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Operator: Greetings. Welcome to Grupo Traxion Third Quarter 2025 Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Aby Lijtszain, Executive President. Thank you. You may begin. Aby Lijtszain Chernizky: Thank you. Good morning, everyone. Thanks for joining us again for this quarterly earnings call. Let me start with the good news. As you know, we executed the integration of Solistica early in the quarter, and it has concluded successfully. It is the most relevant merger in the logistics industry in Mexico and a very strategic move on our side as it is transformational for Traxion. There are many synergies that we have captured so far. Among the most relevant are the transfer of the shared services center together with all their logistics back office to the Traxion platform and have executed several procurement efficiencies that have improved the bottom line. Traxion invested around MXN 1.6 billion in the acquisition and prepared the company to properly cope with the integration, which is expected to bring at least MXN 8 billion of additional revenue. Because of that, management decided to slow down organic growth to focus more on the successful merger of both operations. Most notably, Traxion significantly reduced its organic CapEx for 2025 to accommodate the acquisition of Solistica, which basically implies the same investment levels as in previous years, but with Solistica up and running in our platform. After the acquisition, the company remains with virtually the same level of leverage and interest expense, which is tremendously accretive. In summary, Traxion will post revenue growth with Solistica but will not change its leverage profile or interest expense at the end of the year which is very similar to having grown organically. Moving on, we experienced a downturn in both cargo and logistics operations. Even though export levels were in line with the same period of last year, there were some sectors affected by the tariff uncertainty in which many of our clients face challenges regarding their production and export operations, mainly the automotive and the online steel industries and some in the consumer and e-commerce sectors as well. There is a clear area of opportunity for us there as we have been shifting our capacity to other sectors of the economy with less volatility. Having said that, we are confident that our year-end top line figure will grow in the mid-teens and will be within the range of the guidance we released in our previous call. Thanks for your attention. I will now hand over the others for a deeper dive into details. Rodolfo Mercado Franco: Thank you, Aby. Welcome, everyone. This quarter continued to be marked by a high level of complexity, driven by uncertainty surrounding tariff-related developments between the United States and Mexico and other countries as well. I will now walk you through the most relevant operating highlights. First, I'm very pleased to share with you that the Solistica integration was implemented successfully and that our 100-day plan concluded favorably according to our expectations, thus ensuring operating and financial progression and the retention of both talent and key clients. We designed an integrated structure aimed at collaboration, efficiency and value creation which in the case of Solistica has an even more enhanced effect as this company came from a very institutional enterprise. Moving on, synergies are coming in as planned. And we have seen some effects in margin that will become more tangible in the next quarters. Among the most relevant synergies achieved so far are corporate reductions and adjustments, the shutdown of Solistica's shared services center and 3PL back office with the procurement side reporting the most relevant efficiency so far. In terms of mobility of cargo, severe disruptions continued during the third quarter, mainly in cross-border circuits on both northbound and southbound that have resulted in prices dropping as demand became more intermittent, especially with clients of the automotive industry and those related to the steel and iron sector. Furthermore, the Mexican peso continue to strengthen, which, as you know, affects the U.S. dollar-denominated portion of the cross-border revenue. However, we are seeing signals of recovery in the retail sector in Mexico and enhancement in general terms in the American side. There are no signals of structural changes in the fundamentals of our industry. So we think that this adversity is temporary. We have also achieved some cost efficiencies related mainly to fuel that have helped to improve cost per kilometer, among other smaller enhancements. Now in the logistics business, we continue to face challenges across the board that are explained basically by a downturn in cargo and some disruptions with our e-commerce clients, which typically import merchandise from the United States to Mexico. However, we expect the situation to normalize towards the end of the year. Finally, in mobility of people, we reported a slight increase in revenue, but a better performance moving to the bottom line. We were able to successfully close our commercial pipeline of the quarter, mainly combining capital expenditure with churning out fleet from older non-efficient clients and allocating those units to new clients at more competitive prices, such effects will become more visible in the coming quarters as those new accounts start contributing revenue and fleet productivity. As you can see, it was a very busy quarter with several highlights in many fronts. Thanks for your attention. With this, I end my remarks. Please, Wolf, go ahead. Wolf Silverstein: Thank you. Welcome, everyone. There are many financial highlights. First of all, there was margin stability in our three business divisions, including Solistica, cargo improved 430 basis points compared to the second quarter of this year. However, with the Solistica integration, Traxion has a much larger component of asset-light business lines which was 45% in terms of revenues this quarter and thus consolidated margin is lower compared to the same period of last year. As this business division continues to gain more relevance, the estimate consolidated margin for the company should be around 16%. Moving on, it is very important to note that the net debt to EBITDA ratio was 2.35x compared to 2.22x reported in the second quarter, just before the Solistica acquisition was finalized. This is very noteworthy as the ratio did not increase substantially and that we expect to end the year at similar levels. That translates into an increased profitability for the company. In this line, there's even another important aspect to highlight, which is that the interest expense remained virtually the same but with the acquisition of Solistica already in place. This basically means that we grew 14.5% our revenue base with virtually the same financial cost. This is indeed very good news and prove that this acquisition was exceptionally accretive and will continue to bring value over time as the integration is fully reflected in our P&L moving forward. Also, as Aby mentioned, we reduced significantly our CapEx for this year to accommodate the Solistica acquisition and still be within similar investment levels as in the past few years. In terms of financial results, aside from the interest expense that I just discussed, this quarter, the company did not have the foreign exchange benefit that contributed to net income in the third quarter of last year. Having said all that, Net income grew over 17%, more than revenues and EBITDA, which is a great highlight to mention this quarter. With this, I conclude my remarks and hand over to Tonio, Thanks. Antonio Obregón: Thank you, Wolf. I will now walk you through some relevant ESG milestones and other tech-related developments. Perhaps the most important sustainability milestone is that this period we incorporated data regarding renewable electricity generation from solar panels installed in our facilities. This is indeed very good news and a tremendous step in terms of emissions reduction and energy efficiency as we continue to expand our logistics footprint and presence. Moreover, we released our 2024 integrated report in line with the most important ESG standards, mainly TCFD and GRI, which are the reflection of our strong commitment to governance, transparency, people and planet. During this period, Traxion obtained the ISO certifications regarding anticorruption and compliance management matters, thus reinforcing the company's integrity standards and corporate observance. Moving on. As you very well know, digitalization has transformed many of our business lines. For some years now, we have paid special attention to tech-driven ecosystems and have conducted many upgrades that are now deeply embedded in our business model that have enabled Traxion to be one step ahead of clients' needs and beyond competition. So in terms of tech advancements and digital strategy, Traxion successfully implemented an in-house developed artificial intelligence program to help our commercial force predict and optimize opportunities, enhancing the decision-making process and boosting talent across the company. This milestone consolidates even more of the company's digital transformation that has been its leadership trademark while strengthening the Intelligent Mobility Solutions platform. Thanks again for your attention. With this, I end management's remarks, and we'll open the floor to Q&A. Operator: [Operator Instructions] And your first question comes from Anton Mortenkotter with GBM. Unknown Analyst: I have two quick ones. One is, we've seen that the cargo truck utilization has been dropping in the last quarters. I was wondering when do you expect this to normalize? Or what kind of levels do you expect to see or should be sustainable in the long term? And also thinking about the industrial trends for the next year, the USMCA renegotiation, how are you positioning for that? And then what are your expectations [ ago ]? Antonio Obregón: Anton, this is Tonio, thanks for your question. I'm going to answer the second question first. As many of you know, one of the biggest plans for Traxion is to expand into the United States because we think that is the natural geographic expansion for us, for the company. The cross-border market between Mexico and the U.S. is the fastest-growing market in transportation and logistics in the world currently. And we want to position ourselves in that market and into the United States. So I think that would be the best way to approach positive USMCA renegotiation, and all the benefits that it's going to bring to the table. Aby Lijtszain Chernizky: Anton, regarding to -- this is Aby, regarding to the first question. So what we're doing is getting clients from different industries. We are now giving a lot of services to the car industry. So we are diversifying the industries from Traxion. So with that, we expect to be as good as it was before, maybe in the middle of the next year, first or second quarter of the next year. Operator: And your next question comes from Edson Murguia with Seneca. Edson Murguia: I have two of them, the first one is related to the personal mobility segment, you have a growth of 4.2%. And you mentioned in the earnings release that we execute some efficiencies. So I was relieved if you can give us or you could elaborate more about your type of efficiencies? Did you perform during the quarter? And my second question is about the fleet reduction. Looking ahead, can we expect the same trend of reduction of the fleet? Antonio Obregón: Edson, this is Tonio. Regarding your second question in terms of fleet reduction, yes, you're right. If you see, we had fleet reductions -- slight fleet reductions in both segments. One has to do in mobility of people, the fleet reduction has to do with the profitability program, which is basically churning out buses from older, not that efficient clients into new clients that are willing to pay more market prices. So when you do that, you need to take out the operation, the bus and prepare it for the next one. So that bus is not operating for some time, perhaps two or three weeks and that reduces the average fleet on the quarter. It's not that we are reducing the fleet by design. It's just some metric that got caught up in the middle of the quarter. And regarding the reduction in the fleet -- in the cargo fleet, it's a normal thing. We are conducting a regular renovation program, which is not linear if we're going to renovate 400 trucks in a year. For example, it's not linear, that is perhaps not 100 trucks every quarter is different. So that's basically the reason. We are not reducing the fleet, quite the contrary. We want to keep it as it is. And regarding your first question, Edson, could you please repeat it? Edson Murguia: Yes, what type of efficiency did you perform in the personal segment to achieve 4.2% growth? Antonio Obregón: Sorry Edson, can you please repeat it again? We are not hearing it clearly. Edson Murguia: Perhaps -- Yes, sorry, probably it's my phone. But what type of efficiency did you perform in the personal segment to grow 4.2% during the quarter? Wolf Silverstein: This is Wolf. So let me try to be as clear I think it was the question. So in the mobility of people, as we mentioned, particularly for this 2025, we run this program that is a profitability program client that we are basically, as Tonio mentioned at the beginning, shuffling the clients that pay less for clients that can pay more, considering the opportunity that we saw in the market to raise some of the prices. So this, combined with the renewal program and obviously, let's say, the overhaul of the units that we need to put in place so we can allocate the buses to the new clients. This is basically what we're doing, in particular this year instead of just growing as it was similar in the past. So it's basically the most different problem that will run this particular year. So this is what you are seeing that the margins in that business are growing even though maybe the -- let's say, the revenues are similar than the inflation. Operator: Your next question comes from Felix Garcia with [indiscernible] Research. Unknown Analyst: Felix Garcia from [indiscernible] Research. First, congratulations on the successful integration of Solistica. Could you share which operational or client synergies have already started to materialize? And whether the 100-day plan help identify additional efficiency opportunities? Secondly, we understand the freight division faced a temporary slowdown in cross-border operations. Have you started to see any signs of recovery in demand or contract reactivation, particularly within the automotive sector? Antonio Obregón: Felix, I'm Tonio, I'm going to answer your first question. There are many synergies, but perhaps the most relevant one is that we basically unplugged the shared services center of Solistica and all the 3PL back-office operation and plugged it into the Traxion platform, which brought many costs and expenses savings in overhead, in corporate, in facilities and other tech-related things. But perhaps the most significant synergies we have identified so far and the most that have materialized in the first quarter, the faster ones, perhaps are in procurement, which as you know, we have a huge procurement platform. We do strategic negotiation and other things. And those are the main efficiencies. Effectively in the first 100 days of operation, we identified -- obviously, as you can imagine, we had identified some synergies that were more visible than evident. But once you have the company in your platform, there are others that are not that visible that are also achievable. So we have been with the company for three months. We think that there are going to be other synergies as time goes by. And I think for -- I think that the next year, you're going to be able to see some other efficiencies and synergies more tangible and more evidently in margin mostly. Rodolfo Mercado Franco: Felix, this is Rodolfo. So regarding your second question about the cross-border business or industry and the automotive, as you're saying, we -- the automotive has been hit in this growth business services. And we haven't seen very much of recuperation in this month. That's why Aby just said it in the before question is we're looking for other industries to switch our equipment and our trucks, so we can avoid the uncertainty that we have the automotive industry right now. Operator: Your next question comes from Martin Lara with Miranda Global Research. Martín Lara: Thank you for the call. Your leverage remains at very low levels. How do you see it going forward? Do you think it would reach 2x by the end of 2026? Wolf Silverstein: This is Wolf. So as we mentioned before, let's say, in the previous calls, even though after the Solistica acquisition, we are remaining at similar levels that we were before the acquisition. So that's very good news for the company and for the leverage of the company. Let's say that, as you know, the CapEx plan in an organic way for 2025, it was lower than the previous years. So we are expecting to deleverage the company in a couple of, let's say, quarters. And I think that's also good news regarding all the synergies that we're planning with Solistica on the Traxion platform plus the reducing CapEx and the generation of the cash flow. Martín Lara: Okay. And how do you see the margin -- the EBITDA margins in logistics and technology? Wolf Silverstein: You saw this quarter, it was something around, let's say, even though 9%. As we mentioned before, Solistica basically comes at the beginning with a similar levels of around 5% margin. Inside of Traxion, we think that this particular acquisition could boost 100 and 200 basis points more inside of Traxion. So at the end, let's say, this particular division at the end could be something between 8% to 9.5% margin in the division. Operator: And your next question comes from Fernanda Recchia with BTG. Fernanda Recchia: Two from our side as well. So the first on the top line growth that you provided for the year in last quarter, you mentioned an expectation of reaching between 14% to 16% of top line growth. But when we look at the nine months, you are -- was 6%, just wondering if you expect, still, to reach the guidance or maybe it could be a little bit lower because of the softer demand that we are seeing? And second, maybe if you could comment on the cash flow generation for next year. Antonio Obregón: Fernanda, this is Tonio. Thanks for your question. Yes, regarding the first question is we are very confident that our year-end figures are going to be within the range of guidance that we provided in the previous call. So we are -- we're confident that we're going to achieve it. Wolf Silverstein: Thank you, Fernanda. This is Wolf again. So regarding your second question regarding the cash flow generation for 2026. As you know, and we mentioned since 2024, the company was able basically to, let's say, to stabilize the operating cash flow neutral the previous year. So after, obviously, the Solistica acquisition, we're planning to have a positive cash flow generation for 2026. Operator: And your next question comes from Jorge [indiscernible]. Unknown Analyst: You mentioned you see expansion into the U.S. as one of the best ways to capture next years trends. If you could delve further into that, how would you prefer getting involved? Would it be via M&A on an existing competitor? Or would it be through fleet expansion? Antonio Obregón: Jorge, this is Tonio. Thanks for your question. Yes, we think that the best approach to tackle the opportunities in the cross-border market for us, would be via an M&A transaction. We think it's faster and more efficient than establishing an organic growth operation. It's going to take more time. And I mean if you take a look at the multiples and the valuations of the cargo companies in the U.S., it's a very attractive entry point. And we also think that the USMCA negotiations are going to be carried out positively. And when this [indiscernible] comes due next year. So yes, the answer to your question is M&A. Operator: [Operator Instructions] Now we'll pause for a couple of moments to see if there are any final questions. Thank you. This now concludes our question-and-answer session. I would like to turn the floor back to Aby Lijtszain, Executive President, for closing comments. Aby Lijtszain Chernizky: Our long-term view has not changed. We are confident that this downturn is temporary and that things are going to get back to normal as talks regarding USMCA evolves and the tariff uncertainty dissipates. We are confident that the North American trade will continue. It is the fastest-growing trade market in the world despite the noise and short-term disruptions. Traxion will continue to seize the opportunities, grow and improve it logistic solutions umbrella as we have always done in the past. Thanks for your attention, and have an excellent day. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines, and have a wonderful day.
Operator: Good morning, and welcome to Olin Corporation's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Steve Keenan, Olin's Director of Investor Relations. Please go ahead, Steve. Steve Keenan: Thank you, operator. Good morning, everyone. We appreciate you joining us today to review Olin's third quarter 2025 results. Please keep in mind that today's discussion, together with the associated slides as well as the question-and-answer session that follows, will include statements regarding estimates or expectations of future performance. Please note these are forward-looking statements and that Olin's actual results could differ materially from those projected. Some of the factors that could cause actual results to differ from our projections are described without limitations in the Risk Factors section of our most recent Form 10-K and in yesterday's third quarter earnings press release. A copy of today's transcript and slides will be available on our website in the Investors section under Past Events. Our earnings press release and related financial data and information are available under Press Releases. With me this morning are Ken Lane, Olin's President and CEO; and Todd Slater, Olin's CFO. We'll start with some prepared remarks, then we'll look forward to taking your questions. In order to give everyone an opportunity, we will limit participants to one question with no follow-ups. I'll now turn the call over to Olin's President and CEO, Ken Lane. Kenneth Lane: Thank you, Steve, and thanks to everyone for joining us today. Let's start with Slide 3 and our third quarter highlights. During the third quarter, we delivered robust results, reflecting strong performance in our Chlor Alkali products and Vinyls business, partially offset by ongoing weakness in our Epoxy and Winchester commercial ammunition businesses. We remain disciplined in our value-first commercial approach and operated our assets safely, reliably and efficiently. Team Olin is more committed than ever to executing our value-first commercial strategy, maximizing cash generation and delivering on our capital allocation priorities while preserving our strong leverage to a demand recovery. During the third quarter, we continued to generate positive operating cash flow and with a focused effort by Team Olin achieved a significant milestone by securing our eligibility for Section 45V clean hydrogen production tax credits, which Todd will discuss shortly. Now let's turn to Slide 4 and review our Chlor Alkali Products and Vinyls results. Third quarter ECU values remained stable as did global caustic soda demand. The main end markets for caustic soda have held up well. Some weakness in pulp and paper has been largely offset by good demand in other markets such as alumina and water treatment. As expected, caustic soda remains the stronger side of the ECU. Adding to the good results for CAPV was improved operating performance and lower costs. We are beginning to realize the benefits of our optimize the core strategy. During the quarter, we announced the dissolution of our Blue Water Alliance joint venture with Mitsui at year-end. Mitsui has been a long-term partner for Olin, and that will continue to be the case. However, we believe the complexity of a joint venture is not needed for us to strategically manage our participation in the EDC market. Aligned with our value-first commercial strategy, we will reduce our spot EDC exposure and focus on longer-term structural relationships offering higher returns across the cycle. Looking forward to the fourth quarter, we expect seasonally lower demand and our Chlor Alkali team is focused on preserving ECU values. In support of that, we are taking aggressive steps to adjust our operating rates, which will also help us deliver on our target to reduce working capital. Now let's turn to Slide 5 for a look at our Epoxy results. Global Epoxy resin demand remains weak, and we continue to face significant headwinds in both Europe and the U.S. regions, facing subsidized imported resin from Asian producers. U.S. demand has been more resilient than Europe. And with the removal of Epoxy resins from Annex II tariff exemptions, we are seeing traction with U.S. price increases. In spite of these market dynamics, Olin's third quarter formulated solutions volume improved sequentially. Fourth quarter planned maintenance presents a $14 million sequential headwind to Epoxy earnings. As we execute this turnaround safely and efficiently, the Epoxy team will focus on cash management as they reduce year-end inventories. Olin's new Stade, Germany supply agreement will provide improved economics for our European production, similar to the benefits from our integrated operations at Freeport. Starting in January 2026, the new agreement is expected to provide an annual adjusted EBITDA benefit of approximately $40 million. With rationalization of capacity in Europe, we are seeing opportunities to grow our participation and we'll do so at a value that is attractive. Next, we move to Slide 6 for an update on our Winchester business. As we discussed last quarter, our commercial ammunition business has been hit by a perfect storm, rising costs, elevated channel inventories, lower out-the-door retail sales and falling market prices. We estimate that high retail inventories have decreased Winchester commercial sales by approximately 5% to 10% so far this year. In the face of weak consumer sales, retail inventories have been slow to correct. As a result of this market environment, commercial margins have dropped dramatically, with half being attributable to lower volume, while the other half is a combination of lower pricing and higher costs. We are seeing some positive pricing trends developing for the fourth quarter. Given the recent run-up in metals and manufacturing costs, commercial margins will not be restored until demand recovers and inventory levels have been rightsized. In contrast to weak commercial demand, Winchester's military business continues to show strength. Domestic military and international military demand continues to grow as NATO countries expand their defense budgets. Our Next Generation Squad Weapon ammunition facility project at Lake City is well underway, and we are on course to complete construction in late 2027. In parallel, we are developing and delivering components and equipment to support the Army's accelerated fielding plan. Recognizing that the commercial market is not improving as quickly as we had hoped, we are adjusting our operating model to make-to-order versus make to inventory. As a result, we will see a reduction in Winchester working capital that will be sustained until we see demand improve. As part of this change, we will extend our typical holiday plant shutdowns to further reduce supply and reduce inventory. This will shift Winchester closer to a just-in-time manufacturing model. I'll now turn the call over to Todd Slater for a look at our financial highlights. Todd Slater: Thanks, Ken. Let's review our sequential quarterly adjusted EBITDA bridge. Third quarter 2025 adjusted EBITDA included a $32 million pretax benefit, primarily related to the clean hydrogen production tax credit under Section 45V as part of the Inflation Reduction Act of 2022. Excluding the Section 45V tax credit, our third quarter adjusted EBITDA was $190 million, which was an 8% sequential improvement. Chlor Alkali Products and Vinyls results improved, driven by lower operating costs and higher ethylene dichloride volumes while preserving ECU values as we navigate through this prolonged trough. Our Epoxy business continued to grow its formulated solutions volume as persistent headwinds from subsidized Asian imports impacted both the United States and European markets. As expected, Epoxy's third quarter results included higher operating costs from unabsorbed fixed manufacturing expenses incurred from planned inventory reductions. Winchester's third quarter segment results reflected the continued weakness of commercial ammunition volumes and margins, which more than offset improved military and military project earnings. The typical third quarter seasonal growth in commercial demand was muted. Now turning back to the 45V tax credit. We recognize this benefit as a result of our team's dedicated efforts over the last 3 years. During the third quarter, we received notification from the Department of Energy regarding our provisional carbon dioxide emissions rate, marking a significant milestone for tax credit recognition. The Section 45V tax credit pertains to qualified clean hydrogen produced and either sold or used at certain of our Chlor Alkali plants. Looking forward, we expect an annual benefit in adjusted EBITDA of $15 million to $20 million for the years 2026 through 2028 with lower amounts through 2032. Next, let's move to Slide 8 for a review of our liquidity. During the third quarter, we fell short of our cash flow and working capital targets, resulting in an increase in net debt for the period. This was primarily due to unforeseen payment delays from the U.S. government related to Lake City military business. These payments were subsequently received in October. For 2025, we continue to expect working capital to be a source of at least $100 million of cash, excluding the timing of tax payments. Consistent with what we previously discussed, by year-end 2025, we expect net debt to be flat with year-end 2024. Finally, we remain committed to our disciplined capital allocation approach and our priorities are clear. First and foremost, we retain our investment-grade balance sheet. Second, we fund sustaining capital spending to maintain the safe and reliable operation of our assets. And third, we are committed to maintaining our quarterly dividend. And then fourth, any available free cash flow is returned to shareholders through either highly accretive growth opportunities or share buybacks. Our teams continue to focus on cash generation, maintaining cost discipline and supporting our Beyond250 cost savings initiative. Our strong financial foundation enables Olin to continue executing our value-first commercial approach while adhering to our capital allocation priorities and prudent capital structure with a strong balance sheet and cash flow. Ken, I'll now hand the call back to you. Kenneth Lane: Thanks, Todd. Let's finish up with Slide 9 and our outlook for the fourth quarter. In our CAPV business, through actions we're taking, we expect to see stable ECU values in the face of seasonally weaker demand. Our Epoxy business remains challenged, but will begin to see improvement as we enter the new year and benefits accrue from our new Stade supply agreement, some pricing improvements in the U.S. market and volume gains in Europe following capacity rationalizations. In Winchester, we have a very strong legacy and an industry-leading brand that has supported the U.S. and allied militaries for more than 150 years. We will see resilience in this business and are taking actions to accelerate that in the fourth quarter by adjusting our operating model, driving price increases and finding new opportunities in our international military business. The current trough has been a test of our commercial model and our commitment to operating discipline. We've stayed the course and developed ways to further help ourselves through improvements in our cost structure that are beginning to show benefits. We will provide a more detailed progress report during our fourth quarter earnings call in early 2026. But as we shared during our Investor Day, our Beyond250 initiative is built upon 3 pillars. First, the structural rightsizing and cleanup of our production assets. Recent rationalizations have left behind inefficiencies or remnant costs. This will be implemented in close coordination with our planned outages in the coming years. Second, we must streamline our operations and maintenance practices to work more efficiently and reduce our dependency on contractors. Third, we will redouble our efforts to be the industry leader in operating efficiencies. These Beyond250 pillars are embedded in every employee's incentive so that we create a culture of ownership and performance-driven accountability that is aligned to our values, including being the safest and most reliable operator in the industry. Finally, during the fourth quarter, we will realize a $40 million EBITDA penalty to reduce inventories and support our value-first commercial strategy. Including this, we expect our fourth quarter 2025 adjusted EBITDA to be in the range of $110 million to $130 million. Operator, we are now ready to take questions. Operator: [Operator Instructions] And today's first question comes from Hassan Ahmed with Alembic Global. Hassan Ahmed: A question around -- I know it's early days to start thinking about 2026. But I mean, if I sit there and take a look at what your guidance implies for 2025, excluding sort of the inventory penalty, you get to around $734 million to $754 million in EBITDA, and that's obviously ex the inventory penalty. So I'm just trying to figure out via self-help, via stuff that's in your control, how much of an increment could we see in 2026? Obviously, you guys have the Dow contract in place. There won't be the turnaround in the Epoxy business. And obviously, you guys have the whole cost-cutting side of things as well. Kenneth Lane: Hassan, this is Ken. Listen, I'll start and then maybe Todd can add a little bit. As we look at what we're doing going into the fourth quarter, we've talked a lot about things that we have to do to help ourselves just because we're not seeing the market environment improve really in any of our businesses so far. So the focus on Beyond250 and the cost reductions that we're going to realize there is something that the entire organization is really driving to make sure that we can deliver that. So we've talked about a $70 million to $90 million run rate coming out of this year into next year. And that does include the Dow agreement at Stade, the new agreement that we've got that's -- we're going to be seeing that in the P&L in the first quarter. It actually took effect on October 1. But with all of that, we do see some upside to the $70 million to $90 million in 2026. So we're going to be giving you a little bit more color around that in the fourth quarter earnings call at the beginning of the year next year. So stay tuned for that, and we'll give you a little bit more details. But at the end of the day, we've really got to buckle down here and do what we can do to help ourselves. Todd, do you want to add anything to that? Todd Slater: Hassan, as we look into 2027, you mentioned turnarounds. I'll remind everyone on the call that we do have our 1 in every 3-year major turnaround on our VCM, Vinyl Chloride Monomer unit that will happen generally in the first half of next year. So that's probably a headwind relative to what we've seen this year. Operator: Thank you. Our next question today comes from Josh Spector at UBS. Joshua Spector: I apologize if I missed this earlier, but I also wanted to ask on the 45V credit. I mean, the $32 million in the quarter, how much of that is catch-up for earlier in the year? And really, the question is, what's the ongoing benefit we should be modeling in for Olin into next year or further out? Todd Slater: Josh, it's Todd. Thanks for the question. Yes, it is ultimately a catch-up. The $32 million, we were finally able to realize that because of getting our final CO2 emissions information from the Department of Energy. We've been working on this candidly for the last 3 years. As we go forward, we would look at 2026 through 2028. We think you'll see adjusted EBITDA benefit in the $15 million to $20 million range each of those years. Operator: And our next question today comes from Matt DeYoe with Bank of America. Salvator Tiano: This is Salvator Tiano filling in for Matt. Can you talk a little bit about the working capital situation in Q3? I think there was a very big increase in some of the working capital buckets. Why this happened? And given that, is it safe to assume that Q3 operating rates, especially in Chlor Alkali were better than you expected in the initial guidance? And ultimately, what does this mean for your Q4 operating rates versus your -- how you've been running the past few years? Kenneth Lane: So listen, let's talk a little bit more detail about this inventory reduction. We're going to take a $40 million penalty in EBITDA in the fourth quarter. What that's going to do is going to free up about $150 million in cash. And that benefit that we're going to see in cash is something that really was built up over the full year. So we've seen increases in working capital in all of the businesses. Some of it was back at the beginning of the year when we were expecting demand to be stronger, particularly when you think about Winchester. And we just didn't see the inventories coming down as fast, and now we're going to have to take some aggressive action to reduce that. In Chemicals, it's a combination of timing around turnarounds and needing to build some inventory during the third quarter in order to be ready for turnarounds in the fourth quarter. So you're going to see that come back out in the fourth quarter. But frankly, some of it is just us continuing to show discipline in supporting our commercial first -- our value-first commercial strategy and being sure that we continue to be disciplined with that. So Todd, I don't know if there's anything you want to add related to that. Todd Slater: The only comment I would remind everyone, and thanks for the question, Sal, was that we did have a penalty on working capital at the end of September related to delayed payments from the U.S. government for our Lake City military business. Ultimately, those have been received here in October. But that was candidly the biggest driver by far on why working capital moved up in the third quarter compared to the second. Operator: Thank you. And our next question today comes from Frank Mitsch with Fermium Research. Frank Mitsch: I'd like to flesh out this $40 million negative impact due to inventories in the fourth quarter. It looks like it's a combination of Chlor Alkali and Winchester. So wondering if you could size it to. Is this more of an Olin issue? Or do you feel like the industry overall is holding much too much inventory, so we should expect lower operating rates from the industry overall? And how confident are you that the $40 million is the right number? And then as we start 1Q '26, you can go back to operating as you normally would? Kenneth Lane: Frank, thank you for the question. So listen, just to add a little bit more color maybe to that EBITDA penalty that we're facing. Like I said, a lot of the working capital build was related to Winchester. And so that's a totally different animal than when you talk about the chemicals, value chains and whether the industry there has got too much inventory in the chain. So let me talk about Winchester first. We've been talking about high inventories in the retail chain since this time last year. Those levels of inventory came down at the beginning of the year, but they have not continued to fall. They've sort of leveled off at a relatively high level. And if you couple that with the fact that there was sort of a wave of imports that came in prior to the tariffs of ammunition, that also added to that issue. So Winchester is a bit unique. There is a lot of inventory in the chain there that needs to come out. And what we're going to do is we're not going to continue to use our balance sheet to carry that inventory if that inventory is somewhere else in the chain. That's just what we have to do to be disciplined and support our balance sheet. Now for chemicals, it's really hard to have visibility. What I would say right now is I'm not concerned about too much inventory in the chain -- in the chemicals value chains. That's not something that we've seen. But what I would say is there's always a risk when you get into the fourth quarter because that's seasonally the weakest quarter. There's always a chance that people do start to pull inventory even if they have low inventories, they can take the inventories really very low, very quickly. And so we want to be prepared for anything here. We want to make sure that we rightsize our inventory levels, really reduce them to the minimum level. At the same time, we are going to reduce operating rates and show the discipline around being able to move the volume at the value that we like. And that strategy is not changing. Operator: Thank you. And our next question today comes from Aleksey Yefremov with KeyBanc. Aleksey Yefremov: You mentioned the opportunity to sign EDC supply agreements. Do you have anything in place today? Or is your entire EDC volume on a spot basis? And also, are there any agreements that are fairly close to getting over the finish line soon in this area? Kenneth Lane: So listen, we -- obviously, we are working on more structural term agreements, term contracts for EDC. If you look at the EDC values today, one of the biggest variances we've got versus prior year is the EDC price that we see in the market today. Now fortunately, we're the cost leader in producing EDC. So we're able to weather that better than others. But when we think about this across the cycle, it does make more sense for us to have more contracted positions than what we have today. We do have contracted business today. A lot of that runs through our joint venture with BWA. We announced that we're going to be unwinding that between now and the end of the year. Mitsui has been a great partner, but the complexity of running that business through a joint venture versus the value that we were realizing and the option for us to control that channel to market exclusively to ourselves, the trade-offs just were not in our favor. So that was really what drove our decision to unwind that joint venture so that we can go out and make these structural deals. We'll still be working with Mitsui as a counterparty. That's not going to change. But we are looking at bigger opportunities to be able to place volume, and we should be able to have more to be able to say about that in the coming weeks. But yes, we are shifting the portfolio, but we will still have an exposure to the spot market. It's not going to go to 0, but it will be less than what we've had in the past. Operator: Thank you. And our next question today comes from John Roberts of Mizuho. John Ezekiel Roberts: Could you give us an update on the [indiscernible] propellants contract bidding process? And also maybe an update on your hedging in metals and what you're expecting there? Kenneth Lane: Yes, I'll give you a quick update there. Like anything with the government, it's a slow process. And with the government being shut down, it's basically not a running process right now. It's a little bit frustrating when you're dealing with the government here, especially when they're not paying you sometimes. But we're going to continue to look at that as an opportunity. All it is, is a working capital investment for us. It doesn't require any real capital to speak of. They've issued a preliminary RFP. They've received comments from industry and now they're going back and they're revising that. So there'll be another draft RFP that's coming out in the not-too-distant future. Let's see what happens with the government shutdown. And then there'll be another iteration. So I don't expect there's going to be anything decided regarding this until late next year at the earliest, which means there probably won't be any transition to a new operator, assuming that's the choice that they make until sometime in 2027. And I can't predict when that's going to be. But it certainly is an opportunity that we're still very interested in. As I said in my prepared comments, Winchester has been a strong supporter of the U.S. and NATO allied militaries over many years. We believe that with our chemical-based core businesses, along with the advantages that we have with our Winchester brand, we're the best person to be able to operate that. But we're going to do it for a value that makes sense for Olin and Olin shareholders. Now, I'll let Todd talk about the metals hedging. Todd Slater: Thanks, Ken. As everyone, I believe, on the call knows, we are a hedger, and we would expect metal costs to be a headwind in 2026 relative to 2025. We do operate at least a rolling 4-quarter hedging program. And I happened to look this morning at copper, and it was, I don't know, $510. So as you know, those prices eventually feed into our system slowly but do. And so -- and copper has been up. So as we think about raw material costs, raw material costs will be a headwind have been a headwind, and we expect that headwind to continue. Operator: Thank you. And our next question today comes from Patrick Cunningham at Citi. Patrick Cunningham: Maybe just on Epoxy. Obviously, still continues to be challenged by some price competitive Asian imports. Maybe you're getting a little protection here that gives you a platform for price. But how should we think about earnings levels into next year? You have some nice savings actions at Stade. You have maybe some incremental volume opportunities with competitors leaving the space in Europe. So I'm just how are you thinking about the framework for next year on Epoxy? Kenneth Lane: Patrick, thank you for your question. I hate to get too far out over my skis here, but I'm probably more optimistic on Epoxy than I have been in the last 1.5 years. But that's not because the market is improving. It's really because of the actions that we've taken as Olin over the last few years to be able to rightsize our cost base, rightsize our capacities. We do have a very good integrated business that has allowed us to survive when others can't. And so that's what happens in the trough. You start to see people that are not as competitive close capacity until demand begins to recover, and we're positioned very well as that happens. But in the meantime, with all the cost reductions that we're going to realize, both in Europe and frankly, in the U.S., along with a little bit of a tailwind around tariffs, I do expect that going into next year, we're going to see a pretty significant improvement from a very low level for Epoxy. But I think that's a business where, yes, I'm going to be very eager to see that improvement next year, which should be quite positive versus this year. And as a percentage, will probably be better than any other business we've got. Operator: Thank you. And our next question today comes from David Begleiter with Deutsche Bank. David Begleiter: Ken, on Slide 14, your ECU profit index was down in Q3 versus Q2, but your Chlor Alkali EBITDA was actually up in Q3 versus Q2 even after the onetime benefit. So why was that? Kenneth Lane: Glad to hear you. So listen, that index obviously has got a lot of moving parts to it. A big issue with that is mix, and we've seen that in other quarters. And what I'll tell you is it's all just related to mix in the portfolio. So you've seen it sort of going up and down quarter-to-quarter, but it is not something that I expect to see any further deterioration. Like I said, we expect ECU values to continue to be stable into Q4. Nothing that I see is changing that. But depending on which customers are operating plants or taking volume, that number is going to move around. But it is not something right now that is indicating any trend one way or the other. Stability is the way that I would be thinking about that. Operator: Thank you. And our next question today comes from Pete Osterland with Truist Securities. Peter Osterland: Within Winchester, could you talk a bit more about your plans to shift production towards the international defense markets? Is this intended to be a permanent change in strategy just given the stronger growth opportunities that you're seeing within defense? And where do you see the revenue mix between commercial and defense going for this business over the medium term? Kenneth Lane: Pete, thank you for the question. Yes, this is -- if you go back to our Investor Day, we were very intentional talking about growing our defense business, and we have seen very positive developments in that market, especially around the NATO countries increasing the amount of spending that they're going to be or the investments that they're going to make in the coming years for their own defense, there's an opportunity for us to participate in that. Now there's 2 things. There's a short term where we're getting a lot of inbound and the backlog for international military is growing quite substantially, and we are actively working with our partners to be able to secure that demand and the orders for the coming year. So we're going to continue to see robust growth in the short term. But we're also thinking more strategically about how do we participate in this in the longer term. And there are ways that we can do that, whether it's through partnerships or long-term supply deals, we're going to be looking at that. We do see that as a strategic opportunity for us. We also talked about earlier in this year that the fact that military was going to become a larger part of our portfolio in terms of revenue. That's also driven largely by the project that we've got running at Lake City. So there's a lot of project revenue that's showing up there that's skewing the sales number for Winchester towards military. It's got a relatively low margin because it's a project-based fee that we're basically earning for executing that project. Now having said that, I do think that it's going to be a while before we see commercial demand come back. I think we're just continuing to see that consumers and consumer spending is still challenged around discretionary items such as ammunition. But we will see this growth in international military. So that's going to keep our military portfolio stronger in the portfolio than what we maybe had thought a year ago. Good news is international military margins are attractive. So we're really excited about that. Todd Slater: As you think about revenue, you're probably sitting today 62% military and the remainder, commercial. That is higher than it has been over the last several years. Candidly, I would expect that to tick up a little bit as we move forward with the shift toward more military sales, both internationally as well as project. Operator: Thank you. And our next question today comes from Mike Sison with Wells Fargo. Michael Sison: When you think about what needs to happen for a recovery in chemicals, are you seeing anything that might give you some confidence that there could be a recovery in '26? And then I know you don't talk about operating rates anymore, but how much volume is in the system that could recover? And maybe help us understand the earnings power of that volume now versus the past? Kenneth Lane: So listen, the fact of the matter is, like I had said earlier, we are going to continue to adjust our operating rates to meet the demand that we see and manage our working capital in the chemical space accordingly. We are not going to carry inventory in this environment other than for things like turnaround. So all that I'll tell you is that our operating rates are differentially lower than the rest of the industry, and that shouldn't surprise anybody. That's our operating model, and we're going to continue to execute on that. So in terms of what is it going to take to see a recovery, you can focus in first on North America and you can look at housing. Obviously, housing is a big driver for chemicals, especially a lot of the chemistry that chlorine goes into. And once we see housing start to really recover, it's anybody's guess when that may occur. I hope it's next year. But right now, I just don't see any signs that really there's a big turnaround in the housing market on the horizon. that's sort of North America. I think that's what's going to drive the market here in North America. But when you think beyond our shores and you go to Europe or into Asia, you've got to see both of those markets begin to grow as well. And we haven't seen any signs yet of consumption really taking off in -- particularly in China, the largest market to be able to absorb a lot of this new capacity that they've been bringing on. So they are a big exporter now of PVC, which makes them a bigger exporter of things like caustic. And all of that is going to need to find a home with demand growth. So we need to see the global economy growing as well to be able to help absorb a lot of that additional supply that's coming on in China. I know we've talked a lot about anti-involution and all of those things. Those are great theories and they're great policies that I hope we see the Chinese government begin to execute on. But so far, it's been not as much directed to chemicals as we had hoped that it would be. Maybe that changes in the new year. But right now, we need to see higher demand in Asia and some more rationalization there as well. Operator: Thank you. And our next question today comes from Kevin McCarthy of Vertical Research Partners. Kevin McCarthy: Ken, I was wondering if you could provide an update on your thoughts about the U.S. caustic soda market. On Slide 9, it appears as though you're baking in some price improvement for caustic in the fourth quarter. Maybe you could speak to how much of that is seasonal uplift as chlorine operating rates or demand presumably comes down seasonally versus any cyclical or structural uplift that you may see unfolding in caustic? Kenneth Lane: Kevin, thank you for the question. Yes, so we are expecting to see higher values for caustic in the fourth quarter. As I said in the prepared remarks, the caustic market is relatively stable. So we have seen some softening around pulp and paper, but we continue to see a robust market around alumina. And if you look at the aluminum market, prices for aluminum still are holding up quite well, which indicates healthy demand, and that's a very positive thing for caustic. So the demand side, I would say stability is the key word. On the supply side, yes, you're going to see less supply in the fourth quarter. Some of that is going to be related to some of the things -- some of the actions that we're taking with our portfolio. Some of it is also related to other industry outages that normally happen in the fourth quarter. That's going to be the case here as well. So between lower demand for chlorine derivatives, which is naturally going to pull down operating rates and the normal sort of seasonal turnarounds that occur in the fourth quarter, that's going to restrict supply, and that should give support for caustic values in the fourth quarter. Operator: Thank you. And our next question today comes from Jeff Zekauskas with JPMorgan. Jeffrey Zekauskas: You talked about a large turnaround in VCM. I think this year, your forecasted turnaround costs are $125 million. Is maybe something like $175 million next year, up $50 million a reasonable first draft? Kenneth Lane: So listen, turnarounds this year was pretty heavy. We are going to be updating our modeling data for 2026 at our fourth quarter earnings call here coming up at the beginning of the year. But -- that is a very large turnaround for us. It happens every 3 years, like Todd had mentioned. But there are other puts and takes as well. We're currently finalizing our schedule for turnarounds in 2026. So I don't have a final number to give you today. Some of that is still moving around. And once we do, like I said, we will get you a new outlook for 2026 at the beginning of the year. Operator: And our next question today comes from Vincent Andrews at Morgan Stanley. Vincent Andrews: Wondering if you could just talk a little bit, Todd, I know you went through your capital allocation priorities. But if we look at trailing 12-month leverage at the end of the year based on the fourth quarter EBITDA guidance, it pushes you close to 4. So does that change anything in terms of what you're going to be able to do? Are you going to continue to repurchase stock? Or are you going to hold off a little bit and see how 2026 develops? How should we be thinking about that in terms of your desire to maintain your investment-grade credit rating? Todd Slater: Yes. Thanks for the question. We would expect, as we've said, to have a significant cash flow in the fourth quarter and be able to reduce debt back to even where we started the year. So net debt flat year-over-year. We do -- we have clearly curtailed the level of share repurchases this year compared to what we have done over the last several years. I think you saw us buy $10 million the last couple of quarters. So I wouldn't be surprised if we don't continue at a modest pace, but we are going to clearly prioritize that cash flow that we generate in the fourth quarter toward our reduction of debt from where we sit today. Operator: Thank you. And our next question today comes from Arun Viswanathan with RBC. Arun Viswanathan: You guys are roughly at a $700 million annualized EBITDA run rate here. So -- and then we've seen kind of flattish Chlor Alkali index numbers. So what do you think it's going to take you to get to maybe $1 billion? Is that maybe roughly $50 million in Epoxy and Winchester uplift and then maybe $200 million or so in Chlor Alkali? And how does that -- maybe you can help us bridge that gap, that would be great. Kenneth Lane: Thank you for the question. Listen, if you just think about where we are year-to-date, the biggest delta versus prior year was or is Winchester. So Chlor Alkali has held up quite well, and that's a really positive thing for us as a company. It's one of our -- it is, as Todd says, the engine that drives the bus. And so I'm very happy to see that. So yes, you're going to see -- over time, you're going to see ECU values improve off of trough levels. And with our operating rate leverage that we have, that's where you've got the biggest leverage right now in the portfolio overall. There will be a recovery in Winchester at some point. We've got to get through some of these cost headwinds. We've got to get to a point where we see stronger consumer spending for discretionary items improve. I'm not sure that we're going to see that in the short term. But the good news is -- we are and the Winchester team is very focused on adjusting their operating model to the new environment that they're in. We did not think we would be here a year ago. We thought we were going to see demand recovering in 2025, and we just have not seen that. We've seen it go the other way. And so we'll adjust that model, and I expect that we'll start to see some recovery there. But again, I go back to what I said earlier on Epoxy. I'm probably more optimistic on Epoxy than any other business right now, not because, again, we're seeing lots of positive signals in demand in the market. That is still challenging. But with rationalization of capacity that's happening in the industry, some of the challenges that you see with higher glycerin costs in Asia, which is putting a floor under pricing, you get the tariff headwinds. You get the self-help that we've been implementing over the last several years, we start to see some really positive momentum into next year for the Epoxy business. So that's kind of how I think about where you're going to see the improvements going into 2026. And from there, I think things are going to move higher, but it just depends on what's the rate of change is going to be largely dependent on what's the global economy doing as well. Operator: Thank you. And our next question today comes from Matthew Blair at TPH. Matthew Blair: In light of the slower production outlook for Winchester, how are things going on the AMMO acquisition? And do you still expect to realize -- I think it was previous guidance of about $5 million EBITDA in the back half of the year from AMMO. Is that still realistic? Kenneth Lane: Thank you for the question. Listen, we still feel very positive. We actually -- when we look at the business case around that acquisition and what we have talked about before, the synergies with the capability to build shell cases at that facility has proven to be as good, if not even a little bit better than what we thought. So the synergies that we talked about, yes, very confident in delivering them, not just for this year, but that $40 million level in 3 years' time, we feel very positive about that. The asset is in great shape. The employees have really been great coming into Winchester. I think they're excited to be part of the Winchester brand and that has been a very positive acquisition for us. So we feel really good about it. Operator: Thank you. And our next question today comes from Roger Spitz at Bank of America. Roger Spitz: Todd, how should we see -- expect to see the clean hydrogen benefit in EBITDA? Will you start putting into EBITDA maybe 25% each quarter? Or will you periodically be showing us a bigger once a year number in the EBITDA? Todd Slater: Yes. Thanks for the question, Roger. You should start now that we have received the real -- the key determining factor, which was our emissions information from the Department of Energy. You should start to see the 45V tax credit just be included as part of our normal earnings as a reduction to cost of goods sold every quarter. So there -- it won't be called out like it is today. It will be -- this was really the catch-up for this year because we finally got the emissions data. So as you think about next year and the next 3 years of a $15 million to $20 million benefit, that will just run through as a reduction to cost of goods sold on a quarterly basis. Operator: As there are no further questions, this concludes our question-and-answer session. I'd now like to turn the conference back over to Ken Lane for closing comments. Kenneth Lane: Thank you, Rocco. And listen, thank you, everyone, for joining us this morning. We appreciate your interest in Olin, and we look forward to speaking with you at the beginning of the year next year. We wish you all a very safe and prosperous week. Thank you. Operator: Thank you. And we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
Operator: Good morning, and welcome to Nucor's Third Quarter 2025 Earnings Call. [Operator Instructions] And today's call is being recorded. [Operator Instructions] At this time, I would like to introduce Chris Jacobi, Director of Investor Relations. You may begin your call. Chris Jacobi: Thank you, and good morning, everyone. I'm excited to join you this morning as the newest member of the Nucor IR team and welcome you to our third quarter earnings review and business update. Leading our call today is Leon Topalian, Chair, President and CEO; along with Steve Laxton, Executive Vice President and CFO. Other members of the Nucor executive team are also here with us today and may participate during the Q&A portion of the call. Yesterday, we posted our third quarter earnings release and investor presentation to Nucor's IR website. We encourage you to access these materials as we will cover portions of them during the call. Today's discussion will include the use of non-GAAP financial measures and forward-looking information within the meaning of securities laws. Actual results may be different than forward-looking statements and involve risks outlined in our safe harbor statement and disclosed in Nucor's SEC filings. The appendix of today's presentation includes supplemental information and disclosures along with a reconciliation of non-GAAP financial measures. With that, let's turn the call over to Leon. Leon Topalian: Thanks, Chris. I want to begin by thanking our 33,000 Nucor teammates for their continued commitment to safety. Our team has been lowering our injury and illness rate every year since 2017, and we are on track to do it again in 2025. This level of performance would be impressive at any point, but to do it through a period of significant growth is an amazing accomplishment. Congratulations to the entire Nucor team and let's make the last two months of 2025 the safest in Nucor's history. Turning to Nucor's third quarter financial performance. We generated EBITDA of approximately $1.3 billion and earned $2.63 of EPS. These results exceeded our third quarter guidance driven by stronger-than-expected shipments from our steel mills and favorable corporate adjustments. Steve will provide more details during his financial update. We remain committed to prudent capital management on behalf of our shareholders, balancing long-term growth with meaningful shareholder returns while maintaining our industry-leading credit profile. During the third quarter, we reinvested $807 million into the company with the majority of this capital related to growth projects that are nearing completion. We've also returned approximately $230 million to Nucor shareholders through dividends and share buybacks, bringing our year-to-date returns to nearly $1 billion or 72% of net earnings. We also saw our long-term credit ratings upgraded to A3 by Moody's. Following the Moody's upgrade, we are now rated A- or A3 by all three ratings agencies, making us the only major North American steel producer to hold that distinction. Creating value for our stakeholders requires a relentless focus on execution, and I'm proud of the work our team has done to advance our long-term mission to grow the core, expand beyond and live our culture. We are in the final phase of our multiyear capital investment campaign and will complete four major projects by the end of this year. Recent milestones include the commissioning of two bar mill projects and the commencement of pole production in galvanizing operations at our Alabama Towers & Structures facility. Our two new sheet coating facilities at Crawfordsville and Berkeley County remain on track, and the team in Crawfordsville recently processed the first coil through their new galvanizing line. And construction of our new sheet mill in West Virginia is 2/3 complete and remains on schedule to begin ramping up by the end of next year. Even as we invest to grow our capabilities, we remain focused on leveraging our existing asset base to generate attractive returns for our shareholders. For example, in steel products, we've taken steps to repurpose to existing steel products facilities to support our faster-growing Nucor data systems businesses. And within the steel mills, we have recently decided to no longer pursue a new Rebar micro mill project in the Pacific Northwest region. With the recent investments we've made in the bar group, we can serve the Western U.S. and Canadian markets from our current footprint with superior cost and supply chain advantages. We will continue to monitor market developments to ensure the best use of our shareholder capital. As I've said in the past, our growth strategy is not about growing our capacity it's about providing more capabilities for our shareholders, customers and team. The investments we are making now to grow our core steelmaking capabilities and expand into downstream steel adjacent businesses will better position Nucor to offer comprehensive integrated solutions unmatched by any of our competitors. And by optimizing our full portfolio to operate as one team we make it easier for our customers to buy, build and succeed. Let me now take a few minutes to highlight a couple of the areas where Nucor is improving its position as the supplier, employer and investment of choice within the steel industry. One of these is Nucor's bar mill group. As many of you know, Nucor entered the steelmaking business in 1969 when we began operating our first bar mill in Darlington, South Carolina. Over the following five decades, we have harnessed the inherent advantages of scrap-based steelmaking and Nucor's performance-driven culture to grow our Bar Mill Group into the nationwide powerhouse that it is. The Bar Mill team has delivered strong results in 2025, fueled by increased demand in the nonres construction markets and infrastructure markets. With our broad geographic coverage and capabilities Nucor is well positioned to optimize both product mix and volume regionally. In fact, the team has set quarterly rebar shipment records twice so far this year, first in Q1 and then again in Q3. We also began ramping production in the third quarter at our new melt shop in Kingman, Arizona and our new rebar micro mill in Lexington, North Carolina. Both facilities are strategically located in high-growth regions with reliable access to local scrap supply, enhancing our existing footprint in the Western and Southeast markets. We will continue ramping up operations over the coming months, with both projects on track to be EBITDA positive by the first quarter of 2026. While we build our leadership in steelmaking, we are also positioning Nucor as a key supplier to high-growth markets, like data center construction. The Dodge Construction Network is forecasting 60 million square feet of data center construction in 2025, a 30% increase over '24. And the state of Virginia alone has seen 54 new data center permit applications in the first nine months of the year, underscoring the sector's momentum and long-term growth potential. With our comprehensive portfolio of products, Nucor is uniquely equipped to partner with leading developers and hyperscalers who increasingly value speed and certainty of execution. We now supply over 95% of all steel products that go into a data center from the building envelope to the interior infrastructure. For example, we're the only provider capable of supplying steel for both conventional structures and preengineered buildings at scale. Inside of data centers, we're accelerating growth in our Nucor data systems businesses, implementing domestic production of server cabinets and increasing capacity for hot aisle containment and data center support structures. This unlocks powerful cross-selling opportunities for our diverse product portfolio, creating better outcomes for customers and driving shareholder value. Turning to trade policy. We've seen meaningful federal action this year supporting the American steel industry. Section 232 measures and ongoing trade enforcement are curbing imports with finished deal imports down nearly 11% year-to-date through August. Since the broader Section 232 tariffs were implemented, we have seen larger month-over-month reductions in imports and expect the trend to continue. While imports have decreased since the comprehensive 50% steel tariffs went into effect, they continue to be a necessary tool to counteract the massive amounts of overcapacity that persist in the global steel sector. We believe that tariffs must stay in place with no exceptions or loopholes until there are fundamental changes in the global steel industry. Ongoing trade cases continue to provide another important defense against unfairly traded imports. In September, the ITC Commission rule that American steel producers were materially injured by imports of corrosion-resistant steel from 10 countries. Nucor is pleased with the decision, which clears the way for the Department of Commerce to issue final antidumping and countervailing duty orders in the coming weeks. We are also following the Commerce Department's investigations into rebar imports from four countries and expect to see the preliminary determination later this quarter. Overall, we are encouraged by the administration's actions to help level the playing field for the American steel industry. And as North America's largest and most capable steel products company, Nucor is well positioned to create value for our customers and shareholders. With that, let me turn it over to Steve, who will share additional details about our third quarter financial performance. Steve? Stephen Laxton: Thank you, Leon, and thank you all for joining us on the call this morning. For the third quarter, Nucor generated net earnings of $607 million or $2.63 per share. Earnings were in line with the second quarter's adjusted earnings per share of $2.60 and above adjusted earnings per share of $1.49 for the third quarter of last year. Year-to-date, Nucor's adjusted net earnings are approximately $1.4 billion or $5.98 a share. Earnings for the third quarter exceeded the midpoint of our guidance range by approximately $0.50. The guidance beat was driven by two main factors: better-than-expected shipments and lower pre-operating and start-up costs. Our steel mills segment realized higher-than-expected shipments in sheet, bar and structural. In September, our Berkeley division set an all-time production record. And as Leon mentioned earlier, the bar group achieved another quarterly record for rebar shipments. The steel mills group also saw stronger-than-expected shipment levels from several mills coming out of the third quarter planned outages. Additionally, the steel products segment exceeded volume expectations, contributing further to overall outperformance. Several of our newer operations progressed through start-up activities more rapidly than anticipated, resulting in lower-than-expected pre-operating and start-up cost. Pre-operating and start-up costs for the third quarter were $103 million. Favorable corporate and administrative impacts also contributed to the outperformance. These included lower inventory eliminations due primarily to lower-than-expected inventories in our downstream steel products segment as well as lower overall corporate and administrative costs. Turning to the segment level results for the third quarter. The steel mills segment generated $793 million of pretax earnings, a decrease of 6% from the prior quarter. We saw improved results across our bar and structural steel groups, but lower profitability in sheet and plate more than offset the gains in longs. We continue to see strong demand for long products and more subdued but stable demand for flats. That said, we are gaining market share and are encouraged by the recent operating performance of our steel mills. Sheet shipments nearly matched our record volumes set in the prior quarter with sheet backlog tons up 13% year-over-year. And our bar products backlog at the end of the third quarter was 35% higher than the same time last year. Turning to Steel Products. We generated pretax earnings of $319 million, down from $392 million in the second quarter. Despite the sequential decline, volumes held up better than expected with external shipments increasing 4% quarter-over-quarter. However, operating profit was impacted by less favorable product mix, higher substrate pricing and planned outage cost. Our steel products backlog has moderated alongside typical seasonal ordering trends, but ended the third quarter 14% higher year-over-year. The backlog extends well into the second quarter of 2026 for some of our more custom engineered product lines. Coating activity remains robust, and we believe this reflects business confidence among our customers servicing the construction and infrastructure markets as well as their confidence in Nucor as a reliable provider of high-quality solutions. Turning to the raw materials segment. We realized pretax earnings of approximately $43 million compared to $57 million for the prior quarter. The primary driver of the sequential decline was lower pricing, partially offset by lower operating cost. Moving to the balance sheet. Nucor continues to have a differentiated position of strength and flexibility in our industry. An example of this was on display in the past quarter as evidenced by our recent ratings upgrade by Moody's. And we remain committed to maintaining a strong investment-grade credit profile. We ended the third quarter with a total debt to capital ratio of approximately 24% and cash of approximately $2.7 billion. We generated $1.3 billion in operating cash flow during the quarter, a testament to Nucor's cash-generating operating model. Capital expenditures totaled $807 million for the quarter, bringing our year-to-date total to $2.6 billion. We now expect full year CapEx to be $3.3 billion for 2025 as some project spending was pulled forward from 2026. We will provide more detail on our CapEx budget for 2026 on our year-end earnings call in January, but we expect overall expenditures to decline by more than $0.5 billion compared with 2025. The cornerstone of Nucor's capital allocation framework is providing meaningful cash returns to shareholders. During the second quarter, we returned $227 million to shareholders in the form of dividends and share repurchases. Through the end of the third quarter, we've returned nearly $1 billion, representing 72% of Nucor's year-to-date net earnings. During the same period, we repurchased approximately 4.8 million shares at a weighted average price of approximately $126 per share. Turning to our near- to medium-term demand outlook. I'd like to take a closer look at the distinct demand drivers shaping our flats, longs and steel products markets. While we're seeing varying levels of demand across these products, we expect each will continue to benefit from further declines in imports as the effects of tariffs and trade cases are realized. Beginning with our flat products, we expect strong demand from energy, data centers and advanced manufacturing. At the same time, we're monitoring softer conditions in areas like residential construction, consumer durables, heavy equipment and agricultural machinery. Additionally, new domestic supply is still being absorbed in the market. Turning to long products. Our bar and structural mills continue to benefit from a number of demand drivers, underpinning a more constructive near-term outlook that we remain mindful of typical seasonal purchasing trends. Infrastructure spending remains elevated. The American Road and Transportation Builders Association reports that bridge and tunnel contract awards are up nearly 20% year-over-year. And 60% of total funds allocated to the IIJA highway projects remain unspent. As Leon mentioned, data centers and energy infrastructure needed to power them will continue to drive pronounced demand for Nucor's long products. We also see good demand from institutional construction, stadiums, warehouses and chip facilities. In addition, we expect to capitalize on the strong regional demand and gain market share as our North Carolina micro mill and new melt shop in Arizona ramp up. Finally, in our steel products segment, many of our business lines are benefiting from pockets of strength in nonresidential construction. As the market leader in custom engineered building products like joist and deck, metal buildings and insulated metal panels, we're seeing strong customer interest in our capabilities, particularly from those prioritizing speed, quality and certainty of execution. We also expect healthy demand for our rebar fabrication business and incremental demand for tubular products. That said, we're closely monitoring the impact of evolving trade policy, higher construction cost and persistent softness among residential construction activity. Turning to our fourth quarter outlook. We expect Nucor's consolidated earnings to be lower than the third quarter. We expect lower total volumes across all operating segments due to a combination of factors, including seasonal effects, Nucor's fiscal quarter continuing five less shipping days and two scheduled outages at our DRI facilities during the fourth quarter. We anticipate a decline in realized pricing within our steel mills segment, primarily driven by sheet. In contrast, pricing in our steel products segment is expected to remain stable. Looking ahead to 2026, we expect stable domestic steel demand. With the broadest range of capabilities in the North American steel market, Nucor is confident in our ability to create value for our customers and shareholders as we capture a healthy share of that demand. And with that, we'd like to hear from you and answer any questions you may have. Operator, please open up the line for questions. Operator: [Operator Instructions] Our first question comes from Alex Hacking from Citi. Alexander Hacking: Congrats on the strong results. It seems like Nucor shipments are growing faster than the industry and you referenced they're gaining share. Could you maybe give more color on the kind of specific products where you're gaining share? Any change in strategy that led to you gaining share? Leon Topalian: Yes. Thanks, Alex. Look, let me begin, Alex, with our most important value, and that is the value of safety. We're on track for a historic eighth year in a row of lowering our I&I rates in creating the safest year in the history of our company. And so I just wanted to take a moment and thank the 33,000 team members that execute that incredible value each and every day across 40 states, 300 locations in multiple countries. So again, we begin there. But specifically to address your question, Alex, yes, we continue to stay very focused in being the market leader means that we've got to do things to stay out in front. And so as we think about how we've restructured and positioned the plate group is a great example of that, where Brandenburg continue to ramp up. And as you heard Steve mention earlier, in his prepared remarks, the pre-operating start-up costs reduction means that Brandenburg is ramping up faster than we had anticipated. They're doing a great job. You'll hear more about that in a few moments, I'm sure as we get into plate later in the call. But plate is another broad example where we're focused on that. Long products is another where Nucor is going to continue to look for the opportunities to grow in bar and beams in that segment. But ultimately, what I think the strategy that you've seen playing out over the last few years has really wrapped around our commercial and construction solutions group that are looking to attach these major developers, major hyperscalers that are looking for speed and a capability set that Nucor now has in bringing that to the market. So we're getting a ton of pull-through effect in our products groups from the upstream mills from sheet plate, bar -- engineered bar all the way through the downstream adjacent segments. So we're seeing, I think, a lot of that play out, which is increasing our market share. And again, the capability set. You heard me say in my prepared remarks as well, Alex. You think about how white hot the data center trend is today with our Southwest data products acquisition, with our racking group, with the insulated metal panels as well as the breadth of the steel products that we make, we are now capable of making 95% of all steel components within the framework building and hot aisle contained within that data center. So again, it offers a very unique solution set for, again, these developers and hyperscalers. Alexander Hacking: I guess just a follow-up on that point on the data centers, are there specific products that Nucor is selling that are particularly exposed to data centers? I mean I know that choice impact shipments are up over 20% like this year versus last year. Are they an obvious beneficiary from this? Leon Topalian: Yes, Alex, it's really the gambit. So insulated metal panels, joist, grading, decking, fasteners, sprinkler, conduit, the foundations, the rebar and the foundations, the civil side, the sheeting on the outside of the building, the overhead doors from C.H.I., Rytec and so really, it's the full purview. But John, anything else would you add to that? John Hollatz: Yes, Alex. On the joist and deck side, we're definitely feeling the benefits of the data center build-out as well as e-commerce. And we're just well positioned with these end-use markets because of our industry-leading capabilities, the breadth of our product offering, our nationwide coverage. Right now, our joist and deck backlogs are about 25% higher than what they were a year ago at this time. They extend well into 2026, and we're optimistic about what the next year is going to bring. Operator: Our next question comes from Bill Peterson from JPMorgan. William Peterson: Congrats on the quarter. Maybe to follow up on this data center opportunity, but maybe to contextualize relative to what I think is a larger market, much larger now, which is warehouses, I guess, based off of your backlog, how should we think about square foot growth beyond 2025, maybe from a market perspective as well as your own opportunity? And is there a way you can, I guess, help quantify or provide any anecdotes on how you're gaining share in the market with like Southwest data products compared to industry growth averages? Just trying to get more context on this opportunity relative to larger ones such as warehouses. Leon Topalian: Yes, Bill, let me start with the -- to your point, the larger segment, which is the warehousing. Look, that is probably flat year-over-year and expect it to be about the same in '26. And so again, that peaked, I don't know, '21, '22, where we saw massive buildouts from Amazon, up others that were building as fast as they could come. So the shift has come in the last 12, 18 months into the data center side. But again, with the energy infrastructure is a big piece of that, that Nucor is, again, tying into Southwest data products enables us to do things in that hot aisle that we weren't able to do prior. But Nucor now has a Nucor warehouse and data systems group that kind of provides an overarching solution set for, again, these major developers. And John, maybe unpack that just a little bit further on how we use that go to market with that? John Hollatz: Yes, Bill, when you think about a data center, and it's on our Slide 7 in our presentation, all of the different products that Nucor supplies into that market. And we're the only company that can supply all of those products. Many of our competitors can supply one of them. We have the ability to supply all and we work directly with a lot of these companies to guarantee the surety of their supply to meet their deliveries to get these facilities operational on time. It's a big advantage that we have with that entire portfolio of products. In addition to that, having redundancy in our portfolio we mentioned, we've converted a couple of facilities over the last several months to help the build-out of these data centers because we see that market being so hot moving into the coming years. Stephen Laxton: Bill, this is Steve. I'd like to just add one thing that's implicit in the questions that you and Alex both ask is a commentary on the flexibility of Nucor's overall portfolio. And so as you see different markets get strong, Nucor has excelled over the years at winning in a variety of different ways. And right now, you're focused in on data centers, and we can capture, as John and Leon described, unprecedented. We're unparalleled with anyone in the space and the ability to gain in that area. But it's not lost on us and shouldn't be on you that Nucor has won at various times when different markets have been strong because of the product diversity and the flexibility that we have in supply in the market. William Peterson: No, I appreciate that color. I guess maybe just to follow-up, maybe I missed -- or I didn't hear it, but you said data center flat for '26. Is there a sense for how we should think about the data center growth next year? And then I have a follow-up question. Leon Topalian: Yes. Sorry, Bill. No, warehouse -- traditional warehouse would be flat. Data centers are up double-digit growth for the next 5 to 6 years is what every major category where we're looking at is tracking. So I think in my prepared comments, that I opened with, that the forecast is for 60 million square feet of capacity in 2026. So it's an incredibly fast-growing segment. So not flat on the data center side. William Peterson: Yes. Well, understood. On my second question, so scrap cost was down, but conversion costs were up. I guess can you speak to what contributed to the latter? Is this related to the new mill ramps? Or is there something else there? And I guess, more importantly, how should we think about this trend into the fourth quarter? David Sumoski: Thanks, Bill. This is Dave Sumoski. So although our cost quarter-over-quarter were up, cost year-over-year are down 5%. But specifically, the items affecting the quarter-over-quarter results are slab costs for CSI. Some of our consumables was up such as refractory and labor was slightly up due to some significant planned outages in the quarter. Operator: [Operator Instructions] Our next question comes from Lawson Winder from Bank of America. Lawson Winder: I appreciate the update today. Could I ask about the guide, which, I mean, in the guidance for Q4, you pointed to lower volumes just because of fewer shipping days. I mean, that all makes sense. But you also suggested there was some lower realized cheap pricing factored in. Yesterday, Nucor's CSP was $10 higher. I mean was that factored in? I mean we also saw a competitor raise their pricing by $50 yesterday. How should we think about the movement we've just seen very recently in that? Leon Topalian: Yes, Lawson. I appreciate the question. And most of Nucor's sheet deliveries are based on contracts. So while you see the moves today, what I would tell you is you're seeing that typical seasonality and a softer Q2 flow through the order book, which is our projection for Q4 to see lower realized pricing. But again, with the current price increases in that group, we anticipate Q1 will be -- we'll certainly realize those higher pricing. So it takes some time, right, to flow through that. But on the positive side, there's two factors I'd point out in terms of how quickly that can move through. One is the service center inventory side of things is pretty very, well, seasonally low in terms of that overall picture, but also internally to Nucor. We are not sitting on high volumes of inventory at our mills. So it's going to enable us a much faster realization of that pricing you just mentioned. So again, those two factors, we'll see that move through the order books into the balance sheet for Q1. Lawson Winder: Fantastic. And can I ask on acquisition opportunities? When you look at the relevant acquisition set for Nucor, how would you characterize that in terms of product and region or segment upstream versus downstream? I appreciate any thoughts. Leon Topalian: Yes, Lawson, broadly, here's how I would tell you, our mission statement is very simple right? Where is it we launched in January 1, 2020. It's to grow the core, expand beyond and live our culture. The core steelmaking capabilities, you're seeing that with the start-ups of electric fins, micro mill in North Carolina, the melt shop in Kingman, Arizona, they're ramping up. And then three start-up at Crawfordsville's galv line, Berkeley next year, the start-up of our first towers and structures facility in Alabama, the next two, that will be next year. And then that will ultimately culminate with the start-up of the largest investment in Nucor's history in Mason County, West Virginia, with the most state-of-the-art sheet mill that's going to offer a capability set unparalleled in our industry. And so we're going to have the breadth of capabilities to provide our customers the steel they need today as well as what they're going to need for tomorrow. So that's the core. As we think about expand beyond, it sits in the C.H.I and Rytec Southwest data products, our Summit, which is the first acquisition in the Towers & Structures we made. The insulated metal panels group that continues to bring a really differentiated product mix to the Nucor offering. So as we look to the future now is -- again, we don't anticipate building any more greenfield facilities, at least in the near term. That capital is now going to get deployed in the adjacent space as well. Again, right more we'll leave you that ambiguous. If we think a little bit more about, well, where is that going to go? It's going to go on the mega trends that we're seeing in the U.S. economy like Towers & Structure. So like energy, energy infrastructure, the data center community. So what are the things that we're not providing or don't provide today that again, hit a few boxes, right? So as we look for targets, it's got to be like-minded culture that fits who we are. It's going to be a converter model that we bring in terms of our competencies to that acquisition. Three, it's going to be low capital intensity. And four, we're going to look for 4 and 5 high margins. And fifth, the sort of countercyclical to the traditional cyclicality of steel. So we want something that isn't is affected by the true steel cycles that we see over, again, the last 60 years that we've been in this business. And again, C.H.I., Rytec, IMP all provide a much more stable earnings platform, growth throughout all the sectors and highs and lows in both the financial crisis COVID and whatnot. They have -- their return profiles are incredibly stable. And so again, ultimately, our goal is to stabilize Nucor's overall earnings to provide higher highs and higher lows. Operator: Our next question comes from Timna Tanners from Wells Fargo. Timna Tanners: I wanted to ask about my home state, that is Washington and what's happening in Seattle. So I saw the announcement of not replacing the existing mill. Can you just elaborate on that decision? Does that -- you said you could supply it from other mills. But with imports to the West Coast down, I'm assuming like is there enough supply on the West Coast? Can you supply it from Kingman? And are you just not replacing the existing mill? Or are you just not shutting it down? Leon Topalian: Yes. Look, you kind of answered the question within that question as well, Timna. So thank you for it. Look, we have a great relationship with the city of Seattle and our team out there does an amazing job connecting with our community, being in that community and welcoming that committee with open arms and how we take care of our safety, the environmental, the sustainability side. So they do a really, really nice job. But it is as we step back and look at our prudent capital allocation, where our dollar's best spent. And where is the best returns on those dollars going to be? With the investment of the melt shop in Kingman, Arizona, our Utah facility and the breadth and exposure of our Seattle mill, we are adequately covered for the Western side of the United States as well as Western Canada. So again, as we step back to really evaluate that, we feel really good about where the mill is and its capability set in Seattle, but couple that with the addition of Kingman's melt shop, and we think we've got a very adequate coverage there. So we're going to use those dollars elsewhere to think about growth. And again, how do we not just meet our cost of capital, but double our cost of capital. How do we make sure that we're generating EVA for our shareholders for the long term? And that's where we're going to put that. And again, if we don't have that home, as you've seen over the course of the years and following us, Timna, this year, we're at 72% return of our net earnings back to our shareholders and dividends or share buybacks, and that will continue. Timna Tanners: Great. That's my next question. But just to clarify, that Seattle mill keeps operating. You're just not replacing it with the micro mill, is that right? Leon Topalian: That's correct. Timna Tanners: Okay, super. So along the lines of the shareholder returns, your third quarter buybacks at $100 million. Is the smallest you've had, I think, since 2020 when you didn't have any buybacks. Is that correct? And if so, is that a statement of anything? Do you have other uses of capital? Anything you can elaborate on there? Leon Topalian: Yes, I'll let Steve answer that. But I would remind you the $13 billion that we've returned back to our shareholders over the last five years, but I think you're accurate. But Steve. Stephen Laxton: Yes. Hey Timna, you're correct. That is the lowest quarterly return we've had, but we remain committed to getting back at least 40% of our earnings every year. We don't necessarily do that every quarter. And so over the course of the year, we're well ahead of that mark. And as Leon alluded to, over the last five years, we've given back around 60%. Just under 60% of the earnings. So we've continued that discipline of balancing investment with our capital and growing the company while we also maintain strong liquidity and a strong balance sheet position. We've actually improved that even getting the upgrade from Moody's this past September and give meaningful returns. So those three elements remain in place, and that's not going to change going forward. So I wouldn't get too focused in on the quarter -- quarterly number. I'd just remind you that we remain very mindful and intentional about the management of those three pillars of our capital allocation framework. Operator: [Operator Instructions] Our next question comes from Phil Gibbs from KeyBanc. Philip Gibbs: Just wondering if you could give us the state of the West Virginia sheet investment in terms of where you are in the spending and your expected start-up time frame? Leon Topalian: Yes, certainly, Phil, I'll ask Noah Hanners, our EVP over Sheet Group, to give you a more detailed update. Noah? Noah Hanners: Yes. Thanks for the question, Phil. It gives me a good opportunity to congratulate, recognize the team on the progress there. I'd tell you, we're at about 75% on the build. And in terms of capital spending, we're about to that same point now. Most of the 25% we have remaining remains in the labor category. So if you go there today, it looks like a steel mill. And so we have the world's best steelmaking team, and you see the foundation of it starting there with that team in West Virginia. We have done an awesome job that West Virginia team has done an awesome job of bringing in some of the most talented people from across our sheet group and from across Nucor to lead that project. We've done a great job of hiring and experience and I get often asked about like how do you feel about this investment and we could not be more excited because we're taking this awesome team, and we're giving them the world's best equipment, like they're going to have assets, capabilities there that are the best in our market. And then we are turning them loose in a region where we've been underserved, but where we have really strong customer demand. When you stack those things up, we're going to be extremely successful with that investment, and we're excited about what the future brings for West Virginia. Philip Gibbs: And then just a question for Steve. On the tax side, is there a distinct difference between your cash tax rate and your book tax rate for '25 and '26, given the recent changes in tax legislation? Stephen Laxton: No. Surprisingly, Phil, not necessarily because of the way that legislation was written, it accelerates things that start after legislation. Most of our spend has already been started. So to give you a sense and a feel for that, the deferred tax benefits -- the cash flow benefits this year in '25 will be around $100 million. And when you look out into '26, that gets -- it will be smaller because of the nature of the bill. So the One Big Beautiful Bill had relatively modest impact for us on that. It does accelerate some of the R&D credits a little bit. That's where some of the gains coming from. But in terms of the capital spending, maybe not as pronounced as you might expect given the dollars we're spending in capital. Operator: Our next question comes from Katja Jancic from BMO Capital. Katja Jancic: Starting on the start-up costs, given that you have a couple of projects now that are ramping up, how should we think about these costs over the next few quarters? Stephen Laxton: Katja, this is Steve. We would expect over the next quarter then to be in line with the third quarter. And give or take, they're going to be in that range into the first quarter as well. So call it $100 million to $110 million a quarter going forward for the next couple of quarters. Katja Jancic: And then I think some of the margin compression in the mill segment was tied to the slabs you purchased for the TSI operations. If I'm not mistaken, that mostly comes from Brazil. Is that correct? And if so, why not use more of the material produced internally? Noah Hanners: Katja, this is Noah. I'll take that. Yes, mostly from Brazil, and we have been mostly slab served there this year, but we have a team that looks at the decision about whether to supply with internal substrates, so coils from our own mills like Allison or Crawfordsville more to buy slabs. Most of this year, it's made the most economic sense to buy slab and roll it there to our hot mill, but there have been months where we supplied a lot more coil. And I would tell you, over the course of this year, we've leaned into more of our own internal substrate. So that team will continue to look at what makes the most economic sense and we'll go that way. Operator: Our next question comes from Andrew Jones from UBS. Andrew Jones: I've got a couple of questions on price hikes. And first of all,the MBQ aborted hike from some of your peers. It sounds from the commentary like you didn't support it. Curious on the reasons there. And then secondly, on plates, curious how you're seeing the market at the moment. Obviously, we've had some relief on the import side or we should have done, and it doesn't seem like the Canada carve-out is coming anytime soon. So I'm curious how you're sort of thinking about pricing and the state of the market in the coming months in plate given that sort of tighter supply side? Leon Topalian: Okay. Andrew, we'll start off with the bar group. I'll ask Randy to just give you an update on your questions there, and then we'll take it to Brad on plate. Randy Spicer: Yes. Andy, thank you for the question. Certainly, we're not going to comment on specific pricing actions. But what I can tell you is that the momentum across our bar products, it remains very strong. We're seeing robust order entry across all regions and key end markets. And as kind of been mentioned, it's driven by infrastructure projects, chip plants, warehouses and data centers. And that strength is being amplified by the continued growth of our downstream businesses, Nucor rebar fab, Vulcraft and so forth. So it's also worth noting we have implemented and realized meaningful price increases in merchant bar throughout 2025, supported by our multiyear high backlogs and extended lead times. So all of that gives us confidence as we move through Q4 and into 2026 that the market is strong and ready for us to continue in that space. Brad Ford: Yes. And I'm happy to comment on the plate side. Plate market overall this year has been pretty good. ADC based on the last data we got is trending up around 15% year-over-year, and we're starting to see the impact to tariffs on imports, right? Imports were pretty -- were up a little bit in the beginning of the year, but have come down pretty significantly over the last couple of months. Similar pockets of strength in plate that you heard from Randy and Leon and Steve around energy, both traditional and renewable, infrastructure. Our bridge business has been very strong this year and then on the nonres construction side. As we sit today, our backlog is 58% higher at the end of Q3 than we ended Q3 of last year. So we're pretty optimistic about where -- about where the plate market is going. Leon Topalian: Brad, why don't you touch on just the military applications and great development at Brandenburg as well? Brad Ford: Yes, quick Brandenburg update. Team continues to make significant progress at the mill. We announced last quarter that we achieved EBITDA positive results. We achieved that again in Q3. I'd mentioned some weekly or monthly records from last quarter, but honestly, the team has already shattered those records so far here into Q4. And then on the product development side, we've had some pretty notable achievements, one being X70 API grade for line pipe. We've achieved qualifications and certifications there and captured a very large order for Q4 and into Q1. And then on the military side, we're really encouraged by the early-stage military armour trials. Nucor's product breadth in place between our three plate mills, really is going to allow us to become the premier plate supplier in the U.S. military. And then finally, Brandenburg's capabilities, I know we've mentioned on prior calls that we're seeing opportunities with existing customers, and we're really seeing that play out. The capabilities of Brandenburg are allowing us to sell deeper with our current customer base, and we're seeing that in our total plate volumes where we've shipped nearly as much plate through the first three quarters this year as we did for all of last year. Leon Topalian: Does that cover all the questions you had, Andrew? Andrew Jones: Yes. Just one follow-up on the military side. Curious whether export markets like, obviously, Europe with sort of potential doubling tripling of defense spending. Is that a market you're focused on, given, I guess, with these higher-quality grades it's more of a global market than the U.S?. What is that -- is that a target for Nucor? Stephen Laxton: Yes. Thanks for the question. Certainly, it's an opportunity. Again, Brandenburg's capability set is unique in the world market. There's only so few folks that can produce the qualities and size ranges engages that Brandenburg can. So defense spending increases not just here in the U.S., but across the world. We're well positioned to take advantage of that. Operator: Our next question comes from Tristan Gresser from BNP Paribas. Tristan Gresser: The first one is just on your prepared remarks, you mentioned stable demand outlook for next year. But in your presentation, it seems you have a lot of structural tailwinds, especially on resi and infra. So I'm just trying to understand what could be the pockets of weakness next year that would offset that growth? And that stable demand outlook. If you could split that between longs and flats that would be helpful as well. Leon Topalian: Yes, Tristan, look, I'll touch on a couple of things that we expect to be, I guess, relatively tepid next year, but it is factored into our comments about next year being stable, and it could be up a couple of percent. But again, it's factored in with some softer markets like heavy equipment and ag, right? We don't see that coming back. We think the tariff impact of that has gotten into those heavy equipment suppliers in agriculture. We think residential construction is, again, probably not going to be great. Interest rates will certainly help that, and we'll see what the fate does over the next 70 or 80 days as we finish out 2025. And then auto is probably another one that's not a huge market for us today, again, about 5% or 6%. But one that we think we can continue to grow in because, again, we're increasing our capability sets. But again, I think those are probably three areas that we see either flat or down into '26. Tristan Gresser: All right. That's clear. And maybe just following up on that. I mean consensus has external shipments for the steel mills, I think, below 21 million tons for next year. Obviously, you have all those growth projects coming online and ramping up at different paces. So could you help us understand a little bit of the moving pieces into volumes for next year? And what sort of utilization rates for the new project do you expect? And do you see consensus is conservative or pretty well calibrated at this point? Leon Topalian: Well, okay. Look, I appreciate the question and we'll be careful on how much detail we get into for obvious reasons, Tristan. But look, I'm an incredibly optimistic guy. We're sitting on the eighth safest year in the history of Nucor. We've returned $1 billion through the first nine months of the year. We're ramping up two of our products today that we expect in Lexington, Carolina and Kingman, Arizona that we expect to be profitable in Q1 of '26. We've been upgraded by Moody's to A3. We started up the first of three Towers & Structures facility in Alabama, the other two next year. Continue to grow our capabilities and now make 95% of the data centers that steel that's in data centers that's required, starting up Crawfordsville galvanizing line and Berkeleys galvanizing line, culminating in West Virginia startup next year. The tsunami of earnings power that's going to be brought to Newport's balance sheet is significant. And so I couldn't be more optimistic about our future and do I think there's upside in our forecast. Absolutely. But look, there's other external factors that we all weighed. But again, the investments Nucor has made are for the long term. Not the quarter-to-quarter, that's the 10-, 12-, 15-, 20-year cycles. And again, I think we are as well positioned today as we have ever been in our history. Tristan Gresser: All right. All right. No, that's fair. And maybe just a last one on steel products. Is it fair to expect higher ASP into 2026, have you've seen rebar prices going up? And joists and deck, you mentioned good momentum. And if you could also, I think, expand beyond we're supposed to do $450 million of EBITDA for this year? Do you think it's achievable? And lastly, if you could just remind us the timing and EBITDA contribution of the two new tower projects that would be also really helpful. Leon Topalian: Yes, I'll start with the last. And if I forget the first, either, Steve can help me remember. But -- or you can, Tristan. If we start with the last question you asked about the other two towers facilities. Indiana is expected to be up and running midyear of next year and then Utah facility should be end of '26. So again, by the end of next year, we will rival some of the largest players in that space where the capability set that is truly differentiated, Tristan. It's -- these facilities that are being built aren't -- they're fully automated. They are using the latest technologies that you can imagine that are making these -- the design window for those from a cost and technology standpoint, incredibly advantageous. The product segment though, is also another area, and I'll let John comment here a little bit, but it's another area for us that we are incredibly optimistic about. If you think about the last 3, 4, 5 years of the products group, they have generated somewhere between 30% and 40% of Nucor's overall net earnings. We have seen in the cyclical market that we're in as a steel company. The products group has reached a new high, and we've seen the low and we're already climbing out. Our backlogs are up 25% to 30% year-over-year. We're seeing pricing stabilized and moving up in most of the segments within that group. And so again, do I think there's a lot of upside as we head into the new year and some tailwinds that could make that better? Yes, I absolutely believe that's to be the case. John Hollatz: Yes. Tristan, this is John. On the pricing side, look, the market is going to dictate what pricing is, but the one that we always get the question around is joist and deck pricing. And as we mentioned last quarter, we're expecting the trend and this is coming to a reality where our order entry is on joist and deck is matching our backlog pricing. That's been the case for about the last nine months. We're seeing a lot of stability there. And just echoing what Leon said, this -- the margins and the profits produced by these businesses are much stronger than what they were pre-pandemic, which is important for our downstream performance. Tristan Gresser: All right. And just on the $450 million EBITDA target for Expand Beyond? Stephen Laxton: Yes. Tristan, thanks for that question. Expand is doing fine. It's hitting its clip, and it's a mixed bag of things as Leon was highlighting some of the progress we're making in towers. Keep in mind that's a bit of a build out, a greenfield build-out. So we still would point people to our long-term run rate of $700 million as a target, and we're not going to back off of that. Operator: Thank you very much. We currently have no further questions. So I just like to hand back to Leon Topalian for any further remarks. Leon Topalian: Well, thank you for joining us for today's call and for your questions. Nucor is continuing to execute on our strategy to grow our core steelmaking capabilities while expanding into downstream steel adjacent businesses. I'd like to thank our team for delivering solid financial performance and for your unwavering commitment to become the world's safest steel company. Thank you to our customers for allowing us to serve you and to our shareholders for investing your valuable capital with us. Have a great day. Operator: As we conclude today's call, we'd like to thank everyone for joining. You may disconnect your lines.
