inflection. The castle card swipe data following Labor Day reached post-COVID highs with Class A buildings in the top 10 markets approaching 98% peak day occupancy. Further, in a recent KPMG survey, nearly 80% of CEOs surveyed now expect employees to be full time in office over the next 3 years. This is up from fewer than 40% in the April 2025 survey. And according to CBRE, nonviable space is being converted at record levels. This positively impacts our business in 2 ways. First, it results in more forced moves as landlords encourage current tenants of this nonviable space to relocate. And second, it will accelerate the expected Class A square footage shortage, which will either drive the addition of new space or increased investment in upgrading existing Class B space. Each of these dynamics result in more furniture events. Finally, calendar year 2025 is expected to see the highest net absorption of office space since 2019. Historically, absorption has been an important indicator of office furniture demand. JLL estimates more than 6 million square feet was absorbed on a net basis in the third quarter of 2025 alone. This compares to total negative net absorption of more than 100 million -- 150 million square feet over the past 5 years. Office vacancy rates are falling for the first time in 7 years as we enter what JLL has deemed a new office growth cycle. In New York City alone, businesses leased 23 million square feet of additional office space during the first 9 months of 2025. This is the largest amount of new workspace rented for that period in 2 decades. And in total, 18 of the largest U.S. markets are exceeding pre-pandemic leasing activity over the past year. The macro and industry backdrops are clearly improving, and we expect our contract business to disproportionately benefit from these trends as much of the industry growth cycle to date has been in secondary and tertiary markets. Finally, I will comment on our hospitality business. As I mentioned earlier, compared to our other businesses, this vertical has seen more tariff-related demand volatility over the past 2 quarters. Despite this pressure, we expect revenue in this business to be relatively flat in 2025 overall. We have seen recent improvement in preorder activity, and our pipeline continues to build, pointing to a solid growth year in 2026. Looking ahead, we believe we are particularly well positioned to benefit as the workplace furnishings market continues to improve. We have strong market positions and offer compelling value to our targeted customers with a diversified portfolio of brands. Moving to Residential Building Products. We believe in the positive long-term market fundamentals. We continue to perform well despite an ongoing soft new construction environment, and we acknowledge a market-driven revenue recovery will take some time. We are, however, optimistic about our opportunities to increase revenue through our growth initiatives. Specifically, we continue to invest in developing market-leading new products that offer customers more options and features. We are driving new programs to increase homeowner and homebuyer awareness of their fireplace options, ensuring our products are considered in all remodel and new construction projects. And we are strengthening our already strong relationships with builders across the country, helping them deliver the best overall value to the homeowner. Encouragingly, we are outperforming the market in this segment despite still being in the early days of each of these initiatives. And while we invest in growth, we will continue to deliver high-margin results and strong profits in this business. Longer term, single-family housing remains undersupplied and demographics will support additional demand growth. The results of our ongoing investments, which will enhance our connection to customers and build on our leading brands will fortify our position of strength in the industry. Finally, and importantly, we continue to have elevated earnings visibility this year and next. Our outlook for 2025 revenue continues to include full year growth in both segments. Our outlook for 2025 earnings reflects expectations for mid-teens percent EPS growth. In addition to increased profits and volume growth, KII synergies and the ramp of our Mexico facility are expected to continue to drive significant savings. These 2 initiatives are expected to contribute a total of $0.75 to $0.80 of EPS in 2025-2026 period. I will now turn the call over to VP to discuss our outlook for the remainder of 2025 and our balance sheet. VP? Vincent Berger: Thanks, Jeff. I'll start by discussing our outlook for revenue and profit. Beginning with the top line. Fourth quarter revenue in Workplace Furnishings is expected to increase at a high single-digit rate year-over-year organically. The impact of divestitures is expected to reduce the year-over-year organic revenue growth rate in Workplace Furnishings by a little less than 100 basis points. The benefits of our order and backlog growth, along with an extra week in our fiscal year are expected to drive solid revenue growth in the fourth quarter. For Residential Building Products, fourth quarter net sales are also projected to increase at a high single-digit rate compared to the same period in 2024. Pricing actions are expected to be the primary driver of growth. However, we also [Audio Gap] borrowing capacity will continue to provide us with significant financial flexibility. Moreover, while we expect our initial post-closing net leverage to approximate 2.1x, we continue to project our debt levels will return to our targeted range of 1 to 1.5x within 18 to 24 months of closing. In the meantime, we remain committed of payment of our long-standing dividend and continuing to invest in our business to drive future growth. I'll now turn the call back over to Jeff. Jeffrey Lorenger: Thanks, VP. During the third quarter, we remained financially disciplined, managing the middle of the income statement to drive profit improvement while pursuing revenue growth. As we look forward, several positive secular trends and our HNI-specific initiatives will help offset macro-related risks and continued tariff-driven volatility. We will remain focused, conservative and ready to adjust as required. And as a result, our earnings outlook for the full year is essentially unchanged, and we continue to expect the fourth consecutive year of double-digit non-GAAP EPS growth. This outlook demonstrates the benefits of a stronger-than-expected third quarter, our ongoing visibility story and our proven ability to manage through changing economic conditions. Before we take your questions, I wanted to provide some thoughts on the pending Steelcase acquisition. As we approach the closing, we are excited about the future of bringing together our combined capabilities to create new career growth opportunities for our team members, deliver more value for our customers and dealer networks and further support and invest in the communities in which we operate. The deal is right from a strategic, financial and cyclical perspective, and our 2 companies are highly complementary on many fronts. We currently expect synergies to reach $120 million and ultimate accretion to total $1.20 per share when fully mature, excluding purchase accounting. And as VP highlighted, our anticipated strong free cash flow will help us quickly deleverage our balance sheet. The addition of Steelcase will further strengthen the tenets of the HNI investment thesis, and we are positioned for continued success. We have elevated earnings growth visibility for several years, broad and diverse product and market coverage in Workplace Furnishings, market-leading positions in Residential Building Products, and we continue to invest to drive growth. All this is supported by our strong balance sheet and the ability to generate continued free cash flow. I want to thank each HNI member for their continued dedication and congratulate them on another excellent quarter. We will now open the call to your questions. Operator: [Operator Instructions] Your first question comes from the line of Greg Burns of Sidoti & Co. Gregory Burns: That $1.20 of accretion from Steelcase that you just mentioned, is that considering just the synergies that you've already outlined? Or is that... Vincent Berger: Yes, Greg, that's the $120 million that we talked about on the investor call back in August. So that number has not changed. And just the way the share count works, that now converts to about $1.20 in accretion. Gregory Burns: Okay. So that's just your initial outlook, maybe there's potential upside to that if you get your hands around the business and drive additional savings. Vincent Berger: Greg, I think for that -- I think just one comment there. That's a number that we're really confident in. And we're going to use our disciplined integration process. And once we get in there and if there's more, we'll look for more. But that's what we're on record for right now. Gregory Burns: Okay. Great. And then where are you in terms of the $0.75 to $0.80 from KII and Mexico? How much have you gotten so far and what remains? Vincent Berger: Yes. We had said that $45 million to $50 million would be recognized between '25 and '26. We had mentioned kind of splitting it half and half. We're seeing a little bit more come forward of '26 in the last quarter here of '25. So I would tell you, maybe a little bit more in '25 and '26. But I think more importantly, to Jeff's point on visibility, we do see the $45 million to $50 million coming through. Gregory Burns: Okay. And you gave us a lot of data points around kind of some of the positive industry level fundamentals in the office space. We've seen kind of this slow and steady demand improvement happening over the last couple of years, kind of low single-digit growth. But when we think about the -- where the industry is at relative to maybe pre-pandemic levels, I know you've passed along a lot of pricing. Where are we in terms of volume, like relative to maybe where we were pre-pandemic? Like where are we in terms of industry-wide volumes? I'm just trying to get a sense of where we're at in the cycle and maybe what the potential uplift from here could be if we do get a more positive demand environment going forward? Jeffrey Lorenger: Yes, Greg. I think we're probably -- with all the pricing, it's a little tough to say. But I think confidently, we probably are 30% to 35% on the volume side, still down just given pricing actions and tariffs. But -- so that's kind of -- I think as you think about that, that's how we think about the post-COVID kind of cycle and some of these other macro backdrop items starting to turn around. So that's how I think about, that's how we think about, and that's why we're bullish about the space. Vincent Berger: Yes. Even if it returns half that, Greg, you're looking at mid-single-digit volume growth for a significant number of years. So the backdrop is set up, even if it doesn't get back to the 30% more, there's still a lot of volume growth opportunity. Operator: Your next question comes from the line of Reuben Garner of Benchmark. Reuben Garner: Can we -- can you kind of give us a compare and contrast about your full year guidance? I guess, what's embedded in the fourth quarter now versus maybe how it looked a few months ago? It looks like maybe the top line is a little higher, but there's some more cost in there as well. Can you just kind of give us the breakout of that? Vincent Berger: Yes, I can walk you through that, Reuben. Starting with revenue, I think it's probably -- if I look at Workplace and Residential revenue, it's mostly actually in line with prior expectations. Both are expected to be in the fourth quarter, up high single digits with the extra week. So I think where we're seeing a little bit of the pressure is the product mix. When we look at what's come through in backlog and the pipeline, there's more project-driven business and systems. So that's really a timing issue. It draws a little bit lower margin, but on the backside of that comes other business that goes with that with ancillary products that will come probably in Q1. So a little timing there. I think the second part of our Q3 beat is going to be timing of investments. Some of it slid in the fourth quarter or into the fourth quarter, and it's part of that actually saved in the third quarter. So those are going to come back. I think the key there is our second half is still unchanged. So I think you got a little bit going between the 2 quarters. And I think a couple of other things to mention. Jeff mentioned, I mentioned insurance-related pressure year-over-year. That's hitting us on the SG&A side. And I think we probably need to update our tax rates. Our second half tax rate is now at 24.4%. That's about 80 bps higher than we talked about prior in the year that gets us to a full year tax rate of 23%. So when you boil that all together, the back half is really not changing. It's got a little bit of timing and dealing with some onetime expenses. Reuben Garner: Okay. That's really helpful. And then on the residential building products side, you guys have definitely outperformed kind of what the end markets have been like so far this year. And I know you've got some investments ongoing there to drive growth. How much runway do you have on that front? I guess maybe to ask it differently, if we're looking at kind of a flattish environment next year, like can you -- do you think you can still grow above and beyond the market on the volume side? Jeffrey Lorenger: Yes, Reuben, it's a good question. I think we can. It's all relative to the macro environment, right? I mean -- but we -- I think given the investments we're making, like right now, the new construction business -- I'll give you an example, we're outperforming, for instance, in October, our orders were flat and permits 90 days prior to that were down high single digits, and that's kind of the lag time we've been seeing. So that tells you we believe we can outperform this market. The question is where is the market ultimately going? And your guess is as maybe good as ours, but we definitely we can outperform. We got retail performing well. Our gas inserts are up year-over-year. We've got stoves now going into the big box channel, and that's early innings. Our wholesale business is actually up year-over-year because the operating model is strong in that part of the world to support smaller independent dealers. And just overall investments in our superior service model, our vertical integration and builder intimacy efforts are starting to take shape. So these are in the early innings, but they are bearing some fruit. So we do believe we'll be able to stay ahead of the demand curve, if you will. The question is, where is that macro demand curve and what gap can we put on top of that. Reuben Garner: Okay. And I'm going to sneak one more in on the contract business. It seems like some good momentum on that side and the timing of you guys adding Steelcase seems nice. Can you talk about any risks out of the gate as you're integrating the company? And if we did see an acceleration in demand, just kind of what gives you confidence that you'd be able to kind of, I guess, participate in that upswing as you're putting the 2 companies together? Jeffrey Lorenger: Yes. That's a great point, Reuben. Let me start with, first of all, we're going to -- there's really no change on the front. Our dealer partnerships are going to remain intact as they are. The brand distribution is going to remain intact. Sales force is intact, both for HNI and Steelcase companies. So I think our approach there will avail us the ability to take advantage of some of those trends because everybody's heads down in that regard. And the cultures are good. We're out of the blocks. And so we're bullish about being able to work on what we need to work on, as we've talked about, cost synergies in some of those areas while keeping the front end of these businesses separate and focused on their unique brand position so that we continue to work to build on those. So we would anticipate being able to participate in any of this as these trends continue to evolve, particularly in some of these larger markets. Operator: Question comes from the line of Steven Ramsey of Thompson Research Group. Brian Biros: This is Brian Biros on for Steven. Jeffrey Lorenger: Sure. Brian Biros: On the resi side, I guess, sales were flat. Orders grew 2% and really accelerated at the end of the quarter, it sounds like. So I guess can you just parse out maybe like why orders grew and if there's anything to call out really that drove the acceleration into the quarter end? Vincent Berger: Yes. And are you talking about the resi side or Workplace, Brian, just to make sure I'm... Brian Biros: Sorry, the resi side. Vincent Berger: Yes. Yes. You kind of nailed it. So the -- if you look at orders for the quarter, we're up 2% for the segment. The actual remodel retrofit was up 7%, and it actually was accelerating as we went through the quarter. We actually grew backlog to 13%. So that's given us confidence in the high single digits for the quarter. The backdrop of everything that Jeff just talked about is supporting that, which is allowing us to outpace the market. We're starting to see good signs for a retail season in most of the country outside the West Coast. All those support our high single digits with the extra week. So when we look at that business for the full year, I think it's more important, we're going to grow mid-single digits in a very tough market that didn't grow. And although most of it will be price, we actually are going to show unit volume growth in the fourth quarter and a bit for the full year. Brian Biros: Got it. Helpful. And secondly, I guess, just on the Workplace segment, the opportunity set there, maybe by sector, is there a way to think of how much that reflects return to office compared to non-office verticals? Jeffrey Lorenger: So yes, I think that's -- it's pretty hard to parse that. I think it's some of both. The verticals have been holding up well. You look at education, you look at health care. Obviously, federal government is in kind of in a weird spot right now. But I think the return to office stuff, if I had to say, is probably in the earlier innings definitely than some of the other vertical plays. But we do see some of those verticals as we look out into the future that's still staying strong. But I'd say verticals have been a little stronger than return to office and return to office is just really getting going. Operator: I'd now like to hand the call back to Mr. Lorenger for final remarks. Jeffrey Lorenger: Great. Appreciate it. Thanks -- thank you for taking an interest in HNI, and have a great day. Appreciate the time. Operator: Thank you so much for attending today's call. You may now disconnect. Goodbye.