Operator: Good day, and thank you for standing by. Welcome to NOV Third Quarter 2025 Earnings Conference Call [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the call over to Amie D'Ambrosio, Director of Investor Relations. Please go ahead. Amie D’Ambrosio: Welcome, everyone, to NOV's Third Quarter 2025 Earnings Conference Call. With me today are Clay Williams, our Chairman and CEO; Jose Bayardo, our President and COO; and Rodney Reed, our Senior Vice President and CFO. Before we begin, I would like to remind you that some of today's comments are forward-looking statements within the meaning of the federal securities laws. They involve risks and uncertainty, and actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or later in the year. For a more detailed discussion of the major risk factors affecting our business, please refer to our latest Forms 10-K and 10-Q filed with the Securities and Exchange Commission. Our comments also include non-GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website. On a U.S. GAAP basis, for the third quarter of 2025, NOV reported revenues of $2.18 billion and a net income of $42 million or $0.11 per fully diluted share. Our use of the term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our earnings release. Later in the call, we will host a question-and-answer session. Please limit yourself to one question and one follow-up to permit more participation. Now let me turn the call over to Clay. Clay Williams: Thanks, Amie, and good morning. NOV executed well in the third quarter. Revenues of $2.2 billion were down just slightly, less than 1% year-over-year and sequentially despite a challenging macro environment and softening oilfield activity. EBITDA was $258 million or 11.9% of revenue, up sequentially despite rising tariff and inflationary headwinds. Cost control and strong project execution allowed NOV to lift margins sequentially while increasing free cash flow to $245 million. Energy Equipment saw strong demand for its growing production-related portfolio, leading to higher backlogs and record revenues from our subsea flexible pipe and our gas-focused process systems businesses. These businesses as well as our marine construction and production and midstream units all achieved their highest EBITDA in 5 years, expanding segment year-over-year margins for the 13th consecutive quarter. Our drilling activity-driven Energy Products and Services segment once again outperformed the underlying global rig count declines of 8% year-over-year, aided by our growing share of efficiency-enhancing downhole technologies and strong demand for drill pipe, including NOV's proprietary wired drill pipe data telemetry system. But generally, activity continued to soften. In North America, E&Ps once again trimmed short-cycle oil activity which is likely to slow further seasonally in the fourth quarter. Internationally, the Saudi rig suspensions appear to be behind us. And while spending there remains low, expectations are building for a few more rigs to go back to work in 2026. Elsewhere in the Middle East, demand from the UAE, Qatar and Kuwait remain healthy as customers continue to invest to meet production goals. Many are pursuing unconventional shale developments. Argentina, Saudi Arabia and the UAE are leading the way, but interest is emerging elsewhere around the globe, as I'll speak to in a moment. Offshore, our customers expect a meaningful exploration and development drilling ramp to begin in late 2026. Offshore FIDs are expected to pick up over the next few years following a lull in 2025, and our discussions with customers around deepwater FEED studies support this view. Bookings tied to offshore development are already up double digits year-over-year. Further out, NOV's prospects through the next decade are extraordinarily bright. Why? Step back from the near-term noise created by OPEC quota unwinding, oil oversupply, commodity price pressures, tariffs, inflation and geopolitical uncertainty, and you will see 2 major structural shifts that are setting up a powerful decade of opportunity for our company. First, the globalization of unconventional shale development. Oil and gas are commodities and the winners and losers in all commodity industries live and die based on costs, development costs and marginal production costs. The clear winner in the race to lower marginal production costs since about 2012 or so has been North American unconventional shale, which has arguably provided more than 80% of global supply growth since then. It's been the winner of the horse race to lower cost. And as the winner, it has attracted the most capital. Technology, capital and ingenuity led marginal cost for the shale juggernaut lower and lower, outpacing the marginal cost reduction secured for offshore and other sources of oil and gas. And these competing sources saw capital investment fall sharply through the same period. But as North American shale producers have chipped away at Tier 1 inventory locations, production growth is flattening here and may well be peaking now. And as the mix of lower quality Tier 2 locations rises, marginal cost per barrel for North American unconventional shales is creeping up as comments from producers in the past few Dallas Fed surveys note. After 20-plus years of refining the technology to enable North American shale revolution, these same technologies are now being deployed at scale internationally because international E&Ps see opportunity to develop lower marginal cost sources of oil and gas elsewhere. The advantage international shales have at this point is that they will benefit from decades of advancement and several hundred thousand shale wells that have been drilled and experimented with and continuously optimized here in North America. And these learnings will now be applied to new virgin international rock. The near-term challenge they have is they lack the necessary tools and equipment. That's where NOV comes in. Since prosecuting a successful unconventional shale play requires pretty much everything NOV makes, we're pretty excited about this. Recall that the U.S. shale miracle started with a complete retooling of its land rig fleet and the build-out of a lot of frac, coiled tubing, wireline completion and production equipment. These tools and technologies are squarely in our wheelhouse, and we see the emerging build-out of infrastructure to support international shale development is driving demand for us for years to come. Second, the reemergence of deepwater and offshore development. After years of second place finishes and the marginal cost horse race, deepwater is back to winning. Deepwater has quietly but steadily gotten better since 2012. NOV-supplied offshore drilling rigs are drilling more efficiently, higher hook load capacities are enabling more cost-effective casing programs. The standardization of subsea production kit and FPSO designs have all served to steadily reduce the marginal cost of deepwater barrels and make its economics more compelling. Simply put, we believe that deepwater broadly has brought marginal costs below North American shales, and it is now winning the marginal cost horse race. This is a big deal. We believe this inflection, this leadership change will drive many more investment dollars into deepwater in the coming decade to satisfy growing global energy demand. Evidence of this is apparent in exploration success stories in new basins in Guyana, Suriname, Namibia, Senegal, the Eastern Mediterranean, the Paleogene and the Gulf Hope America. Industry forecasts call for offshore oil output to rise to roughly 13 million barrels a day by 2026, making deepwater the leading source of incremental supply growth. The pivot in spend is further helped by the emergence of profitable floating LNG, which adds natural gas as another viable target for offshore E&Ps. NOV's technology portfolio from subsea flexible pipe and process systems to mooring solutions and rig aftermarket and automation is critical to enabling this expansion. Customer performance expectations favor selection of NOV technology, providing NOV a strong competitive advantage in deepwater operations. Finally, I'll stress that this 166-year-old horse race is never over. Innovative North American shale operators have an amazing track record of honing costs to improve competitiveness. But honestly, all operators in all basins do, and they have to, given the business they're in. But right now, we see deepwater pulling into the lead and international shales entering the race as a serious contender. We believe these 2 will define the next decade plus of oil and gas development and both depend on the tools, equipment and technology that NOV delivers. Back to the near term, however, as I said, we expect market conditions to remain soft through the next few quarters. Tariffs and inflation uncertainty will continue to weigh on margins in the near term and global drilling activity is likely to drift lower. But looking further ahead, we see the back half of 2026 and beyond as a period of strengthening demand across both offshore and international land markets. As deepwater projects ramp and unconventional development expands globally, NOV's technology leadership and global platform will enable us to capture the growth efficiently and profitably. And that's why I'm so excited about NOV's future. To my NOV teammates listening this morning, thank you for all that you do to strengthen and improve and lower the marginal cost of the operations of all of our customers globally. You've helped build NOV to perform through cycles and to lead in the next phase of global energy development. And I'm grateful for the way that you get up every day, put your boots on and make this industry better. Now let me turn it over to Rodney. Rodney Reed: Thank you, Clay. Consolidated revenue was $2.18 billion, down slightly year-over-year and sequentially. Operating profit was $107 million or 4.9% of sales. Net income was $42 million, and the company recorded $65 million within other items. Adjusted EBITDA totaled $258 million, representing 11.9% of sales. Sequentially, EBITDA margins improved as strong operational execution and cost controls offset the effects of softening oilfield activity and higher sequential tariff expense. Free cash flow generation remained robust at $245 million. Over the last 9 months, NOV converted 53% of EBITDA to free cash flow and achieved a 95% conversion rate during the quarter, which was a result of strong cash collections on projects and a focus on systematic structural working capital efficiency improvements. During the quarter, we repurchased 6.2 million shares for $80 million and paid dividends of $28 million, bringing total capital return to shareholders year-to-date to $393 million, which includes a supplemental dividend of approximately $78 million paid in the second quarter. During 2025, we expect to significantly exceed our minimum threshold of returning 50% of excess free cash flow to our shareholders. For the quarter, tariff expense came in just under $20 million, increasing approximately $6 million sequentially. For the fourth quarter, we expect our tariff expense to be around $25 million. We continue to realign our supply chain and execute strategic sourcing initiatives to reduce tariff impacts. We also remain focused on removing structural costs to improve margins and returns, including consolidating facilities, standardizing internal processes and rationalizing product lines or regions that don't meet our profitability requirements. These programs are on track to deliver over $100 million in annualized cost savings by the end of 2026, although tariffs and other inflationary impacts remain headwinds. While we expect the near-term environment to remain choppy, we're executing well, managing what we can control and positioning NOV well for the future. With that, I'll turn to segment results. Starting with our Energy Equipment segment. Third quarter revenue was $1.25 billion, up 2% from the third quarter of 2024. EBITDA increased by $21 million to $180 million, resulting in a 140 basis point increase in EBITDA margins to 14.4% of sales, driven by strong execution in our capital equipment business more than offsetting lower aftermarket revenue. Capital equipment sales accounted for 63% of the segment's revenue in the third quarter of 2025, increasing 20% year-over-year due to strong growth in offshore production equipment. Aftermarket sales and services accounted for the remaining 37% of energy equipment revenue with sales declining year-over-year by 19%. Capital equipment orders of $951 million for the quarter more than doubled sequentially, reaching our second highest quarterly bookings in the last 18 quarters. Orders represented a book-to-bill of 141% for the quarter and 103% book-to-bill over the trailing 12 months. Continued strength in demand for our offshore-related production equipment offerings led the order book with multiple orders for subsea flexible pipe, a monoethylene glycol processing module and our second order for a large submerged swivel and yolk system for LNG offtake in Argentina. Backlog at the end of the third quarter was $4.56 billion, the highest since we started reporting Energy Equipment as a segment. Our Subsea flexible pipe business had another exceptional quarter with solid year-over-year and sequential revenue growth. The operation also continues to improve profitability due to strong execution on projects. The business delivered record quarterly revenue and bookings with project backlog achieving an all-time high. While the business is performing exceptionally well, our team continues to identify ways to further optimize our manufacturing processes to accelerate production and improve operational efficiencies. Our Process Systems business continued its strong performance, both for offshore production and onshore gas fields with revenue growing high double digits year-over-year, finishing the quarter with record revenue and EBITDA. Offshore production market forecasts remain robust, which should continue to drive demand for gas processing and produced water treatment opportunities. Additionally, the build-out of FLNG and FSRUs is driving opportunities for our fluid and gas transfer systems like the order I previously mentioned for the Submerged Swivel and Yoke system for an FLNG project in Argentina. Our Marine and Construction business experienced a sharp increase in revenue compared to the third quarter of 2024, driven by a significant increase in progress on crane and cable A projects, partially offset by lower activity related to wind turbine installation vessels. The outlook for offshore supply vessels, which provides opportunities for our subsea cranes remains strong, and we continue to see tenders for cable lay vessels. The fixed wind market remains challenging. However, we see the potential for another award later this year or early next year with the continued need for larger newbuild vessels in Europe and Asia. Several countries are still planning to expand offshore wind supply, which could lead to a shortage of WTIVs around the end of the decade and therefore, should drive incremental new build demand over the next few years. Revenue for our intervention and stimulation capital equipment fell double digits year-over-year due to a steep drop in demand for pressure pumping equipment in North America, partially offset by strong and growing demand for coiled tubing and wireline equipment. This growing demand related to the development of unconventional resources in international markets and to offshore activity has led to 3 straight quarters of bookings growth and trailing 12-month book-to-bill of over 100%. Revenue from drilling capital equipment decreased high single digits year-over-year due to market uncertainty and contracting gaps from some offshore drillers. Capital equipment orders improved sequentially, but the demand remained soft as offshore drilling contractors preserve capital while navigating through white space in their contract portfolio. Outlook for the offshore drilling appears to be improving for the second half of 2026 and beyond, as Clay mentioned, leading to a more constructive dialogue regarding opportunities to support recent and upcoming tender awards, including higher hook load capacities, crown compensators, managed pressure drilling and BOP upgrades. Additionally, demand for automation and robotics continues to gain momentum for land and offshore rigs due to improved safety and operational efficiencies provided by our ATOM RTX robotics packages. In our drilling aftermarket business, revenues were down significantly compared to prior year. The decrease is the result of lower spare parts bookings over the last few quarters as customers slowed spending in response to gaps in contracting activity, but we did see a mid-teens percentage increase sequentially in spares bookings, which should lead to a stronger fourth quarter revenue for the drilling aftermarket business. For the fourth quarter, we anticipate a less pronounced than usual seasonal increase in our Energy Equipment segment due to timing of capital equipment deliveries. As a result, we expect revenue to decline 2% to 4% year-over-year with EBITDA in the range of $160 million to $180 million. Our Energy Products and Services segment generated revenue of $971 million, a 3% decrease compared to the third quarter of 2024 reflecting lower global activity levels and delayed capital equipment orders for infrastructure projects, partially offset by technology-driven share gains. EBITDA was $135 million or 13.9% of sales. Higher decrementals resulted from an unfavorable sales mix, pricing pressures in North America and increased tariff expense. We're focused on reducing structural costs, including consolidating facilities and exiting product lines or regions that don't meet our return requirements. North America represented 57% of segment revenue and grew 7% year-over-year on higher drill pipe sales compared to a 10% decline in rig count. Segment revenue decreased 15% year-over-year in international markets due to some activity declines in the Middle East and Latin America. For the quarter, the sales mix for energy products and services was 51% services and rental, 31% capital equipment and 18% product sales. Services and rentals revenue declined 4% year-over-year as demand for our solids control services declined in the mid-teens due to lower international activity. However, increased traction for our efficiency-enhancing technologies in North America as well as in unconventional and tight gas applications internationally helped to partially offset the impact of an 8% global rig count decline. In North America, drill bit revenue rose mid-single digits due to market share gains tied to superior performance and reliability, and we realized growing demand for our drill bits, downhole tools and tubular coatings from the increase in gas-directed drilling, particularly in high-temperature applications in the Haynesville. Internationally, our downhole drilling motors were deployed in the first unconventional wells drilled by an independent in Bahrain and rentals of our downhole technologies increased in Argentina, supporting unconventional development. Tubular coating and inspection revenue was down modestly year-over-year with strong growth in North America coating sales, partially offset by lower demand in Latin America and the Eastern Hemisphere. Capital sales increased 5% year-over-year, supported by mid-teens percentage growth in drill pipe sales as customers replenished inventories. Drill pipe bookings reached their highest level since early 2022. However, composite pipe and tank sales declined primarily due to delays in infrastructure projects affecting timing of orders. Orders for infrastructure projects stepped up late in the third quarter and included an order for 2 large fuel storage tanks for a data center and 9 miles of 55-inch glass reinforced plastic pipe in Brazil. The strong order intake for our drill pipe and fiberglass businesses positions us well for improved capital equipment revenues in the fourth quarter. Product sales decreased in the mid-teens percentage range year-over-year with higher downhole tool sales in Asia more than offset by fewer international bulk sale deliveries. Additionally, we are seeing an increase in international customers changing their preference from purchasing to renting drill bits, more in line with predominant customer preferences in North America. Looking to the fourth quarter, we expect a modest sequential pickup in capital equipment sales from our Energy Products and Services segment to be more than offset by softer market conditions. As a result, we expect fourth quarter segment revenue to decline 8% to 10% year-over-year with EBITDA between $120 million and $140 million. With that, I'll turn the call over to Jose. Jose Bayardo: Thank you, Rodney. NOV executed well during the third quarter in a challenging market environment. While we expect near-term activity levels to remain soft, we also believe that growing demand, natural decline rates and a decade plus of underinvestment in exploration will drive a meaningful recovery, potentially beginning as soon as late 2026. We have a very constructive view regarding the industry's and NOV's outlook over the medium to longer term as a result of the market backdrop and how we are positioning the company. We remain sharply focused on improving operational efficiencies while positioning NOV to capitalize on key secular trends, including offshore production supplanting U.S. unconventional resources as the dominant incremental source of global oil supply, accelerating activity in international unconventional basins, natural gas becoming the fuel of choice for power generation and the application of technology to drive efficiencies. These trends are driving actions we see from our oil and gas operator customers and are driving how we invest in and position our business. Clay highlighted that we provide many of the critical tools, equipment and technology required to meet the growing needs of our customers. NOV has a unique but broad portfolio of solutions and serves multiple end markets that often move through cycles at different rates. The diversity in our business, along with our technology and service-driven market leadership are intentional and strategic and provide operational and financial resilience. Let me explain what I mean. In 2023 and 2024, NOV generated roughly $1 billion in adjusted EBITDA, and we expect that we'll deliver about that same amount in each of 2025 and 2026. While our earnings appear stable at the consolidated level, our mix can change meaningfully from year-to-year. Following the pandemic, we realized a rapid recovery in demand for shorter-cycle activity-driven products and services, particularly in North America. As a result, our Energy Products and Services segment drove our growth and contributed roughly 62% of our adjusted EBITDA in 2023. Since then, we've seen slowing activity in North America, which has been offset by growing demand for capital equipment in offshore and international markets. As a result, we expect Energy Equipment's contribution to EBITDA to rise from 38% in 2023 to approximately 55% in 2025, while Energy Products and Services EBITDA contribution moves to about 45%. While we have seen a sizable shift in the contributions from our 2 reporting segments, some of our businesses have realized a greater than 40% increase in their revenues and significantly higher percentage movements in EBITDA, which offset declining activity in North America. The diversity in our portfolio provides resilience during times when market cycles are out of phase as we've seen over the last decade. And when, not if cycles align, likely driven by higher commodity prices and a more sustained global up cycle, the amplitude of NOV's earnings will be materially higher even without an offshore rig new build cycle. While our business is intentionally diverse, we're extremely deliberate about how we position our portfolio and how we compete. Each of our operations leverages NOV's energy expertise-driven core competencies in engineering, material science, manufacturing, service delivery and supply chain management. We also focus on participating in businesses where we can be market leaders and establish and advance competitive advantage often achieved by harnessing our core competencies and world-class R&D capabilities. Additionally, we focus on markets that have high barriers to entry, typically due to complex technological hurdles and the associated capital requirements. Market leadership in high barrier-to-entry markets enables scale. Scale across multiple product and technology-oriented businesses that can leverage common manufacturing, engineering and supply chain resources further advances competitive advantage and provides resiliency during market cycles, allowing us to continue investing in innovation regardless of market conditions. You'll find market leadership across our product portfolio. We pioneered numerous technologies that helped unlock the shale revolution by enabling efficient drilling and completions of ultra-long lateral wells. As Clay noted, these technologies are now realizing accelerated adoption in emerging international unconventional markets. We've also pioneered numerous technologies that unlocked major efficiencies associated with the exploration and development of deepwater resources. Our game-changing leach PDC cutter technology dramatically increased thermal stability and wear resistance of drill bits, leading to substantially higher rates of penetration and longer run times with fewer trips. While the bulk of the industry now uses our technology, we continue to leverage our material science expertise to further advance cutter technology that drives improvements in rate of penetration and reduces costs. These advances have allowed our ReedHycalog drill bit business to gain share in many markets, including the U.S., where its revenue grew 11% year-over-year against an 8% decline in drilling activity. Another game-changing downhole technology we pioneered was our Agitator friction reduction tool, which enables operators to drill farther and faster. We continue to advance our technology to build better fit-for-purpose versions of the tools such as our Agitator ZP and our Agitator RAGE friction reduction tools. The ZP is a zero pressure drop friction reduction tool that allows customers to maintain maximum flow rates in pressure-limited drilling situations. On the opposite end of the spectrum, our agitator RAGE leverages the high-pressure capabilities of super-spec drilling and pump packages to produce extreme levels of friction reduction for tight curves, U-turns and ultra-long laterals in the most demanding environments. Revenue from new downhole drilling technology, which includes our latest agitator offerings is up over 30% year-over-year, comprising almost 20% of our downhole tools business' revenue with more room to run. Even in areas where many people may not think technology plays a big role, such as in tubulars, innovation drives our market leadership. After setting the global standard for premium high-torque drill pipe with our XT connection that can handle 70% more torque and improve hydraulics with up to a 50% reduction in internal pressure loss in comparison to standard API connections, our engineers developed our Delta connection. Delta can handle 20% higher torque than the XT connection for extended length drilling applications and its proprietary design prevents gulling, reducing total cost of ownership and enabling up to 50% faster makeup than other premium connections, reducing tripping time. We also recently introduced wear-resistant drill pipe to address accelerated body wear in extreme drilling environments and insulated coatings to protect against extreme well temperatures that cause premature failures of bottom hole assemblies. Additionally, we are a leader in providing subsea flexible pipe for deepwater production. We have won the Supplier of the Year award from the largest global consumer of subsea flexible pipe 2 years in a row as a result of our technology execution and service. We continuously advance technology that addresses our customers' most pressing needs. This quarter, we received an order for our active heated flexible riser system, which combines flexible pipe and heating technology to address flow assurance challenges in environments where heavier oils become even more viscous and cold deepwater conditions. We also offer our OptiFlex condition monitoring system that utilizes embedded fiber optics to continuously measure temperature and fatigue, and we're undergoing qualifications for what we believe is the leading contender to cost effectively mitigate CO2 stress corrosion cracking, which is a costly issue in Brazil's pre-salt fields. We've been investing in our solution for the CO2 stress corrosion cracking challenge since 2019, reflecting our commitment to invest in critical solutions for our customers throughout the cycle. I could go on all day covering the technology leadership across our product portfolio, but you probably detect the pattern here. NOV pioneers technologies that provide meaningful advancements for the industry, then we continue advancing our technologies, allowing us to maintain our competitive advantage and market leadership. While we focus on rapid innovation and continuously improve our products, R&D efforts that drive potentially revolutionary changes like our CO2 stress corrosion solution and our industry-first 20,000 psi BOP take place over longer periods of time, sometimes over a decade, an investment horizon that few in this industry have the fortitude to stomach. We continue to be relentlessly focused on several other potentially revolutionary long-term R&D initiatives and would like to highlight a couple of our ongoing efforts to digitize and automate the energy industry. Over a decade ago, we commercialized wired drill pipe that can transmit data at up to 58,000 bits per second compared to the 5 to 15 bits per second for standard mud pulse telemetry. Since our initial commercialization, we have significantly improved connection reliability, lowered costs and built a portfolio of advanced sensors and tools that harness the capabilities of real-time broadband data transmission. Additionally, we've invested in a software stack to aggregate, visualize and contextualize data to drive more value for our customers through better analytics, decision-making and automation. During the third quarter, our downhole broadband solutions team helped the customer drill an important exploration well in the North Sea. Our wired drill pipe technologies enabled advanced geosteering for ultra-long horizontal sections at unprecedented speeds, reaching up to 200 meters per hour and precision, accessing significantly more reservoir than the customer previously thought possible. The operator stated that a typical exploration well might intersect a few hundred meters of reservoir, but we helped our customer drill a multilateral multi-target exploration well that exceeded 20 kilometers of reservoir exposure. This complex well drilled with leading-edge technology cost a bit more than a conventional exploration well, but it accessed a very large multiple of the amount of reservoir a conventional well would have encountered. Additionally, with the quality and quantity of data collected, we helped the customer meaningfully reduce uncertainty and accelerate their time line from discovery to development. Lastly, I want to highlight the success we're having with drilling automation. Our NOVOS drilling automation system was designed to automate repetitive drilling activities and more importantly, to serve as a platform that would allow multi-machine control and rig floor automation. Leveraging this platform, we developed our ATOM RTX robotic system, which we commercialized in January 2024 on a rig working for an IOC in Canada. Our ATOM RTX system completely automates the vast majority of operations without human intervention on the rig floor, significantly improving safety and drilling performance while providing high levels of consistency. We now have a total of 6 operational robotics packages, 3 on land and 3 offshore, and the IOC using our robotic system in Canada recently shared with us that the automated rig is their best performing rig in the region. We're hearing more and more of our customers describe our robotic system as the next top drive for the industry, which, by the way, was another revolutionary technology that NOV pioneered for the industry. Excitingly, the backlog for our ATOM RTX system is growing at a healthy clip. NOV's technology and market leadership and business diversity drives operational and financial resilience. This resilience enhances our ability to leverage our core competencies and invest through cycles to further advance our competitive advantage. But none of this would be possible without our fantastic people. NOV will play a key role in the emergence of international unconventional resource development and the coming growth of deepwater production. Our technologies from downhole tools to advanced digital solutions are developed through intensive collaboration among multidisciplinary teams and close engagement with our customers to improve the efficiencies and lower the marginal cost of energy production. Few organizations outside NOV possess the breadth of capabilities required to commercialize solutions of this complexity. The people of NOV continuously demonstrate a remarkable ability to design, manufacture and service essential technologies for our clients. Every member of NOV plays an important role in putting customers first and making NOV better every day. And I'd like to thank our team for their dedication and their unwavering focus. With that, we'll open the call to questions. Operator: [Operator Instructions] The first question today will be coming from the line of Jim Rollyson of Raymond James. James Rollyson: Nice results and obviously, great bookings and ending backlog. And I guess, Clay, nothing like starting -- going into a little bit of slowness before we get to the nice vision you have for where this is all going down the road with a record backlog. And maybe if I can ask about that, your energy equipment business, looking at it the way things have trended this year, you've had pretty solid growth year-on-year every quarter in capital equipment and then you had aftermarket kind of be a drag. And I'm wondering, with the backlog you have and kind of the timing and that as you look out, can you continue to put up pretty decent year-over-year growth like through '26 even in a maybe a bit of a softer near-term market because of that backlog? Clay Williams: Yes. I think it will certainly help on that side. What we're concerned about, Jim, and we referenced this in our prepared remarks, is the general softness in -- every -- look, everybody in the oilfield is worried about the overhang of OPEC barrels. And as those come in, what they're going to do to commodity prices. So I think quicker turn items like aftermarket and spares and that, I think people are going to be very circumspect about what they spend in that area. But yes, so far, so good on the capital equipment side of energy equipment and which is we also noted, is really driven by our production-related equipment. That's risen in our mix from south of 20% of the mix to now north of 30% of the mix for the segment revenues and has really dominated our order, something like 80% of our orders for the past few quarters have been in the production side of things. So the drillers are still very cautious on capital spend, but this is really an engine that's fueled by demand for production equipment. But as we look into 2026, we do foresee a pickup in deepwater late in the year. That's a very consistent theme we've heard from offshore drillers and IOCs both. But I also think that the year's results are likely to be tempered by continued slowing of activity here in North America and otherwise. But as you rightly point out, once we get into late 2026, 2027, once we get through the excess barrels that OPEC is putting back on the market and kind of that gets behind us, I think it's really setting up for a much stronger market for NOV. James Rollyson: Absolutely. And as a follow-up, just maybe sticking with EE. The other issue you've had this year is probably not what we thought 9, 12 months ago, but margins have actually been pretty strong there and kind of bounced around this 13-something to 14-plus percent. And I'm curious, as you look into '26, just on the mix of capital equipment versus aftermarket, the types of stuff like more production-related equipment, how do you think about the margin profile? Like is kind of '25 margin profile something we could see again in '26 when you throw in the tariffs and then the cost offsets that you're also doing? Jose Bayardo: Jim, this is Jose. I'll start off on this one. Really, we'll have to see how things play out during the course of the year. So I think Clay did a nice job of sort of describing the scenario that we envision for 2026 in general, but the timing of how things play out is always difficult to pin down. So as you pointed out, we've had really nice steady improvement in terms of the overall quantity of the backlog, but we've also seen continued improvement in terms of the mix and really embedded pricing and margin within that backlog as well. So feel really good about our positioning from a capital equipment standpoint going into 2026. The real variable is going to be as it relates to, to a lesser extent, book and turn type items. A bigger driver is obviously going to be the aftermarket piece. But really, as we sit here today, we feel pretty good about the way that, that is shaping up. I think as Rodney touched on in his prepared remarks, line of sight towards recontracting a lot of the offshore fleet is looking more and more promising. When those rigs are recontracted, keep in mind that once a contract is signed, it's typically 9 to 12 months before they start to turn to the right. But once those contracts are signed, they're typically picking up the phone and calling us for additional spare parts to replenish those rigs and get them ready to get back to work and also doing any potential upgrades. But -- so the setup is very good, but the timing is a little bit uncertain. So it really just depends on what happens through the course of the year. But as Clay mentioned, what's really exciting to us is the setup for 2027. We talked about the -- when sort of these cycles in our various components of our business converge, significant increase in the amplitude of our earnings when that happens. And what we've seen happen over the last several years is we start off with North America. The North America trends down. Then we saw a reactivation cycle for the offshore rig drilling space, and that sort of tapered off. But we got a pickup in offshore production-related equipment, and that's the bright spot in the portfolio right now. And towards the latter part of 2026 and the latter part of -- and into 2027, that's when we sort of see those -- more of those cycles converge, particularly as it relates to all things offshore, but also think we could see a really nice continued activity for international shales and do think that North America will have to run a little bit harder as well just to maintain flat production, if not sort of grind things just a little higher. So sorry for a long-winded response, but I think the setup for NOV is really good over the next couple of years. Clay Williams: Lisa, do we have another question? Lisa, are you there? Operator. Hello, operator? Hey, Marc, you on the line [indiscernible]. Marc Bianchi: I wasn't hearing anything on my end either. I guess you had a really strong quarter of orders in Energy Equipment. How are you thinking about fourth quarter and beyond? Can we see clicking along at a 1 or better book-to-bill from here on? Or what's the general outlook? Clay Williams: Marc, what I'd tell you is orders here are always lumpy. We're always very hesitant to give too much guidance because a lot depends on some large orders. Going into the fourth quarter so far, we've got line of sight on a couple of large interesting orders. One, we feel pretty good about, another may be a longer but. What I'd tell you is that kind of given the caution, I think, that's out there, my expectation is for the fourth quarter, orders probably will slip a little bit below 100% book-to-bill right now. But if we do land that second order, I think that may help put us over 100% book-to-bill. But my best guess right now is probably just a tad short. But I'll stress again, we've had 4 years of great orders. I think our backlog is up 40-something percent, 43% since 2020 and over 100% book-to-bill trailing 12 months. And obviously, Q3 is very strong at 141% book-to-bill. So we don't get too worried about one particular quarter. What's more important is the longer-term trend and the longer-term trend for NOV for the past few years has been very solid. Marc Bianchi: Yes, indeed, it has. The other question I had was just on the -- there was $65 million of other items, and I think write-down of long-lived assets and inventory were mentioned. Can you say how much of that was the inventory? And how much of a benefit to margin was that in the third quarter, if at all? And how much is it benefiting kind of going forward? Rodney Reed: Yes. Thanks, Marc. Our other items were really an output, as we mentioned in our last quarter earnings call, that we're going through some detailed business process reviews. We're looking at product lines, subproduct lines, business units facilities for high-return opportunities under a return lens. And as we've continued to go through that process over the last 90 days, we have had some facility consolidations, facility closures, some exiting of certain subproduct lines, which, to your point, the output was some inventory charges that those inventory charges don't have any impact to margins going forward. Those -- that inventory is scrapped and does not have any margin impact going forward. Operator: Our next question comes from the line of Arun Jayaram of JPMorgan. Arun Jayaram: Clay and team, I was wondering if you could maybe elaborate a little bit about the build-out of unconventionals that you're seeing. You mentioned Argentina, the UAE and Saudi. Maybe you could talk a little bit about what you're seeing there. I think you highlighted increased coiled tubing and wireline types of orders, but talk about the early build-out there and perhaps other countries or regions where you're seeing unconventionals get gain share. Clay Williams: Yes. Let me talk about that, and then I'll hand it over to Jose to talk about maybe our demand for intervention and stimulation equipment. What I'd tell you that's most interesting to us is you've got very well-known programs in Saudi Arabia with the Jafurah field with Vaca Muerta in Argentina, unconventional fuels in the UAE that are being prosecuted in earnest by the oil companies that control those that are moving forward. But what's interesting to me is a number of really successful North American shale entrepreneurs now that are prospecting and looking for kind of the next basin to move to. And so there are, I think, a wave of unconventional prospecting underway in places like Algeria and Turkey and Oman and Bahrain we mentioned in our press release, Australia. And so these are really interesting technologies or transformative technologies. They have the potential to catalyze new low marginal cost sources of production. And so we're pretty excited about what that means for NOV in the future. Jose Bayardo: Yes. And Arun, just to pick up on that. So yes, there's a broad spectrum of effectively NOCs in countries that are at different stages of their development. As Clay touched on Argentina, Saudi are sort of at the more mature end of the spectrum. And then you have folks like Pakistan and Turkey that are really just starting to get started and everybody else is somewhere in between. And this is an exciting backdrop for NOV and all of these markets tend to start in a pretty similar way. In some of these less mature, very early-stage markets, we're seeing a big pickup in demand for our coring services. As you might imagine, as people try to delineate the boundaries of what these unconventional plays look like, then you typically translate from that type of work to a little bit of probing the formations, but that quickly, assuming everything goes according to plan, that quickly moves to realizing that a lot of investment is necessary in order to make things go, and that translates into investments in infrastructure, which has been driving a lot of demand for businesses like our fiberglass business with a lot of build-out of flexible pipe and rigid pipe as well to transport fluids and gas to and from locations. Also things such as chokes, manifolds, things of that nature also get gone. And that as it relates to once things get a little bit more mature, that's when we start to see a big pickup in demand for effectively more traditional service equipment, whether it's drilling equipment or intervention and stimulation-related equipment. I guess what I'll say related to intervention and stimulation equipment business in general is, obviously, that's been a pretty tough business for us over the last couple of years. Historically, that was very much a North American-centric business. Obviously, there hasn't been a lot of demand here over the last couple of years. But what we have seen here really over the last year is steadily increasing demand from our intervention and stimulation equipment business entirely related to demand from overseas unconventionals, particularly for large diameter coiled tubing units, new wireline equipment, all the things that are really necessary in order to enter into development mode from an unconventional standpoint. And so to put things in perspective, we had a greater than -- slightly greater than 150% book-to-bill this quarter. But really for the last 4 quarters, we've seen a steadily improving book-to-bill in that business. And while we're still down quite a bit from where we were over a trailing 12-month period, we're now back to being over 100% book-to-bill for that business. So things definitely heading in the right direction and see a lot more opportunities to come. Arun Jayaram: Yes. Great. My follow-up is just wondering if you could just discuss what you're seeing in terms of FPSOs, maybe provide a context of how many FIDs did you see in 2025 and maybe thoughts on how that could progress in '26 and '27 because typically, that could include chunkier types of awards for NOV. Clay Williams: Yes. So we've seen -- I think everybody has been affected by this OPEC overhang of production. And so there continues to be a little caution out there. And as a result of that, as we progress through 2024 and 2025, estimates for FIDs and for the number of FPSOs to be ordered have been kind of walking down a little bit. Year-to-date, I think there have been 3 awarded, and I think there are likely a couple more to come here at year-end. But what we're excited about is as we get into late 2026 and 2027, and we get this oil overhang behind us, again, I think it's a much brighter outlook, and I think we'll see demand pick up again. Operator: Our next question comes from the line of Stephen Gengaro of Stifel. Stephen Gengaro: I think my first question, I think it was about a year ago. It may have been a little longer, but you had talked about sort of better priced backlog that was sort of primed to start flowing through the income statement, and we've seen some of that. And I'm just curious if you could talk a little bit about the current backlog, recent orders and how we should think about the margin impact at a high level in '26 and maybe beyond? Rodney Reed: Yes. So good point there, Stephen. So as you mentioned, really throughout '25, we've seen a couple of different cross currents in particular for the EE business. One, as Clay mentioned, a significant number of our bookings throughout the year have been in the offshore production space. As we have strong technological advantages there, high barriers to entry, our margin profile is able to continue to increase in addition to good operational efficiencies over the last 12 months in some of the offshore production area, which has really driven revenue and margins up in that particular area. Offsetting some of that has been a decline in some of our aftermarket business. So we mentioned during the quarter, sort of a high teens decline in our aftermarket business, and that sort of spans across the full portfolio, principally in the drilling space. I think as Jose mentioned on the question earlier, as we look into 2026, we're still able to have strong margins on what we're quoting in our offshore production equipment. And also the team is working diligently to continue to improve operational efficiencies. So that sort of strong backlog heading into '26 should be positive on the margin side. And then part of the other equation is sort of timing of when some of the rig aftermarket, some of the offshore piece happens. And we mentioned that's probably more in the second half of '26 than in the first half. So put those pieces together and put a glimpse into some of the 2026 margins. Clay Williams: Stephen, Rodney said it well. I'm going to add to what he went through, the fact that I think our processes and our controls around the risks on signing new contracts in terms of very thoughtfully going through how we're going to execute, how we can improve our operations, how we can make sure that the scope that we're taking on is clear and we're the right company to handle that scope, the payment terms, all of the above. I think the quality of the backlog is as high as it's ever been today. And so that's why you've seen margins continue to walk up there in energy equipment, and that's strong clear contract provisions with our customers and then just an outstanding team executing these contracts after we win them is a great combination. Stephen Gengaro: Great. And my second question is more high level, and we've all been doing this a long time. And when we start hearing about U.S. production plateauing. We've been hearing that sort of theme from a couple of companies and that activity is not high enough to sustain production. Do you guys see that? And do you think that is a critical sign towards maybe getting a stabilization and ultimately recovery in U.S. land? Clay Williams: Yes. I'm going to caveat this and just full disclosure. I've been wrong on this before. So I'm hesitant to call U.S. production peak. What I would say is though, it's becoming clearer and clearer that growth is decelerating in what it used to be. 2023, U.S. production grew almost 1 million barrels a day. And the EIA now is forecasting 2026 growth to be 0. And so it's been steadily declining. The level of activity has been shrinking. I think you have not seen production declines quite as meaningful as people have forecast, but that's because what activity is going on out there is being done at very high levels of efficiency and all that longer laterals and continuing to improve completion techniques and the like. But it's just -- I think it's becoming more and more evident to a lot of people in the industry that U.S. shale, North American shale is kind of approaching the twilight that Tier 1 locations are being exhausted. Otherwise, why would you drill a horseshoe shaped well? Why would you do a refrac? I think why would you go to Turkey and look for opportunities or Algeria. So I think that all sort of signals the behavior in the industry. The production numbers points to the fact that -- I mean, this has been a fantastic horse in the horse race I described earlier, and it's produced a lot of oil and gas. 8.5 million barrels per day have been added from U.S. shale since 2008 on a $1 trillion capital investment campaign and has done a lot of good for humanity around the globe to provide oil. But I think we're seeing this basin begin to roll over. And as all basins have always done in the entire history of the oil and gas industry, and I think it's inevitable now that this technology gets applied to other basins elsewhere around the world. Operator: Our next question comes from the line of Doug Becker of Capital One. Doug Becker: So EBITDA to free cash flow conversion was 95%, even with a bit of an increase in CapEx sequentially. And so it seems like some of the structural changes in working capital management are having an effect. So I wanted to get some color on what's the outlook for CapEx and free cash flow in the fourth quarter. But more importantly, just do these structural changes put a little bit more of an upside bias to free cash flow conversion as we think in 2026 and 2027. Rodney Reed: Yes. Thanks, Doug. This is Rodney. I appreciate the highlight of the team's effort on free cash flow conversion for the quarter, 95% and as we mentioned, 53% on a year-to-date basis. So strong performance there. And that's been predicated on a couple of different points. One, strong project execution, as Clay mentioned earlier, good contractual terms, good collections. So when you look at things from a DSO perspective, overall AR, contract assets, liabilities, we've seen some good improvement there. And over the last 12 months, some good improvement on the inventory and inventory turn side of things. So that's led to we're at right now. And working capital as a percentage of revenue for the quarter, just a touch under 28%, 27.9%. Just a couple of pieces of commentary to help on Q4. I think that working capital percent may just get a touch better, so call that in that sort of 27% to 28% range. And really on kind of flat revenue Q3 to Q4, working capital may improve just a touch. As you mentioned, our CapEx is up just a bit year-on-year as we've had some good organic opportunities on high-return investments. So that continues to sort of flow through during Q4. And overall, feel good about 2025 sort of being in that ballpark of 55% free cash flow conversion. As we look out into '26, still early as we look at our budgets and composition of the different revenue streams. But with some of the structural improvement that we've made in working capital, I think that sort of ballpark of about 50% conversion is sustainable in the future. Doug Becker: Got it. And then, Clay, I really appreciate the reluctance to talk too much about orders on a go-forward basis because they are so lumpy. But a lot of constructive commentary about the intermediate-term outlook. And is it a fair way to think about this if we see the offshore drilling pickup that seems to be widely expected in late '26, maybe early '27 -- is that a point where we'd start to see book-to-bill pretty consistently above 1? Is that a reasonable way to think about it? Clay Williams: Yes. I think it is, Doug. I think that will be additive to the demand we're seeing for production equipment. And honestly, right now, within energy equipment, it's the demand for offshore drilling equipment that's really missing. And I think that comes back in late 2026, that will be additive. And I think that's a good thing for us. I also think, again, I can't say too many times, the clearing of OPEC overhang and a more constructive commodity price outlook, I think that will help in all categories of equipment demand. Operator: I would now like to turn the conference back to Clay Williams for closing remarks. Sir? Clay Williams: Thank you, operator, and thank you all for joining us this morning. The company looks forward to discussing its fourth quarter results with you in February. Operator, you may close the call. Operator: Thank you, sir. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Greetings, and welcome to the Asbury Automotive Group Q3 2025 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. [Operator Instructions] It's now my pleasure to turn the call over to Chris Reeves, Vice President, Finance and Investor Relations. Please go ahead, Chris. Chris Reeves: Thanks, operator, and good morning. As noted, today's call is being recorded and will be available for replay later this afternoon. Welcome to Asbury Automotive Group's Third Quarter 2025 Earnings Call. The press release detailing Asbury's third quarter results was issued earlier this morning and is posted on our website at investors.asburyauto.com. Participating with me today are David Hult, our President and Chief Executive Officer; Paul Whatley, our Vice President of Operations; and Michael Welch, our Senior Vice President and Chief Financial Officer. At the conclusion of our remarks, we will open up the call for questions and will be available later for any follow-up questions. Before we begin, we must remind you that the discussion during the call today is likely to contain forward-looking statements. Forward-looking statements are statements other than those which are historical in nature, which may include financial projections, forecasts and current expectations, each of which are subject to significant uncertainties. For information regarding certain of the risks that may cause actual results to differ materially from these statements, please see our filings with the SEC from time to time, including our Form 10-K for the year ended December 31, 2024, and any subsequently filed quarterly reports on Form 10-Q and our earnings release issued earlier today. We expressly disclaim any responsibility to update forward-looking statements. In addition, certain non-GAAP financial measures as defined under SEC rules may be discussed on the call. As required by applicable SEC rules, we provide reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on our website. Comparisons will be made on a year-over-year basis unless we indicate otherwise. We have also posted an updated investor presentation on our website, investors.asburyauto.com highlighting our third quarter results. It is now my pleasure to hand the call over to our CEO, David Hult. David? David Hult: Thank you, Chris, and good morning, everyone. Welcome to our third quarter earnings call. Our acquisition of the Chambers Group has already had a positive impact on many of our operating metrics. And while it is still early in the integration process, I am pleased with how our teams are coming together. We've talked many times in the past about how our transition to Tekion will transform how we sell and service vehicles and deliver a superior guest experience. Our litigation with CDK has reached a point where we can continue migrating stores onto the new BMS. Moving on to our operating performance for the quarter. Pent-up consumer demand and the expiration of the EV tax credit drove strong new volumes. And our new vehicle performance on an all-store basis highlights the impact of our Herb Chambers acquisition and the heavier weighting towards luxury brands. In the near term, we'll be opportunistic and react to what the market gives us. Our parts and service business delivered consistent results once again with same-store gross profit up by 7% and the customer pay segment up by 8% in the quarter. As referenced earlier, growing the business while avoiding expense leakage is a top priority for the team. In the third quarter, our same-store SG&A as a percentage of gross profit was 63.6%, a decrease of 32 basis points. Our strategy for deploying capital to its highest and best use has primarily emphasized large transformative acquisitions that expand our portfolio in the most desirable markets. Going forward, we are focused on delevering the balance sheet, optimizing the makeup of our portfolio and being opportunistic with share repurchases. As a reminder, we divested 4 stores in July with annualized revenue of $300 million in keeping with our disciplined approach to portfolio management. We resumed opportunistic share repurchases, buying back $50 million in shares in the quarter. The pace of future share repurchases will be dictated by portfolio management activities, share price levels and returns offered by organic and inorganic opportunities. And now for our consolidated results for the third quarter. We generated a record $4.8 billion in revenue, had a gross profit of $803 million, and a gross profit margin of 16.7%. We delivered an adjusted operating margin of 5.5% and our adjusted earnings per share was $7.17, and our adjusted EBITDA was $261 million. At the end of my remarks, I traditionally hand the call over to Dan Clara to walk through our operational performance. However, Dan was not able to be with us today. So I'll hand the call over to Paul Whatley, Vice President of Operations, who's been doing a phenomenal job running our stores. Now Paul will discuss our operational performance in more detail. Paul Whatley: Thank you, David, and good morning, everyone. Over the past few months, we've integrated a large acquisition with the Chambers Group. We've divested stores, and we've rolled out Tekion to 19 stores, and we still grew our business and new volume, fixed operations and overall same-store gross profit. I'm pleased the team has been able to successfully grow the business and maintain our margin profile while undertaking these large objectives for long-term success. And I'm going to provide some updates on our same-store performance, which includes dealerships and TCA on a year-over-year basis unless stated otherwise. Starting with new vehicles. Same-store revenue was up 8% year-over-year and units were up 7%. We did see elevated consumer demand for EVs to take advantage of the expiring tax credit and significant increases in EV volume versus quarter 2. New average gross profit per vehicle was $3,188 as the increase in EV sales and their lower PVR profile slightly pulled down our overall PVR. Brand unit performance varied widely depending on availability and consumer demand within certain OEMs. We continue to have relatively low day supply in key brands. Across all brands, our same-store new day supply was 58 days at the end of September, one day less than the end of Q2. We've generally been pleased with inventory balances against consumer demand. While it's been a stronger start to the year and inventory levels remained in check, we do expect headwinds through year-end with a softening labor market and challenges with vehicle affordability. Turning to used vehicles. Third quarter unit volume was down 4% year-over-year and used retail GPU was $1,551, a slight increase over the prior year. For the quarter, our team sourced over 85% of our used vehicles from internal channels. The largest portion of this comes from customer trade-ins, which tend to be our most profitable acquisition channel. Our same-store DSI was 35 days at the end of the quarter and we remain diligent on maintaining a healthy velocity of sales to manage inventory. Stepping back for a moment, we see our performance in used vehicles as our biggest opportunity to improve execution. The pool of available used cars starts to recover in 2026, improving further into '27 and '28. Our teams are focused on driving profitable volume growth over the coming quarters. Shifting to F&I. We earned an F&I PVR of $2,175, only $4 less than last year, and it would have been higher by $64 to $2,239 without the noncash deferral impact of TCA. In October, we finished the rollout of the Koons stores to TCA following the completion of the Tekion conversion at those locations. Michael will walk you through additional details regarding TCA. Despite macro challenges of consumer affordability, we continue to see a healthy adoption rate of TCA products. Historically, the average customer chooses about 2 products per deal and that number fell steady even as pricing challenges have become more acute. And finally, in the third quarter, our total front-end yield per vehicle was $4,638, down $230 sequentially, partially due to increased EV volume. Now moving to parts and service. As David mentioned earlier, our same-store parts and service gross profit was up 7% year-over-year, and we generated a gross profit margin of 58.8%, an expansion of 172 basis points. And once again, our fixed absorption rate was over 100%, a key measure for the strength of our business. When looking at customer pay and warranty performance, customer pay gross profit was up 8%, with warranty gross profit higher about 7%, or on a combined basis up 8%, lapping tough comps and warranty from recall work across multiple brands in 2024. We believe our stores are well positioned for growth trends within parts and service. We continue to invest in improved facilities and technology and in training for our people. And before I pass the call to Michael, I want to share a couple of highlights from the Chambers platform. Looking at our overall store numbers, the heavier luxury weighted mix lifted PVRs for both new and used. It's even more impressive considering that it was only for a partial quarter performance. I am very optimistic about how Asbury has strategically set itself up for long-term success by continuously improving our operations today. I will now hand the call over to Michael to discuss our financial performance. Michael? Michael Welch: Thank you, Paul, and good morning to our team members, analysts, investors and other participants on the call. And now on to our financial performance. For the third quarter, adjusted net income was $140 million, adjusted EPS was $7.17 for the quarter. In addition, the noncash deferral headwind due to TCA this quarter was $0.23 per share. Our adjusted EPS would have been $7.40 without the deferral impact. Adjusted net income for the third quarter of 2025 excludes net of tax $27 million in net gain on divestitures, $9 million related to the noncash asset impairment related to a pending disposal, $7 million of professional fees related to the acquisition of Chambers, $2 million in income tax expense related to the deferred tax true-up for the Chambers acquisition, and $2 million related to the Tekion implementation expenses. Adjusted SG&A as a percentage of gross profit for the total company came in at 64.2%. While we are confident in our ability to reduce SG&A expense, there may be transition-related expenses pulled forward over the next couple of quarters as we roll out Tekion to a greater number of stores. As it relates to new vehicle GPUs, we believe those will continue settling to our estimated range of $2,500 to $3,000. However, the trajectory and timing of this normalization would be sensitive to macro elements, and it may be difficult to pinpoint a solid time frame for when this occurs. The adjusted tax rate for the quarter was 25.4%. We estimate the fourth quarter effective tax rate to be approximately 25.5%. TCA generated $14 million of pretax income in the third quarter. The negative noncash deferral impact for the quarter was about $6 million. At the beginning of this year, we provided an outlook for TCA and the impact on earnings per share through 2029 based on information known at the time. With our recent acquisition and divestiture activity, delayed rollout of our Koons stores, and lower projected SAAR through 2030, we have revised our estimate for the TCA business, as shown in our presentation on Slide 18. We now expect less of the deferred revenue impact over the next several years, primarily as a result of changes in the SAAR estimates. Our initial projections were based on a faster return of 17 million SAAR level, while the latest publicly available forecast indicates something closer to high 15 million to low 16 million range. Now moving back to our results. We generated $543 million of adjusted operating cash flow year-to-date, an 11% increase over the comparable period last year. Excluding real estate purchases, we spent $104 million in capital expenditures so far this year. We now anticipate approximately $175 million of CapEx spend for 2025. This amount will depend on the timing of certain projects before year-end, and we expect some CapEx in 2026 associated with Chambers. We will provide a more robust view on 2026 CapEx following our Q4 results. Free cash flow was $438 million through the first 3 quarters of 2025, $50 million higher than 2024. We ended Q3 with $686 million of liquidity, comprised of floor plan offset accounts, availability on both our used line and revolving credit facility and cash, excluding cash of Total Care Auto. Our transaction adjusted net leverage ratio was 3.2x on September 30, following the Chambers acquisition. We believe our business model's ability to generate cash efficiently will help us reduce our leverage over the next 12 months while remaining agile enough to be opportunistic with share repurchases. The dilutions we sold this year enabled us to avoid lower return CapEx while also providing additional liquidity to reduce leverage and repurchase shares. We will continue to review our portfolio for similar opportunities. And finally, before I finish our prepared remarks, I want to thank our team members, and we look forward to finishing the year strong. And with that, this concludes our prepared remarks. We will now turn the call over to the operator and take your questions. Operator? Operator: [Operator Instructions] Our first question today is coming from Jeff Lick from Stephens Inc. Jeffrey Lick: Paul, welcome to the call. David, I was wondering just, obviously, with the Chambers acquisition and everything that was going on in Q3 with EVs and obviously, some of your competitors have talked about maybe the ICE incentive scenario being a little different in Q3 because of all the attention on EVs. I'm just wondering if you could kind of unpack where you see new GPUs going in Q4 as we get into the all-important luxury season? David Hult: Sure. Jeff, this is David. Traditionally, the fourth quarter is a great quarter for luxury and specifically in December. So we don't see any indications where that wouldn't be the case now. Our EV volume of units in Q3 compared to Q2 doubled and our EV average gross profit per car sold is significantly lower than what the hybrid and combustible engine gross profit is. So while that will probably slow down a little bit, even though they're still incentivized from the manufacturers in luxury, we think will pick up in the fourth quarter. At this point, we think our margins will hold up well in the fourth quarter. But again, difficult to predict not knowing what macro events could happen. Jeffrey Lick: And as it relates to Chambers when that gets into the 4Q will be the first quarter where it's all the way in there, just based on the 8-K that you guys filed, it would appear that Chambers will have a slightly accretive effect on new GPUs. Is that correct? David Hult: Absolutely. So far, since we've acquired them, their gross profits on new vehicles and used vehicles as the lead platform in our organization. They do a fantastic job generating growth on both sides. And you look at our numbers in Q3 on an all-store basis, they pulled up our PVRs on new and used. So we're very pleased with the operators and how they run their business. Jeffrey Lick: Awesome. Good luck on fourth quarter. Operator: Our next question today is coming from Ryan Sigdahl from Craig-Hallum Capital Group. Ryan Sigdahl: I want to dig into TCA just given the change or updated outlook here. So if I look at the previous assumptions from a year ago this time when you originally gave them, it was $5.69 of EPS accretion or incremental in 2029. Now it's $0.81. I guess, a 6% reduction in SAAR assumption, 17 million to 16 million has that type of impact on EPS. But I guess, can you help me walk through really the next several years? And what's changing? I assume there has to be more change in there than just the SAAR assumption? Michael Welch: So on that number, TCA, we have a couple of things in there. One, the Chambers acquisition will have that deferral headwind when we roll that out starting kind of mid next year. Also, we disposed of some pretty good stores out West in terms of the Toyota stores in California and the Lexus stores. And those will have an impact. We'll get the lack of the deferral hit, but you basically lose that volume in the future. So you have those 2 pieces on the acquisition and disposal side. And then Koons, we originally projected to roll out early this year. It rolled out in October. And so that's a delay on that kind of deferral hit. But the biggest one is just SAAR, we had assumed that we'd be back to 17 million SAAR in 2027 and then kind of stay at those levels for a couple of years. And now the projection is kind of high 15s to low 16s during that time frame. And that cumulative effect on SAAR [indiscernible] 17 and kind of the high 15 to 16 hits you every year and just kind of rolls out. We still expect to get back to that $5 of EPS. It's just going to be delayed until SAAR fully recovers. And so the biggest impact is just the SAAR piece of that equation. And you looked at the numbers, next year's number is significantly lower from a deferral hit. Again, just the SAAR being delayed has a big impact on the negative deferral hit that we expected next year. Ryan Sigdahl: So we can basically assume just kick it out 2 years kind of from the previous assumptions to get back to that EPS $5 plus? Michael Welch: Yes. Yes, it's probably 2031, 2030, again, it depends on when you think we get back to that high 16 million, 17 million SAAR range. We really have to get back to those levels to drive that volume necessary to get those levels. Ryan Sigdahl: And then maybe one more follow-up and then I'll leave this one. But would you eventually get there with the 16 million SAAR or just will take longer? Or do you actually need 17 million SAAR type volume to get to that level? Michael Welch: To get to the high $5 EPS, we need the 17 million SAAR because you need that volume level. Now you can also get there with future acquisitions and adding additional stores, but you need a total volume level to drive the products going through the system. So we have to get there with the 17 million SAAR or additional acquisitions. Ryan Sigdahl: Got you. Just for my follow-up, SG&A. Just curious, if I look kind of on an adjusted basis, gross profit up similar sequentially as SG&A. I guess just curious from kind of an SG&A to gross profit leverage as you look into Q4 and even into '26. Any comments would be helpful. Michael Welch: I think -- it all depends on what you think gross profit is going to do on the new vehicle side. We think fourth quarter hangs in there on a gross profit, so we should be able to maintain these SG&A levels. Going into next year, we should still be able to maintain these SG&A percentage of gross levels. But again, depends on what your view is on where new vehicle PVR shake out. Going out beyond that, once we get past the Tekion rollout, we will have some kind of onetime costs if we go through that rollout phase. We pulled those out as adjusted items this quarter. We'll continue to do that in future quarters. Once we get past the Tekion rollout, there's opportunities for productivity gains and cost savings because of the Tekion piece that will help us drive that number down. Operator: Next question today is coming from Rajat Gupta from JPMorgan. Rajat Gupta: Great. I had a question on just the total contribution from -- just the total -- just the acquisitions net of divestitures. If I look at the 8-K, it looks like when you do the adjustment on the leverage calculation, you're adding roughly $78 million of net EBITDA for the acquisition divestitures. It would seem like the third quarter contribution is more like $25 million, $26 million. I mean is it like $100 million-ish kind of annualized run rate EBITDA net of all the divestitures that you've done with Herb Chambers? Is that a reasonable run rate to assume for the total sold deals this year? I just want to clarify that. I have a quick follow-up. Michael Welch: Yes. I mean it's probably a little bit above that, but in that ballpark. We did -- we sold the Toyota and Lexus stores, so those were good EBITDA stores. But yes, in that ballpark point, a touch above that number. Rajat Gupta: Understood. That's helpful. Just a broader question on capital allocation. I was a bit surprised to see the buyback this quarter just given you just integrated Herb Chambers. I'm curious if you're able to rank order what your priorities are going forward, should we think about excess free cash flow going more into the delevering and buyback from here? Or is M&A still within the rank order? I'm just curious what -- if you could rank order those? David Hult: Rajat, this is David. I'll take a crack at it, and then Michael can respond. I think some of the divestitures that you've seen, and I talked about in my script as far as organic or inorganic, we'll continue to balance our portfolio, will generate cash with that. And I think there'll be a heavier focus on share repurchases. Debt will take care of itself over the next 12 to 18 months in paying itself down. If we think our share price is at an attractive price, that would probably be #1. And if for some reason, that isn't the case, then naturally buying down debt will be it. But we generate a lot of cash. That will continue through next year. So I would say share repurchase is debt, but they could trade place it depending upon what's going on at a moment in time. Operator: [Operator Instructions] Our next question is coming from Bret Jordan from Jefferies. Bret Jordan: A few of your peers who have reported were sort of talking cautiously about recent luxury trends sort of at the [indiscernible] and it sounds like you guys really aren't seeing that. Is that more brand-specific or region-specific around luxury performance? David Hult: Yes. I would -- Bret, this is David. I would say it's more brand than region specific. On a same-store basis, I think we're back 1% in the quarter on volume. So we don't think that's material. Naturally, Lexus is probably the hottest luxury brand out there right now, but they're all performing fairly well. And we're traditionally going into a quarter that does well with luxury -- it may be choppy October, November, but we still anticipate at this point, a strong luxury into the quarter. We're not seeing any material change in traffic or desire with the luxury consumer. Bret Jordan: Great. And then on parts and service and customer pay, could you sort of parse out what was price versus units in that 8% growth? David Hult: Sure. Almost half and half. It was a little bit more, I would say, 60% dollars and 40% traffic growth. So it's always nice to see the growth in traffic that we have from what we call our repair order count. Up 6%, 7% in the quarter for warranties like compared to our peers, that would have, if we were higher in warranty, that would have drove our overall fixed number higher, obviously, but we came off heavy comps last year from warranty. Bret Jordan: When did the comp peak last year in warranty? There were some big recalls late in the year. Is the fourth quarter the hardest warranty compare? David Hult: You're testing my memory, but I'm pretty sure it is. Operator: Next question today is coming from Glenn Chin from Seaport Research Partners. Glenn Chin: Just a couple of questions on Tekion. David, I think you mentioned it's been rolled out to 19 stores. If you can just give us an update on how it's going? Any surprises favorable and/or unfavorable and the pace at which we should expect to continue to be rolled out? And then lastly, any changes on the prospects for savings there? David Hult: Sure. If I missed something, Glenn, just circle back around. We have 23 stores on Tekion. The 19 stores that we did with Koons was Reynolds and 4 CDK. We start rolling out CDK stores in this quarter. So we anticipate, hopefully, towards the end of next year, we'll be done rolling out all the stores. From an efficiency standpoint, when you think about CDK or traditional DMS, most dealers have a lot of bolt-ons. So for your employees, they have to have multiple screens open to service one customer. We lose 70% of those bolt-ons with Tekion. So it makes it more efficient for our folks to communicate and be more transparent with our guests, but also raised our productivity per employee. So there's some good tailwinds there. Some things that were a little surprising to me, and maybe I just didn't think it through well because it's cloud-based software, and it's extremely intuitive compared to the traditional DMSs, I thought the understanding of migration to the software would be fast. It's been fast for someone that is new to the automotive business or it hasn't been on one of the traditional DMSs. They pick up Tekion fast. For our folks that have been on CDK for a 20-year-plus years or Reynolds, it's taken them a little bit longer to get comfortable and used to Tekion. And I would say for a traditional person that's been on one of the legacy DMSs for a long time. It's about 6 or 7 months before they really become efficient with the software where I thought it would have been closer to 3 months. If it's a new hire that doesn't know the industry or the software, they are adapting to the software extremely fast. So I just think it's going to take some time. When we get past the rollout and all the expenses that are involved in the rollout, there will absolutely be SG&A savings from a software standpoint, from a third-party software standpoint in what I would call fees for API connections that we had with the legacy DMS. Glenn Chin: Okay. And any change in those prospects for savings dated given it sounds like somewhat of a longer tail as far as adoption or efficiency gains? David Hult: Yes, there'll definitely be savings. I think we'll start to -- who knows how things go the next 6 to 9 months rolling out the rest of the stores. But as we sit here today, fourth quarter, we should fully realize the savings of the software cost. And then I would say the end of the first quarter of '27, you should really start to see the efficiency gains with Tekion. And look, not all horses are equal, not all markets are rolling out at once. So the early adopters or transitioning to the software will probably see gains middle of next year, while the stores that go on the back end of integration, will experience it in early '27. Operator: Next question today is coming from David Whiston from Morningstar. David Whiston: Just focusing on used vehicles. You hear all the time, everyone wants to get more of that volume, especially around buying off the street to avoid auction, it's obviously a great opportunity, but what more can you guys be doing in terms of marketing both old-fashioned marketing versus digital marketing to get more vehicles on street? Paul Whatley: David, this is Paul. We've got our Clicklane acquisition tool, which is one tool that we use to buy cars off the street. It's a digitally marketed platform that creates leads that are specifically for selling cars, not necessarily buying anything from us, but that's the #1 portion of the -- the second place is a service drive and those are where we're focusing. We also have opportunity, we think, in the lower end or lower priced cars with retaining more of our wholesale cars and we're more focused on that as well. David Hult: And David, I would add, we believe, from our standpoint, one of the benefits that we continue to lead this space in SG&A, sometimes volume doesn't create more profitability. Larger used car volume at lower gross profits, raise your SG&A. And while it's a very competitive market for preowned right now, because the pool is so shallow, it just doesn't make sense from our perspective to chase volume and be up 2% or 3% or 4% volume but backwards in profitability. So we're trying to balance that as best we can. As Paul said in his script, just because of the COVID hangover and the lack of cars being built back then, '26, there'll be more used cars in the market, '27 gets even better and '28, you're back to a normalized market. So I just think naturally, you'll see lifts in volumes as you go forward. The key is acquisitions because your gross profit is 100% determined on what you acquire the vehicle for. Operator: Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to David for any further closing comments. David Hult: Thank you, operator. This concludes today's call. We look forward to speaking with you all after the fourth quarter earnings. Have a great day. Operator: Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Operator: Good day, and welcome to the Hope Bancorp 2025 Third Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Maxime Olivan, Strategic Finance Manager. Please go ahead. Maxime Olivan: Thank you, Billy. Good morning, everyone, and thank you for joining us for the Hope Bancorp Investor Conference Call for the Third Quarter of 2025. As usual, we will be using a slide presentation to accompany our discussion this morning, which is available in the Presentations page of our Investor Relations website. Beginning on Slide 2. Let me start with a brief statement regarding forward-looking remarks. The call today contains forward-looking projections regarding the future financial performance of the company and future events. Forward-looking statements are not guarantees of future performance. Actual outcomes and results may differ materially. Hope Bancorp assumes no obligation to revise any forward-looking projections that may be made on today's call. In addition, some of the information referenced on this call today are non-GAAP financial measures. For a more detailed description of the risk factors and a reconciliation of GAAP to non-GAAP financial measures, please refer to the company's filings with the SEC as well as the safe harbor statements in our press release issued this morning. Now we have allotted 1 hour for this call. Presenting from the management side today will be Kevin Kim, Hope Bancorp's Chairman, President and CEO; and Julianna Balicka, our Chief Financial Officer. Peter Koh, our Chief Operating Officer, is also here with us as usual and will be available for the Q&A session. With that, let me turn the call over to Kevin Kim. Kevin? Kevin Kim: Thank you, Maxime. Good morning, everyone, and thank you for joining us today. Let us begin on Slide 3 with a brief overview of the quarter. The third quarter of 2025 was a very positive one for Bank of Hope marked by continued progress across our strategic priorities to improve profitability and reflecting solid execution across the organization. Improvement in asset quality was a key highlight as was loan growth across all our major loan segments. Throughout the year, we have been making sustained investments in talent to support our growth, and I'm very pleased with the progress we have made so far. Before we dive into this quarter's results, I want to extend my deepest gratitude to all the bankers at Bank of Hope for their unwavering dedication and commitment to excellence. Their hard work is the driving force behind our success, and I'm incredibly proud of what we are building together. And now on to a discussion of our results. Net income for the third quarter of 2025 totaled $31 million, up 28% year-over-year from $24 million in the year ago quarter and up from a net loss of $28 million in the second quarter. Second quarter results were impacted by elevated notable items related to a securities portfolio repositioning, the close of the Territorial Bancorp acquisition on April 2, and impact from a California state tax law change. Excluding notable items, third quarter 2025 net income of $32 million was up 29% from net income of $24.5 million in the second quarter of 2025. In the third quarter, we saw loan growth across all our major loan portfolio segments of C&I, commercial real estate and residential mortgage. Our net interest margin expanded 20 basis points, which was our best linked quarter expansion since 2012. And importantly, our asset quality improved, led by our disciplined approach to credit management, which resulted in a 57% reduction in net charge-offs and noticeable improvement in classified and special mention loans including a 17% reduction in C&I criticized loans. Moving on to Slide 4. All our capital ratios increased quarter-over-quarter and remain well above the requirements for well-capitalized financial institutions, providing us with a healthy cushion to support growth and navigate an evolving macroeconomic environment. Our Board of Directors declared a quarterly common stock dividend of $0.14 per share payable on November 21, to stockholders of record as of November 7, 2025. Continuing to Slide 5. We continue to be focused on strengthening our deposit franchise, deepening primary banking relationships with our customers and lowering deposit costs through ongoing optimization of our deposit mix and disciplined pricing. As of September 30, 2025, deposits totaled $15.8 billion, reflecting a 1% decrease from $15.9 billion as of June 30, primarily driven by a $139.5 million reduction in broker deposits, partially offset by growth in customer deposits. Noninterest-bearing deposits totaled $3.5 billion at September 30, up 1% quarter-over-quarter. Moving on to Slide 6. At September 30, 2025, gross loans, including held for sale totaled $14.6 billion, up 1.2% quarter-over-quarter, equivalent to 5% annualized with growth across all our major loan segments. Year-over-year, production has been strengthening while maintaining disciplined underwriting and pricing standards. Loan growth this quarter also benefited from lower levels of payoffs and pay downs. Across the organization, we have been investing in talent to drive sustainable prudent growth and enhance our corporate and commercial banking capabilities. As a bank, we are focused on driving business development and deepening client relationships to expand market presence. With that, I will ask Julianna to provide additional details on our financial performance for the third quarter. Julianna? Julianna Balicka: Thank you, Kevin, and good morning, everyone. Beginning on Slide 7. Our net interest income totaled $127 million for the third quarter of 2025, an increase of 8% from the prior quarter and up 21% from the third quarter of 2024. This reflects loan growth, improved yields on earning assets and lower cost of interest-bearing deposits. Overall, our net interest margin increased 20 basis points quarter-over-quarter to 2.89% for the third quarter of 2025, up from 2.69% from the prior quarter. 9 basis points of the linked quarter expansion came from higher earning asset yields, 6 basis points came from lower funding costs and 5 basis points came from a favorable shift in balance sheet mix. On Slide 8, we present the quarterly trends in our average loan and deposit balances and our weighted average yields and costs. The cost of average interest-bearing deposits and the cost of average total deposits for the third quarter each declined by 8 basis points from the previous quarter. The acquisition of Territorial has enhanced our deposit position and renewals of CDs at lower rates provides a tailwind for continued cost reductions. With the September Fed funds target rate cut of 25 basis points, we realized an approximate 85% spot beta and reducing money market deposit rates. On to Slide 9, where we summarize our noninterest income. I will highlight quarter-over-quarter growth in service fees on deposit accounts, international banking fees, foreign exchange and wire transfer fees. During the third quarter, we sold $48 million of SBA loans compared with $67 million in the second quarter. Accordingly, we recognized gains from sale of $3 million for the third quarter compared with $4 million for the second quarter. Moving on to noninterest expense on Slide 10. Our noninterest expense totaled $97 million in the third quarter. Excluding notable items such as merger-related costs, noninterest expense was $96 million in the third quarter compared with $92 million in the second quarter. This quarter-over-quarter increase was mainly driven by higher compensation-related costs reflecting the company's sustained investment in talent to support growth. Importantly, revenue growth outpaced expense growth in the third quarter, generating positive operating leverage. For the third quarter of 2025, our efficiency ratio, excluding notable items, improved to 67.5% compared with 69.1% for the second quarter of 2025. Next, on to Slide 11. I will review our asset quality, the improvement in which was a highlight this quarter. Criticized loans declined $42 million or 10% quarter-over-quarter to $373 million at September 30, with decreases in both special mention and classified loans, and including a 17% linked quarter decrease in C&I criticized loans. The criticized loan ratio improved to 2.56% of total loans at September 30, down from 2.87% at June 30. Net charge-offs totaled $5 million for the third quarter or annualized 14 basis points of average loans, down 57% from $12 million or 33 basis points annualized in the second quarter. The quarter-over-quarter drop in net charge-offs reflected lower charge-offs in C&I loans. The third quarter 2025 provision for credit losses was $9 million. This compares favorably with a provision of poor credit losses of $15 million for the second quarter of 2025, which included $4.5 million of merger-related provision expenses that the company considered a notable item. Excluding notable items, the quarter-over-quarter decrease in the provision for credit losses, largely reflected lower net charge-offs. Finally, allowance for credit losses totaled $152.5 million at September 30 compared with 159 -- excuse me, compared with $149.5 million at June 30. The allowance coverage ratio was 1.05% of loans receivable at September 30 compared with 1.04% at June 30. With that, let me turn the call back to Kevin. Kevin Kim: Thank you, Julianna. Moving on to the outlook on Slide 12. Our outlook for the full year 2025 is updated as follows: We remain on track to achieve high single-digit loan growth in 2025, continuing to build on the growth momentum from the third quarter. We expect net interest income growth of approximately 10% for 2025. For 2025, we expect noninterest income growth of approximately 30%, excluding the second quarter loss on the securities repositioning, reflecting the year-to-date momentum across various business lines. We expect noninterest expenses, excluding notable items, to be up approximately 15% in 2025, reflecting the addition of Territorial's operations to our run rate and our investment in talent to enhance our production capabilities. Throughout the year, we have been adding experienced bankers to our Corporate and Commercial Banking teams. In particular, in the third quarter, we hired a seasoned commercial banking team, which accelerated some of our hiring plans. A leading institution recently exited one of our core markets, and we had the opportunity to bring this group of professionals to Bank of Hope to support our continued expansion. Our hiring is driving improved revenue growth and we expect to see sequential positive operating leverage in the fourth quarter with an improvement to our efficiency ratio. Lastly, we anticipate the fourth quarter 2025 effective tax rate to be approximately 14%, excluding the impact of notable items. With the improvement of our financial performance and strengthening of our balance sheet in the third quarter, along with the strategic additions to our banking teams, we believe we are well positioned to drive profitable growth and create long-term value for our stockholders. With that, operator, please open up the call for questions. Operator: [Operator Instructions] Our first question comes from Matthew Clark with Piper Sandler. Matthew Clark: Just on the margin, do you have the spot rate on deposits, I didn't see in the deck at the end of September and maybe the average margin in the month of September? Julianna Balicka: One second. On the spot rate of deposits at the end of September, it was 2.82% for total deposits and 3.62% for interest-bearing costs. And the average of deposits you see in our earnings tables in the NIM table, yes. Matthew Clark: The average margin for the month of September? Julianna Balicka: The average margin for the month of September, one second. The margin for the month of September was 2.96%. Matthew Clark: Okay. Great. And then just on Territorial. Any update there on how things are progressing? Cost saves you may have extracted so far from that deal? Julianna Balicka: We are continuing to focus on stabilizing and expanding operations there. As we mentioned last quarter, following the acquisition, there's been some homework in terms of staffing up branches and just making sure that our products are rolled out to that platform. So we're continuing to incrementally see cost savings as we kind of align the operations there, but nothing headline grabbing to report this quarter. Operator: Our next question comes from Gary Tenner with D.A. Davidson. Gary Tenner: I wanted to ask, Julianna, if you could give us the purchase accounting impact this quarter. I think last quarter maybe in the deck, but I didn't see it. So the loan discount accretion and then kind of the net purchase accounting benefit as well. Julianna Balicka: So yes, last quarter was the acquisition quarter. So we had the accretion number last quarter. So last quarter, the accretion was $4 million. And this quarter, the accretion was $5 million. Gary Tenner: It was -- I'm sorry, how much? Julianna Balicka: $5 million. Gary Tenner: $5 million was the loan accretion or the net benefit, overall? Julianna Balicka: The loan accretion. All other items were minimal. If you look at the table from last quarter, I mean, pretty much it was de minimis on each of those line items. Gary Tenner: Yes, they were canceled out, I think, last quarter. Okay. And then in terms of the CD maturities in the fourth quarter, can you give us the amount of maturing CDs and the rate they're rolling off at? Julianna Balicka: One second, let me grab that. Our CDs that are maturing in the fourth quarter, we've got $2.3 billion of maturity and an average rate of 4.08%. Gary Tenner: Okay. I'm sorry, you're fading out. $2.2 billion, you said? Julianna Balicka: $2.3 billion at a rate of 4.08%. Operator: [Operator Instructions] Our next question comes from Kelly Motta with KBW. Kelly Motta: I would like to circle back to the expense side of things. You guys mentioned in your prepared remarks that you've made a number of frontline hires that increased the expense run rate. Can you remind us kind of where you are in the process? It seems like some of the better revenue growth is helping to offset some of these investments you're making. So what -- two-part question, where are you adding? And where do you stand in this process? Kevin Kim: Well, Kelly, we have been adding new team members throughout the year. And the additions will strengthen our presence in strategic segments like lower middle markets, project finance, structured finance, entertainment, et cetera, as well as treasury management spread products and so on. Our focus remains on strengthening existing capabilities. And we are somewhat optimistic about the growth prospects with the addition of all these new people. Julianna Balicka: I would say, if you think about it, in the beginning, you hire leadership and more senior positions and then you're kind of filling more mid-level after that. So we -- we've filled in all the key leadership positions, and we've made a number of senior RM hires than the team that we referenced. But I mean, in the fourth quarter, we have more hiring plans and in 2026, obviously, because we're in a great position to be in to expand our organic presence and growth. Operator: [Operator Instructions] Our next question comes from Tim Coffey with Janney. Timothy Coffey: Question, with the government shutdown, does that make it hard to predict revenue from the SBA loan on sale business line? Kevin Kim: Yes. Well, first of all, outside of SBA, we do not really foresee any material impact to -- from the recent government shutdown. As to the SBA, as you may know, the U.S. Small Business Administration has suspended acceptance of new SBA loan applications and additionally, the secondary market for new SBA 7(a) loan sales has been halted. But -- from our side internally, there is no impact to the loans that have already received an SBA approval number. So in the meantime, while the government shutdown continues, we will continue to proceed business as usual for new applications so that these loans are fully prepared to submission to the U.S. SBA once operations resume. So hopefully, the government shutdown ends in a new future. But no matter what happens, I think we are in a good position in terms of our noninterest income in the fourth quarter and throughout 2025. Timothy Coffey: Okay. Great. That's excellent color. And then the other question I had was on the nonaccrual loans. Commercial real estate, I think about half of them right now. And in relation to the totality of the portfolio, it's a relatively small percentage, but they are up quarter or year-to-date rather. Can you kind of describe some of the challenges some of those loans are experiencing? Peter Koh: Yes, this is Peter. I think our NPLs have been relatively flat this quarter. Some of the CRE loans and actually for all the loans in that category, sometimes it just takes time to work out. And we feel good. I think there's a level of problem credits there that we are honed in on. And I think it's just a matter of time before we're able to come to resolutions there. Operator: Our next question comes from Kelly Motta with KBW. Kelly Motta: I just wanted to ask a bit broader about kind of the loan growth ahead. I think you mentioned that growth this quarter was positively benefited by lower payoffs and paydowns. Just given the potential for rates to decrease here. Wondering how you guys are thinking through that impact and your ability to offset that with the pipeline ahead, both next quarter and beyond, if possible? Kevin Kim: Yes. As to our current pipeline, we have a strong pipeline going into the fourth quarter. And we expect our strong pipeline will support our loan growth outlook for the rest of the year. And our fourth quarter loan pipeline is pretty comparable to what we had at the beginning of the third quarter. And we continue to see improvements in our C&I driven by recent frontline additions, as you said. And our CRE pipeline remains pretty, pretty stable. Although we -- in the past, we typically experienced some seasonal slowdown towards the year-end. We expect that our loan growth guideline for the entire 2025 will be a good number for us to share. Kelly Motta: Got it. And I appreciate the color around both the deposit spot rates as well as the spot rate beta on the money market where it seems like you're being successful there. Just wondering, in terms of the competitive environment for deposits, it seems like you're having success on the money market. Can you remind us where new CDs are coming on? And the beta was relatively high on the way up, how you guys are thinking about balancing beta with the outlook for a need for funding ahead? Julianna Balicka: Yes. So we reduced our CD pricing with the last Fed funds cut, right? And new CDs most recently have been coming on closer to 4% for the exceptions and below 4% for the non-exceptions. And so we're kind of continuing to think of deposit pricing as moving with Fed funds market pricing. And with the additional Territorial, we have been in a good position to where we can afford to be more price sensitive, if you will. And the beta was high on the way up because the balance sheet dynamics were different at that point in time. And I'll remind the analyst community that on the way down, right now, our loan-to-deposit ratio is in the low 90%, which is a much different starting point. And I'll also remind the analyst community that on the way up, we had a much higher percentage of broker deposits in our deposit mix. And today, we're sub-5%, around 5% kind of numbers that we shared with you previously. So we're in a much different position today than we were on the way up. So I am optimistic about our ability to have good deposit cost results. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Kevin Kim: Thank you. Once again, thank you all for joining us today, and we look forward to speaking with you again in 3 months. So long, everyone. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings, and welcome to the NETSTREIT Corp. Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Matt Miller, Capital Markets and IR. Please go ahead. Matt Miller: We thank you for joining us for NETSTREIT's Third Quarter 2025 Earnings Conference Call. In addition to the press release distributed yesterday after market close, we posted a supplemental package and an updated investor presentation. Both can be found in the Investor Relations section of the company's website at netstreit.com. On today's call, management's remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. For more information about these risk factors, we encourage you to review our Form 10-K for the year ended December 31, 2024, and our other SEC filings. All forward-looking statements are made as of the date hereof, and NETSTREIT assumes no obligation to update any forward-looking statements in the future. In addition, certain financial information presented on this call includes non-GAAP financial measures. Please refer to our earnings release and supplemental package for definitions of our non-GAAP measures, reconciliations to the most comparable GAAP measure and an explanation of why we believe such non-GAAP financial measures are useful to investors. Today's conference call is hosted by NETSTREIT's Chief Executive Officer, Mark Manheimer; and Chief Financial Officer, Dan Donlan. They will make some prepared remarks, and then we will open up the call for questions. Now I'll turn the call over to Mark. Mark Manheimer: Thank you, Matt, and good morning, everyone. We appreciate you joining us today to discuss our strong third quarter results, which were highlighted by record quarterly investment activity, well-executed capital markets transactions and consistent performance from our defensive net lease portfolio. Looking ahead to the fourth quarter and beyond, we expect to remain highly acquisitive due to our improved cost of capital, our attractive opportunity set and well-capitalized balance sheet. With that in mind, we are increasing our 2025 net investment guidance range to $350 million to $400 million from $125 million to $175 million. Additionally, our year-to-date disposition activity has us well ahead of schedule to exceed our year-end diversification goals as evidenced by our top 5 tenancy declining 600 basis points this year to 22.9% at quarter end. Our momentum on the external growth front picked up considerable pace in the quarter as we closed a record $203.9 million of investments across 50 properties at a blended cash yield of 7.4%. These assets, which are primarily within resilient sectors such as grocery, auto service, convenience stores and quick-service restaurants have an average lease term remaining of 13.4 years and more than 1/3 of these investments are occupied by investment-grade or investment-grade profile tenants. Our weighted average lease term now stands at 9.9 years, up from 9.5 years a year ago, providing a strong foundation for predictable cash flows. Our ability to quickly ramp investments after raising capital in late July illustrates the inherent strength of our relationship-driven investment underwriting and closing teams. We would also note that our later start in the quarter did result in a substantial number of investments closing in the last week of the quarter, which limits their impact to the full year results. On the disposition front, we sold 24 properties for $37.8 million at a 7.2% cap rate, allowing us to recycle the proceeds into higher-yielding opportunities as we have done every quarter in our existence. Please note that we see the fourth quarter as our last quarter of elevated disposition volume due to our focus on diversification as we plan to return to our more normal disposition volumes focused on credit risk and opportunistic sales. Turning to the portfolio. We ended the quarter with 721 investments with 114 tenants in 28 industries generating more than $183 million in ABR across 45 states. With more than 62% of our ABR being generated from tenants with investment-grade ratings or investment-grade profiles and only 2.7% of our ABR expiring through 2027, our portfolio should continue to produce consistent and predictable cash flow. Our active portfolio management continues to contribute to our occupancy rate remaining at an industry-leading 99.9% with no material tenant disruptions. With that in mind, we expect to have our loan vacant property, a former Big Lots, leased by the fourth quarter to an investment-grade tenant at more than a 20% increase in rent with rent to commence later in 2026. While we have been able to generate highly favorable cash yields on investments as a public company, we are proud of our best-in-class credit loss statistics as we again had no credit losses in the quarter. On the left side of the balance sheet, we believe our job is to find assets that generate the best risk-adjusted returns available, which is supported by our creative multipronged investment approach, proven underwriting method and proactive asset management process. By adhering to those core competencies, we aim to provide attractive and consistent cash flow generation for our investors. Looking at the right side of the balance sheet, we had an active quarter adding long-dated unsecured debt, further extending our debt maturity profile and decreased our leverage with significant equity raising, which has accelerated our ability to accretively grow our portfolio and in turn, enhance our earnings power as we look out to 2026 and beyond. Ending with the macro, while we have seen softness develop in the lower and middle-income consumer and some noise in the private credit markets, our focus remains on accretive investments in high-quality and less volatile necessity-based retail properties. We believe our tenant quality, diversification and emphasis on opportunities with the best risk-adjusted returns positions us well for any and all macroeconomic environments. With that in mind, we are currently seeing the most attractive opportunity set that we have seen since going public over 5 years ago, and we are excited to have the dry powder to execute and drive growth well into the future. With that, I'll turn it over to Dan for more details on our financials and outlook. Daniel Donlan: Thank you, Mark. Looking at our third quarter earnings, we reported net income of $621,000 or $0.01 per diluted share. Core FFO for the quarter was $26.4 million or $0.31 per diluted share, and AFFO was $28 million or $0.33 per diluted share, which was an increase of 3.1% over last year. Turning to the expense front. Our total recurring G&A in the quarter increased year-over-year to $5.1 million, which is mostly a result of our staffing levels normalizing after restructured various roles last year. That said, with our total recurring G&A representing 10.6% of total revenues this quarter versus our 11.1% quarterly average last year, our G&A continues to rationalize relative to our revenue base, and we expect this rationalization to accelerate in 2026 and beyond. Turning to capital markets activities in the third quarter. We completed a 12.4 million share follow-on offering in July, which raised $209.7 million in net proceeds. Turning to the ATM. We sold 1.2 million shares for $20.6 million of net proceeds in the quarter. And subsequent to quarter end, we sold an additional 1.6 million shares for $29.7 million of net proceeds. Looking at the balance sheet. Our adjusted net debt, which includes the impact of all forward equity, was $623.5 million. Our weighted average debt maturity was 4.2 years, and our weighted average interest rate was 4.45%. Including extension options, which can be exercised at our discretion, we have no material debt maturing until February 2028. In addition, our total liquidity was over $1.1 billion at quarter end, which consisted of $53 million of cash on hand, $500 million available on our revolving credit facility, $431 million of unsettled forward equity and $150 million of undrawn term loan capacity. From a leverage perspective, our pro forma adjusted net debt to annualized adjusted EBITDAre was 3.6x at quarter end, which remains well below our targeted range of 4.5 to 5.5x. Moving on to 2025 guidance. We are reiterating our AFFO per share guidance range of $1.29 to $1.31 and are increasing our net investment activity range to $350 million to $400 million from the prior range of $125 million to $175 million. We continue to expect cash G&A to range between $15 million and $15.5 million. Additionally, with our outstanding forward equity increasing to $430 million this quarter from $202 million last quarter, our AFFO per share guidance now assumes $0.015 to $0.025 of dilution from the treasury stock method. Lastly, on October 24, the Board declared a quarterly cash dividend of $0.215 per share. The dividend will be payable on December 15 to shareholders of record as of December 1. With that, operator, we will now open the line for questions. Operator: [Operator Instructions] Our first question is from John Kilichowski with Wells Fargo. William John Kilichowski: Mark, you made the comment in the opening remarks that you're currently seeing the most attractive opportunity set that you've seen. Maybe could you dive deeper there in terms of the assets that you're looking at pricing and then maybe the cadence that you think you can achieve going forward from here? Mark Manheimer: Yes, sure. Good to hear from you, John. Yes, so I mean, very similar types of assets. I mean, we're looking at a lot of C-stores, quick-service restaurants, grocery, QSR, similar to what we've really kind of done in the last several quarters. Pricing very close to what we did in the most recent quarter. So I think we're probably going to be in the 7.3%, 7.4% range. Maybe a little bit more investment grade so far. We'll kind of see what we source from here on out, but pretty confident that we should be able to be at the high end of the acquisition range provided. And then looking forward to 2026, I'm not giving guidance on acquisitions at this point, but I think you can expect the dispositions to come in quite a bit. We'll continue to opportunistically sell some assets and focus on potential credit issues down the line and try to get ahead of that, which we did even when we were in diversification mode, but we've really accomplished the goals that we set out at the beginning of the year on the dispose side. So it feels like the net investments should be a little bit higher next year. William John Kilichowski: Okay. That was very helpful. And then just from a pricing perspective, I know this quarter, there was a step down, but you had communicated that several times intra-quarter. I'm just curious, are the cap rates that you're seeing today a better run rate for the business going forward? Mark Manheimer: Yes, I think so. And yes, I mean, I appreciate your comment there. We did try to make that clear in the second quarter that the 7.8% was not going to be repeated, and we've returned back to that kind of 7.4%, 7.5% type cap rate range. I think right now, the 10 years come in from, call it, 4.5% to 4%, inside 4% right now. And so a little bit more competition in the space. So I think it's reasonable to assume that there could be another 10 basis points of compression looking forward into 2026, but that's always difficult to predict outside of, call it, 60, 90 days on a go-forward basis. Operator: Our next question is from Michael Goldsmith with UBS. Michael Goldsmith: Lots of activity in the quarter, but the guidance didn't really move. So can you just talk a little bit about what are the factors that maybe didn't move the 2025 AFFO per share outlook? And I guess, how will that impact the earnings growth kind of going forward? Mark Manheimer: Yes. Michael, I think there's really 2 drivers to the guidance. The first being that while we had a ton of activity in the third quarter, the timing of that activity was -- on the investment side was heavily weighted to the back half of the quarter. We closed basically $100 million on the last 2 days of the quarter, whereas the loan payoffs and the dispositions were heavily weighted to the front end. And you can see that on the income statement. Our total revenues went up $22,000 quarter-over-quarter. So certainly, timing has played a big part in that, whereas in the second quarter, it was the exact opposite was true. And the other is just the unknown nature of the treasury stock dilution. I mean we clearly know how much we've raised. We know how much we're thinking about raising. It's just the price at which the stock is going to average over the quarter is unknowable. And so we certainly baked in a ton of conservatism. What I can say is if the stock kind of stays were to open this morning, obviously, the bottom end of the range would be nowhere possible. But hopefully, that's not the case. And we think our stock price should continue to season and move higher from here, just given the growth that we see coming in 2026 from everything that we're doing here in 2025. I'm sure, as you know, what you do in the third and the fourth quarter has a very big impact on what can happen in the following year, and we're cognizant of that, too. So I certainly think looking at where our cost of capital is today, where we've already raised capital in terms of our term loans, we have another $150 million we can draw down on, basically in the mid-4s. And assuming we can get an IG rating coming up here shortly, that moves down even further from there. So as you think about that accretion, we feel pretty strongly we can get back to certainly an above-average growth rate in 2026 and beyond. And just a little bit of color on the extreme nature of the timing of our acquisitions in the quarter. We raised capital at the end of July. So we're -- we don't want to get over our skis and start deploying capital before we raise it. So we really had a couple of months to deploy the capital. We were really only planning on doing a little bit more on top of the -- covering the dispositions that we did, but raising capital at the end of July kind of put us in a spot where we had 2 months to close, and we're still able to hit pretty good numbers. But to Dan's point, that was all very late in the quarter. Michael Goldsmith: Got it. I really appreciate it. And my follow-up question is just on the equity that needs to be settled. How are you thinking about that? And then what would be kind of the accretion on that equity associated with future deals? Daniel Donlan: Yes. So in terms of the forward equity, as you think about it, you also got to think about where we raised the prior equity versus where our prior cap rates were. In the first half of the year, we averaged 7.7%. So some of the equity raise that was at lower stock prices than we are today, the spread is still fairly high on that anywhere from 135 to 150 basis points when you think about where we raised the term loan capital. As we sit here today, our spreads are closer to, call it, 165, 170, which is still a very healthy spread when you think about the historical average for the sector over the last 20-plus years. So I think for us, that should allow us, again, to continue to grow AFFO per share as we look out to 2026 at a fairly healthy pace and then should ramp up further, hopefully, in 2027 as some of the lower-priced forwards get settled over the course of 2026. But for modeling purposes, I think you should settle somewhere around 8 million to 9 million shares at the end of the fourth quarter. And then we should get rid of most of what was raised over the course of 2024 and 2025 ratably over the course of 2026. Operator: Our next question is from Greg McGinniss with Scotiabank. Greg McGinniss: So although we weren't surprised by the lower cash cap rates achieved this quarter because of the commentary that you guys have been providing, we were a little surprised by the limited increase in IG or IG-like acquisitions. Now it sounds like you're not really expecting much of an increase on that front going forward either. Could you just help us understand what you're seeing on pricing for the IG or equivalent assets and potential for increased acquisition levels within that subset as your cost of equity improves? Mark Manheimer: Yes, sure. So I'd say there's probably about a 50-basis-point difference in terms of the investment-grade and investment-grade like assets that we acquired versus the non-investment grade. So enough of a delta there where as long as we're not taking much more risk, that's something that we're more than comfortable doing. And there just is a lot more attractive opportunities in the non-investment-grade side at this point. I am expecting the fourth quarter to be a little bit more heavy on the investment-grade side than what we've done for this year. But the reality is investment grade is just not really something that we focus on. We're looking for the best risk-adjusted returns that we can. In some quarters, that's going to be high and some quarters, that's going to be low. And we're really kind of focused on getting the best pricing that we can, managing the portfolio and then not having credit losses, which I think we've been able to accomplish both really strong pricing with minimal loss. Greg McGinniss: Are you seeing any trends in terms of what you're looking to acquire from that standpoint on an industry level in terms of where you're seeing the better risk-adjusted returns now versus maybe historically? Mark Manheimer: Yes, sure. I mean we certainly have seen more opportunities on the convenience store side. Quick-service restaurants is another area that has been a focus. Grocery, auto services, that's really been kind of the main 4 food groups that we've had the most success, but there's always a deal here or there that's outside of those. We've added a bit more tractor supply. You saw that move up quite a bit. We're adding a little bit more in the fourth quarter, but it's a pretty broad diversified mix what we're adding in the fourth quarter. Operator: Our next question is from Haendel St. Juste with Mizuho Securities. Haendel St. Juste: I wanted to ask about competition. Certainly quite a bit on the call so far this quarter, you mentioned that you're seeing a bit of competition from private equity. I'm curious what you think of -- what you think their investment strategy is, where are they deploying more capital versus where you are looking to deploy and if and how you'll be able to insulate yourself from that a bit? Mark Manheimer: Yes, that's a great question, Haendel. It's been a big topic. I think every private equity firm is a little different. You saw a couple of larger private equity firms kind of get in the game a few years ago and didn't really make much of an impact, quite frankly. And then you've seen a couple more in the last couple of years, really kind of smaller teams going out elephant hunting. A lot of those have been more focused on industrial, but even on the retail side, kind of looking for the larger transactions to put a lot of capital to work. So we're not really running into, obviously, the industrial side, but also if someone's kind of doing 9-figure type transactions, that's not going to be where we play. More recently, we've seen one large player focused on smaller transactions, but further down the credit curve than really where we like to play, although we have seen them a little bit on the sale leaseback side, but there's more than enough opportunity where -- and especially being that they are looking at a different credit profile for the most part than what we're looking at, not going to have a big impact on us, but they're really the first one that we've seen out there in the investment world. But I think with how fragmented the net lease retail space is and how little institutionally owned it is, there's just a lot of opportunity for even more groups to come in without having a large impact on the pricing that we're seeing. Haendel St. Juste: Appreciate the thoughts there. Maybe as a follow-up, I was curious, maybe an update just more broadly on your strategic plans to reduce your Dollar General, Walgreens and CVS. It looks like you made quite a bit of progress in your quarter. Curious how the pricing came in versus prior sales versus your expectations. And then looking ahead, any other category that you're looking to call a bit into next year, understanding that much of the heavy lifting has already been done? Mark Manheimer: Yes. I mean I think the heavy lifting, to your point, is really already done. We made a big move on the dollar store side. Pricing was pretty attractive. We did do a little bit more with some institutions where the cap rate was maybe slightly higher than the 1031 market. So I think the remaining sales that we have in that space are going to be 1031 driven. We were already in a pretty good spot going into the quarter as it relates to pharmacy. So we're being a little bit more selective on pricing there. And so we've hit our goal on Walgreens getting that below 3%, just about there on CVS. Certainly, we'll be there here in the next couple of weeks. So getting those down, we can be a little bit more choosy when it comes to the pricing and not feel as much pressure there. So I'd expect us to continue to run the portfolio with tenants below 5%. Walgreens will continue to decrease over time, a little bit less of a -- a little bit less pressure there, but that will still continue to come down with a sale here or there and then with us not adding to either of those sectors, just increasing the asset base will decrease those exposures over time. Operator: Our next question is from Smedes Rose with Citi. Bennett Rose: I just wanted to understand maybe the opportunity set a little better. I mean you significantly increased the acquisitions outlook, obviously, for the year. I know part of that is driven by better cost of capital. But also, I mean, is the overall market kind of expanding? Because I mean we just hear from other companies, too, it seems like the acquisitions outlook just continues to sort of accelerate. I'm wondering if you think that's sort of going to continue indefinitely? Or is there anything in particular that's driving that? Mark Manheimer: Yes. No, it's -- yes, we certainly are seeing a lot more opportunity. I think to your point, others are saying the same thing on their call. So I don't think it's just us. And thinking through really what's driving that, rates have come in enough where you have the 10-year has gone from 4.5% to 4%, the 5-year, which is probably more important to 1031 buyers, down around 3.6% or wherever I even looked today. But I mean, that's an area where it pencils on the debt side. So I think we're at a point where rates aren't really restrictive to getting deals done. So I think that's kind of opened up the -- maybe not the floodgates, but I think on the margin, we are seeing more opportunity across the board with every different approach to acquisitions that we take, we're seeing more opportunity really everywhere. Operator: Our next question is from Linda Tsai with Jefferies. Linda Yu Tsai: Yes, it makes a lot of sense to continue diversification in your portfolio, reducing the drug and dollar stores and AAP exposure. That being said, where do you think spreads between acquisitions and disposition cap rates could trend into '26? Mark Manheimer: Linda, yes, I mean, it's probably a little bit difficult to say because we're going to be more opportunistic on the disposition side. So the cap rates could come in a little bit if we're -- if we see some good opportunities there. We had some pressure on our -- put some pressure on ourselves by setting some diversification goals where we're selling assets in industries that were maybe a little bit out of favor. So I think that made it a little bit more difficult, but certainly, a strong 1031 market allowed us to be able to hit those goals a little bit ahead of time. So -- but the dispositions really aren't going to drive much next year. We'll probably return to a $15 million to $25 million pace, which I think is historically what we had done coming into 2025. But overall, I think the cap rates will probably be a little bit lower on the disposition side. Linda Yu Tsai: And then just in terms of your investment spread at 160 bps relative to your WACC, how do you think that could trend, say, by like the second half of '26? Daniel Donlan: Yes. I mean, you tell me where the stock is going to go, Linda, I can give you that answer. I think as we look at cap rates, as Mark said, we think cap rates may -- could potentially drift down 10 basis points over the next 6 to 8 months. It's really unsure. I think we have a very good value proposition here. We've got our cost of capital back. We can continue to grow earnings at a healthier clip and a stronger clip than we did last year. So it really just all depends on kind of the stock price and then to a lesser degree, the -- where debt is. I mean we've basically satisfied our debt needs for the next, call it, 12 to 15 months. So any type of our capital raising and/or our usage of debt is going to be relegated to the credit facility as well as just bring -- settling the forwards over the course of 2026. So I'm hopeful that -- we're hopeful the stock price can continue to move higher, just given the opportunity set that we're seeing. And so I think spreads can hang out where they are or move higher. But I think the one thing we feel confident in at least over the next 6 months is that cap rates should remain in and around kind of where they have been. Linda Yu Tsai: Just one last question. Your tenant credit outlook versus a year ago, how does that compare? Mark Manheimer: Yes, not much different. I mean, I guess, a year ago, we had Big Lots, which we knew was something that we had to work through. Right now, we don't really have anything on the credit watch list. Some coverages have moved around a little bit here or there, but nothing that we're concerned with. Operator: Our next question is from Jay Kornreich with Cantor Fitzgerald. Jay Kornreich: I wanted to go back to the pace of growth going forward. You mentioned a robust opportunity set and net investments to pick up in 2026. I'd be curious just about how you think about your goals for next year. Are you more focused on getting to a certain quarterly investment pace? Is it more about achieving a certain earnings growth level? Just how do you think about that now that you've returned to that opportunity set? Mark Manheimer: Yes. I mean I think you have to evaluate what the opportunity set is. And right now, it's robust. We expect that to continue. And then you have to consider your cost of capital, which is improving, certainly not quite where we want it to be. And you need to consider your team and what we're capable of. And I think we're capable of significantly more than what we've done in the past. And so I think there's an opportunity as our stock has continued to recover and get better that we can ramp acquisitions beyond what we've done historically. To what level remains to be seen. I guess we'll decide when we want to give AFFO per share guidance and acquisitions guidance at a later date. But I think right now, that's trending to a larger number. Jay Kornreich: Okay. And then just as a follow-up, you referenced the prospects of getting investment-grade rating. Can you just give an update as to where that process stands and potential timing to achieve that? Daniel Donlan: Yes. I mean I think what we said all along is that we would hope that we have some type of discussion this year. And I think that still remains true. But obviously, nothing is set in stone. And so I think we'll continue to say, hopefully, we can do something by the end of the year. Operator: Our next question is from Wes Golladay with Baird. Wesley Golladay: Looking outside of traditional acquisitions, are you seeing any development opportunities? And do you have any appetite to increase the loans? Mark Manheimer: Good question, Wes. So yes, we are seeing good opportunities, both on the loan side and the development side, but really not seeing enough of risk-adjusted return on the development side to really kind of ramp that. We've continued to work with a few tenants directly on some development. That's been pretty good. And I think we'll probably see 1 or 2 new tenants kind of pop up in our top tenant list in 2026 from that, but it's -- I don't think it's going to be as big a piece of what we've done historically. The loan book, we've decided to kind of bring that down a little bit over time. And -- but we're still seeing some pretty good opportunities to replace some of the loans that are being paid off. Operator: Our next question is from Upal Rana with KeyBanc Capital Markets. Upal Rana: Just one quick one for me. I want to get your thoughts on the auto parts exposure as it makes up about 2.5% of your ABR, just given some of the recent bankruptcy news out there. Mark Manheimer: Yes, sure. I mean, so we've got really 3 tenants there, Advanced Auto, which has been brought down quite a bit closer to 1% at this point. O'Reilly's and AutoZone. We don't really think that the most recent bankruptcy is something that is going to impact them or even really tangential to them. Really, the bankruptcies that we've seen and kind of the cockroaches that people are talking about, we haven't seen the spread of the cockroaches at this point. And some of that is really due to fraud, which we don't think is really indicative of what's really going on in the economic market. Operator: Our next question is from Jana Galan with Bank of America. Jana Galan: Given the increased competition for net lease retail strategies, are you seeing any changes in lease structures, whether it's term or escalators or options? Just curious if people are trying to compete on something other than price. Mark Manheimer: We haven't really seen any change. I mean I think the institutional capital that's come to the space, I think they're pushing to try to get a lot of the same things that our public peers are trying to get, which is longer leases with good rental escalations. So we haven't really seen much of a change in terms of lease structures. Operator: Our next question is from Daniel Guglielmo with Capital One Securities. Daniel Guglielmo: Based on the commentary and results, you are exiting the recycling phase and headed back into a growth and scaling phase. Looking back on the recycling efforts, are there any learnings that you're going to take with you as net acquisitions ramp back up? Mark Manheimer: Yes. I mean I think we've always been confident in our ability to reduce exposures. And I think maybe the lesson learned for us is having some larger concentrations with publicly traded companies that are constantly in the news cycle at the tenant level, even if you've got really strong assets that generate a lot of cash flow, sometimes it doesn't matter and can still impact your cost of capital, which matters as an external growth vehicle like we are. So I think we're going to be a little bit more cognizant of allowing some exposures to get higher, which is a little bit easier to do now that we've got about $2.5 billion of assets. So being a little bit bigger does help that. Daniel Guglielmo: Okay. Great. I appreciate that and makes sense. And then we always like to look at the ABR by state slide. So when you think about the existing pipeline, are there states or regions where you see better investment opportunities over the next year or so? Mark Manheimer: Yes. I mean we're somewhat agnostic to what state an asset is in. We're focused a little bit more on the micro market of does that location have the demographics to support not only the use of the asset that we're buying, but also potentially future uses and future tenants. And I think overall, we're probably seeing a little bit more opportunity in the Sunbelt where you're seeing more population growth. Texas is a big state. So that being our #1 state. We kind of think of Texas as kind of being like 2 or 3 states, depending on what region of Texas you're in. And so kind of breaking that up by state, sometimes I think you see a lot of our peers also have Texas as the #1 state. But I wouldn't draw too many conclusions from what's in the pipeline or where we're looking to grow. I think it's really just where the opportunities are, where we can get the best risk-adjusted returns and that can be in really any state. Operator: There are no further questions at this time. I'd like to hand the floor back over to Mark Manheimer for any closing comments. Mark Manheimer: Well, thanks, everybody, for joining today. We appreciate the interest in the company and look forward to meeting up with everybody in the conference season. Take care. Operator: Thank you. This concludes today's conference. We thank you again for your participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen. Welcome to Group 1 Automotive's Third Quarter 2025 Financial Results Conference Call. Please be advised that this call is being recorded. At this time, I'd like to turn the call over to Mr. Pete DeLongchamps, Group 1's Senior Vice President, Manufacturer Relations and Financial Services. Please go ahead, Mr. DeLongchamps. Peter Delongchamps: Thank you, Jamie. Good morning, everyone, and welcome to today's call. The earnings release we issued this morning and a related slide presentation that include reconciliations related to the adjusted results we will refer to on this call for comparison purposes have been posted to Group 1's website. Before we begin, I'd like to make some brief remarks about forward-looking statements and the use of non-GAAP financial measures. Except for historical information mentioned during the conference call, statements made by management of Group 1 Automotive are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve both known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results. Those risks include, but are not limited to, risks associated with pricing, volume, inventory supply, conditions of market, successful integrations of acquisitions and adverse developments in the global economy and resulting impacts on demand for new and used vehicles and related services. Those and other risks are described in the company's filings with the Securities and Exchange Commission. In addition, certain non-GAAP financial measures as defined under SEC rules may be discussed on this call. As required by applicable SEC rules, the company provides reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on its website. Participating with me on today's call, Daryl Kenningham, our President and Chief Executive Officer; and Daniel McHenry, Senior Vice President and Chief Financial Officer. I'd now like to hand the call over to Daryl. Daryl Kenningham: Good morning, everyone. Let me start with a few highlights from the quarter before discussing our regional performance. Group 1 delivered an all-time record quarterly revenues driven by record results in parts and service and used vehicles, along with another quarter of very strong F&I performance in both the U.S. and the U.K. New vehicle PRU gross profit performance was solid and customer pay in both markets performed well, supported by healthy repair order growth. We've maintained cost discipline in the U.S. with good SG&A leverage less than 66% on an as-reported and same-store basis. Now turning to our U.K. operation. The U.K. environment remains challenging with inflation, wage and insurance cost pressures and the BEV mandate, which continues to compress margins. While the broader SAAR improved slightly in the quarter, much of that growth was fleet-driven and retail conditions remain soft. New lower-cost entrants are seeing increasing market share performance with cost-conscious consumers. However, this is not yet a significant factor in our business given our luxury leaning portfolio. Despite these headwinds, there are some bright spots in our U.K. business. Our aftersales business continues to expand with healthy customer pay operations. We are applying our U.S. aftersales playbook across our U.K. dealerships. For example, in the U.K., our stores now welcome walk-in customers, which we had previously limited. And we have fully reopened shop schedules, cutting appointment wait times from nearly 2 weeks to just a few days. And we're extremely pleased with the progress we're making in reshaping our U.K. aftersales business. New vehicle margins in the quarter remained steady year-over-year. Our used vehicle volumes in the U.K. were up nearly 4%. Our U.K. used vehicle teams have been successful exercising discipline in our aging and reconditioning process. F&I also delivered an excellent quarter with same-store PRU up $155 or greater than 16% year-over-year. Our team is focused on improving product penetration, which has resulted in same-store financing penetration increasing by over 4%. We're continuing to strengthen our business with initiatives to offset our cost increases. Since the acquisition of Inchcape, we've implemented a series of headcount reductions, systems-integration activities and selective franchise closures and divestitures to improve operational efficiency and to better align our cost structure with current market conditions. Our headcount reductions have included approximately 700 positions across the U.K. and our responsible portfolio management has resulted in the closure of 4 dealerships and the termination of 8 franchises. We're making meaningful progress on systems integration. Across our U.K. business, we've completed the consolidation of 11 DMS platforms, and we're rolling out a new business intelligence system now. We are also completing the final stages of our U.S., U.K. systems integration review spanning approximately 90 different systems company-wide. These actions are improving visibility, operational consistency and data-led decisions across the organization. In the third quarter, we formally notified Jaguar Land Rover of our decision to exit this brand in the U.K. within 24 months. We feel our efforts and some of our real estate can be more effectively utilized elsewhere. We are collaborating closely with our OEM partners at JLR to achieve a positive outcome for them and for Group 1 shareholders. It's our intention that this achieves a positive result for all concerned. Due to this decision, our U.K. portfolio was required to be tested for impairment. As a result, we took a $123.9 million asset impairment in the quarter. Also important to note, this decision was unrelated to the JLR cyberattack, which separately impacted our U.K. profitability by approximately GBP 3 million during the quarter. Those actions reflect our commitment to optimize our portfolio, control costs and focus our resources on winning through operational excellence. We will continue to refine the U.K. business, managing our headcount, rightsizing our network and prioritizing aftersales and F&I while leaning into our luxury platform and geographic diversity. This will position our U.K. business for long-term success. Now turning to our U.K. operation. Our U.S. teams continue to execute very well, maintaining operational discipline and customer focus across our dealerships. As a result, the business delivered another solid quarter of growth with healthy performance across all major lines. Demand remained consistent throughout the quarter, supported by balanced inventory levels and steady consumer interest, which we believe to be relatively healthy in the U.S. Our used vehicle units sold nearly set a record, only 40 units off of our all-time quarterly volume record. Our same-store sales in used vehicle outpaced the industry. F&I was outstanding once again with an all-time quarterly high PRU of nearly $2,500, combined with an impressive 77% new vehicle finance penetration. Aftersales achieved record quarterly revenue and gross profit, underscoring the strength and stability of this high-margin business. Our investment in our aftersales operation continues to capture growth and our initiatives around flexible scheduling, all-day Saturday operations and technician productivity continue to create new capacity and improve retention across our U.S. stores. Same-store technician headcount increased by over 4% due to our recruitment and retention efforts. On a same-store basis, our customer pay revenue increased nearly 8%. Warranty was up 16% versus a prior year comp that saw 20% growth. We continue to believe in the potential of our aftersales business, and we also believe that capacity and productivity are the keys to success. The overall U.S. environment remains dynamic with ongoing policy and trade uncertainty. We're maintaining a cautious but confident stance, balancing discipline in spending with targeted investment where we see long-term return. Our operational excellence is a key advantage, giving us the ability to adjust quickly to changing conditions. Now a word about our capital allocation. In August, we added Mercedes-Benz of Buckhead in Atlanta, Georgia to our portfolio. It's expected to be one of the best-performing stores in the U.S. for Group 1. It's positioned in a growing market and consistent with our cluster strategy and our disciplined focus on pursuing only those opportunities that will create long-term shareholder value. Just as importantly, we continue to opportunistically buy back shares of our company. Since the beginning of 2022, we've repurchased nearly 1/3 of the company's outstanding common shares. The acquisition landscape has been fairly quiet in recent months, and we continue to engage in researching opportunities in the U.S., but we are holding on further U.K. acquisition investment. We expect consolidation to continue in the future in both markets, and we believe we're well positioned with our OEM partners to capitalize on those kind of opportunities. Now I will turn the call over to our CFO, Daniel McHenry, for an operating and financial overview. Daniel McHenry: Thank you, Daryl, and good morning, everyone. In the third quarter of 2025, Group 1 Automotive reported quarterly record revenues of $5.8 billion, gross profit of $920 million, adjusted net income of $135 million and adjusted diluted EPS of $10.45 from continuing operations. Starting with our U.S. operations. Performance was strong across all business lines, both reported and same-store. Revenue growth was broad-based, led by record quarterly records in used vehicle, parts and service and F&I. New vehicle unit sales rose mid-single digits on both a reported and same-store basis, reflecting healthy demand and steady inventory flow. While new vehicle GPUs continue to moderate from the highs of the past few years, we have maintained strong operational discipline through effective cost management and process consistency. Expiring tax credits lead to increased BEV deliveries in the quarter at lower GPUs, negatively affecting U.S. new vehicle GPUs by approximately 6%. Our used vehicle operations performed well with record quarterly revenue and GPUs holding up well with only a slight 3% decline on a same-store and as-reported basis. These results reflect the benefits of our scale and operational flexibility, combined with our team's focus on disciplined sourcing and pricing in a competitive market. Our third quarter F&I GPUs grew over 5% or $135 and $126 on a reported and same-store basis versus the prior year comparable period, respectively. The performance by our F&I professionals has been outstanding to maintain GPU discipline while driving higher product penetration across nearly all product categories. Aftersales once again stood out as a major contributor, achieving record quarterly revenue and gross profit. Gross profit continues to benefit from our efforts to optimize our collision footprint, shifting collision space opportunistically to additional traditional service capacity and closing collision centers where returns do not meet our requirements. Aftersales remains one of our strongest engines of growth and stability. Overall, our U.S. business continues to perform exceptionally well, demonstrating both the strength of the consumer demand and the effectiveness of our disciplined process-driven operating model. Wrapping up the U.S., let's shift to SG&A. While U.S. adjusted SG&A as a percentage of gross profit increased 160 basis points sequentially to 65.8%, we view this as a good performance. We continue to focus on resource management and technology investments to maintain SG&A as a percent of gross profit below pre-COVID levels as vehicle GPUs further normalized. Turning to the U.K. Results reflected a challenging operating environment. However, same-store revenues grew across almost every line of business. New vehicle same-store volumes declined 4% and local currency GPUs moderated by 1% versus the prior year quarter, leading to a 6% decline in local currency same-store new vehicle revenues. Used vehicle same-store revenues were up over 5% on a local currency basis with volumes up 4%. However, same-store GPUs declined by over 24% on a local currency basis, leading to a similar decline in same-store used vehicle GPU, reflecting the challenging used vehicle market in the U.K. Aftersales and F&I year-over-year growth in both revenue and gross profit. The aftersales business remains an important stabilizer within the U.K. operations, along with F&I is a key area of focus as we work to enhance profitability. Same-store F&I PRU reached $1,106 with as reported and same-store PRU both increasing more than 15% year-over-year. On expenses, SG&A increased from the prior period, reflecting cost inflation and integration-related impacts as well as a lack of gross profit for the full quarter from our JLR operations due to the cyberattack. While we have executed target restructuring initiatives to improve efficiency and return the business to more sustainable cost levels, costs continue to increase, some of the government imposed through increased payroll tax-related charges. During the quarter, we also incurred modest nonrecurring restructuring charges tied to our restructuring efforts. In response to current market conditions, we are taking further actions to reduce our corporate headcount by approximately an additional 10%, and we are taking additional expense actions to save an expected $8 million in our stores. We will benefit from these savings in 2026. We will also be executing additional restructuring plans in future periods as we exit select OEM sites. In connection to the notification with JLR, we recognized a franchise rights impairment charge of $18.1 million, which is included in the impairment charge that Daryl mentioned earlier. We are taking decisive actions in the U.K. to control costs, strengthen operational efficiency and position the business for improved returns as market conditions stabilize. Turning to our balance sheet and liquidity. Our strong balance sheet, cash flow generation and leverage position will continue to support flexible capital allocation approach. As of September 30, our liquidity of $1 billion was composed of accessible cash of $434 million and $555 million available to borrow on our acquisition line. Our rent-adjusted leverage ratio as defined by our U.S. syndicated credit facility was 2.9x at the end of September. Cash flow generation through the third quarter of 2025 yielded $500 million of adjusted operating cash flow and $352 million of free cash flow after backing out $148 million of CapEx. This capital was deployed in the quarter through a combination of acquisitions, share repurchases and dividends, including the acquisition of $210 million in revenues, $82 million repurchasing approximately 186,000 shares at an average price of $443.81 and $6.4 million in dividends to our shareholders. Subsequent to the third quarter, we repurchased an additional 140,000 shares under a Rule 10b5-1 trading plan at an average price of $433.48 for a total cost of $60.9 million, resulting in an approximate 5% reduction in share count since January 1. We currently have $165.4 million remaining on our Board-authorized common share repurchase program. For additional detail regarding our financial condition, please refer to the schedules of additional information attached to the news release as well as the investor presentation posted on our website. I will now turn the call over to the operator to begin the question-and-answer session. Operator: [Operator Instructions] And our first question today comes from Bret Jordan from Jefferies. Bret Jordan: Some of your peers have talked about a U.S. luxury trend softening. Could you sort of give us any color on what you're seeing at the consumer, maybe luxury versus import versus domestic demand trends and GPUs? Daryl Kenningham: Bret, I wouldn't say that what we've seen is material enough yet to call it a trend. You've seen a little bit of shift between some of the big bakes. Audi is certainly a challenge. I'm not sure that's consumer related. But we saw a little bit of inventory build in some of the luxury makes in the third quarter. I think the real tell will be fourth quarter, which typically is the largest quarter of the year for the luxury makes and especially the Germans. And so before I think we would say we see a softening there, I'd want to see how the fourth quarter kind of shakes out and where that heads, to be honest with you. And Peter or Daniel may have another view based on their perspective. Peter Delongchamps: Bret, this is Pete DeLongchamps. I would tell you that our Lexus business remains very, very strong. BMW dealerships did well in the quarter. Like of Daniel's or Daryl's comment on the Audi business is certainly difficult. Bret Jordan: Okay. And then a question on the JLR exit, I guess, within 24 months. It sounded as if you might be reallocating some of those properties to other brands? Or is this -- when you think about business? Daryl Kenningham: Yes, we own the vast majority of those -- that real estate. And we've had some reviews of how it might be used in better ways, primarily automotive, other brands potentially. Some of them will stay JLR and transition to another owner. And then others, just through the consolidation work going on in the U.K. with all the OEMs, it might provide an opportunity for us in some of our cluster markets and other brands. Some of that is still undetermined. But that is an outcome that's a possibility. Yes, absolutely, Bret. Bret Jordan: Okay. And the housekeeping, I guess, of the $124 million impairment, $18 million of that was JLR... Daniel McHenry: So it's Daniel here, Bret. It's a combination there. So in terms of our franchise rights, $18 million was JLR. Now what that did was by terminating the JLR franchise, it triggered us to have to look at the U.K. entity as a whole and take a goodwill impairment. Now that goodwill impairment is not just JLR specific, it's the entity as a whole. So some percentage of the circa $100 million remaining will be relating to JLR. So 18-plus some percentage of the total business unit. Operator: Our next question comes from Rajat Gupta from JPMorgan. Rajat Gupta: Just to follow up on Bret's question on the U.K., just the reallocation-of-capacity question. Would you consider partnering with some of the Chinese brands here? It clearly looks like they're gaining a lot of share, putting some pressure on the legacy brands that you own. Curious if there's any thought process around that of maybe increasing exposure there? And I have a quick follow-up. Daryl Kenningham: Rajat, there, we have met with some of the Chinese OEMs about representing them. And we continue to consider that and review that. And we've also looked at that part of the industry and where we believe it's going in the U.K. We believe for the next several years, it will be primarily mass market focus and not luxury. At some point, we certainly get the luxury business. Our focus in the U.K. is primarily luxury. But we have looked at it. What we want to make sure that we are comfortable with is that the retail model is a good one for our shareholders. The rooftop throughput at retail for the Chinese brands is still quite low and the economics around these rooftop aren't what our other stores can generate at this point. But we realize, obviously, they're growing. We want to make sure that we're positioned well to take advantage of that if there's an opportunity. We are having some active dialogue. Rajat Gupta: Got it. Got it. That's helpful. And then just on the used GPUs in the U.S., it seems like it pulled back quite a bit sequentially, also down year-over-year. I'm wondering if you could elaborate a little bit more on that. Was it just some of the tariff tailwinds from the previous quarter going away, maybe some higher priced inventory that came with the quarter? Or is there -- or is it just a sign of just more competitive landscape on the used car side? Any thoughts there would be helpful. Peter Delongchamps: Rajat, it's Pete DeLongchamps. We've certainly seen stabilization through the used car -- in the used car business. But it does remain very competitive in the acquisition landscape of used cars. I think we've done a really good job of maintaining discipline with our auction purchases. The majority of our cars come from trades and customer outside purchases. But it's a business right now that it is dependent on how well you can acquire and how quickly you can turn. I think we maintained a 30 -- 31-day supply again. So we're comfortable with the performance of the used car operation in the current landscape. Operator: Our next question comes from Jeff Lick from Stephens Inc. Jeffrey Lick: I was wondering, Daniel or Daryl, if you wouldn't mind just giving some detail on the parts and service in the U.S. and the dynamics here, customer pay and warranty up 16%. Just as we go forward, is there anything that would skew the gross margin percentage, which obviously flows into gross profit dollars? Just the dynamics and we're lapping some tough compares now. Just any color would be helpful. Daryl Kenningham: Well, the encouraging thing, Jeff, this is Daryl, and I'm sure Daniel has a comment. The encouraging thing is our customer count grew. In the U.K., it grew almost 6% year-over-year. In the U.S., it grew 3%. So we were really pleased that we're adding customers to our shops, not just dollars. And so we feel like our CP business is still healthy, and we still feel like there's a lot of opportunity there. Warranty is really tough to predict sometimes, obviously. And we don't see any reason for necessarily a mix change. One thing that is happening is the -- I mean, a margin mix change, I should say. As the collision business is -- it's getting weaker and that can affect margin because a lot of the our wholesale parts sales go to the collision industry. And so overall aftersales margin may be helped by that on a percentage basis. So if the wholesale parts continue to climb. So at least the collision sector. But on CP and on warranty, we haven't seen that. I know there's been some discussion on margin percentages by some in the industry, but we haven't necessarily seen that. We don't necessarily really predict that either. So Daniel, I don't know if you have anything to add. Daniel McHenry: Jeff, the only thing that I would add around was customer pay, as Daryl said, continues to be strong. U.S. specific, we've grown by about 8% year-on-year. In terms of warranty, we've grown by just over 16% year-on-year. Now as we talked about in the earnings call, collision is down. We closed a number of our smaller collision centers turning those into customer pay work, and it's down about 11% in the quarter. Now the result of that is that our margin mix as a total company is trading upwards and our margin mix has gone up from about 54% to 55.2% in the quarter. Daryl Kenningham: CP margin was up year-over-year for us and so was warranty margin. Jeffrey Lick: Just a quick follow-up. I think maybe this is one for Pete. On your Slide 14, you guys do a good job of always disclosing the retention by model year, which I don't think your peers necessarily disclose that. Could you talk a little bit about -- I believe you guys are well north of what would be typical and just the dynamics there. Peter Delongchamps: This is on parts and service overview, retention? Jeffrey Lick: Yes. Peter Delongchamps: Yes, I think what we're working on, and it starts with the sale. And then if you take a look, Jeff, at our overall consistency with vehicle service contracts, maintenance, we are completely focused on getting our customers back into our shops, and we do that through constant follow-up. We do that by ensuring that pricing is right, making sure that schedules are wide open for appointments. And I think that when you take a look at the trend we've had over the years, and we've done a remarkable job with it, and this is where we've landed at 68-plus percent. Daryl Kenningham: Jeff, one of the things that we focus on, the way we measure retention is 2 visits in a year. Other people measure it differently. OEMs all measure it differently. we wanted a standard number we could use inside Group 1 across all our stores. The key in the future as the average mileage goes up, the age of the cars is still going up. Our average mileage on our service drives is almost 70,000 miles. And really, the key for us to continue to grow customer pay is in reaching those higher mileage, older vehicles. And one of the keys to doing that is when we vertically integrated our own data management with our customers starting about a year ago so that we now have a much clearer view, much better view of where our customers are going and when they're likely to need service next using propensity modeling and things like that, that help us do that. And so we have to be able to reach deeper into that ownership cycle as time goes, and we're really working hard on that, really working hard. Jeffrey Lick: Well, the results show. Best of luck in the next quarter. Operator: Our next question comes from Daniela Haigian from Morgan Stanley. Daniela Haigian: So one on forward demand. We've kind of passed through the peak tariff fear from April. We're now seeing OEMs revise up their guidances, clearing the bar on these improved gross tariff impacts. Are you seeing any decontenting or changing in pricing on new model year vehicles in excess of the normal price hikes? And how are you thinking about that going into next year? Daryl Kenningham: We haven't seen anything in excess of normal price hikes, Daniela. We've seen a little recontenting not -- I wouldn't -- I would say it's normal. there hasn't been any broad announcements about major pricing. There's been a couple of specific pricing actions with smaller OEMs. As we think about it and in more discussions we have with our OEM partners is they are taking a longer view on it, and they're going to try to recover the tariff impacts over a longer period of time and some of that -- and they will absorb most of it in general. And we're seeing very little pricing that can be attributable to tariff increases. And I think that will continue, to be honest with you, unless something radically changes with the tariffs, we think that's probably what will happen. And Pete may have some more. Peter Delongchamps: No, I think, Daryl, you just covered it. The only thing I would add is you take a look at the financial services companies and the strength of the financial services companies can bring down those -- some of those additional costs through leasing subbing rates, which bodes well for those OEMs that have strong financial services companies. Daniela Haigian: Got it. That's helpful. And then one more, maybe, Pete, for you. Daryl Kenningham: Our captive lenders are really -- a real advantage, we feel like. And we -- they drive loyalty, they drive finance attachment, and that's a real key for Group 1. Daniela Haigian: Absolutely. Absolutely. And then in that vein on auto credit, obviously, there's a lot of headlines out there. And obviously, Group 1 skew is much higher on the credit quality curve. But just as investors continue to focus on risk to the consumer, have you seen any change in consumer behavior in the last few weeks starting the fourth quarter? Daryl Kenningham: We have not seen a change in consumer behavior. And actually, we're seeing increased penetration rates on new and used. And then most of the headlines are centered around the deep subprime, which we don't play in. So a channel checked the majority of our lenders prior to this call and the business continues to be robust, and there's still a lot of appetite with the lenders to make car loans with us and our customers. Operator: And our next question comes from Glenn Chin from Seaport Research. Glenn Chin: I guess just a couple of questions on the U.K. So just broadly on the macro. I mean, this used to be close to 25-million-unit market. Can I just ask where you see it settling out? And what needs to be done to improve it? I mean, is it lower energy costs or government incentives? And does it need to get worse before it gets better? Daryl Kenningham: It doesn't need to get worse before it gets better. What has to happen is the throughput through per rooftop has to grow. The margins were steady year-over-year. The aftersales business is healthy. We've got work to do on costs, as we've mentioned. And the OEMs are all working to try to rationalize their networks to a level that meets today's SAAR of around 2 million rather than the 2.5 million that you referenced, Glenn. So as we take rooftops out, that should improve the throughput of the remaining networks, and they're all working feverishly on that. Some of them are in our opinion, taking a healthier approach than others. Groups like Volkswagen, groups like Mercedes-Benz, groups like BMW are doing a really great job working with their dealer partners to try to affect that. And I think their outcomes are going to be really good, really healthy. But that's a real key is to try to get the throughput per rooftop up to a better level. And then while we continue to take costs out, we'll continue to do that and focus on that. Daniel may have something to add. Daniel McHenry: Glenn, there's a couple of things that I would add. If you look at the forward-looking SAAR curve for the U.K., it's pretty static out over the last -- the next 5 years in terms of approximately 2 million. I think the important thing for us as a company is that the premium sector within that 2 million remains pretty constant with a little uptick over the next 5-year period. In terms of the U.K. government at this moment in time, they continue to be taxing both the consumer and the business fairly heavily. And I can't really see that changing in the short term. But as Daryl rightly said, there's a lot that we can still do around cost. And equally so, we bought a lot of stores over the last 18 months, and we are working on portfolio rationalization, which I think will make the business a much stronger business coming out of that in 18 months' time. Glenn Chin: And can you -- with respect to that rationalization, Daniel, can you give us a feel or some perspective on how much more needs to be done? I mean, you took $124 million in impairment this quarter. How much more needs to go? Daniel McHenry: In terms of impairment, that's -- we've taken impairment for JLR as a franchise, and we took effectively a goodwill impairment on our whole company. If I look at our forward-looking projections for that, I would say I would be fairly confident, all things being equal, that we have taken the impairment that's required for us to take as a company. In terms of other things that we would dispose of, typically, they're going to be smaller stores or underperforming stores that have little or no goodwill attributed to those stores, certainly in terms of franchise rights. So I wouldn't expect there to be any additional impairment. Equally so, we've totally impaired the Jaguar Land Rover franchise, and we will be able to sell those for some element of goodwill or some element of value. So we should see some upside coming out of that. Daryl Kenningham: And Glenn, if you look at how we've managed our portfolio in the U.S. over the last 4 years, we've sold smaller underperforming stores in the U.S. or divested of those or closed some of those. And so it's a similar approach that we're taking in the U.K. Daniel McHenry: Portfolio rationalization -- we're optimizing, I should say. Glenn Chin: Just one last question on JLR. So what is different about the franchise in the U.K. versus in the U.S. or your stores for that matter? Do you have a different view of the JLR franchise in the U.S. Daryl Kenningham: Well, when you look at where some of our U.K. JLR stores are, they're close to London. And London had some of the highest theft issues in the -- which affected insurability on those vehicles. And we saw the order banks dry up very quickly in those brands and then in those ZIP codes right around London. And so that was -- and that didn't recover really, Glenn. And so when you look at that and when you look at how much those stores are contributing or losing, and what we really firmly believe at Group 1 is we've got to put our focus and attention and efforts in the areas that are going to drive the best shareholder return for our constituencies. And so when we looked at it and assessed it, and it wasn't an overnight decision, obviously, it was something we've considered for some time. We just felt like our efforts are better with some of our other partners. And we also hope and believe in my conversations with the OEM on this, that they can go get partners that they feel like they can be successful with. But given the real estate that we have with JLR and given the location of those sites and just the outlook in general of it, we felt like our efforts were going to be much better utilized and the return is much better in our other brands. Operator: And ladies and gentlemen, with that, we'll conclude today's question-and-answer session. We do thank you for joining today's presentation. You may now disconnect your lines.