Operator: Good morning, and welcome to The Hartford Insurance Group's Third Quarter 2025 Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Kate Jorens, Senior Vice President, Treasurer and Head of Investor Relations. Thank you. Please go ahead. Kate Jorens: Good morning and thank you for joining us today for our third quarter 2025 earnings call and webcast. Yesterday, we reported results and posted all earnings-related materials on our website. Before we begin, please note that our presentation includes forward-looking statements, which are not guarantees of future performance and may differ materially from actual results. We do not assume any obligation to update these statements. Investors should consider the risks and uncertainties detailed in our recent SEC filings, news release and financial supplement, which are available on the Investor Relations section of thehartford.com. Our commentary includes non-GAAP financial measures with explanations, GAAP reconciliations available in our recent SEC filings, news release and financial supplement. Now I'd like to introduce our speakers, Chris Swift, Chairman and Chief Executive Officer; and Beth Costello, Chief Financial Officer. After their remarks, we will take your questions assisted by several members of our management team. And now I'll turn the call over to Chris. Christopher Swift: Good morning, and thank you for joining us today. The Hartford delivered outstanding third quarter results with core earnings of $1.1 billion or $3.78 per diluted share, both records for the company. These results reflect the strength of our franchise and disciplined execution of our strategy. We continue to grow top line while maintaining strong margins in a dynamic environment, supported by investments that advance our underwriting discipline while deepening relationships with customers and distribution partners. Highlights in the quarter include written premium growth in Business Insurance of 9% with an underlying combined ratio of 89.4%. In Personal Insurance, an underlying combined ratio of 90%, a 3.7-point improvement over prior year. In Employee Benefits, an outstanding core earnings margin of 8.3% and continued solid performance in the investment portfolio. All these items contributed to an outstanding trailing 12-month core earnings ROE of 18.4%. Let's take a closer look at third quarter performance. In Business Insurance, third quarter results reflect excellent growth with strong underlying margins, sustaining momentum from the first half of the year. Our small business franchise continues to set the standard for growth and profitability in the industry, delivering record-breaking new business premium with strong underlying combined ratios. Written premium growth of 11% was fueled by double-digit increases in our industry-leading package product and auto. E&S binding also delivered exceptional results with written premium up 47%, reaching over $100 million in the quarter. These results reflect the power of our underwriting expertise, AI-driven capabilities and strong digital platforms built on years of strategic investments. Written premium is expected to exceed $6 billion in 2025, representing 10% growth over prior year. Turning to Middle & Large business. Growth was outstanding with solid underlying margins. Written premium increased 10%, underscoring the strength of our diversified portfolio. This performance was fueled by robust new business generation, strong retention levels and solid pricing execution across the lines. Our underwriting approach continues to guide us towards opportunities that deliver attractive risk-adjusted returns while ensuring we remain selective and disciplined. Shifting to Global Specialty. Results were excellent with another quarter of underlying margins in the mid-80s. This performance reflects targeted growth strategies alongside strong risk and pricing fundamentals. Net written premium grew by 5% driven by U.S. financial lines, bond and across international, partially offset by a 3% dip in wholesale, primarily due to a decline in new construction projects. Within Global Specialty, we are taking advantage of innovative solutions that combine our specialized underwriting expertise with advanced technology and broad distribution of our small business franchise. Through our [ One Hartford ] approach, agents and customers can seamlessly quote and bind comprehensive coverages in a single unified experience. For example, this approach is resonating with small and midsized business customers who require professional and management liability coverage, not addressed by the standard package product. We remain focused on helping all business customers succeed by using digital capabilities, leveraging our broad distribution network and offering a comprehensive product suite that meets more of their needs. Moving to pricing. Business Insurance renewal written pricing, excluding workers' compensation, was 7.3%, above overall loss trend. Pricing execution remains highly disciplined. General liability remained firm and above loss trend, supported by rate increases and proactive underwriting actions focused on segmentation, limits management and geographic optimization. Excess and umbrella lines delivered double-digit pricing increases and primary lines moderated slightly while still in the high single digits. Despite modest easing this quarter, auto pricing remained near 11%, while workers' compensation pricing was slightly up from the second quarter. Across business insurance, property written premium grew 11% to $800 million with expectations for full year premium to reach $3.3 billion. Over the past 3 years through the team's thoughtful and disciplined strategy, including CAT management, the Business Insurance property book grew 50%. In Small business, property pricing within the package product remained strong, achieving 12% renewal written price increases. In general industries, property pricing was relatively consistent with the second quarter and above loss trend. Other property lines, primarily E&S and Large representing approximately 20% of the property book, achieved renewal pricing increases of 1.2%, up nearly 2 points from the second quarter. Turning to Personal Insurance. Results continued to improve over prior year. Homeowners had a strong quarter, highlighted by 10% written premium growth in mid-70s underlying combined ratio. Renewal written pricing remained flat to the second quarter at 12.6% driven by net rate and insured value increases. Auto underlying results improved by 3.6 points in the quarter with a year-to-date underlying combined ratio in the mid-90s. While Personal Insurance underlying margins are at targeted levels, total PIF growth continues to be impacted by a highly competitive market. We are pleased with growth in agency, where policies in force grew 17% over prior year, including 4% in auto. In the third quarter, we introduced Prevail to retail distribution, bringing new product, technology and experiences to our agency partners. We are now live in 6 states, and we'll continue to roll out Prevail Agency over time with 30 state launches planned by early 2027. Initial results are positive, with agents excited about our improved performance in competitive positioning with preferred market customers. Prevail represents a meaningful investment in our businesses, now benefiting both direct and retail channels. Earlier this month, the Hartford senior leadership team attended the CIAB Insurance Leadership Forum, a premier property and casualty industry event. We met with more than 50 key distributors and reinforced our commitment to consistent execution and strategic alignment. Brokers and agents recognize our industry-leading digital capabilities, as clear differentiators. We left the forum with increased confidence in the strength of our independent distribution relationships, positioning us to capture additional market share over time. Moving on to Employee Benefits. The core earnings margin of 8.3% was driven by excellent life and strong disability results. Persistency remained strong in the low 90s while fully insured premium and sales were flat year-over-year, reflecting a competitive market and lower large case sales in 2025. Quote activity and known sales for 2026 are trending very favorably as recent investments in technology and customer-facing tools gain traction in the marketplace. In terms of capital management, yesterday, we announced a 15% increase in the common quarterly dividend, continuing a track record of annual dividend increases supported by earnings power and strong capital generation. In addition, we are pleased that both S&P and Moody's upgraded the debt and financial strength ratings of the Hartford. Commentary from the agencies highlighted our effective risk selection and sophisticated pricing strategies, which have positively impacted underwriting performance across business cycles, with expectations for continued strength, supported by well-diversified revenues and earnings. In closing, as we enter the final quarter of 2025, our financial strength disciplined execution and strategic investments position the company to sustain strong results by leveraging industry-leading tools, underwriting expertise and advanced data science, we are confident in our ability to continue to navigate a dynamic market cycle and deliver superior returns for our shareholders. Now I'll turn the call over to Beth to provide more detailed commentary on the quarter. Beth Bombara: Thank you, Chris. Core earnings for the quarter were $1.77 billion or $3.78 per diluted share with a trailing 12-month core earnings ROE of 18.4%. In Business Insurance, core earnings were $723 million with written premium growth of 9% and an underlying combined ratio of 89.4%. Small business continues to deliver excellent results with written premium growth of 11% and an underlying combined ratio of 89.8%. Middle & Large business had another strong quarter with written premium growth of 10% and an underlying combined ratio of 91.4%. Global Specialty's third quarter was solid with written premium growth of 5% and an underlying combined ratio of 85.8%. The Business Insurance expense ratio of 31.1% was relatively flat from the 2024 period, however, increased sequentially as the impact of earned premium leverage was offset by higher incentive compensation and benefit costs. In Personal Insurance, core earnings were $143 million with an underlying combined ratio of 90%. Homeowners delivered an underlying combined ratio of 74.4%, a 1-point improvement over the prior year. Auto underlying results improved by 3.6 points in the quarter and remain in line with expectations, reflecting typical seasonality as the year progresses. The Personal Insurance third quarter expense ratio of 25.8% was relatively flat from the 2024 period. Written premium in Personal Insurance increased 2% in the third quarter. We achieved written pricing increases of 11.3% in auto and 12.6% in homeowners. With respect to catastrophes, P&C current accident year losses were $70 million before tax for 1.6 combined ratio points, which included $37 million of favorable prior quarter development. Through September 30, we have reached the $750 million attachment point for our aggregate property catastrophe treaty, which means that CAT losses of up to $200 million in the fourth quarter would be covered by the treaty. As a reminder, the aggregate cover does not include losses from the global reinsurance business, which purchases its own retrocessional coverage. Total P&C net favorable prior accident year development within core earnings was $95 million before tax, primarily due to reserve reductions in workers' compensation and personal auto liability and physical damage. We recorded $8 million of deferred gain amortization related to the Navigators ADC, which has now been fully amortized. As a reminder, the A&E ADC cover was exhausted in 2024, so any development from the fourth quarter A&E study will impact core earnings. Moving to Employee Benefits. Core earnings of $149 million and a core earnings margin of 8.3% reflect excellent group life and strong disability performance. The group life loss ratio of 74.2%, improved 3.3 points, reflecting lower mortality across both term and accidental life products. The group disability loss ratio of 70.6% increased 2.7 points from the prior year. Last year included a benefit of 2.2 points related to the long-term disability recovery rate assumption update, while current year long-term disability trends were slightly higher as expected. This was partially offset by pricing increases earning into our paid family and medical leave products. The Employee Benefits expense ratio of 26.7% increased 1.4 points, primarily driven by higher staffing costs, including increased incentive compensation and benefits, increased investments in technology and a higher commission ratio due to premium mix. Turning to investments. Our diversified portfolio continues to produce solid results. Net investment income of $759 million increased $100 million from third quarter 2024 due to income from limited partnerships and other alternative investments, a higher level of invested assets and reinvesting at higher interest rates, partially offset by a lower yield on variable rate securities. The total annualized portfolio yield, excluding limited partnerships, was 4.6% before tax, consistent with the second quarter. We continue to strategically manage the portfolio, balancing risk while pursuing accretive trading opportunities. In the quarter, we reinvested at 50 basis points above the sales and maturity yield, reflecting increased call and paydown activity on higher-yielding corporate bonds and certain structured securities. We remain focused on our ability to reinvest above the current portfolio yield. As expected, our third quarter annualized LP returns of 6.7% before tax were higher than the first half of the year, reflecting increased returns from our private equity portfolio. While still early, we anticipate fourth quarter results to be in a similar range to third quarter. Turning to capital management. As Chris mentioned, we increased our common quarterly dividend by 15% to $0.60 per share, payable on January 5, 2026. Over the past decade, we have delivered dividend increases averaging approximately 11% per year. The step-up in our dividend demonstrates our confidence in the sustained earnings power and capital generation of the organization. Holding company resources totaled $1.3 billion at quarter end. During the quarter, we repurchased 3.1 million shares under our share repurchase program for $400 million, and we expect to remain at that level of repurchases in the fourth quarter. As of September 30, we had $1.95 billion remaining on our share repurchase authorization through December 31, 2026. In summary, we are pleased with our outstanding performance for the third quarter and first 9 months of the year. We believe we are well positioned to continue to deliver industry-leading returns and enhance value for all stakeholders. I will now turn the call back to Kate. Kate Jorens: Thank you, Beth. We will now take your questions. Operator, please repeat the instructions for asking a question. Operator: [Operator Instructions] Our first question will come from Brian Meredith from UBS. Brian Meredith: Chris, I wonder if you could talk a little bit about workers' comp. It looks like we're starting to see some price increases there, which is great. Do you expect that trend to continue here? And do you think there'll be at a point here in the next, call it, 12 to 18 months where maybe rate there is in line with trend. And where are we right now rate versus trend? Christopher Swift: Yes. Thanks for the question and joining us. I would say the workers' comp market remains consistent. When we talked about pricing this quarter, it was really up 4 times from a slight negative to a slight positive. So that's really not a meaningful move. And if you look at sort of state filings and regulatory activity across all the states, I don't see much rate increases set up for 2026 at this point in time, primarily because as you know, Brian, I mean, it's a highly profitable line is still behaving pretty well. Loss trends are stable and predictable, and it doesn't set itself up for meaningful rate increases. I think you're aware of one state had a fairly meaningful rate increase in California because their loss trends were a little outsized compared to others. So I would say it's steady as she goes. And we feel good about the profitability -- the overall profitability of the book, whether it be on an accident year basis or calendar year, particularly when you look at our reserve releases, over the last 3 years have been pretty steady and predictable. Brian Meredith: Makes sense. And then I wonder if we could just dig in a little bit more into the underlying loss ratio in business insurance and commercial insurance. So I understand that most of the year-over-year deterioration is due to the workers' comp. But if I think about the other lines of business, you talk about rate has been in excess of trend and pricing has been excess trend for a long time. Are you holding those picks kind of constant right now, given where we are with port inflation and maybe potential impacts of tariffs, or are we actually seeing improvement there, and they're just being more than offset by comp? Christopher Swift: Yes. I think what I'd like to do, and I know you've studied our data, but let's look at the 9-month year-over-year underlying combined ratio. Currently, it's running 88.6% versus 88.1%. And I would say within those numbers, comp is performing as we expected. So there is no change in sort of anything that we've done with comp in this accident year. And obviously, prior accident years continued to develop favorably. I think what -- if I really attribute the difference in run rates through 9 months is really incentive compensation, so an expense component, not a loss component is higher than we planned, just given overall strong ROEs that we're generating and overall profitability. So if you sort of back that out, we're within a few tenths of what we think would be sort of a consistent -- generally consistent expectation at that 88.1%. And then I would even add further attribution, if we really look at the book. We mixed in property at a good level. You saw the 10% growth. But we did mix in more national account business, which tends to have a higher underlying combined ratio, both for comp and GL, that obviously impacted another few tenths. And then if I really want to quibble and look at it even more on a refined basis, we probably had a slightly more favorable non-CAT property experience last year compared to this year. So you put that all together, and you're dealing with sort of 0.5 point. And I would even share with you, as I think about the fourth quarter and the full year, I think we'll come in slightly below 88.6%, and call it a very productive, high-quality year and feel very good. Operator: Our next question comes from Andrew Kligerman from TD Cowen. Andrew Kligerman: So I'd like to start out with the terrific new business growth of 11% and 20% in small and then mid and large, respectively. I mean, those are phenomenal numbers in this environment. I know you touched on property a little bit, but maybe you could talk to the lines that were most strong in each of those 2 segments. And why you're able to see that kind of growth in a somewhat softening market? Christopher Swift: Thank you, Andrew, for the question. I'll give some highlights, but I'd let Mo to cover his point of view as too. But besides the major segments, you can see those growth numbers. If you pull back our Spectrum product in small commercial, it was up 13% in the quarter. Global Re was up 14%, Business Insurance, auto, was up 10%. I referenced national accounts before, which was up 17% in the quarter, really pleased with how that book is performing and or more importantly, our reputation in the marketplace in that national account area. So I would say it was broad-based. I would even say our excess liability line was up 20%. And workers' comp, I think, grew 3% year-over-year. So I would say it was just broad-based strong performance by the team. And Andrew, you've heard us, myself and Mo talk, I mean, we've asked the team to focus on margins and maintain those margins as we head into -- as we executed here in 2025. And I really feel like the team is executing flawlessly. They know how to draw lines in the sand and say no, and move on, but also our capabilities, our digital capabilities, all the investments that we've made across all our business segments, Mo, I think, are performing well. Adin Tooker: Maybe I'll just add a couple of pieces, Chris. Yes, I think flow, Andrew, remains really good in both businesses, both in small and middle. In small, that's admitted and non-admitted, so the flow we're seeing -- you saw that Chris quoted a plus 47% growth in the E&S lines binding in Small business. The flow in admitted and non-admitted channels remain really strong in small. And I think that's just a sign of how well the technology we're creating efficiency for our agents, and we see further opportunity for consolidation in the Small business space. And then in the middle space, I think Chris referenced it. But again, we've got real specialization we've built. The technology we have in Small is -- we're taking it into middle to make that process more efficient for agents. However, I think the Middle results will be more lumpy. We showed a plus 5% in Q2. We're showing, as you saw, plus 10% in Q3. I think we're really making decisions there that we just add them up at the end of the quarter and sometimes it's going to be a great number, sometimes it's going to be an okay number. So we feel really confident about the Small and the consistency of the growth there. I just feel like the Middle may be a little bit more choppy and more dependent on market conditions. Andrew Kligerman: That was super helpful. Shifting over to Personal lines. The auto line came in at a 97.9%, and I know there's a lot of seasonality there. But maybe you could talk about where you'd like that to kind of center? Like what would be the kind of range where you'd be very comfortable, and now that you've got the prevailed chassis kind of rolling out, do you see the policy count starting to pick up in the near future? Christopher Swift: Andrew, what I would say, as I said in my prepared remarks, we're at target margins today and feel good with what Melinda and the team have done to sort of restore our margins. As you know, we have a 12-month policy. So there's a little bit of a lag that we have to manage. So -- and I would say -- and I think we've talked about it in the past, if -- for an auto book, if we can run an underlying combined at 95% with 2 points of CAT, I feel good, and we're then in go mode to grow, which we are now. We are pivoting to growth, particularly in '26. The real opportunity, I think, for growth will be our new agency offering, which is, as I said, we're in 6 states now and 40 by early '27, which will add to incremental growth, particularly in addition to our AARP response. But a lot of our good competition is also pivoting to growth. So it's not going to be a layup. We're going to have to break a sweat and differentiate ourselves. But when we think about growing, we think about bundling, auto and home. And we still need to maintain sort of the loss cost environment that -- where we see loss costs going. So all I would say is I think it's balanced. I'm pleased where we're at. Melinda, I don't know if you would add any additional color. Melinda Thompson: Chris, I think that's all accurate. And I would just add that in addition to the new business efforts and the competitive environment we're experiencing there, retention certainly is another dynamic influencing growth, and we still have double-digit renewal price change being felt by our customers. So as that drops into single digits in the fourth quarter and continues to moderate in '26, that will help alleviate pressure on the retention and top line dynamics. Beth Bombara: And then Andrew, it's Beth. The only other thing that I would just add is, when we talk about being at an underlying combined ratio in auto of 95%, that would be for the full year. And I just want to remind you, again, that we see seasonality in our auto results under normal conditions where it increases roughly 2 to 3 points over the course of the year. So it's not as if every quarter would be at 95%, we'd expect the first half of the year to be lower in the second half of the year to be higher when we think about that in total. Operator: Our next question comes from Gregory Peters from Raymond James. Charles Peters: So the first question on pricing, you mentioned in your press release and your comments, the 7.3% benefit in the quarter. And I guess there's been a lot of growing chatter around increasing price competition. Maybe it's not as relevant in the small market, but maybe you can talk about some pressure points you're seeing on price, maybe from your distribution partners as it relates to the Middle & Large business or maybe it's even sitting inside the Global Specialty. Christopher Swift: Yes, Greg, thanks for joining us. You're right. The 7.3% we called out this quarter is ex workers' comp in our, I'll call it, standard insurance businesses. If you're interested, I would say, in Small business, ex comp, it's 9.3%, Middle & Large ex comp, 7.3%, and roughly, that's down 1-point-or-so from prior quarters sequentially. And some of that is to be expected, just given the overall performance of certain lines, particularly led by property. But I would say, and I'm going to ask Mo to add his color, is that the real discipline that we have, and it is still needed, is there anything liability related. You could think in commercial auto. You could think of primary GL excess umbrella. And I think I gave you some of those rates. But overall, from a GL basis, we're in high single digits. Excess in umbrellas low double digits, a little bit of a sequential drop, but still double digits and commercial auto is holding up in that 10% range. So I think those are the highlights that I would just point out to you and ask Mo to add his color. Adin Tooker: Greg, I'd just say that we still feel like the market is pretty fairly priced really and especially in the smaller end of our -- of each of our books, and that will be small, middle and the global books. And I think it's also really important to make sure that you understand our starting point. We have not been fixing anything here for 2 or 3 years. And we know that -- again, when we look at some of our peers, there's some higher rate action coming through, but I think that's relative to their starting point over the past couple of years. And so I just -- I feel confident in our ability to grow. We've given tools to the underwriters that I think are market leading, the data science, the actuarial tools. So -- and I think the underwriters are really executing well in each of the BI segments. And we've given leaders, I think, booked management tools that, again, I think are second to none in the industry. So I think all in all, we're executing really well. Just to your point on where we've seen competition. I think we've talked to you before about the public D&O market. I think we've proven that when the margins aren't there, we'll pull back. I think we've been patient on workers' comp just trying to pick our spots there, knowing that market has been competitive, but the returns are good. And the most recent example, Greg, that I'll point to is our large property book in Middle & Large that segment. We've been pulling back just especially on some of the larger accounts in that segment, we've seen the market really get hungry for the large premium in that segment. And then the only other thing I'll call out for you is we are watching the London market closely. The rate movement in the quarter was something that we kept our eye on. And I think we'll pick our spots internationally as well. Charles Peters: Thanks for that additional color, Mo. I'm going to pivot to my favorite topic that I'd like to ask you guys about from time to time, which is technology. During the third quarter, a couple of your peers came out with statements about the potential benefits of technology whether it's in production or in cost savings through headcount reduction. And it's certainly consuming a lot of oxygen in the industry. So I'd like to go back and maybe -- can you give us a sense of how your tech budget looks for the upcoming year? And maybe how you're allocating it to sustaining legacy systems versus new initiatives to sort of give us a state of the union on your tech outlook? Christopher Swift: Yes. Happy to provide that, Greg. I would say to your first point on sort of the impacts here. I think we're early on in this baseball game. I don't know if it will be an 18-inning baseball game for those of you that watched it last night. But it's early. And I think for us, our guiding principles on any technology, whether you want to call it a data science or artificial intelligence or general intelligence is really to sort of augment our human talent, not necessarily to replace it. And ultimately, what the objective is, is to create a more frictionless experience for our customers, for our agents and brokers where we can be fast, accurate and really differentiate ourselves on a just the ease of business. I think when that happens, I think we'll -- retention will go up. I think we'll attract more business, capture more market share as we've been saying. So that's the first premise. And the premise of where we ought to go from a process side is generally 3 major areas: claims, underwriting and operations. And so that's what we're focused on. It's -- we're trying to go as fast as we can. We've allocated substantial resources to looking at our processes and fundamentally improving them, redesigning them with sort of a tech AI focus from the get-go. So that's what I would say from an outlook side, what we're trying to do, just to give you numbers, we run basically $1.3 billion all-in IT run in an invest budget. And I would say a little over $500 million is sort of the invest side of that. And its various projects, some that you might be interested in. We're still taking all our data and applications to the cloud, which we're in our fourth year of a 6-year journey to get that done. We are rolling out some pretty cool stuff, particularly in the call center activity. We're rolling out AWS Connect, which everyone in the organization, all product lines, all service centers will use. We expect that to be completed in the first half of '26. And the list can go on. But I do want to try to refrain from giving too much detail because some of this is proprietary. It's competitive. We're trying to get a first-mover advantage. And I know you'll respect that philosophy that I have. But Beth, what would you add from... Beth Bombara: Yes. The only thing I would add, and maybe just to point out the language that you used, Greg, when you said, how much do you spend on legacy business -- legacy systems versus invest. And Chris gave you the breakout between run and invest. But I wouldn't have you think that, that run is all about legacy systems. We've been on a path for several years now of modernizing our core platforms. So those run costs are related to more modern systems, which really sets us up very well to be able to spend the dollars that we're talking about from the invest side to make the strides that Chris talked about. So I just wanted to just clarify that a little bit when you think about our platforms and what we've been doing over the last 10 years. Charles Peters: You gave us some new information. So appreciate it. Operator: Our next question comes from Alex Scott from Barclays. Taylor Scott: I wanted to go back to Personal lines and just some of the comments you made about retention. And as you're kind of getting into 4Q and you're starting to lap some of the bigger rate increases, are you seeing shopping rates come down at all for the policies where