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. 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Operator: Greetings. Welcome to Grupo Traxion Third Quarter 2025 Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Aby Lijtszain, Executive President. Thank you. You may begin. Aby Lijtszain Chernizky: Thank you. Good morning, everyone. Thanks for joining us again for this quarterly earnings call. Let me start with the good news. As you know, we executed the integration of Solistica early in the quarter, and it has concluded successfully. It is the most relevant merger in the logistics industry in Mexico and a very strategic move on our side as it is transformational for Traxion. There are many synergies that we have captured so far. Among the most relevant are the transfer of the shared services center together with all their logistics back office to the Traxion platform and have executed several procurement efficiencies that have improved the bottom line. Traxion invested around MXN 1.6 billion in the acquisition and prepared the company to properly cope with the integration, which is expected to bring at least MXN 8 billion of additional revenue. Because of that, management decided to slow down organic growth to focus more on the successful merger of both operations. Most notably, Traxion significantly reduced its organic CapEx for 2025 to accommodate the acquisition of Solistica, which basically implies the same investment levels as in previous years, but with Solistica up and running in our platform. After the acquisition, the company remains with virtually the same level of leverage and interest expense, which is tremendously accretive. In summary, Traxion will post revenue growth with Solistica but will not change its leverage profile or interest expense at the end of the year which is very similar to having grown organically. Moving on, we experienced a downturn in both cargo and logistics operations. Even though export levels were in line with the same period of last year, there were some sectors affected by the tariff uncertainty in which many of our clients face challenges regarding their production and export operations, mainly the automotive and the online steel industries and some in the consumer and e-commerce sectors as well. There is a clear area of opportunity for us there as we have been shifting our capacity to other sectors of the economy with less volatility. Having said that, we are confident that our year-end top line figure will grow in the mid-teens and will be within the range of the guidance we released in our previous call. Thanks for your attention. I will now hand over the others for a deeper dive into details. Rodolfo Mercado Franco: Thank you, Aby. Welcome, everyone. This quarter continued to be marked by a high level of complexity, driven by uncertainty surrounding tariff-related developments between the United States and Mexico and other countries as well. I will now walk you through the most relevant operating highlights. First, I'm very pleased to share with you that the Solistica integration was implemented successfully and that our 100-day plan concluded favorably according to our expectations, thus ensuring operating and financial progression and the retention of both talent and key clients. We designed an integrated structure aimed at collaboration, efficiency and value creation which in the case of Solistica has an even more enhanced effect as this company came from a very institutional enterprise. Moving on, synergies are coming in as planned. And we have seen some effects in margin that will become more tangible in the next quarters. Among the most relevant synergies achieved so far are corporate reductions and adjustments, the shutdown of Solistica's shared services center and 3PL back office with the procurement side reporting the most relevant efficiency so far. In terms of mobility of cargo, severe disruptions continued during the third quarter, mainly in cross-border circuits on both northbound and southbound that have resulted in prices dropping as demand became more intermittent, especially with clients of the automotive industry and those related to the steel and iron sector. Furthermore, the Mexican peso continue to strengthen, which, as you know, affects the U.S. dollar-denominated portion of the cross-border revenue. However, we are seeing signals of recovery in the retail sector in Mexico and enhancement in general terms in the American side. There are no signals of structural changes in the fundamentals of our industry. So we think that this adversity is temporary. We have also achieved some cost efficiencies related mainly to fuel that have helped to improve cost per kilometer, among other smaller enhancements. Now in the logistics business, we continue to face challenges across the board that are explained basically by a downturn in cargo and some disruptions with our e-commerce clients, which typically import merchandise from the United States to Mexico. However, we expect the situation to normalize towards the end of the year. Finally, in mobility of people, we reported a slight increase in revenue, but a better performance moving to the bottom line. We were able to successfully close our commercial pipeline of the quarter, mainly combining capital expenditure with churning out fleet from older non-efficient clients and allocating those units to new clients at more competitive prices, such effects will become more visible in the coming quarters as those new accounts start contributing revenue and fleet productivity. As you can see, it was a very busy quarter with several highlights in many fronts. Thanks for your attention. With this, I end my remarks. Please, Wolf, go ahead. Wolf Silverstein: Thank you. Welcome, everyone. There are many financial highlights. First of all, there was margin stability in our three business divisions, including Solistica, cargo improved 430 basis points compared to the second quarter of this year. However, with the Solistica integration, Traxion has a much larger component of asset-light business lines which was 45% in terms of revenues this quarter and thus consolidated margin is lower compared to the same period of last year. As this business division continues to gain more relevance, the estimate consolidated margin for the company should be around 16%. Moving on, it is very important to note that the net debt to EBITDA ratio was 2.35x compared to 2.22x reported in the second quarter, just before the Solistica acquisition was finalized. This is very noteworthy as the ratio did not increase substantially and that we expect to end the year at similar levels. That translates into an increased profitability for the company. In this line, there's even another important aspect to highlight, which is that the interest expense remained virtually the same but with the acquisition of Solistica already in place. This basically means that we grew 14.5% our revenue base with virtually the same financial cost. This is indeed very good news and prove that this acquisition was exceptionally accretive and will continue to bring value over time as the integration is fully reflected in our P&L moving forward. Also, as Aby mentioned, we reduced significantly our CapEx for this year to accommodate the Solistica acquisition and still be within similar investment levels as in the past few years. In terms of financial results, aside from the interest expense that I just discussed, this quarter, the company did not have the foreign exchange benefit that contributed to net income in the third quarter of last year. Having said all that, Net income grew over 17%, more than revenues and EBITDA, which is a great highlight to mention this quarter. With this, I conclude my remarks and hand over to Tonio, Thanks. Antonio Obregón: Thank you, Wolf. I will now walk you through some relevant ESG milestones and other tech-related developments. Perhaps the most important sustainability milestone is that this period we incorporated data regarding renewable electricity generation from solar panels installed in our facilities. This is indeed very good news and a tremendous step in terms of emissions reduction and energy efficiency as we continue to expand our logistics footprint and presence. Moreover, we released our 2024 integrated report in line with the most important ESG standards, mainly TCFD and GRI, which are the reflection of our strong commitment to governance, transparency, people and planet. During this period, Traxion obtained the ISO certifications regarding anticorruption and compliance management matters, thus reinforcing the company's integrity standards and corporate observance. Moving on. As you very well know, digitalization has transformed many of our business lines. For some years now, we have paid special attention to tech-driven ecosystems and have conducted many upgrades that are now deeply embedded in our business model that have enabled Traxion to be one step ahead of clients' needs and beyond competition. So in terms of tech advancements and digital strategy, Traxion successfully implemented an in-house developed artificial intelligence program to help our commercial force predict and optimize opportunities, enhancing the decision-making process and boosting talent across the company. This milestone consolidates even more of the company's digital transformation that has been its leadership trademark while strengthening the Intelligent Mobility Solutions platform. Thanks again for your attention. With this, I end management's remarks, and we'll open the floor to Q&A. Operator: [Operator Instructions] And your first question comes from Anton Mortenkotter with GBM. Unknown Analyst: I have two quick ones. One is, we've seen that the cargo truck utilization has been dropping in the last quarters. I was wondering when do you expect this to normalize? Or what kind of levels do you expect to see or should be sustainable in the long term? And also thinking about the industrial trends for the next year, the USMCA renegotiation, how are you positioning for that? And then what are your expectations [ ago ]? Antonio Obregón: Anton, this is Tonio, thanks for your question. I'm going to answer the second question first. As many of you know, one of the biggest plans for Traxion is to expand into the United States because we think that is the natural geographic expansion for us, for the company. The cross-border market between Mexico and the U.S. is the fastest-growing market in transportation and logistics in the world currently. And we want to position ourselves in that market and into the United States. So I think that would be the best way to approach positive USMCA renegotiation, and all the benefits that it's going to bring to the table. Aby Lijtszain Chernizky: Anton, regarding to -- this is Aby, regarding to the first question. So what we're doing is getting clients from different industries. We are now giving a lot of services to the car industry. So we are diversifying the industries from Traxion. So with that, we expect to be as good as it was before, maybe in the middle of the next year, first or second quarter of the next year. Operator: And your next question comes from Edson Murguia with Seneca. Edson Murguia: I have two of them, the first one is related to the personal mobility segment, you have a growth of 4.2%. And you mentioned in the earnings release that we execute some efficiencies. So I was relieved if you can give us or you could elaborate more about your type of efficiencies? Did you perform during the quarter? And my second question is about the fleet reduction. Looking ahead, can we expect the same trend of reduction of the fleet? Antonio Obregón: Edson, this is Tonio. Regarding your second question in terms of fleet reduction, yes, you're right. If you see, we had fleet reductions -- slight fleet reductions in both segments. One has to do in mobility of people, the fleet reduction has to do with the profitability program, which is basically churning out buses from older, not that efficient clients into new clients that are willing to pay more market prices. So when you do that, you need to take out the operation, the bus and prepare it for the next one. So that bus is not operating for some time, perhaps two or three weeks and that reduces the average fleet on the quarter. It's not that we are reducing the fleet by design. It's just some metric that got caught up in the middle of the quarter. And regarding the reduction in the fleet -- in the cargo fleet, it's a normal thing. We are conducting a regular renovation program, which is not linear if we're going to renovate 400 trucks in a year. For example, it's not linear, that is perhaps not 100 trucks every quarter is different. So that's basically the reason. We are not reducing the fleet, quite the contrary. We want to keep it as it is. And regarding your first question, Edson, could you please repeat it? Edson Murguia: Yes, what type of efficiency did you perform in the personal segment to achieve 4.2% growth? Antonio Obregón: Sorry Edson, can you please repeat it again? We are not hearing it clearly. Edson Murguia: Perhaps -- Yes, sorry, probably it's my phone. But what type of efficiency did you perform in the personal segment to grow 4.2% during the quarter? Wolf Silverstein: This is Wolf. So let me try to be as clear I think it was the question. So in the mobility of people, as we mentioned, particularly for this 2025, we run this program that is a profitability program client that we are basically, as Tonio mentioned at the beginning, shuffling the clients that pay less for clients that can pay more, considering the opportunity that we saw in the market to raise some of the prices. So this, combined with the renewal program and obviously, let's say, the overhaul of the units that we need to put in place so we can allocate the buses to the new clients. This is basically what we're doing, in particular this year instead of just growing as it was similar in the past. So it's basically the most different problem that will run this particular year. So this is what you are seeing that the margins in that business are growing even though maybe the -- let's say, the revenues are similar than the inflation. Operator: Your next question comes from Felix Garcia with [indiscernible] Research. Unknown Analyst: Felix Garcia from [indiscernible] Research. First, congratulations on the successful integration of Solistica. Could you share which operational or client synergies have already started to materialize? And whether the 100-day plan help identify additional efficiency opportunities? Secondly, we understand the freight division faced a temporary slowdown in cross-border operations. Have you started to see any signs of recovery in demand or contract reactivation, particularly within the automotive sector? Antonio Obregón: Felix, I'm Tonio, I'm going to answer your first question. There are many synergies, but perhaps the most relevant one is that we basically unplugged the shared services center of Solistica and all the 3PL back-office operation and plugged it into the Traxion platform, which brought many costs and expenses savings in overhead, in corporate, in facilities and other tech-related things. But perhaps the most significant synergies we have identified so far and the most that have materialized in the first quarter, the faster ones, perhaps are in procurement, which as you know, we have a huge procurement platform. We do strategic negotiation and other things. And those are the main efficiencies. Effectively in the first 100 days of operation, we identified -- obviously, as you can imagine, we had identified some synergies that were more visible than evident. But once you have the company in your platform, there are others that are not that visible that are also achievable. So we have been with the company for three months. We think that there are going to be other synergies as time goes by. And I think for -- I think that the next year, you're going to be able to see some other efficiencies and synergies more tangible and more evidently in margin mostly. Rodolfo Mercado Franco: Felix, this is Rodolfo. So regarding your second question about the cross-border business or industry and the automotive, as you're saying, we -- the automotive has been hit in this growth business services. And we haven't seen very much of recuperation in this month. That's why Aby just said it in the before question is we're looking for other industries to switch our equipment and our trucks, so we can avoid the uncertainty that we have the automotive industry right now. Operator: Your next question comes from Martin Lara with Miranda Global Research. Martín Lara: Thank you for the call. Your leverage remains at very low levels. How do you see it going forward? Do you think it would reach 2x by the end of 2026? Wolf Silverstein: This is Wolf. So as we mentioned before, let's say, in the previous calls, even though after the Solistica acquisition, we are remaining at similar levels that we were before the acquisition. So that's very good news for the company and for the leverage of the company. Let's say that, as you know, the CapEx plan in an organic way for 2025, it was lower than the previous years. So we are expecting to deleverage the company in a couple of, let's say, quarters. And I think that's also good news regarding all the synergies that we're planning with Solistica on the Traxion platform plus the reducing CapEx and the generation of the cash flow. Martín Lara: Okay. And how do you see the margin -- the EBITDA margins in logistics and technology? Wolf Silverstein: You saw this quarter, it was something around, let's say, even though 9%. As we mentioned before, Solistica basically comes at the beginning with a similar levels of around 5% margin. Inside of Traxion, we think that this particular acquisition could boost 100 and 200 basis points more inside of Traxion. So at the end, let's say, this particular division at the end could be something between 8% to 9.5% margin in the division. Operator: And your next question comes from Fernanda Recchia with BTG. Fernanda Recchia: Two from our side as well. So the first on the top line growth that you provided for the year in last quarter, you mentioned an expectation of reaching between 14% to 16% of top line growth. But when we look at the nine months, you are -- was 6%, just wondering if you expect, still, to reach the guidance or maybe it could be a little bit lower because of the softer demand that we are seeing? And second, maybe if you could comment on the cash flow generation for next year. Antonio Obregón: Fernanda, this is Tonio. Thanks for your question. Yes, regarding the first question is we are very confident that our year-end figures are going to be within the range of guidance that we provided in the previous call. So we are -- we're confident that we're going to achieve it. Wolf Silverstein: Thank you, Fernanda. This is Wolf again. So regarding your second question regarding the cash flow generation for 2026. As you know, and we mentioned since 2024, the company was able basically to, let's say, to stabilize the operating cash flow neutral the previous year. So after, obviously, the Solistica acquisition, we're planning to have a positive cash flow generation for 2026. Operator: And your next question comes from Jorge [indiscernible]. Unknown Analyst: You mentioned you see expansion into the U.S. as one of the best ways to capture next years trends. If you could delve further into that, how would you prefer getting involved? Would it be via M&A on an existing competitor? Or would it be through fleet expansion? Antonio Obregón: Jorge, this is Tonio. Thanks for your question. Yes, we think that the best approach to tackle the opportunities in the cross-border market for us, would be via an M&A transaction. We think it's faster and more efficient than establishing an organic growth operation. It's going to take more time. And I mean if you take a look at the multiples and the valuations of the cargo companies in the U.S., it's a very attractive entry point. And we also think that the USMCA negotiations are going to be carried out positively. And when this [indiscernible] comes due next year. So yes, the answer to your question is M&A. Operator: [Operator Instructions] Now we'll pause for a couple of moments to see if there are any final questions. Thank you. This now concludes our question-and-answer session. I would like to turn the floor back to Aby Lijtszain, Executive President, for closing comments. Aby Lijtszain Chernizky: Our long-term view has not changed. We are confident that this downturn is temporary and that things are going to get back to normal as talks regarding USMCA evolves and the tariff uncertainty dissipates. We are confident that the North American trade will continue. It is the fastest-growing trade market in the world despite the noise and short-term disruptions. Traxion will continue to seize the opportunities, grow and improve it logistic solutions umbrella as we have always done in the past. Thanks for your attention, and have an excellent day. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines, and have a wonderful day.
Operator: Good morning. My name is Matthew, and I'll be your facilitator today. I'd like to welcome everyone to the UPS Third Quarter 2025 Earnings Conference Call. It is now my pleasure to turn the floor over to your host, Mr. PJ Guido, Investor Relations Officer. Sir, the floor is yours. PJ Guido: Good morning, and welcome to the UPS Third Quarter 2025 Earnings Call. Joining me today are Carol Tome, our CEO; Brian Dykes, our CFO; and a few additional members of our executive leadership team. Before we begin, I want to remind you that some of the comments we'll make today are forward-looking statements and address our expectations for the future performance or operating results of our company. These statements are subject to risks and uncertainties, which are described in our 2024 Form 10-K and other reports we file with or furnish to the Securities and Exchange Commission. These reports, when filed, are available on the UPS Investor Relations website and from the SEC. Unless stated otherwise, our discussion refers to adjusted results. For the third quarter of 2025, GAAP results include a net charge of $164 million or $0.19 per diluted share, comprised of after-tax transformation strategy costs of $250 million, which were partially offset by an $86 million benefit from the reversal of an income tax valuation allowance. A reconciliation of non-GAAP adjusted amounts to GAAP financial results is available in today's webcast materials. These materials are also available on the UPS Investor Relations website. Following our prepared remarks, we will take questions from those joining us via the teleconference. And now I'll turn the call over to Carol. Carol Tomé: Thank you, PJ, and good morning. To start, I want to extend my sincere gratitude to all UPSers for their dedication and hard work. The third quarter brought a wave of tariff changes, some expected, others unforeseen, and our team navigated these complexities with exceptional skills and resilience. At the same time, we continued advancing our network reconfiguration, a critical step in shaping the future of our U.S. business. Amid this significant transformation, I remain deeply impressed by the determination of UPS and their steadfast commitment to serving our customers and building a stronger, more agile UPS. Turning to our results. In the third quarter, consolidated revenue was $21.4 billion. Consolidated operating profit was $2.1 billion and consolidated operating margin was 10%. The cash flow pressures we saw in the second quarter eased during the third quarter. As a result, our year-to-date free cash flow reached $2.7 billion. In the third quarter, our focus on revenue quality continued. And as expected, our U.S. average daily volume, or ADV, declined from last year. The largest drivers of the U.S. volume decline were the planned glide down of Amazon volume and a targeted reduction in lower-yielding e-commerce volume. Our focus on revenue quality yielded solid results as U.S. revenue per piece grew by 9.8% in the third quarter. By coupling solid revenue per piece growth with outstanding expense control, we were able to grow our U.S. operating margin by 10 basis points to what we reported last year on an ADV decline of $2.3 million or 12.3% -- in our international business, total ADV grew 4.8%. Our priority is to our customers. And during the quarter, we ran our international network with agility, rerouting capacity to where our customers needed it. Looking at export ADV, it increased 5.9%, marking the fifth quarter in a row of growth. But due to the changes in trade policy, export volume fell in our higher-margin lanes and grew in our lower-margin lanes. This volume mix change pressured our international operating margin and also pressured our forwarding business. On a positive note, we continue to see strength in health care with strong revenue growth in the third quarter year-over-year, driven by our portfolio of health care logistics solutions. As Brian will provide more details on our financial performance, let me provide some operational updates. In recent years, the spotlight on international commerce and the intricacies of supply chains has intensified. And in 2025, we're witnessing the most profound shift in trade policy in a century. At UPS, this is our domain. Every day, we connect businesses and customers across more than 200 countries and territories, ensuring goods move seamlessly across borders. That includes navigating the complexities of customs brokerage, where we're one of the world's largest customs brokers, managing millions of customs entries annually. Our success is powered by deep expertise, exceptional talent and cutting-edge technology. With our next-gen brokerage capabilities, we harness AI to digitally process over 90% of our cross-border transactions, delivering speed, accuracy and reliability at a global scale. Following the elimination of the de minimis exemption for U.S. imports, UPS experienced a tenfold surge in daily customs entries. We responded swiftly, upgrading our shipping systems to capture the expanded data requirements mandated by U.S. customs and border protection. To manage the increased volume and complexity, we enhanced our customs brokerage capabilities by integrating Agentic AI. This advanced technology streamlined formal entry processes. At UPS, we don't just move goods, we remove friction. By absorbing regulatory complexity, we help our customers minimize disruptions and keep global commerce flowing. And due to the investments we've made in our brokerage business, we can absorb this complexity without adding cost that isn't offset by revenue. As you know, we have a goal to become the #1 complex health care logistics provider in the world. To that end, we are making great progress towards our acquisition of Canadian-based Andlauer Healthcare Group. The addition of Andlauer's capabilities will further strengthen our solutions in global health care logistics, particularly in North America. We expect to close this transaction in early November. Now touching on DAP, our digital access program. We have more than 8 million SMBs on DAP. And in the first 9 months of the year, we generated over $2.8 billion in global DAP revenue, an increase of 20% year-over-year. DAP continues to be an important SMB growth engine. And for the full year, we expect to deliver over $3.5 billion in global DAP revenue. Before we move on, let me provide updates on our Amazon glide down effort and our Ground Saver product. Our Amazon glide down efforts are proceeding as planned. As expected, in the third quarter, we experienced a stepped-up volume decline with Amazon. Versus last year, Amazon's total volume decline in the third quarter was 21.2% compared to 13% for the first half of the year. In tandem with this change, we are continuing to reconfigure our U.S. network. We closed an additional 19 buildings, bringing our total so far this year to 93 buildings. Further during the quarter, we completed a successful voluntary retirement program for many long-term drivers who welcome the opportunity to retire from UPS after decades of dedicated service. In total, our network reconfiguration and cost-out efforts are on schedule and the profit improvement we expect to see from the Amazon glide down initiatives is on plan. In a few minutes, Brian will provide more details about our progress here. Moving to Ground Saver. In the third quarter, our Ground Saver average daily volume declined 32.7% year-over-year due primarily to the actions we've taken with Amazon and to trim lower-yielding e-commerce volume. We recently reached a preliminary understanding on revenue and rates with the United States Postal Service to support last-mile delivery for our Ground Saver product. There's still more work to do, but we are confident we will come to an agreement that ensures our service levels will remain best-in-class, which brings me to peak. As we've discussed, our top 100 customers drive about 80% of our peak surge each year, and we expect that to be the case again this year. Early forecasts from these customers suggest they are planning for a good peak that will result in a considerable surge in volume from our current volume levels. But remember that given the Amazon glide down plan, we expect total peak average daily volume in the U.S. to be down year-over-year. Operationally, we're poised to deliver a strong peak season driven by several key factors. First, thanks to strategic enhancements made to our Network of the Future initiative, we're operating more efficiently than ever. These changes will allow us to reduce reliance on seasonal hires and significantly cut back on lease trailers, vehicles and aircraft compared to previous years. Much of this efficiency is powered by automation. Over the past year, we've deployed new automated systems in 35 facilities. In the fourth quarter, we anticipate 66% of our volume will move through automated processes, up from 63% during the same period last year. Second, as we approach the peak shipping window, we'll continue to leverage our proven technologies and scale the network where needed, all while maintaining a sharp focus on service quality. These advancements position us to run the most efficient peak in our history. We've set the standard for holiday shipping, 7 consecutive years of industry-leading service, and we're confident that our operational strategy and commitment to excellence will make it. With the uncertainty around tariffs now somewhat resolved and clear peak forecast from our largest customers, we're in a stronger position to offer guidance than we were at the end of the second quarter. As I wrap up, let me share our financial expectations for the fourth quarter. We anticipate consolidated revenue of approximately $24 billion and consolidated operating margin of approximately 11% to 11.5%. Brian will walk you through the details of our fourth quarter outlook shortly. Amid a rapidly evolving global landscape, UPS is executing the most significant strategic shift in our company's history. We're focused on winning where it matters most, capturing high-value parts of the market and onboarding customers with increasingly complex logistics needs. Our company is rock solid strong with more than sufficient liquidity to deliver upon our transformation and return capital to shareowners. The changes we're implementing are designed to deliver long-term value for all stakeholders. So with that, thank you for listening. And now I'll turn the call over to Brian. Brian Dykes: Thank you, Carol, and good morning, everyone. This morning, I'll cover 3 areas, starting with our third quarter results. Next, I'll discuss progress with the Amazon volume glide down and our network reconfiguration and cost-out efforts. Then I'll close with our expectations for the fourth quarter and capital allocation for the full year. Moving to our results. Starting with our consolidated performance. In the third quarter, revenue was $21.4 billion and operating profit was $2.1 billion. Consolidated operating margin was 10%. Diluted earnings per share were $1.74. $0.30 of EPS came from a sale-leaseback transaction involving 5 properties completed in the third quarter, which resulted in a $330 million pretax gain on sale. This transaction was part of a broader strategy aimed at freeing up capital for reinvestment as we reconfigure our network. The leases are structured to maintain operational continuity for our business. And as a result, we have not adjusted this gain on sale in our non-GAAP presentation. Now moving to our segment performance, starting with U.S. Domestic. In the third quarter, we continued to improve the mix of volume in our network and our disciplined approach to revenue quality meaningfully offset the impact lower volume had on revenue. Additionally, the team did an excellent job managing expense throughout the quarter, resulting in an improvement in U.S. domestic operating margin. For the quarter, total U.S. average daily volume was down 12.3%, primarily due to the glide down of Amazon volume and our focus on improving revenue quality. Total air average daily volume was down 13.9%, mainly due to Amazon. Health care and high-tech customers both showed growth in air average daily volume in the third quarter, which was the third consecutive quarter of positive momentum from these key industries. Ground average daily volume was down 12% year-over-year. Within Ground, Ground Saver ADV declined 32.7% due primarily to the actions we've taken with Amazon and to trim lower-yielding e-commerce volume. As a result, our more premium ground commercial and residential services made up over 84% of our total ground average daily volume in the third quarter. That's the highest percentage we've seen in more than 5 years. Now moving to customer mix. SMB average daily volume was down 2.2% versus last year. However, we continue to see bright spots in SMB health care and automotive as well as growth from DAP, our digital access program. In the third quarter, SMBs made up 32.8% of total U.S. volume, which is about a 340 basis point improvement compared to last year. In the third quarter, B2B average daily volume finished down 4.8% compared to last year due to softness in retail and in manufacturing activity. B2B represented 45.2% of our U.S. volume, which was a 350 basis point improvement versus last year. B2C average daily volume was down 17.6% year-over-year. Moving to revenue. For the third quarter, U.S. domestic generated revenue of $14.2 billion, which was down just 2.6% year-over-year against an ADV decline of 12.3%. Our revenue performance reflects strong growth in revenue per piece and air cargo. In the third quarter, revenue per piece increased 9.8% year-over-year, which was the strongest revenue per piece growth rate we've seen in 3 years. Breaking down the components of the 9.8% revenue per piece improvement, base rates and package characteristics increased the revenue per piece growth rate by 350 basis points. Customer and product mix improvements increased the revenue per piece growth rate by 400 basis points. The remaining 230 basis point increase was from fuel. Turning to costs. In the third quarter, total expense in U.S. domestic was down 2.7%. The decline in total expense was primarily driven by our actions to reduce hours and operational positions with volume. Looking at cost per piece, we were up against a tough comparison from last year. This comparison, together with the costs associated with delivering Ground Saver volume and the contractual union wage increase that went into effect on August 1, resulted in a cost per piece increase of 10.4%. The U.S. Domestic segment delivered $905 million in operating profit and operating margin was 6.4%. Moving to our International segment. Through ongoing shifts in trade patterns spurred by changes in U.S. trade policy, we are continuing to operate our global network with agility to serve our customers. As a result, in the third quarter, International delivered its fourth consecutive quarter of growth in average daily volume and revenue. In the third quarter, total international ADV increased 4.8%, led by Europe and the Americas regions. International domestic average daily volume increased 3.6% compared to last year, led by Canada. On the export side, average daily volume increased 5.9% year-over-year, driven by the agility of our network to adjust to changing trade lanes and led by strength between European countries. As the third quarter played out, we saw a decline in U.S. imports, led by an ADV decline on the China to U.S. lane of 27.1%. Turning to revenue. In the third quarter, international revenue was $4.7 billion, up 5.9% from last year. Operating profit in the International segment was $691 million, down $101 million year-over-year, reflecting pressures from trade lane shifts, product trade down and lower demand-related surcharges. International operating margin in the third quarter was 14.8%. Moving to Supply Chain Solutions. In the third quarter, revenue was $2.5 billion, lower than last year by $715 million, of which $465 million was due to our divestiture of Coyote in the third quarter of 2024. Within Supply Chain Solutions, demand softness in Air and Ocean Forwarding resulted in lower market rates, which drove a decline in revenue year-over-year. Logistics revenue was down year-over-year, driven by a decline in Mail Innovation. This was partially offset by revenue growth in Healthcare Logistics. And UPS Digital, which includes Roadie and Happy Returns, grew revenue by 9.5% year-over-year. In the third quarter, Supply Chain Solutions generated operating profit of $536 million. Operating margin was 21.3%. Our results in Supply Chain Solutions this quarter include the impact of the sale-leaseback transaction, which generated the $330 million one-time gain that I mentioned earlier. Turning to cash and shareowner returns. Year-to-date, we generated $5.1 billion in cash from operations and free cash flow of $2.7 billion. We finished the quarter with strong liquidity and no outstanding commercial paper. And so far this year, UPS has paid $4 billion in dividends. Now let me provide an update on our cost out and network reconfiguration efforts. In conjunction with our actions to significantly reduce the amount of Amazon volume in our network, we are executing the largest network reconfiguration in our history and will remove approximately $3.5 billion in related costs this year. We've made a lot of progress since our last earnings call. Let me walk you through the details. Total Amazon volume was down 21.2% compared to the third quarter of last year. We achieved our reduction target in the portions of the Amazon volume we are exiting, and we grew the portions of Amazon volume that we are continuing to serve. Now let's look at the savings we've generated so far this year. As a reminder, we are tracking our savings within 3 cost buckets. They are variable costs, which primarily captures operational hours, semi-variable costs, which reflects operational positions and fixed costs, which includes closing buildings and reducing expense from support functions through our efficiency reimagined initiative. Looking at variable costs. Total operational hours continue to move down with volume. So far this year, we are down more than 16 million hours, and we are on track to reach our reduction target of approximately 25 million hours for the year. Moving to semi-variable costs. Attrition and operational positions accelerated each month during the quarter, and we finished down nearly 34,000 positions year-over-year, which includes a reduction from our driver voluntary separation program. Nearly 1/3 of the reductions occurred in September. In our fixed cost bucket, year-to-date, we have completed the closure of 195 operations, including closing 93 buildings. As we are closing buildings, we are also investing through our Network of the Future efforts. And as Carol mentioned, we've deployed additional automation in 35 facilities. And while we expect to be busy processing volume during peak, we also plan to deploy automation projects in 7 additional buildings in December. Lastly, savings from our efficiency reimagined initiatives continued to accelerate in the third quarter. Pulling it all together, we are making meaningful progress executing our strategy. So far this year, we've reduced expense by $2.2 billion, and we're on track to achieve our 2025 expense reduction target of approximately $3.5 billion. Now moving to our outlook. At the consolidated level, we expect fourth quarter revenue of approximately $24 billion and an operating margin of approximately 11% to 11.5%. Looking at the segments in the fourth quarter. Starting with U.S. Domestic, we expect revenue to be around $16.2 billion in the fourth quarter, driven by the continued volume reduction with Amazon and strong revenue per piece growth. And we expect an operating margin of approximately 9.5% to 10%. In terms of peak, in the U.S., we expect heavier volume earlier in the peak period, and we have 1 additional delivery day compared to last year, which gives us more flexibility. The network reconfiguration and additional automation we deployed through Network of the Future set us up to deliver a more efficient peak and another year of industry-leading service for our customers. In short, we're ready for peak. Turning to International. We expect the dynamic environment we've experienced throughout the year will continue. With this in mind, we expect fourth quarter revenue to be approximately $5 billion, and we expect an operating margin of between 17% and 18%. In Supply Chain Solutions, we expect revenue in the fourth quarter of around $2.7 billion and an operating margin of approximately 9%. Looking at capital allocation for the full year, we expect capital expenditures to be approximately $3.5 billion. We are planning to pay out around $5.5 billion in dividends, subject to Board approval, and we have completed the targeted share repurchase of about $1 billion of our shares. Lastly, we expect the tax rate to be approximately 23.75% for the full year 2025. Before I close, let me comment on our financial condition. UPS is rock solid strong, and we have plenty of liquidity to continue executing our strategy and return value to our shareowners. And following the completion of our acquisition of Andlauer, we expect to end the year with around $5 billion in cash. So with that, operator, please open the lines for questions. Operator: [Operator Instructions] Your first question is coming from Chris Wetherbee from Wells Fargo. Christian Wetherbee: Maybe we can start on domestic margins. So obviously, some improvement, but we had a lot of RPP growth in the quarter. So I guess as we think forward, I know there's a mix of cost as well as yield management that we're going to see. And I know you've given us some ranges for the fourth quarter. But generally speaking, where you think you are in the glide down, can you give us a little sense of maybe what we can start to think about for 2026 from a domestic margin perspective? Brian Dykes: Thanks, Chris. I appreciate it. And look, I think we're very pleased with both the revenue quality we saw in the third quarter as well as the progress that we're making with the Amazon glide down, and we laid out the activity metrics around that. On 2026, look, we'll update 2026 on the January call when we report fourth quarter. But there are a few things that I think are worth kind of keeping in mind. Remember, we're 3 quarters into a 6-quarter drawdown. So as we lap the year, we kind of come through the first 3 quarters of this year, we will see a sequential increase in Amazon volume as we go into peak because everybody peaks. And then we'll continue to draw down as we go through the first half of next year and the cost takeout will continue as we go through that. The second is, as Carol mentioned, we're taking strategic actions around Ground Saver that will start to take hold next year, and we'll see economic benefit in the back half of next year for that as well. We do anticipate closing Andlauer in November of this year, and we'll update you on the financials as we wrap that into next year, but that's an exciting acquisition to accelerate our health care strategy. And look, we're continuing to focus on growing in the parts of the market that will help us continue to drive revenue per piece growth as well as higher margins as we go into the back half of '26 and complete the Amazon glide down. Operator: Our next question comes from the line of David Vernon from Bernstein. David Vernon: So Brian, can you talk a little bit about the exit rate on cost per piece coming out of the third quarter? It seems like this was kind of an inflection quarter where with the buyout and everything else, you probably came out a little bit better than you started and whether we should expect that to accelerate into 4Q? And then it sounds like you guys are saying you found a way to work with the USPS on Final Mile for some of the residential lower rate e-commerce type of stuff. Can you kind of be more specific in terms of what that looks like and how that changes cost per piece? Brian Dykes: Sure. Well, first, let me talk about exit rate on Q3 cost per piece, and I'll let Carol comment on the USPS. And there's a couple of things on cost per piece. Look, the cost per piece is on a tough comp year-over-year because this is probably the largest year-over-year comp related to the e-commerce volume that we're exiting. So it has a big mix impact both on rev per piece and cost per piece. As we've gone through the quarter, though, we are seeing some of the best production metrics that we've seen certainly on our inside, I think it's in 12 years, on a preload in 20 years. The investments that we're making in automation that we're deploying through Network of the Future are certainly showing benefits, and we're seeing that come through the cost per piece. The other thing that I'll point out, and I'm sure you saw it in the non-GAAP reconciliation is that we executed on our driver voluntary severance program in the quarter. About 90% of those drivers exited on August 31. And so those savings will start to materialize in the fourth quarter as well. Carol, do you want to comment on Ground Saver? Carol Tomé: I'm happy to. And David, nice to hear from you. Just maybe going back on the driver piece. The total cost of the buyout is $175 million. the payback -- annual payback is $179 million. So the payback is less than 1 year. So that's a good thing for our cost per piece, isn't it? Yes. Now let's talk about the USPS. As you know, David, the Postal Service has a new Postmaster General. And when Mr. Steiner joined, immediately started having a conversation with him about how could we create a win-win-win relationship, a win for the postal system, a win for UPS and a win for our customers. And the way to do that is to leverage what they're best at, which is final mile and what we're best at is middle mile. And so I'm happy to tell you that we've reached preliminary agreement on what that looks like from a volume and rates perspective. We're working through the details and look at those details all ironed out over the next weeks and months. And by the end of the fourth quarter, we'll be able to give you more details. But I'm very, very pleased with where we are today and this new -- renewed relationship with USPS. David Vernon: Is there any way to kind of talk a little bit more about timing and how that kind of affects the domestic margin for 2026? Or is it still too early? Carol Tomé: It's too early. We don't expect any benefit in the fourth quarter. It will start, we hope, knock on wood, we can knock it all down by the beginning of the year. And it's not just for our Ground Saver product, which is in our U.S. small package business, but also for Mail Innovations. And we're excited about what that's going to mean to our Mail Innovations margin looking forward. So at the end of the year, we'll give you more color. Operator: Our next question comes from the line of Todd Wadewitz from UBS. Thomas Wadewitz: So I wanted to ask, let's see, I mean, I think on your comments in 2Q, you talked about concern on SMB stepping down. I think this was the impact of the elimination of the de minimis exemption that, that would have a meaningful impact and then it became a global elimination, not just China and Hong Kong. So can you give us a bit more perspective on how SMB played out versus what seemed to be a lot of concern in 2Q? And then also, when we look at September, how is the impact different in the international business when it became a global elimination versus China, Hong Kong? So yes, on those 2 things. Carol Tomé: Sure. If you look at our SMB results for the quarter, we were down slightly year-on-year. But as we look at our performance relative to the market, we took share both in volume and value. So we were pleased with our performance relative to the market and the decline year-on-year wasn't as dramatic as we thought it could be. We are watching the SMBs very closely, though, Todd. Some are doing just fine and managing through the changes in trade policy and some of them candidly are challenged. So we've got a close attention to these to these customers. And let me just give you some data, which is amazing how many shippers are looking for help. In the third quarter, we had 12 trade webinars with more than 8,300 participants. And we've reached out and had conversations with 61,000 customers trying to help them navigate through these changes in trade policy. It's complicated. It's super complicated. And to your point about the elimination of the de minimis exemption. Well, it certainly played some havoc on some of these shippers, and I'll just make that real for you, too, just some data. Back in March, we had 13,000 packages that came into the United States every day that required some sort of a dutiable clearance. And we handled that about 21% was handled with technology, so cleared without any manual intervention. If you fast forward to September, when now it's a global elimination, 112,000 packages a day required some sort of dutiable clearance. And thank goodness, we invested in technology. So we were able to clear 90% of those packages without any manual intervention, which is great, but 10% needed some help. And where they needed some help, they really needed some help because when the global exemption went into place, you might have seen that some mail systems like Royal Mail or Deutsche Post really stopped shipping into the United States, which meant shippers, predominantly consumers who used to use those mail carriers as a way to get packages in the United States came into carriers like UPS or FedEx or others. And many of those shippers, consumer to consumer were naive, and you wouldn't expect them to understand the intricacies of trade policies and they shipped in packages that didn't have the information necessary to clear. And so Kate, you might want to talk about how we worked with those shippers because it was a lot of hard work and effort to work with those shippers. Yes, sure was. And so to help especially these C2C consumer-to-consumer shippers, multiple calls with them, helping -- trying to get them to understand the missing information that they are required to provide. And a good portion was on food. And if you think about a family shipping food to family members, and that tended to be the pinch in that 3-week, I'll call it, initial surge from the international post. The post then got the exception and that food and low -- very low-end value of goods consumer to consumer moved back to the post. And so since that point, we have been clearing now up to 97% within the last 1.5 weeks same-day clearance on our goods. So helping our very valued shippers ensure that they meet the requirements of the U.S. government. Brian Dykes: And Todd, if I could just maybe dimensionalize the impact of that. In the third quarter, that had about a $60 million impact for us. And we estimate in the fourth quarter, the direct impact will be $75 million to $100 million. A lot of this is demand related, right, because the technology allows us to scale our brokerage operations, but there is a demand impact. Carol Tomé: And let's be clear on what that cost is. It's really not the cost of clearing. It's the change in trade lanes because as you know, our most profitable trade lane is that between China and the United States. And we saw an over 20% decline in that in the third quarter and expect that will continue into the fourth quarter. Now there's a big meeting coming up this week. So maybe we'll have a little bit more certainty about trade between our 2 countries, but we're right now forecasting a decline in those trade lanes in the fourth quarter. Thomas Wadewitz: And -- just quick circling back on SMB. Do you think you're at stability now, like now we shouldn't have as much concern about a drop-off going forward as maybe you had in 2Q? Carol Tomé: So as we look at the peak forecast, that's the best way to tell you where we are. As we look at our -- as you know, 100 of our customers, most of them are enterprise customers make up 80% of our peak surge. And what those large customers have told us that they expect a good peak that the surge should be about 60% from where their volume is today. That's the same surge that we've seen over the past 3 years. So they've got the inventory, they're ready for peak. On the SMB side, they're a little short of where they were a year ago. So if you think about effectiveness being 100% effective, our enterprise customers are at the 100% mark. The SMB customers that give us forecast are at the 99% mark. So has it stabilized a bit, but it's still something, I think, to watch out for, particularly as we head into next year because next year is when you're going to feel the full brunt of some of these tariffs hitting some of these SMBs. Now -- we're working with them to try to help them think about how do they change where they source their goods, how do they think about the mode of transportation that you saw and so forth. So we're working with them, but I think it's prudent to be a bit cautious on the outlook here because it's still early days. Operator: Our next question comes from the line of Ari Rosa from Citigroup. Ariel Rosa: So it was really nice to see the step-up in free cash flow. Carol or Brian, I was hoping you could talk about how you think about kind of the sustainable level of free cash flow after some of these cost-cutting initiatives occur and kind of as you work through some of these shifts in revenue mix? Brian Dykes: Yes. Great. Thanks, Ari. It's great to hear from you. Yes, look, we saw the Q3 free cash flow bounce back. There were some timing issues in our Q2 versus Q3 that have kind of worked themselves out, and we expect Q4 to look similar to Q3. Now on your question, though, I think you're exactly right. This is why we're leaning into the parts of the market that we're leaning into is because you'll see that our penetration in B2B was up 350 basis points. Our penetration in SMB was up 340 basis points. We're seeing growth in the areas of the markets where we want to grow. That allows us to drive better returns and better margins. And with the cost takeout and the network efficiency that we're creating through our automation investments, we do expect the business to generate significantly more free cash flow over time. Clearly, we've got a dividend of around $5.4 billion to $5.5 billion, and we expect it to be above that in the very near future. Operator: Our next question comes from the line of Jonathan Chaplin from Evercore ISI. Jonathan Chappell: Just kind of a 2-parter. I'm sorry to do 2pers here. But Amazon glide down, I said you're kind of running on track here. You said down 21%. I thought we're supposed to be around 30% at this point. So maybe just help us understand where you are as we think about exit rate in 4Q? And then secondly, it really looks like you're on track with the cost takeout associated with that volume glide down. Can you speak to the cost alignment with the rest of the business ex Amazon? Just given all these changes that you've spoken about already with Rest of World de minimis, maybe some of the SMBs being a little bit lighter in the peak, do you feel like you're on track there as well? Or is there a little bit more catch-up to do on ex-Amazon cost alignment? Carol Tomé: Well, on the Amazon glide down, we're winding down the volume that we don't want, and we're right on our plan. But we're growing the volume that we do want. And so that's why the year-over-year decline wasn't as much as we had anticipated at the end of the second quarter. So we're really pleased with that, growing the volume that we want, like returns is good for our business. On the question about cost out, I would say excellent job managing through the Amazon glide down, but we're also driving a heck of a good business. And Abbott, you might want to talk about your production numbers, the best that we've seen in 20 years, 10 years, talk a little bit about that. Unknown Executive: Yes, sure. And I think it's really exciting as we look at our network. We're not looking at everything exclusively or uniquely, but as one big network. And of course, we keep finding opportunities for us to bring costs down. So if you think about the buildings we've closed, the operations we've closed, also the 34,000 positions that we've eliminated, that's part and parcel, of course, driven by some Amazon, but also our productivity. So if you think about production across the network, Brian mentioned that our inside operations are demonstrating the best process rates in 12 years. Our hub process rates in 20 years, and then we can go down the list with safety in the decade and other items related to cost. I guess what should give everybody comfort is what we've displayed in the first 9 months, we've also started the stage next year in 2026. So this continues, and we will hit our Amazon targets and our drawdown in terms of cost and productivity just gets enhanced as we first, introduce more NOF projects, but also all the peripheral buildings that we had supporting those upgrades will start to fall off as well as we start to implement NOF. A great example of that is Mesquite, 48,000 hub per hour for us, just opened up 2 weeks ago and prior to that, a similar hub in Texas in SweetWater. So really excited about those additions to the network and of course, more to come. Brian Dykes: And Jonathan, just to put a number to that because I think the third quarter really shows a testament. We started the year saying that we were going to focus on getting the right volume in the network and drive efficiency and volume was down 12.3%, and we expanded operating margin, and we'll look to continue that trend... Operator: Our next question comes from the line of Scott Group from Wolfe Research. Scott Group: So just a follow-up on the Amazon piece. So I think when you first talked about this, it was -- it would be down -- be cut in about half by the middle of next year. Is that number changing at all, bigger or smaller? And as we think about like the next wave of Amazon volume to come out, is it any different in terms of mix, any harder or easier to manage from like a decremental standpoint? And then it's all part of like the same question. Like I know there's $3.5 billion of cost reduction this year. What's the right number to think about for next year in terms of cost reduction? Brian Dykes: Sure, Scott. Thank you, and good to speak to you. So on the Amazon, look, think about it as there's a portion of the Amazon volume that we're exiting that they're going to in-source that that's the outbound. That's a pretty consistent glide. It's all scheduled, right? So this is where e-commerce gets very physical, right? We have to hand over a building, they catch a building. There has to be tax cars and drivers and sorters that all transition in kind of the same week. Lane by lane. Lane by lane, building by building, city by city. So that's all scheduled out. It's on track. We're working very collaboratively with them. And I think it shows in our service numbers, both for ourselves and for them that this has been a great relationship. Separate to that, right, we -- Amazon is still going to be a large customer, right? And there's a lot of places where we can add value to their supply chain like returns, their inbound, the small business sellers that sell on the platform. That part of the business is growing. But when you think about the decrementals going into next year, it's the same type of volume. It's just over a period of time. On the cost takeout, we'll reset that in January as we roll forward. But Nando's team has been doing a great job that as these buildings transition, we move to work, we consolidate, we're investing in NOF, and we'll drive a similar level of efficiency next year. Carol Tomé: And the same cost buckets, right? It will still be the variable, the semi-variable and the fixed cost. You should expect that to continue into next year. And we'll dimensionalize that at the end of the quarter -- end of the fourth quarter. Operator: Our next question comes from the line of Jordan Alliger from Goldman Sachs. Jordan Alliger: Just wanted to come back to international. Maybe some additional thoughts around your international trade flow analysis. Now that the rest of de minimis has gone, when we sort of lap Liberation Day next year, could we get back to more normal sort of trajectories or patterns? Or is it permanent shifts? And then just along with that, what does it take to keep international margin more sustainably in that high-teen level you guys had been used to? And that's with an eye towards 2026 as well. Brian Dykes: Sure. Thanks, Jordan, and good to hear from you. On international trade flows, look, as Carol mentioned, as we went through the third quarter and particularly into September with de minimis, we did see things slow down. Now look, there's still a lot of flux going on in the world where things are moving around. What we are seeing is a lot of growth outside the U.S., right? So trade is continuing to flow, but it's not touching the U.S. as much as it was before. As we look into next year and we think about the margin, look, there will be some permanent change until things -- until the system settles and the new equilibrium on trade flows settles. I do think that this mid- to high teens margin for international is absolutely the target, but we need kind of trade flows to settle in order to get there. Carol Tomé: Well, what Kate and her team have done is really operationalize the change in trade flows. In the third quarter alone, you did 100 different operational changes to make sure that we could meet the needs of our customers as trade trade flows are changing. And we're investing ahead of some of this. You might talk, Kate, about what you're doing in Asia. We've mentioned this before, but just remind everyone what we're doing in Hong Kong and in the Philippines. Kathleen Gutmann: Yes, absolutely. And so to unlock that growth, we're a global network with a global portfolio, and we're seeing the return on the investments we made in Asia, expanding our service, fastening our time in transit. So if you look at, say, the top 20 export lanes, non-U.S., 16 of them are growing and growing very nicely. A lot of them are Asia to either Asia, Asia or Asia to Europe and reverse. So that's really the expansion. Customers have needs. They are shifting trade. And within there, I will tell you, we see the small and medium-sized businesses in international growing 9% in many regions of the world. So that also will help us with momentum for next year. Operator: Your next question is coming from the line of Bruce Chan from Stifel. J. Bruce Chan: Nice to see the results in the guidance here. And maybe just on that last point, I'm guessing that since the books closed and since you built your guidance in fourth quarter budget, we've got yet another variable with the government shutdown. Wondering if that is contemplated in the guidance? And if not, is there any downside to the range in terms of demand or service or operations, especially with regard to ATC and payrolls and consumption? Carol Tomé: Yes. So we don't have a real crystal ball here. We're watching this closely, obviously, particularly as it relates to the airlines. So far, we've seen no disruption of service, but we're watching this very closely because we all are reading the stories about what's happening with people not showing up to work. From a volume perspective in the United States, here we are at the end of October, and we're right on where we thought we would be, if not a little bit better. So we haven't factored in any significant impact to the peak season because we rely on what our customers are telling us and our customers are telling us those from peak that they're going to have a good peak. So we haven't factored any of that in. But of course, it's smart to always think about what could happen. Hopefully, there will be a resolution soon as we should hope for. Operator: Our next question is coming from Ken Hoexter from Bank of America. Ken Hoexter: So it seems like your 300 basis points in improvement in domestic is maybe a bit more -- sorry, sequential improvement is a bit more than normal in terms of your target of getting to 9.5% to 10%. Just trying to understand your view on maybe the potential for accelerating that cost-cutting benefits above normal trend as we not only enter fourth quarter, but your thoughts on as we go into '26. And then next -- I guess, next week, we're going to start the Supreme Court hearings on tariffs. Thoughts on -- initial thoughts on the potential impact to de minimis. Could that get reversed and we start seeing that for the rest of the world, if not China, Hong Kong Lane? Maybe any thoughts on the Supreme Court process? Brian Dykes: Sure. Well, let me talk about the sequential impact first. So Ken, if you go from Q3 to Q4, remember, as Carol said, we have been working closely with our customers, and we expect peak to be in similar shape as it has in the last 4 years, right? So we'll see about a 20% step-up in sequential ADV in the U.S., about 10% in international. Now also, there will be holiday demand surcharges that have been announced. Our take rate on those has been good. Even though there's one incremental day in the peak season, we're still balancing demand and expect to see good take on the holiday demand surcharges. On the cost side, remember, we've been investing in deploying automation throughout the year, the Network of the Future. There's been -- there will be 42 new automation projects live by the time we start peak. And part of the function of bringing down the water level in the total U.S. network is it allows us to run more efficiently. So you need less variable capacity, fewer leased aircraft, fewer rented vehicles, fewer seasonal workers that allows you to run a much more efficient network. And we're excited. We think it's going to be one of our best service and production peaks that we've had in a long time. Carol... Carol Tomé: On the Supreme Court question, obviously, we'll be watching it very closely. But Ken, we don't -- we're not in a position to speculate on what the outcome will be. Operator: Your next question is coming from Brian Ossenbeck from JPMorgan. Brian Ossenbeck: Just one quick follow-up on -- first on the USPS. In the last quarter, Carol, you called out some density headwinds. It sounds like those were probably still present here in 3Q, and I would expect in 4Q. So if you could clarify that. And then, Brian, can you give us a little bit more color on how you think rev per piece will track into the fourth quarter and sort of exit the year? There's a lot going on with the mix dynamics, some of the product service changes, but clearly, it looks like there's still some base rate momentum and also a bit of a help from fuel. So if you can give us a little bit more thoughts on those 3 parts of that trend would be helpful. Carol Tomé: On the Ground Saver product, density is -- continues to be a challenge. We just can't seem to get more packages per stop on these residential deliveries. And this is one reason why we're so very excited about our renewed relationship with USPS. We estimate that the cost drag in the third quarter was about $100 million... Brian Dykes: Which is another cost that we overcame as we came down to drive margin expansion. And Brian, on your point on rev per piece, look, we continue to see strong base rate improvement in rev per piece. We expect the fourth quarter to be a little bit above 6%. And if you look at that with where we set out originally at the full year to be 6%, we're coming in higher than that. And so we expect that to come through both in base rate, slightly less mix improvement in the third quarter as we start to lap some of the Chinese e-commerce shipper actions that we took last year and then holiday demand -- strong holiday demand surcharge. Operator: Our next question is coming from Ravi Shanker from Morgan Stanley. Ravi Shanker: So you obviously had a lot of traction with headcount reduction in both the building side and the driver side. The union is saying that kind of you guys have committed to net job increases through the course of the contract. So how do you see that playing out in the remaining 2.5 years of the contract? And would you have to start hiring again to make up for that difference? Carol Tomé: We are in compliance with the terms of our contract. And Brian, you might want to give a little bit more color there. Brian Dykes: Sure. And Ravi, part of the terms of the contract allow us to offer full-time positions to part-time employees in order to give them the ability to go part time to full time, which look is, quite frankly, that's the best outcome from us, right? We want to create lifetime jobs and good careers with people who can earn a solid income with benefits at UPS. So the way the contract works is we offer full-time positions to part-time employees. From a net headcount standpoint, it doesn't really change things, but it's a way for us to create career pathing. It's good for the union. It's good for our people. It's good for us. It helps us have more trained workers that are committed to UPS. Carol Tomé: And sometimes there's messaging that's confusing on this point. So if you read something that's confusing, just call us, and we'll clarify it. Operator: Your next question is coming from Stephanie Moore from Jefferies. Stephanie Benjamin Moore: I wanted to touch on the add-backs, specifically in the U.S. domestic segment for the quarter. If you could just break down maybe the delta between the add-backs going from $66 million to the $302 million in the quarter, really what the components of those -- the major components of the add-backs were for the quarter? Brian Dykes: And Stephanie, just to clarify, you're talking about the non-GAAP adjustments. Stephanie Benjamin Moore: That is correct. Brian Dykes: Right. Yes. So as Carol mentioned, so we executed on our driver voluntary separation plan in the quarter. About 90% of the drivers exited on August 31. 80% of that charge is associated with the severance included in that. It be -- in the second quarter, we laid out a range of kind of $400 million to $650 million associated with the total network reconfiguration and efficiency reimagine program. We're still within that range. Carol Tomé: And I think just to make it real, real, we had $166 million of cost in the third quarter for the driver buyout against a total cost of $175 million. So we won't see that same amount in Q4. Brian Dykes: That's right. PJ Guido: And Matthew, we have time for one more question. Operator: Our final question comes from the line of Conor Cunningham from Melius Research. Conor Cunningham: So I think you said you had 195 operations that have been reduced and then 93 buildings that have been closed. I was hoping you could talk about how that may trend into 2026. Like are we expecting that to continue to ramp up? Or it seems like there's further opportunities. So if you could just talk about the opportunity just in terms of getting more efficient on the network. Carol Tomé: Sure. Well, the Amazon glide down continues. We're 3 quarters in a 6-quarter glide down. So the Amazon glide down continues, which means there will be further consolidation of buildings. At the end of the fourth quarter, we'll provide guidance for 2026 or our outlook for 2026, where we can be more specific on what that looks like. Operator: Thank you. I will now turn the floor back over to your host, Mr. PJ Guido. PJ Guido: Thank you, Matthew. This concludes our call. Thank you for joining, and have a good day.