you're not taking as much price. I'm just trying to get a sense of how much is that being driven by the rate you're taking versus maybe the environment also still kind of just getting competitive with price decreases in some pockets and particularly direct-to-consumer and so forth. Christopher Swift: Yes. Alex, I'll let Melinda add her color, but I would say shopping is still elevated across -- just across the business, whether it be auto or home. I think people have been somewhat conditioned to shop, and obviously, digital makes it a lot easier. You saw our price increases in auto this quarter. I would say, as we -- you get into the fourth quarter and early '26, I think by the fourth quarter, those loss -- or those pricing numbers will probably drop into the high single -- single digits, and we'll continue then to moderate in early '26 and throughout which gives us, again, the opportunity to be competitive and try to grow our PIF count. But Melinda, what would you add? Melinda Thompson: Thank you, Chris. No, I don't think that shopping behavior in our book is any different than the broader industry. And I would say switching behavior has been higher driven by the multiple cycles of rate that, again, the industry has put in not anything specific to the Hartford. But I would point out, our retention is stable, and we're certainly reflective of the environment. And we implemented a number of initiatives to really focus on policyholder education and experiences, things to help them think about coverage counseling adjustments that they can make, billing reminders and other assistance. So we do a lot to try to create seamless experiences and a lot of connection with our customer as we navigate this period of time with more accelerated switching behavior. Taylor Scott: Helpful. Next thing I wanted to touch on was the capital position of the company. And I was just interested in the bigger increase in the common dividend in particular. And I wanted to get your thinking around what gives you the confidence on that. What are you seeing in the business? Is it the growth environment is slowing, or do you feel like kind of the capital position is strong enough that you can sort of do both in terms of increasing your capital distributions while still continuing to get kind of growth to get this quarter? Beth Bombara: Yes, Alex, I'll take that. And it really is about the fundamentals we see in our businesses and the earnings power that we have. We've been very focused through the years and looking to maintain a competitive dividend. And when we look at where our earnings growth has been, we felt very comfortable increasing it by the 15%. And I -- again, I think it just speaks to the strength of our underlying businesses. It still provides us plenty of opportunity to continue to invest for growth. So I wouldn't look at the change as any sort of signal and change in focus, and how we think about the prospects for our underlying businesses. Operator: Our next question comes from Elyse Greenspan from Wells Fargo. Elyse Greenspan: My first question, I want to start on Personal, auto again. I just curious if you guys saw any impact of tariffs on results in the quarter? And then is there any expectation that you'll see an impact going forward, right, when you point -- is that embedded within your expectation that you guys are now back at target margins? Christopher Swift: I would say a very negligible this quarter and really for the whole year, I think as we discussed in prior calls, Elyse, and then as we turn the clock into 2026, we'll make the appropriate trend picks for our loss costs, giving due credence to any tariff pressure, particularly in property or physical damage coverages. But at this point, I don't think they'll be significant. And I think we will know how to make the appropriate estimates and judgments. So I don't think there's anything unusual here. Just another factor that we'll have to consider in our loss trends. Elyse Greenspan: And then my follow-up was also on capital, but I guess on the different side. Buyback, right, has been kind of within this $400 million quarterly level, right, for more than a year. As you know, earnings growth are strong and the capital levels are strong at the company, what would you need to see, I guess, to increase from that $400 million baseline? And would that be, I guess, when do you think through that? Is that with the capital plan when you'll update us next quarter for next year potentially just coming off the $400 million? Christopher Swift: Yes. Elyse, I'll let Beth add her perspective. And you've heard us talk before, we like to be steady, predictable, and yes, any changes, we would have to contemplate. But I feel good about really what we're doing with our excess capital that we're generating, our companies are well capitalized, obviously, recognized by Moody's and S&P. We're funding meaningful growth, which we want to continue to do. Again, with the right margins, with the right mindset on profitable growth and then you see our healthy dividend that Beth commented upon. And you put it all together, it's still a good use of excess capital. And if we change the numbers or amounts, we'll let you know when we make those decisions. But we haven't made any of those decisions. Operator: Our next question comes from Ryan Tunis from Cantor Fitzgerald. Ryan Tunis: I guess just taking a look at the supplement, case value sort of looks like any type of underlying combined ratio pressure we had in Business Insurance this quarter was in middle markets. Not sure if I'm thinking about that right, but just some commentary, I guess, on the underlying combined ratio deterioration there. Christopher Swift: Ryan, if you're looking at sort of sequential, I would just call out, we had a strong national accounts quarter that put some pressure on the booking ratio there tends to be a little higher just given it's a long duration. And I don't know if it was any favorable or is there any property impact, no, I'm looking at you. But yes, I would just call out the national account mix that we had a strong quarter in national accounts. Adin Tooker: Yes, there's some slight favorability in property, but it was pretty minor overall non-CAT property. Ryan Tunis: Okay. And then I guess just in group disability, sound like there's some paid family comp stuff. But I'm just curious if any new trends worth pointing out there? Christopher Swift: Well, the trends in sort of just the lead product in totality, paid family or medical, I think, are encouraging. People want these products I think it's a fairly straightforward product to sort of price and understand. We've -- after we've seen people use them just a little bit more, and that's why we're making some of the profit actions and pricing actions that we're taking there. But it's a fast-cycling business, generally 1- or 2-year rate guarantee. So we think we could be reactive. And that book is a little over $500 million for us today, Mike Fish. And so I don't know if you would call anything out on leave, but I think the main difference was what we talked about in the quarter for LTD was the basis study that we did last year that didn't reoccur. And generally, LTD is behaving. Maybe we saw a little tick up in severity this quarter. So the people that went out on LTD tend to be a little more higher salaried folks. But that can bounce around from quarter-to-quarter, so -- but Mike, what would you add? Michael Fish: Yes, Chris, I think I'd just maybe add a couple of points. I think on the leave side, as you noted, we're seeing some increase in utilization of those benefits. So we're pricing that in both when cases come up for renewal as well as our new business price pick. So again, we'll continue to do that. And we do expect utilization to level out probably in the next couple of years. But again, as employees see the value of those benefits, we're making sure we're including that increased utilization in our premium rates. And then, Chris, as you noted on the overall long-term disability book of business, we're very pleased with the performance there. So again, even though loss ratio up a bit quarter-over-quarter. I'd say, in total, we're still performing well within pricing expectations. Just we saw some very -- and we've talked about this in past quarters, some very favorable incidence trends back last year and prior in '23. So I'd almost characterize it as a bit more of a normalization as we expected to see in the loss ratio this year. Operator: Our next question comes from Mike Zaremski from BMO Capital Markets. Michael Zaremski: Focusing on the smaller commercial end. Mo made some comments about further opportunity for consolidation in that space. If you could elaborate, that would be great. And just related, I'm curious is there -- if you look at the last 3-, 4-, 5-year trend, I think it's fair to assume that some players, maybe just you all, you can correct me, have taken a lot of market share there. Is there a level of market share in small commercial where you start to see some kind of friction where you just have a good issue just too much market share with some of your agency partners. Adin Tooker: Yes, our market share today, Mike, is less than 5% in the Small business space. So I don't think we felt that in any way so far. But to give you a little bit more context on what we're feeling, the -- I think coming out of CIAB, that Chris referenced in October, earlier this month, there was some really terrific feedback just about -- again, the continued themes of how good our technology is. How much time it saves relative to our competitors. Also once a small business placement is with us, our appetite has been consistent for years. So we're not pushing it back into the market. As there's been some disruption in that space, so there's a consistency of appetite that again keeps an agent from having to touch that policy again. I think we get feedback on the service capabilities that we built. We actually take time out of the agency's office, and we do that servicing for them so that we're saving them a couple of dollars on every policy. So I can keep going here. But I think broadly, our digital, our service, our placement capabilities in Small and the feedback that we get, just -- it's a better experience all around. So we expect to be able to continue to grow at a reasonable pace in that small business space and to take market share. Michael Zaremski: Got it. And my follow-up is more high level on the pricing power levels in small to mid-commercial. I guess the increasing questions we get, I'm sure you get to is where will pricing go? It seems to be a consensus that pricing will continue to decelerate. Would you say folks in our seat might be focusing a bit too much on the ROE of the industry being healthy, whereas loss cost trend appears to be much more elevated than it has historically. Any kind of insights you'd want to add into how we should think about kind of the forward trajectory, what's impacting pricing? Christopher Swift: Yes. I would say, Mike, again, honestly, selfishly, I mean I think the industry ROEs are good, are healthy. But if you look at other financial services companies, I mean, they generate really, really high ROEs compared to us. You look at banks or others that participate in that side of the business. I mean, our business is one of taking risk. We're taking long-term risk. We have a lot of variability in our loss cost trends. So there's margins and prudence that we try to price into our products. So you put it all together, I think we're earning a fair return and as you've heard us, Mo and I talk along with Beth, I mean, we're trying to maintain these margins and keep up with loss cost trends. And that sounds simple. I know it's hard to do in a competitive environment. But if we could do that and compound that over a longer period of time, that's a win for our shareholders. So do I feel like you're focused on the wrong things? No, I think you're focused on the right question on trend and growth and sort of that balancing equation. But as Mo just said, it all depends where you start, right? And if you have lines like workers' comp, where -- are producing good returns and results just because you're getting a lower price increase there. That's not necessarily a bad thing because that's a product that everyone needs. It's a lead product that we use then to account round and sell other products. So it's all part of the equation of pricing your products individually, but also keeping an eye on accounts, and what you're trying to do for agents, brokers and customers. Operator: Our next question comes from Rob Cox from Goldman Sachs. Robert Cox: Yes, I was just hoping you guys could remind us where you're trending some of the bigger lines of business to the extent you could share and I appreciate the comments on the national accounts, but also just curious if you touched up any of the loss trend assumptions across Business Insurance this quarter. Christopher Swift: I think -- I mean, I think the trends that we talked about, Rob, that are worth repeating is the liability trends are still elevated, you could judge by what we're doing from a pricing there. I think the overall point though, I'll just emphasize it again, particularly ex comp. We feel like we're on top of loss cost trends as we sit here today, and we'll try to maintain that on top position going forward. There's nothing really new in comp. Particularly on severity trends are behaving at least compared to our assumptions. So I don't think there's a new piece of data that we could share with you that we haven't already talked about. But Mo or Beth, would you add anything? Adin Tooker: No, I would just say the trends are relatively stable. And I think what we're -- especially on the liability line, so think anything GL, anything auto, the teams are keeping rates above loss cost, and I think that's going to be continue for some time. We are really pushing hard to make sure that we don't fall behind on those lines, knowing how the trend has been elevated over the past couple of years, and we intend to stay ahead of that. Robert Cox: Okay. Perfect. And just as a follow-up, I was just curious on the component of your 5.2% all-in pricing or 7.3% ex comp, the exposure-related portion of that. How has that been trending versus the pure renewal rate? Are you guys still getting a solid contribution there from the exposure component? Christopher Swift: Yes. The quarter, I would call it at 1.8%, and it's been sort of consistent of 75% rate and 25% exposure as we break that down. So just to be clear, that's at the 7.3% ex comp rate that I quoted before. Operator: We are out of time for questions today. I would like to turn the call back over to Kate Jorens for closing remarks. Kate Jorens: Thank you for joining us today. Please reach out with any additional questions and have a great day. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, welcome to the Analyst and Investor Call Half Year 2025 Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Christian Waelti. Please go ahead, sir. Christian Waelti: Thank you, Sandra, and good afternoon, good morning, everyone. As you know, earlier today, Landis+Gyr issued its results ad hoc release and related presentation for the first half year 2025, which are available on our website. This session will follow the structure of the earnings presentation, so we encourage you to follow along. We'll conclude with Q&A, where Sandra will provide further instructions and where you will be able to ask questions. Please take a moment to review the usual disclaimer on Slide 2 of the presentation. A brief note on reporting before starting. The results of the EMEA operations are presented as discontinued operations for all periods. Unless stated otherwise, the figures we are sharing reflect Landis+Gyr's continuing operations only. After the short introduction, I'd like to hand the floor over to our CEO, Peter Mainz. Peter Mainz: Thank you, Christian. Good morning and good afternoon, everyone. And thank you again, Christian, for reminding us to consider our financials from a new perspective. I'm here with Davinder, our Chief Financial Officer, and we are pleased to present our half year 2025 financial results. With that said, let's now start with a review of the highlights of our performance in the first half of 2025. Let's move to Slide 3. The first half of our financial year 2025 was marked by solid commercial momentum, as you can see. We are pleased to report a strong order intake of $595 million, resulting in a book-to-bill of 1.1, driven by key grid edge tech wins in the Americas. We're also particularly happy with the resulting order backlog that reached a new record for our company with close to $4 billion, building a very solid base and a clear outlook for long-term growth. Both our net revenue and EBITDA are noticeably improving compared to the second half of financial year 2024 when we started our strategic journey. At the end of September, we announced the divestment of our EMEA business, concluding a process we talked about every time we stepped in front of you since late 2024, and that our outcome allows us to return the proceeds to our shareholders through a share buyback program. Let's move to Slide 4. More information on this point specifically. We are very happy to have completed and fulfilled the commitment that we announced about 1 year ago. It was a very competitive process where the investment in preparation we made delivered a strong financial outcome. The 13.4x EBITDA multiple of 2024 actual adjusted EBITDA is a strong indicator in this regard. But outside the numbers, it is also a great outcome for our customers as this makes us comfortable continuing to perform over the next period. And most important, it is a great outcome for our employees who were very positive and welcomed this decision. Credit of this positive outcome goes to our EMEA team led by Rob Evans for their dedication and focus to deliver exceptional operational performance while in parallel dedicating time and energy to the sales process. As previously indicated, this allows us to return the proceeds from the divestment to our shareholders with a share buyback program for which we have announced concrete parameters, namely $175 million on the first trading line. This program will start as of tomorrow. Let's move to Slide 5. Last year, at the occasion of our half year results presentation, we announced 3 strategic initiatives. I'm pleased to report that we have now successfully executed 2 of them. And as we move forward, our focus on the Americas will remain a key priority. As mentioned, the divestment of EMEA on which our teams together with the buyer are currently working hard to carve out the business with the aim to close the transaction in the second quarter of 2026. The current priority is and remains the Americas with a focus on advancing high-quality business built around grid edge intelligence solutions and delivering value to utilities across the globe. The focus on this business will elevate both our EBITDA and cash profile, with very low capital intensity, creating a very different financial profile of the business. While we focus on the Americas, we remain a global business, and we're excited about the global appeal of the offering that we have. And with that in mind, we keep on working towards the U.S. listing in 2026, aligning capital markets with the majority of our business activity. Moving on to Slide 6. We are focusing on the Americas as we believe there is a tailwind that is exceptionally strong with electricity demand growing again after 10 to 15 years of basically 0 growth. There is a real fundamental load growth, thanks to AI and data centers, manufacturing, reshoring and industrial hydrogen production. An assessment we can also see in the utilities capital expenditures going up substantially, which is validated in every single CEO conversation I'm having at the moment. Peak demand growth leads to peak demand no longer supported by permanent energy resources, a secondary tailwind further driving the need for our technology. Let's move to Slide 7 and how this trend translates into business for us. The strength that we continue to see in our pipeline translates into our order intake, and we're excited about that. In the first 6 months, we won close to $600 million of new business with a strong book-to-bill ratio of 1.1. Contrary to last year, when we won some very large orders, this time, we have received a multitude of orders, which speaks to the solid pipeline that we have. Our backlog increased by 30% over the past 12 months and stands at a record $4 billion. We are very pleased about the fact that 43% of the backlog is recurring in nature for our software and services business. In Asia Pacific, the backlog has nearly doubled over the past 12 months, leveraging the same technology platform as in the Americas and benefiting from the region's unique drivers. A recent example of this is the PLUS ES contract in Australia we have recently announced, introducing our grid edge platform on this continent as well. And now I will give the floor to Davinder, our CFO, that will run us through the financials in more detail. Davinder Athwal: Thank you, Peter. Good morning and good afternoon, everyone, and thank you for joining us today. Let's begin with our consolidated key financial results on Slide 8. Our net revenue for the first half was $535.9 million, reflecting a year-over-year decline. This is primarily due to early milestone completions in the Americas and the wrap-up of a major APAC project in the prior year period. However, on a sequential semester basis, we saw solid growth momentum with meaningful improvements in both revenues and margin. As anticipated, the lower sales volume impacted both gross margin and adjusted EBITDA on a year-over-year basis, driven by reduced operating leverage in the current half year and the absence of a onetime gain recorded on the sale of real estate in India in the prior year period. That said, both metrics improved by more than 200 basis points each compared to the second half of fiscal '24, thanks to disciplined execution and the realization of operational efficiencies. Let's now turn to our regional performance, starting with the Americas on Slide 9. Revenue in the Americas declined by 16% year-over-year, largely due to the early completion of deliverables on a large software project in Japan last year as well as lower sales of certain legacy meters in the current period. The lower software revenue in the current half year, in particular, caused a drop in both gross margin and profit. Despite these headwinds, adjusted EBITDA margin held strong at 17.5%, even after a temporary 100 basis point impact from tariffs in the half year-to-date. This margin resilience reflects our sharpened focus on operating expenses, which were reduced by nearly $14 million year-over-year. Now let's move to APAC on Slide 10. APAC revenue declined by 17.4% year-over-year, largely because the prior year period saw a peak in sales related to an AMI project in Hong Kong that completed together with a delayed project rollout in Bangladesh in the current half year. We do, however, see improved momentum in Singapore and New Zealand as well as consistent performance in Australia. APAC's adjusted margin was impacted by lower operational leverage and mix when looking at a normalized view, excluding the one-off real estate gain in India. Now let's review our liquidity position on Slide 11. We ended the half year with net debt balance of $209.3 million. Key movements since the prior year-end included $41.1 million in dividends paid in July, $37.7 million in cash generated from operations, $12.9 million in capital expenditures focused on growth and efficiency projects and $10.1 million in transformation expenses tied to our key strategic initiatives. We closed the year with a net debt to adjusted EBITDA leverage ratio of 1.4x, providing us with the balance sheet strength to fund future growth. That concludes my prepared remarks. Thank you again for joining us today and for your continued interest in Landis+Gyr. I'll now hand it back to Peter to walk through our remaining fiscal '25 guidance. Peter? Peter Mainz: Thank you, Davinder. Before addressing the guidance, let me close by commenting on the improved look of our high-quality global business and the new starting point we have created. Let's move to Slide 12. On this slide, we have depicted the impact on both revenue and adjusted EBITDA from removing the EMEA business from full year 2024 financials. It invigorates that we are now paving the path towards a more focused and efficient operating model with a portfolio weighted towards higher-margin business as seen through the immediate 300 basis point improvement in adjusted EBITDA. After selling the EMEA business, this marks a fresh start for our high-quality company with significant predictable recurring revenue and substantial improvements across every financial metric. This is reflected in the guidance discussed on our next slide. So let's move to Slide 13. For net revenue, we confirm our 5% to 8% growth guidance we gave in May this year for the continuing Landis+Gyr business. We expect a strong top line performance in the second half, driven by the momentum built in the first half. For the adjusted EBITDA margin, we increased our forecast from initially 10.5% to 12% to now 13% to 14.5% of revenue. This raise in margin is a result of the focused high-quality business we have created with the strategic transformation. In fiscal year 2025, we will carry $10 million to $15 million of dis-synergies, mainly corporate costs that will go with EMEA after closing. For fiscal year 2025, we need to think about this on a pro forma basis, and it will elevate our profitability further in 2026 and beyond. Let's move to Slide 14. Let me wrap up why we believe Landis+Gyr is exceptionally well positioned for the future. We are a trusted leader in energy technology with a platform deeply embedded in our customers' operations and a track record of being invited back again and again. Across our core markets, we hold substantial share and benefit from a record $4 billion backlog, representing more than 3 years of revenue for the continuing business. This gives us strong visibility in an ever-growing base of recurring revenue. Our financial profile has strengthened significantly. We have sharpened our focus, increased EBITDA and cash generation and lowered our capital intensity, in essence, improving every single financial metric. We are returning value to our shareholders with $175 million buyback and staying disciplined in our execution. With structural demand drivers across electrification, grid modernization and AI, Landis+Gyr is focused, aligned and ready to lead the next era of intelligent energy. And now we'll open the call for questions. Sandra, please. Operator: [Operator Instructions] Our first question comes from Akash Gupta from JPMorgan. Akash Gupta: I have a few questions, and I'll ask one at a time. My first one is on North American growth. So if we look at your full year guidance and look at what you delivered in the first half, on my back-of-envelope calculation, it looks like you are guiding for mid- to high teens sequential growth in second half in North America. Maybe if you can start with what is driving it? How much visibility do you have? And what are the risks in delivering this strong growth that you're expecting in the second half? Peter Mainz: Yes. Thank you, Akash. So obviously, what is driving it, it starts with the backlog that we have on hand. And if you look at the growth rate that you mentioned, that's also -- we saw a similar growth rate in the first half of this year compared to second half of last fiscal year. And part of the substantial growth we also see in the second half, the first couple of months of this first half was a bit impacted by the tariffs, and we had to shift our supply chain a bit, but it's really driven by the momentum that we have created and the momentum manifesting itself in the best way in the backlog that we have as we start the second half of this year. Akash Gupta: And my second question is on tariffs. I mean you mentioned that you got hit by $5 million. Maybe if you can talk about, is this gross impact or net impact? And what sort of protection do you have in your contracts if something changes materially on tariff fronts in the future? Peter Mainz: Okay. So the most important thing, if you recall, at the beginning of the year, we said tariffs will have a minimal impact on our financial performance throughout the fiscal year, and that is still true. And the number that you see, the net impact of about $5 million, that's really what we've seen in the first 2 months or so, I would say, of the year when we said we needed to make some sourcing changes to be compliant with USMCA. And as the rules of the game became a bit clear as we started the year, we needed a couple of weeks to clarify that. So we incurred costs in the first, I would say, 2 to 3 months. And we expect those costs to be in the rear mirror here. Akash Gupta: And my last question is on more of the big picture question. When I look at your Slide #6, where you talk about U.S. power demand and growth. I think what I want to understand is that a substantial part of this growth is coming from data centers. And as we hear, there are -- most of the data centers may have their own power generation on top of grid connection. So the question is that how does this adoption of data centers, both directly and indirectly going to impact your business? Maybe you can give us some examples to better understand how do you expect the demand to change because of this data center growth in U.S. power market? Peter Mainz: So it's still -- obviously, we'll see a mix how data centers will be powered. But when I speak with utility executives, data center and onshoring is still a substantial growth for the capital expenditures that they have to spend to bring those users of energy life on the grid. So it's driving them substantially, and we believe only a smaller portion will be powered independently. And even if they are powered independently, they need to be connected to the grid and require what we provide flexibility. So we see it as a consistent driver in the capital expenditures and where we see it the most as utilities look at their increasing capital expenditures, they look at which capital expenditures make the most sense. If they are pushed by the utility commission to adjust their capital expenditures, then they go back, which are the expenditures with the highest return on capital and that's where investments in our technology come up being on top over and over again. So we see that as one driver. And the second driver is also -- is the one as we see this peak demand growth and it's turning more into a peak plateau versus a peak. We also see that with some of the permanent energy resources are no longer sufficient to provide that. And again, that's the second driver providing substantial flexibility in the grid to provide the resilience to do that. So those are the 2 drivers that we see. And every time we engage with utilities, they bring that up over and over again. Resilience in light of the demand growth is a big driver. So that's the big driver we see. Operator: [Operator Instructions] We have now a question from Jeffrey Osborne from TD Cowen. Jeffrey Osborne: Just a couple of questions on my side. I was wondering if you could split up the recurring revenue that you mentioned between services and software. What's the mix between the 2? I assume it's more weighted to services. Peter Mainz: So we haven't broken that one out specifically. I don't think you're right with that statement, but we have not broken that one out specifically. So I couldn't provide you a percentage here on this call. Jeffrey Osborne: Got it. I'm just trying to think of the margin implications as we move forward as that revenue is recognized over the next 3 to 5 years. I assume that would have a pretty pronounced impact on EBITDA for the Americas segment. Is that true or no? Peter Mainz: Yes. We don't have Microsoft margins on our software. We have industrial software margin, but they're definitely accretive to the overall margin that we see for the business in the Americas. Jeffrey Osborne: Got it. And then can you just update us -- I think on the last call, 6 months ago, there were a couple of customers that had transitioned from the legacy technology to the new and you had taken a $20 million inventory write-down. Have those customers started ramping up with the newer Revelo platform? Or is that still something to come here in the second half? Peter Mainz: So when I look at the pipeline and I look at the order intake, that is more or less exclusively Revelo and grid edge technology today. When we look at the execution customers that signed contracts 3 years ago or so, they're still deploying the technology of that generation at that time. But we see a dramatic shift to grid edge to Revelo. Jeffrey Osborne: Got it. And just 2 quick last ones. What needs to go right to be at the high end of the guidance of 5% to 8% growth? If you could just respond to that? And then I didn't see any wins announced in the order, it sounded -- or in the quarter, the half. It sounded like you mentioned Australia, but is it the right way to think that you just had quite a few smaller wins and not any sort of marquee investor-owned utility wins in the quarter? Peter Mainz: So as we said, like different from the last time, we didn't have the one big one in our order intake. We had a multitude of orders. I think the largest one was close to $200 million. That was the largest one. So I think we had a good plan and a good mix of order intake. And as I say, every time we are not landing one of those big ones, being close to one is an exceptional result. So I think it's -- the order intake is more a testimony to the strength of the pipeline as it came in than to a single order. So we quite