Nadav Zafrir: Thank you, Kip, and good to see you all. So we delivered a strong third quarter marked by double-digit growth in calculated billings, driven by disciplined execution and the rising demand across all of our portfolio. And nearly a month into Q4, we remain confident in our trajectory, and we're raising our midpoint for 2025 revenue guidance, and Roei will share more on this shortly. As we discussed during our second quarter earnings call, our strategy continues to be anchored in 4 core principles that we believe define the foundation of a modern cybersecurity stack, shaped predominantly by the accelerating adoption of AI. As we continue to shape the future of cybersecurity, our strategy is guided by these 4 principles. First, securing the connectivity fabric as it evolves from a traditional infrastructure into a genetic autonomous reality. Second, our prevention first approach, which I believe is now more important than ever as attackers leverage sophisticated agentic capabilities, it's literally imperative that we dramatically improve the signal-to-noise ratio and limit our reliance on detection to a minimum. Our open platform philosophy. The open platform philosophy is not the easiest path, but it's the only viable one for achieving security resilience. Building an open collaborative ecosystem among vendors, demands communication and cooperation, sometimes even with previous competitors, yet I can tell you from the trenches of cybersecurity, it's clear to us that it's essential. And our recent acquisition of Veriti is a powerful example of how we're advancing this vision by integrating Veriti into our exposure management organizations, we've expanded integrations across endpoint firewall, cloud providers reaching over 100 deployments and delivering automated remediation based on what's the best security possible. And finally, as I emphasized before, securing AI is top priority. We are in the very first innings of the most impactful technological revolution of our lifetime. Moving from current phase of human enhancement to replacement and delegation to the next phase of crossover, where sophisticated agents are taking over and crossing the crossing lanes, it's both exhilarating, but also extremely challenging. And I think it's a race for relevance for everyone. And we must remember, and we see that at the same time, we're seeing how rapid the attackers are leveraging AI to outpace us as defenders. And this drives our mission to build a full stack AI-powered security platform. Last week, we closed the acquisition of Lakera, a Zurich-based AI native security leader with deep expertise in protecting large language models and autonomous agents. Lakera enables real-time defense against prompt injections, data leakage and model manipulation. And it gives us a secure -- a unique security-oriented model that ensures evolving defense to stay ahead of emerging AI threats. And I believe that together, we're building a comprehensive AI security platform that will enable our customers, the enterprises that we work with, to scale AI adoption securely and confidently. And what does that mean? It means securing employee usage of AI tools through observability and data loss prevention. It means protecting AI applications and agents with run time defenses. And then finally, strengthening model robustness by our continuous testing and compliance readiness. You should know that Lakera is already trusted by Fortune 500 enterprises, including some of the biggest banks and largest technology companies worldwide, and we're just getting started. As AI adoption accelerates, it exposes new threats, and we're committed to leading the journey to enable organizations to adopt AI securely. We're investing organically in research and development and we're identifying strategic acquisition opportunities that will reinforce our leadership position. Beyond that, I want to touch briefly on our latest go-to-market updates. During the quarter, we achieved Fed rep authorization for the Infinity platform for government. This positions us as a trusted partner for the most demanding federal environments. Our go-to-market organization is now fully staffed. [ Rachel Roberts ] joined us as President of Americas Sales. She brings deep enterprise sales expertise from her leadership roles at [ Cisco ] and [ Palo ] to further build and scale our sales organization. Avi Rembaum was appointed President of Technical Sales. Avi's been with us for a long time. And from here on, he will lead the efforts to drive technical excellence and strengthen consumer customer engagement. And finally, Brett Theiss joins us as Chief Marketing Officer to strengthen our brand presence, to fuel demand and position Check Point for its next chapter of market leadership. To close, before I hand over to Roei, so with over 10 months in my role as CEO at Check Point, I think that our strategic vision is taking shape. And I'm energized by the progress we've made already and where we're going in the future. And with that, I'll turn it over to Roei. Roei Golan: Right. Can you see my screen? Unknown Executive: Yes. Roei Golan: Great. So thank you, Nadav, and thank you, everyone, for joining the call. As Nadav mentioned, we had a strong quarter, driven by strong demand across our portfolio. If we are looking on our revenues, our revenue grew by 7% to $678 million exceeded by $6 million our midpoint. Our non-GAAP EPS reached $3.94 per diluted share and exceeded our guidance. It is important to note that this number includes a onetime tax benefit in connection with tax settlement we signed during the quarter that resulted in an update for our tax provision, and that had a benefit of $1.47, both our GAAP and non-GAAP EPS. Excluding the onetime benefit, our EPS exceeded the midpoint of our projection by approximately $0.02. Moving to our results. As I indicated, our revenues grew by 7%. Our deferred revenues grew by 8% to $1.887 billion. Our calculated billing totaled $672 million, reflecting a robust 20% growth year-over-year. That was driven by strong demand across our portfolio and across our geographies that all of them grew by double digit. I don't need to -- I do want to remind you that our billing effect also affected by approximately 3 points that -- from these that were slipped from previous quarter. We talked about it in our last earnings call. In addition, we had one large deal -- early renewal of that resulted in a 2% benefit earlier from Q4 that came in, in Q3 and is also the benefit of 2 points to our billings. If we're looking on our current calculated billings, so that grew by 14% to $642 million. Our remaining performance obligation grew by 9% to $2.4 billion. I'll move forward. As I said that we did see a strong demand across our portfolio. If we're looking on our services calculated billings, service calculated billings actually the calculated billing excluding our product business, and that grew 21% compared to 7% last year. And again, that's not only from certain products, that's across our portfolio, if it's the Quantum firewall, Harmony e-mail, Harmony SASE drove these great results. If we are looking on our emerging technology, so that's the ARR, we do see that it's the [ 3 ] main products that [ 3 ] companies that we acquired in the last few years, Harmony SASE, Harmony e-mail and collaboration and external risk management. All of these products grew organically 40% -- more than 40% in ARR year-over-year, and we do see them becoming more and more significant to our total business. Moving back to our global revenue distribution. So we did see double-digit growth in America, a 10% growth. That represents to the 42% of our revenues in Q3. EMEA, which represents 45% of our revenues this quarter, grew by 3%; while APAC, Asia Pacific, grew by 8% and representing today 13% of our total revenues. Moving into our P&L into operating performance. So our gross profit decreased from $563 million to $602 million, representing a gross margin of 89%, similar to last year. Our operating expenses increased by 11%. The increase was mainly as a result of our continued investment organically and also the impact of Cyberint and Veriti acquisition that were not part of Q3 last year P&L. Our non-GAAP operating income continues to be strong at $282 million, 42% operating margin. Also something that I discussed also in our last earnings call, and I want to touch base on it again in this call. The U.S. dollar got, in the last few months, I would say, since the beginning of Q3, the U.S. dollar got weakened significantly [ versus ] the Israeli shekels, given the fact that we have significant expenses in shekels that have had -- and although we are hedging a significant part of that expenses, still, we do see a negative effect for this weaker dollar on our P&L. In this quarter alone that affected our P&L by approximately 1 point to our margin, approximately, I would say, $0.06. Looking ahead, if we're already talking about next quarter. So we continue to hedge, of course, our foreign exchange currencies and our foreign currencies. And we do expect to see approximately 1 point headwind to our margin in Q4. In addition, as Nadav earlier mentioned, we closed last week, the acquisition of Lakera, leading AI native security for platform -- for agent application. This acquisition that was closed last week will result in approximately 0.5 point headwind for margin in Q4. As we look further into 2026 and as I indicated in the previous earnings call, based on the current FX rates, that can have an increase for [ NL ] expenses next in 2026 of approximately $50 million to $60 million. That's something that we discussed last quarter. And again, because the current rates are similar to what we discussed last quarter, I wanted to bring it back again here. Moving into our cash flow. Our cash flow was very strong. Operating cash flow was very strong with $241 million of operating cash flow. That included a $66 million onetime tax payment in connection with tax settlement signed during the quarter, that also I touched base about it when we talked about the EPS. Excluding this onetime tax payment, our operating cash flow grew by 23%, very strong cash flow. If we're looking on our total cash, our total cash in the end of the quarter is $2.8 billion for cash and marketable securities and deposits. Another point that we had during the -- another [ 2.3 ] I want to mention here that we had during the quarter, we talked about it also last quarter that we are building a new Check Point campus in Israel in Tel Aviv. And during the quarter, we paid approximately $160 million for the land. And that's -- we're going to see it in the invest -- in the cash flow from investments. I do have to say here that we don't expect any significant additional investments until 2027. In addition, we continue to do our buyback, and we purchased our share. We purchased approximately $325 million of shares at an average price of [ $198 ]. So to summarize, strong quarter, avenues and EPS exceeded our projection, accelerated growth across our portfolio, driven by 20% growth in calculated billings, driven 20% growth in calculated billing and another strong operating cash flow and profitability -- profitable quarter. Moving to the business outlook for Q4 before we move to the Q&A. So if we're looking on Q4, so we'll start with the Q4 and then touch base on the full year. So Q4, our range is between $724 million to $764 million, which represents 6% in the midpoint. The non-GAAP EPS is between $2.70 to $2.80. GAAP EPS is expected to be $0.60 less. If we're looking on the annual guidance. So first, I'll remind you that the -- in the middle column, you see the original guidance we provided in the middle of the year. Our midpoint -- or the updated midpoint of the revenue guidance will be $50 million -- is going to be $15 million above the original midpoint. So it's -- the range is between [ 2.705 and 2.745 ]. Midpoint of 2.725, 6% growth year-over-year. Our non-GAAP EPS is expected to be between $11.22 to $11.32, and the GAAP EPS is expected to be approximately $2.29. Again, the EPS also includes the tax benefit that I discussed. And 2 things -- 2 items that I want to address here about revenues and EPS. Q4 as we -- it's like -- which is more typical for Q4, it's a very heavy back-end loaded quarter that also includes heavy hardware and heavy hardware projects. We see also in our final today, significant refresh project that's supposed to come in, in Q4. And because it's more heavy, so again, there is more -- we are providing the rent. There is the -- the range is mainly for the [indiscernible] portion that again, we do expect to see more refresh projects, but because the hardware is more significant in Q4, that's something that we need to take into account in the guidance. And it's for the EPS, I mentioned it when I discussed the P&L. The EPS in Q4 will be affected by 2 main items. One is the FX that we have approximately $0.07 to $0.08 effect based on the current rates in Q4, the weaker dollar that will affect our P&L and Lakera that will have approximately between $0.04 to $0.05 effect on Q4 EPS. That's it, and I'll turn in to Kip to manage the Q&A. Kip Meintzer: All right. Just give us a brief moment while we get the speaker situated. Our first up is going to be Brian Essex from JPMorgan, followed by [ Amelia Colpa ] from Patrick Colville and position #2. Brian Essex: Maybe I'll start with Roei. On that last point that you just talked about in terms of guidance, noting that Q4 tends to be a heavier hardware quarter. Could you talk about your underlying assumptions for subscription and recurring revenue in your guide and how much visibility you have? Would love to just get the thoughts around the sensitivity versus hardware in Q4. Roei Golan: So we expect to be -- Here, I can give more insight on that. So we are expecting to have, of course, a double-digit growth in subscription with slight improvement into Q3. I remind you that in Q4 -- last Q4, we have already in the comparable Cyberint that the first quarter this year, the Cyberint is included. But still, we do expect to see acceleration of our subscription revenues from what we did have this quarter and support similar rates -- gross rates for what you've seen in the third quarter. As for the appliances, we do expect to see growth year-over-year more around the midpoint and mid-single digit. Kip Meintzer: All right. Next up is Patrick Colville. Hey, Patrick. Patrick Edwin Colville: I'll bow down, kiss the ring. King Kip, King Nadav, and King Roei, congratulations. 20% billings growth is -- I've covered Check Point a long time and it's usually impressive. So good to see that. The question we're getting already is what is the sustainability of that growth? I mean, so you talked about there were a few one-offs pushed from 2Q pull for 4Q. But as we think about 2026, is this a new chapter for Check Point and under Nadav's leadership. And are there any puts and takes as we think -- just on models looking out a year out? Roei Golan: Nadav, you start. Nadav Zafrir: Sure, I can start. First of all, thank you, Patrick. It's -- for your kind words. I think it is a new trajectory. Yes, Q3 was a very strong quarter. And I think it -- and some of it, as you said, has some pullovers and pull-ins. But generally speaking, it's a strong quarter. And I believe that when we give our guidance for 2026, you'll see that we believe a trajectory of growth is in the cards for us. Having said that, you know us already, we're going to do this prudently and we're going to make sure that we make the investments at the right places at the right time. So I think it's a journey. But I do think that we're seeing the beginning of the fruits of this journey. Kip Meintzer: All right. Next up is Joseph Gallo followed by Tal Liani. Joseph Gallo: Nice job on the results. On the go-to-market leadership changes announced, is there a change in strategy? And should we factor that into 4Q billings? Maybe just give us some commentary on how we should think about 4Q billings? And then where are you on a quota carrying rep basis? And how should we think about that growth going forward? Nadav Zafrir: Yes. Thank you for that, Joseph. So the strategy is -- the new strategy with the new leadership is actually going to take effect in Q1 of 2026. Q4, Avi Rembaum is still going to lead the Americas, and we're keeping ahead a full steam for all cylinders ahead. We are going to make changes as we go into 2026. And we'll announce some of them when we meet again and speak about guidance for 2026. I will say that we are going to be ultra focused on making sure that we go back -- not go back, but continue winning, upsell in large enterprise with our current existing customer base, but also with our new products road map, with our new capabilities, go and acquire new enterprise customers across the world with a focus in the Americas. Kip Meintzer: All right. Next up is Tal Liani followed by Adam Tindle. Tal Liani: How long does it take for billing growth to translate to revenue growth? And then where would it be recorded? Meaning when I look at your revenues, product revenues, subscription and services, it's all very predictable, meaning the only swing factor is maybe products, but very predictable. So as this increase in billings translates into revenue growth, where would you see it? Roei Golan: So -- so I'll touch base on that. I'll take it. The billing, of course, it's allocated between, as you said, services, I would combine support and subscription services and product. I think on the services side, that grew this quarter, the billing grew by 21%. That's going to be -- you're going to see it in the revenues in the next 4 quarters, most of it because most of these billings came in the last month of the quarter. And every quarter, it's back end loaded quarters. So you're going to see the effect in the next 4 quarters. I do have to say that we want to show sustainable growth of billing -- of services billing that we -- that if we're going to make sustainable billing grow -- I mean, similar growth as we've seen in this quarter. So that in the end, you'll see it pretty -- I mean, you'll see it also in our revenues. On the product side, if you're -- most of the billing is coming together with the revenues. So -- because it's recognized immediately and we are billing the customer when we are delivering the product. So it's easier. So you see it usually immediately on the services, as I said, it takes more time. Kip Meintzer: Next up is Adam Tindle, followed by Rob Owens. Adam Tindle: All right. Nadav, congrats, obviously, 20% calculated billings growth. I was scrolling through my model. I don't think I've seen a number like that in the past decade, at least. You talked about at the Analyst Day earlier this year, SASE being a very critical growth area for the company. I wonder as you kind of reflect on the growth that you're seeing right now, if you could talk about the contribution from SASE, the upcoming road map that you have for that product area. And on the back of this, do you think we're at a point in time where it makes sense to step on the gas for investment for Check Point from here and maybe any parameters on what that would do to margin, if Roei wants to weigh in. Nadav Zafrir: Yes. Thank you, Adam. So I'll start with SASE. We are seeing a meaningful ARR growth in SASE, as Roei said, over 40% in Q3 of ARR growth. SASE for us is not a stand-alone. It's a part of our the connectivity fabric and hybrid mesh, and that's one of the reasons this is such a critical factor for us. I also think that as our clients, as our customers start adopting AI, our SASE hybrid approach, the fact that we are not only cloud but also on device gives us another parameter or another, I would say, advantage. I will say that we've made substantial investments, as I've said before, in SASE, in terms of hiring new talent, and we're talking -- this is not in the dozens, this is in the hundreds because this is a must-win product for us. And we are seeing success as we go into 2026. The good news is that we can upscale and go in and start deploying in larger and larger enterprise as we go into 2026. So that's on the SASE side. Optimism, but to be completely transparent, it's never good enough. We need to move faster. We need to add features. We need to grow the larger enterprise. We need to integrate this into a hybrid mesh connectivity fabric and keep on moving. So that's on SASE. Investment, generally speaking, the answer is yes, but we need to do it prudently. So we're investing in SASE. But we're also investing in our newly formed Workspace. We've had great success with e-mail. Now we're bringing the other products so that we can secure our customers' employee base wherever they are and whatever they are. So that's endpoint mobile browser. The biggest investment that you are going to see from us is investing in the future, and that's building the full stack AI security platform. Lakera is just one example. But we're literally going after the best talent. We are -- some of these are building products, some of these individuals are just looking to understand what the attackers are going to do as they increase Phase 2, Phase 3 and Phase 4, so that's going to be an investment in our future, and we really need to make investments across the board. And we've spoken about this, and I'll let Roei chime in as well. We are doing this calculation of profitability versus growth and always looking at the 2 and trying to make the right calls prudently so that we can get to a sustainable growth without sacrificing too much of our margins. Roei Golan: And I think we're going to talk more about it, Adam, about 2026 when we announce Q4 numbers probably around in February, and we can have more color about 2026 gross margins. Kip Meintzer: All right. Next up is Rob Owens, followed by Keith Bachman. Robbie Owens: Always a pleasure to be behind Adam. So Nadav, maybe you could just expand on some of your comments around the AI security component. I realized -- you laid out kind of the 3 different components of where your strategy is, but how much do you need to fill in from an M&A perspective? And I realize that it's changing rapidly. But at this point, where is Check Point just in terms of having the coverage that you want? And how much more M&A do you think will be in the next 12 to 18 months? Nadav Zafrir: Yes. Thanks, Rob. My favorite topic. I look at this from 2 different perspectives that are outside of Check Point and where Check Point's role is. So outside of Check Point, it's the 4 phases of adoption. I still need to sort of -- I still haven't seen a meeting with the C level, whether it's the Board C-suite, CIO, Chief Data Officer, where this is not front and center of their strategy. We're all there. We're there as people. We're there as organizations. We understand that we either start advancing in the journey or we become obsolete. And it's moving from enhancement where -- which is already where we are right now, right? So we're all -- we're better performers because of AI. Most of the organizations already have replacement. So they already have agents that are replacing humans in different lanes, but they're in their own lanes. And the first organizations, the more sophisticated ones are starting to play around with crossover agents that are now making crossover decisions and getting access to different databases. That opens a whole new plethora of challenges, changing the idea of what it means to protect the network. Not only because there's more to attack, but also because on the other side, we need to understand that attackers are usually one phase ahead. So if we are in the first and second phase, they're already experimenting with the third phase. So that's how we look at the outside world. And when we look at our customers, we want to be their partner to be able to quickly adopt AI when we are doing the security part for them. So on the level of the users, I believe we already have the best security. On the level of runtime security for the second phase and approaching the third phase, I think that Lakera is unique. And with Lakera, I think we have the full stack of what's needed for today. However, we need to think about Phase 3 and 4, and that's where some of it will be organically. But to your question, Rob, some of it will be inorganically. And so we're looking at acquisition targets as we speak. I literally just had a meeting before this call with our M&A team, they're looking at multiple companies as we speak. Nothing is imminent right now, but there will be more. Kip Meintzer: All right. Next up is Keith Bachman followed by the purple man, John DiFucci. Keith Bachman: I appreciate going before DiFucci. I wanted to, Nadav, for you, is there anything different or changing on Harmony e-mail in terms of the competitive dynamics, specifically? And I just wanted to understand a little bit how that pipe is building. And the spirit of the question is driven by how should we be thinking about Harmony e-mail potential growth in CY '26 versus CY '25? Is there a deceleration, you think, even driven by just the base or scale, if you will. And then Roei, just if I could sneak one into, you mentioned that FX would be $50 million to $60 million, I think, next year, headwind. Not trying to jump ahead of your guidance, but just what you've done so far in M&A, if you could just give us some context about what that would be to CY '26 margins just the level set for those 2? And I know you've talked about some other investments you might want to do as well. But just wanted to -- on the knowns that you have today between FX and M&A that will impact margins. Nadav Zafrir: So I'll start with e-mail. So no, we don't see a deceleration. In fact, we're hoping for an acceleration, and we'll speak about it in our guidance. And the reason is very simple. I truly believe that we have the best product in the market. And although e-mail has been around as long as the Internet has been around or as long as cyber has been around, because attackers are already at Phase 2, e-mail attacks are becoming much more sophisticated, and we're all seeing that. I mean we all have this conversation. Did you get my e-mail? No, I didn't get your e-mail. Why didn't you get my e-mail? Well, because somebody block your e-mail. Why did they block your e-mail? Because they are becoming more and more sophisticated. And so what we've built around our e-mail is an AI capability, which I think is superior to what's out there. So this is a replacement business, right? We're going out there and we're replacing incumbents all the time. And I think that in terms of TAM, we're still relatively small, so I don't see a deceleration. Beyond that, as you know, we've asked Gil Friedrich based on that success to take all the other products that create the suite for employees. So now we're bringing in not just the e-mail, but e-mail, endpoint, browser and mobile. At the end of the day, we want to look at the use case. And the use case here is employees that are working from everywhere and are now being empowered by AI agents. And the fact that we can have an agent sitting at the endpoint, either at the browser level or at the SASE level, means that we can do more on the device itself, which is cheaper, more scalable and brings better security. So I'm really optimistic about bringing all that together into our workspace. Roei Golan: And I'll continue regarding your second question about the FX. So yes, as I said, about $50 million to $60 million. And about the M&A, I also talked about the effect for Q4, Lakera. So we talked about $0.04 to $0.05 headwind for Q4. We do expect to have more -- from one end, more investment. But from the other end, we also do expect to see more revenues from Lakera. So in the end, it's tough to say right now, again, we are working on the plan for next deal. So it's tough to say it's going to be the impact on our margin next year, the Lakera acquisition. And in general, margin for next year, I think that it's -- we're going to -- we are still planning working on 2026. And as I said, we'll talk more about it in February when we're going to announce Q4 numbers. Kip Meintzer: All right. Next up is John DiFucci followed by Shrenik Kothari. John DiFucci: My question is sort of a high-level question for Nadav. Nadav, I've known you a long time. And I know that you mean what you say when you talk about an open garden approach, and it makes total sense for the customer. It really does. And I -- but I almost -- and I was looking for the right word to describe it because it almost seems -- and I know this isn't you. It almost seems naive to think you can do it. Because your competitors, I think you said fierce in your prepared remarks, your fierce competitors. And even though it's the right thing for the customer, no one's ever been able to do it. So I guess, can you give us a little bit more, like are there any anecdotes you can share with us? Anything you talked to us about how it's actually going in the right direction. And then finally, just Roei, just a quick follow-up. It's great to have pricing power. But you -- just how should we think of the price increases in subscription lately and how they may be contributing? How should we think about that? It's great to have that, just try to understand it. Sorry. Nadav Zafrir: So thank you, John. I'll be as open platform -- open, sort of open mind. I'll tell you this. First of all, it's a philosophy, I agree with you. And I've been in the trenches for more than 30 years in cybersecurity. I think that where we're going, trying to come to this with a vendor lock, closed garden, a monolithic approach will really not be enough to secure our customers for many reasons. Now I agree, it's not an easy path, but we're seeing a glimpse of first success. So I brought up Veriti as an example. Veriti already has the ability to integrate with over 70 other vendors. From our CTAM, we see where the danger or the threat is coming from, and we can take these IC and actually fix them not only a Check Point, but even at other vendors. And that's -- and we already have 100 implementations of that within customers, all right? So I'm not saying this is sort of all the story, but it's a glimpse of the story. Another one is our unified management. Our unified management today, with some of the cloud native firewalls, we can manage -- in our unified management on those other firewalls so that from the customer's perspective, whatever they're using, they can have the access to truly our best-in-class threat cloud AI with over 100 engines that is blocking billions of attacks all the time. So it's forming. I agree that from a business perspective, some might say, yes, that's naive, it's never going to happen. I think it needs to happen. I think it's -- there isn't another way to resecure our customers. And we are seeing early success with this open platform approach. There's a lot of investment that we need to do in order to put more meat on the bone and create a real alternative to this idea of -- and we see it and we see how it resonates with our customers, right? They want to listen to this. Some of them because it's just the nature of the beast. They have 1 vendor, but then they make an acquisition. Now they have 3. How are they going to consolidate this? And the attackers are going to come through the cracks. So it's a philosophy, but it's also a road map. And some of it is already happening, not only in our labs, but at customer sites. As I said, over 100 deployments of Veriti only and more to come around that. I'll give you one more sort of way to try to defend this. When you think about detection, for example, right, we look at the [ Mitre ] attack sort of chain, right, and kill chain. And we say, okay, at every point, we need to have multiple guarding capabilities in order to be successful at blocking attackers. Within that framework, we're saying a lot goes into the detection and response. I can tell you that I'm constantly trying to imagine what I would do if I were on the bad side guys, and I'd tell you that with agentic AI, a lot of what's happening on-prem for -- that gives us the ability to detect is going to become obsolete. So now if we're in a client or a customer's environment with a competitor and we don't share what we see immediately, it's going to be game over for the customers. So now afterwards in the aftermath, I'm going to say, yes, but it wasn't my firewall, I was their firewall. The customer doesn't care. Roei Golan: And to your question about the price increase. So yes, we did the price increase for the subscription firewall effective July 1. It didn't have any effect on our revenues for Q3 because most of the business is coming in the last months would have a very immaterial effect. I do -- on the billing side, we do see some benefit from that, yet not significant from the price increase. Again, it's when we're managing the same discount, so we can benefit from this price increase. I don't want to have you that we have another price increase of 5% across all our Quantum firewall, which will be effective 1/1/2026. Kip Meintzer: All right. Next up is Shrenik followed by Joshua Tilton. Shrenik Kothari: Yes, team, echoing my congrats... Kip Meintzer: Nice of you to join us from Alaska or whatever other place you're from. Shrenik Kothari: A little sensitive. Great, great execution. Just continuing on with the big picture theme [indiscernible]. So Nadav, you have been firming your belief that not everything goes to the cloud and lean hard into the hybrid mesh value proposition, especially as the cloud infra cost rising. We have been hearing that a lot of AI native use cases also staying on-prem. So can you elaborate from your use case perspective, like where are you winning the most in these hybrid conversation, hybrid mesh? And then I had a quick follow-up on the go to market. Nadav Zafrir: I think our advantage is in large-scale complex hybrid environments, where you have on-prem with cloud, multi-cloud, you need to manage all that. And I think that's where our advantage is. Looking into the future, there are use cases that we're seeing with the use of AI, data sovereign issues and governance that are going to take some of the use cases back to either private or quasi-private establishments that are going to offer that. Again, I think this is an opportunity for us on 2 fronts. First, it's our sweet spot. Second, when you think about data centers that are providing either data center as a service or a private data center for AI usage, this is where performance and speed matters more than anything else. And again, that is our sweet spot. So I'm not saying this is the only use case, but I think it's a growing use case. Shrenik Kothari: Got it. To make some big go-to-market hires and some ongoing transitions, just if you can walk us through how this factors into your operating model, both near term and on fiscal '26, we appreciate that. Nadav Zafrir: Operating model in terms of our investment in marketing? Shrenik Kothari: Yes, investment, just execution, assumptions, yes. Nadav Zafrir: Yes. We are starting to be more aggressive in our marketing dollars across the board, and we'll see an increase in that in 2026, hopefully, to be offset with operational excellence so that we don't hurt our margins, but are more effective in our go-to-market. Kip Meintzer: All right. Next up is Joshua Tilton followed by Brad Zelnick. Joshua Tilton: Great, guys. Can you hear me? Nadav Zafrir: Yes. Joshua Tilton: Awesome. Congrats on a good quarter. Maybe though, just stepping back, just a broader spending question from my end. I think the first half for security was a little challenging. We had Liberation Day. There was a lot of uncertainty. So I'm just trying to understand like how would you characterize the spending environment in 3Q? How does it compare to what you saw in the first half? And maybe help us parse out how much of the success today is just pent-up demand from the first half versus better execution on your end? And just kind of what are you seeing heading into Q4? Will there be a budget flush? What are your expectations? Just level set that for us, if you could, please. Nadav Zafrir: Mr. Golan, do you want to start here? Roei Golan: Yes. So I'll touch -- I'll start, and then you can continue. As I think, again, I think it's -- first half was more challenging, mainly Q2, I think. You mentioned the Liberation Day. So definitely, it was more uncertainty in the market. I do have to say that -- you ask if the -- I mean, besides the 3 points that we mentioned, that the deals that actually will slip from the first half to Q3. So as I look at, and we're analyzing from across, I mean, many metrics, internal metrics, it's definitely much better execution. Q3 was much better execution. And when we're looking at Q4, so Q4, again, we do see very nice deals in the pipeline. Q4 is like -- almost every quarter, but Q4 is more tricky. It includes a lot of large refresh, large outdoor deals. And again, it also depends on budget flush. You ask about budget flush. For example, last year, we did see, I would say, less than average budget flush. So tough -- it's early to say, I mean, what's going to be this year. Again, when you're talking with the field, with the sales leaders, too early to see -- to understand if we're going to see more budgets like this year. Our guidance, our midpoint of the guidance didn't take into account any significant budget flush. So that's how I see it. Nadav, I don't know if you want to add something. Nadav Zafrir: No, no, I agree. I think America, I think, is good and steady. We are hoping see an increased demand in Europe going forward. But as Roei said, what we're guiding right now does not take an optimistic view on how demand is going to be growing beyond that. Kip Meintzer: Next up is Brad Zelnick followed by Jonathan Ho. Brad Zelnick: Congrats. It's great to see the success in Q3 and -- and I love saying when Patrick Colville can admit he's a real gentleman, that he's able to admit when maybe he's got it wrong, happens to the best of us. Nadav, I wanted to ask, as you reflect on changes you made to sales incentives this year, specifically paying on ARR growth, how much of an impact might that have had? And how much might that be contributing to the strong billings we're seeing this morning? And along those lines, maybe Roei, can you talk about the trends in ARR growth as we look through all the billings noise because externally, obviously, there's always puts and takes, but ARR is obviously a very pure metric. Roei Golan: Yes. I'll start also -- I want to -- regarding your first question. So I think we -- this year, we paid -- our [ comp plan ] was -- the significant factor there, a significant factor of our comp plan. Definitely, it's something that we did see improvement when we are looking on the discounts. On the discounts that we are giving that again, for renewals, for example, so we did see improvement on that effect after we implemented ARR factor into the comp plan. So that's something that definitely -- I mean, we see the change. We see the mine and how the salespeople are. When in the past, it was mainly around bookings. And now, they need to think more about booking only but also about ARR. And definitely, we see the positive effects of that mainly around the renewal, the discounts around renewals. So that's one aspect that I want to touch. The other stuff, anything else trying to -- what was the next one that you had, Brad? Or Nadav, if you want to add on that. Nadav Zafrir: Well, the only thing I would add is that I think we're seeing the beginning. I agree with Roei that I would attribute a better performance in Q3 mostly to execution. I do believe that as we progress the change in how we measure things and our comp plan, et cetera, will take effect, but it's work in progress. Brad Zelnick: That's helpful. I guess related, is there a future where maybe you would disclose ARR as a key metric for us externally to measure the business? Roei Golan: Might be, might be. We'll see. I mean it's something that we are considering every time, but it might be in the future. Kip Meintzer: All right. Next up is Jonathan Ho followed by Gabriela Borges. Jonathan Ho: Congratulations on the strong results. Can you maybe give us a sense of what you're seeing from the impact of the federal government shutdown? And can you talk a little bit about the investments that you've made on the federal side, maybe where those opportunities lie? Nadav Zafrir: Yes. I would say that because our current business is relatively small, we're not seeing a strong impact. Are -- having said that, our investment in Fed ramping our products is something that we're going to continue to do for a couple of reasons. The obvious one is that it's a big market. The second one is that this is what we're passionate about doing, securing the most under threat environment, the most complex environments. And I think we really have an advantage there to really bring better security. So we're going to continue investing in that. And investing in that means in our product, but also Fed ramping and focusing the -- our selling focus on that because I think there's a big potential there. Kip Meintzer: All right. Next up is Gabriela Borges, followed by Fatima Boolani. Gabriela Borges: Nadav and Roei, I wanted to follow up on how you think about the impact of hardware refresh on your business? More specifically, I know that 2024 was a big year for Quantum refresh. I know that 2025 was also a good year for Quantum refresh. Obviously, it's not binary, but when you look at 2026 in the cohort that's up for [ UL ] in 2026, is there anything that we should keep in mind on the size or how, being in year 3 of the quantum refresh, impacts that cohort? Roei Golan: So definitely, the [ refresh ] cycle is a big part of our business. But I have to say that, again, when you are looking today on the opportunities, I think we are in the middle of the refresh cycle. And I'm looking on the final for Q4. And I'm looking on the final for 2026, there's a lot of opportunity just for refresh of our existing installed base. And I'm not talking even about the competitive replacement that we see more of them in the last few quarters. So that's definitely -- have a factor on our total business. And definitely, we see more cross-sell -- cross-selling of our other products in our portfolio. As we said, a lot of the business is coming from ERM, external risk management. Or from SASE, it's coming from actually opportunities that will be part of the refresh that we did for a customer. That's part of the refresh project. We also took -- they also acquired their purchase, sorry, purchase one of -- a few of our products. So that's definitely a big factor. And again, as of today, based on what we see today, the potential is definitely also there for the next 12 months. Kip Meintzer: All right. Next up is for Fatima Boolani, followed by Peter Levine. Fatima Boolani: Nadav, I wanted to ask you a question about product strategy. You have absolutely not been shy about thinking about the portfolio in a holistic manner, both from an M&A standpoint, but also from the standpoint of, hey, these products or these capabilities aren't necessarily our forte. We're going to take a partnership route. So I'm referring to your partnership with Wiz on the CNAPP front. So first and foremost, are there opportunities in the current portfolio as it stands, where there is scope for rationalization, where you can take your wins, where we're very strong and maybe exit certain product areas? So that's the first question. And then the second question is just with respect to Lakera and the vision around building a full stack AI solution kit for your customers. How much of a budgetary attribution and allocation are you actively seeing from CISOs and CIOs who, I can't imagine aren't getting absolutely inundated with the next new mousetrap in technology. So just helping customers be ready to purchase when the technology around AI security is changing probably the most rapidly than we've ever seen in our lifetime. So a very big picture, but I wanted to get your opinion on it. Nadav Zafrir: No. Thank you, Fatima. So on the first one, yes, we do want to focus and become a podium player where we play. So a couple of examples. You brought up the Wiz example, but we also announced that we're going to be partnering with Illumio in micro segmentation because I think that's an important piece of becoming secure in a hybrid mesh environment, especially as the agents are coming our way and starting to cross these lanes. So segmentation becomes very, very important. So we're doing that with them. We're partnering with others on OT and IoT, and we're partnering on identity. So yes, there's a lot more where that comes from. Some of it is just being able to go through the normal APIs, but just be very mindful about that so that we can actually do it. Some of it is actual integration, and some of it is going to market together, like what we've done with Wiz. With regards to the full stack, I think this is just really the beginning, right? This is not a huge market yet because, as I said, it's about these phases. And most organizations are in Phase 1. In Phase 1, we have -- our product, for example, we call it GenAI Protect. So GenAI Protect could come in as a stand-alone, but could also be a part of our browser, a part of our SASE solution. And I think you'll see a lot of that. As we move to Phase 2 and 3, we will need stand-alone products like what we're going to -- what we're bringing with Lakera, which is already deployed in some of the largest organizations of the world. But those are the earlier -- I wouldn't even say the early. These are the innovators that are starting to do this. I think we'll see more and more. I don't think we'll see this blow up in 2026. We'll see substantial growth, and I think we'll see much more in 2027. Kip Meintzer: All right. Next up is Peter Levine for our last question of the day. Peter Levine: Great. Maybe to piggyback off that last point, Nadav or Roei, you talked about those different levels. And maybe just as a pricing question is, how do you view the current subscription licensing model, right? Is there a room to kind of evolve towards a more usage-based flexible kind of consumption model, right? You've seen many of your peers kind of move towards this usage-based model. As you talk about AI, SASE, cloud security, what are your thoughts here as you think about pricing and to get customers to maybe expand and adopt more of your products over time? Nadav Zafrir: Yes. I think as we -- and Roei, you can chime in as well. I think as you see our portfolio, its breadth is expanding, but also its nature, right? So when you think about SASE models of consumption, I think that is becoming more relevant. The first thing that we must do is not only sell our products, but make sure that our clients and our customers are using it and are satisfied with it. We still haven't moved to a consumption base. But I'll be honest, it is something that we're speaking about in the corridors, specifically, for example, for areas like war space. Kip Meintzer: All right. That's it for today, folks. Thank you for joining us. And with that, we'll see you next quarter. Nadav Zafrir: Thanks, everyone, for joining. Kip Meintzer: Bye now.
Operator: Greetings, and welcome to Alkermes' Third Quarter 2025 Financial Results Conference Call. My name is Rob, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Sandra Coombs, Senior Vice President of Investor Relations and Corporate Affairs. Sandy, you may now begin. Sandra Coombs: Thanks, Rob. Welcome to the Alkermes plc conference call to discuss our financial results and business update for the quarter ended September 30, 2025. With me today are Richard Pops, our CEO; Blair Jackson, our Chief Operating Officer; Todd Nichols, our Chief Commercial Officer; and Joshua Reed, our Chief Financial Officer. A slide presentation, along with our press release, related financial tables and reconciliations of the GAAP to non-GAAP financial measures that we'll discuss today are available on the Investors section of alkermes.com. We believe the non-GAAP financial results in conjunction with the GAAP results are useful in understanding the ongoing economics of our business. Our discussions during this conference call will include forward-looking statements. Actual results could differ materially from these forward-looking statements. Please see Slide 2 of the accompanying presentation, our press release issued this morning and our most recent annual and quarterly reports filed with the SEC for important risk factors that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements. We undertake no obligation to update or revise the information provided on this call or in the accompanying presentation as a result of new information or future results or developments. After our prepared remarks, we will open the call for Q&A. And now I'll turn the call over to Richard for some opening remarks. Richard F. Pops: That's great, Sandy. Thank you. Good morning, everyone. So Alkermes delivered a strong third quarter. It was marked by solid commercial execution, significant progress in our development pipeline, robust financial performance and continued execution across our strategic priorities. Today, we're raising our financial expectations for 2025, reflecting our confidence in the momentum of the business. Before we dive into the results for the quarter and our increased expectations for the remainder of 2025, I'd like to take a moment on the announcement we made last week regarding our proposed acquisition of Avadel Pharmaceuticals. This transaction is an important step forward in Alkermes' strategic evolution for 3 compelling reasons. First, we gain an FDA-approved medicine with significant growth potential. LUMRYZ is the first and only FDA-approved, once-at-bedtime oxybate for the treatment of cataplexy or excessive daytime sleepiness in patients 7 years or older with narcolepsy. It has already shown strong market uptake since launch. In 2025, it is expected to generate [between] $265– to $275 million in net revenue. Once the transaction is complete, it will immediately diversify our commercial portfolio and strengthen our profitability. Second, this acquisition will accelerate our commercial entry into the sleep medicine market. It will provide a well-established foundation for the potential launch of 3 alixorexton, our promising orexin 2 receptor agonist in development for narcolepsy and idiopathic hypersomnia. Avadel is a recognized leader in sleep medicine and has successfully built and scaled a high-performing commercial organization. With positive Phase II data for alixorexton in narcolepsy type 1 now in hand, data from Vibrance-2 in NT2 that we expect to report in November, and plans to initiate a global Phase III program early next year, we have reached a new level of conviction in the potential of our orexin platform. And third, the financial strength of the combined company will enhance our ability to support a diversified development strategy in sleep disorders. This will include alixorexton, as well as our additional orexin 2 receptor agonist candidates, ALKS 4510 and ALKS 7290, which recently entered the clinic. Avadel’'s development pipeline also has the potential to broaden our offerings for the sleep community, with an ongoing Phase III study of LUMRYZ in idiopathic hypersomnia and valiloxybate, a no-salt oxybate candidate in early-stage development. The proposed acquisition reinforces our commitment to neuroscience. It gives us additional scale and builds on our legacy of innovation in complex psychiatric and neurological disorders. The transaction is a compelling opportunity to accelerate our growth trajectory and is squarely aligned with our financial and strategic priorities. Upon closing, which we currently expect in Q1, we'll be able to provide more color on our expectations for the combined business. So with that as an intro, I'll turn it over to Joshua, who will walk through our third quarter financial results. Joshua Reed: Thank you, Richard. I'm pleased to join you today for my first earnings call as Chief Financial Officer of Alkermes. I'm excited to be part of a company with a strong financial foundation, a clear strategic vision and a deep commitment to delivering value for shareholders while advancing innovative medicines that have the potential to make a meaningful difference for patients. Since joining, I spent time getting to know our teams, our operations and our financial priorities. I've been impressed by the discipline and focus that drive our performance, and I look forward to building on that momentum. Now turning to our financial results. Our third quarter results were strong, reflecting continued commercial and operational execution. Financially, the year is tracking ahead of our expectations. And based on our performance through the first 9 months, we are raising our full-year 2025 guidance today. For the third quarter, we generated total revenues of $394.2 million, driven primarily by our portfolio of proprietary products, which generated net sales of $317.4 million, reflecting 16% year-over-year growth. These results were driven by strong underlying demand, which Todd will address in his remarks, and gross-to-net favorability, primarily related to Medicaid utilization rates, which drove a onetime gross-to-net benefit of approximately $8 million for VIVITROL and approximately $5 million for ARISTADA. As we move into the fourth quarter, we expect Q4 net sales from this portfolio in the range of $300 million to $320 million. Manufacturing and royalty revenues were $76.8 million for the third quarter, including revenues of $35.6 million from VUMERITY and $30.2 million from the long-acting INVEGA products. Turning to expenses. Cost of goods sold were $51.6 million, which compared favorably to $63.1 million for Q3 last year, primarily reflecting efficiencies following the sale of our Athlone-based manufacturing business last year. R&D expenses were $81.7 million compared to $59.9 million for Q3 last year, reflecting investments in the Vibrance Phase II studies of alixorexton across narcolepsy and idiopathic hypersomnia and first-in-human studies and development efforts for our next orexin 2 receptor agonist candidates, ALKS 4510 and ALKS 7290. SG&A expenses were $171.8 million compared to $150.4 million for Q3 last year, reflecting the expansion of our psychiatry field organization earlier this year and promotional activities related to LYBALVI. In Q4, we expect a modest increase in SG&A, primarily reflecting activities related to the Avadel transaction. This performance generated strong profitability of GAAP net income of $82.8 million, EBITDA of $96.9 million and adjusted EBITDA of $121.5 million in the third quarter. As we look ahead, based on our strong commercial performance and momentum through the first 9 months of the year, we are on track to deliver record revenues from our portfolio of proprietary products in 2025. As a result, we are raising our 2025 full-year guidance to reflect our current expectations of total revenues of $1.43 billion to $1.49 billion, GAAP net income of $230 million to $250 million, EBITDA of $270 million to $290 million and adjusted EBITDA of $365 million to $385 million. Our full expectations are outlined in the press release issued this morning. Turning to our balance sheet. We ended the quarter in a strong position with $1.14 billion in cash and total investments. For the acquisition of Avadel, we will use cash from our balance sheet in conjunction with bank debt to finance the transaction. As we close the transaction and finalize the financing, we will be in a position to provide more details. Taking a step back, Alkermes is one of the few biopharmaceutical companies that has successfully transitioned into a fully integrated profitable commercial organization with an exciting development pipeline. I stepped into this role at a time when the company is operating from a position of financial strength with a clear growth trajectory and near-term opportunities with the potential to drive meaningful value for shareholders. I'm energized by the opportunity to help shape that next phase of our growth, working closely with the rest of the leadership team to support our strategic priorities and drive long-term value creation. I look forward to engaging with many of you in the weeks ahead and to contributing to the continued success of Alkermes. With that, I will turn the call to Todd for a review of the proprietary portfolio. C. Nichols: Thank you, Joshua, and good morning, everyone. In the first 3 quarters of the year, we executed with discipline against our targeted growth initiatives. The focus drove strong consistent performance across our 3 proprietary brands, underscoring the strength of our commercial strategy and our capabilities. We're encouraged by the momentum we've built and remain confident in our ability to carry it forward. In the third quarter, we recorded net sales from our proprietary product portfolio of $317.4 million, reflecting 16% year-over-year growth. We drove strong end market demand across VIVITROL, ARISTADA and LYBALVI. Starting with VIVITROL. Net sales in the third quarter were $121.1 million. VIVITROL performance continued to be driven by growth in the alcohol dependence indication market and our ability to capitalize on highly localized market dynamics in certain states and payer systems. For the full-year 2025, we now expect VIVITROL net sales in the range of $460 million to $470 million compared to our prior expectation of $440 million to $460 million. Turning to our psychiatry franchise. The expansion of our psychiatry sales force earlier this year was a key strategic initiative designed to enhance our competitive share of voice. With our expanded footprint, we have been able to significantly increase the frequency of our call volume for high-priority prescriber targets across LYBALVI and ARISTADA. This increased share of voice, along with strong execution has driven increased breadth of prescribers for both brands. For the ARISTADA product family, in the third quarter, net sales were $98.1 million. Leading indicators related to underlying demand were encouraging with increased prescriber breadth and strong new-to-brand prescriptions during the quarter. For the full-year 2025, we now expect ARISTADA net sales in the range of $360 million to $370 million compared to our prior expectation of $335 million to $355 million. Turning to LYBALVI. Net sales grew 32% year-over-year to $98.2 million. Underlying TRx growth was 25% year-over-year, driven by new patient starts and prescriber breadth. Gross to net adjustments were approximately 28% in the third quarter. For the full year, we now expect LYBALVI net sales in the range of $340 million to $350 million compared to our prior expectation of $320 million to $340 million. Across the portfolio, we are pleased with our performance through the first 3 quarters of the year and entered the final stretch of the year with strong momentum and a clear focus on delivering against our full year objectives. With that, I will pass the call back to Rich. Richard F. Pops: Thank you, Todd. Well done. I think you can see from the results that the company is performing well across each of the key aspects of our business. During the quarter, our commercial teams delivered strong operational financial performance, our R&D teams made major strides in advancing our expanding development pipeline. So I want to make comments about both aspects of the business. First, commercial. We entered the final quarter of the year ahead of plan and with good momentum into year-end. Over many years, we've developed capabilities necessary to operate in challenging payer and policy environments. By design, we manufacture our proprietary products in the United States, and we do not commercialize these products outside the U.S. We are growing our business by growing demand based on the clear clinical attributes of our medicines and maintaining a disciplined contracting strategy consistent with our view of their significant value. Now R&D. Our portfolio of orexin 2 receptor agonist is advancing rapidly, led by alixorexton. The first Phase II data set of alixorexton was presented at World Sleep in September. In the Vibrance-1 study, alixorexton demonstrated compelling therapeutic benefits in patients with narcolepsy type 1 with a profound effect on excessive daytime sleepiness and cataplexy, along with a generally well-tolerated safety profile. Taken together with the clinically meaningful improvements in fatigue and cognitive function demonstrated in the study, we believe alixorexton has the potential to transform the treatment of NT1. At World Sleep, the competitive positioning for alixorexton in NT1 also came clearly into focus. In this large randomized, double-blind, multi-week study, alixorexton administered once daily across a range of doses demonstrated new potential best-in-class features. With data from this rigorous Phase II study now in hand, we're confident in the profile of alixorexton in NT1, and we're moving rapidly to initiate the Phase III registrational program in the first quarter of next year. We expect to be first to market in narcolepsy type 2 and idiopathic hypersomnia. We completed enrollment in Vibrance-2 in patients with narcolepsy type 2 toward the end of the summer, and we expect to report top line data in November. In idiopathic hypersomnia, Vibrance-3 is enrolling well, and we expect data from that study in mid-2026. Like Vibrance-1, these are both large, well-powered Phase II studies designed to provide substantial data sets informing potential Phase III development. We are building a significant body of clinical data that deepens our understanding of orexin biology and its therapeutic potential in central orders of hypersomnolence and beyond. Equally important, the Phase II studies are yielding key learnings related to study design and implementation that we believe will be invaluable for Phase III and help support alixorexton's competitive position in narcolepsy. Beyond alixorexton and sleep disorders, additional candidates from our portfolio of orexin 2 receptor agonists are advancing well. ALKS 4510 is in the clinic and progressing quickly through single and multiple ascending dose studies in healthy volunteers. We expect to complete this Phase I work early next year and move quickly into proof-of-concept studies in the disease areas that we plan to pursue. For ALKS 7290, we have filed the IND and recently initiated our first-in-human study. Across our orexin development programs, we have demonstrated in clinical or preclinical models that orexin 2 receptor agonist may have powerful effects, not only on wakefulness, but also across domains related to fatigue, cognition, attention and mood. We look forward to sharing more on both of these candidates next year as they complete their Phase I healthy volunteer studies. So to wrap up, the third quarter was a clear demonstration of Alkermes' strong execution, commercial momentum and scientific leadership. We continue to operate from a position of financial strength as we advance our pipeline and generate a growing body of data and insights that inform our strategy and reinforce our conviction in the opportunities ahead. With disciplined focus and a commitment to innovation in the patients we serve, we're well positioned to deliver long-term value for our shareholders. So we look forward to sharing our progress. With that, I'll turn the call back to Sandy to manage the Q&A. Sandra Coombs: Thanks, Rich. Rob, we'll open the call now for Q&A. Operator: [Operator Instructions] And our first question is from the line of Marc Goodman with Leerink Partners. Marc Goodman: Yes. Can you talk about LYBALVI just a little bit, seem to be a lot stronger than expected and the gross to net seem to be a little lower than expected. We were expecting that to kind of creep up some. Just give us a sense of what's happening with the product and just how you're thinking about gross to nets into the next year? C. Nichols: Yes, absolutely, Marc. This is Todd. Yes, we're really pleased with performance for Q3. As I said in my prepared remarks, expansion of our psychiatry footprint really drove a strong share of voice in the quarter. We were able to significantly increase our call volume, which was our strategic plan. We did that in Q3. We believe that, that momentum will carry into Q4. And so the result of that is we saw year-over-year TRx growth of about 25%. But what's even more encouraging is we saw new patient start year-over-year NBRx has increased almost 16%. So the underlying demand is really encouraging, and we believe that's a really direct reflection of the expansion of our sales force. So for context, breadth of prescribing over the quarter increased 7%. So that's 2 consecutive quarters, Q2 and Q3, we saw a strong breadth of prescribing. To your question on gross-to-net, gross-to-net was a little bit lower in the quarter than from Q2. That's the result of just as deductible resets throughout the year, lower co-pay utilization, some small little dynamics like that actually had a lower gross-to-net for the quarter. Richard F. Pops: And Marc, it's Rich. I'll just add and Todd can expand on it. But the story about LYBALVI over time in the marketplace other than just our strong commercial execution is its efficacy. And that efficacy message is resonating, and I think it's supported now by multiyear data in the real world. Marc Goodman: How do we think about gross-to-net into next year? C. Nichols: So we're not going to provide any guidance today, Marc, for next year. We do expect that going into Q4 that the typical seasonal patterns would show up. So we do expect a little bit of expansion of gross-to-net in Q4, but we'll give you a full-year guide in February. Operator: Our next question is from the line of David Hoang with Deutsche Bank. David Hoang: So I just wanted to ask about, I guess, expectations once the NT2 alixorexton data are in hand. How does that inform the next steps with the FDA? And when will we know more about the Phase III program and design? And then maybe just a follow-up on VIVITROL, just kind of the expectations heading into Q4 for that product. Richard F. Pops: David, it's Rich. I'll take the first, and then Todd can answer on VIVITROL. So we expect that we're on track for data from the NT2 study in November. And as we've said along, when we get those data in hand, that coupled with the Vibrance-1 in NT1 data will comprise the package for our end of Phase II meeting with FDA. So we'll request that meeting as soon as we get the NT2 data. We'll have that meeting and then we'll launch the Phase III program as our expectation early next year. Go ahead, Todd. C. Nichols: Yes. In terms of VIVITROL for the fourth quarter, I think the basis of that is what we saw in Q3. We saw strong AD demand. AD sales continue to drive the substantial majority of the brand. We hear very encouraging feedback from the market from HCPs and patients. So our expectation is that we would continue to see AD growth going to the fourth quarter. I think it's also just important to keep in mind that this is a mature product. So we think it will perform like a mature product, but our focus is really driving AD sales in Q4. Operator: Our next question comes from the line of Umer Raffat with Evercore ISI. Umer Raffat: I just wanted to dial in on the NT2 study a little bit. Could you perhaps lay out for us your expectation of how much of an MWT benefit is reasonable to expect, knowing there's a bit of tachyphylaxis off of single-dose work in Phase I. But on the flip side, patients are starting off at 10 to 12 minutes at baseline. So how much MWT improvements are you expecting? And then also any broad parameters around what do you know as of right now on blinded safety for NT2? Richard F. Pops: Umer, it's Rich, I won't comment on any of the blinded data. We'll get the full data set here just in a matter of weeks. So we'll look at the data in the aggregate in a large multi-week randomized, placebo-controlled study, the blinded information is only -- is not particularly useful to us. So we'll look forward to seeing the whole data set right away. Our expectation is that based on the Phase Ib study is that we know that orexin 2 receptor agonist from that study can drive wakefulness in patients with NT2 and NIH. But we really don't have a numerical threshold at the outset because we also expect a lot more variability in the patient population. So from a Phase II perspective, what we're looking for is we've identified a range of doses like we did in the NT1 study. What we'd like to see is the safety tolerability profile across that range of doses and clear evidence of efficacy across the various efficacy parameters, all to inform our dose selection for Phase III. So that's the goal. If we can come out of the NT2 study with clear evidence of safety, tolerability and efficacy and a design for Phase III, we think we're going to be the first to market in NT2. And the same thing applies for IH. And this is the virtue, by the way, of running these large Phase II studies. When you're talking about cohorts of 90 patients or so over multiple weeks. And remember, it's not just the 6-week or 5-week double-blind period or 8-week double-blind period. It's also the extension period where we have dose variability and selection for patients. So between these 2 phases, we just learned a tremendous amount about patient preference as well as dose response, and that all goes into the calculus for Phase III. Operator: Our next question comes from the line of Paul Matteis with Stifel. Paul Matteis: Just to piggyback off that, can you confirm what details you'll give us in the top line release? Will we know the actual effect size? Or are you going to be saving some of this for a medical meeting? And then on the safety point, how are you thinking now looking ahead as to whether you might employ some sort of titration to try to attenuate certain side effects given that in the OLE and the NT1 study, we weren't really seeing much in the way of new onset visual AEs or things like that? Richard F. Pops: So yes, we have a good sense of how we're going to provide the top line data. You'll see that in the next few weeks. What you learned from the Vibrance-1? Probably, there's a lot of data that comes out of these studies. So what we'll do is as soon as we get the data, we'll start submitting the abstracts for the various medical meetings as they roll into 2026. But you can expect a fair amount of data coming out, but the top line, we have a good sense of the structure of it, and you'll see that in relatively short order. We have made a lot of decisions following Vibrance-1 about the structure of the dosing in Phase III. We're going to keep most of that proprietary right now because we feel like there are some real learnings. Some of them probably you can think through and derives from the comment that you made is that we really saw a very, very low incidence of new-onset adverse events for patients who had already been exposed to alixorexton in the double-blind period. So all that information from Vibrance-1 has been put into our modeling. And I think we've settled on our Phase III design, and you'll see that when the study gets underway. Operator: The next question is from the line of Akash Tewari with Jefferies. Manoj Eradath: This is Manoj for Akash. Just 2 questions. When you release the top line Vibrance-2 data, will you be releasing data points over time like 4 weeks and 8 weeks because both TRK-994 and 861NT2 data showed some deterioration of efficacy, primarily in MWT going from 4 weeks to 8 weeks. Do you see any biological rationale for this? Or is this just like a noise related to a small number there? And also, do you expect a dose response in Vibrance-2 in terms of ESS? And also lastly, what kind of PK profile do you look for the next-gen orexin agonist? Richard F. Pops: So on the point about the tachyphylaxis that you referred to or Umer referred to as well, we don't see based on previous data, a significant evidence of tachyphylaxis or degradation in efficacy signal between 4 and 8 weeks or even 8 and 12 weeks in other data sets. So at the top line, I wouldn't expect all the detailed data of time course. But I just want to let you know at the outset, that's not our pretest hypothesis that we expect to see a degradation. Now, to the extent that one did, one way that you could overcome it is with a range of doses. And we've always thought that having a range of doses could be a real competitive advantage in this category. We are hopeful to see dose response across the various efficacy measures, but we won't know until we see the data. The 3 doses that we modeled for NT2 were designed to give us a spectrum of dose response, but we won't know until we see the final data set. And the PK profile of -- I think you asked about the next orexin agonist. We're really not going to disclose any of those particular attributes of the next wave of molecules coming in. I wouldn't necessarily describe them as next generation because I don't feel like they're improving necessarily on deficiencies the alixorexton has. They're just different. And so they're designed for different patient populations in different clinical settings. And as such, they share common features of potency and selectivity, and we think that's essential for interrogating the circuitry in the brain, but they will be different. Operator: Our next question is from the line of Joseph Thome with TD Cowen. Joseph Thome: Maybe for the NT2 data set, can you talk a little bit about the importance of also showing the benefit on the ESS? Is this important for both the FDA? Or is this more of a European measure? If you can kind of put that into context a little bit? And then for the Phase III programs, can you talk a little bit about your expectation for ocular monitoring on one side of it, I could see that it would be helpful if you do see some early visual disturbances to kind of say that this was not impactful. But obviously, on the flip side, it would probably make the Phase III a little bit more complicated. So kind of your latest thoughts on that would be helpful. Richard F. Pops: Yes, we think in the NT2 study, both MWT and ESS or Epworth Sleepiness Scale are primary endpoints. And they capture different things. The virtue of the MWT is it's sort of a numeric quantitative assessment of the sleep latency. And ESS captures the patient experience, their self-described degree of sleepiness. And they both -- I think they both are quite important. And in Phase II, we're interested in looking at where the sensitivity is, where -- what scales move the most reliably across the doses. And that includes, [I'll throw] cognition, fatigue, narcolepsy severity scale, global impressions, and all the endpoints that we're looking in Phase II because that informs your Phase III structure and design. So we're hoping to see signs of efficacy across all those various parameters. Phase III, it's too early to say. Just for counting, I think that in Vibrance-1, what we saw was really generally very mild, one moderate and one severe ocular in the form of blurred vision. And so it was generally very well tolerated. And that along with the rigorous ophthalmic exams that were conducted in all the patients, I think really answered the question about are there any structural issues that derive from using an orexin-2 receptor agonist. And so I don't know the answer yet whether we'll have to do any monitoring in the Phase III study. We hope that we don't. And to the extent that we do, it's quite mild. But I think in some ways, that will be more of a discussion with the regulators. Operator: Our next questions come from the line of David Amsellem with Piper Sandler. David Amsellem: Just a couple of quick ones on the additional orexins that are going into the clinic. I know, Richard, you talked about properties in mood and attention. So is it safe to say that the -- at least one additional disease setting is going to be in a psychiatric setting once you move into proof-of-concept studies next year? Maybe elaborate a little more on how you're thinking about that? And then secondly, I don't know if this has been asked, but any thoughts on alixorexton outside of the United States? And what kind of discussions, if any, have you had with European regulators there? Richard F. Pops: Yes, I think we've said about the next candidates that we're interested in 3 broad domains: psychiatry, neurology and interestingly, certain rare neurodevelopmental or neurodegenerative settings where we think a significant part of the clinical presentation is excessive daytime sleepiness, anhedonia, fatigue, depressed mood, things like that. So we won't be more specific than that right now. But as I mentioned in the earlier remarks, our goal is as we get through the SAD/MAD to move right into those types of patient-focused studies to get signal early on. And you'll -- what I'm hopeful is that by the end of 2026, people see how this program has expanded well beyond narcolepsy. And the essential prerequisite of that is getting these 2 candidates through their SAD/MAD credentialing them as bona fide development candidates for these indications. That's well underway. So we're quite excited about how that's going to mature in 2026. The second question was alixorexton in ex U.S. We're developing in ex U.S. We're running clinical trials in Europe and in Asia. And there's a strong demand, I think, for this type of product for patients around the world. So given the state of pharmaceutical pricing discussions across the world, I think it's -- we can say comfortably, we wouldn't expect to bring alixorexton to patients outside the U.S. at significantly lower prices than in the U.S. But our goal is to bring this patient -- to patients in the U.S., in Europe as well as in Asia. Operator: Our next question is from the line of Ash Verma with UBS. Unknown Analyst: This is [indiscernible] on for Ash. For NT2, how are you thinking about these patients' hypersensitivity to exogenous orexin? What's the most concrete evidence that you see why this hypersensitivity could be lower in NT2 patients versus the NT1? Richard F. Pops: Yes, I wouldn't describe it as hypersensitivity. I think it's the other direction. I think NT2 patients based on the data are less sensitive to orexin agonist administered exogenously. So NT1, recall, is the disease, is a deficiency of orexin. So in NT1 patients, small doses are driving significant efficacy benefits as low as 1 milligram in our hands with alixorexton, we've shown meaningful changes in wakefulness. Whereas in the NT2 patients, and we know this from our Phase Ib study, you can drive higher doses in order to elicit more wakefulness as well as they tolerate higher doses before you see adverse events. So the basic hypothesis going into the NT2 and IH studies is that there's a frame shift, there's a dose response curve shift to the right so that you need more alixorexton in order to drive wakefulness and patients will tolerate more alixorexton before seeing adverse events. Operator: The next question is from the line of Leonid Timashev with RBC Capital Markets. Leonid Timashev: I just want to ask how you're thinking about the NT2 versus IH populations and sort of the differences in your ability to actually accurately capture them in separate trials, sort of what you're hearing from physicians on how those are diagnosed and bucketed. And then ultimately, whether these are differences that are meaningful in the real world and how that may impact how you're thinking about the relative opportunities of NT2 versus IH? Richard F. Pops: I think it's an important question. I think we won't really know the answer until we complete the 2 studies. And I think there's differences based on our learnings in multiple discussions with clinicians and patient groups in the U.S. and Europe, there could be regional differences too, in the way that the differential diagnosis is made. What's interesting though, Leonid, is the hypothesis -- there's no pretest hypothesis that suggests there might be a difference in the response between the IH/NT2 diagnosis or the subcategorization within those 2 diagnoses. As you know, within IH, there are long sleep IH patients, there are shorter sleep IH patients. They have different phenotypes that present. What we know from our Phase Ib study, albeit small, was just taking all comers with NT2 and IH, we were able to show changes in wakefulness and well-tolerated profile. So I think this is de novo clinical research. No one's ever tested orexin 2 receptor agonist at these doses in these patient populations. So I think the whole community is going to be fascinating to see what the distribution looks like, what the variability looks like and what the overall effect of various doses in these patients. And then I think with that information, we can better design Phase III, too, are there ways of tuning up or focusing that response in the Phase III studies. But a priority, we're enrolling patients without any discrimination between the differential diagnosis. Interestingly, in NT2s, you tend to use MWT as an endpoint, whereas that's not used in IH, they use idiopathic hypersomnia severity scale and Epworth. So it's -- it will be interesting to see how the 2 patient populations look when we're finished with the studies. Operator: Our next question comes from the line of Luke Herrmann with Baird. Luke Herrmann: Congrats on the quarter. Just a couple of time line questions on the earlier pipeline. For the next-gen orexins, are you expecting to share Phase I data from 4510 next year? And do you think there's a possibility of 7290 first-in-human data reading out next year as well? And then similarly, I know it's sensitive right now before deal close. But in general, do you see a possibility of some new data on the low-salt oxybate next year? Richard F. Pops: Yes. The 4510 and 7290, I think -- I can't say right now whether we'll show you data "per se from the SAD/MAD." I think it's more of the gating -- the go decision to say if we're through SAD/MAD at doses we think are target engaging and therapeutically relevant, then we're going to -- you'll know that we're moving into the patient-focused studies. The timing of the readout of those translational studies remains to be disclosed. I think we're getting a sense of it right now, but it just depends on how fast we move into those translational studies and how quick the readout is. So give us some time to give a little bit more refinement about that as we move into 2026. But our goal is to finish SAD/MAD for 4510 first and move right into some translational studies. Same thing with 7290, get through the SAD/MAD and then go right into a different set of translational studies. We're obviously quite interested in the no salt once-daily development program within Avadel. And as we complete the merger, we will -- or the acquisition, what we'll do is we'll give you more sense of -- in our hands, what we'll be doing with that program. But we think it's a very logical extension to the business that LUMRYZ has built. Operator: The next question is from the line of Ami Fadia with Needham & Company. Ami Fadia: With regards to impact on nighttime sleep, can you talk about the 2 mechanisms, orexin versus oxybate and how you're thinking about the 2 mechanisms being complementary and how you intend to study that further going forward? And just separately, with regards to ARISTADA, can you talk about where you expect the gross-to-net to land for the full year? Richard F. Pops: It's Rich. Yes, I think your question about nighttime sleep is going to be a very fertile one for additional clinical research. What we've heard from clinicians, you've probably heard the same thing, is notwithstanding the powerful daytime wakefulness that orexin agonists are driving, there is still some interest in understanding how that coexists with consolidation of sleep at night for certain patients. Recognizing that most patients don't take oxybate, but the ones who do see real benefit from it, I think there's a real opportunity for some clinical research now to understand how the 2 can coexist, particularly in once-nightly and once daily forms that we would control both. So that's an exciting area for further research for patients and I think for the full field because I think that the full effect of an orexin agonist on nighttime sleep architecture is still yet to be learned. We're developing those data in our Phase II program with extensive polysomnography. So we'll be analyzing that data as we complete the Vibrance program. But in the meantime, I think that there's a -- we see that there's a place for the oxybates on a going-forward basis for the patients who really benefit from them, and we want to further elaborate that. Todd, do you want to talk about the GTN? C. Nichols: Yes, absolutely. For ARISTADA, for the full year, we expect it to follow the consistent historical patterns, which should be approximately 53%. Operator: Our next question is from the line of Uy Ear with Mizuho. Uy Ear: Congrats on the quarter. So maybe just a quick question on the gross-to-net favorability. You benefit from the last quarter and this quarter for both -- for ARISTADA and VIVITROL. Just wondering, could you maybe just help us understand whether there's more benefit going forward? Like what is being -- like -- yes, help us understand why these adjustments? And secondly, in the quarter, could you also sort of speak about inventory, whether it's -- is there any stocking or is that normal level? C. Nichols: Yes, absolutely. Yes, as we said in our prepared remarks, we did see a benefit for VIVITROL and ARISTADA in relation to Medicaid utilization. Going forward, we're not assuming or planning for any additional gross-to-net favorability within Medicaid. I think it's important just to note that the Medicaid volume, the absolute volume for Medicaid patients is stable. This is just related to the percentage of Medicaid across our overall channel mix. That was -- that's the favorability. In terms of inventory, there's always seasonal patterns during the fourth quarter, and it can be a little bit difficult to predict, but we are expecting a little bit smoother of a pattern from Q4 of this year into Q1 of next year. Operator: The next question is from the line of Ben Burnett with Wells Fargo. Benjamin Burnett: I wanted to see if you could just maybe talk about some of the Phase III scenarios for alixorexton. I think we're assuming sort of 2 Phase IIIs would be needed. I guess, number one, I guess, do you agree with that? And then if so, like would a Phase III NT2 study maybe be sufficient along with an NT1 Phase III to get approval in both of those indications? Richard F. Pops: Ben, it's Richard. That's our assumption right now, but we'll confirm that, obviously, with FDA. Our expectation is that we'll seek labeling for alixorexton for the treatment of narcolepsy. And the Phase III program will be a well-controlled Phase III study for NT1 on a stand-alone basis and a similar study in NT2. Operator: The next question is from the line of Douglas Tsao with H.C. Wainwright. Douglas Tsao: Congrats on the progress. I guess -- I know it's early, Richard, and a lot of uncertainty. But just given the fact that you're always thoughtful on public policy issues, I'm just curious if you thought much about the potential impact of sort of lapse on ACA subsidies and what it could have for your commercial business in the near-term. And I have a follow-up. Richard F. Pops: Yes, it's a good question, Doug. And I think everybody is watching that. I think my sense is that there's a strong political virtue to continuing the ACA subsidies at some level. And recall that in reconciliation and the One Big Beautiful Bill, what we were able to make sure is that patients in our population, i.e., patients with serious mental illness and addiction are treated differently. They're the ones who are the explicit target of programs like Medicaid because if these patients are not treated, they end up in the emergency rooms and in the criminal justice system in the community. So the price points of our medicines treating these patients are lower and the gross-to-nets are high. So they're not breaking the bank. So our view from a policy perspective is that there's a reason -- there's a political reason to keep ACA subsidies in place, a; and b, to the extent that we have changes that are focused on Medicaid population, in particular, serious mental illness and addiction patients, we're going to continue to fight to have them carved out. Douglas Tsao: And I guess just a follow-up on LYBALVI. I'm just curious, just given the success you had with the sort of additional promotion and detailing the product, do you have the sense was it physicians just weren't writing and they just needed that consistent reminder? Or was there just sort of some extent lack of awareness of the product and its attributes? C. Nichols: Yes. In terms of LYBALVI, I think the first thing is over the last several years, we've had a really strong focus strategically on building awareness around the efficacy profile. And that's really resonating. It resonates every single quarter. So that's a big driver is just the underlying value of the product. It's also important to remember that LYBALVI has a broad label, right? So we have a broad addressable population. So we're seeing strong growth with schizophrenia and bipolar. The mix is still roughly about 50-50, but new patient starts are definitely growing more towards the bipolar population. And so I think with the strong efficacy, along with our commercial execution and then also the resourcing that we've put behind the brand, we actually really saw a very positive quarter, and our expectation is that -- and our focus is really growing that demand going into the fourth quarter as well. Douglas Tsao: I guess just sort of what was driving it? Do you think some clinicians just weren't familiar that you had the breadth of label for bipolar and the efficacy? Or was it just those are competitive markets and you just constantly need to stay in front of reps? C. Nichols: Yes, it's a good point. The competitive landscape is fierce as we know. And so we're very practical with this to make sure that we're putting resources in our highest growth driver. So we felt and the data showed us that we needed a stronger share of voice. But number 2 is physician research tells us that HCPs need experience. So once they get experience with one patient type, schizophrenia or bipolar, in general, patients are having a good experience. They're more open to expanding their breadth of prescribing. And so we're very pleased. As I said earlier, breadth of prescribing has expanded by approximately 7% for 2 consecutive quarters, and we're seeing encouraging trends with depth. So it's really those 2 things. It's our commercial investment, but it's also the experience of the HCP and the positive experience they're hearing from patients. Operator: Our last question is from the line of Jason Gerberry with Bank of America. Chi Meng Fong: This is Chi on for Jason. I want to follow up on the visual AE commentary earlier for Vibrance-1. The commentary that I heard was that most visual AEs were mild, and there was one moderate and one severe case. Can you contextual like one constitute a severe vision blur and how long did that AE last? And secondarily, is there a dose response relationship with that -- with the visual AE in Vibrance-1? When I look back at the Vibrance-1 AE table, there was a severe case of AE of any cost in the 4-milligram dose and 2 severe cases of AE of any cost in 8-milligram dose. Can you clarify which dose level did that one moderate case of visual AE and which dose level did the one severe visual AE case occurred in? Richard F. Pops: Yes. The vast preponderance of the visual AE, they were actually reported as blurred vision were mild cases. There was one moderate that became a mild after 4 days, I believe. And there was one that was categorized as severe, but that was part of a constellation of symptoms that led to an early termination of that patient after the third day, I believe, in the study. So -- there was dose response. We saw more at the 8-milligram dose than at the 4 and the 6. But interestingly, in the extension period, after patients have been in the double-blind period and could choose their dose, if patients had been on a previous dose of alixorexton then moved to the 8 milligram, we saw no new incidence of visual AEs of burn vision. So we think that there is dose response. We think the phenomenon is largely mild, meaning it's noted by the patient, but doesn't affect them and largely occurred in the first week and are largely transient as well. But we'll see now in the NT2 data set, what that looks like in the IHs as well. But as we build a bigger and bigger data set, the overall conclusion, I think you have to draw from this class so far is that they're largely generally well tolerated and the side effects are generally mild-to-moderate and transient. And the top of the list of the AEs that are on target, you're going to see with these drugs are insomnia and pollakiuria which is urinary frequency. Operator: That will conclude our question-and-answer session. I'll turn the floor back to management for closing comments. Sandra Coombs: All right. Thanks, everyone, for joining us on the call today. Please don't hesitate to reach out to us at the company if there are any follow-up questions. Operator: Thank you. This will conclude today's conference. You may disconnect your lines at this time, and have a wonderful day.
Operator: Good day, and thank you for standing by. Welcome to the GeneDx Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Sabrina Dunbar, Investor Relations. Please go ahead. Sabrina Dunbar: Thank you, operator, and thank you to everyone for joining us today. On the call, we have Katherine Stueland, President and Chief Executive Officer; Bryan Dechairo, Chief Operations Officer; and Kevin Feeley, Chief Financial Officer. Earlier today, GeneDx released financial results for the third quarter ended September 30, 2025. Before we begin, please take note of our cautionary statement. We may make forward-looking statements on today's call, including about our business plans, updated 2025 guidance and outlook. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, October 28, and we are under no obligation to update. When discussing our results, we refer to non-GAAP measures, which exclude certain items from reported results. Please refer to our third quarter 2025 earnings release and slides available at ir.genedx.com for definitions and reconciliations of non-GAAP measures and additional information regarding our results, including a discussion of factors that could cause actual results to materially differ from forward-looking statements. And with that, I'll turn the call over to Katherine. Katherine Stueland: Thank you, Sabrina, and good morning, everyone. The third quarter was another exceptional quarter for GeneDx. We continue to drive record growth while maintaining our commitment to profitability. For us, better patient care and profitability go hand-in-hand because our ambition is truly transformative to fundamentally alter how precision health care is delivered, making it more accessible, effective and patient-centric. We envision a world where any genetic disorder is diagnosed quickly to prevent disease progression and ensure everyone has a chance to live a long and healthy life. Achieving that vision requires a fast-growing, disciplined, profitable business that delivers both life-changing answers for patients and long-term value for shareholders. Based on our momentum exiting this quarter, we're raising our 2025 revenue guidance to $425 million to $428 million. Our North Star, the goal that drives each and every one of us at GeneDx is to diagnose disease earlier for as many families as possible. Our strategy to do so is to: one, drive high profitable growth; two, offer the best-in-class diagnostics products and experience for clinicians and patients globally; and three, build the network effect required to usher in the next era of precision medicine. Across all 3 focus areas, we are leveraging the power of GeneDx Infinity, the largest rare disease data set to generate deep genomic insights that enable fast and reliable diagnoses and fuel the precision medicine revolution. Just last week, the FDA granted breakthrough device designation to our ExomeDx and GenomeDx tests, offering powerful validation that our industry-leading technology is the gold standard in transforming lives and shaping the future of health. There are over 10,000 rare diseases impacting 1 in 10 Americans, most of them children, and it still takes an average of 5 years to reach an accurate diagnosis. Receiving an accurate genetic diagnosis is a pivotal milestone in a patient's journey that is often not the end. Today, 95% of rare diseases have no approved treatment. But as the largest provider of rare disease diagnosis in the world, GeneDx will be central in changing that. As we look to our future, GeneDx isn't just the starting point for rare disease. We're the nexus, connecting patients, biopharma, health systems, payers, policymakers and advocacy to unlock the full potential of genomic medicine. We recently announced 2 key executive hires, Lisa Gurry as Chief Business Officer; and Dr. Mimi Lee as Chief Precision Medicine Officer, to unite our data diagnostics and partnerships so that clinical adoption, equitable access and therapeutic advancements reinforce one another, creating a network effect. We are uniquely positioned to move our system from sick care to health care and strengthened by the network effect, we will deliver on the promise of precision medicine for all. What fuels our business is growth in diagnostic testing at scale, and our strategy is twofold. We're deepening our penetration while widening the market, enabling us to serve more patients today while opening access for patients tomorrow. Our existing markets of geneticists and pediatric neurologists continue to deliver impressive growth, and we have ample room to run. And with updated guidance from the American Academy of Pediatrics now in place, we can now shorten that multiyear diagnostic odyssey by meeting parents where they go first, their pediatricians. Our commercial build-out is underway, and we expect to nearly double our sales force over the coming quarters with a dedicated GeneDx team. We're also leading medical education on updated guidance, expanding GeneDx's authority as the leader in genomics to this new cohort of clinicians, many of whom are learning about these changes for the first time from us. We're also investing in customer experience to drive utilization. The opportunity is significant, and we expect it will take 18 to 24 months from the June update before we see real adoption. Turning to the inpatient setting. The NICU remains underpenetrated and continues to be a focus with less than 5% of NICU patients receiving any genetic testing today. We have 8 Epic Aura integrations live and are on track to deliver at least 12 by the end of the year. Our ultra rapid genome continues to prove its value for critically ill infants. And as protocols evolve and whole system engagement increases, we're well positioned to significantly scale testing in Level 3 and Level 4 NICUs over time. Our work to date has shown the value of testing symptomatic patients, but we know the next step forward is to enable proactive personalized care beginning at the earliest moment possible. Our leadership in genomic newborn screening from supporting pioneering research to enabling clinical adoption in Florida, reflects our mission to drive true longevity and highlights our unique ability to expand access to this technology at scale. Our work on the GUARDIAN study generated foundational clinical data to support adoption, demonstrating an over 3% true positive rate for actionable conditions at birth. This quarter, we announced our role in 2 new pivotal initiatives, the NIH with Beacon program and the Sunshine Genetics Network. These programs are relying on GeneDx as a trusted adviser in newborn screening because we have the unique talent and experience to design programs that are clinically impactful, equitable and scalable. Broad adoption of newborn screening will flip the system from reactive to proactive, advancing our mission and accelerating impact as population scale. At the same time, exome and genome testing can have significant utility later in life. Adult conditions represent another large untapped market where GeneDx is uniquely positioned to offer diagnosis for cardiovascular conditions, neurodegenerative diseases and many others. And as we grow our footprint domestically, we're also poised to address growing opportunities internationally. The Fabric genomics platform offers us flexibility to serve global markets at scale, and we're excited to have boots on the ground in key ex-U.S. regions to develop these markets. We're proud to have built a business that delivers both purpose and profit to fuel reinvestment and the strength of our model today is laying the foundation for an exciting future. With that, I'll pass it over to Kevin to share more about our results. Kevin Feeley: Good morning, everyone, and thanks for joining us today. We reported third quarter 2025 revenues of $116.7 million, a 52% increase year-over-year. That total includes $98.9 million in revenue from exome and genome, up 66% from the same quarter last year. In the third quarter, we reported 25,702 exome and genome tests. Growth there, has accelerated from 24% year-over-year in the first quarter to 29% in the second quarter to now 33% in the third quarter. We expect volume growth on these tests to continue to accelerate in Q4 and offer high growth for the foreseeable future. For those new to our story, the business began by serving expert clinical geneticist 25 years ago, and now 8 out of 10 in the U.S. ordered their testing from GeneDx. I mentioned that because it's been just over 2 years since we began calling on pediatric neurologists and already 1/3 of those physicians order from us. Over the next few years, we expect to pull volume from many more call points, the largest of which is the general pediatrician. Near-term growth should continue to be fueled by increased ordering patterns from existing accounts as they continue to convert from panels and activating more untapped pediatric neurologists. We'll also open up and penetrate additional pediatric and adult specialty call points and begin international market development. The NICU remains a compelling market for us, expected to ramp over the next several quarters and years. Of course, all of that is supplemented by the long-term potential to establish a commercial newborn screening market and by our ability to put GeneDx Infinity work for biopharma and other health care partners in a way that contributes meaningfully to our revenue base. The average reimbursement rate for exome and genome was over $3,500 a test in the third quarter. That's up from approximately $3,700 last quarter and $3,100 a year ago. With a talented team in place, our cross-functional revenue cycle efforts are positively influencing Medicaid coverage expansion and fighting for fair adjudication. And there's one big recent development to share in that regard. On November 1, the largest state Medicaid program, Medi-Cal, will begin covering whole genome testing for their members in California. We applaud their decision to become what is now the 36th state to cover exome and genome outpatient. As I mentioned on our last call, when we begin to sell into new call points and for new indications, we inherently expect lower initial payment rates compared to our established channels like Neuro and Geneticists. With this strategy to expand into new markets, some new volume may start out at lower collection rates, which in turn may have a modest impact on our average reimbursement rate in the coming quarters. That said, any impact should be transitory. And to be clear, unit economics matter to us. Lessons from this industry's past are always top of mind when contemplating pricing and go-to-market strategies. Our view that rates will be durable and enable both high growth and attractive gross margins well into the future remains intact. Turning to gross margin. We expanded total company adjusted gross margin of 74%, driven by favorable mix shift, improved reimbursement and lower COGS. Bryan's team continues to innovate, and they have an impressive road map to further reduce COGS by leveraging automation and AI to optimize production. GeneDx has achieved an important economy of scale advantage, and we expect to hold on to that advantage well into the future. Adjusted total operating expenses were $71 million. That is up sequentially in terms of aggregate dollars, representing some variable costs growing with the revenue base, but primarily early investments we expect will drive volume growth mid-2026 and beyond. Total OpEx was 61% of revenue this quarter, and that's a number I'm quite comfortable with at this point. I want to underscore the spend here is deliberate, representing strategic investments into accelerating our long-term growth vectors. Specifically, we've begun to build the first phase of the dedicated Gen Peds sales team. We've added the first few sales heads in new specialty markets and key international markets. We're executing against our first ever brand campaign. We've ramped product and technology talent to design and build our next-gen customer experience for nonexperts and R&D includes innovation to our genomics program and support for clinical and health economic research as just some examples. The expense ramp reflects continued confidence in the ROI. They're all designed to drive volume in the future. That growth, in turn, accelerates a flywheel effect, whereby our Infinity data set expands, our competitive moat strengthens, we attract new customers and economies of scale continue to improve. While these investments impact near-term operating margin, every dollar is meant to build high-quality, durable future revenues. Expect sequential growth in our operating expense for the next several quarters, but all within a framework designed to achieve industry-leading growth rates while maintaining attractive gross margins. We have demonstrated the ability to drive operating leverage and EPS accretion. With strong demand in an ever-expanding serviceable market, we'll be reinvesting back into the business to capture an exponentially larger future and build long-term value creation. The team here has the experience to understand our responsibility to be good stewards of investor capital. On the bottom line, we generated $14.7 million in adjusted net income and $0.51 of adjusted basic EPS in the third quarter of 2025. And we're well capitalized with cash, cash equivalents, marketable securities and restricted cash totaling $156 million as of September 30, 2025. Cash flow for the third quarter included $9 million in free cash flow generated and $12 million in ATM proceeds net of fees from the issuance of 101,367 shares of common stock. Now an update on guidance before turning over to Bryan. We're raising top line total revenue guidance to between $425 million and $428 million for full year 2025. Just as a reminder, in the third quarter, we discontinued our hereditary cancer offerings. That business generated $1.2 million in this third quarter of 2025 and $3.3 million in the same quarter last year. It will be near 0 in the fourth quarter of this year. We're raising exome and genome revenue guidance to deliver between 53% and 55% growth for full year 2025, which is exome and genome revenues of $358 million to $361 million. As a reminder, when looking at the prior year comp, the fourth quarter of 2024 included a discrete benefit of $6.8 million we called out on our fourth quarter 2024 call. $5.8 million of that benefit was exome and genome. Excluding that, the full year growth rate is 57% to 60%. We again reaffirm our expectation to deliver at least 30% exome and genome volume growth for full year 2025. As had always been expected, volume growth has accelerated throughout the year, and the guide implies a fourth quarter exit of at least 34%. We're raising expectation for full year 2025 adjusted gross margin to between 70% and 71%. And we once again reaffirm our expectation to remain profitable. I'll now hand it over to Bryan, our Chief Operating Officer. Bryan Dechairo: Thanks, Kevin. Good morning, everyone. When children need medical care, parents like myself want an accurate diagnosis as soon as possible. That's what we do every single day at GeneDx, and we do it better than any other lab in the world because of GeneDx Infinity, the leading rare disease data set, made up of more than 2.5 million rare genetic tests, including nearly 1 million exomes and genomes and over 7 million phenotypic data points. Infinity contains an unparalleled vast and structured reservoir of potential gene variants that cause rare condition. We reported over 25,000 cases this quarter and nearly 2/3 of those were parent-child trios capturing mom and dad as comparator samples. That means this quarter alone, we actually sequenced more than 55,000 individuals. The scale of the data is fundamental. It takes at least 2 children with the same gene variation to validate a diagnosis for both kids and the greatest chance of finding another child with fewer child variant is within GeneDx Infinity. Every patient enriches Infinity's data density, creating the flywheel effect and rapidly making it more difficult for competitors to catch up to our quality, speed and accuracy across diverse populations. As we're accelerating, this year alone, we are projected to add 30% more rare disease exomes and genomes into Infinity than in the previous 24 years combined. Tapping into Infinity is our brilliant team of more than 100 MDs and PhDs and 150 genetic counselors who transform Infinity into clear trusted answers that clinicians can act on with confidence. We are also applying AI tools like our ML-powered GeneRanker Multiscore on top of GeneDx Infinity to harness the power of our data, scale our platform and increase speed and turnaround time. We already deliver answers in as soon as 48 hours in critical care settings like the NICU. But by expanding AI across our system, there's potential to turn our ultrarapid turnaround time into standard of care in every setting. Infinity, our team and our technology have helped us build a best-in-class genome, and we continue to raise the bar. We are constantly enriching our product with new genomic technologies, including medium and long-read sequencing and adding multimodal analysis beyond DNA. Partners come to GeneDx looking to validate emerging technologies and pioneer modalities that will forever change how we diagnose disease, thus creating a virtuous cycle of innovation that not only future-proofs our product leadership, but enhances our ability to serve more patients with speed, accuracy and scale over time. As showcased in the science we delivered at the ASHG conference, these programs generate data that compounds upon our massive library of more than 1,000 peer-reviewed publications, further exemplifying GeneDx position at the forefront of genomic innovation. In parallel, we are radically simplifying genomics to enable broad adoption in everyday medicine. GeneDx is the #1 genetic testing brand amongst pediatric providers, and we are evolving our customer experience to extend that lead. On average, general pediatricians have only 10 minutes with the patient. So we need to meet them where they are with 1 minute ordering and best-in-class customer experience. Catalyzed by the American Academy of Pediatrics clinical report in June, we are simplifying ordering and result interpretation for clinicians while enriching the patient and family experience. We are already still testing many of these customer experience innovations and are positioned for broader rollout in 2026 and beyond. With that, I'll hand it back to Katherine. Katherine Stueland: Thank you so much, Bryan. We talk about being a fast growth business and volumes because each one of those samples represents a family that is desperate for an accurate diagnosis. So we act with urgency and purpose because those patients and families are counting on us. There are incredible opportunities ahead as we continue the broader paradigm shift already underway across health care, supported by GeneDx Infinity, and strengthened by our network of partners. GeneDx is leading the shift to proactive personalized care that begins at first, unlocking earlier diagnoses, faster breakthroughs and healthier lives for all, and we're very proud of the work we do each and every day. So thank you. With that, I'd love to open up the line for your questions. Operator: [Operator Instructions]. And our first question for today will come from the line of Subbu Nambi of Guggenheim. Subhalaxmi Nambi: With emphasis at AAP for clinicians to take a stepwise approach to ordering beginning with chromosomal microarray, have you seen an uptick in volume there? And if so, how does that change your strategy, if at all, to sunset some of these legacy products? Katherine Stueland: Absolutely. Thanks, Subbu. As I mentioned in the script, most pediatricians are hearing about the guidelines update for the first time from us. So whether it is at AAP or as we're starting to engage with pediatricians on education, they're hearing about it from us. So I think that underscores the massive need for education and why it reaffirms our view that it will take 18 to 24 months beyond education, it's also going to require workflow. So I would say what we saw in the quarter was the vast majority of growth coming from our core, which is great. And no meaningful uptake in terms of orders from pediatricians from CMA and no notable changes on CMA or orders from general peds. But really good engagement. I would say the research that we've done with pediatricians is affirming how important our opportunity is. And it's not if they're going to order an exome or a genome, it's how they're going to order it. And is it going to be through an improved ordering process that we're building that Bryan talked about. So one minute ordering, we think, is an awesome improvement for us as we think about 2026. Doctors are consumers, too. And so they're used to fast efficient ordering. And Epic Aura is also going to be a great way. So I would say that the feedback that we're getting from the engagement that we're having with pediatricians is really positive about the fact that they are going to order testing and want to order it from us. I think the FDA designation only further reinforces why they should order from us. Infinity is another reason why they're going to order from us in terms of accuracy. So it's not -- if they're going to order, it's how, and we feel really confident it will be from GeneDx. Subhalaxmi Nambi: Kevin, this one is for you. The guide implies ASPs to go down sequentially. Is that just conservatism? Or are there any seasonal dynamics to call out? Even the margin guide implies COGS to increase sequentially? Any color you could provide. And then just a cleanup, the true-ups for 3Q '24, in this print, it says $2.2 million, but in the Q, it had said $6.3 million, if I remember it right. So just help us out here, please. Kevin Feeley: Yes. And by the way, in case I misspoke in my prepared remarks, the third quarter average reimbursement rate was over $3,800 and so representative of a lot of strength in the third quarter and continually reducing denials. So really pleased with that third quarter result over $3,800. Yes, the guide would imply that potentially the rate could bounce, bounce around some in the magnitude of about $100 down in the fourth quarter. That's really just part of that inherent expectation as we continue to open up new call points, target indication expansion there may be some experience on the outset where rates are artificially lower to start, and we have to build up some experience and show that demand to payers. And so the guide builds in some conservatism in that regard just to level set. And then in terms of true-ups throughout the year, the third quarter, nothing to call out, very minimal impact in terms of out-of-period adjustments in the third quarter. So that rate of over $3,800 is representative of what we think the third quarter activity will produce. And historically, we've averaged a couple of million dollars of those true-ups each quarter, but nothing that I would call out as extraordinary or onetime. Subhalaxmi Nambi: And Kevin, it was a pretty good margin as well this quarter. So is there any reason for us to believe that it should not be sustainable? Kevin Feeley: No. Look, we raised the guide again in terms of gross margin. And so I just wanted to leave some room there should we see some of those reimbursement rates bounce around some in the fourth quarter. So a little bit of a function of raising the guide, but keeping a bit of a conservative stance. Operator: And our next question will be coming from the line of Dan Brennan of TD Cowen. Daniel Brennan: Maybe the first one, Kevin and Katherine, can you just speak to the NICU? I know you discussed, Katherine, in your prepared remarks, you guys are on track for the number of NICUs that are be enabled with EMR. But just kind of what did you see in Q3? How do we think about implicit in the volume guide for 4Q, what the NICU contribution is? And any color on just kind of what some of the early traction and kind of feedback has been? Katherine Stueland: Yes, I'll start, and then we'll pass it over to Kevin. So the NICU, as I said, remains a really important opportunity. It is shocking to people when you say fewer than 5% of babies in the NICU get a genetic test. We have the clinical data. We've got the health economic data. We have the calculator that can convince the CFO that this is going to be good for their business. Hospitals are running businesses as well. And we have Epic Aura. We're continuing to see growth in that sector. And in fact, that it's a fast-growing part of our business. We're seeing meaningful growth in terms of same-store sales on the NICU side of things. So we definitely see it as an important contributor to our overall goal of getting an earlier possible diagnosis. And what we're also learning is that some clinicians like our portal. And so we're on track to continue to drive Epic Aura. We'll have at least 12 systems activated by the end of this year. We're seeing kind of the full test menu being ordered, which is fantastic. So we think Epic Aura continues to be a meaningful unlock for new clinicians who are working with us. And so we're going to continue to drive utilization of Epic Aura at the health system level in order to impact both outpatient and inpatient. Kevin Feeley: Yes. I mean through the third quarter and to date, volumes from the NICU are growing nicely. It's one of our fastest-growing channels, albeit from a much smaller pace. But percentage-wise, it's growing nicely. Throughout the year, we've been tracking looking to bring in an incremental 2,000 units or so in the second half of the year with most of those coming in the fourth quarter. We're going to run through the tape as much as we can through the fourth quarter. Whether or not we hit that number exact or not, more than confident that outpatient volumes will supplement and more than make up for that. I think most importantly, we're seeing growth. We're engaging with health system administrators and our thesis that the NICU market is very compelling and part of our growth story in the years to come remains very much intact. Daniel Brennan: Maybe just on the quarter itself. I mean the quarter came in better than expected. I know in past quarters, you've given some color about same-store sales growth, maybe some new indications. I know you discussed in the prepared remarks also new doctors. Just any way to frame kind of what's happening with their volumes and how that might inform kind of the implied guide for the fourth quarter with those building blocks? Kevin Feeley: The strength really driven by those core outpatient markets, continued nice step-up from even that innermost core of Expert Geneticist. So we are seeing strong signals of the continued evolution of those docs putting down single-gene tests and multi-gene panels in place of exome and genome, and we'd expect that to continue for several more quarters or years to come. So in terms of same-store sales rates at Expert Geneticist continue to see nice uptake there. And then ped neuros good account activation. We're now at a point where just over 1/3 of all ped neuros are ordering their exome and genome from us. Not all of those are mature yet in their ramp cycle. And so good growth to come from docs we've already activated. But I think what's more exciting to us in the coming quarters is just the green space to activate more docs there. The messaging we have for how we can serve that cohort, in particular, is really resonating. And so the next couple of quarters, we'll continue to see growth rates pretty similar to what we just produced from ped neuro and geneticist. And of course, what we remain most excited about is activating even more call points in the coming quarters. Daniel Brennan: And then maybe just one final follow-up. I heard you mention on the cost side. I'd love to get a little more color on kind of OpEx. I think you said the third quarter OpEx number is a good number. Maybe you can just elaborate a little bit on the OpEx spending from here. And I think you said it's going to open up growth by mid-'26. So is that when we're expecting to see a bit of like some pediatrician volume show up? So maybe just clarify the OpEx outlook and kind of and the pediatrician call point and the impact there. Kevin Feeley: Yes. We've begun to build out the commercial team that, of course, includes building a dedicated general pediatrician sales team. I think we remain anchored on that initial expectation we set of about 18 to 24 months from the time those AAP guidelines dropped in June to when we would see sort of escape velocity on incoming volume. That said, we're engaging with the pediatrician community as we speak. We attended their conference in September. And all of that has validated our thesis that the market will be real and that there will be demand out there, but we've got to build some of the tools and medical education. And so we'll, of course, be carrying some incremental commercial costs as we go through that education period. And so that's part of the step-up there. And if we look at overall R&D spend, we continue to rev our genomic assays and technology to keep the best-in-class product in the field and build out that customer experience for nonexperts because we continue to see strong ROI opportunities and pulling through volume from even more physician types out there. So the level of step-up from Q2 to Q3, you might expect something similar into the fourth quarter from Q3 to Q4, but all within an eye towards keeping the business profitable. We maintain our commitment to keep the business in the [ black ] there, so that we can continue to reinvest back into achieving industry-leading growth rates. Operator: And our next question will be coming from the line of Mark Massaro of BTIG. Mark Massaro: Congrats on the strong quarter. I wanted to start, you guys indicated, if I heard correctly, that you plan to double the size of your sales force over the coming quarters. Just looking at your website, it looks like there's over 80 job openings and over 35 to 40 in general pediatrics. Can you just give us a sense for how quickly you plan to onboard these folks? I think you indicated that you've added the first few reps. But can you just give us a sense of how large of a team this might look like, say, maybe 2 years from now? Katherine Stueland: Sure. So we have started hiring our regional sales directors. So the leaders who are coming in and who are starting to form their teams. Frankly, there's just really good talent available to us on the market right now, and we wanted to make sure that we're hiring the best of the best. And I'm thrilled to see the talent that's coming in at the RSD level. So we expect that we're going to be -- as the regional sales directors get assembled, we want to make sure that they are discerning and recruiting the best. So I expect over the next several quarters, we'll get them up to in their seats and activated. And then, of course, it requires training and ensuring that they have their merchant orders in the field. So we've said about double the size of the sales force today. And so we'll be opportunistic and continue to hire over the next several quarters. Our goal is to accelerate that adoption framework. We said 18 to 24 months. We still think that, that's accurate. But of course, we're going to push to see if we can pull that in as much as we can and all centers around that North Star of earliest possible diagnosis for as many families as possible. So we're hiring. I think looking at 2 years from now, could we grow beyond that? Possibly, but we first need to see. I'd like to get this team assembled. I'd like to have them activated. We want to get the features up and running in terms of the workflow. We know it's going to require more education, more medical affairs education. So we have a lot of work to do. So I wouldn't want to commit to building the team beyond what we've built or beyond what we're hiring for today because I think that's a really healthy investment in forward leaning growth. So hopefully, that gives you a sense of how we're thinking about it. Mark Massaro: Yes, that's great. And I wanted to ask, congrats on all the progress on the newborn side with the Florida Sunshine Genetics Act, the BEACONS NIH award and the ongoing GUARDIAN study. Recognizing this is a ways away in terms of recognizing, I would say, perhaps clinical revenue. But can you give us a sense for whether or not you think that this could be more of a near-term driver as it relates to driving clinical adoption. So I guess what I'm asking is in -- like first half of '26, would you expect to drive any clinical testing in genetic newborn screening? Or would this all be basically precursor work to create the evidence for this in the out years? Katherine Stueland: Yes. So thank you for recognizing that we have been central to all of these studies. And these have all been competitive processes. And we have put our best foot forward with each of them. I think the reason why we continue to be selected is because we've done more of this than anyone in the United States. And now with Fabric, it certainly extends our opportunity to be able to do it in a standardized way regardless of if a baby is born in Los Angeles or London. Every child deserves results that are coming from the same data set, which is Infinity. So we think that we've got a massive opportunity to be able to really lead this new era of genomic medicine. Just to give you a little bit of color on each of these programs. So obviously, with GUARDIAN, it established, I think, a responsible ethical foundation for why you can do newborn screening in a way that is going to be something that parents have demand for, 70% of parents enrolled and to be able to deliver clinically actionable information, more than 3% of babies had a clinically actionable finding. With BEACONS, which is an NIH grant, that is looking at a federal approach to how do we operationalize it. And so we're going to be gaining more and more information on how to do this in a more standardized way across multiple states. So there's inherent goodness, I think, in that. And then, of course, Sunshine really takes it out of a research setting and into the clinic. So each one of those has an important -- is playing an important role in how we get to a place where we can drive clinical samples and start getting paid for them, which is ultimately what we want to accelerate. I would say the one piece that we have yet to deliver on, but that we are working on with the various groups that are overseeing the steering committees of these programs is the health economics. We think that's going to be a critically important part of how we can actually start getting paid for it. But as we talk to state Medicaid, we're talking about outpatient health economics. We're talking about inpatient health economics, and we're talking about newborn screening and why they need to start paying attention to it. So I think Florida gives us the first opportunity to say that there is a state that has a progressive approach to genomics and child health. And we want to continue to drive kind of the competition across these other states in order to start getting paid for it. We don't anticipate that, that's going to be a '26 driver in terms of revenue. But we'd like to see how we can continue to accelerate some of these policies to get paid as soon as possible. Kevin Feeley: Yes. I think the base plan, Mark, not counting on anything material in '26, and we'll have further updates throughout 2026 and what that means to 2027 and beyond. But certainly, the momentum would say that beginning in '27 and beyond, we may start to see some nice contribution there. Mark Massaro: Okay. Fantastic. And then if I can ask one more. I am curious about the FDA path Nice to see breakthrough device designation come in from the agency. Can you give us a sense for timing here? Are you expecting to have to run any more clinical trial work or samples to prove the evidence to obtain the approval? And I recognize that some clinicians sort of like the stamp of approval from the agency, but there could potentially be pricing or ADLT implications here. So can you just maybe walk us through the rationale to pursue FDA approval? Katherine Stueland: Sure. I'll kick it off and then I'll hand over to Bryan, who's been leading the charge here. So part of the rationale as we think about the future market, I think a couple of things. One, your point about, yes, clinicians do respond to FDA and FDA-approved, FDA authorized and see it as a sign of validation. And pediatricians who are really busy looking at everything under the sun, we know that they also respond to FDA approved FDA authorized. So we think that there's a really important message to be delivered to accelerate that market. I think part of what's interesting, and this is different than in the oncology space. And as we think about the importance of FDA, in rare diseases, we're trying to open up access and open up more diagnoses, not limit them. So we don't see a real restriction coming through this designation. But I'll let Bryan comment some more on what the next steps are and how the path will look moving forward. Bryan Dechairo: Thanks, Katherine. Mark, so the breakthrough designation is really important because what it actually shows us signals is that our test is unique. The power of our Infinity database is also unique. And it shows that what we're doing today is actually helping critical patients to make decisions that there's nothing else out there to help them with today. And that's what breakthrough designation says from the FDA's recognition. It also is letting us know that FDA is working side-by-side with us in an accelerated regulatory framework to get this critical technology through the agency and to as many people around the U.S. and globally because FDA is also recognized by many markets around the U.S. as we expand ex-U.S. as well. But the nice thing I would also say is not only expedited regulatory review. We are also working by the fact that we've been around for 25 years. Our process, our test is not changing. And what we're doing is we're working with FDA to understand our legacy data and all the power of our database and how it informs the accuracy that we've already been bringing to patients. It's not a new test. It's a test that we've done for many years that we lead in that place. And so I wouldn't look at this at all as limiting access or limiting reimbursement or limiting the actual diseases that we're answering today. It will just be a partnership to accelerate the regulatory review and give that stamp of FDA approval that pediatricians look for in their medications, and they look for that in their diagnostic test as well. Operator: Our next question is coming from the line of Tycho Peterson of Jefferies. Tycho Peterson: I want to go back to the OpEx questions. I know you've had a few already. I appreciate the color on the sales hires. I guess, Kevin, maybe help us think about the ROI on some of the buckets that you flagged. And I'd love to hear a little bit more color beyond the sales hires, you talked about the first brand campaign, international product and technology investments. Maybe could you bucket those for us how meaningful they are? Kevin Feeley: Yes. In many ways, it's like choosing between your children. They're all really important to create a bit of the virtuous cycle to make us more attractive and more sticky with more and more physician types out there. And so the commercial expansion should be viewed as our confidence in the long-term market well beyond the existing physician types that we have today. We have about 3 call points today, at least primarily ped neuro, geneticist and then the NICU. You can see that expanding well beyond a dozen towards 20 over time as you slice different physician types. The largest is the general pediatrician, the 60,000 pediatricians in the U.S. There's about 25,000 of those who are ordering diagnostic tests for developmental intellectual delay, which is covered by the umbrella of those AAP guidelines. And so that's a lot of doors to knock on, and we intend to do so, bringing the best available experience to those nonexperts. As Bryan talked about, those are really busy physicians without a lot of face time. And so it's important that we build the experience, both on the front end to honor their time, but also on the back end to make them feel comfort in providing what oftentimes is devastating diagnosis to families. And so GeneDx is one of the largest employers of geneticists and genetic counselors in the country, if not the world. And so part of the long-term road map is to force multiply those resources with technology, so that nonexperts are comfortable in providing care to patients in the back end of a diagnostic result. All of those, we think, important to capture a leading market share. Today, we hold about an 80% market share of all clinical exome and genome run in the United States, whether we hold 80% or give up a few hundred basis points here or there over the next decade, we'll see, but we intend to hold a majority market share in much larger markets to come. And we think now is the time to make some of those investments. Katherine Stueland: The only thing I would add, Tycho, 2 things. One, whatever we're putting a sales rep out there, we first are following the patients, and we're also following reimbursement. So we're not going to put a rep in a territory, whether it's in the U.S. or in a region outside the U.S. unless there's ample patients for us to help and a healthy path to reimbursement. So those have been like our core principles that I think are unique to GeneDx's business model that we're committed to. Second, on the brand campaign, we are continuing to drive awareness of GeneDx because part of the problem is geneticists have known GeneDx, 8 out of 10 geneticists know us. We need to continue to raise awareness amongst general clinicians as well as parents. So parents know to ask for this testing that the technology exists today is paid for today by insurance companies and that we can get them an answer in a short period of time. So we've got a strong effort there that is only being amplified by the addition of Lisa Gurry, who was at Microsoft running marketing across different business units amongst other roles for about 25 years, and she was at Truveta as well. So she's going to help us also really amplify how we communicate the message, both to clinicians and to patients as well. Tycho Peterson: Okay. Okay. Maybe a follow-up along those lines. I guess, CapEx is also up 3x over last year. I guess, Kevin, anything to flag there? Is that the core Maryland facility? Is it fabrics? How should we think about CapEx here? Kevin Feeley: It's primarily all pulling forward some additional sequencers as we scale. Obviously, the business, we think, has achieved great economies of scale such that we're able to exponentially grow volumes without matching adding resources one for one. But as we grow, we're going to have to add more to the sequencer line. And so what you see in the third quarter, by and large, is really just some sequencer technology to keep pace with the volume. The facility itself has plenty of room in it. And yes, we're still operating the core laboratory down in Gaithersburg, Maryland. Very little from the fabric side. Tycho Peterson: Okay. And then maybe just shifting to denial rates. Can you give us a sense of where you ended the quarter? I understand your ASP commentary for the fourth quarter, but how are you thinking about denial rates and how much leverage you will have maybe first half of '26? Kevin Feeley: It's mid- to high 50% collection rate, picked up a nice basis point or 2 on that with the rate in the $3,800, really pleased with the progress of the team. I think what's most exciting is if you look at that Medicaid population in the 36 or 35 states up until next week, the 35 states with coverage outpatient, we're seeing a really high payment rate of about 80% fairly consistently, pretty clear rules to follow. And not some of the nonmedical denials that we see over the commercial insurers. But the aggregate rate have picked up some towards the high 50s in terms of collection rate. Tycho Peterson: Okay. Last point, Katherine, can we get an update on how some of the earlier launches this year have tracked cerebral palsy, IEI, et cetera? Katherine Stueland: Yes. So I think as we have continued to roll out additional new indications, and again, there's 10,000 rare diseases. So we're just going to be routinely cranking out new indications over time. I think that's part of the reason why we're seeing the strong growth. It's contributing. A lot of the symptoms are overlapping. So you might have a rep who is talking about symptoms associated with epilepsy and it turns out it's cerebral palsy. You might have a rep going in talking about cerebral palsy and it turns out that it's epilepsy. Some of these -- there are dual diagnoses. So there are very -- the new indications are certainly contributing to our growth. And I think it just speaks to the vast underutilization of testing for so many of these kids. So we'll continue to have kind of rolling indications launch. This is a core part of the way that we operate the business. Operator: And our next question will be coming from the line of David Westenberg of Piper Sandler. David Westenberg: I apologize if I asked something I've been jumping between calls. Can you give us an incremental -- a sense for the incremental revenue opportunity with the expansion of Medi-Cal and what the strategy is for securing the remaining 14 states? And how should we think about timing there? And I'll just have one more. Kevin Feeley: Yes. Look, with California being the most densely populated state, certainly a nice win. The probably next largest to come would be Massachusetts. So really exciting to see California come online next week in a couple of days. Today, a couple of thousand tests that would have run through as zeros that now we might expect to get paid for. Obviously, we have to build up some history and experience to see that. And of course, with coverage now, a more focused effort to calibrate and pull more volumes through the state. So excited about a larger opportunity ahead beyond the existing volume that we have. And then the second part of your question, Dave. Katherine Stueland: Strategy is for other states to come online from Medicare. So we've got a fantastic market access team that we only continue to bolster. We now have an East and West government affairs leader. And so they're continuing to put good data, great guidelines, health economics data in front of the state-by-state Medicaid officers. And we work with local clinicians, local parent advocates. So it's -- I would say it's a well-oiled machine, but it's within their control, not ours. So we're just getting playbook. We know they respond well, particularly to the health economic data. The reality is we are paying for these children and the absence of accurate diagnosis one way or another using our testing upfront is an opportunity to get to the right diagnosis sooner and save all of these payers. So that message is resonating. So we'll continue to drive that until we have every single state with inpatient, outpatient. And as I said earlier, then we move on a new work. So we've got our work cut out for us, but a very optimistic path ahead. David Westenberg: Sounds great. I just wanted to ask one longer-term question, and that is about pricing in the longer term. Now a lot of times you're billing for codes of exome and genome. Now saying that not all exomes and genomes are the same, and there's a constant need to integrate things like methylation, long reads, skillful informatics. Do you think that payers understand that constant innovation is necessary to enhance diagnostic yields and you're able to retain pricing over the long term? And consequently to that, when you're thinking about new competitors coming in, do you feel like the constant need for improving the test does maintain pricing long term because you will be constantly needing to enhance the assays? Katherine Stueland: Yes. Thank you, Dave. And I ask Bryan and Kevin to tag in this because I think it speaks to, one, what we're doing today beyond short read, but two, also why Infinity and that data set sets us apart from others. Bryan Dechairo: Yes. Thanks, Katherine. So on the technology front, it's really our job to continue to innovate and fund that innovation to bring the best answers to patients every day. We already have seen that with the indication expansions as we move more and more people off of panels and into genome and exome, which is what's driving the growth that we've been seeing and will continue to drive a lot of that growth. And that takes new technologies, technologies around medium and long-read sequencing, multimodal technologies that we discussed. But what's great is that the scale of our operations that we continue to scale, we are actually able to be driving down cost of goods as we bring in more and more innovations. And so you're not seeing an increase in COGS as the innovations roll out into production. You're actually seeing COGS continue to come down with those innovations with higher diagnostic yield. And really only GeneDx with our scale can deliver that quality. I'll hand it over to Kevin to talk about the reimbursement. Kevin Feeley: Yes. Let's assume that's an issue with Dave's technology. To follow up with Bryan's comments, look, it's upon us to prove the value proposition of all of our services to payers. And so we're hard at work doing so. We've always viewed the long-term durability of our rates at that average reimbursement or cash collection rate. Potentially, over time, you might see the billable rate come down, but we're still facing a dynamic today where we just produced $3,800 a test despite having a denial rate in the mid-40s. And we absolutely think that we can improve upon that in a meaningful way. And so continue to believe that, that average collection rate will be at or higher than today's levels for the foreseeable future over time. Operator: The next question will be coming from the line of Bill Bonello of Craig-Hallum. William Bonello: No, I was kind of interested in hearing where David was going to go with that conversation. So virtually everything interesting and noninteresting has already been asked. I just want to clarify one thing on the margin front with the incremental investments that you obviously need to make drive growth, drive these new opportunities. Is the thinking right now that you would at least try and sort of maintain the level of EBITDA margin where you are at? Or should we think about this more as in the interim, we may see EBITDA margin drop down a little bit as you set up for a future where it could be significantly better? Kevin Feeley: Yes. Certainly all within the framework and design of a future where it's significantly better. But we're entering an investment cycle here. Not every quarter will be different, and we'll have more to say about 2026 at our Q4 call. So -- but may see that EBITDA margin come down some, in some of these quarters as we ramp up investments and then wait to see those investments mature in terms of top line contribution. I read through the commitment as keeping it in the black and positive, but not necessarily at these levels. But certainly, we think the business model has proven the ability to accrete EPS upwards, and there will be a time and place when we focus back on doing that. But for now, there's such a large opportunity ahead. We think it's important we make some of these investments to take advantage of that. William Bonello: Okay. That's helpful. And then just the second thing, as I talk to people, there always seems to be some skepticism about the 18 to 24 months and to avoid the possibility that people get sort of overly exuberant here. Can you maybe just talk through in a little bit more detail some of the steps that need to be completed before you can really see a meaningful ramp in the general pediatrician market. You talked about the sales force, obviously, has to be recruited and trained, but you also mentioned some things that you want to do with the ordering platform and the results delivery platform. What -- maybe you can tell us a little bit more about that and just other -- some of the other basic nuts and bolts kind of work that is required to expand into a totally new segment of the market. Katherine Stueland: Yes. Thank you for that, Bill. So education is key. As I said, most of these pediatricians are learning about the guidelines update from us. We need to make it relevant for them. They're seeing a whole host of symptoms and issues coming into their clinic. And we have to do a lot to dispel some of the myths related to genomics. They think that it's going to take a long time. It's going to be confusing to understand. It's going to be hard to order that a geneticist should be the one ordering it. And when we come in and we explain to them that it is covered by insurance, we can turn around their sample within a few weeks, and we're going to provide a simplified report. It changes the way that they're thinking about things. So I would say education is key to kind of setting the record straight about what we can and cannot do. Also educating them, there's still -- there could be 12 to 24 months to begin to see a geneticist. So they may say that they would like to send a patient to a geneticist. But if you say, well, if that delays a diagnosis by 12 to 24 months, then they don't want to see that happen. They want to activate in that moment. So we're getting a lot of good, I would say, market research feedback that affirms the need to continue to educate. So education is one. Coming out of that, too, yes, we talked about workflow. Their time is precious. And so how do we take our ordering platform today and bring it to what Bryan said was a 1-minute ordering approach. So we're building that capability as well as other ways to ensure that we can unburden the pediatrician from some of the administrative work that they may have to do. So workflow is another key investment market access and ensuring that our market access team is delivering a dossier with these updated guidelines is going to be critically important. So they've started doing that. So that's the third piece. And then fourth is the sales rep and the sales rep going in and doing a lot of the kind of hand-to-hand combat in terms of education. But that's part of the reason why we're investing now. We would love to see an acceleration of that 18 to 24 months, but we know that there's a lot of work that we have to deliver on to educate and to smooth things out and make it easier for these clinicians to order. Kevin Feeley: Yes. Look, if the skepticism is that we'll beat the time frame we set out, I guess I'd characterize that as a high-quality problem. Will it be more than 0 in 2026? It will be more than 0 in 2026 in general pediatricians. But -- we want to make sure we're approaching the market in a responsible way that really sets the stage for the company's growth over the next half a decade to decade. And you only get one good first impression, and we intend to make that. William Bonello: Yes. That makes a ton of sense. And one last question just along that line, and you just may not care to answer this at this point. But in some of the areas where we've been seeing companies reach out to primary care physician markets, which obviously a lot larger, but not a ton different than the conceptually than reaching out to the pediatric market. We've seen companies with specialized tests partner with some of the larger lab companies with broad menus to make ordering of testing a little bit easier, even results delivery a little bit easier. Is that something you would consider? Katherine Stueland: Look, we're always thinking about new channels and ways to help more patients. So I wouldn't say no, we would not consider that if there's an opportunity for us to drive our business forward, help more families. Certainly, in our experience, we haven't seen that work because it tends to not be the highest priority on the part of the partner. But certainly, we would be open to it. So for now, our plan is to make sure that we can drive as much of the business forward as we can in service of more patients. So we're placing a bet on what we know works, which is our team. Bryan Dechairo: I'd also add that we've been around for 25 years and pediatricians have seen their patients who they stay with for 18 years, these kids come back to them with our reports. And when we did market research to look at what was the brand that they thought of when it came to genetics, GeneDx was the #1 brand over all other testing companies, even the ones that they use every day for other tests. And so I think with that recognition and with the understanding that our test is #1 in the space, it makes sense for us to continue with the models that we're exploring. William Bonello: Yes, makes a ton of sense. Operator: And the next question will come from the line of Kyle Mikson of Canaccord. Kyle Mikson: Congrats on the quarter. So Kevin, on the Medi-Cal impact, California is obviously large. It's densely populated, as you said. How significant of an ASP and gross margin headwind is that going to be? And then how long will that dynamic take to stabilize and then approach the higher kind of core ASP and gross margin? Kevin Feeley: Yes. Look, we're excited that Medi-Cal news, of course, will further bolster the reimbursement environment here. So it's certainly positive. So consider it a tailwind. Those are tests, at least the existing volume or tests that we're running and taking zeros on today. And starting next week, we'd expect to get paid for that volume. The couple of thousand tests, I think, would understate the long-term opportunity with now Medicaid coverage in hand, it's certainly a nice talking point for our commercial team to get out there, spread that work and begin to pull in even more volumes. We're serving all 50 states, but at various levels. And so in those states where there's good reimbursement coverage, that's where we tend to amplify sales resources to pull in more volume, and we certainly plan on doing so moving forward. Kyle Mikson: Just to clarify, so payment collection rate would go from 0 to like 80% overnight, you're kind of saying in United States? Kevin Feeley: Yes Yes. Still waiting on the ultimate price from the Medicaid administrator, but we expect it to be in line with other states that have gone live with coverage. Kyle Mikson: Okay. Sounds good. And then Katherine, on the longer-term kind of data business, Infinity AI and Multiscore, you're kind of emphasizing that recently. Could you just contextualize the competitive moat that provides and what the future kind of holds there? And then I think a follow-up to Dave's question, how critical is the longer-range sequencing data going to be to advance that asset, specifically the medium-range kind of sequencing from Roche or longer read with PacBio, et cetera? Bryan Dechairo: Yes. Let me take that 2 parts. First is the Infinity database that you just were mentioning. As I mentioned in my earlier comments, the power of that database is the fact that it's a massive reservoir of variants that we have seen in patients that have yet to be validated by a second patient. But every day, with the volume that we're having, we're validating more and more and growing that database over time. And so the AI tools that we put on top our machine learning, multiscore, it really just improves the accuracy, the speed and the efficiency that our clinical experts can go through and find those diagnosis. It gives us the highest accuracy in that space. But as you're also mentioning, those same AI tools become value add to our partners like pharma, employers and others as they go out and look at the Infinity database, look at the data that it sees and really starts to actually open up the ability to have more and more drug targets, more therapies and bring more solutions to these children with these devastating diagnoses over time. And so we really see that those AI approach is expanding into our pharma and our other partnerships around the globe. As far as our technology, the genome needs -- has some gaps in it. There's some difficult to sequence regions that we know about, which is why there are still some panels that people will order, every time that we bring in a medium read or a long read or other type of technologies, it really starts to improve the diagnostic yield for some of these other conditions, which again converts more and more folks off of panels and into the exome and genome as the best answer for all patients. And we are continuing to add more and more of these technologies for the right patients with the right phenotype. Operator: And the next question is coming from the line of Keith Hinton of Freedom Capital Markets. Keith Hinton: Just 2 quick ones. First one on the ExGen volumes. Just based on the volume split for second half of '25 that you talked about on the second quarter call, it seems like volume in the quarter slightly exceeded your internal expectations. So just can you talk a little bit about where you outperformed versus your internal expectations and maybe why you decided to leave the full year guide unchanged despite the beat? Kevin Feeley: Yes, we saw good momentum through the third quarter with accelerating volumes each month of the quarter. And so wrapped up September sort of as expected with the high point of the quarter and momentum has continued nicely. The outperformance mostly coming in the -- or primarily coming in the outpatient side of the business. Really forming that ped neuro call point. So most of the outperformance there coming from that physician type, and we continue to see a lot of space to go activate more ped neuros and bring in more volume. Overall, really pleased with the third quarter performance. Keith Hinton: Okay. Great. And then just one more question about the launch in general pediatricians, just less so about the sales force and more talking about any kind of buildup you need to do on the back end in terms of adding additional billing and revenue cycle folks to make sure the ASP doesn't drop too much, DTC spending, the parents, anything like that? Can you talk through how we should be thinking about the magnitude there? And also, is there any concern that there could be a bottleneck around genetic counseling for those patients that do have variants that come back that they need to better understand? Kevin Feeley: Part of those investments, as you rightly pointed out, are to ensure that there is no bottleneck in terms of genetic counseling resources or other support for nonexperts, both at the front end or back end of the process and translating those results to patients. And so those are core to the experience design changes that we'll be investing in. If you look at the expense ramp from Q2 to Q3, as I called out, from Q3 to Q4, I expect something in the same order of magnitude. And we'll have more to say as we frame out 2026. But again, would expect that there's ample gross margin to cover those reinvestments back in the business such that we'll keep the business profitable on an adjusted basis. Operator: Thank you. This does conclude today's Q&A session. I would now like to turn the call back over to Katherine Stueland for closing remarks. Please go ahead. Katherine Stueland: Wonderful. Well, on behalf of all the families who we serve, our customers and all of the employees at GeneDx, I just want to say thank you to our shareholders for continuing to support our long-term growth and changing health care for the better. So thank you all, and we look forward to seeing you soon over the coming days and weeks. Take care. Operator: Thank you. This does conclude today's program. Thank you all for joining. You may now disconnect.
Operator: Good morning, everyone, and welcome to the NeoGenomics Third Quarter 2025 Financial Results Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Priya Vedaraman, Senior Vice President of Finance at NeoGenomics. The floor is yours. Priya Vedaraman: Thank you, Jenny, and good morning, everyone. Welcome to the NeoGenomics Third Quarter 2025 Financial Results Call. With me today to discuss the results are Tony Zook, Chief Executive Officer; and Jeff Sherman, Chief Financial Officer. Additional members of the management team will be available for the Q&A portion of our call. This call is being simultaneously webcast. For reference, concurrent with today's call, we posted a short slide presentation in the Investor tab on our website at ir.neogenomics.com. During this call, we will make forward-looking statements regarding our future financial and business performance, business strategy, the timing and outcome of reimbursement decisions and financial guidance. We caution you that the actual events or results could differ materially from those expressed or implied by the forward-looking statements. These forward-looking statements made during the call speak only as of the original date of this call, and we undertake no obligation to update or revise any of these statements. Please refer to the information disclosed on the safe harbor statement slide in the deck posted on our website as well as the information under the heading Risk Factors in our most recent Forms 10-K, 10-Q, and 8-K that we filed with the SEC to identify important risks and other factors that may cause our actual results to differ materially from the forward-looking statements. These documents can be found in the Investors section of our website or on the SEC's website. During this call, we will also refer to certain non-GAAP financial measures that involve adjustments to GAAP results. The non-GAAP financial measures presented should not be considered an alternative to the financial measures required by GAAP, should not be considered measures of liquidity and are unlikely to be comparable to non-GAAP financial measures provided by other companies. Any non-GAAP financial measures referenced on this call are reconciled to the most directly comparable GAAP financial measures in a table available in the press release we issued this morning and in the slide deck available in the Investors section of our website. I will now turn the call over to Tony. Anthony Zook: Thanks, Priya. Well, good morning, everyone. Thank you for joining us today. I'll begin with a discussion of Q3 highlights and key business growth drivers before turning the call over to Jeff for a deep dive into the financials. We'll then open the call for your questions. During the third quarter of 2025, we again delivered record clinical volumes and revenues while making meaningful progress advancing our NGS and MRD long-term growth initiatives, including securing a favorable court ruling in our ongoing litigation with Natera that paves the way for a full clinical launch of our RaDaR ST MRD assay. I'll cover these initiatives in more detail shortly. Taking a step back, for those who may be new to the story, having spent much of my first 2 quarters as CEO, engaged in conversations with key stakeholders, I am as optimistic as ever about the significant opportunities that are in front of us as a leader in cancer testing. Importantly, we continue to differentiate ourselves in the community setting with both hospitals and oncologists, where approximately 80% of all cancer care is delivered. We've built a geographically balanced lab network that allows us to be responsive to customer needs, including offering some of the fastest test turnaround times in the industry when faster, more accurate treatment decisions can have a material impact on patient outcomes. Our recent acquisition of Pathline, a New York State-approved lab based in New Jersey, gives us a meaningful presence in the Northeast, which is the #3 cancer care market in the U.S. We believe the addition of Pathline allows us to offer significantly faster turnaround times, a larger and relevant New York State-approved test menu and an enhanced physician experience in the Northeast region, where we have historically been underpenetrated. The integration continues to proceed according to the plan that we communicated when we announced the transaction in March, including the validation of critical turnaround time-sensitive assays, which was completed during the third quarter. We remain positive about the impact that the acquisition will have in accelerating our growth in the Northeast, and we're on track to capture operational efficiencies and synergies that we anticipate will be accretive to profitability beginning in 2026. Together with our world-class commercial team, we have deep relationships with hospitals, cancer centers, and oncologists across the country. We're winning the customer experience by enabling precision oncology in the community setting, where adoption of next-generation testing has historically lagged behind NCI-designated cancer centers. Our customers increasingly view us as the partner of choice for all of their testing needs as their patients advance along their cancer care journey. We offer one of the broadest menus in the industry with more than 500 tests focused solely on oncology. Our menu spans everything from diagnostics to next-generation sequencing for therapy selection to MRD for cancer recurrence and monitoring. This makes Neo an ideal partner for institutions and practices who are looking to consolidate send-out testing to simplify operational workflows and improve patient experience. The therapy selection and MRD markets represent more than $40 billion of addressable market opportunity, both of which are growing rapidly and are relatively underpenetrated. Needless to say, the ongoing investments that we make in R&D as well as the potential BD partnerships are focused on these areas. This is particularly true of MRD, where we think we can create significant value while introducing innovation to the cancer testing market where it's needed most in the community setting. We also remain committed to our next-gen MRD research program, focused on generating IP that is entirely separate and distinct from our RaDaR portfolio. Given our broad menu and strong brand recognition in the community setting, coupled with a competitive MRD test, we believe we will capture market share over time as we add additional indications to this modality. While Jeff will provide a detailed review of our financials in a moment, I'd like to hit a few highlights from our third quarter. Our clinical business continued to perform well, driven by volume and share gains in key segments. As expected, nonclinical revenue declined in the quarter due to lower revenue from pharma and biotech customers. Total revenue for Q3 was $188 million, representing double-digit growth of 12% year-over-year. Our clinical business continued its robust growth, generating revenue growth of 15%, excluding the Pathline acquisition. The clinical performance was driven by effective execution of our commercial strategy: Protect, expand and acquire. In the third quarter, we again saw a sequential improvement in AUP, a record quarter for test volumes and NGS revenue growth of 24%, well ahead of the low to mid-teens NGS market growth rate. The 5 NGS products launched in 2023 contributed 24% of clinical revenue in the quarter. We continue to see demand for our non-NGS modalities as well with all modalities growing above market, which represented -- which resulted in record volumes, up 10.4% versus prior year on a same-store basis. The nonclinical portion of our business accounted for less than 9% of our total revenue in the third quarter and was down from the prior year, consistent with our expectations. Turning now to our RaDaR ST test. In August, the District Court for the Middle District of North Carolina granted our motion for summary judgment that all of Natera's asserted patent claims are invalid for claiming an eligible subject matter. The court dismissed Natera's claims against NeoGenomics with prejudice and entered a declaratory judgment of invalidity of both of Natera's asserted patents. The ruling paves the way for us to broadly commercialize RaDaR ST, formerly RaDaR 1.1. We launched RaDaR ST for biopharma customers in Q3. And while some of these efforts could result in bookings in Q4 of '25, the lead times necessary to obtain samples make it more likely that we'll begin recognizing revenue from biopharma customers in 2026. We have received MolDX approval for RaDaR ST in subsets of head and neck and breast cancer. We're preparing for a robust launch of this important assay in the clinical oncology setting in Q1 of 2026. We estimate that MRD cancer surveillance and monitoring represents a $30 billion addressable market, growing at a 30% CAGR. And with the market penetration of less than 10%, we believe we are well positioned as the cancer testing partner of choice in the community setting to capitalize on this lucrative market and deliver a differentiated and integrated MRD solution to our oncology customers. In parallel with our RaDaR ST launch preparedness activities, we continue to focus our R&D investments in next-generation MRD, demonstrating our long-term commitment to the MRD space as well as complementary targeted partnerships that allow us to fill in MRD product gaps that we don't currently address in an effort to deliver a unique industry-leading MRD portfolio to the market. Now turning to PanTracer LBx, our liquid biopsy genomic profiling test that delivers comprehensive clinically actionable insights from a simple blood draw. PanTracer LBx is a noninvasive blood-based test that analyzes circulating tumor DNA to identify key genomic alterations that inform treatment decisions in patients with advanced stage solid tumors. PanTracer LBx, together with our PanTracer tissue test, form a comprehensive portfolio, capable of delivering a holistic genomic picture of the patient in support of therapy selection. With an average turnaround time of just 7 days, PanTracer LBx empowers real-time decision-making. Recall that last quarter, we elected to delay the commercial launch of PanTracer LBx so that we could incorporate learnings from our evaluation assessment program to improve the product profile. In preparation for a full clinical launch, we allowed select physicians to use the assay on a limited basis ahead of commercial availability. The EAP, which was very well subscribed and help us further enhance the assay clinically and optimize the launch by testing and identifying the opportunities to streamline logistics, reporting, and customer support. With the benefit of valuable lessons we garnered from our EAP, we launched the product in late July, 3 months later than expected. Based on the interest we're seeing, I believe the delay allowed us to introduce a better product, which will further support the strong NGS volumes we are capturing this year and position us well for continued growth in 2026. We continue to work with MolDx on our PanTracer LBx submission, and we'll provide additional updates as they become available. As it pertains to our full year 2025 guidance, based on the strength in our clinical business and expected performance in our nonclinical business that I just reviewed, we are reiterating the revised guidance for consolidated revenue, adjusted EBITDA, and net loss that we provided last quarter. I'm incredibly optimistic about our future, particularly as we continue to innovate in the large and rapidly growing NGS and MRD markets and further leverage our leading presence in the community setting, where as much as 80% of cancer care is delivered to patients. And with that, I'll hand it over to Jeff to further discuss our results from the quarter. Jeffrey Sherman: Thanks, Tony, and good morning. Third quarter total revenue grew sequentially by 4% from Q2 and increased by 12% over prior year to $188 million. Total clinical revenue continued with strong double-digit growth and increased by 18% from prior year. This strong clinical growth was partially offset by nonclinical revenue climbing by 27% versus the prior year, driven by weakness in the pharma revenue Tony spoke about. Adjusted gross profit improved by $5.2 million or 7% over prior year. Adjusted EBITDA was $12.2 million, the ninth consecutive quarter of positive earnings. Clinical volumes and revenues continued with robust growth in the quarter. Total test volumes increased by 15% in the third quarter with AUP growth of 3%. Same-store revenue without contribution from Pathline was $167 million, representing growth of 15%, driven by a 10% increase in test volumes and a 4% increase in AUP. We are continuing to see strength across our portfolio with above-market growth rates across the modalities we offer. NGS revenues grew by 24% over prior year in the quarter and accounted for 33% of total clinical revenue. Year-to-date NGS revenues grew by 22% over prior year. Average revenue per clinical test increased sequentially from Q2 by $15 or 3% and was up by 3% from prior year. Excluding Pathline, AUP increased by $17 or 4% from Q2 and was also up 4% over prior year. A larger percentage of higher-value tests, including NGS as well as recent managed care pricing increases are helping to drive higher AUP. Total operating expenses in the quarter were $107 million, an increase of $11 million or 12%. We recorded an additional $7 million in impairment charges related to the planned sale of Trapelo with the balance of the cost increase due to higher compensation costs driven by the expansion of the commercial sales team. Cash flow from operations was a positive $9 million in the quarter, and we ended the quarter with total cash of $164 million, up slightly from Q2. Our balance sheet and expected cash flow will enable us to continue to invest in our business to drive organic growth, increase operating efficiencies, and fund future business development opportunities, including licensing and partnerships. We continue to see traction from the investments we have made to expand and enhance our commercial organization with our strong test volume growth. The LIMS project remains on track, and we expect to deliver operating efficiencies in 2026 and 2027 through the consolidation of multiple LIMS systems and reduction in redundant operating costs as well as streamlining our lab operations. We remain committed to driving long-term shareholder value through targeted investments in the business and improved operational execution. As Tony noted, we are reiterating our full year guidance that we updated in the second quarter. We expect full year consolidated revenue will be in the range of $720 million to $726 million, representing growth of 9% to 10% over full year 2024. We anticipate adjusted EBITDA to be in the range of $41 million to $44 million, representing growth of 3% to 10%. And we expect full year net loss to be in the range of $116 million to $108 million, representing an increase of 37% to 47% as compared to our full year 2024 net loss of $79 million. We will release our 2026 guidance when we report our full 2025 full year earnings in February 2026. With that, I'll turn the call back to Tony. Anthony Zook: Thanks, Jeff. To recap, during the third quarter, we again delivered strong clinical volumes and revenue while advancing NGS and MRD initiatives that we believe will contribute to accelerating growth in 2026 and beyond. We believe our unwavering focus on delivering a superior customer experience in the community setting is resonating in the marketplace. And as we continue to expand our menu of tests, community oncologists and pathologists will continue to view us as a partner of choice for their cancer testing and send-out consolidation needs. We remain committed to innovation and operational excellence, which we believe will drive sustainable and profitable growth for our company and improve outcomes for patients. Thank you for your continued interest in NeoGenomics. Operator, this concludes our prepared remarks, so please open the line for questions. Operator: [Operator Instructions] Your first question is coming from David Westenberg of Piper Sandler. David Westenberg: Congrats on a strong quarter, particularly with that clinical revenue growth. So how do you feel -- I'm going to start with Jeff. How comfortable do you feel with the guidance? And can you remind us what's the latest on PanTracer liquid? Is there any chance you could see some revenue from it this year? And I just want to confirm that, that was removed from the guidance, so if we do get revenue from it this year, it would be upside to your estimates. Jeffrey Sherman: Yes. Thanks, Dave. So we gave thoughtful guidance for the year in Q2. We believe we had a good third quarter and believe we're in a good position to meet Q4 expectations. In terms of liquid, Tony was pretty clear that last quarter, that we did not need approval for liquid biopsy from MolDX to hit our guide, and that is still the case as we look at our performance now in the fourth quarter. David Westenberg: And now I know you're not giving '26, but you gave a lot of good commentary on MRD and you hinted that you will be a contributor to revenue in '26. Can you give us a sense for when you expect certain reimbursements? I mean I know there's some competitive stuff you want to be a little bit careful with. But just in the sense of the magnitude and timing of some of those, what you're going to get in MRD? And then can you give us a sense on how much commercial muscle you'll put behind these launches? And just as a reminder, I mean, I think with breast, you have a lot of expansion indications. Do you think could you get expansion in that indication this year, so -- next year? And again, congrats, and I'll hop off after this. Anthony Zook: Thanks, David. It's Tony. I'll take a crack at a couple of these, and then certainly, I can look to Warren to add a little bit more color as well. First, on '26, as you appropriately say, we'll talk '26 in 2026, but I will give you a sense of what we see as some of the growth drivers that we anticipate for 2026. And then I will pull that back to your conversation around liquid biopsy and RaDaR ST. So at the highest level, you should expect the growth drivers for '26 to be in large part, quite similar to what we had in 2025. We expect our ongoing strong clinical performance relative to volumes to continue. And so that will certainly be a growth driver for us. We expect ongoing NGS growth rate. As Jeff commented in his remarks, we had 24% growth in revenue in NGS, and that without the full ability of PanTracer LBx included within that mix. And so we have every expectation that NGS will continue to be a growth driver for us. As you rightfully mentioned, PanTracer LBx combined with the PanTracer family, we believe, will be drivers moving forward. I can't really speculate as to the timing of LBx reimbursement. But nonetheless, we see early signs of a positive uptake for the product. And we believe once reimbursement is secured, that will be a growth driver for us. We'll see revenue build through the course of the year with obviously more of that becoming evident in the second half. The sales force that you mentioned, we are beginning to see the full benefit of now the sales force expansion efforts that we have put in place, and we expect that to be a continued driver for us. And then on the RaDaR ST front, we've already launched RaDaR ST in the pharma sector. We're having good early conversations with that. As you might expect, the lead times on that book of business takes considerably longer. So we would expect kind of a slow revenue build in 2026 and most of that revenue becoming evident in the back half of 2026. And with MolDX approval with the current indications, we expect a full launch of RaDaR ST in the clinical setting in Q1. That will also be a build for us through the course of the year. And of course, there's still Pathline in our RCM initiatives. And so we still see a healthy list of growth drivers for us in '26. And relative to sales force, I think Warren and Beth Eastland and their teams have done a phenomenal job at onboarding the existing representatives that we have. I will tell you that we still believe that that is the right size for the indication mix that we have. But as we continue to invest and we will invest in new indication flow, you should probably believe that we will be looking at options to upsize that sales force as it is under-indexed, especially in the oncology side of our sales force. But we don't anticipate that coming on too early. That will be, again, a build probably more in the latter half, indicative of the new indications that we will be submitting and when they might come online, which will be more than likely second half. So that's kind of a high level of the drivers. And again, we'll get more detail on these things in '26 when we talk around February time. Okay, Dave? Operator: Our next question is coming from Andrew Brackmann of William Blair. Andrew Brackmann: Maybe on the NGS side of things, so the growth rates here imply that you're obviously taking share or growing the market or some combination of both. Can you maybe just sort of talk to us about where you're seeing the most win on the customer side of things? What types of accounts where you're winning? And then also on the product side, what products are you leading with? Where you're able to sort of capture share and begin to capture some share there? Warren Stone: Yes. Thanks, Andrew. Certainly, as you said, the growth rate of 24% implies a pretty meaningful share capture. Most of that business in quarter 3 was coming out of the community setting and largely from the oncology practice. Certainly, we still see opportunity within the community hospital setting. But as we onboard new practices, bring on new oncology ordering physicians and we see repeat order rates, we're seeing a compounding effect. So largely coming from that community oncology setting. In terms of focus areas, certainly, the PanTracer Family has been a core focus for us. We've launched liquid, as we've mentioned, but at the same time, we've introduced the PanTracer family, which includes PanTracer Tissue, PanTracer Tissue plus HRD and obviously, PanTracer Liquid, which is our solution for therapy selection on the solid tumor side, and we're seeing really strong growth within that category as we make that a priority. But we're certainly not losing sight of sort of what got us here, which is our heme NGS portfolio, and that continues to grow very effectively as well. But there's a subset of 5 to 7 products, which are ultimately our key focus area from a therapy selection perspective, and all of them are seeing attractive growth. Jeffrey Sherman: And then just from a potential expand and acquire perspective, from an acquirer, new oncologists coming on board, we're seeing a good lift from recently brought on oncologists. In 2025, we track that closely, and we're seeing reorder rates and higher penetration amongst that. So we are seeing success in the acquire aspect of our strategy as well. Anthony Zook: I guess, Andrew, the last tap-off point, I think Warren was just hitting on it towards the end. NGS just strategic for us, is extremely important that we continue that penetration into the therapy selection markets. As Warren highlighted, the top 5 products now represent almost 1/4 of our clinical revenue and NGS in totality is almost 1/3 of our total clinical revenue. And so it aids us in AUP and a whole lot of other areas. And so it's going to be a continued point of emphasis for us moving forward. So thanks for the call. Andrew Brackmann: And then if I could follow-up, just as one other question here. On the LIMS rollout, and I also think that you're integrating with Epic in some accounts. Obviously, those are multiyear processes to roll out here. But anything you can maybe share with respect to benefits that we should start to see from these initiatives into 2026, just in practical terms, what does this do for your business? Anthony Zook: Yes. Warren and I will tag team on that one, Andrew. I would say, first, from an organizational perspective, you're going to hear me speak quite a bit about ongoing need for simplification across the organization. I think that the model that we have today with multiple locations and, unfortunately, multiple LIMS systems, it works against us in that regard. And so moving towards a common LIMS program, it aids certainly within the organization, not just the lab team, where they'll be able to be able to see where a particular testing at any given time along the continuum. Organizationally, as you say, we can retire 8 LIMS systems that were in place prior to that. So there's certainly a cost benefit. And then across other parts of the organization as well because in order to kind of offset the complication of multiple LIMS systems, we do a lot of things in other organizations that require a bit of a heavy lift that I think the LIMS system provide some efficiencies for as well. And so I think the early view is we should start to see some of these efficiencies coming through in the latter part of '26 and the later -- the better benefit being more evident in '27 and '28 and beyond. But it is just one step of many relative to simplification that we think could help us from a contribution perspective. And now Warren to give a little added color. Warren Stone: Yes. So let me start with the Epic, Andrew. So first of all, I will start by saying we have over 340 interfaces in place already today. Some of them with Epic already, but we're establishing the Epic Aura solution, and that will go live towards the end of this year, and we'll see fairly rapid customer onboarding in early part of 2026 and beyond. So excited about the acceleration nature that the Epic Aura solution will bring to us. And we've seen very strong sort of revenue growth and ongoing adoption when we put interfaces in place in general, and we believe it will be the same with Epic Aura. So certainly, that's a key strategy for us moving forward and enables growth and stickiness. Coming back to the LIMS side of things, as Tony said, I think a strategy to simplify, we have sort of 5 key priorities, operational simplification, and margin expansion, one of which is being LIMS. I'll touch on 2 of the benefits that I anticipate us seeing value in 2026. The first one is our ability to be able to proactively equip physicians, ordering physicians and practices to understand sort of test status and more particularly the ability to do add-ons, et cetera, that they can do themselves versus having to come to customer service. So just ultimately creating a more seamless experience for the ordering physician or the practice, so to speak. That's one area. The second one is the LIMS system we're putting in place has sort of AI integrated into it, and it will allow us to identify areas of, I'm going to call it, leakage, productivity leakage within our workflows, and we can identify this and obviously look to streamline the workflow to iron out those areas that sort of lack or have opportunity for productivity. So it really is going to deliver insights to our workflow that we don't have today that will allow for further productivity. Operator: Our next question is coming from Mason Carrico of Stephens. Mason Carrico: On your NGS business, you've called out share gains. You guys often quote NGS revenue growth. But I was curious if you'd be willing to give us a bit of insight into how NGS volume growth has trended, just to give us a better view on gains. So when we look at NGS revenue growth, 24% this quarter, I think 23% last quarter. How much has been driven by volume versus ASP? Because I assume you guys are benefiting from ASP to some degree as coverage expands for those assays. Jeffrey Sherman: Yes. We haven't disclosed the volume per se, but I would say it is more volume driven. There is some AUP growth, but it's more volume-driven than AUP growth. And I think as we're continuing to see penetration there and getting the ability to be -- access our strong commercial channel, I think that's where we're seeing that volume uptick. I think bringing on the liquid, we're actually seeing good uptick between the 2 of them as well, liquid and solid. And so I think we're well positioned to continue to get those gains. Mason Carrico: And when you think about revitalizing growth within your pharma business, could you just talk about how much of that is in your control versus how much relies on a snapback in spend across the broader sector? I guess what do you view as kind of the key internal initiatives that you'll need to execute on to reaccelerate growth in that segment? Anthony Zook: Yes. Mason, I'll take a crack and then Warren again could add additional detail. I would say that for us, a big part of the opportunity lies in the portfolio and bringing that portfolio forward. And so we have now the opportunity to represent products like Paletrra. We have RaDaR ST now available to us within the Pharma segment and of course, the liquid biopsy and PanTracer family. It affords us opportunities to have conversations and get a little bit more relevant in those conversations as well. As I said to you before, I think a lot of those conversations are generating interest, but because of the lag times, I would still expect that some of the challenges that we see in our business in '25 will continue into 2026. And so we see a return to growth opportunity in '27 and anything that would lead that to happen a bit faster would represent upside. As far as things in our control, there are things still in our control, and that's a heavy focus on execution excellence, and we have onboarded a leadership team that is taking the bull by the horns. And I think that part is very much in our control to drive the right conversations with the right customers. And that, I think, is something that we acknowledge that we had to improve upon. I'm pleased to see that that action is taking root across the organization. With that, I'll turn to Warren to add any other color. Warren Stone: I think, Tony hit most of the high points. I'd say that certainly, we're preparing our execution so that we can offer an attractive value proposition to our target customers in the biopharma space. Certainly, the inclusion of RaDaR has made us a significantly more attractive partner, which is enabling access for us to focus on both RaDaR, but other sort of high-value products, NGS, Paletrra, et cetera. So we're certainly gearing our commercial organization around that focus, coupled with underpinning that with a sound customer experience, which is, again, a key buying driver for pharma sponsors. From a market perspective, certainly, we're going to continue to work to execute effectively. As the market rebounds, we feel that there will be a compounding effect in the recovery of the business. Jeffrey Sherman: But this is a long sales cycle product area. And so just to reiterate what Tony said last quarter, we expect pharma to be soft in Q4 as well as throughout 2026 as well. Operator: Our next question is coming from Dan Brennan of TD Cowen. Thomas Stevens: This is Tom on for Dan. Congrats on the quarter. Just a question now on what is driving the acceleration in your base clinical business? It looks like it's ticked up on a volumes basis this year versus prior years. The base clinical -- the non-NGS business. What is driving that? Is that better bundling? Is that better turnaround times to your point? This is a business that everyone thought would be kind of cannibalized quite aggressively by NGS. So I just want to understand how you're driving that growth and how sustainable that acceleration kind of could be going forward? Warren Stone: Tom, thanks for the question. I think a couple of facets I'll highlight here. First of all, I would again come back to effective execution of our protect, expand, and acquire strategy. We continue to do a great job of protecting existing customers. And that's sort of driven to just continuous focus on customer experience, whether that be from an operational perspective or just end-to-end as we look at it from requisition to results. So protect has really been a key factor. But we're seeing accelerated wins on the expand side and the acquire side of things. And I attribute that to 2 aspects. First and foremost, it's new products that we're bringing into the portfolio, and we speak significantly, obviously, about the NGS side of things, but don't forget about products like Claudin 18 and c-MET, which have been critical sort of pillars to actually round out our offering. So new products is certainly a key driver. And I think lastly and very importantly, we communicated in Q4 of last year around the sales force expansion and sort of said that this was going to be a 6 to 9 months sort of ramp to productivity. And what you're seeing right now is just follow through on exactly what we had said. We're starting to see increased productivity from those added sales resources, which are focused on the protect, expand, acquire strategy and the new products we're bringing to market. And these things are operating in concert with one another, delivering the type of numbers that you reflected on. Jeffrey Sherman: Yes. The only thing I would add to that is even with record volumes, our operational execution and turnaround times continue to improve. So that remains kind of a vital component of our go-to-market strategy for retaining and growing and expanding business. Thomas Stevens: Great. And then just one follow-up on kind of the launch of PanTracer into next year and just trying to scope out the potential for acceleration there. So should we be treating this as kind of 2023 all over again? Or is the sales force now appreciably larger? Should we expect a larger acceleration given this is quite a hot area in general in oncology diagnostics? So just anything to help frame your expectations versus your kind of solid tissue launch in 2023 would be really helpful. Warren Stone: Yes, certainly. As an organization, we've matured since 2023. We've also expanded commercially as well. And so I think using 2023 as sort of a proxy would probably be a good starting point at this junction and probably layering on some additional factors like the sales force expansion would be a way to look at it. Jeffrey Sherman: And the majority of the sales force expansion was in the community segment. So that really positions us well to have the coverage we need for these new products. Operator: Our next question is coming from Subu Nambi of Guggenheim Securities. Thomas VonDerVellen: This is Thomas on for Subu. Maybe I can ask both upfront. So first, are you still expecting stronger performance in the data business on the nonclinical side in fourth quarter? And maybe just some color on why that should show strength based on what you've seen so far this year? What you're seeing in the funnel to be comfortable with that? And then second, can you just talk specifically for clinicians in the community setting on how RaDaR has been received following the favorable summary judgment? What's the chatter like there? Jeffrey Sherman: Yes. On the data business, Q4 is historically the strongest quarter in that business. That business actually did grow in the third quarter, double-digit growth in the third quarter. And so we are expecting that business to see sequential growth over Q3 and the fourth quarter. Warren Stone: Yes. Again, I just want to reiterate that we have not clinically launched RaDaR as yet in the clinical setting. However, obviously, the news with regards to the outcome of the summary judgment has certainly circulated through the community oncology setting. And I'd say the vibe is increasingly positive about the fact that we can reenter the market. Again, it comes back to the fact that we believe we have one of the most sensitive assays in the market, but also the portfolio effect, the ability to consolidate all of your needs within the community oncology setting within a single vendor. So this helps round out that sort of value proposition for us. Anthony Zook: Yes. I think that's an important point, just to reinforce. We've always said this preferred partner of choice in the community setting, and that speaks to a balance of breadth of portfolio and innovation as well. And we look at that breadth of portfolio beyond just heme of solid tumor and MRD, we look at breadth of portfolio at MRD as well. And so for us to be in a position to be able to offer Flow MRD, have an outstanding NGS partner MRD with Adaptive and now RaDaR ST. And don't forget, we're going to continue to invest in our next-gen MRD program. So it's a suite of products that also fits well into our overall strategy. So I believe as that becomes more evident to our customers, the chatter will increase. Thanks for the question. Operator: Our next question is coming from Yuko Oku of Morgan Stanley. Yuko Oku: Given that IMvigor011 trial demonstrated how incorporating MRD testing can enhance probability of trial success, are you seeing an uptick in interest from pharma partners in integrating MRD into their clinical trial designs? And then a separate follow-up. Could you provide an update on an Adaptive partnership? And what are some of the key learnings and feedback from the pilot so far? Warren Stone: Yes. So coming back to sort of pharma interest, I would say that pharma interest has been robust ever since we launched the product back in August of this year. Certainly, our first targets were prior users of the assay because of their familiarity, et cetera. But we've rapidly expanded that. We were recently at the ESMO conference, which was in Germany late last month or early this month. And again, very, very strong interest with regards to the assay for multiple purpose, but also from an endpoint perspective, as you articulated. So we're encouraged by the early signs in terms of the pharma sponsor interest with regards to MRD. Sorry, what was your second question? Yuko Oku: Adaptive. Warren Stone: Adaptive. Yes. So we continue to progress very favorably with Adaptive. We started a pilot initiative in the third quarter. And really, this was just to sort of understand the operational workflows, et cetera, because both organizations are very focused on delivering a sound customer experience, and we continue to expand that pilot into -- in 3 distinct phases. We're rolling out the first phase of the 3-phase initiative now holistically in the fourth quarter and Phase II and Phase III will happen quickly in 2026. Operator: Our next question is coming from Tycho Peterson of Jefferies. Unknown Analyst: This is Lauren on for Tycho. Just going back a little bit to the rebounding growth in the pharma and nonclinical setting, likely more of a '27 event. For '26, how are you seeing RaDaR adoption evolving in pharma partnerships versus the clinical setting? And then in terms of kind of the phrasing of partner of choice you've been using for community oncologists, what are some of the specific investments or initiatives that are kind of reinforcing that position? Warren Stone: So I think we are -- we're certainly expecting to see revenue on the MRD side of things in the pharma space for 2026. And certainly, that would sort of go a long way to address some of the other sort of headwinds we've been experiencing. We'll obviously look to quantify that as part of the guide when we speak about that next year, but certainly expecting pharma revenue for MRD. In terms of your second question, it's multiple factors. I think first and foremost, it is around the portfolio and making sure that as we look to be the partner of choice to the community setting, it's having the most relevant portfolio, which a big focus of ours has been on ensuring we've got the right therapy selection portfolio. And we believe that the PanTracer family brings that to the table now, along with key sort of add-on sort of testing, c-MET, Claudin 18 that sort of rounds out our larger portfolio across diagnosis and therapy selection. Now we have MRD as well. And as Tony mentioned, it's not just RaDaR ST, it's the partnership with Adaptive. It's the fact that we have Flow MRD on the heme side as well. But in addition to that, it's the work that we're doing from a bidirectional interface perspective. It's the work we're doing around customer experience because those are the 2 areas which are sort of critical buying drivers. We hear over and over again that these community oncology practices are looking to remove friction from their practices, so they can focus on sort of top of license type activities and they look for vendors that offer this frictionless experience. And we believe the combination of consolidating the oncology send-out requirements to a single lab along with best-in-class customer experience makes for a very, very attractive value proposition. Jeffrey Sherman: Yes. I just think overall, from -- if you go back historically, when we were on the market for a few years with RaDaR Pharma, we hit $6 million, $7 million a year after a couple of years. So there will be a ramp for pharma in RaDaR as we're kind of reengaging in the market. Operator: And our next question is coming from Puneet Souda from Leerink. Puneet Souda: How are you thinking about the AUP with -- as you bring this MRD on board? And then maybe just elaborate to us sort of as you think about -- looking at the competitive landscape, CGP has continued to grow for a number of companies that are serving products in the marketplace. So are you seeing anything different competitively in the NGS side of the business? Jeffrey Sherman: So I'll start with AUP and then let Warren talk about the competitive dynamics. Puneet, so I think obviously, getting MolDX approval was a good first step for RaDaR. We're also working to get commercial approval as well. And as is the challenge with some larger panel tests, that will take time to get commercial coverage for RaDaR as well. Others being in the space and having more overall acceptance, I think, is a positive. So I think it will be a driver for AUP over time, but probably more starting in the back half of next year and into '27. Warren Stone: I think in terms of are we seeing anything different in sort of therapy selection in NGS, Puneet, I mean, we certainly -- the competitors that we've continuously come up against in the community oncology setting remain very present. It's certainly a hotly contested environment. But we feel that the -- certainly the round out of our portfolio, which was sort of requested by many of these oncologists in the community has been very well received. And it's not just the volume increases that we've seen across the liquid biopsy test that we launched, we're seeing across the category. And actually, for interesting information, some of our what we call NeoTYPE, which are cancer-specific panels for breast or for lung or for brain, we're seeing actually renewed growth in those panels as well. So again, it comes back to this comprehensive offering that we have both across solid tumor and heme that creates the differentiation for us in the marketplace. Puneet Souda: And then just on the COGS side, can you talk a bit about the levers you have to reduce the COGS? As you bring on these new assays, there's obviously a push and pull there. So just wondering how are you thinking about the overall cost per test? Jeffrey Sherman: Yes. Thanks, Puneet. I think even in Q3, we've got some LBx volume and limited reimbursement. So we're actually covering the COGS in Q3 for LBx. As our volume increases from some of these larger panel tests, we will see operating cost efficiencies just by the number of tests we can do at one time. I think a few of the other things we've talked about today will also be drivers of COGS. The LENS consolidation, consolidating multiple LENS systems, streamlining the lab. We have a dedicated process on lab automation. And so the ability to automate processes and use technology and newer lab equipment to drive efficiencies is well underway, and we see good uptick there. Being able to digitize more lab processes to improve the customer experience as well. And then digital pathology, we see efficiencies and revenue opportunities with digital pathology. And finally, look, we still have a fair amount of capacity in our lab footprint. So we've got the lab in Fort Myers. We've got a new lab we expanded in North Carolina, RTP. We have new lab in the Northeast. So just incremental volume coming in, we can get operating efficiencies on a relatively large fixed cost footprint. So we have a multiyear opportunity to drive margins there. Warren Stone: I'd add maybe 2 points to substantiate what Jeff was saying about larger volume and the leverage there. So I mean, we've always focused on turnaround time because that's a differentiator for us. And as a result, we hadn't moved to largest flow panels and we hadn't moved to the NovaSeq X. Those are both initiatives that we have in focus for us in 2026. So there are 2 real tangible examples in terms of how incremental volume can help to drive down cost. Jeffrey Sherman: Yes. And the last piece I would say is from a cost per test perspective, Pathline has a higher overall cost per test than legacy Neo because of that lack of incremental volume. So the ability to streamline Pathline and actually pump incremental volume in there will bring down that cost per test as well. So early. Operator: Our next question is coming from Mark Massaro of BTIG. Vidyun Bais: This is Vidyun on for Mark. I'll just keep it to one on RaDaR. Could you just remind us what indications you're pursuing here in addition to head and neck and breast cancer? And any cadence of reimbursement that you're expecting there? Any further milestones we should be looking for out to '26? Anthony Zook: Well, as you mentioned, the 2 indications that we have secured have been subsets of head and neck, which is HPV-negative adjuvant and surveillance. And in breast, it's HR-positive and HER2-negative surveillance 5 years out. So those are the 2 that we go to market. Relative to new indication areas, I will tell you, we have every intention. We have done -- we have been doing ongoing work in R&D. And so we will be making additional submissions for indications, expansion for RaDaR ST. I won't go into the specifics about those for relatively obvious reasons, but we plan to be moving forward with those. And as well, we are continuing our next-gen MRD program as well. And we see the necessity of having both RaDaR ST and Next-Gen because having an ultrasensitive option for low-shedding cancers is going to be an important aspect as well. And so we see the indication flow a little bit different for our Next-Gen program that we would with RaDaR ST. So we're trying to avoid redundancy and overlap in spend relative to those indications. So you should expect us to add indication submissions in the short term, which we believe could be manifest in the second half of 2026. Operator: And our next question is coming from Mike Matson of Needham. Joseph Conway: This is Joseph on for Mike. I guess just 2 from me. Just looking at pricing, AUP, obviously, you guys have seen many consecutive quarters of improvement there. While small Pathline is a headwind there. And I did hear what you guys said concerning just volume coming through at a higher rate will improve COGS. But I know NGS, bringing NGS into there is the plan or was the plan. I was just kind of curious if you could remind us on the time line for that. Is that a 2026 plan? Or is that already in the works to bring NGS or more NGS into the Pathline lab? Jeffrey Sherman: Yes. So just to be clear, on the Pathline lab, so the NGS is going to be done at our other sites. So the fast turnaround tests enable us to capture more NGS work. The time lines for doing that NGS work enable us to send those out to our other labs in Florida and California and still meet our time frame. So we're actually going to gain operating leverage by pumping more volume into our existing sites as a pull-through through the Pathline site. Anthony Zook: Yes. And just as a follow-up, on that Pathline, as we said, the strategy there was always to give us opportunity to deal with the under-penetration in the Northeast, and we have made really good progress there. So all the legal integration and the assay validations have been completed. And so now we can offer a more complete complement of the Neo portfolio and take advantage of the Pathline site for the more rapid turnaround testing needs that are up there, but as Jeff said, taking advantage of our footprint and the efficiencies we gain in our other lab sites. And so we're confident. I know our selling team is excited about the prospects that they are generating. We see a healthy new customer list beginning to emerge, and that's why we are of the belief that it will be a growth driver for us in '26 and beyond. Joseph Conway: I guess maybe just one quick one. NGS growth specifically, I know the target there is 25% or more, very near that target, obviously, above market growth right now. But we have seen acceleration there in NGS growth the last 2 quarters. I'm just curious how you're thinking of the next quarter, 4Q '25 and 2026? Is it back on that target of over 25%? Is the target more just above 20% at this point? I'm just kind of curious your guys' thoughts there. Jeffrey Sherman: Yes. So we gave guide for the back half of the year. We didn't give a Q4 specific guide. We expect to see continued good growth in NGS, but we haven't broken out the specifics on that. Operator: Well, that does conclude our question-and-answer session. I would now like to turn the floor back to Tony Zook for closing comments. Anthony Zook: Well, again, I'd just like to thank everybody for joining us on the call. As we said, it was a good quarter. We have focused on operational excellence, and I'm pleased to say that the teams in both our commercial organization and our lab have performed extremely well, and we're very proud of all the work people at Neo are doing to advance cancer care for all the patients in the community. Once again, thank you for your time, everyone, and we'll look forward to some one-on-one follow-ups. Operator: Thank you very much. This does conclude today's conference. You may disconnect your phone lines at this time, and have a wonderful day. We thank you for your participation.