like that one. And between you asked the 5% to 8%, what moves us to 8% versus the 5%, I think it's execution until the last day of March of our fiscal year. Jeffrey Osborne: But I assume you're not hoping for any type of regulatory decisions between now and March to go your way that everything would be in backlog and it's more around execution and timing of implementation? Or is there still wins that you need to get from a turns business? Peter Mainz: No. I think anything you need regulatory approval today to wait for revenue. I think we're a bit too far advanced into the fiscal year for this to happen. So it's -- what we need to ship and execute is part of the $4 billion of backlog that we articulated today, and then you have a small portion of just business that comes in day in, day out from the existing customer base we have. So we feel quite good about the starting point. Operator: We have a follow-up question from Akash Gupta from JPMorgan. Akash Gupta: The first one is on the share buyback announcement that you plan to spend up to $175 million for share buyback. And the question I had was the consideration of share buyback over, let's say, bolt-on M&A. We often hear that some of your smaller competitors in North America, which are part of large organizations, they are kind of struggling in their smart meter business. And there is some speculation in the market that some of them might come in the market. So maybe can you talk about rationale of share buyback over bolt-on M&A? And if there will be any good interesting assets on the block, would you consider changing your capital allocation? Peter Mainz: So we've been fairly consistent from the time we announced that we're looking for options for the EMEA business that with the proceeds, we want to return it to the shareholders. And if you look at the list of activities that we still have in front of us for the next, I would say, 6 to 12 months, we still need to close the EMEA business. We're looking at the listing at the U.S. that consumes a tremendous amount of resources. So for M&A throughout that period of time, there would just be exceptional risk, and that's really not at the forefront of capital allocation for us for that period of time. So I think that's really the answer for the next 12 months period. Akash Gupta: And lastly, I think you announced in the release that you will be now providing quarterly trading update for third quarter in January. So I think that's a welcome step. But just wondering what sort of information shall we expect in the quarterly trading update? Peter Mainz: Well, you're certainly going to see revenue and gross margin when it is customary for a trading update, I guess, order intake. I think those would be the key numbers that we'll provide -- to provide comfort that we are on track for the full year numbers. Operator: [Operator Instructions] Gentlemen, so far, there are no further questions. Back over to you for any closing remarks. Peter Mainz: Looks like with our presentation, we tackled most of the questions that everyone had. So thank you again for joining us today. I appreciate your time and interest in Landis+Gyr, and I look forward to meeting all of you soon, either virtually or in person. Goodbye. Have a great day. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Angélica Garnica: [Audio Gap] consolidated sales of Grupo Carso totaled MXN 45.5 billion, decreasing 5.8% in the quarter. Grupo Sanborns and Grupo Condumex increased its revenues by 1.9% and 1.2%, respectively, related to summer promotional activities and higher volumes of industrial products. Zamajal hydrocarbons operation, which started consolidating in the second quarter of last year and is in developing process contributed with additional MXN 546 million, growing 27%. On the other hand, Elementia/Fortaleza, Carso Energy and Carso Infraestructura y Construcción decreased its sales 1.1%, 3.2% and 34.2%, respectively. This last division due to the conclusion of major infrastructure projects. Consolidated operating income totaled MXN 3.1 billion versus MXN 5.3 billion in the third quarter 2024. This 39.7% fall reflected lower exchange rate, higher salaries, wages and inflation in general. Grupo Sanborns additionally is implementing a new IT platform and Zamajal started depreciating major investments. Consolidated EBITDA for Grupo Carso from July to September 2025 decreased 20.4%, reaching MXN 5.6 billion compared to MXN 7 billion a year ago. The EBITDA margin decreased from 14.6% to 12.3%. Consolidated controlling net income decreased 78.4%, totaling MXN 651 million, lower than MXN 3 billion last year, reflecting lower operating results and a foreign exchange loss compared to a foreign exchange gain last year. Regarding the performance by division, Grupo Sanborns recorded higher sales with a 1.9% increase related to promotions carried out in the month of August and September. Operating income totaled MXN 443 million compared to MXN 535 million a year ago. This reduction in profitability was explained by an increase of 8.3% in expenses related to higher wages and salaries and the investment in different IT platforms to improve customer experience. EBITDA went down 6.8% with an EBITDA margin of 6.2%, while net income dropped 9.3%. In the Industrial Division, Grupo Condumex sales increased 2.2%, reaching MXN 13.2 billion versus MXN 13 billion in the same quarter of last year. This improvement was obtained by higher volumes of fiber optic cables for the CFE and automotive cables. Regarding operating income and EBITDA, these items reached MXN 967 million and MXN 1.2 billion, respectively, recording lower profitability compared to MXN 1.4 billion and MXN 1.6 billion a year ago. Carso Infraestructura y Construcción's sales totaled MXN 7 billion with the best performance coming from pipelines, where the construction of the Centauro del Norte gas pipeline started in the north of the country. Manufacturing and services for the oil and chemical industry had lower drilling activity and infrastructure concluded large projects. It is important to mention that currently new replacement projects are being recorded in the backlog due to recent bids, one such as the contract for the construction of the passenger train in Saltillo and new finance drilling services for oil wells. The operating income and EBITDA in Carso Infraestructura went down 95.5% and 78.9%, respectively. The controlling net result was a loss of MXN 629 million compared to a net income of MXN 649 million a year ago. The projects currently in place are the construction of shopping centers such as Pavilion Polanco, Star Medica Hospital, Plaza Carso 3-apartment building, telecom installation services and the construction of the Centauro del Norte gas pipeline. The backlog totaled MXN 70.4 billion compared to MXN 21.6 billion a year ago growing 267.9% since new projects were allocated such as the construction and design of 111 kilometers of the Saltillo-Nuevo Laredo passenger train segments for 13 and 14, Saltillo to Santa Catarina and the onshore and offshore drilling services of up to 32 wells for Pemex. The sales of Elementia/Fortaleza decreased 1.1% from MXN 7.7 billion in the third quarter 2024 to MXN 7.6 billion in the third quarter 2025. This was related to the exchange rate with a relevant part of revenues generated outside of Mexico, either from exports or from companies abroad. On the other hand, cement was affected by adverse weather conditions with heavy rains and hurricanes in some regions, which affected construction and cement demand. Therefore, operating income decreased from MXN 1.3 billion to MXN 1 billion and EBITDA decreased 14.9% due to the same reasons. Carso Energy's performance in the third quarter reduced 3.4% with total sales of MXN 867 million. This was attributable mainly to the exchange rate. The operating income and EBITDA of Carso Energy were MXN 659 million and MXN 773 million, decreasing 5.5% and 3.3%, respectively. The net result totaled MXN 371 million with a 10.8% reduction. Lastly, beginning in the second quarter, the oil operations to explore and exploit the Ichalkil and Pokoch fields on the Campeche Coast are being recorded and consolidated within the Carso numbers, where additional MXN 546 million were recorded in revenues at the Zamajal division. The operating result was a loss of MXN 439 million, while EBITDA totaled MXN 59 million. Zamajal continues its activities in the Ichalkil and Pokoch shallow water fields, increasing production and reducing operating costs and expenses. However, there were impacts of around MXN 250 million recorded in depreciation this quarter coming from significant capitalizations. With this, I finish my general comments to proceed to the Q&A session. We will make [Foreign Language] in Espaneol. But I want to remind you that the financial media can stay, but cannot make questions. The questions for the media will be addressed by Renato Flores Cartas from AMX, which help us with the media inquiries. Angélica Garnica: [Foreign Language] Unknown Analyst: [Foreign Language] Unknown Executive: [Foreign Language] Unknown Analyst: [Foreign Language] Unknown Executive: [Foreign Language] Angélica Garnica: [Foreign Language] Unknown Analyst: [Foreign Language] Unknown Executive: [Foreign Language] Unknown Analyst: [Foreign Language] Unknown Executive: [Foreign Language] Angélica Garnica: [Foreign Language] Unknown Executive: [Foreign Language] Unknown Analyst: [Foreign Language] Angélica Garnica: [Foreign Language] Unknown Analyst: [Foreign Language] Angélica Garnica: [Foreign Language] Unknown Analyst: [Foreign Language] Angélica Garnica: [Foreign Language] Unknown Executive: [Foreign Language] Angélica Garnica: [Foreign Language]
Operator: Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to Northwest Bancshares, Inc., Q3 2025 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Michael Perry, Managing Director, Corporate Development and Strategy and Investor Relations. You may begin. Michael Perry: Good morning, everyone, and thank you, operator. Welcome to Northwest Bancshares Third Quarter 2025 Earnings Call. Joining me today are Lou Torchio, President and CEO of Northwest Bancshares; Doug Schosser, our Chief Financial Officer; and T.K. Creal, our Chief Credit Officer. During this call, we will refer to information included in the supplemental third quarter earnings presentation, which is available on our Investor Relations website. If you'd like to read our forward-looking and other related disclosures, you can find them on Slide 2. Thank you. And now I'll hand it over to Lou. Louis Torchio: Thank you, Michael, and good morning, everyone. Thank you for joining us today to discuss our third quarter results. It was a busy and productive third quarter, and I'm pleased with our results and the team's performance. At the end of July, we closed the Penns Woods merger, the largest transaction in our company's history and completed customer and data conversion, and financial center rebranding. This is Northwest's first quarter as a combined entity with about 2/3 of a full quarter of combined company results. Deal synergies are as expected and the various financial impacts of the merger, including cost savings are all on target or better than expected. I would like to thank and congratulate our team on the successful execution and integration of this merger. In early August, in celebration of that achievement and joining the ranks of the nation's 100 largest bank holding companies, we rang the NASDAQ opening bell in New York City. During the third quarter, we continued to make strategic additions to our leadership team. We welcomed a new Chief Legal Officer, Treasurer and the Head of Wealth Management, a new role to lead our expanding wealth management team. We now have more than 150 financial centers across Pennsylvania, New York, Ohio and Indiana. And yesterday, we had an official groundbreaking ceremony for our first de novo financial center in the Columbus market, and we're joined by the Mayor of New Albany and the Chair of its Chamber of Commerce. This is the first of 3 new financial centers we'll be opening in the Columbus market next summer. We're already building out our Columbus de novo teams to support local deposit gathering, customer acquisition and developing business relationships for a fast ramp-up when we open our doors. Our newest de novo financial center in Fishers, Indiana, which we opened in June, is performing well and on target. And as we look out over the next 12 to 18 months, we expect to open additional new financial centers in key locations in the high-growth Columbus and Indianapolis markets. I'll now walk through some of the highlights of the third quarter, directing everyone to Slide 4. I'm pleased with the performance of our first quarter as a combined company with the team staying focused on executing our strategy and delivering on our commitment to sustainable, responsible and profitable growth. The merger enhanced our balance sheet scale. At quarter's end, we had $16.4 billion in total assets, $13.7 billion in deposits and $12.9 billion in loans. We delivered more than 25% year-over-year average commercial C&I growth with strong progress on our continuing strategic rebalancing of the portfolio. We're in the third year of our commercial banking transformation, and we're seeing the benefits of that focus and investment with progress in our specialty verticals, commercial deposits and continued growth in SBA lending. Northwest was recently named as a top 50 SBA lender nationally by volume. We delivered $168 million in revenue for the third quarter, a record in the company's history, resulting in more than 20% year-over-year revenue growth. Net interest margin improved 9 basis points quarter-over-quarter to 3.65%, benefiting from higher average loan yields and purchase accounting accretion. Our EPS on a GAAP basis was up $0.08 or 15% for the 9 months ended September 30, 2025, and our adjusted EPS increased $0.16 or 21% for the same period. Turning to credit, which we know is currently a topic of significant interest across the industry. For the record, we have no direct exposure or known indirect exposure to any of the companies with high-profile credit issues that have recently been referenced in the media coverage on regional banking. The headline is that we continue to manage risk tightly, and our credit costs continue to be in line with our expectations. We're happy with our progress in reducing the level of our criticized and classified loans that we highlighted last quarter. Prior to accounting for acquired loans, which resulted in an increase of $9 million to classified loans of the combined company, legacy Northwest classified loans decreased by $74 million this quarter, and we've seen further improvement post quarter end as we continue to manage our loan book in a focused and methodical manner. And finally, as we have for the previous 123 quarters, the Board of Directors has declared a quarterly dividend of $0.20 per share to shareholders of record as of November 6, 2025. Based on the market value of the company's common stock as of September 30, 2025, this represents an annualized dividend yield of approximately 6.5%. This quarter's results are the product of an extremely talented team's hard work. I want to thank our entire Northwest team for their continued dedication to our company's success. Looking forward to the final quarter of 2025, we continue to focus on managing the factors within our control, serving our core customers and communities, building on our strong financial foundations and maintaining tight cost controls and risk management discipline. Now I'll hand it over to Doug Schosser, our Chief Financial Officer. Doug? Douglas Schosser: Thank you, Lou, and good morning, everyone. As Lou indicated, we are pleased with our financial performance. This is the product of the efforts of our entire team working tirelessly to deliver these results while also ensuring that our merger and conversion activities went smoothly for our new customers and associates. Now let's continue on Page 5 of the earnings presentation, where I'll walk you through the highlights of Northwest's financial results for the third quarter of 2025. As a reminder, we closed our merger on July 25. So this quarter includes approximately 2 months benefit from the merger. The fourth quarter will be our first full quarter of reporting as a combined entity. Given the overall size of this transaction, our fully completed conversion and opportunities as a combined organization, we don't intend to disaggregate results unless doing so would aid in the explanation in this first combined quarter of reporting. Our GAAP EPS for the quarter was $0.02 per share, which reflects the merger and restructuring charges related to the merger. On an adjusted basis, our EPS was $0.29 per share for the third quarter. Net interest income grew $16.5 million or 14% quarter-over-quarter with the net interest margin improving to 3.65%, benefiting from higher average loan yields, increased average earning assets and the benefit from purchase accounting accretion. Noninterest income increased by $1.3 million or 4% quarter-over-quarter, driven primarily from an increase in service charges. These items combined drove total revenue to a record of $168.1 million in the quarter, a $17.7 million increase quarter-over-quarter. Additionally, we saw an increase in our adjusted pretax pre-provision net revenue, which came in at almost $66 million, an 11.5% increase quarter-over-quarter and a 36% improvement from third quarter 2024. And finally, our adjusted efficiency ratio of 59.6% in third quarter '25 improved by 80 basis points quarter-over-quarter and 520 basis points year-over-year. Turning to Page 6, I'll spend a moment covering the highlights of our Merger. We successfully completed all remaining merger conversion activities in third quarter 2025. All acquired branches are operating under the Northwest Bank name. All associates have been onboarded and the strong cultural fit is as we anticipated. All customers are converted and are being served under the Northwest brand. Deal synergies are on target and our capital position remains strong. Tangible common equity to tangible assets of 8.6% at quarter end is better than originally projected. This is a good time to cover a few other points that are important. First, I'd like to cover our liquidity position that is very strong. We have readily available incremental sources of liquidity that would cover approximately 250% of the company's uninsured deposits, net of collateralized and intercompany deposits at quarter end. As for capital, we have disclosed our current preliminary CET1 ratio at 12.3%, which is only about 60 basis points lower than the level recorded in second quarter 2025 and significantly in excess of the levels required to be considered well capitalized for regulatory purposes. Turning to Page 7 and the Purchase Accounting Impacts. Loan mark accretion was $2.7 million in the third quarter of 2025 and based on projected contractual cash flows is expected to be $1.9 million in the fourth quarter of 2025. We provided some additional information covering contractual accretion for 2026 and 2027. Actual results will vary with customer activity. Day 1 non-PCD and unfunded provision expense was $20.7 million, and our core deposit intangibles or CDI, were $48 million with $1.6 million of CDI amortization in the third quarter of 2025. The preliminary goodwill created was $61.2 million. On Page 8, we cover Loan Balances. Average loan balances grew $1.32 billion quarter-over-quarter, benefited from the acquired loan balances. Loan yields increased to 5.63% in third quarter 2025, growing by 8 basis points quarter-over-quarter. We have provided information by loan category throughout our investor presentation. I will also note that the increase in CRE balances did not meaningfully change our overall regulatory CRE concentration. On Page 9, we cover Deposit Balances. Deposit balances similarly benefited from the acquired balance sheet as average total deposits grew by $1.14 billion quarter-over-quarter, while broker deposits decreased $2.2 million quarter-over-quarter. Cost of deposits remained flat at 1.55%, benefiting from proactive management of the overall portfolio and still near best-in-class relative to our peers. We saw growth of deposit balances in most categories while maintaining reasonable deposit costs, and we are pleased with our progress here. We also saw no appreciable change in our deposit mix other than small increases in demand deposits, offset by minor reductions in borrowings. Moving to Slide 10 and our Net Interest Margin. Net interest income increased 13.8% quarter-over-quarter or $17 million, inclusive of the benefit from purchase accounting accretion, with NIM expanding 9 basis points to 3.65% in third quarter 2025. Purchase accounting accretion net impact equated to 6 basis points of our margin expansion. This continues our track record of growing both net interest income and improving our net interest margin by focusing on our loan pricing and our funding cost as the rate environment has been more favorable in 2025. Securities portfolio yields continue to increase as we reinvest cash flows at higher yields than the current portfolio. This is clearly a bright spot for our bank and will further improve many of our key profitability and return metrics. Slide 11 provides some details on our Earning Asset & Funding Mix. You will notice a few changes from last quarter. We've seen a modest shift in our earning asset mix as the acquired loans drove changes in our fixed and periodic repricing categories, while our funding mix was largely unchanged. You'll also note our time deposits have a very short duration, allowing us to continue to benefit from future repricing opportunities in a falling rate environment and lower interest expense. We hold a granular diversified deposit book with an average balance of over $18,000. Customer deposits consist of over 728,000 accounts with an average tenure of 12 years. The similar average customer balance and tenure pre and post-merger illustrates the similar high quality and granularity of the acquired deposit book. On Slide 12, our securities portfolio continues to be a strong source of liquidity for us. The yield on our securities portfolio continues to increase as we continue to reinvest cash flows at higher yields in the runoff portfolio, yields increased 10 basis points to 2.82% in the quarter. Slide 13 contains details on our noninterest income, which increased $1.3 million from last quarter, driven by an increase in service charges and fees benefiting from a larger customer base resulting from our acquisition and other operating income, primarily from a gain on equity method investments. Noninterest income increased 15.7% or $4.4 million year-over-year, driven by a $3 million increase in other operating income and continued growth across other fee income categories. Slide 14 details our noninterest expense. We incurred approximately $133 million of expenses on a GAAP basis, which included about $31 million of merger-related costs this quarter. Core expenses of $102 million are up $11 million from quarter 2 levels, resulting from higher levels of compensation and other expenses from the newly acquired employees and facilities. Additionally, core expenses also increased in the third quarter as we incurred additional expenses related to accruals for performance-based compensation. Our adjusted efficiency ratio of 59.6% after excluding those merger and restructuring expenses is an improvement from the 64.8% in the prior year period. This reflects our continued focus on managing expenses without an impact on our core operations or sacrificing customer service while still investing in talent to support future growth. On the next few slides, we'll cover credit quality. On Slide 15, you can see our overall allowance coverage ratio has increased to 1.22%, up slightly from second quarter of 2025 with provision expense of $11.2 million, net of day 1 non-PCD impacts versus $11.5 million in the second quarter of 2025 due to individual assessments within the commercial portfolio. Our annualized net charge-offs of 29 basis points for the quarter are in line with expectations and guidance. We believe our coverage is appropriate, prudent and in keeping with our rigorous credit risk management approach. On Slide 16, you will note that our 30-day plus loan delinquencies increased slightly from 1% to 1.10%, mostly from acquired loans within the consumer book. This increase does contain some more administrative consumer delinquencies as customers need to manage certain changes in online bill pay and other electronic payment methods resulting from impacts from the conversion. We expect this trend to decline over time. NPAs increased by $26.3 million, approximately $17 million of which is attributed to the acquired loans. Our NPAs as a percentage of loans outstanding plus OREO has increased to 100 basis points. We provide some additional details on the drivers of this change on that slide. Turning to Page 17. We've included some additional information on changes within the classified loans reported this quarter. The third quarter 2025 increase in our classified loans is a result of the acquired loan book, but overall classified loans declined as a percentage of total loans. Northwest legacy classified loan book decreased $74 million quarter-over-quarter, resulting primarily from payoffs. Net charge-offs remained within guidance at 7 basis points or $9.2 million for the quarter or 29 basis points annualized. We included our commercial loan distribution and CRE concentration information on a slide in the appendix. As Lou alluded to earlier, we have no direct exposure or known indirect exposure to Tricolor, First Brands or Cantor Group. Regulatory CRE concentration is approximately 156% of target Tier 1 plus ACL, up slightly from the prior quarter at 152%. On Slide 18, we have provided an updated perspective on our outlook. We continue to be confident about Northwest business and would expect to maintain our net interest margin at the third quarter 2025 levels of the mid-360s. Future NIM will be a bit more volatile as prepayments of the acquired loans will accelerate purchase accounting accretion, making it difficult to forecast. We are effectively reaffirming the rest of our previous fourth quarter 2025 guidance, including noninterest income expected to be $32 million to $33 million, noninterest expense expected to be in the range of $102 million to $104 million, tax rate expected to remain flat at the 2024 tax rate. And finally, net charge-offs to average loans expected to end the year at the low end of the 25 to 35 basis point range, which could mean net charge-offs up to $13 million in the fourth quarter of 2025. As a reminder, we said last quarter, we will not have fully realized all the cost savings from the merger in the fourth quarter of 2025, but expect to achieve 100% of the savings by second quarter 2026. We will provide full year 2026 guidance during our fourth quarter 2025 earnings release call in January 2026. Now I'll turn the call over to the operator, who will open the lines for a live Q&A session. Operator: [Operator Instructions] Your first question comes from the line of Daniel Tamayo with Raymond James. Daniel Tamayo: Maybe we start on the loan growth side. I don't know if I heard any commentary on loan growth expectations. But as you address that, just curious if you could talk about the new de novo branches that you're adding in Indianapolis and Columbus and how that kind of fits into the loan growth guidance? Douglas Schosser: Okay. I'll start, and then I'll let Lou comment on the new branches and expansion. So this quarter, we would have had a big impact from the acquisition, and we didn't disaggregate all of that movement. But I would say for next quarter, we are looking, again, to hold the balance sheet stable. To the extent there's opportunities to create some balance sheet growth on the loan side, of course, we'll take advantage of that, but the overall environment has been pretty good, our pipelines look pretty good. But again, closings in any given quarter are a little bit hard to predict. So certainly looking to continue to grow the franchise, and we'll look to that in the fourth quarter as well. Louis Torchio: Daniel, it's Lou. Thanks for calling in. On the de novo strategy, we're already out in the market. We've hired commercial real estate business bankers. We're recruiting for the wealth team, and we'll start the deposit gathering sometime in '26 in anticipation of the new launches. We did break ground yesterday at the -- in the high-growth suburb of New Albany, Ohio. As you know, we opened suburban Indianapolis last quarter and so yes, we would -- we look to plan to grow in-market that it will be -- and use our national verticals that we created to be complementary. And again, in January, we'll give '26 guidance on loan growth, but we feel really comfortable with all the different levers that we have and where our pipelines currently are, including our commercial pipeline. Daniel Tamayo: That's helpful. I guess just to dig in a little bit more. I know you're not giving guidance in '26 yet, but you're thinking it was -- legacy growth was pretty flat in the third quarter, and you're saying flat again in the fourth quarter. I'm assuming you're hoping to grow in '26. I mean, is that a fair statement? Is it -- should we be looking for something in the low to mid-single-digit range? Or do you think you can do a little bit better than that? Douglas Schosser: Yes. I mean I definitely think we're going to -- when we provide that guidance, you would expect to see a loan growth number that would look pretty comparable to GDP growth. So I think that's fair kind of thinking right now. I think the other thing to keep in mind is we are working through the criticized classified assets that's obviously going to have an impact on our ability to show growth as well. So as those refinance off the book, of course, that creates a little bit of a tailwind to actually showing growth in the portfolio. So I would just mention that as well. Again, as we talked about last quarter and we kind of continue the conversation this quarter, we're hoping to see a good amount of movement on that portfolio. In our opening comments, we talked about, that was $75 million of change this quarter alone. Daniel Tamayo: And then maybe just touching on the expenses here, the number was better than I was looking for in the third quarter and guidance looks pretty good for the fourth quarter. Again, you talked about continued cost savings coming through the beginning of next year. How should we think about expense numbers going forward? If that run rate is still -- what is it -- is it stabilis, you think, off of the fourth quarter number into 2026? Or because you've got the hirings or the de novo branches opening that you'll be growing expenses at a decent clip next year? Douglas Schosser: So I think that's a good way to think about it. Again, we'll get into more details when we do guidance for '26. But I think the way Lou and I think about it right now is we really want to focus on continuing to manage positive operating leverage. So -- and we want to continue to invest for growth. So the de novos being a good example of that. So I think next year, we need to take a look at where our revenue growth is going to be, and then we want to continue to invest to grow. So we would definitely hold some level of ability to think about our expenses in that way, but we're certainly not talking about a significant increase from here. And then we will have the benefit of those costs on the Penns Woods side starting to become a little bit more rationalized as we get into the third quarter, again, so we've got some opportunities there as well. But I think the way you're thinking about it around does it make sense to kind of hold them at these levels? Yes, but we'll obviously try to do better than that. Operator: Your next question comes from the line of Brian Foran with Truist Securities. Brian Foran: Just on the tangible common equity ratio and CET1 coming in better than expected post the acquisition, could you just give us your updated thoughts on kind of the levels you think you would target over time? And as you look to next year, how you're thinking about trade-offs between buybacks, potential acquisitions, maybe just running with a little bit of excess, just how we should think about managing that capital position in the next 12 to 18 months? Douglas Schosser: Yes, sure. I mean, clearly, we're at -- we're well in excess of regulatory minimums for capital, and we like that position. I think that just helps support safe and sound banking franchise. The other thing I would say is it also -- as we want to be able to take advantage of any opportunities in the market, we would hold that capital level there. We've never gotten into capital level targets per se, but I think we're significantly comfortable with the capital levels that we carry now. And as we find opportunities to deploy that capital because obviously, that would -- your returns on tangible common equity would be benefited if you had a little bit less capital, similar returns, we obviously think about that. But I wouldn't say that you're looking at a massive change in the capital position for the company, just kind of normal operating. But we like having a strong capital base certainly to operate from. Brian Foran: And then on the margin commentary, I definitely heard you on the -- I think the word used was volatile, but the difficulty managing or forecasting purchase accounting accretion, outside of the quarter-to-quarter moves and paydowns in the PAA book, does it feel like the second half of this year is kind of a good run rate? Or should we build in a little bit of haircut as PAA and rate cuts and all that factors through? Douglas Schosser: Yes. No, I think we said that there was about 6 basis points impact from the