Operator: Good morning, welcome to Tenet Healthcare's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I'll now turn the call over to your host, Mr. Will McDowell, Vice President of Investor Relations. Mr. McDowell, you may begin. William McDowell: Good morning, everyone, and thank you for joining today's call. I am Will McDowell, Vice President of Investor Relations. We're pleased to have you join us for a discussion of Tenet's third quarter 2025 results as well as a discussion of our financial outlook. Tenet senior management participating in today's call will be Dr. Saum Sutaria, Chairman and Chief Executive Officer; and Sun Park, Executive Vice President and Chief Financial Officer. Our webcast this morning includes a slide presentation, which has been posted to the Investor Relations section of our website, tenethealth.com. Listeners to this call are advised that certain statements made during our discussion today are forward-looking and represent management's expectations based on currently available information. Actual results and plans could differ materially. Tenet is under no obligation to update any forward-looking statements based on subsequent information. Investors should take note of the cautionary statement slide included in today's presentation as well as the risk factors discussed in our most recent Form 10-K and other filings with the Securities and Exchange Commission. And with that, I'll turn the call over to Saum. Saumya Sutaria: All right. Thank you, Will, and good morning, everyone. We had another quarter of strong performance where we exceeded our expectations for revenue, adjusted EBITDA and margins. Third quarter 2025 net operating revenues were $5.3 billion, and consolidated adjusted EBITDA grew 12% over the third quarter 2024 to $1.1 billion. This represents an adjusted EBITDA margin of 20.8%, which is 170 basis points improvement over the prior year, driven by our strong same-store growth and continued operating efficiency. USPI continues to excel, and we generated $492 million in adjusted EBITDA, which represents 12% growth year-over-year. Same-facility revenues grew by 8.3% in the third quarter, highlighted by 11% growth in total joint replacements in the ASCs over the prior year. Our M&A and de novo activity remains robust as we acquired 11 centers and opened 2 de novo centers in the quarter, including facilities specializing in high acuity procedures such as spine and orthopedics. We have already spent nearly $300 million on M&A in this space year-to-date and expect to continue adding additional centers in the fourth quarter. The M&A and de novo pipelines remain strong. Turning to our hospital segment. Adjusted EBITDA grew 13% to $607 million in the third quarter of 2025. Same-store hospital admissions, adjusted admissions were up 1.4% in the quarter. And third quarter 2025 revenue per adjusted admission was up 5.9% over the prior year as payer mix and acuity remains strong. In September, we opened our newest hospital facility in Port St. Lucie, Florida. This facility expands capacity in one of the fastest-growing areas in the country. The hospital will provide comprehensive emergency in specialty care and is focused on leveraging state-of-the-art technology, including robotics and advanced cardiac catheterization techniques. Turning to our full year guidance. At this point in the year, we are once again raising our full year 2025 adjusted EBITDA guidance to a range of $4.47 billion to $4.57 billion. Building upon our substantial post second quarter guidance increase, indicating the confidence we have in our business this year, we have now increased our adjusted EBITDA guidance by $445 million or 11% at the midpoint of the range from our initial guidance. Additionally, we are increasing our investments in capital expenditures in 2025 and now expect to invest $875 million to $975 million to fuel organic growth in the future, a $150 million increase at the midpoint over our prior expectations. In addition to this increased investment, we are also raising our expectations for full year 2025 free cash flow minus NCI to a range of $1.495 billion to $1.695 billion, an increase of $250 million at the midpoint from our previous guidance range. This increase is driven not only by the fundamental growth in adjusted EBITDA, but also by the strong cash collection performance of Conifer. Let me turn to 2026 with a few points. Uncertainty about the enhanced premium tax subsidies and the impact on reimbursement and enrollment in the exchanges still exists. Approvals for various increases in state directed payment programs for 2026 are still pending. Currently, in our hospital segment planning process, we see healthy patient demand that would support same-store volume growth and a stable operating environment supported by disciplined cost controls in 2026. Our strategy, which is more focused on higher acuity services, has delivered a track record of improved margins and strong earnings growth over the past few years. The return on invested capital for this improved portfolio of hospital assets is such that we have confidently increased our CapEx per bed from prior levels to higher levels in both 2024 and 2025, and we should continue to see the benefits of that into 2026. At USPI, we expect same-store revenue growth in line with our long-term expectations, a continued focus on high acuity cases, operational efficiencies and disciplined cost controls. Additionally, we expect further contributions from M&A and de novo development. I would note that USPI is less exposed to Medicaid and the exchanges and our ASCs are on freestanding rates. We will continue to operate and invest in this attractive segment. In summary, we continue to deliver our commitments for sustained growth, expanding margins, a delevered balance sheet, and improved free cash flow generation. Our strong execution is driving attractive EBITDA growth that we are converting into significant free cash flow and our transformed portfolio of businesses are well positioned to drive sustained performance in the future. And with that, Sun will provide us a more detailed review of our financial results. Sun, over to you. Sun Park: Thank you, Saum, and good morning, everyone. We delivered strong results in third quarter 2025 with adjusted EBITDA above the high end of our guidance range, once again driven by strong same-store revenue growth, continued high patient acuity, favorable payer mix and effective cost controls. We generated total net operating revenues of $5.3 billion and consolidated adjusted EBITDA of $1.1 billion, a 12.4% increase year-over-year. Our adjusted EBITDA margin in the quarter was 20.8%, a continuation of our improved margin performance over multiple quarters. I would now like to highlight some key items for both of our segments, beginning with USPI, which again delivered strong operating results. In the third quarter, USPI's adjusted EBITDA grew 12% over last year, with adjusted EBITDA margins at 38.6%. USPI delivered an 8.3% increase in same-facility system-wide revenues with net revenue per case up 6.1% and same-facility case volumes up 2.1% -- turning to our hospital segment. Third quarter 2025 adjusted EBITDA was $607 million, with margins up 160 basis points over last year at 15.1%. Same-hospital inpatient adjusted admissions increased 1.4% and revenue per adjusted admissions grew 5.9%. Our consolidated salary, wages and benefits was 41.7% of net revenues, a 160 basis point improvement from the prior year, and our contract labor expense was 1.9% of consolidated SWB expenses. These improvements continue to be driven by our data-driven approach to capacity and labor management and disciplined operating expense controls. Finally, we recognized a $38 million pretax impact for Medicaid supplemental revenues related to prior years in the third quarter of 2025. As a reminder, in total, year-to-date, we have recorded $148 million of favorable pretax impacts associated with Medicaid supplemental revenues related to prior years. Next, we will discuss our cash flow, balance sheet and capital structure. We generated $778 million of free cash flow in the third quarter, amounting to $2.16 billion of free cash flow year-to-date, which is up 22% over the same 9-month period in the prior year. As of September 30, 2025, we had $2.98 billion of cash on hand with no borrowings outstanding under our line of credit facility. Additionally, we have no significant debt maturities until 2027. And finally, during the third quarter, we repurchased 598,000 shares of our stock for $93 million. Year-to-date through September 30, we have repurchased 7.8 million shares for $1.2 billion. Our leverage ratio as of September 30 was 2.3x EBITDA or 2.93x EBITDA less NCI, driven by our outstanding operational performance and continued focus on financial discipline. We believe we have significant financial flexibility to support our capital allocation priorities and drive shareholder value and are very pleased with our ongoing cash flow generation capabilities. We remain committed to a deleveraged balance sheet. Let me now turn to our outlook for 2025. For '25, we now expect consolidated net operating revenues in the range of $21.15 billion to $21.35 billion, an increase of $150 million over prior expectations. As Saum mentioned, we are raising our 2025 adjusted EBITDA outlook range by $50 million at the midpoint to $4.47 billion to $4.57 billion, reflecting our outperformance in the hospital business. This is in addition to the substantial $395 million guidance raise that we announced in the second quarter. At the midpoint of our range, we now expect our full year 2025 adjusted EBITDA to grow 13% over 2024. Turning to our cash flows for 2025. We now expect free cash flows in the range of $2.275 billion to $2.525 billion, distributions to noncontrolling interest in the range of $780 million to $830 million, resulting in free cash flow after NCI in the range of $1.495 billion to $1.695 billion, an increase of $250 million at the midpoint from our previous guidance range. This reflects our focus on strong free cash flow conversion from our EBITDA growth, the continued outstanding cash collection performance of Conifer and continued investment into high-priority areas of our business. Now turning to our capital deployment priorities. We are well positioned to create value for shareholders through the effective deployment of free cash flow, and our priorities have not changed. First, we will continue to prioritize capital investments to grow USPI through M&A. Second, we expect to continue investing in key hospital growth opportunities to fuel organic growth, including our focus on higher acuity service offerings. Third, we will evaluate opportunities to retire and/or refinance debt. And finally, we'll continue to have a balanced approach to share repurchases depending on market conditions and other investment opportunities. We continue to deliver consistent growth and have disciplined operations, which has translated into outstanding financial results. We are confident in our ability to deliver on our increased outlook for 2025 as we continue to provide high-quality care for our patients. And with that, we're ready to begin the Q&A. Operator? Operator: [Operator Instructions] Our first question comes from Kevin Fischbeck with Bank of America. Kevin Fischbeck: I wanted to ask you about the Q4 guidance and kind of the expectations for utilization. Are you guys building anything in there for higher utilization before these subsidies expire? And how do you think about the capacity, I guess, particularly within USPI to accommodate utilization there? And then I guess, secondly, you mentioned that USPI is insulated from the headwinds for next year, but just trying to understand a little bit where you do see that pressure. I guess can you talk a little bit about exchange exposure within USPI? Saumya Sutaria: All right. There's a lot of questions in there, Kevin. So let me just tackle one by one and Sun, we can kind of complement here. First of all, we haven't built in anything nor are we seeing any kind of rush to the office, if you will, with respect to the exchange subsidies. We're not planning nor are we saying that we expect them to expire at this stage. I think much of what we're hearing is that it may take time, but a compromise will be achieved from our intelligence coming from Washington. So we're just sort of patiently waiting to see what happens there. From a capacity utilization standpoint, at USPI, we typically have, as you know, a busier late November and certainly December. And have planned for staffing and capacity stretch that happens in that time period every year. So the simplest way to look at it is we're not worried about our capacity to take on the demand that we would see in the typical end of the fourth quarter at USPI. We begin planning for that every year, months in advance with a very well-established protocol of how we do things. And there should be no reason that's different this year, including if there happened to be more demand that came because of the -- any kind of change in the exchanges or whatever that may be ahead of us from that perspective. What we have said about exchange business at USPI is a couple of things. One is there's a lot less exposure there on a per case or revenue basis than in the hospital segment. And the reason for that, we have said is that we typically see the exchange business, especially newer exchange members behaving with consumption patterns that are more similar to, for example, Medicaid, and that explains some of the difference. Sun, I don't know if there's anything you want to add here. Sun Park: Yes. Just a couple of metrics, Saum. Thank you. Kevin, I would also just note for USPI, our implied Q4 guidance is about an increase of $80 million roughly from Q3 into Q4, which is fairly standard if you look at our historical pacing and change into Q4. So I think we remain confident in our -- both our capacity as well as our ability to take care of those patients. And then exchange, I would just note for Q3, exchange was 8.4% of our total admissions and 7% of our total consolidated revenues. So a slight increase in total as a percent of admissions from Q2 and relatively flat in terms of total percent of consolidated revenue. So we do see continued strong exchange performance, but at this point, no significant increase in Q3. So we'll see in Q4. Operator: Our next question comes from Scott Fidel with Goldman Sachs. Scott Fidel: I wanted to hopefully just drill a little bit more to the CapEx inputs for the year, including the increase in the CapEx guidance. Maybe if you can talk about specific allocation of capital related to the increase and then maybe bucket some of the key larger investments that you're making within the CapEx for the full year. Saumya Sutaria: Yes. Scott, I appreciate the question. So I would just characterize the increased capital expenditure as more investment in both program or clinical program infrastructure, service line support and various other growth strategies in the hospitals. I mean, obviously, our CapEx plan for the year included the residual capital that was required to open up the Port St. Lucie Hospital. So this is capital expenditure that has extended above and beyond that where we see opportunities for growth. Look, as I indicated, the demand environment continues to be very healthy, and we see opportunities and the efficiency with which we operate, our focus on service levels to the physician community, we see the opportunity for them to choose our sites as a location of care for their patients. more and more. Obviously, the way in which we tend to deploy this capital is focused more on our high acuity strategy, so things that are relevant to the cardiac care unit, intensive care unit, cath labs, high-end imaging, et cetera, surgical programs. But that's really how we're making the investments around the country. And as we reviewed them through this business planning cycle, we felt it was a good time given the demand that we continue to see through the third quarter to go ahead and make those investments and raise our guidance. Operator: Our next question comes from Craig Hettenbach with Morgan Stanley. Craig Hettenbach: Yes. I want to just extend that just focus on free cash flow here, the increase to guidance. You mentioned kind of improved cash collections at Conifer, you also have margins coming up. So any other context around kind of free cash flow and importantly, just the sustainability of those trends as you see it? Saumya Sutaria: Sun, go ahead. Sun Park: Craig, thanks. Yes, as mentioned, this has been a long-term focus of ours, making sure not only EBITDA growth and EBITDA margins come through strong operational performance, but also then making sure that converts through free cash flow. And we listed some of the key drivers there. Obviously, the continued improving and fantastic performance by Conifer on cash collections. Obviously, growth in EBITDA comes through. And then probably a couple of other things that I'll point out. More broadly in terms of working capital management, we have spent a lot of time and focus on making sure we're optimizing all components of there. And then obviously, one of the additional benefits of our continued deleveraging is improvement in interest expenses, which also helps our free cash flow generation. We believe these operational efficiencies that we've implemented similar to our margin performance, whether it's Conifer or working capital management or continued EBITDA generation, we obviously will work hard to make these sustainable over a long period of time. Operator: Our next question comes from Jason Cassorla with Guggenheim Securities. Jason Cassorla: Great. I just wanted to go back to your commentary around the implied 4Q guidance on USPI. At the midpoint, it would imply year-over-year growth a little over 8%, which is still strong, marks a little bit of a deceleration from like the low to mid-teens you've done this year. Just any thoughts around that? Is it conservatism? Anything from a timing perspective, like the pace of development coming online that's impacting that? Just any further detail around the implied fourth quarter guidance for USPI would be helpful. Saumya Sutaria: Well, Sun, we can -- let me start. I don't think anything we're saying about the business demand organic performance really changes. I mean, obviously, we have certain assets at a larger scale and various other pricing elements that begin to lap year-over-year from that perspective. And so if anything, it's just math basically. But there's really no -- I mean, we don't -- there's no implication. We're not looking at this fourth quarter at USPI really any differently than in prior fourth quarter. As I said, we're intensely just focused on the ramp-up of business that we typically would see. Sun? Sun Park: Yes, I don't think I have anything further to add, Saum, thanks. Operator: Our next question comes from Ann Hynes with Mizuho. Ann Hynes: Just looking at the -- obviously, margins and cash flows have been very strong and costs have been very good. Going into 2026, especially the labor environment, I think that's better than expectations in 2025. Do you expect that to continue into 2026 on the labor side? And then any other inflationary pressure you would call out as we do our models, that would be great. Saumya Sutaria: Go ahead Sun. Sun Park: Sure. Ann, while we're not commenting specifically on '26 yet, we'll note a couple of things. You're right, our labor environment has generally been very strong and conducive to our operations, whether it's full-time labor expenses, whether it's our management of contract labor and other premium labor, whether it's pro fees. I think they've all been to our expectations. And in the current environment, as we sit here today, don't see any meaningful changes coming. In terms of other inflationary pressures, again, not commenting specifically on '26. But obviously, the other topic that we've talked about is tariffs. we've said that for 2025, we've been able to manage that fairly well due to both our sourcing optimization exercises, whether it's contracting, whether it's working with our vendors, whether it's picking the right products as well as through efforts through our GPO. So we remain confident based on our contract structure that we have a couple more cycles where we'll be able to manage this. But obviously, as we get into the future years, we'll have to remain nimble on the tariff dynamic. Operator: Our next question comes from Benjamin Rossi with JPMorgan Chase. Benjamin Rossi: I guess just checking in on Conifer. How did Conifer's contribution within the hospital operations segment shake out during 3Q? And then you've previously mentioned Conifer's ability to assist with patient eligibility and enrollment services during things like Medicaid redeterminations. I guess should the ACA exchange subsidies expire, do you think Conifer could have a similar utility for you in helping identify patients who have lost coverage and could be eligible for coverage elsewhere? Saumya Sutaria: Well, I mean, that's a very good insight about some of the capabilities that we have in Conifer. And by the way, I would flip it the other direction as well. Given the time frame we're at, but the likelihood -- the positive likelihood of a compromise that we keep hearing, it will also be important that we have invested in the right capacity and capabilities to utilize Conifer's ability to help with enrollment and enrollment in our markets in our clients' markets on the exchanges if the exchange enrollment time line gets delayed or extended. So yes, obviously, the capabilities to help enroll in other products is there, but we're also ramping up our investments and approach to support what might be a little bit of a dislocated enrollment time line on the exchanges given the potential for a later compromise. So it will work well on both dimensions, and we have been investing up in both our staffing and field deployment in preparation for that already. Conifer is performing well according to our expectations within the segment. Not a lot else to comment on there. I mean, Obviously, we are really happy with the way it's performing in the market for us and our base of clients from a cash collection standpoint that I noted before. Operator: Our next question comes from Ryan Langston with TD Cowen. Ryan Langston: Nice to see the ASC volumes positive. Any particular service lines or maybe even geographies driving this? And maybe same thing for the acute side, any hospital service lines stronger, weaker than you expected in the third quarter? Saumya Sutaria: Yes. No, I appreciate the question. A couple of things. I mean we said this at the start of the year when we gave guidance that we kind of saw the environment USPI picking up later in the year, just given -- we look very carefully, obviously, at how busy our physicians are. And as we looked at that, we saw it ramping up in the latter part of the year. I would say probably the biggest driver of that growth in addition to the core of the higher acuity services that we're investing in ortho, spine, some of the things we're doing in robotics and other things. Those things continue to go strong. We saw just based upon the numbers, healthier GI recovery into the third quarter, which is kind of what we were expecting given what the volumes and business of our physicians looked like in the first half. So that was probably an outsized driver of the USPI volume contribution. On the hospital side, and you can tell from the acuity net revenue per case, et cetera, I mean, that environment continues to be strong. Obviously, things like trauma and high acuity emergency visits and stuff, there's less elasticity there, right, with market conditions given the nature of that. The only thing I would note on the hospital side is that especially outpatient visits, which contribute to adjusted admissions, the respiratory and infectious disease volumes were a little bit lower than perhaps expectations. And that just may signal some sort of a slower start to the respiratory season. The numbers certainly seem to indicate that. But again, we're talking about the third quarter, right? So it's less of a harbinger than one would say. But factually speaking, the infectious disease respiratory areas are the only areas I would call out on a proportional basis. Operator: Our next question comes from Justin Lake with Wolfe Research. Justin Lake: I might have missed it, but I was hoping to get an update on total contribution from DPP in provider taxes in the third quarter and your updated estimate on that benefit for the year. And then I appreciate you pointing out the $148 million of prior year DPP that we should think about as being kind of onetime, I assume. Any other items we should consider for 2026 in terms of that bridge year-over-year versus kind of typical growth? Sun Park: Yes. Justin, on the DPP, in Q3, we had about -- we recorded almost $350 million, $346 million of supplemental Medicaid programs, of which we noted $38 million of that was prior year. So that brings us to about a little over $1 billion, $1.02 billion for year-to-date in fiscal '25. Then of that $148 million was out of period. So I think we're on track. It's right in the middle of kind of our expectations once you normalize for the out-of-period prior year payments. And then in terms of normalizations, I would say from a technical math basis, the $148 million of Medicaid supplemental payments that we pointed out are the largest normalization factor for '25 into '26. Obviously, there are a lot of other dynamics that we -- that Saum touched on in his opening comments around reimbursement and other dynamics that we'll have to take into consideration as we get deeper into guidance in our next earnings call. Operator: Our next question comes from Brian Tanquilut with Jefferies. Brian Tanquilut: Just a question on capital allocation. Obviously, you've set goals for USPI's acquisition spend and you've already exceeded that. And then how should we be thinking about that and then the buyback in terms of how you're thinking about throwing capital at the buyback since you've hit your M&A targets already? Saumya Sutaria: Yes. I mean the M&A targets every year are obviously guidance that we go into the year with respect to expectations of what we're going to do. We're responsive to a marketplace, as you can imagine. And we're very careful about our diligence in maintaining our high bar for acquisitions. This year, we have found more opportunities, a broader pipeline, certain processes that may have been competitive in addition that we won and just continued momentum on our de novo strategy. So I mean, the kind of cash flow that USPI generates, we can fund those increases. Now obviously, if you go back historically, with the platform deals that we have done, we've also outspent our typical guidance. So look, we try to update that as we go quarter-to-quarter based upon what we're seeing in the environment and what we're bringing on board. Obviously, having these additional assets on board is positive for the organization going into the following year. And as I noted, we also continue to see some more opportunity in the fourth quarter. So we'll see how that all plays out. I mean we just remain focused on executing the M&A and de novo strategy. And if we do it with the appropriate diligence and onboarding, we're just updating what the spend looks like in the given year. Look, on the second point, we've been very active repurchasers of our shares this year. I would continue to reiterate that our trading multiples, we're long-term active repurchasers of our shares. This quarter, obviously, was lower than the prior quarter. There's also a lot more uncertainty in the market. And we feel fine about what we've achieved this year in that regard. Operator: Our next question comes from A.J. Rice with UBS. Albert Rice: As you start to think about 2026, pulling budgeting together, et cetera, are there any particular areas on the expense management side? I know you've talked a little bit about some of the things you're seeing this year in labor, but whether it's labor supplies, other that are opportunities for incremental savings or programs to initiatives to move forward. And then obviously, there's a lot of discussion about AI, whether there's anything on AI that's worth calling out that you're focused on being able to deploy that? Saumya Sutaria: AJ, so short, medium, long term, kind of all embedded in there, we have undertaken over the last few months and ongoing, a business transformation initiative that is designed to look for those opportunities and also do contingency planning given the uncertainty in the marketplace. Those opportunities would include how we think about all aspects of what I would call labor costs within the organization. Obviously, this year, as we have noted before, we have done some work to rightsize our corporate structure given some of the asset divestitures that we've had in the past. It has very much been our philosophy to -- I think you know this, to use advanced analytics and where we have the ability to more automation and leveraging our Global Business Center, which is continuing to perform well and scale up. This will -- this year proportionately will be one of the larger scale-up years in the last few years within the Global Business Center, which we feel very good about. So there are a lot of opportunities there. Sun already talked about supplies, so I won't say a lot more there. And we continue to invest actively in improvement opportunities and our ability to drive more efficient and better collections in Conifer, some of which we've noted in earlier parts of this call. So very much comprehensively looking at these opportunities. But with a mindset of finding both shorter-term and longer-term opportunities that will impact the business. Operator: Our next question comes from Josh Raskin with Nephron Research. Joshua Raskin: Just first was a quick clarification, I think, on Kevin's question. Did you see the contribution from exchanges, the revenue contribution was less than the percentage of adjusted admissions. And then my real question, just sort of getting back to the M&A environment for the ASCs. There's been a couple more reports, media reports in terms of maybe a competitive landscape. And I'm just curious if that's been changing or if you're seeing anything on valuations yet. And as you speak to your conversations with physicians, maybe how they're evaluating opportunities in ASCs as well. Saumya Sutaria: I think the commentary going back to the first question from Kevin was simply that the exposure to exchanges either on volumes or revenue is less than in the hospital business at USPI, the exposure, whether you're looking at volumes of exchange patients or revenue from exchange patients proportionally in their business is less than the hospital business. That was what the comment was. I hope that helps clarify. The ASC opportunity, first of all, I would say it has so many different dimensions in terms of the growth platform that we have built at USPI, right? We're active in de novos. Those are more focused on higher-end specialties and partnerships with our more proactive health system partners. So there's really 2 threads there. We've worked hard to work with MSO organizations that are deploying capital and scaling their businesses to be the partner of choice on the ASC side. I think that has played out very nicely. And really there, the strategies are across multiple different service lines, GI, orthopedics, stuff that we do with MSOs in ophthalmology, obviously, our urology platform, et cetera. So there are multiple avenues of growth that develop there. Of course, we talk about the acquisition market a fair amount. And in that acquisition market, we have been, for a long period of time, the partner of choice. It's the reason we've scaled so effectively. But physicians, to get to your question of what are they looking for, I mean, they're looking for somebody who's delivered a consistent track record, who has demonstrated the ability to grow, who has demonstrated the ability to take on new assets and find that other doctors tell them that it went well when onboarded. And they're looking -- many times, single specialty physicians are looking for somebody who has a proven track record to help them diversify their business to grow the center and make it multi-specialty, which is, as you know, something that USPI has historically been very, very good at in terms of running larger multi-specialty type of centers that help these physicians get to the next level of maturity in their investment. So when I look across the board on the way the market works, we continue to be the advantaged party in what it takes to build and grow this segment. And so that's what gives us the confidence to continue ahead to spend more than we had originally thought we would spend and look forward to a healthy pipeline in 2026. Sun Park: And this is Sun. Josh, just to give you the numbers again, what we said was for HICS, it represents 8.4% of our admissions in Q3 of '25 and 7% of our total consolidated revenues. So the admission stat is a little slightly higher than the revenue stat, and that's been consistent for us historically. Hopefully, that helps. Operator: Our next question comes from Whit Mayo with Leerink Partners. Benjamin Mayo: Saum, CMS is this new Wiser model in fee-for-service Medicare that starts next year. Do you see any impact on prior auth or administrative work for USPI? I know it's only 6 states, but Texas is one of them and knee arthroscopy and certain implants, I think are an area they're focused on. So just any thoughts or insight into how you're preparing for this? Saumya Sutaria: Yes. Well, there is some movement in the pre-authorization space in fee-for-service Medicare, as you correctly note, the Wiser program still has some uncertainty about how -- and what scope of services it will be implemented for. But yes, we have taken into consideration what will be required there. There are really 3 threats to it. One is preparing documentation, understanding of documentation requirements for appropriate care. Two is actually consistently complying with those. And three is the operational element of managing our scheduling to be complemented by preauthorization having been achieved. So we're sort of prepared to do all of that. I mean we don't talk about it much, but we have a very capable revenue cycle function within USPI that deals with all of the end-to-end type of services that are required there. And so we feel pretty good about that. Look, the other thing is that in any marketplace, when these types of things are introduced, there's an adjustment period, but also physicians have the opportunity to adjust different mix into the centers as they fill their -- especially the ones that have block time. And so I think part of the move here will also be to increase commercial mix and work with the physicians to increase their commercial mix in that process. Operator: Our last question comes from Andrew Mok with Barclays Bank. Thomas Walsh: This is Thomas Walsh on for Andrew. As we await the finalization of the hospital outpatient rule, could you comment on whether the removal of the inpatient-only list is a net positive or net negative for the enterprise? Saumya Sutaria: Okay. So that came through really garbled. I think the question was, is the inpatient-only rule list going away? And is that a benefit to us? I don't know that it's going away. I think there's been discussion about the inpatient-only rule list and what that impact would be. I mean, obviously, for us, the benefit would be in the USPI segment and potentially a push for more in certain types of volumes that have been in the hospital setting into the outpatient setting. In our acute care hospital segment, because of our greater focus on high acuity work, proportionally, and it's not to say that we don't have the business, but proportionally, those cases wouldn't be affected as much as maybe a typical general acute care facility. But we haven't done any quantification of that, that we've shared anywhere. I think this policy is still very much up in the air being discussed and not even at the point where I would say that we're engaging in rule-making discussions about it. Operator: We have reached the end of the question-and-answer session, and this concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation. Saumya Sutaria: Thank you.
Nate Melihercik: Good afternoon, and good evening. Welcome to Logitech's video call to discuss our financial results for the second quarter of our fiscal year 2026. Joining us today are Hanneke Faber, our CEO; and Matteo Anversa, our CFO. During this call, we will make forward-looking statements, including discussions of our outlook, strategy and guidance. We're making these statements based on our views only as of today. Our actual results could differ materially as a result of many factors. Additional information concerning those factors is available in our most recent annual report on Form 10-K and any subsequent reports on Forms 10-Q and 8-K, which you can find on the SEC's website and the Investor Relations section of our website. We undertake no obligation to update or revise any of these forward-looking statements, except as required by law. We will also discuss non-GAAP financial results. You can find a reconciliation between GAAP and non-GAAP results and information about our use of non-GAAP measures and factors that could impact our financial results and forward-looking statements in our press release and in our filings with the SEC. These materials as well as the shareholder letter and a webcast of this call are all available at the Investor Relations page of our website. We encourage you to review these materials carefully. And unless noted otherwise, references to net sales growth are in constant currency and comparisons between periods are year-over-year. This call is being recorded and will be available for a replay on our website. I will now turn the call over to Hanneke. Johanna Faber: Thank you, Nate, and welcome, everyone. We delivered a strong second quarter to close out the first half of fiscal year 2026. Our teams executed with excellence, delivering good top line growth and outstanding profitability. They executed well across all regions and delivered strong growth across both B2B and consumer channels. To achieve these results in the current environment underscores Logitech's discipline and resilience. In Q2, we remain focused on our long-term strategic priorities, and they drove our results. First, of course, superior products and innovation, which are so integral to our DNA. This quarter, we announced 16 new products. Some of the highlights included the much anticipated MX Master 4, a new generation of our flagship premium mouse. This new product is the first in the MX line to provide advanced users with tactile haptic feedback, and it is off to a record-breaking start. We also unveiled a wide array of exciting new gaming products, including the new PRO X2 SuperStrike mouse, which blends inductive analog sensing and real-time haptic feedback for the most competitive gamers. We also launched the McLaren Racing collection, a premium lineup of SIM racing gear inspired by McLaren's iconic racing brand and technology. And for those of us in the business world on calls like this one, we introduced the new Zone Wireless 2ES and Zone Wired 2 headsets with AI-powered dual noise canceling microphones and adaptive hybrid active noise cancellation. Many of these new products were announced at our Logitech-ownned flagship events, Logi WORK and Logi PLAY in September. These coveted live events took place in more than 30 cities around the world, attracting thousands of media, influencers, content creators, partners and thought leaders. The Logi PLAY global live stream on the day drove more than 12 million views. And within a month, the Logi PLAY social media and creator activations reached approximately 200 million people. This underscores the growing strength of our global brand. We also continue to double down on B2B with good momentum behind our investments in new products and capabilities. Logitech for business demand was strong across video collaboration, personal workspace solutions and the education vertical. Time Magazine recognized our new office environmental sensor, the Logitech Spot, as one of the best inventions of 2025. This is the second year in a row we have received this prestigious recognition for a new product. Logitech's global scale remains a key advantage. And in Q2, we executed very well across geographies. EMEA posted solid growth. Once again, Asia Pacific had an excellent quarter, supported by our China for China investments. Their strength helped offset a modest sales decline in the Americas as we proactively manage tariffs. Importantly, demand trends in the U.S. improved as the quarter progressed. Finally, our Q2 performance underscores Logitech's capabilities as an operational powerhouse. Our cost discipline and manufacturing diversification were important factors in driving excellent gross margins and double-digit growth in non-GAAP operating income. We are on track to reduce our share of U.S. products originating from China to 10% by the end of this calendar year. We're able to do this, thanks to our long established diversified manufacturing capabilities in 5 other countries, while our Chinese manufacturing site continue to serve China and the rest of the world. Now looking ahead to Q3, we believe we will see continued strong momentum in our business, but we also see some market uncertainty. The North American consumer market, especially in gaming, was softer in Q2. We're cautiously optimistic that this will improve for the holiday season, but that is, of course, yet to be confirmed. The macros also remain uncertain with tariffs, export restrictions, persistent inflation, just some of the dynamics. In this context, we believe our Q3 outlook reflects a pragmatic balance between the strong momentum of our business and the litany of uncertainties within the global economy. Our approach to deliver the holiday quarter and beyond remains unchanged. We'll focus on our long-term strategic priorities while being guided by the 3 in-year principles of playing offense, cost discipline and agility. In terms of playing offense, we will continue to invest in R&D and demand generation to gain share, both in the short and the long term. As for rigorous cost discipline, we'll continue to focus on product cost optimization, tariff mitigation and disciplined G&A spend. And of course, we will continue to be agile and move fast. In closing, we entered a holiday quarter in a dynamic global environment with a strong first half under our belts and with a unique set of assets that underpin our resilience, our extraordinary capacity for superior products and innovation, our global reach with 2/3 of sales generated outside the U.S., our diversified manufacturing footprint or China plus 5, our strong and growing brand, our pristine balance sheet and our experienced high-performing team. I believe these assets, combined with our clear strategic priorities, position us well to continue to deliver strong results. And before I hand over to Matteo, let me say a big thank you to our teams around the world. Our people are driving this strong performance and a unique culture. And I was super proud that, that was recognized by Forbes this quarter when they ranked Logitech out of 900 global companies as #25 on their list of the world's best employers. Matteo, over to you. Matteo Anversa: Thank you, Hanneke, and thank you all for joining us on the call today. I would like to start by thanking our teams around the globe for the continuous strong execution in the second quarter. While the external environment remains challenging, our execution centered on playing offense, disciplined cost control and agility. And this focus drove a non-GAAP operating income of $230 million, up 19% year-over-year. This strong profitability was achieved in a quarter where we delivered mid-single-digit net sales growth year-over-year. So let me discuss some of the key aspects of our second quarter financials. Net sales were up 4% year-over-year in constant currency, supported by continued robust demand across both consumer and B2B. And actually, B2B demand outpaced consumer in the quarter. Some key highlights to mention across our product categories. Personal Workspace grew year-over-year, fueled by double-digit growth in Pointing Devices and Keyboards & Combos. Gaming delivered 5% year-over-year growth in constant currency, driven by double-digit growth in PC gaming. Video Collaboration grew 3% in constant currency, driven by high growth in EMEA, while Americas was relatively flat due in part to the pull forward of sales that we highlighted in the first quarter. We executed well across our regions and more specifically, Asia Pacific grew 19% year-over-year in constant currency, led by sustained double-digit growth in China. EMEA grew 3% in constant currency, driven by strong growth in Video Collaboration and Personal Workspace. And conversely, Americas was down 4%, primarily due to the gaming market decline. And as Hanneke just noted, we also experienced lower demand early in the quarter as a result of the pricing actions that we took to offset tariffs, which improved in the latter half. Moving to gross margin. Our non-GAAP gross margin rate for the quarter was 43.8%, similar to the prior year, and it is important to note that the negative impact of tariffs was entirely offset by our price and manufacturing diversification actions. Additionally, product cost reductions offset investment in strategic promotions. We continue to be very disciplined in managing our costs. And as a result, operating expenses declined 3% year-over-year and were 24.4% of net sales, down 240 basis points from the 26.9% in the second quarter of last year. And similarly to last quarter, this decrease was primarily driven by a reduction in G&A as a result of the measures that we implemented to mitigate the impact of tariffs. As I mentioned earlier, this focus drove a non-GAAP operating income of $230 million, up 19% year-over-year and a non-GAAP operating income margin expansion of more than 200 basis points. Moving to cash. Cash flow continues to be strong. We generated approximately $230 million in cash from operations, 100% of operating income and ended the quarter with a cash balance of $1.4 billion. We returned $340 million to shareholders in the quarter through dividends and share repurchases, consistent with our capital allocation priorities. Now looking ahead, as Hanneke pointed out, we are monitoring 2 pockets of uncertainty. The U.S. consumer market, particularly in gaming, and the overall macro environment, particularly around tariffs, export restrictions, global trade dynamics and inflation. Now nonetheless, we are expecting the overall top line trend to continue to be positive and roughly in line with the performance year-to-date. Net sales in the third quarter are expected to grow 1% to 4% year-over-year in constant currency, with gross margin rate between 42% and 43% and non-GAAP operating income is expected to be between $270 million and $290 million. This outlook contemplates tariff levels for the third quarter to be unchanged from the current structure. And we anticipate, again, that our pricing actions and continued diversification efforts will offset the negative impacts of these tariffs. So while there is a level of uncertainty in the U.S. market, we will continue to manage the business with diligence, generating strong levels of operating income and cash from operations. So I want to thank once again our teams across the globe for their dedication and flexibility. And now, David, I think we can open the call for questions. Operator: [Operator Instructions] And now our first question is form Asiya Merchant from Citi. Asiya Merchant: Great. I hope you can hear me. Matteo Anversa: Yes, Asiya. Asiya Merchant: Okay, okay. All right. Wonderful. [Technical Difficulty] double down a little bit on the U.S. consumer uncertainity that you talked about specifically [indiscernible] gaming. What have you seen? Has that been a function of the price increases that you put through? And when you talk about Americas improving as the quarter progressed, was that a -- is gaming part of that? If you can just double-click on that. And then just given the fact that sell-through was so much better than sell-in, why should we have like more seasonal or maybe more like mid-teens, mid- to high teens kind of guide that you guys are talking about? Johanna Faber: Yes. Thanks, Asiya. So there's a couple of pieces in that question. I appreciate it. Maybe first on the markets overall, we saw continued strong markets around the world on the work side of our business. So Video Conferencing and Personal Workspace, really markets were strong and growing everywhere. In Europe and in APAC, the gaming market also continued to grow. But in the Americas, it was a little bit more mixed. Again, VC and PWS were really solid market-wise, but the Gaming market in Q2 declined mid-single digits. And the reasons for that decline can be debated, but I think what's more important is that we're cautiously optimistic that the gaming market will recover and be back to growth in the holiday quarter for a number of reasons. First of all, we saw the trends improve as the quarter progressed, Q2. There have been some game releases early in Q3, notably Battlefield 6, which is the type of game that really plays to our strength and is off to a really good start. And then we have an excellent innovation bundle and some targeted promotions where needed to continue to grow the business. So I think, again, globally, market is actually quite strong. North America gaming, a little softer. And by the way, in the global context, our competitive share performance in Q2 was also very strong. So all in all, good momentum and cautiously optimistic that, that spot of North American gaming will be better during the holidays... Asiya Merchant: No, no, go ahead. Matteo Anversa: Unpacking a bit of the second portion of your question on the outlook. So the way I think I would describe it as we think it's a reasonably fair balance between the underlying strong performance that the business continues to have, as you have seen in the results that we posted earlier today with some of the litany of uncertainties that Hanneke talked about in her prepared remarks. So when you look at it by region, basically, we are expecting Asia Pacific to continue to perform extremely well with double-digit growth. China keeps doing extremely well. We have 11/11 coming up here in November. So we are expecting strong performance on gaming. So Asia Pacific will continue to perform in line with the last couple of quarters. Similar thing for EMEA, we are expecting a low to mid-single-digit growth in constant currency in Europe as well. So the bookends of our outlook is really around the -- what's going to happen in North America with the U.S. consumer to Hanneke's point earlier. And here, if you look at the low end of the outlook assumes a North America that continues to be slightly negative year-over-year in terms of net sales, like we have seen in the first 6 months of the year, while the high end of the outlook assumes a strong holiday season, strong consumer and North America actually turning flat to slightly positive. So that's are the bookends of the outlook that we provided today. Asiya Merchant: And was any of that an impact of prices that you put through, price increases that you put through? Johanna Faber: Yes. I think mostly our brand and our products, both of which are, we believe, quite superior, protected us to a large extent from impacts of the pricing. I would say, in general, higher priced and premium products as well as our B2B portfolio, we saw very little to no impact of the price increases. Where we did see some impact was on entry-priced products and even there, probably a little bit more so on entry pricing gaming than in PWS. And we're actively managing that with targeted promotions. Operator: Our next question comes from Erik with Morgan Stanley. Erik Woodring: Maybe just following up on Asiya's question there. Just if you could maybe touch a little bit more on the consumer response to higher prices. And really, what I'm trying to get at is, you talked a little bit about B2B pull forward in the June quarter. What type of behavior did you see kind of prior and then after pricing increases in the U.S. that maybe informs you about the consumer? And how are you -- or what are the assumptions that you're making into the December quarter as it relates to pricing and kind of the elasticity of pricing? And then a quick follow-up, please. Johanna Faber: Yes. So again, on the B2B side, very little impact with the exception maybe of some timing impact where, again, we saw a little bit of pull forward in our Q1. But demand-wise, very little impact. Same thing on the premium end of the portfolio, very little impact. I think the U.S. consumer at the high end is in good shape. A little bit more impact on the lower end. That's not unexpected. And again, that got better during the quarter. So overall, we're really pleased by the fact that we took pricing early and you see what that does to our gross margins where we were able to offset the entire impact of tariffs by pricing and cost reductions. Erik Woodring: Okay. And then quickly as my follow-up, Hanneke or maybe it's better for Matteo as well or maybe both of you is just can you talk about how Logitech is thinking about M&A today? And if there's any difference from what you outlined at your Analyst Day back in March, I only ask, we haven't seen I don't think anything has necessarily materialized over the last, let's call it, 6 or 7 months. And so is that just a function of better uses of cash? Is it a function of valuations? Is it a function of the opportunity set? Would just love your feedback there. And that's it for me. Johanna Faber: Yes. Thanks, Erik. No change. I'm afraid versus AID. So our top priority for capital allocation is investing organically in the business, and that's definitely what we're doing. Second priority is making sure we grow the dividend every year. Third priority is M&A, and we are actively out in the market looking for the right targets, but they have to be strategic and they have to make the boat go faster. And we're looking at lots of things, but I'm going to be very careful. I want things that make the boat go faster, and those are not so easy to come by. And then our last priority when it comes to capital allocation is share buybacks because we also don't want a lazy balance sheet, and you saw us returning a lot of cash to shareholders in the quarter, mostly through the dividend in Q2, but also through some buybacks. Operator: Our next question comes from Alek Valero with Loop Capital. Alek Valero: This is Alex on for Ananda. So just back to Gaming in the Americas, can you speak to how and when do you think the Americas, I believe you said entry-level gaming can normalize the higher ASPs? Johanna Faber: Yes. Again, we saw trends improving throughout the quarter. And in America, we haven't taken price increases in a long time. So we don't have a lot of history, but we have taken price increases in other markets around the world over the last -- in recent times. And you tend to see a bit of an impact in the first quarter after. So that is no surprise. And again, we were pleased to see in the impacted parts of the portfolio trends improving throughout the quarter. And as Matteo outlined, exactly when that will normalize is a little hard to tell, which is why we have a range for Q3 and the bookends of those assume either it normalizes faster or it takes a little bit longer. But overall, we're confident that it will normalize. Alek Valero: Awesome. Just a quick follow-up. I believe I recall you mentioned that the B2B is going to layer in over time. Can you speak to what the mix is today in terms of business to consumer? And where does it go from here? Johanna Faber: Yes. So Logitech for Business, which includes VC headsets and Personal Workspace sold into the enterprise channel is about 40% of the business, and that's creeping up but very slowly over time as we double down on that. And we're pleased in Q2. It was again a strong quarter for Logitech for Business. You saw the VC sales were up with double-digit demand growth. And we like -- there's a lot of things we like about Q2 in Logitech for Business. But I would say what I like particularly, we saw disproportionate growth in higher ASP, more premium solutions, including the exciting new Rally Board 65 video conferencing mobile solution, which is proving to be very popular. We continue to strengthen our go-to-market capabilities. We launched CPQ, configure price quote in the quarter, which is really helping us quote faster and deliver better service to our customers. And the education vertical continued to be -- continue to do very well in the quarter. So lots to like there, and we'll continue our focus on Logitech for Business. Operator: Okay. Our next question comes from Samik Chatterjee with JPMorgan. Samik Chatterjee: Let me check first , can you hear me? Matteo Anversa: We can hear you. Samik Chatterjee: Okay. Great. Maybe Hanneke and Matteo, what are you hearing from your distribution partners in terms of promotional activity that they want to really sort of ramp into the December quarter? I know you mentioned 11/11 as well in China. Just in relation to previous years, what are you seeing in terms of intentions from retailers for promotional activity? And maybe how does that influence the gross margin guide, Matteo, that you outlined for the next quarter, particularly when we compare to the slight moderation we had seen last quarter going from Q2 to Q3 -- last year, I mean, sorry. And I have a follow-up. Johanna Faber: Yes. I'll let Matteo comment on the gross margin guide for the next quarter. In terms of what we're hearing, I've been out in the market quite a bit here in the U.S. and in Canada in the last few weeks, talking to customers, to consumers, to some of our partners. I would say they're also optimistic on the holidays. They want to be sure that our premium offerings look really great. And if you go into a Best Buy or in Europe into a MediaMarkt, you'll see fabulous execution, I think, of the McLaren collection and the MX Master 4, which is at beast. They also want to be sure that we together offer great value on the low end of the portfolio. So both in Europe and the U.S., you've seen us in the past quarter do a little bit more promotion there. And I would say that, that kind of mix of great visibility of the high end and targeted promo on the low end will continue into Q4. And that's important -- Q3, sorry, that's continuing. That's important, not just in the U.S., but also in Europe, where we need to do a lot of blocking and tackling versus low-end Chinese competition, which for obvious reasons, is more active in Europe now than last year. Matteo Anversa: So Samik, let me unpack to you the gross margin a bit. I think the best way to think about the third quarter is almost looking back at the second as the story is actually pretty similar. We've been now for quite some time, pretty surgical on promotion and really, to Hanneke's point, really spend the money very carefully where we think is needed. And that's exactly what happened in the second quarter, and that's what you can expect us to do also in the third. So if you look at the gross margin rate in the second, we're basically flattish year-over-year. As we said in our prepared remarks, our pricing actions completely offset the impact of tariffs. Then we had -- the team -- the operating team did a marvelous job and continue to work on product cost reduction, while they were also concurrently working on the manufacturing diversification. And this gave us about 100 basis points of margin expansion year-over-year, which was offset by slightly higher promotion to Hanneke's point that she just described. And then last quarter, if you recall, last year, we had a release of inventory reserves, which was -- did not occur this year that put about 100 basis points pressure year-over-year on the gross margin side, but this was offset by the positive effects due to the current exchange rate, primarily euro to USD. So that's the breakdown of the second quarter. So if you look at the third quarter, actually, the story is going to be -- we are expecting this to be very, very similar. So we will continue to work on product cost reduction. So that should help us offset a little bit more of the promotional spend that you normally have in the third quarter being the holiday quarter. And then price will continue to offset the impact of tariffs. So that's how we layered out the outlook of 42% to 43% that we described today. Samik Chatterjee: Okay. Okay. Got it. Maybe just for my follow-up, for the OpEx run rate that you're managing the business to fairly -- looks fairly disciplined and you're managing it with a lower OpEx envelope year-over-year. I mean, obviously, the business is still growing. So what are the areas you're sort of making those trade-offs on? And where are you finding those efficiencies to keep the OpEx envelope this tight at this point? Matteo Anversa: Sure. So starting at a high level with the numbers, right? We outlined even at the Investor Day that our objective is to have OpEx in the range of 24% to 26% of net revenue, right? Last year, you saw us maybe more on the higher end of this range. And this year, so far, we have been a bit on the lower end. And that's fundamentally driven by the -- some of the measures that we took in light of tariffs to control some of the cost. And here, we need to be very clear that as we did also in the first quarter, most of these cost control actions were centered around G&A. So the typical semi blocking and tackling that you would expect a company to do on G&A, control the contractor cost, pausing hires of people that are not related to R&D or sales and marketing and travel control, this kind of stuff. And so that's really where the focus has been. So really trying to curtail the cost on G&A, but at the same time, take these savings on the G&A side and then refunnel it back into the growth of the business, which for us means R&D and then sales and marketing. And that's what should expect -- you should expect us to continue to do in the next couple of quarters. Operator: [Operator Instructions] And with that, our next question goes to Didier with Bank of America. Didier Scemama: I've got a couple. Maybe first, maybe for Matteo, Hanneke, whoever. I'm just wondering, I think you touched on it a little bit, but how should we think about the marketing spend in the holiday season? Because I can think like some -- you've got some sort of tailwinds from FX. You've got also a sort of difficult consumer environment or slightly more difficult consumer environment in the U.S. So you would want to use that FX tailwind maybe to invest in the U.S. At the same time, you also have a channel that is very lean. So I just wonder how you should we think about that? Johanna Faber: Yes. So we feel good about inventories ahead of the holidays, both in the channel and our own inventory levels. So they're healthy. We have enough. We don't have too much. It's all good. The way -- if I look at overall OpEx, again, Matteo said it just now, we had a great quarter in terms of OpEx, 24.4%. That's, I think, 240 basis points down versus last year. So that's a really great discipline. That was focused on G&A, where we're super purposeful and just tight. R&D was virtually unchanged in Q2, and we're going to continue to invest there. That's our bread and butter. And then to your point, marketing was also in Q2 close to last year. I think what's important to note there is that the effectiveness of our marketing spend globally continues to improve. We're shifting money from nonworking producing stuff to working, which is, in general, much better. And we're also strengthening our marketing capabilities. I've mentioned China before, but in China, we are really rocking it in marketing. And in fact, just last week, at China's big marketing ROI Festival, there were 2,400 entries for best marketing ROI, and we were one of only 11 Gold Award winners. So it just shows the strength of our marketing team and how we've modernized marketing. We're getting more bang for the buck in marketing. And I expect that to continue in Q3, and we won't hesitate to lean into either R&D or sales and marketing spend if we think it can accelerate the top line. Matteo Anversa: For modeling purposes, the -- remember, the third quarter, OpEx as a percentage of net sales tends to be a little lower just because it's the biggest quarter of the year. So that would imply a sequential increase to Hanneke's point, both overall in OpEx and the increase will be primarily in R&D and sales and marketing. So that's what you can expect. Didier Scemama: Perfect. And the quick follow-up is on the China for China strategy. I think Hanneke last quarter, you sort of mentioned that there was a pivot in the competitive positioning of Logitech. You were starting to gain share after several quarters of difficult, let's say, competitive environment for the company. So maybe can you elaborate a little bit more on the products you've introduced, the price points you're hitting and where you've encountered the greatest success? Johanna Faber: Yes. No, happy to do that. So again, China had -- we don't break it out, but you've seen the APAC numbers and China was ahead of those APAC numbers. We continue to hold the #1 shares. Actually, in Q2, PWS share now grew for the entire quarter, which I haven't seen since I've been at Logitech. So that was great to see. And gaming share for the quarter was still slightly down, but the trends are improving. So that's good to see. That's driven by the marketing I just mentioned, where the team is doing a great job versus even a year ago and by innovation. So our global innovations are working well in China, but we've also invested in China for China innovation. So the most exciting thing we launched in Q2 was a new gaming keyboard, the G316 just for China, really cool and unique RGB lighting, retro vintage display and of course, all the cool performance stuff, 8 kilohertz, et cetera. That is doing very well. That's actually on the medium, I would say, the lower medium end of the price range, which is an important part in China to really go big on. Still great margins. The team has done a great job designing and building that in China. And you'll see that type of innovation more and more of it going forward, but super excited about the momentum we now have in China in a fast-growing market as well. Operator: Okay. Our final question will come from Michael with Vontobel. Michael Foeth: You actually answered just all my questions on China just now. But I have 2 small follow-ups. One is on the channel inventories. You said channel inventories are quite lean. You're happy with inventories. Is that the same dynamic across all regions? Or are there any differences across the regions? And can you tie that also maybe with the numbers you showed on sell-in and sell-through? And the second question would be just on gaming. Could you give a bit more color on the different subsegments in gaming, simulation, console and PC gaming? I mean you mentioned PC gaming being very strong, but what about the other categories? Johanna Faber: Why don't I take the gaming and then you can comment on the inventory. So yes, we talked a lot about gaming in the U.S., but maybe if we zoom out gaming globally, again, continue to be really strong with net sales up 5% and demand up double digits, driven by very strong, again, double-digit sales growth in our #1 market, which is China. When we look at the different parts of the business, Michael, we're seeing continued strong demand at the top end. So Pro was up more than 25%. SIM was up more than 10%. So that's really great. And again, we continue to block and tackle in the lower end of the portfolio, which is also important, which also saw solid growth, but the kind of disproportionate growth is coming from the top end of the gaming business. Again, excited for the short term on gaming with things like the SuperStrike and the McLaren Collection. I'm very excited about the mid- and long-term perspectives in gaming. Matteo Anversa: And Michael, on the -- on your question on the channel inventory, we feel the channel overall across all our regions is in a good spot. When we look at the weeks on hand, it's in the range that where we wanted this to be. It's important not to confuse. We had a little bit of a channel inventory dynamic in B2B in VC actually last quarter. That's why you saw in the first quarter, the sell-in of VC outpaced the sell-through and now the reverse happened in the second quarter. But that's a dynamic that has been fixed here in the last 6 months. So overall, we are pleased where the inventory is. And overall, if you look at AMR, that's where you have the biggest discrepancy, the sell-out outpaced the sell-in a bit, which is a positive sign as we enter into the third quarter and the earlier season. Operator: Sorry, we do have one more question from Martin with BMP. Martin? Martin Jungfleisch: Two quick follow-ups. The first one is really on the strength in keyboard and mice. Would you say that is Windows 10 Refresh driven? Or is it more COVID refresh? Or none of those 2? That's the first question. Johanna Faber: Yes. Sorry go ahead, go ahead for your second one. Martin Jungfleisch: Yes. The second one is more for Matteo, I would say, just on the tariff headwind. I think was it the 200 to 300 basis points that you were expecting that you saw in the third quarter? And then also going forward, as you exit the -- or slowly exit the China to U.S. business, should we actually see that headwind ease over the next couple of quarters? Johanna Faber: Yes. Maybe I'll take the PWS one first. And thanks for noticing that really great results in Keyboards & Combos and Mice. Some people think those things can't grow. But as you can see, they can grow. What were the drivers? I'd say the first driver was, again, the premium end of our portfolio. So MX and Ergo are doing extremely well, both with double-digit growth in the quarter. And again, that MX Master 4, a lot of pent-up demand for it, entire subredits dedicated to it before launch, just a lot of excitement on that launch. Then we're seeing continued excellent execution in-store and online on our core keyword and mice business. And to your question, is this linked to the Windows 11 Refresh? We've always said I don't think our growth -- we know our growth is not directly tied to any PC sales trends. And historically, peripherals have always grown a couple of hundred basis points ahead of PC sales, but it can't hurt. And we're always very focused on attach programs in-store and online. When you buy a new PC, we also hope you will attach one of our peripherals. And of course, with some of the excitement about the Windows 11 Refresh and the AI PCs, that gives us more attach opportunities. So I would say that's a mild tailwind, but the real growth comes from our premium portfolio. Matteo Anversa: So Michael, let me -- Martin, sorry, let me talk about the other question. So the -- if I rewind the tape a little bit, right? So in the last earnings call, we said that we were expecting the tariff impact to be about 200 to 300 basis points, offset by 200 basis points of price. So we were expecting the net impact all in, including the diversification action and price to be between 0 and 100 basis points negative for the gross margin for the quarter. What in reality happened is, as we mentioned in the prepared remarks, we were able through -- we were able to offset the entire impact of tariffs. It's about 150 basis points each. So the impact of tariff net of diversification was 150 basis points pressure to the gross margin and price was a lift of 150 basis points. So net-net, we were able to offset entirely. And really, that's driven by 3 key things. Number one, the continued work that our supply chain team is doing on manufacturing diversification, which is trending in line with plan. The price actions that we took in April and then supply chain management. Really, they're doing a fantastic job in managing inventory, and they were able, as we said in prior calls, to pull in some of the inventory, some of the purchases ahead of new tariffs being placed. So we were able to mitigate some of the impact of the tariffs. So this 150 basis points dynamic, that's what I would expect also to happen in the third quarter. So 150 basis points impact on tariffs, offset by price, assuming, obviously, the tariff structure stays as it is currently. Operator: And now we have no further questions. Johanna Faber: Great. Well, thank you always great to see you all. Looking forward to seeing you in the follow-ups, and thanks for being with us today. Have a good week.
Operator: Good afternoon, and welcome to the Mondelez International 2025 Third Quarter Earnings question-and-answer session. [Operator Instructions] On today's call are Dirk Van de Put, Chairman and CEO; Luca Zaramella, CFO; and Shep Dunlap, SVP of Investor Relations. Earlier this afternoon, the company posted a press release and prepared remarks, both of which are available on its website. During this call, the company will make forward-looking statements about performance. These statements are based on how the company sees things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in the company's 10-K, 10-Q and 8-K filings for more details on forward-looking statements. As the company discusses results today, unless noted as reported, it will be referencing non-GAAP financial measures, which adjust for certain items included in the company's GAAP results. In addition, the company provides year-over-year growth on a constant currency basis unless otherwise noted. You can find the comparable GAAP measures and GAAP to non-GAAP reconciliations within the company's earnings release and at the back of the slide presentation. Operator: We will now move to our first question. Our first question comes from the line of Andrew Lazar with Barclays. Andrew Lazar: Dirk, maybe to start off, I was hoping you could talk a bit more in depth about Europe, how you're seeing things as you sort of close the year and into next, particularly when it comes to pricing that's been landed and movements sort of that you deem that you need to make, as you mentioned, price gap management in certain European markets. Dirk Van de Put: Yes, Andrew. So I would say, if I start with the consumer in Europe, I would say the consumer confidence remains, in general, stable, unchanged versus the last quarter. If I look at our biscuits, cakes and pastries and meals business, they're all performing well, where we have share growth and volume/mix growth. And if I look at it from an overall euro perspective, I would say the category is performing generally in line -- the chocolate categories in general, in line with expectations. We've seen the cocoa situation. As you know, we had to do quite substantial price increases in the order of about 30%. And so broadly speaking, I would say, the chocolate business is fine, but we are clearly seeing a couple of pockets of pressure that we need to address. These are caused sometimes by competitive situations where our competitors did not increase their pricing as much as we did, largely because they are private companies. And the other thing I would say is that in certain markets, the retailers also suddenly took more margin than they have historically done. So we're fixing these problems. I wouldn't say it's a structural issue, but we need to be -- deal with, and that has caused a difference in what we were expecting for this quarter in Europe. I would also mention that as you look at the European situation, there was a heatwave in July, which has affected our volumes, plus we have done some significant downsizing also, which affects our volumes. The two markets where we have these situations are the U.K. and Germany. We are starting to see a reaction to the repositioning of the price points in certain areas of the portfolio that we have done. And so we are seeing the volume and the share improve as a consequence of that. We've also seen that competition has started to price recently. So that also will help the situation going forward. Overall, I would say, as I see how the pricing is landing in Europe, elasticity is around 0.7, 0.8, it's higher than we would have expected where -- our thinking was more like 0.4, 0.5. And so we are taking on top of what I already explained to a number of other actions in the sense that we are innovating with new flavors and new formats. We are investing more in A&C. We're driving the seasonals very hard. We're working on promo effectiveness because that's also not playing out sometimes the way we would have expected. And largely our main focus is on hitting the right price points where in certain cases, like on our 300-gram range in chocolate, we passed 2 key price points, and that was probably a little bit more than the consumer can accept at the moment. We are, of course, accompanying that with a lot of productivity and cost savings. But overall, I would say, seen the fact that this was the heaviest cocoa cost that we would have in the year, from here going forward, we expect a significant improvement. We expect to see a significant improvement in Europe. I hope that helps, Andrew. Andrew Lazar: Yes, really thorough. Really appreciate that. And I guess, lastly, with respect to guidance, maybe you could talk briefly about the implied Q4 guidance change, just as I would assume, cocoa is largely been locked in at this point. And then what's the key reason behind, I guess, the cut? And then as it relates really to '26, you make reference to being an algorithm and EPS. I was hoping you could add a bit more color on your confidence around this. And I guess, more importantly, the sort of the key puts and takes that we should think about when thinking about organic sales growth next year in light of the planned investments that you're making and some of the elasticity concerns? Luca Zaramella: Thank you, Andrew. I will start by saying that on the '25 guidance, we had a series of impacts that clearly we weren't anticipating at the time of us giving guidance for 2025. The three main ones are the tariffs and related uncertainty affecting the overall consumer confidence. The second one is the material destocking that happened in the U.S. due to retailers lowering their working capital. And the third one clearly was the unprecedented heatwave in Europe. Those elements lowered already, when we talked to you for Q2, our flexibility for the year. With incremental softening of the U.S. biscuit market at the end of Q3, and we saw the market declining in volume terms a little bit more than the previous quarters, and the higher chocolate elasticities in Europe. Clearly, that caused a volume/mix impact that at this point in time, we don't want to offset by cutting costs and potential growth into next year. I think importantly, in the prepared remarks, we give you a sense of all the actions we are taking to improve the volume trend that we see specifically in the U.S. and in Europe. And importantly, we have taken additional pricing in the U.S. We have confidence in all the plants that we are putting in place around seasonals. I think we call out clear elements of growth in the U.S. like Tate's, the Ventures and Give & Go. And I think when you really look at what the new guidance means in terms of implied Q4, you see a step-up in the top line. 4% is year-to-date organic net revenue growth, we are guiding you at more than 4%. And importantly, last year, below the line, we had an $0.08 impact in the tax line that is nonrecurring this year. And so the implied EPS growth will translate in an over delivery compared to last year of the EBIT that will be quite good in terms of growth. Obviously, as far as '26 goes, it is a little bit premature to put all the pieces together for you at this point in time. We are literally going through the plans. And you might imagine that the big question we are asking ourselves is, what cocoa level are we going to have into next year? As I mentioned a few times, we are well protected and covered. But reality is we have put in place a series of coverage strategies that would allow us to participate to cocoa further potential declines. And so we need to understand a little bit better, and we will have a better sense of what the real cocoa impact is going to be for next year. It's certainly going to be positive even if cocoa is trading at a level that is quite higher compared to historical norms. We feel quite good about the plans we have been reviewing with all the business units in terms of chocolate. We are clearly optimizing GP dollars into next year, in line with our guidelines and how we want to manage the business. The commercial approach to chocolate is quite good. We are doubling down on things that are working really well for us. And obviously, we want to build share, drive consumer value and protecting penetration. And I don't have to tell you again that we have big opportunities in all emerging markets. I mean, adjacencies like cakes and pastries, snack bar and premium. So cocoa will be deflationary in '26, and we wanted you to hear that our goal is clear in terms of EPS growth for next year. And so we are really targeting a high single-digit EPS growth for 2026, even after the material investments that we're going to put into the business to really protect the long-term growth of our categories. Operator: We'll move next to Peter Galbo with Bank of America. Peter Galbo: Dirk, I was hoping maybe you could give us a similar walk around the U.S. in terms of the path forward maybe to getting back to growth. I know you gave kind of a very detailed answer around Europe, but would appreciate kind of a similar level of detail on the U.S., please. Dirk Van de Put: Yes, yes. Well, so as Luca already said, we saw the category slowing down more in the last quarter versus what we saw in the first half, which is obviously not good. If you look at it, the volume was down 4% versus 2.8% average year-to-date. That is driven obviously by a consumer that is very concerned in general about the economy, frustrated with the pricing they're seeing. And we're seeing the same behavior that we've been seeing before in the sense that they are really seeking for value, that means different things for the lower-income consumers, that means going to smaller packs at the right price points. For the higher income consumer that usually goes for bigger packs and buying when they're on promotion. We see that the basket size of the consumer is really not increasing over the last 3 years. And as you can imagine, as prices have gone up, they're being more squeezed on what they can buy within that basket. And they are tending to focus on what are the essentials. And as a consequence, snacking categories are not that essential for them, and we're seeing that in our volumes. And on top of that, promos are not necessarily delivering the expected ROI. What else are they doing? They're shifting channels and format. So we see a big shift from food and mass to value, club and online. We see more multipacks being sold. There's also some good news in the sense that some of the premium segments are doing well, like cakes for us is doing well and some of the better-for-you offerings, particularly protein related, that is for us a Builder's Bar under the Clif range, or a Perfect bar. They're doing well. We have Hu, which is our vegan chocolate is doing well. So we can see that there are areas that are connecting with the consumer for instance, also a Give & Go is doing quite well. The main concern is the U.S. biscuits category. And of course, the government shop shutdown going forward will not help with the confidence of the consumer. If I look at the OI, the reason why the OI is negative in North America is largely driven also by cocoa. It might not immediately be clear, but Oreo or chips or Tate's also have quite a bit of chocolate in them. And so they are affected by them. At the moment, it's not easy to price in the U.S. So what are we doing about all this is the big question, of course. I would say in the first place, the one thing that's important to realize is that our presence in those channels that are benefiting, Club, Value and E-commerce is good, but we don't have the same market share as we have in food and mass. So we've been working very hard to increase our presence there over the past more than one year. And every quarter, our market share in those channels is increasing, and we will continue to do so. That means we have to adapt our PPA. We have to increase the number of displays we have in these channels, and we need to do some route-to-market investments. The other channel that we are pushing very hard is on the go. And on the go, you can reach the consumer on the go with multipacks. If you think about a big multipack, and mom has to put a snack in the lunch basket, if you buy a multipack, that can cover several days or more than a week. And so we see a big opportunity in multipacks. Of course, we are working very hard on C stores because that's the other big area where on the go is happening. Overall, price points are critical, so we're doing a lot of RGM work on hitting the right price points. And that means really PPA at both ends of the spectrum. On one hand, the lower price. And so we've been talking about in previous calls that we need to get really to that $3 price point with some of our packs and then also the big pack as I was talking about before. The other thing, as I said, better for you, particularly protein is doing well. So we're driving our protein range quite hard. We're seeing 20%-plus growth there in Perfect bar and in Builders. So that is something that we will continue to double down on. And then as it relates to premium, particularly brands like Tate's, belVita and Hu are the other ones that we are going to double down on. As it relates to health and wellness, we also see a little bit of movement in overall health and wellness. We are working on expanding the Zero Oreo range and also the gluten-free Oreo and Tate's range. So maybe the last thing I would mention there on how we are trying to get back to growth is that we are studying very carefully how our promotions are working, and we've seen that we have to shift the way we do certain promotions. We need a lot more activation, not just a price decrease, but activation featuring special events, things like that. So those -- all those activities combined at this stage, make us believe that we can get to positive growth next year in U.S. Peter Galbo: Great. And Luca, maybe just on the prior question, maybe a bit more directly, you seem to have the visibility on, on-algorithm EPS growth for next year. I mean, should we be expecting that on top line, you'd have some visibility to algorithm top line, even if it's at the low end, just I know it's a bit more of a direct question, but would be helpful just from a modeling standpoint. Luca Zaramella: As I said, Peter, we need to put together our thinking at this point in time on what type of cocoa levels we are going to have into 2026. As I mentioned, we are well protected, but should cocoa go even lower, we will take advantage of that. I think the way you have to think about the top line is in three key components. One, it is Europe, where clearly, chocolate pricing might be deflationary. But as a consequence, the elasticity that we saw on the way up, should happen on the way down as well. And importantly, I think we will be seeing volume growth in the chocolate business for 2026 in Europe. The other component is developing markets where I think you're going to see continuous growth, volume and price-driven at this point in time. And the third component is really the U.S. where we are not projecting an improvement of the market situation, but where we will have material benefits coming out of channel expansion, us investing more in our brands and importantly, going after things that are really working well for us and doubling down on those. I think in the prepared remarks, for instance, we mentioned Oreo with Reese's. So it's really impossible for us at this point in time to give you exactly the range of top line growth of 2026. But rest assured that we are driving for volume growth in chocolate in Europe, we are going to restore top line and bottom line in the U.S. And third, emerging markets will continue growing for us. Operator: We'll move next to David Palmer with Evercore ISI. David Palmer: I just want to circle back to Europe. You mentioned the price elasticity up to 0.7 or so. And you also talked about there's some price gap issues and some competitors that have lagged on pricing. I'm curious how you're thinking about the outlook for price elasticity going forward, maybe some of the gives and takes since we don't deal with that market quite as much. One scenario would be that you're making adjustments right now. And that price elasticity could come back down. And then you mentioned the historically high prices, and we've seen categories where there's a little bit of fatigue after a series of prices and that price elasticity can continue to be stubborn and rising. So I wanted to get your sense on that. And I have a quick follow-up. Dirk Van de Put: Yes. Well, the type of price increases we had to implement our kind of unprecedented if you think about it. We are players that are largely in the tablet market. We are also in the other segments of chocolate, which is gifting or count lines. But largely tablet players, which has the biggest content of cocoa. So as a consequence, we had to do, as I said before, about a 30% price increase. And historically, the elasticity has been around 0.4, 0.5. It is higher, as I said, 0.7, 0.8, but that's not yet dramatic in the scheme of things, I would say, that's pretty good as long as you're below 1, I don't think there's many categories that would have such a limited price elasticity. But the main thing is, if you think about a 30% price increase on a 300-gram chocolate bar, for instance, you start to really get into quite high euros per bar. And I think as an example, that one, that's the one where we believe that we need to do something going forward. That doesn't necessarily mean elasticity needs to improve. What we need to do is get that bar to a price point, which is much more acceptable for the consumer. Short term, we can do that by reducing the price. Long term, we have to see if we reduce it to for instance, a 250-gram bar or something like that. So it is really adapting to very specific circumstances where we knew that we were taking a risk by passing certain price points, and in some cases, that worked quite well. In other cases, it didn't turn out so well. So that's one movement we are doing right now. That movement is helped a little bit by some of the more benign cocoa environment. I wouldn't say cocoa is getting extremely cheap, but it's still much higher than it used to be, but at least it's come down from the high that we saw during this year. The other one is probably that we need to adapt certain formats and look at where our competition is placed and make sure that we are in a much more competitive level. That would be the second big movement that we need to make. So these two movements, we believe, will solve some of the issues that we're seeing. And again, I want to emphasize that, yes, things are different than we expected, but it's not that they're often a major way of what we would have expected to happen in Europe, but we do need to make a number of adjustments of which I just gave you two. David Palmer: And when you look at your emerging markets, do you -- I don't want to make a big deal of the type of price elasticities that it looked like in the third quarter, they were still not bad. Your volume was down, the price elasticity would be sub-0.5, even if you take that quarter in isolation. But are you seeing certain markets where you're seeing a little bit of fatigue or maybe price gap issues? Or is that playing out just as you would think there, and I'll pass it on. Dirk Van de Put: Yes. I would say -- in the emerging markets, I would say, it's playing out largely the way that we would expect. The first thing I would say is there is more downsizing that has an effect on our volume. So if you think about it, our emerging markets, volume was down 4.7%. And first of all, Argentina, where everything has been going on. I probably assume that you're aware of that. So there, we saw hyperinflation, very negative macros and so our volumes were significantly affected in the quarter in Argentina. I guess with the recent elections that will start to improve going forward. And then the other big market for us is India, where we decided not to increase our prices that much, but to downsize quite a bit. So if you take out those two, the 4.7% becomes a 3% volume decline. So there's a number of effects in there that are driven by downsizing or the economy in two markets. If I then go a little bit around, I would say, the one market that we are experiencing more pressure is China, where we had low single-digit growth, a negative low single-digit growth in Q3, which is a new thing for us. Year-to-date, we are positive in our growth. We do see some short-term pressure. But overall, we believe that things will be okay going forward. And as you know, we still have a big distribution runway. It's clear that the consumer there is still not in the same confidence and probably still at a low for the last 20 years, and we're starting to see some signs of that. But we do believe gradually the consumer confidence will come back. India, I mentioned, India in fact is doing quite well in the movement that we had to make. So performing better than we expected, mid-single-digit growth in Q3, low single digit year-to-date. And then if I go to Brazil, double-digit growth in Q3, excellent execution in biscuits, chocolate and gum and candy. And then Mexico, also improving. I wouldn't say that the consumer in Mexico is in a good place. Clearly, very concerned about the economy and overall job opportunities, but our business is recuperating from some of the issues that we had before. We're seeing good mid-single-digit growth in Q3. So I would say, overall, we feel pretty good. Maybe looking at the volume, you might say that there is -- or it might look like there's a big elasticity effect, but that's really not the case from our perspective. And on our four big markets, we feel quite good at the moment. Operator: We'll take our next question from Megan Clapp with Morgan Stanley. Megan Christine Alexander: Luca, maybe just a quick follow-up. I think in one of your answers you said the guide does imply a step-up in the fourth quarter from an organic sales perspective. It sounds like that's mostly driven by Europe. I guess, is that fair? And then just the second part of the question. I think you had anticipated some rebound in North America just as the pricing flowed through. So can you just help us understand a little bit more about what you're expecting for North America in the fourth quarter, just given scanner data has been a little bit softer recently. Luca Zaramella: Thank you, Megan. Yes, we expect a bit of a rebound in Europe. Definitely, there is going to be a big activation around Christmas, and so the team is full steam ahead in terms of delivering the season and -- so you will see a little bit of a volume step-up in Europe, and that's one of the drivers. I think you see emerging markets despite the numbers that on the face of it are in terms of volume/mix, maybe a little bit lower than you would have expected. As Dirk mentioned, there is a big impact of Argentina, but the chocolate elasticity in emerging markets is just 0.3x as of Q3. And we expect that not to improve, but not worsen either in Q4. And importantly, in places like Mexico, China, India, Brazil, et cetera, I think the top line will continue to be good. So yes, there will be a better top line going into Q4. In the U.S., we are projecting a market that is in line with the minus 4% volume wise that we have been talking. But as we said, we are fine-tuning our pricing strategies and our promos, and so you will see a little bit of more pricing kicking in, and that will have a positive impact on both the top and the bottom line. And so that's where we are at this point in time. Megan Christine Alexander: Okay. Great. And then maybe just as a follow-up. You talked about in the prepared remarks the new multiyear North America supply chain program. Maybe you can just spend a little bit of time helping us understand what's different about this from prior productivity programs and any early targets you can share today? Luca Zaramella: Yes, it is a plan that we have been reviewing with the team for the last, I would say, 6 to 9 months. It is leveraging the competitive advantages that we have in terms of supply chain already. I think if you look at our profitability in the U.S. in biscuits and compare it to other players, it is obvious that we have quite a few good things to -- that help us delivering good profitability of the business. The new program will be intended to address mostly cost in some of the U.S. bakeries. I think we still have opportunities in terms of putting down lines that are more automated and address, a, some capacity constraints that we have, but importantly, our overall cost structure, and I think it will be a meaningful impact, again, that you will start seeing most likely as of 2027. And the second big element that we are addressing at this point in time is our DSD system. We stand by it, it is a competitive advantage. And so we're not talking about the front-face delivery of our great brands to retailers, but we are rather talking about the logistics system that is in the back of all of that. And having potentially fewer distribution centers and branches and automating those will result, a, in much better cost from a logistics standpoint, but second, in a much better service level and inventory for retailers. And so let's stay tuned. We'll talk a little bit more about it in the next few months. And all of this will be done within the envelope of the cash flow goals that we have. Operator: We'll move next to Tom Palmer with JPMorgan. Thomas Palmer: You noted the planned reinvestment for 2026 just when kind of talking about earnings. SG&A has been running down quite a bit this year. I guess any framing of how much of the reduction we've seen this year is more persistent cost reductions versus items that kind of come back next year? Luca Zaramella: So in terms of SG&A, I would say there are three key components of it. The #1 is clearly the working media, and working media is a little bit in decline compared to last year, but we didn't touch structurally the amount of spending investments we have been making in that P&L line in 2025. Going forward, you will see a big step-up of that line into 2026, and we firmly believe that the virtuous cycle that has delivered great results for us will have to be put back in place in 2026, particularly as there is cocoa coming down and there is a cost favorability due to that. The second element is non-working media that has been managed in a declining mode for 2025 and that will continue into 2026. Obviously, we'll have to make some specific investments, but we expect the non-working media line to be kept in control. And the third element is the overhead. This year, specifically, there is a positive impact due to our incentive plan that is not as high as we had it last year. But importantly, as we go forward, I think the team is working on initiatives that will deliver further SG&A savings. And so we expect that line to be in level to 2025 in 2026, with the exception, obviously, of the incentive that will be planned at 100% for 2026. Thomas Palmer: Okay. And I apologize for asking again on Europe. But I do just want to clarify on elasticity because I think there's kind of two pieces you discussed. This 0.7 to 0.8, that's effectively like non-seasonal products where you're seeing that elasticity and the belief is that will not change for the quarter. But as you shift more to seasonal, you'll effectively see better volume trends because those items will have less elasticity? Dirk Van de Put: Yes. That's basically the correct assumption in the sense that the 0.7, 0.8, unless we start to do major movements, and what I said is we are adapting in certain areas, that means it's not an across the board sort of adjustment of our pricing. It's only in those specific cases where we think we need to bring it back to the right price point. And so the 0.7, 0.8 roughly will be maintained on the normal range. And just historically, we noticed that the seasonal range, the consumer is not that clear on what the right price point is and also is inclined to pay a little bit more. So the seasonal range will have less elasticity. Operator: We will take our next question from Chris Carey with Wells Fargo Securities. Christopher Carey: So I wanted to ask about North America strategy. Some of your competitors in North America or peers maybe better said, have taken the approach of investing into value, into pricing, so as to establish a foundation from which to grow volume longer term and have effectively accepted the consequences over a 12-month time horizon. I think you certainly dabbled with this strategy in the front half of the year, and it impacted your profitability and there's been some shift towards, I suppose, protecting the profit pool. Can you just talk about your -- I suppose, level of confidence is the right way to put this, that a strategy that's a bit more focused on value and protecting the profit pool is the right strategy as we exit this cycle over the next 6 to 12 months. And maybe just if you could highlight a bit more whether you don't see these as mutually exclusive items, you can both protect the profit pool with pricing, but also offer value with some of the innovations and pack changes. So a little bit of detail on the strategy evolution in North America regarding pricing and volume. Dirk Van de Put: Yes. Well, I would start with saying it's a particular year for us in the sense that you have on one hand, the whole chocolate, cocoa movement that we have to deal with. And on top of that, you've got North America, particularly U.S. market that is slower than we've seen in quite a while. And so at a certain stage, we need to, yes, protect our overall profit pool, and we cannot try to solve for all problems at the same time. And so that would be one reflection that we had. The other one, I would say, as we started off the year, and we had a certain promotional strategy, what we noticed in North America is that, that promotional strategy was not giving us the volume effect that we were hoping for. And as a consequence, that started to affect our margins more than what we have thought or our profit pool, if you want. And so the shift that you've seen with now some price increases and some changes in the way we promote are really not driven necessarily by protecting the profit pool but are really driven by seeing how can we optimize our situation. And so going forward, as you look into next year, on one hand, as we explained, we think that the chocolate situation will significantly improve and that will allow us also to invest more into North America. If we would use that extra investment for a value play at the moment, I'm not convinced that, that is the best solution. As I said before, consumers don't seem to necessarily just react to value. They seem to be much more in a situation where they say, "Well, I can buy in my basket today what I can afford. I'm not planning to increase my spending. Within that, I need to cover my essentials. And yes, sometimes I will buy my biscuits, sometimes I won't." But even if the biscuits are a very cheap price, it doesn't necessarily mean that they will buy them. So our experience with the value strategy hasn't been that great. What we do, do is in our PPA strategy, we have launched a range of products that are at lower price points, you get less product for it, but at least it's available at the $3 or the $4 price point where about 1.5 years ago, 70% of our range or so was above the $4 price point. And we've significantly moved that in a way, that is a value strategy, but those products come still at very good margins. So that's the way I see the movements that we are going to do. And I hope this clarifies it a little bit. Christopher Carey: Yes. Helpful. One quick follow-up on the investment a little bit around this SG&A buckets. Is there any pull forward of investment that you had planned for 2026 coming into Q4 as you see some opportunities to lean in to achieve some of those outcomes that you're looking for? And then just as it pertains to this 2026 earnings outlook, does that embed a full spending, a replenishment of spending that you would expect to be sufficient so as not to need to do that again going into 2027? Luca Zaramella: Look, I think the -- at this point in time, the Q4 plans for A&C investments are locked in. So there is -- the guidance we gave you is in line with the level of spending. And clearly, we allocated money in the places where we saw opportunities. And as I said, we pulled back, particularly on nonworking media. But in general, pricing a lot, and they are contemplated in guidance. The virtuous model of this company is continuous investments in our brands, in our franchises and execution at point of sales and activation at point of sales. For instance, if you take some of the plans we have for next year, particularly around our chocolate with Biscoff or the fact that we are launching Biscoff in India. I think that will be meaningful spending and incremental cost due to activation at point of sales. I don't think it's possible to assume in a growth company like the one we want to be that we have done in 2026 with the investment. If you look at the amount of working media we have put into the system in the last few years, it is quite meaningful. But I think that is one of the reasons why we see our categories doing well. We have seen the company delivering good top line, volume-driven and price driven in a balanced way, and we want to continue that algorithm. I think importantly, you will see us in the years to come to go more deliberately after key incremental spaces like snack bars and cakes and pastries. We have just launched 7 Days in Brazil, we want to make sure there is efficiency of spending behind all these incremental initiatives. And so we don't want to play necessarily on a model that is launched, see how it does and then invest A&C, we want to go all in, both in terms of execution at point of sales and support to our brands. Operator: And this does conclude our question-and-answer session. I would now like to hand it back to Dirk Van de Put for any additional or closing remarks. Dirk Van de Put: Well, thank you for attending our Q3 earnings call. Obviously, if you have any further questions, our IR team, Shep and Ron, are available to answer anything else that you would like to discuss. Thank you. Luca Zaramella: Thank you, everybody. Operator: This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful evening.
Operator: Good afternoon, and welcome to the Red Rock Resorts Third Quarter 2025 Conference Call. [Operator Instructions] Please note this conference call is being recorded. I would now like to turn the conference over to Mr. Stephen Cootey, Executive Vice President, Chief Financial Officer and Treasurer of Red Rock Resorts. Please go ahead. Stephen Cootey: Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Red Rock Resorts Third Quarter 2025 Earnings Conference Call. Joining me on the call today are Frank and Lorenzo Fertitta, Scott Kreeger and our executive management team. I'd like to remind everyone that our call today will include forward-looking statements under the safe harbor provisions of the United States federal securities laws. Developments and results may differ from those projected. During the call, we will also discuss non-GAAP financial measures. For definitions and complete reconciliation of these figures to GAAP, please refer to the financial tables in our earnings release, Form 8-K and investor deck, which were filed this afternoon prior to the call. Also, please note this call is being recorded. The third quarter was another strong one for the company by every measure. Our Las Vegas operations once again set new records, delivering its highest third quarter net revenue and adjusted EBITDA in our history while maintaining a near record adjusted EBITDA margin. This marks the ninth consecutive quarter of record net revenue and the fifth consecutive quarter of record adjusted EBITDA, underscoring the strength, consistency and long-term earnings power of our operating model. In addition to delivering strong financial results, we remain very pleased with the continued performance of our Durango Casino Resort and the revenue backfill at our core properties. Durango continues to expand the Las Vegas locals market, drive incremental play from our existing customer base and attract new guests to the Station Casinos brand. Despite the disruption caused by the construction of our new high limit slot room and covered parking garage, the property continued to demonstrate strong momentum within the quarter with increased visitation and elevated net theoretical win from our carted customers in the surrounding Durango area as well as adding new customers to the brand. As discussed on prior earnings calls, construction continues on the current phase of our Durango master plan. This expansion will add more than 25,000 square feet of additional casino space, including a new high limit slot area and bar. In total, the project will introduce approximately 230 new slot machines with 120 allocated to the high limit room. As part of this phase, we are also building a new covered parking garage with nearly 2,000 spaces, which will enhance customer access and provide infrastructure flexibility to support future growth of the company. The total project cost is approximately $120 million remains on budget and is expected to be completed in late December. With this phase nearing completion, we are now turning our attention to the next phase of Durango's master plan as we continue to build on the property's early success and strong customer demand. Supported by robust market fundamentals and the rapid development of the surrounding area, this next phase will expand the podium along the north side of the existing facility by more than 275,000 square feet. The expansion will add nearly 400 additional slot machines and [ancillary] gaming to the casino floor as well as introduce a range of new amenities designed to enhance the guest experience and deliver on what our customers are asking for, including a state-of-the-art 36-lane bowling facility, luxury movie theaters, a mix of new restaurant concepts and food hall tenants and multiple entertainment venues designed to drive repeat visitation and broaden our customer appeal. Construction is expected to begin in January and will take approximately 18 months to complete. The total project cost is estimated at approximately $385 million and will be executed under a guaranteed maximum price contract. We are excited to embark on this next phase of growth at Durango. And upon completion, we believe the property will be even better positioned to capture additional market share and drive sustained growth in the local market, which is expected to add more than 6,000 new households within 3-mile radius of the property over the next few years, complemented by the continued build-out of Downtown Summerlin and Summerlin West, which together are projected to add approximately 34,000 new households. Now let's take a look at our third quarter. With respect to our Las Vegas operations, our third quarter net revenue was $468.6 million, up almost 1% from the prior year's third quarter. Our adjusted EBITDA was $209.4 million, up 3.4% from the prior year's third quarter. Our adjusted EBITDA margin was 44.7%, an increase of 110 basis points from the prior year. On a consolidated basis, our third quarter net revenue, which includes $3.9 million from our North Fork project, was $475.6 million, up 1.6% from the prior year's third quarter. Our adjusted EBITDA, which also includes $3.9 million from our North Fork project, was $190.9 million, up 4.5% from the prior year's third quarter. Our adjusted EBITDA margin was 40.1% for the quarter, an increase of 110 basis points from the prior year. In the quarter, we converted 67.3% of our adjusted EBITDA into operating free cash flow, generating $128.5 million or $1.21 per share. This brings our year-to-date cumulative free cash flow to $335.3 million or $3.17 per share. This strong level of free cash flow was strategically deployed to support our long-term growth initiatives, including our most recent projects at Durango, Sunset Station and Green Valley Ranch or returned to our stakeholders through debt reduction, dividends and share repurchases. As we begin the fourth quarter, we remained focused on our core local guests while continue to grow our regional and national customer segments across the portfolio. Compared to the third quarter of last year, we saw continued strength in carded slot play across our database, including our regional and national segments. Robust visitation and net theoretical win helped drive the highest third quarter revenue and profitability in our gaming segment in the company's history. Turning to our non-gaming operations. Both hotel and food and beverage delivered another strong quarter, achieving near record revenue and profitability in the quarter. The hotel segment performed exceptionally well, generating near-record results despite the West Tower at Green Valley Ranch being offline for renovation, driven by our team's success in increasing occupancy across the portfolio. The Food and Beverage segment achieved record revenue and near-record profitability for the quarter, supported by higher cover counts across our outlets. In group sales and catering, our teams delivered near record third quarter revenue, and we continue to see positive momentum in both business lines through the balance of 2025 and into early 2026. As we look ahead to the fourth quarter, we are seeing continued stability in our core slot and table games business within the locals market and across our Carta database. We've also seen a return to a more normal hold in our sports business as we start the fourth quarter. While we do expect near-term disruption impact from our ongoing construction projects at Durango, Sunset Station and Green Valley Ranch, we remain as confident as ever in the strength of our business and long-term growth prospects. Now let's cover a few balance sheet and capital items. The company's cash and cash equivalents at the end of the third quarter were $129.8 million, and the total principal amount of debt outstanding was $3.4 billion, resulting in net debt of $3.3 billion. At the end of the third quarter, the company's net debt-to-EBITDA ratio was 3.89x. During the third quarter, we made total distributions of approximately $27.8 million to the LLC unitholders of Station Holdco, including a distribution of approximately $16.3 million to Red Rock Resorts. The company used a portion of the distribution to pay its previously declared quarterly dividend of $0.25 per Class A common share and repurchase approximately 92,000 Class A common shares under its previously announced $600 million share repurchase program. Prior to the earnings call, our Board authorized an extension of our existing share repurchase program to December 31, 2027, as well as authorized an additional $300 million to our existing share repurchase program, giving us $573 million of availability for future share repurchases. As a reminder, since we began purchasing shares either through our share repurchase program or the 2021 tender, we have purchased approximately 15.2 million Class A shares at an average price of $45.53 per share, reducing our share count to approximately 105.9 million shares. As mentioned on our previous earnings call, there was no estimated cash tax payment for Red Rock Resorts in the third quarter, and we do not anticipate one occurring in the fourth quarter due to the passage of the One Big Beautiful Bill Act earlier this year. Capital spend in the third quarter was $93.7 million, which includes approximately $70.5 million in investment capital as well as $23.2 million in maintenance capital. This brings our year-to-date capital spend to $240.1 million, which includes approximately $163.1 million in investment capital as well as $77 million in maintenance capital. For the full year 2025, we now expect to spend between $325 million and $350 million, down $25 million from our previous earnings call, mainly due to the timing of capital expenditures. The full year capital spend includes $235 million to $250 million in investment capital as well as $90 million to $100 million in maintenance capital. In addition to our continued investment in our Durango property, we are making significant investments in our Sunset Station and Green Valley Ranch properties. At Sunset Station, we continue to advance our podium refresh to better position the property for continued growth in Henderson, particularly for the master planned communities of the Sky and Cadence, which are expected to deliver over 12,500 new households at full build-out. The $53 million renovation includes an all-new Country Western bar and Nightclub, a new Mexican restaurant, a new center bar and a fully renovated casino floor. We are pleased to report that customer feedback and initial financial performance on the completed portions of the renovation has been overwhelmingly positive, reinforcing our confidence in the project's direction. The project remains on budget with the new amenities expected to come online throughout the remainder of 2025 and into the first half of 2026. At Green Valley Ranch, we've commenced a comprehensive refresh of our guestroom suites and convention spaces, aligning the hotel experience with the recently renovated and well-received high limit table and slot rooms at the property. Work on the rooms in the West Tower is currently underway and is expected to be completed by mid-November, at which point the East Tower will come offline. While we are still reviewing the East Tower and convention schedules, we now expect the timing for this portion of the project to extend into the summer of 2026. As with our recently -- other recently introduced amenities, we believe these upgrades will generate strong returns. However, we do anticipate some continued disruption at the property through the first half of 2026 as we bring these new offerings online for our guests. Turning now to North Fork. Construction is progressing well. We expect to have the facility enclosed by the end of the month and permanent power in place by December, keeping us on pace for an early fourth quarter 2026 opening. The total all-in project cost remains approximately $750 million is fully financed and is being executed under a guaranteed maximum price contract. When complete, this best-in-class resort will feature approximately 100,000 square feet of casino space with over 2,400 slot machines, including 2,000 Class III games, 40 table games, 2 food and beverage outlets and a food court with many exciting options. At the end of the quarter, Red Rock's outstanding note balance due from the tribe stands at approximately $75.2 million. We're excited about this project, very happy with the progress of construction and look forward to providing further updates on future earnings calls. Lastly, the company's Board of Directors has approved an increase in our regular quarterly cash dividend of $0.26 per Class A common share payable on December 31 to shareholders of record as of December 15. The decision to raise our regular quarter dividend reflects the continued strength we are seeing in our business and the confidence we have in our long-term earnings power of our operating model. Including the dividend and the share repurchases completed during the quarter, we will have returned approximately $221 million to our shareholders year-to-date, demonstrating our ongoing commitment to disciplined capital allocation and delivering sustainable long-term value to our shareholders. With a third record quarter behind us, strong momentum from the start of the year has continued, and we remain confident in the strength and resilience of our business. Durango continues to validate our long-term growth strategy and highlight the value of our own development pipeline and real estate bank, which includes more than 450 acres of developable land in highly desirable locations across the Las Vegas Valley. Combined with our portfolio of best-in-class assets in premier locations, this pipeline positions us for significant long-term growth and allows us to fully capitalize on the favorable demographic trends and high barriers to entry that define the Las Vegas locals market. Looking ahead, we remain focused on executing our development pipeline, maintaining operating discipline and enhancing shareholder returns through a balanced and consistent capital allocation strategy. Finally, we want to take a moment to sincerely thank all of our team members for their continued hard work and dedication. Our success begins with them. They are the driving force behind the exceptional guest experience that keep our guests coming back time and again. Thanks to their efforts, we are proud to have been recognized with multiple accolades, including being voted top casino employer in the Las Vegas Valley for 5 consecutive years, certified as a Great Place to Work for 4 years running and named one of America's best in-state employers by Forbes for the second year in a row. We were also honored as a top place to work by USA TODAY and recently recognized by Newsweek as one of America's Greatest Workplaces in Nevada. Lastly, we extend our heartfelt gratitude to our loyal guests for their unwavering support over the past 6 decades. With that, operator, we're happy to open the line for questions. Operator: [Operator Instructions] and at this time, our first question will come from Dan Politzer with JPMorgan. Daniel Politzer: First, Durango, I guess, we can call it Phase 3, if you will. Can you maybe talk about the rationale there for adding on as you kind of finish up this initial phase, the disruption impact and maybe how to frame returns just given there is a big component of this project that's going to be clearly non-gaming? Lorenzo Fertitta: Sure. This is Lorenzo. Obviously, as you know, Durango opened very strong 2 years ago. Guests really have taken to the property, and we've been very happy with the results so far. Going back to the overall premise of the Durango investment, looking at the fact where the location exists, there's no competition within 3 miles in a growing market, submarket in Las Vegas. And then when we look at demand there, particularly for entertainment assets at that property, we felt like that there was the ability to drive additional traffic and additional guests by adding some additional capacity as well as additional entertainment assets there. And look, and the reality is that from a return standpoint, we expect to get similar returns on the expansion that we have gotten so far on the initial build, which is right in line with what we had communicated to everybody when we announced the project. Stephen Cootey: And of all the customer surveys that we've done since we opened, the one thing that our customer base expects is all these other entertainment amenities like movie theaters and bowling and things of this nature. So we're basically giving our customers what they're asking for. And that's really what we build as regional entertainment destinations in the best locations with the best amenities at the facilities. That's what's allowed our company to grow the way that it has. Daniel Politzer: Got it. That makes sense. And then just in terms of the quarter, Steve, I think you alluded to something along the lines of sports betting hold. I don't know if you can quantify what that might have been in the quarter? And then along those lines, any way to kind of get a sense of what that disruption impact, where we stand year-to-date versus I think that $23 million, although given it sounds like they're [indiscernible]. Stephen Cootey: It's really last year was like a not normal sports hold last year given the way the NFL had most of the favorites winning every game. Lorenzo Fertitta: Yes. If you recall, last October, we announced that last third quarter call, we announced we had about $4 million of unfavorable hold. So I just wanted to remind everyone that we're back to a normal hold as Q4 is progressing. In terms of, I think, disruption, I think this quarter was a really outstanding quarter by every measure, even despite the disruption we had in both our Green Valley Ranch, where the hotel remains offline through mid-November. It probably impacted our results by $2.5 million to $3 million for the quarter, after which the East Tower will then go right down. We also did experience some disruption, especially during peak parking times at Durango and at Sunset Station as we're during peak construction times. As mentioned, with the Green Valley Ranch project extended, we expect that disruption to extend beyond 2025 and into 2026. For Q4, we're estimating Green Valley disruption probably around $8 million. Operator: The next question will come from Brandt Montour with Barclays. Brandt Montour: So Steve, you called out in the hotel business, exceptional success. Obviously, one of your peers has an asset that's a little bit closer to the strip that was feeling it right from the sort of Las Vegas softness. And I know you guys are sort of running a different model, perhaps a different customer, different regional location. But maybe you could just comment on what you did see in terms of the strip weakness over the summer in your business. You guys have been taking share from the strip on VIPs. Did that kind of hold its own even with what's going on over there? Scott Kreeger: Brandt, this is Scott. Maybe I'll take this one. For the quarter, we were very happy with the hotel performance. We look at the choppy market in the city, and we felt like we were very resilient in regard to the performance. One thing to caveat, if you look at hotel revenue being down, it's largely a function of the Green Valley rooms being offline. So if you take that out, we actually performed quite well. Occupancy was up about 244 basis points. And when you look at RevPAR, we were only off by about 1.3%. And if you added back in the GVR rooms that RevPAR, we probably would have been positive in RevPAR for the quarter. Probably the one thing that you're most interested in is ADR. And we kind of mirrored the rest of the city where you saw luxury properties performing a little bit better in ADR year-over-year comparison to, say, something that's more 2- or 3-star level. We saw the same thing. But if you look at overall ADR for our company against the Strip, we outperformed them by about 25% on an ADR basis. Brandt Montour: Okay. Great. And then just to circle back on one of Dan's questions. I don't know if I caught it. But Phase 3 Durango disruption potential, assuming not that big of a deal. I mean it's on the north side, and so maybe it's not a big deal and you guys didn't -- but you didn't talk about it making sure we didn't miss anything there. Stephen Cootey: No Brandt, you didn't miss anything. I think we're still working through the details as we're getting for the construction launch in January. But we do feel that disrupting the north side of the resort is going to cause some significant disruption. Operator: The next question will come from Stephen Grambling with Morgan Stanley. Stephen Grambling: Just a follow-up on Brandt's question about the strip. Just maybe more broadly, how do you think about the health of the Strip and its impact on your business? And should we be thinking that maybe historical correlations are not potentially useful at this point? Stephen Cootey: Yes, Stephen, I know there's been a lot of discussion, particularly since G2E about the recent softening trends from the strip and really whether these things are going to spill over in the locals market. And I think the first thing to do is really differentiate the business model. So the past 50 years, we viewed the Las Vegas locals market. It's just a fundamentally different business. One unlike the strip, it doesn't rely on heavy tourism, doesn't rely on conventions nor is it hotel driven. Instead, our locals market is anchored in a gaming-centric business model that offers value propositions to both local guests as well as out-of-town guests and at its core, is supported by incredibly loyal guests who, in our case, over 50% of our card revenue sees guests come over 8 times a month. And then further, the market continues to display resilience and stability within this market. We believe we're best positioned to capture our fair share of that market in the Las Vegas Valley. And this is demonstrated by our financial results. We had 9 record quarters of revenue and 5 record quarters of EBITDA. Stephen Grambling: Makes sense. And then you've got a lot on your plate, I recognize with the different projects. But as we look further out to some of the new development opportunities out there, just given the confidence that it sounds like you have in some of these projects, does it change how you think about either the magnitude or what projects or even the ROIC that you could have on some of the land that you could still develop going forward? Scott Kreeger: Well, this is Scott. That's a great question. I don't think that anything has really changed in our view and what we've said in the past. The announcement of Durango North is really just about the fact that Durango North is shovel-ready. So it's the quickest project we can get in the ground. That does not slow us down in any way in our master planning, entitlement or cost analysis of the other projects that we've talked about, namely Cactus and Inspirada. Stephen Cootey: And perhaps the Durango hotel rooms. Lorenzo Fertitta: This is Lorenzo, we're continuing to plan and design and move forward with entitlements, and we're as bullish as we've ever been relative to the future development of the company and our ability to generate returns. Operator: The next question will come from David Katz with Jefferies. David Katz: So just to follow on to that a bit. I know Steve and everyone, we've had the discussion about potentially having 2 projects kind of in the ground and spending at once. And that was possible, but it didn't seem all that likely. Can you sort of give us your updated perspective on that? Scott Kreeger: Look, we definitely could have 2 projects in the ground at the same time, but I don't think that would be more than a minor overlap in my opinion. One project may be winding down with another project starting out. Stephen Cootey: And that said, David, when you talk about major developments, like we just announced Durango North, which we view as almost an extension of a new build. At the same time, we're doing an extensive remodel at Green Valley. We're doing extension remodel at Sunset Station. Scott Kreeger: And we're working on our greenfield projects. David Katz: Okay. Lots of balls in the air. And Steve, I just want to make sure I heard correctly, fully loaded leverage is 3.89x. Just looking through the next 12 months, is that a neighborhood that we should expect you to kind of stay in? Or does that start to ramp up in your model? Stephen Cootey: Right now, I can tell you we're very comfortable with the leverage. This quarter marked the sixth quarter in a row of deleveraging. And as I mentioned earlier, we converted 67% of our EBITDA to free cash flow. So we do plan on funding these resorts out of free cash. Leverage, if it does spike up because of the development of these projects would be temporary in nature as we get these projects up and running, particularly our Green Valley project and Sunset Station projects online and generating cash. David Katz: And you don't expect to be a cash taxpayer in the near term? Stephen Cootey: No. I think as Frank alluded to, the tax bill has been -- is going to be incredibly favorable for these development projects. When we took an initial look, and there's still some wood to chop in this analysis, but we would expect 100% of the Sunset Station project that's currently scoped to be allowed to accelerate depreciation, about 40% of the GDR project to be accelerated, 40% of the Durango North project to be accelerated and about 10% of the current Durango South garage to be accelerated. When you kind of put all that together, that's a little bit over $300 million of capital we're going to put to work that we'll be able to accelerate depreciation and take advantage of the tax bill. Operator: The next question will come from Ben Chaiken with Mizuho. Benjamin Chaiken: Just a follow-up on the tax benefit that you were just running through. I guess now that you have a better view of what the capital outlays will look like in '26, could you help us with the free cash flow conversion next year, EBITDA to free cash flow? Stephen Cootey: Well, I mean, we're still in the throes of actually doing our operating budget and our capital plan for 2026. What we was able to focus on is our capital on our existing projects. I mean that's really where the extent of it. I do -- as you've seen over the last several quarters, we've reduced capital outlays by $25 million, mainly due to the timing of those projects. So these 3 same projects, the Sunset is currently scoped, Green Valley, the hotel and convention as well as the Durango South the Garage, which is going to be opening in mid-December, about $175 million of capital related to those projects will spill over into 2026, just as a matter of timing. And hopefully, that helps, Ben. Benjamin Chaiken: Yes, that's very helpful. I appreciate it. And then just kind of like more modeling related. In the past, you've -- last couple of quarters, you've given us some seasonality color. Is there anything notable we should consider as we close out the year? I think you mentioned $8 million of construction disruption. Just anything else you'd flag? Stephen Cootey: I mean, typically, Q4 to -- Q3 to Q4 seasonality is usually up about 10% to 11%. Right now, at least we haven't seen anything that would argue differently. But then as you mentioned, that's going to be offset by there's some Green Valley disruption, about $8 million and probably Sunset Station to the tune of $1 million to $1.5 million. Operator: The next question will come from John DeCree with CBRE. John DeCree: Maybe a question operationally. You talked a little bit about on the hotel side, the performance on luxury versus more value-oriented options. I wonder if you could speak to the gaming business, perhaps the database. And Steve, you may have touched a little bit on this in the prepared remarks. But what are you seeing across the database kind of upper tiers versus lower tiers? And any trends in kind of unrated play? It's not a huge piece of your business, but from a consumer perspective. Scott Kreeger: John, this is Scott. I'll take that one. For the quarter, we saw meaningful increases in carded and uncarded slot win. It's really been consistent and stable performance. And it's really a function of us prioritizing investments around our higher valued customers. So whether that's having some of the best-in-class high [indiscernible] rooms in town, new relevant amenities, best-in-class assets, keeping them clean and fresh and really location. That's what I was just going to say is the fact that we're positioned in these high net worth, high-growth areas on arterial freeways is really shining through in the database. So when you look at our local, our regional and our national customers, all of those groups or those categories are up meaningfully with particular growth in VIP, regional and national, while the lower worth segments remained stable. And then I also mentioned and you got that uncarded is also up for the quarter. John DeCree: That's all really helpful. And then maybe an easy one on the promotional environment. Las Vegas is kind of a separate market, but we're kind of seeing and hearing outside of Las Vegas regionally a little bit of uptick in promotional activity. Have you guys noted or seen anything, of course, throughout the summer or currently in terms of changes in competitive behavior in the market? Scott Kreeger: No, it's been business as usual for us. So it remains very constant and rational. Operator: The next question will come from Chad Beynon with Macquarie. Chad Beynon: Flow-through in the quarter was slightly better than, I think, what most expected given the disruption that you called out and OpEx per day was down for the first time in several years. Can you just talk about if this is sustainable from a cost standpoint? And anything else that we should be thinking about from a labor, utility, et cetera, standpoint for expenses in the next couple of quarters? Scott Kreeger: I can take the OpEx part, maybe you take the free cash flow part. Really, you said it. Overall, operating expenses were flat to down for the quarter. When you look at COGS as a percentage of revenue, we were flat. When you look at utilities and repairs and maintenance, we were down slightly. So payroll, we were up a bit, but that was a function of us giving a 3% raise in the middle of the year to salary and hourly employees, which is really kind of a CPI pacing pay raise. But fundamentally, as long as marketing remains rational, which it has for the last several years, these are completely sustainable efforts and kind of a shout out to our operating teams in the field. They're incredibly focused on margin control and expense management and the GMs and their teams out in the field do a great job. Stephen Cootey: Yes. And just to add to piggyback what Scott said, and I was going to give a similar shot on the revenue side. I mean this is really -- it's about operating leverage and a flow-through operating leverage. So as Scott mentioned, the database is healthy. The business is healthy despite some disruption at 3 of our properties. So if we keep that up, flow-through should be sustainable. The consolidated flow-through, Chad, is probably a little bit lumpy just given the fact that there's the North Fork development fee embedded in that. But other than that, it's business as usual. Chad Beynon: And then actually a good segue to my next question. Just in terms of the fee, you said opening for North Fork, you said Q4 '26. When will you start to receive kind of those top and bottom line economics? Do those flow through as the property ramps? Or are there any deferred payments in terms of how that's structured? Stephen Cootey: Well, I think the first thing I think you'll see is that we've been accruing, we accrued $10 million of the development fee last quarter, $3.9 million this quarter. We expect to accrue $3.4 million pretty much through the opening. That obviously is noncash. Once the resort opens in Q4 per the development agreement, I would think about -- there's going to be an influx of cash from that development fee upon the resort successful opening. And the -- there's probably going to be a true-up of that development fee, probably, I would say, a quarter behind that as we true up construction costs. And as Frank is mentioning, the $75 million note payable goes cash interest immediately upon cash open, and then we will look to recoup that note as soon as the property starts cash flowing at which point our 7-year management agreement kicks in the day we opened. And we expect -- if we're going to give guidance to that resort, we expect to generate $40 million to $50 million in management fees upon stabilization over that term. Operator: The next question will come from Joe Stauff with Susquehanna. Joseph Stauff: Just 2 quick ones. I was wondering if you can maybe just give us an update on the backfill process at Red Rock. I know there are a couple of things moving around in the quarter with GBR out, the hotel offline. But I was wondering if you could comment on that. And just to clarify, Scott, I think you had mentioned in the previous answer that both regional and national demand were up in the quarter. Is that right? Scott Kreeger: That's correct. Stephen Cootey: On the backfill, we're on track. As you know, when we kind of kicked off the Durango process in December of '23, we said that we would experience cannibalization. We did. We expected within 3 years to backfill Red Rock. And so we're kind of in the year 2 in the throes of year 2, and we're on track to do that just that. Operator: The next question will come from Steve Paella with Deutsche Bank. Steven Pizzella: Just a couple of quick ones. Within locals, can you talk about if there was anything to call out from a cadence perspective intra-quarter? Stephen Cootey: Cadence for the quarter No, I think it was pretty normal quarter, yes. Steven Pizzella: Okay. And then I might have missed it. Did you give a sportsbook hold impact for the quarter if there was one? Stephen Cootey: No, we didn't. What we did, I think prior question, we referenced it during the script because if you recall last year, during the third quarter call, we held unusually poorly, and we called a $4 million number out last October. We just wanted to remind folks that the hold is normal through today. Operator: The next question will come from Jordan Bender with Citizens. Jordan Bender: Maybe to drill down on margins one more time. If I look at casino margins, they continue to improve to levels we haven't seen in over 2 years. Is this a function of mix? Is it Durango continuing to ramp? Or anything else you would kind of point us to, to say this is kind of the right level for your casino margins looking forward? Stephen Cootey: I think it's a function of the mix, but also I think the team has done a great job managing expenses. Scott Kreeger: And I think it's been a shift in our approach to the market post-COVID, where we shifted towards high-limit slot rooms, high-limit table games. And I think we're doing a much better job post-COVID on attracting the high-end value customer. Jordan Bender: Understood. And just on the follow-up, the dividend increase went up $0.01 a quarter. I mean is there any kind of calculation behind why that went up $0.01? Or was it just arbitrary that's kind of what you guys landed on? Stephen Cootey: Well, it's a whole number to start. So it took some condensing, but it's $0.01 a quarter, so $0.04 a year. I think the Board recognized and the management team recognize the continued strength of the business and the long-term earnings power of the platform. The Board continues to evaluate its dividend policy every quarter. And so I think they set something up so that in the future, they could reevaluate quarterly earnings dividend increases. Operator: The next question will come from Barry Jonas with Truist Securities. Patrick Keough: It's Patrick Keough on for Barry tonight. First, zooming out on the construction impact, you had previously pointed to around $25 million for the year. Where would you say you are cumulatively? And any reason to think you'd be tracking above or below that number for the full year? Stephen Cootey: I think we're tracking below that number, and I kind of walked you through it. sunset, we have seen marginal disruption in the past quarters. I expected $1 million to $1.5 million this quarter. Durango, Dave and the team down there have done an amazing job managing the disruption. So there's minor disruption there. It's tough to quantify because it's mainly peak parking time. And then Green Valley, I kind of walked you through what I think this quarter was about $2.5 million, $3 million. Next quarter, I anticipate $8 million sorry, this quarter. Patrick Keough: Sounds good. As a follow-up, we'd be interested to hear any early thoughts on the taverns business. How many do you have open at this point? How have they performed relative to expectations? And what does your pipeline look like? Scott Kreeger: Patrick, this is Scott. So we've got 8 under contract, 2 are operational. We've got 5 coming online starting in the early part of next year and all the way through to the summer. Early indicators are we're ramping to our investment thesis. So we're happy with the performance of the 2 taverns. And if we go back to the thesis a little bit of why we like the taverns, tends to skew a younger audience. As we grow our database, we're seeing that come to fruition that it's a younger customer base and the customer base we're trying to attract. Also, because of the locations of the 2 open taverns, we're finding a pretty strong penetration into unknown customers in those zones. So we're kind of reaching out and finding new customers that we didn't have in our bloodstream. And we are seeing those customers now migrate to our large box properties as well. So all of those original reasons why we got into the business, we're starting to see green shoots on. It's early days as we open up more of the taverns, we'll kind of solidify the performance and the kind of attributes of what we like about the taverns. But so far, we're pretty excited about it. Operator: And this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Stephen Cootey for any closing remarks. Please go ahead, sir. Stephen Cootey: Well, thank you very much for joining the call, and we look forward to talking again in about 90 days. Take care. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. My name is Colby and I'll be your conference operator today. At this time, I'd like to welcome you to the Bloom Energy Third Quarter 2025 Earnings Results. [Operator Instructions] Thank you. I'd like to turn the call over to your host today to Michael Tierney, Vice President, Investor Relations. Sir, you may begin. Michael Tierney: Thank you, and good afternoon, everybody. Thank you for joining us for Bloom Energy's Third Quarter 2025 Earnings Call. To supplement this conference call, we furnished our third quarter 2025 earnings press release with the SEC on Form 8-K and have posted it along with supplemental financial information that we will reference throughout this call to our Investor Relations website. During this conference call, both in our prepared remarks and in answers to your questions, we may make forward-looking statements that represent our expectations regarding future events and our future financial performance. These include statements about the company's business results, products, new markets, strategy, financial position, liquidity and full year outlook for 2025 or 2026. These statements are predictions based upon our expectations, estimates and assumptions. However, as these statements deal with future events, they are subject to numerous known and unknown risks and uncertainties as discussed in detail in our documents filed with the SEC, including our most recently filed Forms 10-K and 10-Q. We assume no obligation to revise any forward-looking statements made on today's call. During this call and in our third quarter 2025 earnings press release, we refer to GAAP and non-GAAP financial measures. The non-GAAP financial measures are not prepared in accordance with U.S. generally accepted accounting principles and are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between the GAAP and non-GAAP financial measures is included in our third quarter 2025 earnings press release available on our Investor Relations website. Joining me on the call today are K.R. Sridhar, Founder, Chairman and Chief Executive Officer; and Maciej Kurzymski, our Acting Principal Financial Officer. K.R. will begin with an overview of our progress, and then Maciej will review financial highlights for the quarter. After our prepared remarks, we will have time to take your questions. I will now turn the call over to K.R. K. Sridhar: Good afternoon, and thank you for joining us today. I'm delighted that Bloom had its fourth consecutive quarter of record revenue. This seminal year for Bloom positions us for an even stronger 2026 and beyond with higher growth and more profitability. Three major tailwinds benefiting Bloom today have created a once-in-a-generation opportunity for us to become the global standard for on-site power generation. First, the AI buildouts and their power demands are making on-site power generated by natural gas a necessity. Second, winning the AI race is a nation-state priority, driving government policy and removing barriers that had previously been headwinds for on-site power generation. Third, our product innovation is advancing at a pace more akin to semiconductor evolution than to that of traditional industrial products. Every year, for over a decade, our fuel cells have seen double-digit year-over-year cost reductions. While our costs are coming down, our performance is going up. Our fuel cells last longer, are more reliable and are more efficient and today produce 10x more power in the same footprint than they did 10 years ago. These improvements have opened up large market opportunities. For example, we historically sold exclusively in high-cost electricity markets such as California and the Northeast. We are now competitive in large power-hungry markets of the Midwest, Mid-Atlantic, Mountain West and Texas, and many European and Asian cities. Bloom is now positioned to become the standard in on-site power, which many of us believe will be a trillion-dollar market. Becoming the standard means we will be the benchmark by which all others are measured. The reference point for speed, reliability and performance in on-site power. When customers, partners, regulators and governments think about dependable, dispatchable electricity, they should think about Bloom first. While we built Bloom with the conviction that this moment would arrive, we had no illusions of the difficulties we would face to gain acceptance as we embarked on this journey. To be even considered, we had to be better in every dimension. We persevered and delivered step by step. Now after 24 years, we have robust supply chains, manufacturing processes, installation capabilities and field performance data to show our customers we offer an unparalleled on-site power solution at speed and scale. We obsess about meeting our customers' needs and do not expect them to compromise. We do not offer them false choices, clean, reliable or fast. Instead we offer them an and solution. We ship on time and aim to ship faster than anyone else. We are more reliable and resilient and offer our customers superior price-to-performance value. Our mass-produced modular power systems allow us to power sites as small as your neighborhood retail store and as large as a giga AI factory that mass manufactures intelligence. Bloom Energy servers are safe, operate without consuming water, do not pollute the local air and have curb appeal, all features that make them welcomed in the communities where they are installed. The precursor to becoming the standard is to first earn our place in the evaluation process alongside the well-entrenched and very capable competitors that have defined the market for decades. We are now executing on this phase, working to replicate in new markets, the success we have achieved in sectors like semiconductor manufacturing and telecommunications, industries that demand the highest reliability. Today, we are the standard for on-site power in telecom and semiconductor manufacturing as evidenced by the rapid adoption of our technology by the top-tier players and the strong sales pipeline in those segments. Our strategy is deliberate and simple. In each vertical, we establish our credibility with a lighthouse account and then build on that success with other Tier 1 customers. For example, in telecommunications, we first secured AT&T as a lighthouse customer in 2011. After they became convinced of our operational excellence, they deployed us in multiple sites in many states. Soon, we added Verizon and T-Mobile as customers and have sold over 100 megawatts of on-site power to telecoms. Today, we are a go-to on-site power choice for U.S. telecom companies. Now we are following the same playbook to become the standard on-site power solution for AI. We are embedded in 7 distinct AI ecosystem channels. In each channel, we have secured a lighthouse customer in our robust pipelines. First, the hyperscalers. Back in August, we announced our first deal to power an AI factory with Oracle. We have fulfilled our delivery ahead of schedule. We promised to deliver in 90 days, and we delivered in 55 days. Second, electricity providers. Last year, we signed a gigawatt agreement with AEP, which purchased our fuel cell systems to power another big hyperscaler, AWS. Third, gas providers. We signed our first deal with a major gas provider who will convert its gas to electricity with Bloom fuel cells and sell that on-site power to a third hyperscaler. The hyperscaler will announce details of this installation when it is ready. Fourth are co-location providers. We work with many, including Equinix, which has deployed over 100 megawatts across data centers in multiple states. Fifth, neoclouds. Our systems are generating on-site power for a top neocloud provider, CoreWeave, at a high-performance data center in Illinois. Sixth, data center developers. When an understanding has been reached on key terms, developers begin to file permits and permissions. You may have seen some of these public filings recently. Seventh, infrastructure owners. Large infrastructure funds are increasingly developing their own AI factories. Brookfield, the world's largest AI infrastructure investor has invested $50 billion in AI opportunities and is tripling the size of its AI strategy over the next 3 years. It announced an AI infrastructure partnership with Bloom Energy and made an initial investment of $5 billion. Bloom will be the preferred on-site provider for Brookfield's trillion-dollar infrastructure portfolio of AI factories, data center operators, corporate facilities and factories. Brookfield will also finance Bloom-sourced AI opportunities. We have already completed projects and Brookfield plans to announce a Bloom-powered European AI inference data center project by the end of the year. To recap, we have strong traction across all channels of the AI ecosystem. Each channel is anchored by a lighthouse customer and accompanied by robust commercial activity. As we continue to penetrate new geographies and verticals, success builds upon itself and should make each new market entry easier than the first. The opportunity is vast, and we are still in the early innings. So what are we doing to make sure we are ready to handle growth as well as further advance our leadership position? As we have previously announced, we are doubling our capacity to 2 gigawatts by December 2026, which will support about 4x our 2025 revenue. That expansion is all systems go. Bloom's capacity will not be a bottleneck for our customers. We are also investing in operational talent and capabilities needed for the expansion of our production capacity beyond the 2 gigawatts. We are building a commercial team that can capture opportunities across diverse market segments and geographies. And we are continuing to invest in R&D to increase our lead in on-site power. We are doing all of this while maintaining our focus on operational excellence and financial discipline to achieve margin expansion over time. Based on what we see today, we expect 2025 to be better than our previously stated annual guidance on our financial metrics. In addition, we expect double-digit product cost reductions to continue and keep us on a path of margin accretion. We look forward to a strong 2026 as we march forward and build a future where Bloom powers the digital age and is the recognized standard for on-site power globally. I'll turn over to Maciej now, and I look forward to answering your questions. Maciej Kurzymski: Thank you, K.R., and good afternoon, everyone. As K.R. mentioned, Bloom is now positioned to become a standard in on-site power. Our announced customer base and financial results are a testament to this. On today's call, I will discuss our Q3 financial performance and make a few comments about fiscal 2025. The last 4 quarters have been a record operational and financial performance and Q3 was no exception. While our commercial success have been most visible, the work our engineering, manufacturing and support teams have done behind the scenes to drive product cost reduction is evident in our financial results. Highlights include record third quarter revenue, positive cash flows from operating activities and our seventh consecutive quarter of profitability in our service business. As a reminder, I will focus my discussion on non-GAAP adjusted financial metrics. For a reconciliation of GAAP to non-GAAP, please see our press release and the supplemental deck on our website. Revenue for the quarter was $519 million, up 57% year-over-year. Time-to-power needs are creating demand for on-site power. This, together with the advantages of our fuel cell technology for AI factories is driving our revenue growth. Gross margin was 30.4%, 510 basis points higher than the 25.2% gross margin in Q3 of 2024, driven by continued focus on product costs and manufacturing efficiencies. Our operating income was $46.2 million versus $8.1 million in Q3 last year. Adjusted EBITDA was $59 million versus $21 million in Q3 of 2024 while EPS was a positive $0.15 versus $0.01 loss a year ago. Again, these are all non-GAAP results. Our product margins were 35.9%, while our service margins were 14.4%. This is the second straight quarter of double-digit margins in the service business, and we expect this trend to continue. As we have talked about on each call this year, we took advantage of our balance sheet and our visibility into customer demand to level load our factory. We expect to work down inventory in Q4 as our shipments of product accelerate. Cash flow from operating activities was an inflow of $20 million, primarily due to working capital improvements. We ended the quarter with $627 million in total cash on the balance sheet. Turning to the full year. As K.R. mentioned, based on what we see today, we expect fiscal 2025 to be better than our previously stated annual guidance on our financial metrics. To conclude, Bloom is focused on not just on scale, but on showing sustainable profitability as we grow. We are uniquely positioned to benefit from this unprecedented market dynamic, and I could not be more excited about the opportunity in progress. Operator, we are now happy to take questions. Operator: [Operator Instructions] Your first question comes from the line of David Arcaro from Morgan Stanley. David Arcaro: I was wondering if -- very helpful commentary, too. I was wondering if you could talk about the pace of commercial activity that you're seeing. You've had success now with multiple agreements in a short period of time. How do you see this playing out as we look forward to the next agreements in the pipeline just in the context of the market demand that you're seeing? K. Sridhar: David, thanks for that call. Look, I think we've been saying in the last 3 earnings calls that the commercial momentum is robust. And all that I can tell you, if I looked at it this week and last week, and if I walk over to the commercial section of our offices is that momentum is clearly accelerating and it's palpable, okay? So forget questions of, is it static or is it slowing down? It's accelerating. That's all we see. And we see that across the board. And by the way, it's accelerating not just in AI, our traditional, commercial, industrial segments are doing the same. So it's across the board. And the larger the deals get, the more the actors that get involved, as I explained in the entire AI value chain. These are complex deals. And each one goes to a different phase, different momentum. Some close extremely fast because of the need. Some take a little bit longer. But make no mistake, the commercial momentum is absolutely accelerating. David Arcaro: Okay. Excellent. And I was wondering, we've seen other technologies emerging in recent data center deals, small-scale gas turbines, gas engines. I'm wondering if you could describe what you're seeing with the competitive environment, how your product compares to some of the other solutions? And just is the competition heating up? Or how do you see it playing out? K. Sridhar: Look, I think the supply-demand mismatch is so large that everybody who has a solution that's viable today has a market out there for them to address. So you're going to see data center developers, hyperscalers wanting any and every solution that they can find. But there are very clearly, you're asking for distinction between us and other technologies. These were purpose-built for the data centers. The additional benefit and value we bring to them is enormous compared to band-aided solution of something that was created for the mechanical age, trying to solve this very sophisticated digital AI problem. We stand to benefit every single time that we stand to benefit our end customer using our technology. And so you asked me to compare, let me compare other technologies that generate on-site create air pollution, we don't. Other technologies that now using mechanical combustion moving parts, cannot load follow and require lots of batteries to be able to maintain a on-site power because these are not connected to the grid, whereas our solid-state power does not require batteries and we are able to provide that power. Today, we are able to provide our power faster than most of the others who have supply chain constraints. We can expand our capacities a lot faster than anybody else. We are future-proofing our customers for future technology advances, whether it is in the field of DC power, whether it is in the field of carbon capture and zero carbon or a green molecule, we offer all those optionalities that others don't have. You put all those together from -- and then if you take the same amount of gas that is available, we can produce a lot more power and allow the hyperscaler to put out a lot more tokens. At the end of the day, it is converting those watts to tokens is where the game is. With the same amount of gas that's available, same amount of space that's available, we can produce a lot more tokens for the hyperscaler than any other technology can today, end-to-end. And so the value for a hyperscaler is not about the cost of power. It's about that cost of the entire value chain across the board. So price-performance ratio, we can compete with anybody. So that's the answer, David. Thank you. Operator: Your next question comes from the line of Chris Dendrinos from RBC Capital Markets. Christopher Dendrinos: Congratulations on the strong quarter. I wanted to follow up on the Brookfield partnership here. And I'm hoping you could just expand a little bit on the relationship and provide some more details around the potential development time line? And then just how should we think about this partnership financially and how that benefits you? K. Sridhar: Chris, thank you so much. Brookfield, look, they're an incredible partner to Bloom, right? I mean they are at the heart of the AI value chain. And I think I mentioned this in the script, they've already invested over $50 billion in AI and want to triple that very quickly in the next 2 to 3 years. But put that in a broader context. They're one of the world's largest infrastructure owners with over $1 trillion in assets that comprise of 140 data centers operating and using approximately 1 gigawatt of critical load capacity and wanting to accelerate and grow that enormously in AI. On top of that, they have a portfolio of factories. They have a portfolio of commercial offices and real estate that are all going to be beneficiaries of AI. And as they automate, as they bring robots in, those factories are going to need more power. So Brookfield is using their balance sheet and using their relationship with us as the power provider and making us the preferred choice that they would recommend to all their portfolio companies, including their data centers. On top of that, Brookfield believes that they themselves are going to be a large AI infrastructure developer. And there, they're going to use us. On top of that, if there are Bloom-sourced deals that require financing, so we can offer a customer a PPA, they are willing to step in and be the financier for that. This is all not -- and they have made it very clear that this $5 billion investment is an inaugural investment. Now what Brookfield -- with Brookfield, we have already done some deals together. And they have said that they will announce a European AI inference data center before the end of the year using Bloom as the power source, so stay tuned for that. So it's a very big relationship. I cannot understate how important it is to us. Christopher Dendrinos: Got it. And I guess maybe just as a follow-up, sticking with the European opportunity here, can you maybe just expand on the global opportunity? And are you seeing the same kind of power limitations globally as you are in the U.S.? And does that present a strong opportunity for more international growth? K. Sridhar: Yes. Chris, that's a great question. Look, I have been to these capitals, whether it is Frankfurt, whether it's Munich, whether it's Dublin, whether it's Taipei, okay? They all have a power shortage problem. And they all clearly recognize that their central power plants along with transmission and distribution cannot keep up with AI speed. That's across the board. This is true in Delhi. This is true in Mumbai, okay? So now what is happening in Europe, Asia, if you take as an example, I was just recently in Tokyo. And what I heard there is finally the sentiment of natural gas not just being a short-term bridge, but a long-term solution. And the agreements the U.S. is reaching with our friendly countries, our friendly allies to say, we will supply you long-term LNG, is now making them take a very different look at natural gas. And once that policy unlock happens of saying natural gas projects can move forward, we think there will be a tremendous acceleration in those places, and we are extremely well positioned to be able to play and the interest in Europe for our carbon capture solutions where you can go to almost net zero using natural gas as a fuel, tremendous interest there. No other technology, the turbines and the engines cannot do that. We can. So tremendous interest there. Operator: Your next question comes from the line of Manav Gupta from UBS. Manav Gupta: Generally, when you tell a customer, I can deliver the order in 90 days, the customer is happy to get the order in 360 days. So incredible feat delivering it in 55 days. My first question, sir, here is last week, Energy Secretary sent a draft proposal to FERC that would limit the regulatory review period for data center connections to power grid to just 60 days, expediting a process that can currently extend up to years. Help us understand how this could help Bloom Energy. K. Sridhar: Manav, thank you for those kind remarks. A shout out to our team for doing that. So look, the first thing I want to say about that or people who are not familiar with that is, again, the Energy Secretary asked FERC to start a hearing process and a rule-making change to allow large loads like data centers and AI factories and other factories to get rapid interconnection with the grid, which has been an issue. And first and foremost, we applaud the policymakers and regulators for doing that. I think it's the right thing for us as a country to do. The second thing I want to say is, if you read that announcement, it's very obvious, even when you get that interconnection, they state very clearly, you're entering the age of BYOP, bring your own power, okay? You get curtailed even if you have an interconnection, if you don't bring your own power. And large AI data centers are not going to operate in a place where the utility is going to curtail them and not curtail them depending on what their load and peaks are, right? So that becomes extremely important. So obviously, time to power is the reason this is being done. We are able to provide our servers very quickly to a utility who wants to interconnect and offer the power to either a data center or a factory. And it's not unlike what AEP is trying to do. We think it's just going to accelerate other utilities wanting to do the same thing. So that's how we think it's going to help our business. And for people from the utility listening to that, right, it's very simple. You don't make your nuclear power plants, you don't make your gas turbines, you don't make your fuel cell. You can now buy our fuel cells very quickly and install it in front of the meter and offer it to your customer. But when you do that, here are the additional benefits you get. Ancillary support for the grid. Let me explain this. It's not a easy concept to understand. Engines and turbines can offer reactive power. It is something that you can provide as a byproduct in addition to supplying power to your load almost for free into the grid, and the grid benefits from that in stabilizing the local grid. Now engines and turbines can -- or any other kind of combustion device that has rotation or movement can only do that in a very narrow range. Bloom has an amazing range in terms of that power factor, and that benefit will be enormous in places like PJM, where you have grid congestion and grid instability or places like California, where the amount of renewables you have completely destabilize the grid. We are a stabilizing factor. In addition, we can easily provide a lot more power into the grid in short notice to make up peaks and non-peaks if they want to net meter it as a utility because we are constantly standing in hot standby and when the grid -- when the data center is not using it, you can export that power. However, if you're going to use a bunch of turbines to be able to do it, you don't keep the turbines on hot standby, it' not economically possible. So you have to start it up and bring it up, which means you need 5, 6 minutes, and that may be the time you need to peak. So we are a tremendous asset to benefit, first, the data centers being built fast. Second, for the utilities to be able to provide that and win with that. Third, for the utilities to use our ancillary services and benefit from that. And fourth, because we don't pollute the air, we are a benefit to the communities where they are installed. So this is a win-win-win. We love this proposition. Manav Gupta: My second question, and I apologize in advance, I am an electronics engineer, but it's been two decades since I graduated. So in case it's an invalid question, please just ignore it. Sir, I recently read somewhere that some chip makers are looking to move from 400-volt AC to 800-volt DC by 2027. I think it was NVIDIA. I'm just trying to understand, if that does happen, would it make your fuel cell even more efficient? Would DC/DC power be even more efficient than a DC/AC power because of transmission losses? If you could just talk about that. K. Sridhar: Don't undersell your technical knowledge, it is spot on. So I think given how you phrased it, let me -- this is such an important question, and we didn't address it. It is probably a miss on my part to have not addressed it in the script. So let me take a few minutes to explain this so everybody understands. It's so important. Here's the important part, and I want you to understand this. This moving from converting that 400-volt AC to 48-volt DC, which is how server racks, which are the size of a refrigerator roughly sitting in a data center. These are the machines that manufacture the intelligence, okay? They -- today, the standard has been ever since we had data centers, low voltage, like 48-volt DC. So it gets converted. So think of this, the power going -- so I'm thinking of an analog as you ask me this question. It may not be perfect, but I think it will answer the question. So think of power coming in into the rack as a hungry human being drinking water, okay? They can only drink through a straw. And that straw was sufficient. That is the 48-volt DC because the small wire through which a small amount of water comes into the straw, that water was sufficient to satiate the thirst. That was when CPU racks were 13 kilowatts. We have put a lot of Band-Aids on it to make sure Blackwell chips that come somewhere near the 130 kilowatts can handle it through the straw. Guess what? Rubin chips and going forward are going to be 5x that to 10x that. There is no way you can pump that much of fluid for the body to keep up if that's the amount of water you need, that's the amount of power you need through that little straw. But in the rack, there is no more space than the straw. What does that mean? You have to increase the pressure of the water that you're shoving to that straw. That's the only way you're going to get more water through. And that pressure equivalent in the water is voltage in power. So it is -- the laws of physics dictate that you have to go to an 800-volt DC architecture if you want AI chips that have more power density, which is the only way you can improve upon AI in the next generation. This is not an if, this is not a nice-to-have. This is a must-have. Now go to the other side. All our wonderful legacy power generation systems that helped us propel into the mechanical age was built for the mechanical age. They are like Niagara Falls dropping water and you cannot make it to the voltage that you need. You need to make it very, very high voltage. Otherwise, you can't bring all that water in a pipe of reasonable size to where you want to bring it. Even an on-site 50-megawatt turbine cannot produce directly at 800 volts or the amount of copper you need becomes too bulky, too big. It's not just physically viable. Guess what we did at Bloom? We saw this coming one day. We didn't know what day in 2000 when we initially created architecture. We built an architecture where we can feed these straws appropriately right at that 800 volts, and we decided every unit we have shipped for the last 15 years has that. But after that, we have one other box that takes that DC and makes it into AC and provides it because we were making color TV images, the world was only consuming black and white. So we are converting our color TV images to black and white. But the other guys create black and white, and now you have to colorize them all and provide low definition when we already have high-definition color image. That's the analog. So we are super excited about this. As I see it, it's self-evident to me that this has to become the standard and Bloom will set the standard for the digital age, digital power. Operator: Your next question comes from the line of Nick Amicucci from Evercore ISI. Nicholas Amicucci: I just wanted to build upon on kind of the doubling of capacity by the end of 2026 and kind of the commentary that would support 4x the fiscal '25 revenue. How should we think about kind of the utilization on that capacity as we kind of enter into -- again, as we enter into 2027 and we have that -- the 2 gigawatts kind of up and running. I mean because if we're exploring opportunities to go beyond that 2 gigawatts, it seems like 4x full year '25 revenue, that seems like a big number that we could get there relatively quickly. So I just wanted to parse that out a little bit. K. Sridhar: Yes. So here is a simple way to think about it, right? We didn't get to where we are today to deliver what I just explained, this purpose-built factory based on just meeting a market demand as we see it right now, we just prepared ourselves. What is the beauty of Bloom being able to expand its capacity and offer what we do? Is the return on investment like invested capital? So we are fiscally very disciplined, and we only make decisions based on that added cost and its absorption, will it have a great rate of return. So we have a very disciplined process on this. And on top of that, we have a very clear understanding right now given time to power shortages and the importance of this as a nation-state issue for AI. We are committing to strive and work as hard as we need to and stay ahead such that we will never be the constraint to our customer on growing their data center. That's what we are positioned for. And we will increase capacity. We will increase it in whatever steps necessary as we see fit. But as you saw, this 2-gigawatt capacity, all systems go based on that. Would we use it for peak capacity? When we use it, will we use it for steady capacity? All that, you'll hear from us as we talk about our backlog and other things next year. But we are now using our OpEx wisely to invest in capability and talent to think about how do we expand beyond 2 gigawatts. That's all I can say right now. Thanks for that question. Nicholas Amicucci: Got it. That makes sense. And so as we see kind of the here and now, obviously, the power demand is here and obviously, you guys are ready, willing and able to address it. But as we kind of think out and I bring this up because you had mentioned an inference data center in Europe. I guess just the -- can you just kind of convey the additive value when we think of kind of the inference and when latency becomes an issue when we get to inference and reasoning within the AI complex, how kind of Bloom's partaken that? K. Sridhar: So thanks for asking that question. It's very important, right? Here is the beauty. Our exact same architecture with fewer LEGO blocks, okay? Think of each of our Bloom power systems as a LEGO block. With fewer LEGO blocks is an inference data center, multiply that many times over, it can power a training data center. No difference. No other technology can do that. That's how we built it. That's the power of our modular, fault-tolerant architecture, number one. Number two, inference data centers are going to be close to your bedroom window and your office window. You don't want that to be polluting, you don't want that to be noisy. We are -- we should be for those inference data centers, the power producer of choice. Operator: Your next question comes from the line of Ben Kallo from Baird. Ben Kallo: K.R., maybe could you just talk about, I think, the biggest project you guys have announced is 80 megawatts with SK. Could you just talk about how you view -- because there's been permits out there, huge numbers on them on doing bigger projects, how your customers have gotten comfortable with your technology over time? And maybe the time to power, how you think about the size of projects you can do and where we think you guys fit in, if it's 100 megawatts or 900 megawatts. K. Sridhar: Ben, that's a very good question. And look, again, our architecture was purpose-built. Our factories do copy exact modules. And the boxes don't know whether they are sitting along with 5 other boxes or 5,000 other boxes. Nothing in our scaling has scaling risk, right? So yes, we are talking to customers with lot bigger stamps right now and working with them on ideas and projects and various stages of negotiations of much larger sizes. We can do that, and we can do your neighborhood retail store, and we are talking to customers about that, too. So that is the flexibility of our architecture. You're adding no additional risk. In fact, think about it because these are hot swappable LEGO blocks, the more LEGO blocks you have, the more reliable our system gets. So large block power becomes a lot more reliable than small block power. Thank you. Ben Kallo: Maybe a follow-up. Just as we think about capacity, I think other people asked about this, but we see these big numbers out there. What's go/no-go decision from going 2 gigawatts more? And how fast can you do that? K. Sridhar: Look, we get accused of you're building capacity too fast. We get accused of we don't think you can build too fast. Let me be very clear. We are going to strive to make sure we are able to provide power for our customers before they are ready for it. We will not be the bottleneck. And we designed our factories, we built it with that in mind. Thank you. Operator: [Operator Instructions] Your next question comes from the line of Mark Strouse from JPMorgan. Mark W. Strouse: So K.R., things obviously are changing very rapidly here. It's been a bit there since you've provided kind of long-term margin targets. So kind of to the earlier point about your capacity expanding, but also as the utilization of that capacity increases, how we should think about kind of gross or operating margins under that scenario? K. Sridhar: Thank you. So look, here's how I'd answer it. Wait till 90 days from now to hear our annual guidance for next year. But in the meantime, if you want to think about it, here's how you can think about it. For over a decade, every single year, we have a cost down in double digits, number one. Number two, when we transact on electricity as we grow our volume, the pricing pressure on electricity is going to be based on the macros and there's a shortage of electricity. So you go figure out what that pricing pressure would be. And we have tremendous operating discipline within the company that you have seen us exercise these last 3, 4 quarters, and that's how we'll continue going forward. Our factories are not capital intensive. We have made that statement very clear. You know what those numbers are. Where is it that we will spend? Investment. We'll invest in our people. We'll continue to invest in our technology. We will invest in the talent necessary for scaling our operations. We'll invest in the skills needed, in our commercial team to go capture opportunity. And we will continue to invest in technology to further enhance our leadership position on on-site power. So those are the things to take away. Thank you. Operator: Your next question comes from the line of Michael Blum from Wells Fargo. Michael Blum: You've given us some good information on how to think about the Brookfield partnership and the scope of that. But can you give something similar with Oracle? Can you give us a sense of the size of that opportunity set? And how exactly Bloom will play a role in that partnership because they also obviously have pretty big ambitions as well? K. Sridhar: Michael, I can't speak to any one customer. You should be asking them about that question. But I think what I can refer you to there would be their statement when we had the press release saying that what we did for them earlier was the first of many, right? So we think they are going to play an extremely big role in this space, and they are going to be growing in many, many geographies. And they are not only looking at how we have executed on the first year, but they're intimately familiar with what's in our technology road map and all the value we can bring to them. So we just obsess on pleasing the customer, then the customer will do the right thing. So that's what we do. Thank you. Operator: Your next question comes from the line of Ameet Thakkar from BMO Capital Markets. Ameet Thakkar: I've just got a quick kind of housekeeping question. Your 10-Q kind of refers to $288 million of related power -- related party revenues during the quarter. I was just wondering, is that related to Brookfield? Or is that related to SK? Maciej Kurzymski: Yes. This is Maciej. As part of the contracts with Brookfield, we've made equity investments into this vehicle. And because of those equity investments, those JVs became a related party to Bloom, and that's what created the disclosure around the related party revenue. And again, it's important to note that the equity investments are fairly small. The way the contract is being set up is that we put a little bit of ceiling on those investments to be very significant. That said, there's a criteria to go through. And if you meet the criteria of equity investment, you get into the related party disclosure. Operator: Your next question comes from the line of Colin Rusch from Piper Sandler (sic) [ Oppenheimer ]. Colin Rusch: No, it's Colin Rusch, but I am from Oppenheimer. So just in terms of the balance of 2025 and looking into '26, can you talk a little bit about the mix shifts from direct product sales into some of these financing options with partners or related parties? And then also if we could get a quick update on the CFO search and that coming to conclusion? K. Sridhar: Yes. I'll take the CFO search. Look, it's a very important position for us. We take it very seriously. And so we have a process in place, and that search is going on. We have a sense of urgency, but no sense of rush. So we will let you know when we hire one. Thank you. Maciej Kurzymski: Yes. As far as the financing goes, if you go back and we talk about this in pretty good detail in our 10-Ks, where there are 3 ways of going to market. There is a direct sale, which we refer to as CapEx, which is effectively a customer showing up and writes a big check, which effectively is like prepaying for electricity for a number of years. There's a PPA financing structure in place and the managed services, which is the sale-leaseback transaction. We haven't done managed service transactions in quite some time. We don't expect to do those going forward. And I would say, majority of the transactions we get into are actually through the PPA structures, although there are some CapEx deals every quarter from time to time where the customer is wanting to finance the deal themselves. Operator: Your next question comes from the line of Maheep Mandloi from Mizuho. Maheep Mandloi: Most of the high-levels are answered, but just like housekeeping on the guidance for Q4. Could you just talk about like the reason to not disclose that? Is it just timing of these lumpy installations you have in December or January or something else over there? K. Sridhar: Yes. I think you just answered your question, Maheep. We have said that at the beginning of the year, why do we give a range? Because project-based installations, many of them being greenfield for changes in variations. Lots of things could happen on the customer end. We have no difficulty supplying our boxes on time, ahead of time, as you saw. But the customer has to be ready to take the power, which is when we ship. So a project can fall a few days in front of or on the other side of December 31, which is just a deadline, and it has no impact on that project or that revenue other than a pure timing issue. And yes, with 365 days in the year, we would give you one guidance. Now 300 of those are gone, and we have 65 days left. So we're giving you a slightly better guidance, but we can't pinpoint it. That's exactly right. Thank you. Operator: Your next question comes from the line of Sherif Elmaghrabi from BTIG. Sherif Elmaghrabi: For the Brookfield partnership, you mentioned they're bringing a substantial balance sheet to the equation. But any capital commitments for Bloom under those joint ventures or other costs related to that, obviously, besides the Fremont CapEx that you're already investing? Maciej Kurzymski: Yes. Other than the equity investments that were -- that we agreed to make for the respective projects, very small equity investment, there is none. K. Sridhar: Okay. With that, I just want to bring this to a close as we are getting to the top of the hour. Thank you all. We are delighted with our results in Q3. Our commercial activity is robust and the momentum is accelerating across the board. This year has been a big transition year for Bloom. I want to thank our team inside for stepping up and contributing to our success in such a great way. We appreciate the trust of our long-term shareholders, and we welcome our newest shareholders. And thanks to all of you for placing trust in us. And I think we have an exciting journey ahead of us together as we go forward to become the standard for on-site power. Thank you, and have a great day. Operator: This concludes today's conference call. You may now disconnect.