purchase accounting side, so that would take our core margin, if you will, to like a 359 bps level. So when I sort of guided to that mid-360s bps, that was conceptually thinking about that 359 bps. We feel pretty good about that and being able to maintain that. You'll get a couple of basis points here or there depending on a quarter-over-quarter, if you had more paydowns and purchase accounting acceleration in one quarter versus another, that was the fees of the volatility I was thinking about. But I think we're pretty well positioned as it relates to kind of rates and are comfortable that we can keep that 360 bps core, like right around 360 bps and then we have some -- a little bit of movement from purchase accounting here or there. Does that help? Brian Foran: That's great. Maybe one last one just on the credit slide. Just kind of comparing to last quarter, it seems like the nursing home book had some nice payoffs as you alluded to the fourth quarter, potentially seeing additional payoffs of classified loans. Is it still concentrated there? Is it spreading a little bit? And related to that, when you talk about up to $13 million of charge-offs, is that just a mathematical statement? Or are you kind of saying, look, we've got maybe a couple of larger resolutions we're working through and fourth quarter might be a little higher than 3Q? Douglas Schosser: It was a bit of both, right? I think what we wanted to clarify is when we came out in the second quarter, we said expect a couple of quarters in the $11 million to $13 million range and that we were expecting to have total charge-offs at around that low end of our guidance or 25 basis points of loans. In order to kind of be clear about what that could mean in the fourth quarter is that could mean $13 million, and we'd still hit all of that guidance. So we just didn't want anybody to sort of say, "Oh, $9 million and then $9 million." We wanted to say, "Yes, well, as we work through this book, we may have some elevated charge-offs for a period of time, but not elevated to the extent that we felt like we were going to be above or even within that sort of 25 bps to 35 bps range that we said." We said we'd be at the lower end of that range for around 25 bps. So it's more doing the math. I think there is a little bit of work to do on credit classified loans as we work some of them out. So we would expect that there'll be some impact there, but we feel pretty good that we're reserved for all of that. But again, when you hit a charge-off versus reserves, we just wanted to be clear. Operator: Your next question comes from the line of Tim Switzer with KBW. Timothy Switzer: First question I have is a follow-up on the credit in terms of the consumer portfolio. I'd love to get an idea of like what trends you guys are seeing there? And then maybe even outside of the loan book, what you're seeing across your deposit accounts in terms of like activity and behavior just because there's been some noise around the health of the consumer, particularly at like the lower end of the credit spectrum, which I don't think you get that much exposure to, but if you could update us on that, too, please? Douglas Schosser: Sure. So first of all, on the consumer side, I think we referenced it in our comments that we have a little bit of elevated delinquencies as we brought on the Penns Woods customers and the acquired loans. However, some of that is definitely administrative in nature. So if you think about going through a conversion, be able to reestablish their payment channels through new online portals and other things. So you do tend to see a little bit of incremental activity there. We continue to see that sort of work its way through the system. So we don't see that as being a negative trend on the overall consumer book, just more a process of some administrative things that are going on with the customer base. So that would be one thing. I'd also say that we continue to be very comfortable with our consumer exposure beyond that. Our auto loan book is very high credit quality; super prime book, very low delinquencies on that book, and we have not seen a meaningful change in those delinquency rates between the second and third quarter. And then the only other thing I might comment on is I don't think we're seeing any significant impact from any of the government showdown -- slowdown activities, and we wouldn't have expected to see it this early either but generally speaking, I think we're seeing the consumers be very similar in the third quarter as they were in the second quarter sort of across the book. Timothy Switzer: And the other question I have is, I know you guys just closed Penns Woods, but how do you think about scaling up the bank from here? Is there a target size for the bank where you hit optimal efficiency or returns over the next 5 years or so? And you have a management team with a lot of experience at larger banks. So how would you like to get there through organic growth, de novo or M&A? Louis Torchio: Yes. Tim, this is Lou. I'll take that. So as you know, at this point, we're looking at really maximizing the integration and the efficiency and then the accretion of the Penns Woods merger, which being the largest in franchise history is really important on the execution side. It's going extremely well. As you noted, we have -- we now have an executive management team that we're really comfortable with being able to go out to the market and do M&A. Notwithstanding an M&A strategy, I would say that's just -- it's complementary. We are focused on improving our financial returns, our metrics at the core organic bank. And I think that the de novo branching opportunity, while meaningful for us in higher-growth markets that we currently don't have a large presence in, i.e., Columbus, Ohio and Indianapolis, Indiana, will continue to be a focus of ours, but we will have to do complementary, whether it be look at acquiring a branch deal, opportunistically M&A in order to scale that. So I think that we're focused on, as we've stated in the past, a dual strategy, run the bank organically, continue to create efficiencies. We think there's some upside there and then look for M&A that's in and around our market that either fits us strategically, geographically that can add value to the franchise and then to the shareholder. Operator: Our next question comes from the line of David Bishop with Hovde Group. David Bishop: I appreciate the details on Slide 11 regarding the funding mix. Just curious in terms of the short duration nature of the CD, maybe what you're seeing in terms of weighted average cost rolling off over the next year and what you sort of put on rate these days? Douglas Schosser: Yes. I don't know that I have that number right at my fingertips. So what I would say, though, over 90% of that CD portfolio will mature before the middle of next year. So that does give us quite a bit of flexibility around what the new rates would go on as the overall interest rate environment sort of goes down theoretically with these rate cuts. So we like the way that book is positioned right now. We don't have a ton of really long exposures there. So we should be able to take advantage of sort of the rate curve wherever it is and still be fairly priced for our customers. David Bishop: And then in terms of the funding of expected loan growth, securities runoff expectations here in cash flows. Is that going to be securities funding that? Do you think deposit funding could cover the funding? Just curious how you're thinking about sort of the balance sheet ebbs and flows on sort of cash and securities. Douglas Schosser: Yes. I mean I think we would -- we have the ability to fund as much loan growth as we want. We have pretty low positions overall in brokered CDs. And in fact, we've been able to pay down a lot of that. So we've got plenty of funding capacity. Certainly, opening up some of these branches, we have to have that result in deposit growth. And we continue to focus on our ability to continue to help our customers on the commercial side with deposits. So we feel good about the opportunity to grow deposits organically. It's always super competitive, though, but we have other sources of funding, including the securities portfolio if we would need it. So I don't -- we don't have any real concerns or constraints in that place that we see right now. David Bishop: Looks like the security is about 13% of assets. Do you think it holds around this level or maybe builds or fall slightly. Just curious how you see that trending over time? Douglas Schosser: Yes. We can provide a little bit more color on that. We don't really have a target that we've ever talked about publicly. But depending on what opportunities exist and how we want to manage our interest rate position and liquidity position, we'll make those determinations. Operator: Your next question comes from the line of Matthew Breese with Stephens Inc. Matthew Breese: Doug, do you happen to have the most recent kind of spot rate of deposits either at quarter end or more recently? And then maybe I was hoping for some color or expectations for deposit betas over the next, call it, 12 to 18 months. Douglas Schosser: Yes. So we gave total cost of deposits at that 1.55% level, and they've been very stable. We actually were able to bring on some -- a good set of deposit mix from the acquisition, which helped. So again, I don't think we're seeing any upward pressure there. I think you're seeing -- money market promotional rates would be obviously higher than that, they might be in the 4s. But again, we're able to sort of manage that mix. And again, we operate in some really good markets that have a bit less competitive intensity than a lot of other markets. But again, we have to respond to market rates just like everybody else does. What was the second part of your question? Matthew Breese: Just expectations for deposit betas, particularly given the low overall cost of deposits here? Douglas Schosser: Yes. We feel -- I think our overall deposit beta has been in the mid-20s through this rate cycle, and we don't see it. We still have room when we kind of think about our opportunities as -- because we have a generally fixed or periodic repricing on the asset side, we are able to benefit as rates go down and sort of hold those margins pretty comparable with the amount of funding that we have available on the deposit side that does pay rate like CDs, money market rates, et cetera. So we feel pretty neutral position right now for the next series of rate cuts. Matthew Breese: And then you had also mentioned that pipelines were good or pretty good -- could you just better quantify for us what that looks like? And maybe within the pipeline, what are you seeing in terms of pockets of strength or areas that might grow a little bit more than other? Douglas Schosser: Yes. I mean I would say our pipeline commentary, we have nice developed pipelines in all of the national verticals that we support, and those continue to be strong. And again, that is an ability to pull from businesses sort of all around the country in those specialty areas that we have. Those would be sports finance, franchise finance, our equipment financing business, and a couple of others. We also feel pretty good about where our commercial real estate exposure is. There's obviously room there. So we would look to all of those businesses to drive some decent support. I think if you looked at our pipelines, you'll probably see a little bit more pipeline growth or support in the national verticals versus the end market, but that ebbs and flows over time. But I think that pipeline has been pretty consistent for the last couple of quarters. Matthew Breese: And then just on that last point, the specialized verticals, particularly the national one sports equipment finance. What is the total within C&I that you kind of consider in the national or specialty verticals? And how much of that or how much of those are participations versus kind of stand-alone relationships? Douglas Schosser: Yes. So those would be in the 20% range of the C&I book. And I would say generally not significant amounts of participations within that side. That would be more in our corporate finance book where we would have those, which is not one of the newer verticals that we built. Louis Torchio: And I would just add that we're very prescriptive and very measured in how we're growing those businesses. I would, in general terms, describe them as complementary. We're scaling them. They're scaling nicely. The performance -- the credit performance is very good. As Doug mentioned, limited participation activity. What we're looking to do is notwithstanding the equipment finance group, we're looking to also gather deposits and fees in those businesses. We have hired experts that have long-standing reputations in those industries, and they include sponsor, restaurant, finance, SBA lending group, equipment and sports. So we're watching those closely. We're scaling them appropriately within our credit risk tolerances, and they're performing wonderfully to date. Matthew Breese: Just last one, if I could sneak it in. On the pipeline, what are you seeing for overall blended loan yields? There have been others, perhaps your peers that are discussing a little bit of spread compression and I'm curious if you're seeing that as well. Douglas Schosser: Yes. I mean I would say overall rates coming on the book are in the 7s, low 7s. Certainly, it's competitive out there. As everyone is expecting rate reductions, obviously, we're pricing a lot of that on forward curve, so you would expect to see those yields get -- come under a little bit of pressure as well as you get into future environments that would have lower rates, but they're certainly not bad. Operator: Your last question comes from the line of Daniel Cardenas, Janney Montgomery Scott. Daniel Cardenas: So just a couple of quick questions here. On the expansion efforts, the de novo expansion efforts, do you have the talent already identified to run those new offices? Or is that kind of a search in progress right now? Louis Torchio: Yes, Daniel, I would say that it is a search in progress. It's a little early. We have gone out to the market here in Columbus with tangent business partners. We're currently evaluating wealth talent, small business talent. We've hired in the commercial space, middle market, CRE. And then as I stated, in '26, when the calendar turns, we'll be out with some deposit gathering campaigns so that we can fully load the branches and when we open the doors hit the ground running. But as far as we have a few people internally identified that will lead the early retail efforts. And then, of course, it's a little early to go to the marketplace and hire the other staff that are needed for the branch development. Daniel Cardenas: And then last question for me is just in terms of the Penns Woods transaction, can you provide any color as to, what the runoff on the loan and deposit portfolios is looking like? Is it in line with expectations, not as great as you thought? Or any color would be helpful. Douglas Schosser: Yes. No, it's definitely in line with our expectations. I would say maybe it's slightly better, but certainly not materially different from where we thought it would be. Again, I think new market, we have different credit standards than where the original franchise would have been. So that's going to take a little bit of time to work its way through the market, but we have not seen significant spikes that have concerned us at all. So I would say it's sort of steady as she goes, and we're comfortable with what we've seen come through thus far. Louis Torchio: Yes. In addition to Doug's comments, we have been very focused on integration and execution. We spent a lot of time in the marketplace, our senior leadership. Culturally, it has developed exactly like we thought. We are -- as I think we pointed out both in the release and verbally, achieving the cost saves that we expect. We expect also to get to the marketplace with an improved product set, SBA lending, Penns Woods didn't have some other products and services, trust and wealth. So we're pleased with the upside that the future we think from the Penns Woods acquisition will bring from a value standpoint. Operator: That concludes our Q&A session. I will now turn the call back over to Lou Torchio for closing remarks. Louis Torchio: Thank you. On behalf of the entire leadership team and the Board of Directors, thank you for joining our call this morning. With strong and stable financial foundations, tight cost controls and risk management discipline that we've described, additional scale from a larger balance sheet, we are well prepared to capitalize on the opportunities for driving sustainable, responsible and profitable growth. I look forward to updating you on the progress on our fourth quarter earnings call early next year. Have a good day. Operator: Ladies and gentlemen, thank you all for joining, and you may now disconnect. Everyone, have a great day.